RAC Financial Group is continuing its rapid expansion, announcing that it plans to buy Western Interstate Bancorp.

Citizen's Thrift and Loan Association, a Western subsidiary in Tustin, Calif., makes home improvement loans through retail offices in Phoenix, Las Vegas, and Seattle, plus six in California.

Since last June, the thrift has originated more than $140 million of debt-consolidation and second-lien home improvement loans. At the end of 1996, Citizen's had assets of $125 million.

The purchase will be done through the swap of an undisclosed number of shares of RAC Financial's stock for all Citizen's stock.

Citizen's expects its access to RAC Financial's capital and marketing and organizational network to help it enlarge its market share in the West Coast consumer finance business, said the thrift's chairman and chief executive, James T. Capretz.

The deal was made in much the same way that other large finance companies have picked up subsidiaries: Previously, RAC, a Dallas subprime lender, had forged a business alliance with Citizen's and begun buying some of its loan paper to package into securities. Such ties give the larger company a chance to become familiar with its potential target's management style and loan quality before buying.

Currently, RAC Financial buys and securitizes about 40% of the loans Citizen's generates, but after the merger, it expects to package all the lender's loans into securities.

RAC Financial has been piling on volume, lining up acquisitions, and ramping up marketing since going public in September 1995.

Most recently, the company announced just days before the Super Bowl last month that it was allying itself with the National Football League's alumni association as a sponsor for Players of the Year awards.

In mid-January, RAC spirited Mauro Appezzato away from the Money Store to head its in-house advertising efforts. And at the same time, RAC announced that it would form an alliance with Turner Broadcasting System. The company bought advertising spots on a variety of TBS channels, including CNN Headline News and Warner Bros. Television.

The company's booming origination growth and controversial 125% loan-to- value product have drawn significant attention from analysts and competitors. In the past three years, it has increased originations from virtually zero to $1.1 billion a year.

Naysayers call the 125% LTV product dangerous, especially vulnerable to losses if the economy sinks.

In addition, some observers have called RAC's method of computing earnings less than rock solid.

"RAC is profitable, but cash flow is negative," said James Grant, editor of Grant's Interest Rate Observer. Earnings like RAC's are sure to run into trouble in a credit-cycle downturn, he said.

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