Six years ago, when North Vally Bank began selling its excess data processing capacity to three other small California banks, chief executive Donald Carter thought he had found a good thing.

"We just wanted to cut our costs," Mr. Carter said.

But though consultants have long urged small banks to partner in this way as a logical means for survival, the North Valley deal soon began to unravel-as have many like it. One of the banks backed out three years ago, and a second is about to leave-with no signs of any replacements.

Changes in the banks' financial and technological needs probably contributed to the venture's collapse, but Mr. Carter and others at Redding-based North Valley largely blame a less tangible problem-ego and independence.

"If you're in banks that are close to one another and are competitive, the egos of operating officers get in the way," Mr. Carter said. "I don't see a future for this kind of thing."

His experience demonstrates the problems inherent in technology partnerships among community banks.

Consultants and some bankers say cooperative ventures can help banks that lack the people and management expertise to staff their own back- office operations or to handle certain regulatory pressures.

Also, many small banks lack the volume to make the technology investments worthwhile, said Robert McGoffin, director of affiliation for Austin, Tex.-based Alex Sheshunoff Management Services Inc. Working with a larger bank, particularly one that is not a direct competitor, provides access to technology while helping the partner use its extra computer time and space.

That certainly has helped San Diego's Bank of Commerce, which has been marketing its item-processing services to other banks for several years and now has one client. And it worked for Lancaster, Calif.-based Antelope Valley Bank, which provided data-processing services to five client banks for several years before spinning off the processing center last March as a separate company equally owned by all of the banks.

Yet despite such urging, successful cooperative ventures among the nation's 9,000-plus small banks are few.

With technology costs declining, many banks have eventually found it easier to buy their own equipment or outsource to one of the many third- party providers. That gives the banks far more freedom and flexibility to structure their back-office processing to fit their needs and strategies, and alleviates the common concern about cooperating in a joint venture with a competitor.

Humboldt Bank in Eureka, Calif., is the North Valley customer that is about to pull out. "In a market where there are two banks operating, I doubt that one bank is going to be too happy about the other doing their data processing and having their customer lists, even though it's confidential," said Theodore S. Mason, Humboldt's president and chief executive officer.

"You trust them, but you still have a little uneasiness about letting the fox into the henhouse."

Also, banks' systems and operating officers don't like giving up power or control to someone else, particularly at another bank.

Now, however, community banks facing tighter competition from larger banks and nonbanks are looking beyond data processing to other kinds of cooperation-in leasing, technology research, small-business lending, imaging, trust operations, loan reviews, and loan processing.

"There is a lot more exploration of those sort of alliances today than there ever has been," said Timothy Finn, managing partner at Financial Management Consulting Group in Louisville, Ky. "And I think it's going to accelerate."

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