The following discussion and analysis should be read in conjunction with the financial statements and related notes appearing herein and in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Results of operations for the period ending June 30, 2012 are not necessarily indicative of the results to be attained for any other period.

This Report on Form 10-Q may contain forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products and similar matters. All statements that are not historical facts are "forward-looking statements." The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Forward-looking statements include statements with respect to management's beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond the Company's control, and which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. These forward-looking statements can be identified through use of words such as "may," "will," "anticipate," "assume," "should," "indicate," "would," "believe," "contemplate," "expect," "seek," "estimate," "continue," "plan," "point to," "project," "projection," "predict," "could," "intend," "target," "potential," and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

o future economic and business conditions;

o lack of sustained growth and disruptions in the economy of the Greater Charleston area, including, but not limited to, continued falling real estate values and increasing levels of unemployment;

o government monetary and fiscal policies;

o the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

o the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services;

o the effects of credit rating downgrades on the value of investment securities issued or guaranteed by various governments and government agencies, including the United States of America;

o credit risks;

o higher than anticipated levels of defaults on loans;

o perceptions by depositors about the safety of their deposits;

o the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;

o changes in assumptions underlying allowances on deferred tax assets;

o changes in assumptions underlying, or accuracy of, analysis relating to other-than-temporary impairment of assets;

o accuracy of fair value measurements and the methods and assumptions used to estimate fair value;

o the risks of opening new offices, including, without limitation, the related costs and time of building customer relationships and integrating operations as part of these endeavors and the failure to achieve expected gains, revenue growth and/or expense savings from such endeavors;

o changes in laws and regulations, including tax, banking and securities laws and regulations and deposit insurance assessments;

o the effect of agreements with regulatory authorities, which restrict various activities and impose additionaladministrative requirements without commensurate benefits;

o changes in the requirements of regulatory agencies;

o changes in accounting policies, rules and practices;

o changes in technology or products may be more difficult or costly, or less effective than anticipated;

o the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence;

o ability to continue to weather the current economic downturn;

o loss of consumer or investor confidence; and

o other factors and information described in any of the reports that we file with the Securities and ExchangeCommission under the Securities Exchange Act of 1934.

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The Company has no obligation, and does not undertake, to update, revise or correct any of the forward-looking statements after the date of this report. The Company has expressed its expectations, beliefs, and projections in good faith and believes they have a reasonable basis. However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished.

Results of Operations

The Company's net income for the six months ended June 30, 2012 was $1.7 million or $0.33 per basic share, compared to a net loss of $8.7 million, or $1.65 per basic share, for the six months ended June 30, 2011. The average number of basic shares outstanding for the six months ended June 30, 2012 was 5,321,578 compared to 5,275,558 for the six months ended June 30, 2011.

The Company's net income for the three months ended June 30, 2012 was $503,000, or $0.09 per basic share, compared to net loss of $8.1 million, or $1.54 per basic share, for the three months ended June 30, 2011. The average number of basic shares outstanding for the three months ended June 30, 2012 was 5,326,577 compared to 5,280,925 for the three months ended June 30, 2011.

Net Interest Income

Net interest income is the difference between the interest earned on interest earning assets and the interest paid for funds acquired to support those assets, and is the principal source of the Company's earnings. Net interest income was $6.5 million for the six months ended June 30, 2012, compared to $6.6 million for the six months ended June 30, 2011. Net interest income was $3.3 million for the three months ended June 30, 2012, compared to $3.3 million for the three months ended June 30, 2011.

Changes that affect net interest income include changes in the average rate earned on interest earning assets, changes in the average rate paid on interest bearing liabilities, and changes in the volumes of interest earning assets and interest bearing liabilities. The Company's net interest income for the six months and three months ended June 30, 2012 and 2011 was approximately the same due to nearly equal declines in total interest income and total interest expense. The decreases in interest income and interest expense were both driven by declines in volume and rates, though volume declines played a larger role in the decrease in interest income while rates played a larger role in the decrease in interest expense.

