CFX Corp. is seeking to become the first New Hampshire bank to expand across state lines, forcing a change in the banking community's perception of that state's institutions.

The $754 million-asset holding company for Cheshire County Savings Bank plans to purchase Orange Savings Bank, an $82.9 million-asset thrift in Orange, Mass.

"We've been very interested in expanding our presence into new markets," including southern New Hampshire, western Massachusetts and southern Vermont, said Mark A. Gavin, chief financial officer for CFX, based in Keene. Orange is only 18 miles from a CFX branch.

Hardly Ventured Forth

Until now, New Hampshire institutions have taken only tentative steps outside the state. NFS Savings Bank of Nashua bought $10 million of deposits from a failed Comfed branch in Pepperell, Mass., in September 1991, but did not purchase the entire bank.

"It sends a message out," said Michael Cerato, of First Albany Corp. in Nashua, N.H. "In many circles, people have considered New Hampshire banks as acquisition targets only, when in reality some of the New Hampshire banks are both targets and acquirers, and Cheshire just showed that."

Mr. Cerato said the small banks of southern New Hampshire must expand to survive the competition posed by the superregional banks like Fleet Financial Group and Shawmut National Corp.

What's Left to Acquire?

But Jeffrey Cohn, a bank equity analyst with broker H.C. Wainwright of Boston, noted that although many banks like CFX are looking to expand, the market isn't cooperating.

"The banking industry has been washed out to a great extent," said Mr. Cohn. "It's difficult as the population of independent bankers diminishes. Everybody wants to be a CEO."

CFX's announcement also comes as the company tries to shake off investment-related problems.

"This acquisition gives [CFX] the opportunity to leverage their capital in a manner that doesn't involve the use of derivative securities," Mr. Cohn said.

More Supply than Demand

Faced with little demand for loans, but plenty of capital, the company last September began borrowing from the Federal Home Loan Bank of Boston and using the proceeds to invest in government-backed mortgage securities.

By the end of the year, CFX had invested $62 million in the securities. CFX used $42 million of home loan bank borrowings to buy a portion of the securities.

"We were looking for ways to utilize our capital," said CFX president Peter J. Baxter. "The obvious way to utilize capital is to grow. We couldn't see ourselves growing fast enough or safely enough, so we looked for alternative investment activities."

Stung by Rate Hikes

But the bank couldn't escape interest rate risk. When the Federal Reserve raised interest rates this spring, the securities lost almost $600,000 in value, causing a first quarter loss of $147,000 in the mortgage portfolio.

The bank earned a 0.30% return on its mortgage-backed assets in the second quarter, making $40,000. The bank's ROA goal is 1.25% on those assets.

CFX cut its investment to $34 million from the original $62 million during the second quarter because it was "not seeing a lot of opportunities in the marketplace," said Mr. Gavin, the chief financial officer.

Hedges Pay Off

But the bank's president noted that the bank's standard hedging still deflected greater losses.

Mr. Cohn said he doesn't know of many other New England community banks that entered the mortgage-backed securities market.

Despite the setback in its investment portfolio, CFX reported increased earnings of $1.3 million for the second quarter of 1994, up 29% from just over $1 million for the same period last year.

The company's six-month earnings rose 30% to $2.4 million, up from $1.8 million last year.

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