As Portland, Ore.-based Umpqua Holding Corp. and Spokane-based Sterling Financial Corp. await regulatory approval of the proposed merger of their respective banks, it’s a good time to pause and consider how the financial landscape is shifting in both the Inland Northwest and greater Pacific Northwest.

Increased regulatory burdens, coupled with banks’ desires to expand their markets, will likely lead to more consolidation. In 2013, merger-and-acquisition activity was brisk for the banking industry in the Pacific Northwest, with more than 10 deals announced. This year is expected to bring more of the same.

The cost of keeping up with regulations continues to grow, particularly as banks exceed $10 billion in assets. Combining assets with another institution can help offset that additional cost more efficiently. In addition, as small and mid-sized banks and community banks look to expand their product and service offerings as well as their geographic reach, it may make sense to find a strategic ally that can accelerate growth and fill out regional footprints.

For the Spokane community, the Umpqua/Sterling merger means a stronger community bank at any size. The combined institution will house more than $22 billion in assets. No overlap in the Inland Northwest means that not only should local bank stores remain operating, but customers will have greater access to their bank as they travel throughout Washington, Oregon, Idaho, California, and Nevada. 

Puget Sound’s economy has picked up steam in the latter half of 2013 and the Inland Northwest economy usually lags by nine months to a year, which bodes well for local businesses. The newly formed Umpqua Bank will offer more robust commercial and industrial loan platforms as our economy expands and businesses start hiring and reinvesting. The Spokane region is expected to benefit from greater consumer spending and improvements in the housing market, and regional job growth is anticipated to expand at a modest pace of 1.5 percent in 2014.

Considered a gateway to the Mountain region, Spokane will continue to be an important hub for the banking industry and for the proposed Umpqua/Sterling organization. The regional economy is diverse and growing, from aerospace companies on the West Plains, to tech and health sciences companies in Spokane, to manufacturing companies in Spokane Valley and Liberty Lake. For a community bank the size of Umpqua and Sterling combined, the region’s businesses offer considerable potential for business banking relationships and commercial loan opportunities.

As a bank grows, customers might question its ability to retain its community focus. With its pool of talent, local expertise and long-standing relationships, Sterling has deep roots in the region. As part of the Umpqua organization, it will continue to be well positioned to address local needs and economic conditions. Both banks have a history of forging local ties and supporting local decision making in lending, and such community connections aren’t bound to change any time soon.

Facing more intense competition moving forward, local banks will be hard pressed to demonstrate superior value. As successful community banks on their own, Umpqua and Sterling together will continue to differentiate the combined organization, in part, by its personal and direct relationships with its customers and communities. Sterling has been an ardent supporter of Spokane’s economic growth and development, and the larger organization hopes to continue that tradition. 

Hand in hand with an increasingly competitive environment, banks will need to rely on unique delivery systems to set themselves apart in 2014. Regardless of the size or location of an institution, customers will become more demanding in terms of streamlined and efficient digital offerings. New technologies will offer additional opportunity for banks to differentiate themselves, but banks must be wary of customers’ high expectations. 

Banks also will be challenged to maintain strong balance sheets. Despite significant improvements in loan growth, the interest rate environment has squeezed margins for banks of all sizes, and little change is readily apparent. Plus, expenses associated with compliance with the Dodd-Frank Act may force banks to evaluate areas for cost cutting or to consider new alliances to help share the burden.

Despite the challenges ahead in banking, the potential for a continued and steady rebound in the regional economy could provide opportunity. Banks that prove agile and in tune with local needs should be best situated to maintain and grow market share.

Ezra Eckhardt is the president and chief operating officer of Sterling Bank.