Average earning assets for the six months ended June 30, 2012 decreased 7.58 percent to $373.1 million from the $403.6 million reported for the six months ended June 30, 2011. The decrease was attributable to decreases of $8.5 million in average loans and $22.1 million in average total investments, cash, and federal funds sold. The decrease in average loans between the two periods was primarily due to loan chargeoffs and foreclosures during 2011, which totaled $9.3 million and $9.4 million, respectively.

Average interest bearing liabilities for the six months ended June 30, 2012 decreased 8.9 percent to $357.0 million from the $392.0 million reported for the six months ended June 30, 2011. The decrease was attributable to decreases of $42.4 million and $5.7 million in average time deposits and average other borrowings, respectively. These decreases were partially offset by an increase of $13.1 million in average savings and transaction accounts. The decrease in average time deposits was attributable to a decrease of $24.9 million in average retail time deposits, and a decrease of $17.5 million in average brokered and wholesale time deposits. The decrease in average other borrowings was primarily attributable to decreases of $1.9 million and $3.8 million in average Federal Home Loan Bank Borrowings and average retail repurchase agreements, respectively. These changes in the funding mix are consistent with the Company's efforts to build its core deposits while reducing its reliance on wholesale funding sources and retail time deposits.

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

The following table compares the average balances, yields and rates for the
interest sensitive segments of the Company's balance sheets for the six months
ended June 30, 2012 and 2011.

(Dollars in thousands)
                                                         For the six months ended                                       For the six months ended
                                                               June 30, 2012                                                 June 30, 2011
                                          Average Balance      Income/Expense       Yield/Rate(1)       Average Balance       Income/Expense       Yield/Rate(1)
Assets
Cash and Federal funds sold              $          14,384     $            16                0.23 %   $          15,910     $             17                0.22 %
Investments - taxable                               47,840                 529                2.22                62,474                  852                2.75
Investments - nontaxable (2)                         6,115                 122                4.02                12,030                  246                4.13
Total investments and federal funds
sold                                                68,339                 667                1.96                90,414                1,115                2.49
Loans (3)(4)                                       304,718               8,377                5.51               313,240                8,965                5.75
Total earning assets/interest income               373,057               9,044                4.86 %             403,654               10,080                5.02 %
Other assets                                        59,004                                                        68,175
Total assets                             $         432,061                                             $         471,829
Liabilities
Savings and transaction accounts         $         111,687                 375                0.67 %   $          98,635                  634                1.30 %
Time deposits                                      176,942               1,005                1.14               219,333                1,667                1.53
Other borrowings                                    58,034               1,080                3.73                63,692                1,120                3.55
Subordinated debt                                   10,310                 103                2.00                10,310                   91                1.77
Total interest
bearing liabilities/interest expense               356,973               2,563                1.44               391,970                3,512                1.81
Non-interest bearing liabilities                    43,432                                                        33,791
Total liabilities                                  400,405               2,563                1.28               425,761                3,512                1.66
Equity                                              31,656                                                        46,068
Total liabilities and equity             $         432,061                                             $         471,829
Net interest income/margin (5)                                 $         6,481                3.48 %                         $          6,568                3.27 %
Net interest spread (6)                                                                       3.42 %                                                         3.22 %

(1) Annualized

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Does not include nonaccruing loans.

(4) Income includes loan fees of $394,000 in 2012 and $369,000 in 2011.

(5) Net interest income divided by total earning assets.

(6) Total interest earning assets yield less interest bearing liabilities rate.

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

As shown above, for the six months ended June 30, 2012 the average yield on earning assets was 4.86 percent, while the average cost of interest bearing liabilities was 1.44 percent. For the six months ended June 30, 2011 the average yield on earning assets was 5.02 percent and the average cost of interest-bearing liabilities was 1.81 percent. The decrease in the asset yields and average rates paid is due to market rate decreases over the last year. The net interest margin was 3.48 percent and 3.27 percent for the six months ended June 30, 2012 and 2011, respectively. The increase in the net interest margin is primarily attributable to a relatively minor $87,000 decrease in net interest income accompanied by a $30.6 million decrease in average interest earning assets between the two periods. The decrease in net interest income was the result of a $1.0 million decrease in interest income, partially offset by a $949,000 decrease in interest expense. The decrease in interest expense was driven by maturities of higher cost time deposits and other borrowings and the partial replacement of these time deposits and other borrowings with core deposits consisting of lower cost savings and transaction accounts.

