Atlantic Coast Federal: An Effectiveness Echo of Restatement Thunder

A while ago, investors were inundated by restatement thunder as firms revised their past financials to unwind Statement 133 hedge accounting for derivative instruments that they thought qualified properly for skipping effectiveness testing.

An echo of that thunder can be heard in the non-reliance 8-K filed by Atlantic Coast Federal Corporation (ACFC).

Like other firms, the company initially figured that the terms of interest rate swaps used in hedging evenly matched the terms of the items hedged - and that they’d be off the hook for effectiveness testing of the hedging relationship on an ongoing basis.

Oops. Not to be. It turns out that the interest rate swaps employed contained an embedded written option that allowed the counterparty to terminate the interest rate swap under certain conditions, while the hedged items - FHLB advances - did not contain similar terms. Lacking absolute parity and a match of the critical terms, the firm decided that the initial assessment was wrong.

Fluctuations in the value of the interest rate swaps should have been included in other non-interest income resulting in quarterly and annual mark-to-market adjustments instead of in other comprehensive income. That’s how it will be treated in the revisions to the past financials.

ACFC 1-yr chart: