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Community Banks Step In for CIT Group

Stocks in this article: CIT C BAC

CIT has rushed to reassure its current customers that business will continue as usual. "Our plan of reorganization is not a 'free-fall' filing or a liquidation of our assets," the company said in a statement to customers. "CIT is continuing its operations and is not going out of business."

But CIT will not be taking on new customers for the foreseeable future. That means countless small businesses have lost a major financing resource, even as large banks such as Citigroup (C) or Bank of America (BAC) have cut back dramatically on new loans.

But that doesn't mean small businesses that want to expand have no other options. According to the Small Business Administration, lending has increased dramatically in the second half of the year. Since the economic stimulus package went into effect in February, the average number of loans approved each week has grown by more than 50%. In September, almost $2 billion worth of loans were approved, the highest single-month dollar value since August 2007.

With large banks focused on paying back their TARP money or negotiating year-end bonuses for the executive suite, smaller independent banks have stepped in to meet small-business needs. According to an analysis of FDIC data by the Independent Community Bankers of America, community banks with less than $1 billion in assets were the only segment of the banking industry to show growth in net loans and leases in the second quarter of this year.

"The vast majority of community banks are well-capitalized and have plenty of liquidity," says Paul Merski, senior vice president and chief economist of the Independent Community Bankers of America, which represents about 5,000 of the estimated 8,000 community banks across the country. "We're transitioning back to the traditional model of local deposits funding local lending."

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