Our latest contest for the presidency of Schmidlap National Bank revolved around the problem of retaining public deposits.

The question: How do we keep municipalities from moving their funds out of banks and into money market instruments and other competitive vehicles?

We recommended that banks remain as competitive as they can on today's uneven playing field, where banks must keep reserves and competitors do not have to. We also recommended that banks offer the best service possible.

Next, we stated that banks should publicize what they do for the community, so that the public and elected officials do not feel that rate is the only important factor.

But then we asked for your ideas. How has your bank kept public deposits from fleeing to higher rates?

We hit a hot button. Readers gave us a number of thoughtful suggestions.

First we had the bankers who said, "Who wants the deposits anyway?" They cited the time needed for such accounts and publicity problems in handling public funds as reasons why the money isn't worth fighting for.

Examples mentioned included the way some communities have pulled their balances from banks that have tried to become more efficient by moving offices or by lessening the number of employees in town. Also mentioned was the removal of deposits from a bank because it had decided to fingerprint nondepositors who came in to cash checks.

Roy L. Harmon Jr. sees the public deposits issue from both sides. In addition to being an alderman for Kingsport, Tenn., he is president of the only bank headquartered there, Bank of Tennessee.

"From the bank's side," he wrote, "the short-term nature of the investments (usually less than six months) creates a dilemma of replacement should the city not renew a significant deposit. In addition, cities are becoming more sophisticated in their cash management needs, and a smaller community bank may not be able to offer the spectrum of services desired by city treasurers.

"Our best success has been to target smaller utility districts, gas companies, etc., which have proven to be a lot less prone to move core relationships as often. When combined with working capital lines of credit, the needs can be met with less sophisticated services and the local directors can deal with local bankers that know each other.

"From the city's perspective, I would like to see us bid the investments and then offer to the local institutions smaller bites that are more manageable. This obviously isn't feasible when securities are involved, but would at least support those banks that are headquartered or have significant investment in the community."

William W. Watson, president of the Cross Keys Bank, St. Joseph, La. listed several ways his bank has been successful in working with municipalities.

Firstly, "deposits from governmental bodies are not like other deposits," he wrote. "Since we are required to pledge securities to the accounts, we cannot use the money for car loans, consumer loans, etc. The return we can make on them is limited to the yields available in the securities market.

Secondly, "we are prohibited by law from charging service charges on the numerous checking accounts that are required by most public agencies which frequently involve payroll accounts or other accounts with a high level of activity."

Mr. Watson also said the bank tries to price deposits generously, acts as a good corporate citizen,' and provides "friendly and efficient" service.

"Doubt if this will get me the presidency of Schmidlap National Bank, but I hear they don't pay too much anyway," Mr. Watson concluded.

Well, he'll have to wait until next week to find out.

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