Cole Taylor Financial Group

(CTFG:Nasdaq) couldn't have picked a worse time to pare down to a pure automobile-finance company, or so it seems.

On Wednesday, the Wheeling, Ill., company will spin off its bank, leaving the auto-finance company as the publicly traded entity, which will be renamed

Reliance Acceptance Group

(RACC:Nasdaq). This transaction comes as the auto-finance industry resembles a broken-down used car instead of the speedy roadster it looked like just a month ago.

First,

Mercury Finance

(MFN:NYSE) a couple of weeks ago disclosed that it overstated its profits for the past four years, and its stock dropped by more than 80%. Then last week

Jayhawk Acceptance

(JACC:Nasdaq) said it planned to file for Chapter 11 bankruptcy protection, which it did Monday.

So the newly independent Reliance looks dead on arrival. Indeed, investors have fled Cole Taylor's stock, which will become Reliance's stock, sending it down to 17 3/4 Friday from 29 1/2 on Jan. 21.

But they might want to take another look. The spinoff will leave Reliance with more than $100 million in equity capital -- considered steep in this business. And analysts consider the firm's asset quality good and its management team experienced.

Reliance even is considering buying a piece of Mercury, the

American Banker

newspaper reported Monday. Reliance declined to comment on the report, and Mercury didn't return a phone call. Mercury's stock climbed 7/16 to 2 5/16, though mainly because the company secured a short-term financing package to help it meet certain debt obligations.

Steven Katz, an analyst at

Fitch Investors Service

, says that Reliance could acquire Mercury's receivables, which remain attractive despite the company's problems. Fitch, the bond rating firm, rates Reliance's commercial paper "F2," its third highest rating out of six.

Investors are biting a bit at what will become Reliance. Cole Taylor's stock climbed 1 1/2 to 19 Monday. Still, that puts its price-to-earnings ratio, based on trailing earnings, at just under 10. That's less expensive than two other strong competitors,

AmeriCredit

(ACF:NYSE), which has a P/E of 16, and

Union Acceptance

(UACA:Nasdaq), which has a P/E of 11.

A Reliance purchase of Mercury, or any acquisition in the industry, would be welcome to other auto-finance companies, analysts say. The market for auto loans to people with poor credit, called sub-prime, is fragmented. Cole Taylor estimates that no company controls more than 2% of the $70 billion market. When consolidation begins, "companies that perform well now are the ones that will be around in the future," Katz says.

Reliance so far is one of those. In the nine months ended Sept. 30, Cole Taylor's continuing operations, which included Reliance, posted net income of $10.7 million, or 69 cents a share, up sharply from $4.5 million, or 30 cents a share, in the year-earlier period. The company has yet to release its 1996 earnings. Katz adds that its reserves against bad loans were adequate and that charge-offs of 5.5% of managed receivables at Sept. 30 were within industry norms. Howard Silverman, chairman of the Reliance unit who will also chair Reliance as a public company, told

The Street

that the company's reserves will be "strong" when its year-end earnings report comes out in a couple of weeks.

In addition, Reliance has showed restraint where other auto-finance companies have plowed ahead. For instance, in last year's second quarter the company held back on growth, refusing to open any new offices, while it upgraded its loan-accounting system.

Reliance also is trying to recognize problems earlier. At the beginning of last year it began writing down repossessed cars right when it got them back instead of waiting until they are sold.

To be sure, Reliance could run into some of the same problems as other sub-prime lenders, especially if the economy takes a southward turn. And investors remain wary. "You really don't know which one will blow up next," says one portfolio manager who owned stock in some sub-prime lenders last year, but has since sold his stakes. "With all the turmoil here I kind of want to sit on the sidelines and let the dust settle."

Katz notes that Reliance has a limited history, having started business only in 1993, which makes it even more uncertain how its loan portfolio will react to an economic downturn. He also says that Reliance has limited funding sources, which could stunt growth.

Indeed, Reliance last week couldn't tap the commercial paper markets because lenders there were skittish about auto-finance companies. But, Silverman says, Reliance simply taps its bank credit lines in such cases.

By Erle Norton

enorton@thestreet.com