Income Taxes

12 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income tax expense for the years ended September 30, 2021, 2020, and 2019 consisted of the following:

	2021		2020		2019
	(Dollars in thousands)
Current:
Federal	$	17,586	$	17,610	$	22,030
State	4,028		4,068		4,742
	21,614		21,678		26,772
Deferred:
Federal	(1,405)		(4,857)		(456)
State	(263)		(731)		95
	(1,668)		(5,588)		(361)
	$	19,946	$	16,090	$	26,411

The Company's effective tax rates were 20.8%, 20.0%, and 21.9% for the years ended September 30, 2021, 2020, and 2019, respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense resulted from the following:

	2021				2020				2019
	Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Federal income tax expense
computed at statutory Federal rate	$	20,166	21.0	%	$	16,932	21.0	%	$	25,337	21.0	%
Increases (decreases) in taxes resulting from:
State taxes, net of Federal tax effect	3,102		3.2		2,626		3.3		4,024		3.3
Low income housing tax credits, net	(2,085)		(2.1)		(1,897)		(2.4)		(1,745)		(1.4)
ESOP related expenses, net	(662)		(0.7)		(525)		(0.6)		(757)		(0.6)
Acquired BOLI policies	—		—		(636)		(0.8)		—		—
Other	(575)		(0.6)		(410)		(0.5)		(448)		(0.4)
	$	19,946	20.8	%	$	16,090	20.0	%	$	26,411	21.9	%

The components of the net deferred income tax liabilities as of September 30, 2021 and 2020 were as follows:

	2021		2020
	(Dollars in thousands)
Deferred income tax assets:
Unrealized loss on interest rate swaps	$	6,763	$	12,916
ACL	4,163		6,553
Lease liabilities	3,129		3,590
Salaries, deferred compensation and employee benefits	2,017		1,622
ESOP compensation	1,422		1,360
Reserve for off-balance sheet credit exposures	1,402		—
Low income housing partnerships	522		655
Net purchase discounts related to acquired loans	287		577
Other	417		2,717
Gross deferred income tax assets	20,122		29,990
Valuation allowance	(72)		(1,808)
Gross deferred income tax asset, net of valuation allowance	20,050		28,182
Deferred income tax liabilities:
FHLB stock dividends	12,563		15,699
Premises and equipment	4,256		4,625
Lease right-of-use assets	3,088		3,588
ACL	2,892		2,388
Unrealized gain on AFS securities	1,501		7,617
Deposit intangible	1,047		1,475
Other	513		970
Gross deferred income tax liabilities	25,860		36,362
Net deferred tax liabilities	$	5,810	$	8,180

The State of Kansas allows for a bad debt deduction on savings and loan institutions' privilege tax returns of up to 5% of Kansas taxable income.  Due to the low level of net loan charge-offs experienced by the Bank historically, at times, the Bank's bad debt deduction on the Kansas privilege tax return has been in excess of actual net charge-offs, resulting in a state deferred tax liability, which is presented separately from the federal deferred tax asset related to ACL.

The Company assesses the available positive and negative evidence surrounding the recoverability of its deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances.  At September 30, 2021 and 2020, the Company had a valuation allowance of $72 thousand and $1.8 million, respectively, related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return. The companies included in the consolidated Kansas corporate income tax return are the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., as the Bank files a Kansas privilege tax return. Based on the nature of the operations of the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., management believes there will not be sufficient taxable income to fully utilize the deferred tax assets noted above; therefore, a valuation allowance has been recorded for the related amounts at September 30, 2021 and 2020. The decrease in the valuation allowance at September 30, 2021 compared to September 30, 2020 was due primarily to the expiration of operating losses generated during fiscal year 2011, which resulted in the removal of the related deferred tax asset and corresponding valuation allowance.

ASC 740 Income Taxes prescribes a process by which a tax position taken, or expected to be taken, on an income tax return is determined based upon the technical merits of the position, along with whether the tax position meets a more-likely-than-not-recognition threshold, to determine the amount, if any, of unrecognized tax benefits to recognize in the financial statements. Estimated penalties and interest related to unrecognized tax benefits are included in income tax expense in the consolidated statements of income. For the years ended September 30, 2021, 2020, and 2019 the Company had no unrecognized tax benefits.

The Company files income tax returns in the U.S. federal jurisdiction and the state of Kansas, as well as other states where it has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest income derived from sources within a given state. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for fiscal years ending before 2018.