Income Taxes

12 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income tax expense for the years ended September 30, 2020, 2019, and 2018 consisted of the following:

	2020		2019		2018
	(Dollars in thousands)
Current:
Federal	$	17,610	$	22,030	$	26,007
State	4,068		4,742		3,512
	21,678		26,772		29,519
Deferred:
Federal	(4,857)		(456)		(5,956)
State	(731)		95		1,416
	(5,588)		(361)		(4,540)
	$	16,090	$	26,411	$	24,979

The Tax Cuts and Jobs Act, enacted in December 2017, made significant changes to the U.S. corporate income tax laws, such as a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company had a blended statutory federal income tax rate of 24.5% for the year ended September 30, 2018, which was based on the applicable income tax rates prior to and subsequent to January 1, 2018 and the number of days in the fiscal year. The Company revalued its deferred tax assets and liabilities as of the enactment date to account for the future impact of a lower federal income tax rate. The revaluation of the Company's deferred tax assets and liabilities resulted in a $7.5 million reduction in income tax expense during the December 31, 2017 quarter and a corresponding reduction in the Company's net deferred tax liability, as reflected in the table below.

The Company's effective tax rates were 20.0%, 21.9%, and 20.2% for the years ended September 30, 2020, 2019, and 2018, 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:

	2020				2019				2018
	Amount		%		Amount		%		Amount		%
	(Dollars in thousands)
Federal income tax expense
computed at statutory Federal rate	$	16,932	21.0	%	$	25,337	21.0	%	$	30,392	24.5	%
Increases (decreases) in taxes resulting from:
State taxes, net of Federal tax effect	2,626		3.3		4,024		3.3		3,986		3.2
Deferred tax liability remeasurement, net	—		—		—		—		(7,498)		(6.0)
Low income housing tax credits, net	(1,897)		(2.4)		(1,745)		(1.4)		(500)		(0.4)
ESOP related expenses, net	(525)		(0.6)		(757)		(0.6)		(790)		(0.6)
Acquired BOLI policies	(636)		(0.8)		—		—		—		—
Other	(410)		(0.5)		(448)		(0.4)		(611)		(0.5)
	$	16,090	20.0	%	$	26,411	21.9	%	$	24,979	20.2	%

The components of the net deferred income tax liabilities as of September 30, 2020 and 2019 were as follows:

	2020		2019
	(Dollars in thousands)
Deferred income tax assets:
Unrealized loss on interest rate swaps	$	12,916	$	8,041
ACL	6,553		1,938
Lease liabilities	3,590		—
Salaries, deferred compensation and employee benefits	1,622		1,579
ESOP compensation	1,360		1,288
Low income housing partnerships	655		792
Net purchase discounts related to acquired loans	577		991
Other	2,717		2,918
Gross deferred income tax assets	29,990		17,547
Valuation allowance	(1,808)		(1,823)
Gross deferred income tax asset, net of valuation allowance	28,182		15,724
Deferred income tax liabilities:
FHLB stock dividends	15,699		16,009
Unrealized gain on AFS securities	7,617		3,258
Premises and equipment	4,625		3,546
Lease right-of-use assets	3,588		—
Deposit intangible	1,475		1,978
ACL	2,388		3,018
Other	970		2,197
Gross deferred income tax liabilities	36,362		30,006
Net deferred tax liabilities	$	8,180	$	14,282

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 both September 30, 2020 and 2019, the Company had a valuation allowance of $1.8 million 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, 2020 and 2019.

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, 2020, 2019, and 2018 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 before 2017.