Dime Commercial Bancshares, Inc. /NY/ 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosures about market risk were presented at December 31, 2020 in Item 7A of the Holding Company’s Annual Report on Form 10-K, filed with the SEC on March 15, 2021. The following is an update of the discussion provided therein. General . The Company’s largest component of market risk remains interest rate risk. The Company is not subject to foreign currency exchange or commodity price risk. During the three and nine months ended September 30, 2021, the Company conducted zero transactions involving derivative instruments requiring bifurcation in order to hedge interest rate or market risk. Interest Rate Risk Exposure Analysis Economic Value of Equity ("EVE") Analysis . In accordance with agency regulatory guidelines, the Company simulates the impact of interest rate volatility upon EVE using several interest rate scenarios. EVE is the difference between the present value of the expected future cash flows of the Company’s assets and liabilities and the value of any off-balance sheet items, such as derivatives, if applicable. Traditionally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. Increases in interest rates thus result in decreases in the fair value of interest-earning assets, which could adversely affect the Company’s consolidated results of operations in the event they were to be sold, or, in the case of interest-earning assets classified as available-for-sale, reduce the Company’s consolidated stockholders’ equity, if retained. The changes in the value of assets and liabilities due to fluctuations in interest rates measure the interest rate sensitivity of those assets and liabilities. In order to measure the Company’s sensitivity to changes in interest rates, EVE is calculated under market interest rates prevailing at a given quarter-end ("Pre-Shock Scenario"), and under various other interest rate scenarios ("Rate Shock Scenarios") representing immediate, permanent, parallel shifts in the term structure of interest rates from the actual term structure observed in the Pre-Shock Scenario. An increase in the EVE is considered favorable, while a decline is considered unfavorable. The changes in EVE between the Pre-Shock Scenario and various Rate Shock Scenarios due to fluctuations 63 Table of Contents in interest rates reflect the interest rate sensitivity of the Company’s assets, liabilities, and off-balance sheet items that are included in the EVE. Management reports the EVE results to the Board of Directors on a quarterly basis. The report compares the Company’s estimated Pre-Shock Scenario EVE to the estimated EVE calculated under the various Rate Shock Scenarios. The Company’s valuation model makes various estimates regarding cash flows from principal repayments on loans and deposit decay rates at each level of interest rate change. The Company’s estimates for loan repayment levels are influenced by the recent history of prepayment activity in its loan portfolio, as well as the interest rate composition of the existing portfolio, especially in relation to the existing interest rate environment. In addition, the Company considers the amount of fee protection inherent in the loan portfolio when estimating future repayment cash flows. Regarding deposit decay rates, the Company tracks and analyzes the decay rate of its deposits over time, with the assistance of a reputable third party, and over various interest rate scenarios. Such results are utilized in determining estimates of deposit decay rates in the valuation model. The Company also generates a series of spot discount rates that are integral to the valuation of the projected monthly cash flows of its assets and liabilities. The valuation model employs discount rates that it considers representative of prevailing market rates of interest with appropriate adjustments it believes are suited to the heterogeneous characteristics of the Company’s various asset and liability portfolios. No matter the care and precision with which the estimates are derived, actual cash flows could differ significantly from the Company’s estimates resulting in significantly different EVE calculations. The analysis that follows presents, as of September 30, 2021 and December 31, 2020, the estimated EVE at both the Pre-Shock Scenario and the +100 Basis Point Rate and +200 Basis Point Rate Shock Scenarios. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 ​ December 31, 2020 ​ ​ ​ Dollar Percentage ​ ​ Dollar Percentage (Dollars in thousands) ​ EVE ​ Change ​ Change ​ EVE ​ Change ​ Change Rate Shock Scenarios ​ ​ + 200 Basis Points ​ $ 1,369,702 ​ $ 222,016 ​ 19.34% ​ $ 601,319 ​ $ 7,892 ​ 1.33% ​ + 100 Basis Points ​ ​ 1,280,262 ​ ​ 132,576 11.55% ​ ​ 597,398 ​ ​ 3,971 0.67% ​ Pre-Shock Scenario ​ 1,147,686 ​ — — ​ 593,427 ​ — — ​ ​ The Company’s Pre-Shock Scenario EVE increased from $593.4 million at December 31, 2020 to $1.15 billion at September 30, 2021. The primary factor contributing to the significant increase in EVE at September 30, 2021, was the completion of the Merger in the first quarter. ​ The Company’s EVE in the +100 Basis Point Rate and +200 Basis Point Rate Shock Scenarios increased from $597.4 million and $601.3 million, respectively, at December 31, 2020, to $1.28 billion and $1.37 billion, respectively, at September 30, 2021. Income Simulation Analysis . As of the end of each quarterly period, the Company also monitors the impact of interest rate changes through a net interest income simulation model. This model estimates the impact of interest rate changes on the Company’s net interest income over forward-looking periods typically not exceeding 36 months (a considerably shorter period than measured through the EVE analysis). Management reports the net interest income simulation results to the Company’s Board of Directors on a quarterly basis. The following table discloses the estimated changes to the Company’s net interest income over the 12-month period beginning September 30, 2021 assuming gradual changes in interest rates for the given rate scenarios: ​ ​ ​ ​ ​ Percentage Change in Gradual Change in Interest rates of: ​ Net Interest Income + 200 Basis Points 1.28 % + 100 Basis Points 0.47 % ​ ​