Cape Fear Bank Corp. in Wilmington, N.C., said Monday that it swung to a loss in the second quarter as credit quality weakened and expenses soared.

The $496 million-asset company said it lost $599,000, or 16 cents a share. One analyst had estimated it would post a 12-cent loss. For the year-earlier period it turned a profit of $499,000, or 13 cents a share.

The company said expenses associated with an ongoing proxy battle with one of its largest shareholders, Maurice J. Koury, were damaging. Its regulatory and legal expenses increased 44%, to $2.5 million.

Mr. Koury, who has criticized its earnings performance, tried to buy the company last year but was rebuffed by Cape Fear's board. He has since nominated his own slate of directors to the company's board and has urged shareholders to elect his slate at the Aug. 19 annual meeting.

Cameron Coburn, Cape Fear's chairman, president, and CEO, said in a news release Monday, "Our resources have recently been stretched by the increased expenses and time associated with the ongoing dissident shareholder proxy battle."

A slimmer net interest margin and an increased provision for loan losses also took a big bite out of second-quarter earnings.

Cape Fear's net interest margin fell 82 basis points from a year earlier, to 2.27%. Its $375,000 loss provision brought its provision for the year to $1.2 million, 1,457% more than its provision for the first six months of 2007.

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