Mounting challenges are reshaping how some banks view expansion in Chicago.

While Illinois lawmakers just passed a long-overdue budget, concerns linger that the effort failed to address underlying financial and political shortcomings.

Chicago has its own issues. The population has been shrinking, by roughly 5% since 2010, based on Census Bureau data, and Moody’s Investors Service recently placed the city's general obligation bonds under review for a possible downgrade.

Those issues have given a boost to communities in northern Indiana and southern Wisconsin.

Wintrust Financial in Rosemont, Ill., has bought two Wisconsin banks — Generations Bancorp and Delavan Bancshares — in the last three years. The $27 billion-asset company has also been making a southern push into Indiana.

“Our moves into northwest Indiana and southern Wisconsin were defensive also, but we want to grow those areas, too, to catch all … those that are going to move or expand in that area,” Ed Wehmer, Wintrust's president and CEO, said during a recent conference call to discuss quarterly results.

While having an approved budget eases some uncertainty, people remain “very, very frustrated” that it merely added taxes and did “nothing for reform,” Wehmer added. “The feeling is somewhat mixed. Everybody is unhappy that no structural changes were made and I don’t think the pressure will be off.”

Wehmer isn’t the only banker unsatisfied with the situation in Illinois.

Lawmakers failed to address concerns about political corruption, said Micah Barlett, president and CEO of Town and Country Bank in Springfield, Ill. The $742 million-asset bank provides services to many state employees.

“The sense ... is that we really haven’t passed a solution here," Bartlett said. "Increasing taxes and not fundamentally addressing the core problem will probably make the population issue worse."

Expect more people to leave Chicago, industry experts said.

“You continue to see folks from Illinois move … to avoid the recent increase in income taxes,” said Nathan Race, an analyst at Piper Jaffray. Wintrust is “still well positioned to maintain those clients given that they do have a presence” beyond Chicago.

Nearby markets such as Milwaukee and Madison, Wis., present “more attractive opportunities” than Illinois, said Kevin Reevey, an analyst at D.A. Davidson. “Even though they finally came together and passed a balanced budget a few weeks ago, the state is still experiencing population shrinkage.”

Another factor for Wintrust’s expansion beyond Illinois is its selectivity when it comes to acquisition targets. Wehmer, who has historically favored buying small institutions with deep roots in established neighborhoods, said in an interview that there is a dearth of healthy targets in Chicago with assets of $500 million or less.

Other banks are looking at acquisitions in nearby markets.

First Midwest Bancorp in Itasca, Ill., is among those interested in adjacent states, Michael Scudder, the $14 billion-asset company’s president and CEO, said during a recent conference call to discuss quarterly results.

Bankers, however, stressed that opportunities still exist in Chicago, which is still the nation’s third-biggest city.

“Chicago, in and of itself, continues to be a very robust market for business,” Scudder said. “It is the center of the Midwest … in terms of business activity and economic size."

Wintrust can continue to expand in the city despite an outflow of residents, Wehmer said.

“Illinois is still a very vibrant, economic community,” Wehmer said in the interview. “The fact that the government can’t get their act together and act efficiently is an issue, but this is still a great place to do business.”

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