It's been a long four months for Merrill Sherman and Malcolm "Kim" Chace 3rd. But it all paid off last week when they announced plans for the largest banking start-up in New England history.

After intense last-minute negotiating, the banking attorney and the Providence investor led an informal group of Rhode Island private and corporate investors that snatched up 13 branches and almost $500 million in deposits divested in the state by Fleet Financial Group Inc.

Providence-based Fleet sold the branches to satisfy the Justice Department's antitrust concerns about its pending merger with Shawmut National Corp.

The group, which still needs enough private and institutional investors to raise $50 million in capital to support the deposits, plans to launch a new state-chartered bank in the first quarter of 1996.

Immediately, it will become the second-largest independent bank in Rhode Island, behind Westerly-based Washington Trust Bancorp. With $540 million of assets, the new bank becomes a competitor to Fleet and Bank of Boston right in Providence.

"There is a need for a good community bank in this part of Rhode Island," Mr. Chace said. "There are three giant regionals (Fleet, Shawmut, and Bank of Boston) that do most of the business, and there are a couple of community banks in other parts of the state that do a good niche business and I think we can do the same thing in the Providence-Warwick area."

But their efforts nearly came to naught. The group appeared to have lost the bidding until Fleet chairman Terrance Murray urged his negotiators to let it make another offer. "He saw the possibility of a community bank in Rhode Island being a real positive for the state," said a source familiar with negotiations.

"Fleet in this divestiture has made a genuine effort to work with us in order to make this transaction possible, and we're very grateful," Ms. Sherman said in an interview. "Terry Murray's personal efforts made the difference in this deal."

The start-up operation, still needing federal and state regulatory approval, is the second-largest case of an investor group buying a group of divested branches in the nation. In 1992, following its merger with Security Pacific Corp., San Francisco-based BankAmerica Corp. sold 49 branches with $1.6 billion of deposits in Arizona to a start-up holding company, Independent Bancorp of Arizona, Phoenix.

But the 47-year-old Ms. Sherman declined to characterize the venture as a true start-up. "In reality, it's much more in the model of an existing bank," she said.

In addition to the deposits, the new bank will get $375 million in loans.

"We're starting with a really solid branch network and 110 employees who are fully trained and in place," Ms. Sherman said. "It's an opportunity to put an administrative structure over that that's very effective from day one."

A headquarters has yet to be selected for the new company, but all 13 branches are in the metropolitan Providence-Warwick area. A name for the bank is expected to be announced in late October.

The divested branches are part of an old community bank that was sold to Shawmut with federal assistance in the late 1980s, said Peter S. Damon, president and chief executive of Bank of Newport, which has agreed to take a 5% stake in the start-up.

"Rhode Island is a small state, but developments over the past five or six years have resulted in a large section being without a community bank," Mr. Damon said.

The investor effort has been led by Mr. Chace, chairman of wire manufacturer Mossberg Industries and a director of the Berkshire-Hathaway Co., which is controlled by investor Warren Buffett. However, Mr. Chace said he will not be the largest shareholder.

"That is certainly going to bring a lot of credibility to this project, probably more than anything else," a banking industry source said. "Two months ago, people had doubts about the ability of a startup enterprise to pull it off. The Chace name gave it credibility."

So far, $375 million-asset Bank of Newport is the only corporate investor identified. It has agreed to invest $2.5 million, and Mr. Chace said banks' total stake should reach $20 million if pending commitments receive board approval. Washington Trust confirmed the bank is considering an investment.

"Starting a de novo bank and raising $50 million in four months is not rolling off a log, I'll tell you that," Mr. Chace said.

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