Southern Community Financial Corp. in Winston-Salem, N.C., warned Tuesday that its provision for loan losses would increase to $6 million in the second quarter because of accelerated chargeoffs.

The $1.8 billion-asset company estimated that net chargeoffs would be $5.7 million to $5.9 million, about double their level in the first quarter. On an annualized basis the chargeoff rate would rise to 1.78% to 1.84% of average loans, up from 1.09%.

Southern Community cited trouble with residential construction and development loans due to persistently slow home sales.

Still, F. Scott Bauer, its chairman and chief executive officer, said loan delinquencies decreased this quarter. As a result nonperforming loans should be lower than the March 31 level of $20.3 million or 1.56% of total loans.

However, foreclosures are expected to increase nonperforming assets to a range between 2.10% to 2.15% of total assets at June 30, compared with 1.73% at the end of the first quarter.

Southern Community also said it expects to take a $1 million charge to write off the remaining value of collateral held by Lehman Brothers as the counterparty in derivative contracts. The company, which took a $440,000 charge associated with the derivatives in the third quarter, said it is seeking to recover the collateral in Lehman's bankruptcy proceedings, but recently learned that it would be classified as an unsecured creditor.

Southern Community lost $49.7 million in the first quarter, mostly because of a goodwill impairment charge. It took a $4 million provision in the quarter.

The company expects to report its second-quarter earnings July 23.

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