Income Taxes:

During 2013, Sterling recognized income tax expense of $37.9 million, reflecting a 29% effective tax rate. During 2012, an income tax benefit of $292.0 million was recognized, the result of reversing Sterling's deferred tax asset valuation allowance. The effective tax rate for 2013 reflects permanent differences between book income and tax income from the Borrego acquisition bargain purchase gain, as well as tax exempt municipal bond and BOLI income. As of December 31, 2013, the net deferred tax asset was $284.1 million, including $242.3 million of net operating loss and tax credit carry-forwards, compared with $292.1 million as of December 31, 2012, including $274.0 million of net operating loss and tax credit carry-forwards.

The components of income tax expense (benefit) included in the consolidated statements of operations were as follows:



	Years Ended December 31,
	2013			2012			2011
	(in thousands)
Current income taxes:
Federal	$	(27	)	$	(163	)	$	(248	)
State	0			0			(27		)
Total current income taxes	(27		)	(163		)	(275		)

Deferred income taxes:
Federal	35,900			(269,968		)	248
State	1,994			(21,912		)	27
Total deferred income taxes	37,894			(291,880		)	275
Total income tax (benefit) expense	$	37,867		$	(292,043	)	$	0

The tax effects of the principal temporary differences giving rise to deferred tax assets and liabilities were as follows:



	December 31,
	2013			2012
	(in thousands)
Deferred tax assets:
NOL carryforwards - federal	$	206,841		$	242,318
NOL carryforwards - state	19,831			21,443
Tax credits - federal	13,172			7,671
Tax credits - state	2,421			2,594
Allowance for losses on loans	54,951			61,385
Deferred compensation	13,727			10,760
Bonus accrual	4,901			4,670
Intangibles	4,591			2,284
Unrealized losses on available-for-sale securities	1,368			0
Purchase accounting premiums and discounts	3,470			2,087
Nonaccrual loans	2,543			1,931
Deferred rent	1,309			1,119
Other	1,143			3,394
Total deferred tax assets	330,268			361,656
Deferred tax liabilities:
Mortgage servicing rights	19,851			11,869
FHLB Seattle dividends	15,451			16,325
Deferred loan fees	6,799			5,867
Prepaid expenses	1,955			2,151
Fair value - loans held for sale	389			8,966
Unrealized gains on available-for-sale securities	0			22,627
ASC 740 (FIN 48) - temporary differences	0			5
Total deferred tax liabilities	44,445			67,810
Valuation allowance	(1,764		)	(1,764		)
Net deferred tax asset	$	284,059		$	292,082

As of December 31, 2013, the net operating loss carry-forwards represented the tax effect of $591.0 million of federal operating loss carry-forwards, $332.7 million of state operating loss carry-forwards, federal tax credits of $13.2 million, and state tax credits of $2.4 million. These operating loss carry-forwards and tax credits expire between 2014 and 2032.

The following table summarizes the calculation of Sterling's effective tax rates for the periods presented:



	Years Ended December 31,
	2013		2012		2011
Income tax provision at the federal statutory rate	35.0	%	35.0	%	35.0	%
Tax effect of:
Deferred tax valuation allowance	0.0	%	(347.8	)%	(25.0	)%
State taxes, net of federal benefit	3.5	%	3.8	%	0.0	%
Tax-exempt interest	(1.8	)%	(2.5	)%	(6.3	)%
Bank owned life insurance	(1.7	)%	(3.2	)%	(5.8	)%
Tax credits	(2.4	)%	0.0	%	(1.6	)%
Other, net	(3.7	)%	3.2	%	3.7	%
Effective tax rate	28.9	%	(311.5	)%	0.0	%

The following is a reconciliation of the beginning and ending amount of unrecognized tax positions for the periods presented:



	2013			2012			2011
	(in thousands)
Balance at January 1	$	412		$	525		$	1,586
Additions - current year tax positions	70			70			75
Additions - prior year tax positions	0			0			0
Reductions - prior year tax positions	(55		)	(183		)	(1,136		)
Balance at December 31	427			412			525
Accrued interest and penalties, net of tax effect at December 31	63			100			103
Total liability for unrecognized tax positions at December 31	$	490		$	512		$	628

Sterling's tax positions for the years 2009 through 2013 remain subject to review by federal and state taxing authorities. Realization of $490,000 of unrecognized tax liabilities would result in an unfavorable impact to the effective tax rate.