States hardest hit by the COVID-19 pandemic received fewer loans on a per-business basis in the first round of the Paycheck Protection Program than states that have suffered the least from the virus, according to the Federal Reserve Bank of New York.

According to a new study from the New York Fed, which examined the $349 billion dispersed in the first round, less than 20% of the loan applications from small businesses in New York state, the epicenter of the pandemic in the U.S., were approved compared with 55% for small businesses in Nebraska. (Another $310 billion was approved for the second round.)

Some of the hardest hit areas — such as New York, New Jersey, Michigan and Pennsylvania — are getting fewer loans than some Mountain and Midwest states on a per-small business basis,” according to the report.

The report also found that small businesses in some of the industries suffering the biggest  losses from the COVID-19 pandemic, such as retail and hotels and food services, received a smaller share of funds from PPP loans than construction and scientific and technical services.

The New York Fed researchers tested several hypotheses for the underlying reasons for these results, including the idea that states hit the hardest have had more strict lockdown policies, making it difficult for borrowers to obtain loans. But the report knocks down that idea because most of the PPP applications are done online, as well as other explanations.

What it does find is a link between loan approvals and small businesses’ banking relationships, which has been widely reported, but with a twist. It’s the relationship with community banks that’s key, according to the New York Fed report.

States with larger shares of community banks such as North Dakota, Nebraska, Wyoming and Iowa, as measured by the percentage of deposits in those banks, had a larger share of PPP loans. The percentage of deposits in community banks in those four states ranged between 35% and 50%. 

In contrast, that percentage of deposits in community banks was under 10% for New York, New Jersey, Michigan and Pennsylvania, among many other states.

“Community banks have been reported to view PPP as a chance to expand their customer base,” according to the report.

The report doesn’t say what percentage of PPP loans were distributed through community banks but notes that the four largest banks in the U.S. account for just 12% of funds lent through the PPP. Two of those banks — J.P. Morgan and Citigroup — are headquartered in New York City. The other two are Bank of America, based in Charlotte, North Carolina, and Wells Fargo, which has been adding staff to its Charlotte offices but is headquartered in San Francisco.

“The economic impact of COVID-19, both measured by the number of COVID-19 cases per capita and by the number of initial unemployment claims per capita, does not explain the geographical distribution of PPP loans… We find that lenders preference for borrowers with an existing relationship and the market share of community banks are the main factors explaining the geographic variation in PPP funding,” the study concludes.

The researchers note, however, that the results of their research are “are preliminary and subject to caveats” and future research is needed to make a “causal analysis” of the distributions of PPP loans.