The Company’s income tax expense is comprised of the following components for the years ended September 30, 2021 and 2020:

MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

	For the Year Ended
	September 30,
	2021		2020
	(In thousands)

Income tax expense at the statutory federal tax rate of 21%
for the year ended September 30, 2021 and 2020	$	1,832	$	653
State tax expense		772		323
Other		1		(55	)
Income tax expense	$	2,605	$	921

A reconciliation of income tax at the statutory tax rate to the effective income tax expense for the years ended September 30, 2021 and 2020 is as follows:

	September 30,
	2021			2020
	(In thousands)

Income tax expense at statutory rate	$	1,832		$	653
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit		772			323
Tax-exempt income, net		(68	)		(68	)
Nondeductible expenses		26			18
Employee stock ownership plan		1			(5	)
Other, net		42			—
Total income tax expense	$	2,605		$	921

The major sources of temporary differences and their deferred tax effect at September 30, 2021 and 2020 are as follows:

	September 30,
	2021			2020
	(In thousands)

Allowance for loan losses	$	2,270		$	1,799
Deferred loan fees		416			731
Unrealized loss, minimum pension liability		351			620
OREO		123			73
Straight line rent		101			110
Gross deferred tax asset		3,261			3,333

Depreciation		(874	)		(872	)
Discount accretion on investments		—			(61	)
Employee benefits		(183	)		(37	)
Mortgage servicing rights		(1	)		(3	)
Gross deferred tax liability		(1,058	)		(973	)
Net deferred tax asset, included in other assests	$	2,203		$	2,360

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

upon the generation of future taxable income during the periods in which temporary differences are deductible and carry forwards are available.

There were no valuation allowances for the year ended September 30, 2021 and 2020. The Company has considered future market growth, forecasted earnings, future taxable income, feasible and permissible tax planning strategies in determining the realizability of deferred tax assets. If the Company was to determine that it would not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made.

The Bank’s statutory income tax rate in the State of New Jersey was 9.0% for the years ending September 30, 2021 and 2020. The State of New Jersey imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax is set at a rate of 2.5% and it currently effective through December 31, 2023. Accordingly, the Company used an 11.5% State tax rate for the calculation of its State income tax expense the years ended September 30, 2021 and 2020.