SOUTHERN FIRST BANCSHARES INC (SFST)

Item 2. MANAGEMENT’S
DISCUSSION AND Analysis of Financial Condition and Results of Operations.

The following discussion reviews our results
of operations for the three and six month periods ended June 30, 2026 as compared to the three and six month periods ended June 30, 2025
and assesses our financial condition as of June 30, 2026 as compared to December 31, 2025. You should read the following discussion and
analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements
and the related notes for the year ended December 31, 2025 included in our Annual Report on

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Form 10-K for that period. Results for the three
and six month periods ended June 30, 2026 are not necessarily indicative of the results for the year ending December 31, 2026 or any future
period.

Unless the context requires otherwise, references
to the “Company,” “we,” “us,” “our,” or similar references mean Southern First Bancshares,
Inc. and its consolidated subsidiary. References to the “Bank” refer to Southern First Bank.

Cautionary Warning Regarding
forward-looking statements

This report contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934 (the “Exchange Act”). Forward-looking statements may relate to our financial condition, results of operations,
plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future
performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on
many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,”
“could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,”
“anticipate,” “predict,” “project,” “potential,” “believe,” “continue,”
“assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant
to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those
anticipated in any forward-looking statements include, but are not limited to:

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If any of these risks or uncertainties materialize,
or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from
those expressed in, implied or projected by, such forward-looking statements. We urge investors to consider all of these factors carefully
in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements
as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update
the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements, except
as required by law.

OVERVIEW

Our business model continues to be client-focused,
utilizing relationship teams to provide our clients with a specific banker contact and support team responsible for all of their banking
needs. The purpose of this structure is to provide a consistent and superior level of professional service, and we believe it provides
us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture, which we refer
to as “ClientFIRST.”

At June 30, 2026, we had total assets of $4.70
billion, a 6.7% increase from total assets of $4.40 billion at December 31, 2025. The largest component of our total assets is loans which
were $4.03 billion and $3.85 billion at June 30, 2026, and December 31, 2025, respectively. Our liabilities and shareholders’ equity
at June 30, 2026 totaled $4.2 billion and $452.3 million, respectively, compared to liabilities of $4.03 billion and shareholders’
equity of $368.7 million at December 31, 2025. The principal component of our liabilities is deposits which were $3.94 billion and $3.72
billion at June 30, 2026 and December 31, 2025, respectively.

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Like most community banks, we derive the majority
of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments
is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income,
or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets
and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest on our
loans and investments, we earn income through fees and other charges to our clients.

Our net income to common shareholders was $11.2
million and $6.6 million for the three months ended June 30, 2026, and 2025, respectively. Diluted earnings per share (“EPS”)
was $1.20 for the second quarter of 2026 as compared to $0.81 for the same period in 2025. Our net income to common shareholders was $21.1
million and $11.8 million for the six months ended June 30, 2026 and 2025, respectively. Diluted EPS was $2.39 for the six months ended
June 30, 2026 as compared to $1.46 for the same period of 2025. The increase in net inco

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Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations

The following discussion and analysis identifies significant
factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.
We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other
statistical information also included in this Annual Report on Form 10-K.

OVERVIEW

Our business model continues
to be client-focused, utilizing relationship teams to provide our clients with a specific banker contact and support team responsible
for all of their banking needs. The purpose of this structure is to provide a consistent and superior level of professional service, and
we believe it provides us with a distinct competitive advantage. We consider exceptional client service to be a critical part of our culture,
which we refer to as “ClientFIRST.”

At December 31, 2025, we had total assets of $4.40
billion, an increase from total assets of $4.09 billion at December 31, 2024. The largest components of our total assets are loans, which
were $3.85 billion and $3.63 billion at December 31, 2025 and 2024, respectively. Our liabilities and shareholders’ equity at December
31, 2025 totaled $4.03 billion and $368.7 million, respectively, compared to liabilities of $3.76 billion and shareholders’ equity
of $330.4 million at December 31, 2024. The principal component of our liabilities is deposits which were $3.72 billion and $3.44 billion
at December 31, 2025 and 2024, respectively.

Like most community banks, we derive the majority
of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments
is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income,
or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits and borrowings. Another key measure is the difference between the yield we earn on these interest-earning
assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. In addition to earning interest
on our loans and investments, we earn income through fees and other charges to our clients.

Our net income available to common shareholders for
the years ended December 31, 2025 and 2024 was $30.4 million and $15.5 million, or diluted earnings per share (“EPS”) of $3.72
and $1.91 for the years ended December 31, 2025 and 2024, respectively. The increase in net income resulted primarily from an increase
in net interest income. In addition, our net income available to common shareholders was $13.4 million, or EPS of $1.66 for the year ended
December 31, 2023.

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SELECTED FINANCIAL DATA

The following table
sets forth our selected historical consolidated financial information for the periods and as of the dates indicated. We derived our balance
sheet and income statement data for the years ended December 31, 2025, 2024, and 2023 from our audited consolidated financial statements.
You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our audited consolidated financial statements and the related notes thereto, which are included elsewhere in this
Annual Report on Form 10-K.

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CRITICAL ACCOUNTING ESTIMATES

We have adopted various accounting policies that govern
the application of accounting principles generally accepted in the U.S. and with general practices within the banking industry in the
preparation of our financial statements. Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements
as of December 31, 2025.

Certain accounting policies inherently involve a greater
reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be
materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities
and our results of operations. We consider these accounting policies and estimates to be critical. We have identified the determination
of the allowance for credit losses, the fair valuation of financial instruments and income taxes to be the accounting areas that require
the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available
or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, management has reviewed
and approved these critical accounting policies and estimates and has discussed these policies with the Company’s Audit Committee.

Allowance for Credit Losses

The allowance for credit
losses (“ACL”) is management’s current estimate of expected credit losses that will result from the inability of our
borrowers to make required loan payments, with particular applicability on our balance sheet to loans and unfunded loan commitments. Estimating
the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable
and supportable forecasts, and the value of collateral on collateral-dependent loans. Credit losses are charged against the allowance,
while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations
based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

There are many factors affecting the ACL; some are
quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately
considers all the potential factors that could result in credit losses, the process includes subjective elements and is susceptible to
significant change. Changes in economic conditions, portfolio composition, collateral values, and forecast assumptions could materially
affect the ACL. To the extent actual outcomes are worse than management estimates, additional provision for credit losses could be required
that could adversely affect our earnings or financial position in future periods. During 2025, we transitioned to the discounted cash
flow “DCF” methodology for calculating the ACL, and management analyzed the risk level associated with factors such as changes
in lending policies; international, national, regional, and local conditions; volume and terms of loans; experience and depth of management;
volume and severity of past due loans; concentrations of credit; and loan review results in the consideration of the qualitative portion
of the ACL.

See Note 1 – Summary
of Significant Accounting Poli

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