Income Taxes

12 Months Ended

Dec. 31, 2018

NOTE 10 — Income Taxes

The provision for income taxes included in the accompanying financial statements consists of the following components:

	Years ended December 31,
	2018			2017
Current taxes:
Federal	$	(397	)	$	89
State		—			—
Total current taxes		(397	)		89
Deferred taxes:
Federal		263			(678	)
State		(43	)		(178	)
Adjustment to net deferred tax asset for the Tax Cuts and Jobs Act		—			2,062
Change in valuation allowance		—			(4,757	)
Total deferred taxes		220			(3,551	)
Total tax (benefit)	$	(177	)	$	(3,462	)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The net deferred tax asset in the accompanying balance sheet includes the following amounts of deferred tax assets and liabilities:

	As of December 31,
	2018		2017
Deferred tax assets:
Allowance for loan losses	$	884	$	848
Deferred compensation		658		615
Accrued employee benefits		229		227
Loss carryforwards		4,080		4,105
Unrealized loss on available for sale securities		586		292
Premises and equipment		262		274
Other		91		436
Total deferred tax assets		6,790		6,797
Deferred tax liabilities:
Loan fees	$	136	$	161
Premises and equipment		—		—
Mortgage servicing rights		570		623
FHLB stock dividends		38		42
Total deferred tax liabilities		744		826
Net deferred tax asset	$	6,046	$	5,971

The Bank has federal loss carryforwards of approximately $12,500 as of December 31, 2018. These losses begin to expire in 2029. The Bank has state net operating loss carryforwards totaling approximately $22,600 that may be applied against future state taxable income and begin to expire in 2021 as of December 31, 2018.

Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses, with less weight placed on future projected profitability. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryforward periods available under tax law. Management determined there was enough reasonable evidence under current tax laws to reverse the December 31, 2016, valuation allowance of $4,757 during the year ended December 31, 2017.

Under the Internal Revenue Code and Wisconsin statutes, the Bank is permitted to deduct, for tax years beginning before 1997, an annual addition to a reserve for bad debts. The amount differs from the provision for loan losses recorded for financial accounting purposes. Under prior law, bad debt deductions for income tax purposes were included in taxable income of later years only if the bad debt reserves were used for purposes other than to absorb bad debt losses. Because the Bank did not intend to use the reserve for purposes other than to absorb losses, no deferred income taxes were provided. Retained earnings at December 31, 2018, included approximately $8,315, for which no deferred federal or state income taxes were provided. If, in the future, the Bank no longer qualified as a bank for tax purposes, income taxes of approximately $2,278 would be imposed.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amends the Internal Revenue Code to reduce corporate tax rates and modify various tax policies, credits, and deductions. The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate, which is effective for the Bank beginning January 1, 2018. As a result of the tax rate reduction in the Act, the Bank reduced its net deferred tax asset during the year ended December 31, 2017, by $2,062, which was recognized as additional income tax expense.

A summary of the sources of differences between income taxes at the federal statutory rate and the provision (credit) for income taxes follows:

	Years ended December 31,
	2018						2017
	Amount			% of Pretax Income			Amount			% of Pretax Income
Reconciliation of statutory to effective rates:
Federal income taxes at statutory rate	$	(41	)		21.00	%	$	(613	)		34.00	%
Adjustments for:
State income taxes, net of federal income tax benefit		(34	)		17.34	%		(118	)		6.54	%
Increase in cash value of life insurance		(142	)		72.73	%		(140	)		7.76	%
Change in valuation allowance		—			0.00	%		(4,757	)		263.83	%
Tax reform		—			0.00	%		2,062			-114.36	%
Other		40			-20.41	%		104			-5.76	%
Provision (credit) for income taxes	$	(177	)		90.66	%	$	(3,462	)		192.01	%

With few exceptions, the Bank is no longer subject to federal or state examinations by taxing authorities for years before 2014.