Average earning assets for the three months ending June 30, 2012 decreased 7.31 percent to $378.6 million from the $408.5 million reported for the three months ending June 30, 2011. The decrease was attributable to decreases of $25.1 million and $4.8 million in average investments and federal funds sold and average loans, respectively.

Average interest bearing liabilities for the three months ending June 30, 2012 decreased 8.8 percent to $357.2 million from the $391.8 million reported for the three months ending June 30, 2011. The change was due to decreases in average time deposits and other borrowings of $38.4 million and $5.9 million, respectively between the two periods, partially offset by an increase in average savings and transaction accounts of $9.7 million.

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

The following table compares the average balances, yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended June 30, 2012 and 2011.

(Dollars in thousands)
                                                       For the three months ended                                     For the three months ended
                                                             June 30, 2012                                                  June 30, 2011
                                       Average Balance        Income/Expense       Yield/Rate(1)      Average Balance        Income/Expense       Yield/Rate(1)
Assets
Cash and Federal funds sold            $         15,886      $             10                0.26 %   $         18,150      $             11                0.23 %
Investments - taxable                            49,955                   292                2.34               66,533                   462                2.79
Investments - nontaxable (2)                      5,588                    55                3.98               11,798                   123                4.19
Total investments and federal funds
sold                                             71,429                   357                2.01               96,481                   596                2.48
Loans (3)(4)                                    307,213                 4,222                5.51              312,005                 4,474                5.75
Total earning assets/interest income            378,642                 4,579                4.85 %            408,486                 5,070                4.98 %
Other assets                                     57,717                                                         65,000
Total assets                           $        436,359                                               $        473,486
Liabilities
Savings and transaction accounts       $        111,590                   186                0.67 %   $        101,887                   329                1.30 %
Time deposits                                   180,243                   500                1.11              218,634                   818                1.50
Other borrowings                                 55,021                   539                3.93               60,934                   542                3.57
Subordinated debt                                10,310                    50                1.96               10,310                    46                1.78
Total interest bearing
liabilities/interest expense                    357,164                 1,275                1.43              391,765                 1,735                1.78
Non-interest bearing liabilities                 47,192                                                         35,465
Total liabilities                               404,356                 1,275                1.27              427,230                 1,735                1.63
Equity                                           32,003                                                         46,256
Total liabilities and equity           $        436,359                                               $        473,486
Net interest income/margin (5)                               $          3,304                3.42 %                         $          3,335                3.27 %
Net interest spread (6)                                                                      3.42 %                                                         3.20 %

(1) Annualized

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Does not include nonaccruing loans.

(4) Income includes loan fees of $189,000 in 2012 and $175,000 in 2011.

(5) Net interest income divided by total earning assets.

(6) Total interest earning assets yield less interest bearing liabilities rate.

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - continued
As shown above, for the three months ended June 30, 2012 the average yield on earning assets was 4.85 percent, while the average cost of interest bearing liabilities was 1.43 percent. For the three months ended June 30, 2011 the average yield on earning assets was 4.98 percent and the average cost of interest-bearing liabilities was 1.78 percent. The decrease in the asset yields and average rates paid is due to market rate decreases over the last year. The net interest margin was 3.42 percent and 3.27 percent for the three months ended June 30, 2012 and 2011, respectively. The increase in the net interest margin is primarily attributable to a relatively minor $31,000 decrease in net interest income accompanied by a $29.8 million decrease in average interest earning assets between the two periods. The decrease in net interest income was the result of a $491,000 decrease in interest income, partially offset by a $460,000 decrease in interest expense. The decrease in interest expense was driven by maturities of higher cost time deposits and other borrowings and the partial replacement of these time deposits and other borrowings with core deposits consisting of lower cost savings and transaction accounts.

