Derivative Financial Instruments

9 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We use derivative financial instruments (“derivatives”) to manage exposure to variable interest rates. Our primary objective in holding derivatives is to reduce the volatility in cash flows associated with our funding activities, arising from changes in interest rates. We do not employ derivatives for trading or speculative purposes.

As of March 31, 2023, we used a combination of interest rate cap agreements and interest rate swaps to manage interest costs and the risk associated with variable interest rates. FASB ASC 815-10 requires that an entity recognize all derivative instruments as either assets or liabilities in the statement of financial position. In accordance with that Subtopic, we designate certain derivative instruments as cash flow hedges, while others are not designated as hedges. Certain of our derivative agreements provide for netting arrangements for contracts that settle with the same counterparty, however, we do not offset assets and liabilities under these arrangements for financial statement presentation purposes. As such, the fair values are presented gross within other assets and accrued expenses and other liabilities. Offsetting collateral received by or paid to the counterparty is presented gross within accrued expenses and other liabilities or other assets, as applicable, on the interim condensed consolidated balance sheets.

Cash Flow Hedges

We have interest rate swaps designated as cash flow hedges in order to mitigate our exposure to changes in interest rates on our variable rate warehouse funding debt. The interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. These swaps that qualify as cash flow hedges are documented and designated as such when we enter into the contracts. In accordance with our risk management policies, we structure our hedges with terms similar to that of the item being hedged. We formally assess, at inception of the hedge accounting relationship and on a quarterly basis, whether derivatives designated as cash flow hedges are highly effective in offsetting changes to the forecasted cash flows of the hedged items.

The gain or loss on the derivatives is recorded in other comprehensive income (loss) (“OCI”) and reclassified into earnings when the hedged cash flows are recognized in funding costs within the interim consolidated statements of operations and comprehensive income. The amount that is reclassified into earnings is presented in the interim consolidated statements of income in funding costs, the same line item in which the hedged transaction is recognized.

Derivatives Not Designated as Hedges

We have interest rate caps and interest rate swaps that are not designated as hedging instruments. We enter into these contracts to manage interest rate risk. Any changes in the fair value of these financial instruments are reflected in other income, net, on the interim condensed consolidated statements of operations and comprehensive loss.

Derivative Activity

The following table summarizes the total fair value, including interest accruals, and outstanding notional amounts of derivative instruments as of March 31, 2023 and June 30, 2022 (in thousands):


	March 31, 2023						June 30, 2022
	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as cash flow hedges
Interest rate contracts - cash flow hedges	$	1,100,000	$	27	$	(284)	$	—	$	—	$	—
Derivatives not designated as hedges
Interest rate contracts	2,066,660		49,432		—		1,690,000		49,983		—
Total gross derivative assets/liabilities	$	3,166,660	$	49,459	$	(284)	$	1,690,000	$	49,983	$	—

The following table summarizes the impact of the cash flow hedges on Accumulated Other Comprehensive Income (“AOCI”) (in thousands):


	Three Months Ended March 31,		Nine Months Ended March 31,
	2023		2023
Balance at beginning of period	$	—	$	—
Changes in fair value	(303)		(303)
Amounts reclassified into earnings (1)	(46)		(46)
Balance at end of period (2)	$	(257)	$	(257)

(1)The amounts reclassified into earnings is presented in the interim consolidated statements of income within funding costs.

(2)Over the next 12 months, we expect to reclassify $0.3 million of net pre-tax losses from AOCI into funding costs within our interim consolidated statements of operations and comprehensive income.

The following table summarizes the impact of the derivative instruments on income and indicates where within the interim consolidated statements of operations and comprehensive income such impact is reported (in thousands):


Location of Gains (Losses) where the Effects of Derivatives are recorded	Three Months Ended March 31,		Nine Months Ended March 31,
	2023	2022	2023	2022
The effects of cash flow hedging
Funding Costs	(46)		(46)
The effects of derivatives not designated in hedging relationships
Other Income, net	(3,691)	35,145	33,819	38,416