Jimmy Bhullar: Okay. And if I could ask just one more. Your comments on CRE seem fairly negative and the environment is pretty challenging as well. But how do you square the watch list of over $1 billion or around $1 billion with your CECL reserve, which seems pretty modest at around $34 million?
Brad Dyslin: Yeah. Good morning, Jimmy, this is Brad Dyslin. I’ll take that. There’s a couple of things behind the relatively modest reserving that you’ve seen so far compared to that $1 billion watch list. One is the average LTV of the portfolio and the price declines we’ve seen. What happens when we go through the foreclosure process is we have to mark that asset to the lower of the principal balance of the loan or the value of the asset. So when you’re starting at a 60% LTV, you’ve got a fair amount of cushion before you start to realize losses on that mark. The second dynamic at play here is we are still in process on about half of that $1 billion of watch list, which means we are in workout negotiations with the borrower.
Those can be very long-lasting, very intense and they can ebb and flow a lot of different directions. Once we get certainty that we expect to foreclose, we have to order a third-party appraisal. Those take time to come in. And as they come in, that’s when we end up re-marking our assets. So it’s a combination of our relatively conservative LTVs and the fact that we’ve still got about half that portfolio subject to appraisal.
Jimmy Bhullar: Thank you.
Operator: Our next question will come from Ryan Krueger with KBW. You may now go ahead.
Ryan Krueger: Hey, thanks. Good morning. My first question was on the changes you made to the FX hedging program. And I just wanted to confirm, you had a pretty major decline in the hedge costs in the third quarter versus the last couple of quarters. Just wanted to confirm that — that’s a reasonable expectation on the hedge cost going forward for the foreseeable future?
Max Broden: Yeah. Thank you, Ryan. Yes, I think what you saw in terms of hedge cost for the third quarter, it’s a blend of us rolling into our new structure, so it’s a mix between the old structure and the new structure. In terms of run rate hedge costs going forward, I do think that the third quarter hedge cost that you saw, it’s certainly not going to be higher. We’re probably going to, on a run rate basis going forward, be at this level or slightly lower going forward in terms of actual hedge cost. That is obviously subject to capital markets inputs and everything that impacts the cost of a put option and also, to some extent, if we decide to increase our forward exposure in the future as well. So things like the FX volatility, interest rates, et cetera, will come into play here. But in the near future, I would expect our hedge cost to be similar to the third quarter level or slightly lower.
Ryan Krueger: And there’s no offset anywhere else, right, that would drop to the bottom line?
Max Broden: Sorry, Ryan, I didn’t quite catch that. Can you repeat?
Ryan Krueger: I just want to — there’s no offset anywhere else that would drop to the bottom line?
Max Broden: The way to think about this in terms of the P&L, this will drop to the bottom line. When you think about the P&L here, what we have done when we move gradually from using forwards to put options, what happens is that we are now increasing the volatility for small moves in the yen-dollar as it relates to our capital ratios in Japan, i.e., the SMR and ESR. So for a strengthening yen or a weakening yen, you’re going to see slightly higher volatility in that ratio for small moves. But what the put options give us is that we have dramatically reduced the tails. So any dramatic moves or shock moves in the yen-dollar, we have reduced our risk exposure to those kind of events. And we feel that this is a very good risk reward for us.