The following tables present changes in the Company's net interest income which are primarily a result of changes in the volume and rates of its interest-earning assets and interest-bearing liabilities.

                                                Analysis of Changes in Net Interest Income For the six months ended June 30,
                                                               2012 Versus six months ended June 30, 2011 (1)
                                                    Volume                          Rate                        Net Change
Interest income:

Cash and Federal funds sold                    $             (2 )             $              1               $             (1 )
Investments - taxable                                      (200 )                         (123 )                         (323 )
Investments - non taxable (2)                              (122 )                           (2 )                         (124 )
Total investments and federal funds sold                   (324 )                         (124 )                         (448 )
Net loans (3)(4)                                           (245 )                         (343 )                         (588 )
Total interest income                                      (569 )                         (467 )                       (1,036 )
Interest expense:
Savings and transaction accounts                             84                           (343 )                         (259 )
Time deposits                                              (324 )                         (338 )                         (662 )
Other borrowings                                           (100 )                           60                            (40 )
Subordinated debt                                                                           12                             12
Total interest expense                                     (340 )                         (609 )                         (949 )
Net interest income                            $           (229 )             $            142               $            (87 )

(1) Changes in rate/volume have been allocated to each category on a consistent basis between rate and volume.

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Income includes loan fees of $394,000 in 2012 and $369,000 in 2011.

(4) Does not include nonaccruing loans.

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Net Interest Income - (continued)

                                                 Analysis of Changes in Net Interest Income For the
                                                three months ended June 30, 2012 Versus three months
                                                               ended June 30, 2011 (1)
                                                    Volume              Rate            Net Change
Interest income:

Cash and Federal funds sold                    $              (1 )   $         1     $              (1 )
Investments - taxable                                       (115 )           (55 )                (170 )
Investments - non taxable (2)                                (65 )            (2 )                 (67 )
Total investments and federal funds sold                    (181 )           (57 )                (238 )
Net loans (3)(4)                                             (69 )          (184 )                (253 )
Total interest income                                       (250 )          (241 )                (491 )
Interest expense:
Savings and transaction accounts                              31            (174 )                (143 )
Time deposits                                               (144 )          (174 )                (318 )
Other borrowings                                             (52 )            49                    (3 )
Subordinated debt                                                              4                     4
Total interest expense                                      (165 )          (295 )                (460 )
Net interest income                            $             (85 )   $        54     $             (31 )

(1) Changes in rate/volume have been allocated to each category on a consistent basis between rate and volume.

(2) Yield is not calculated on a tax equivalent basis due to the full valuation allowance on the deferred tax asset.

(3) Income includes loan fees of $189,000 in 2012 and $175,000 in 2011.

(4) Does not include nonaccruing loans.

Noninterest Income and Expenses

Noninterest income for the six months ended June 30, 2012 was $1,531,000 compared to $1,655,000 for the six months ended June 30, 2011, a decrease of $124,000. This decrease was primarily due to a decrease of $604,000 in gains on the sale of available for sale securities, which totaled $215,000 and $819,000 for the six months ended June 30, 2012 and 2011, respectively. The decrease in the Company's noninterest income was partially offset by the recognition of $176,000 of other-than-temporary impairment on available for sale securities during the six months ended June 30, 2011, compared to no other-than-temporary impairment for the six months ended June 30, 2012. Also offsetting the decrease in noninterest income were increases of $124,000 and $96,000 in gains on the sale of premises and equipment, and service fees on deposit accounts, respectively. The increase in service fees was attributable to a $13.0 million increase in average savings and interest bearing transaction accounts between the two periods. Growth in these types of core deposit accounts commonly generates additional deposit fee income. Also offsetting the decrease in noninterest income was an $89,000 increase in other noninterest income between the two periods. This increase was primarily made up of a $60,000 increase in fees on loans sold, which totaled $90,000 and $30,000 for the six-month periods ended June 30, 2012 and 2011, respectively.

Noninterest expenses for the six months ended June 30, 2012 were $5.8 million, compared to $8.5 million for the six months ended June 30, 2011, a decrease of . . .