RD494 - Virginia Small Business Financing Authority (A Component Unit of the Commonwealth of Virginia) Management’s Discussion and Analysis and Basic Financial Statements and Supplementary Information for the Fiscal Years ending June 30, 2015 and 2014

Executive Summary:
This section of the Virginia Small Business Financing Authority’s (the “Authority”) annual financial report presents management’s discussion and analysis of the Authority’s financial performance during the fiscal years that ended June 30, 2015 and 2014. Please read it in conjunction with the Authority’s financial statements, which follow this section. The annual financial report consists of three parts, management’s discussion and analysis, the basic financial statements and the notes to the financial statement.


The following information represents a comparative analysis of key financial aspects of the Authority’s operations between the years ended June 30, 2015 and June 30, 2014.

• The Authority received its third and final tranche of funding under the U.S. State Small Business Credit Initiative (“SSBCI”) from the U.S. Treasury Department during FY 2015.

• The Authority’s Cash Collateral Program has continued to enjoy strong demand statewide throughout 2015. Usage among participating Cash Collateral Program banks increased during 2015 and at the 2015 fiscal year-end, VSBFA had $8.1 million in reserve accounts at participating Cash Collateral Program banks compared with $5.2 million in CCP reserve accounts at the 2014 fiscal year-end.

• As demand for our programs increased, the Authority experienced strong loan growth during 2015. Net loans outstanding increased by 29% from $10.4 million in 2014 to $13.1 million in 2015. This compares favorably to the change between FY 2013 and FY 2014 when net loans outstanding fell by 7%.

• Total assets for the Authority increased from $50,742,891 at June 30, 2014 to $54,968,923 as of June 30, 2015. The increase was due to the Authority’s receipt of its third and final tranche of funding from the U.S. State Small Business Credit Initiative.

• Although the Authority’s total assets increased in 2015, net assets declined from $48,392,909 at June 30, 2014 to $43,900,598 at June 30, 2015. This decline in net assets was primarily due to a change in reporting methodology for restricted assets which are held in reserve funds at banks participating in the SSBCI Capital Access Program, the Cash Collateral Program (“CCP) and the Virginia Capital Access Program (“VCAP.”) The majority of these restricted assets are federal in nature and attributable to funding through the U.S. SSBCI program. (See additionally, immediately below.)

• The Authority made a significant change in reporting methodology as of our June 30, 2015 year-end. This change was motivated by the Authority’s desire to more accurately reflect our liquidity position in the SSBCI Cash Collateral Program and State Cash Collateral Program, and, additionally, to more accurately reflect the Authority’s support obligations to participating banks under both programs.

* The CCP program utilizes reserve accounts at participating banks to offset potential losses the bank may incur in the future from the enrolled CCP loans. VSBFA obligates these CCP reserves by committing transaction-specific collateral support (relative to a specific loan at a specific bank) for a specified period of time and up to a specified maximum amount. Funds in these reserve accounts are “clawed back” and returned to our SSBCI program when commitments expire or loans are repaid in full, or periodically, as the bank collects payments and the principal balance of the loan declines.

* From time to time, the Authority has utilized VSBFA funds to support a loan through the CCP program which did not qualify for SSBCI funding. Those State CCP funds have been maintained in the same reserve accounts as SSBCI funds.

* Since the Authority’s receipt of SSBCI funding in 2013, the Authority has shown the CCP reserve accounts at participating banks as Restricted Cash Not Held with the Treasurer. This reporting methodology implied these funds were liquid and available immediately to be deployed for additional CCP activity. In fact, the funds maintained in CCP reserve accounts at participating banks cannot be considered as cash because these funds have been committed to participating banks for their potential future and because of the federal regulations governing their use.

* Consequently, effective June 30, 2015, the Authority reclassified all SSBCI CCP and State CCP funds held in CCP reserve accounts as Restricted Assets, resulting in Total Restricted Assets of $10,667,144 as of the 2015 fiscal year-end. In order to accurately reflect the Authority’s legal obligations to participating banks under the CCP program – arising from the Authority’s commitments to provide these funds for the participating bank’s use in the event of future losses on a CCP enrolled loan –the Authority has recorded an offsetting liability of $10,667,144.

* As a result of this change, the Authority additionally recorded a prior period adjustment which reduced the Authority’s Net Position for prior periods by $5,650,676.

* In addition to the changes described above which impacted the Authority’s balance sheet, the Authority also recorded aggregate operating expenditures of $3,883,110 for the Cash Collateral Program to reflect the distribution of SSBCI CCP and State CCP funds the CCP reserve accounts at participating banks. These distributions were offset by $330,664 in SSBCI and VSBFA funds which were “clawed-back” by the Authority from participating CCP banks (as a result of reductions in the principal balance of loans supported by the CCP reserve funds) and $1,378,846 of SSBCI and VSBFA funds which were returned from participating CCP banks because the Authority’s CCP support had expired or the loan had been paid in full.

• During 2015, the Authority distributed $3,974,018 to banks for the purpose of extending credit enhancement support through the SSBCI CCP, State CCP and CAP programs (including SSBCI CAP, VCAP and TCAP.) Although these distributions are included in the Authority’s operating expenses, it is important to note these distributions are not “operating expenses” in the traditional sense. They are classified as such due to the limitations in the Commonwealth’s accounting system.

• Fee income from the Authority’s bond issuances increased very slightly by $20,084 from $806,966 in 2014 to $827,050 in 2015, following a decline in bond fee income from 2013 to 2014. The Authority’s revenue from this source is inconsistent from year-to-year given that demand for these bonds is driven by U.S. Internal Revenue Service (IRS) regulations governing these bonds and by the U.S. capital markets. The Authority’s revenue from bond issuances is also affected by other factors, including the repayment of bonds in our existing portfolio. (VSBFA bond fees are paid on the outstanding principal balance of existing bonds, VSBFA fees decline as those bonds are repaid.) Additionally, the Authority continues to be impacted by the Memorandum of Understanding it voluntarily entered into in March 2012 whereby VSBFA agreed to share 40% of its bond fee revenue from non-profit bond issuances with local economic development authorities around the Commonwealth.

• In 2014, the VSBFA entered into a Memorandum of Understanding (MOU) with the Center for Innovative Technology (CIT) to provide up to $2 million in funding from the Authority’s SSBCI funds for CIT’s Gap Fund, the Commonwealth’s venture capital fund. The Authority’s agreement with CIT allows CIT to utilize SSBCI funding to make debt or equity investments in Virginia small technology businesses for purposes which are compliant with U.S. Treasury SSBCI policies and guidelines. In late 2015, CIT had exhausted that initial funding and the Authority agreed, contingent upon approval by the U.S. Treasury Department, to increase the SSBCI funding allocated to the CIT Gap Fund to up to $3 million. As of November 2015, Treasury approval of the increased CIT allocation was expected but still pending.

• In June 2015, the Chief Credit Officer of the Authority retired after an eighteen year career with the Authority. She was replaced by a Regional Lending Manager and senior staff member of the Authority staff who has been employed by the Authority since 1992. In June 2015, the Authority hired a new staff member for a newly created position within its loan accounting function. In November 2015, the Authority hired a new Regional Lending Manager to fill the position vacated by the Authority’s new Chief Credit Officer.