A small California credit union has won a partial victory in its legal fight to keep a larger institution off its turf.

Public Works Credit Union wasn't able to prevent another credit union with an overlapping membership base from merging with giant Lockheed Federal Credit Union.

But under an out-of-court settlement between the credit unions and their regulator, Lockheed now is prohibited from soliciting new Los Angeles County municipal employees in the membership field of the acquired Engineers Federal Credit Union after Nov. 20, 1996. Public Works Employees had argued that allowing such a behemoth to go after the same field of membership would have presented too much competition.

"The parties involved in reaching this agreement believe it will benefit the credit union system," said a two-page statement about the settlement, which contained a confidentiality agreement.

"We are pleased with the settlement," said Delaney Morris, chief executive of Alhambra-based Public Works Employees.

Public Works Employees, which has $28.2 million in assets, sued the National Credit Union Administration on June 26 for permitting the merger of $959.4 million-asset Lockheed Federal and $38.6 million-asset Engineers Federal.

Public Works Employees charged that the NCUA broke its own rules in approving the merger. The agency failed to meet its required duty of considering the acquisition's economic impact on the other four credit unions serving Los Angeles County employees, the institution charged.

Agency sources said the challenge was the first of its kind.

In its brief, Public Works Employees expressed concern that Burbank- based Lockheed Federal would upset the balance among credit unions serving county employees. Those institutions traditionally hadn't gone after each other's membership.

NCUA sources said the agency's approval of the merger was defensible. But it worked for a settlement because rules governing such transactions, and membership overlaps, are "murky."

"These are issues for which it's not clear what NCUA's policy is, and we're not real sure we've been consistent in applying policies," an NCUA source said.

NCUA Chairman Norman E. D'Amours has said he plans to review the agency's membership field and overlap rules.

Joseph S. Melchione, a partner for the Glendale, Calif., firm Syskal, Wiese & Melchione and representative of Public Works Employees, agreed that NCUA policy is sketchy.

"It's a difficult area," he said.

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