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Income Taxes
 12 Months Ended
Sep. 30, 2024
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXES
Income tax expense (benefit) for the years ended September 30, 2024, 2023, and 2022 consisted of the following:
202420232022
(Dollars in thousands)
Current:
Federal$12,153 $6,789 $17,105 
State394 1,435 3,598 
12,547 8,224 20,703 
Deferred:
Federal1,316 (39,209)1,632 
State2,230 (6,311)415 
3,546 (45,520)2,047 
$16,093 $(37,296)$22,750 

The Company's effective tax rates were 29.7%, 26.8%, and 21.2% for the years ended September 30, 2024, 2023, and 2022, 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:
202420232022
Amount%Amount%Amount%
(Dollars in thousands)
Federal income tax expense
computed at statutory Federal rate$11,362 21.0 %$(29,180)21.0 %$22,513 21.0 %
Increases (decreases) in taxes resulting from:
Pre-1988 bad debt recapture5,406 10.0 — — — — 
State taxes, net of Federal tax effect2,497 4.8 (5,412)3.9 3,399 3.2 
Low income housing tax credits, net(2,244)(4.2)(2,303)1.6 (2,238)(2.1)
ESOP related expenses, net (448)(0.8)(652)0.5 (641)(0.6)
Other(480)(1.1)251 (0.2)(283)(0.3)
$16,093 29.7 %$(37,296)26.8 %$22,750 21.2 %

Pre-1988 bad debt recapture - Prior to the Small Business Job Protection Act (the "1996 Act"), the Bank was permitted to deduct, up to a specified formula limit, a certain percentage of income as bad debts, for which the Bank was not required to establish a deferred tax liability. The difference between actual bad debts and the formula limit bad debt amount ("excess reserves") was recorded in the Bank's retained earnings. As a result of the 1996 Act, savings institutions, like the Bank, were required to use the specific charge-off method in computing bad debts on their tax returns beginning with their 1996 Federal tax returns. The 1996 Act required the recapture of excess reserves over the base year, which was September 30, 1988 for the Bank. The excess reserves established prior to September 30, 1988 are to remain in retained earnings ("pre-1988 bad debt reserves") subject to recapture by the Bank on the occurrence of certain distributions in excess of current earnings and profits accumulated in tax years beginning after December 31, 1951 ("accumulated earnings and profits"). For tax purposes, if current and accumulated earnings and profits are negative, distributions from the Bank to Capitol Federal Financial, Inc. would be deemed to be drawn out of the Bank's pre-1988 bad debt reserve requiring a payment of income tax at the then-current rate by the Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distributions ("pre-1988 bad debt recapture").
The net loss associated with the strategic securities transaction ("securities strategy") that was recognized in fiscal year 2023 net income will be recognized in the Company's fiscal year 2024 income tax return due to the sale of the securities occurring in October 2023 (in fiscal 2024). As a result, the Company will report a taxable net loss on its September 30, 2024 income tax return, resulting in negative current and accumulated earnings and profits for the Bank for the current fiscal year. This required the Bank to draw upon the pre-1988 bad debt reserves for distributions from the Bank to the Company during the current fiscal year and resulted in income tax expense in fiscal year 2024 equivalent to the distributions paid by the Bank times the Bank's current statutory tax rate of 21%. During the year ended September 30, 2024, the Bank recorded $5.4 million of income tax expense related to these distributions. The Bank estimates its pre-1988 bad debt reserves to be $75.9 million at September 30, 2024, which equates to an unrecorded deferred tax liability of $15.9 million at September 30, 2024.

The components of the net deferred income tax assets (liabilities) as of September 30, 2024 and 2023 were as follows:
20242023
(Dollars in thousands)
Deferred income tax assets:
Net operating loss carry forward$30,459 $— 
Low income housing tax credit carry forward12,813 — 
ACL4,837 4,989 
Lease liabilities2,156 2,835 
ESOP compensation1,522 1,510 
Reserve for off-balance sheet credit exposures1,451 999 
Salaries, deferred compensation and employee benefits1,431 1,269 
Net purchase discounts related to acquired loans116 149 
Low income housing partnerships6 92 
Net loss on securities transactions— 47,006 
Unrealized loss on AFS securities— 368 
Other829 912 
Gross deferred income tax assets55,620 60,129 
Valuation allowance(27)(30)
Gross deferred income tax asset, net of valuation allowance55,593 60,099 
Deferred income tax liabilities:
FHLB stock dividends18,871 17,547 
Unrealized gain on AFS securities6,382 — 
ACL2,741 2,936 
Premises and equipment2,317 3,164 
Lease right-of-use assets2,043 2,748 
Unrealized gain on interest rate swaps508 3,176 
Deposit intangible200 411 
Other553 512 
Gross deferred income tax liabilities33,615 30,494 
Net deferred tax assets$21,978 $29,605 

During the year ended September 30, 2024, the Company reversed the $47.0 million deferred tax asset as of September 30, 2023 related to the net loss on the securities transaction and recorded a deferred tax asset for the anticipated taxable net loss in the current fiscal year. The deferred tax asset related to the taxable net loss, or net operating loss, was $30.5 million at September 30, 2024. The gross federal and state net operating loss amount at September 30, 2024 was $126.0 million and will carryforward indefinitely. In addition, the Company recorded a deferred tax asset in the current fiscal year related to its low income housing tax credits that are currently not utilized due to income tax return income limitations. The related deferred tax asset at September 30, 2024 was $12.8 million. Federal tax credits carry forward for 20 years.
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, 2024 and 2023, the Company had a valuation allowance of $27 thousand and $30 thousand, respectively, related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return as management believes there will not be sufficient taxable income to fully utilize these deferred tax assets before they begin to expire in 2028 and thereafter. For this reason, a valuation allowance was recorded for the related amounts at September 30, 2024 and 2023. No additional valuation allowances were recorded for the Company's other deferred tax assets as management believes it is more likely than not that these amounts will be realized through the reversal of the Company's existing taxable temporary differences and projected future taxable income.

For the years ended September 30, 2024, 2023, and 2022 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 loan 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 2021.