Newark, N.J., is a tough town.

Population has dropped by half from its peak in the 1960s, and unemployment is severe. No wonder an ex-mayor frequently stated, "I don't know where American cities are going, but Newark will be there first."

But Newark has its strengths - its labor pool; its great location for sea, air, and rail transportation; and number of strong educational institutions, including my own school, Rutgers. (Outside New Jersey, many people believe Rutgers is an Ivy League college. I have always felt that if we could change the name from Newark to Upper North Princeton, Rutgers would attract even more people from around the world.)

And Newark is like a fraternity. Those of us who work there have a silent kinship.

Why all this talk about Newark?

It is because First Union Corp. of North Carolina, which bought New Jersey's largest bank - Newark-based First Fidelity - is discussing moving the headquarters to Summit, about 15 miles away.

The plan would take about 350 jobs out of Newark. And even though 1,150 First Union jobs will remain, Mayor Sharpe James says the city government will retaliate by removing $250 million in deposits and placing them elsewhere.

There is irony in this situation, given the history of the players.

First National State Bank and, later, First Fidelity - a combination of First National State and Fidelity Union - have always been extremely loyal to Newark. When other banks moved their operations centers to the suburbs, Fidelity Union stayed kept its right in downtown Newark.

And the bank did more. When it needed new employees, it turned to those already on the payroll ones and asked them to bring in their friends. If a friend lasted a certain amount of time, the one who recommended him would get a bonus.

As a result, the bank was able to attract and hire highly motivated staffers, many of them Newark residents. No employee with some seniority would suggest that the bank hire someone he or she knew to be a poor prospect.

The bank fixed up its operations center with new paint and lighting, making people happy to come to work. Almost spontaneously, operations people started coming to work dressed up, because they were proud of their working conditions and facilities.

But Charlotte, N.C., is now headquarters. And, as with most cases of bank acquisitions, the old First Fidelity emphasis on serving the community, helping its nonprofit institutions and service organizations, and generally being a top citizen has eroded substantially.

Newark can hardly be blamed for retaliating against a bank that took away desperately needed jobs and reduced the tax base, but I hope it will be sensible.

Balances should not be deposited out of spite or for political reasons. They must be used to entice banks to work for the community and provide jobs. The recipients of the deposits should help the municipality in its borrowings through notes and bonds.

Yield available on municipal deposits also should be considered. If a bank that no longer is headquartered in a community offers a higher yield than local banks, this should be considered in placing balances.

Having a portfolio of CDs that can be liquidated quickly in the secondary market without sacrificing return is also important. Here is an area in which most community banks are at a disadvantage to larger institutions.

To community banks, then, the Newark situation should serve as an example of opportunity - and a warning.

Local banks have every right to get first dibs on their local government deposits, but should not be complacent. They must help with municipal finance and provide as much liquidity on their CDs as possible, and must offer a yield as strong as the municipal treasurer can get elsewhere.

Community banks that fail these test won't attract substantial municipal balances. Nor would they deserve to.

Cities like Newark may need jobs badly, but fiduciary responsibilities require their officials to seek the highest possible return on city money. Jobs count too, but they should go hand in hand with that goal.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.

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