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, 2017 and June 30, 2016. Please read the information below 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 statements.

FINANCIAL HIGHLIGHTS

The following information represents a comparative analysis of key financial aspects of the Authority’s operations between the fiscal years ended June 30, 2017 and June 30, 2016.

• The Authority received its fourth and final tranche funding in funding from the U.S. State Small Business Credit Initiative (“SSBCI") from the U.S. Treasury Department during Fiscal 2017. This fourth tranche of funding was relatively insignificant ($81,2013) compared with the previous tranches and was not originally anticipated to be distributed by the U.S. Treasury. These funds represented a reallocation of unused SSBCI funding which the U.S. Treasury provided to those participating states which had utilized their original allocation in its entirety.

• The Authority’s Cash Collateral Program continued to enjoy strong demand statewide until midway during Fiscal 2017 when demand for the program finally exceeded the SSBCI Cash Collateral Program’s available cash. At that time, the Authority established a waiting list for qualified SSBCI Cash Collateral Program applicants and approved SSBCI CCP applications are now being funded as program cash becomes available.

• As a result of the program’s high demand and limited SSBCI cash, SSBCI Cash Collateral Program support distributions fell by 24.3% to $3,900,249 during Fiscal 2017 from $5,154,542 in Fiscal 2016.

• As of June 30, 2017 there were 32 banks actively enrolled and participating in the Cash Collateral Program. The number of participating CCP banks was affected during Fiscal 2017 by mergers of the following banks, each of which previously participated in the CCP program: the merger of Access National Bank and Middleburg Bank, the merger of Blue Ridge Bank and River Community Bank and the merger of Xenith Bank and the Bank of Hampton Roads.

• At the 2017 fiscal year-end, VSBFA had $13,677,364 in SSBCI CCP reserves as of June 30, 2017 – an increase of 16% when compared with $11, 844,733 in SSBCI reserves at June 30, 2016. Total CCP reserves (SSBCI and State CCP) were $15,322,501 as of June 30, 2017, compared with $13,713,307 as of June 30, 2016. Balances in the CCP reserve accounts are affected by additions of new Cash Collateral Program support and by “claw back" withdrawals which are routinely done as supported loans repay in part or in full.

• At the 2017 fiscal year-end, VSBFA had $1,645,1376 in State CCP reserve accounts – compared with $1,878,574 at the 2016 year-end, which represents a decline of 12%. The Authority is not actively pursuing additional State CCP transactions, and therefore, it is anticipated that State CCP reserve balances will continue to decline as the Authority “claws back" the collateral support as the supported loan repay.

• The Authority’s net direct loans fell from $12,030,715 as of June 30, 2016 to $9,009,570 as of June 30, 2017, a decrease of 25%. A significant majority of the $4.4 million decline can be attributed to the repayment of two loans in the Authority’s Economic Development Loan Fund Program.

• Total operating revenues for the Authority declined from $1,823,065 in Fiscal 2016 to $1,395,110 in Fiscal 2017, a decline of 23%. Total operating revenues in 2016 were higher than usual as the result of a $315,8456 recovery made during 2016 on an Economic Development Loan Fund which had been previously charged off.

• Total Assets for the Authority increased by $456,006, less than 1%, from $54,150,004 as of June 30, 2016 to $54,606,010 as of at June 30, 2017.

• Federal funding from the State Small Business Credit Initiative is now the sole source of funding for the Authority’s SSBCI Capital Access Program. During Fiscal 2017, the Authority distributed $25,912 to banks for the purpose of extending credit enhancement support through the SSBCI Capital Access Program (SSBCI CAP) compared with $89,810 which was distributed in all CAP programs during Fiscal 2016. All loans accepted for enrollment under the Authority’s SSBCI Capital Access Program must meet all federal eligibility guidelines and regulations. The Authority’s now inactive Virginia Capital Access Program and Tobacco Capital Access Program continue to support outstanding loans previously enrolled by participating banks; however, these programs are no longer accepting new loan enrollments as both programs were discontinued during Fiscal 2016 due to a lack of continued funding.

• Fee income generated from the Authority’s financing programs (including application fees and program fees) and from fees associated with bond issuances increased slightly from $946,449 in Fiscal 2016 to $985,519 in Fiscal 2017. The Authority’s revenue from bond issuances typically varies from year-to-year, since demand for issuance of these bonds is driven a number of external factors, including the U.S. Internal Revenue Service (IRS) regulations governing their use and by conditions within the U.S. capital markets. The Authority’s revenue from bond issuance is also affected by other factors, including the repayment of bonds in the Authority’s existing portfolio. (The Authority’s bond fees are based on the outstanding principal balance of the bonds, and consequently, this revenue declines as the principal balance on outstanding bonds are repaid.) Bond fee revenue for the Authority is also impacted by the Memorandum of Understanding which the Authority voluntarily entered into in March 2012. Under this Memorandum of Understand, the Authority agreed to share 40% of its bond fee revenue from non-profit bond issuances with those localities where the bond project is located.

• The Authority’s agreement with the federal Economic Development Administration (U.S. Department of Commerce, “EDA") requires that the Authority lend or commit 85% of the EDA American Safety Razor Fund and 75% of both the Craddock-Terry RLF and Defense Conversion funds which the Authority utilizes to provide direct loans through its Economic Development Loan Fund (“EDLF") program. Having not met that federal requirement, the Authority has been required to sequester cash from the program since February 2016. During a period of sequestration, the Authority must remit all interest earned on the sequestered funds to EDA. As of June 30, 2017, the Authority had approximately $7.5 million in sequestered EDA funds. As of the Fiscal 2017 year-end, the Authority also had outstanding EDLF loan commitments of $3.7 million. In August 2017, the Authority subsequently approved an additional $3.5 million in EDLF loan commitments for a total of $7.2 million in outstanding and unfunded EDLF loan commitments which are expected to require funding within the next 12 to 18 months. Consequently, the Authority anticipates making a formal request to EDA in the near future to remove these funds from sequestration as the Authority expects to need all currently sequestered EDA funds for upcoming disbursements.

• The Authority entered into a Memorandum of Understanding (“MOU") in 2014 with the Center for Innovative Technology (“CIT") which ultimately provided approximately $3 million in SSBCI funding from 2014 to 2017 for use in CIT’s Gap Fund, the Commonwealth’s Venture Capital fund. During Fiscal 2017, the Authority provided $182,468 in remaining SSBCI funding (allocated for this purpose) to CIT for qualified SSBCI investments.

• In September 2017, the Authority’s Executive Director left the Authority after a seventeen-year career to join the Virginia Economic Development Partnership. The Authority’s Chief Credit Officer will serve as Interim Executive Director until a permanent replacement is named.