Big banks or small, U.S. financial institutions are using taxpayer-funded Troubled Asset Relief Program (TARP) funds in many ways, with mega-banks like Citi (Stock Quote: C) lending more money and smaller community banks using it to halt foreclosures or expand into geographically favorable markets.

At the same time, more banks are announcing plans to repay government bailout funds, with most of the banks that borrowed from the TARP fund saying they will pay back the money by the end of 2009.

Citi has already paid back a large chunk of its TARP funds while other big banks like Bank of America (Stock Quote: BAC) say they’ll pay off their TARP debt by the third quarter of 2009.

In the meantime, the picture is crystallizing as to how banks are using TARP money, presumably to get back on their feet after two years of serious credit and toxic loan problems

Take Citi, for example. As of March 31, the bank has already approved of $44.7 billion in new lending. That’s a fairly big upward spike compared to February 2009, when Citi lent $36 billion to bank customers.

So who’s already received money from Citi?

• State and local governments and non-profits - $5 billion
• Citi lenders (aka “financial suppliers”) - $2 billion
• Home mortgage customers - $1 billion
• Auto loan customers - $250 million

Citi says it has extended more than $200 billion in new credit since October 2009. That’s when the bank accepted its first TARP payment of $25 billion (it would ultimately accept $45 billion in government bailout funds). It’s also worth noting that Citi does not lend TARP money directly to customers -- big banks usually use the TARP money as collateral to borrow more money from outside financial sources, and use that cash to lend to customers.

At the smaller end of the scale, community banks are using TARP money to expand lending, and to expand operations, as well.

Take Community Bankers Trust Corp. a Richmond, Virginia bank that accepted $17.7 million in government bailout money. The bank is using the money to purchase Baltimore-based Suburban Federal Savings Bank, along with its seven bank branches and over $300 million in assets. Another Richmond area bank, C&F Financial Corp., which took $20 million in TARP funds, is using some of the money to loosen lending standards for home mortgage customers who are behind on their house payments.

Customers at banks like these can expect to begin to see credit loosen up and more money flow through the lending pipeline. Others can expect to get more favorable results when looking for loan modification help from banks that have more TARP money on hand. Even small business owners should start to see stalled loan applications kick back into gear with more money for projects and operations.

All in all, as the above stories attest, TARP-favored banks are starting to act like banks again … overall, good news for consumers and for the economy.

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