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David Dykstra

Great. Thank you, Tim. First, with respect to the balance sheet growth, Tim mentioned the strong loan and deposit growth in the third quarter. Excluding the impact of Macatawa, that produced a balanced $1.1 billion of growth for both loans and deposits. The loan growth net of the acquisition was nearly 10% on an annualized basis, in line with our prior guidance of being in the upper end of our mid to high single-digit loan growth forecast.
Also, including the impact of Macatawa, we ended the third quarter with a slightly reduced loan-to-deposit ratio of roughly 92% compared to the 93% at the end of the prior quarter. I think it's important to note that non-interest-bearing deposits increased by approximately $708 million in the third quarter, relative to the second quarter, with that growth driven mainly by the non-interest-bearing accounts associated with the Macatawa Bank acquisition. Total non-interest-bearing balances have remained stable at 21% of total deposits as of the end of each of the first, second, and third quarters of this year.
As to other aspects of the balance sheet results, total assets grew by approximately $4 billion to $63.8 billion, and our capital ratios increased slightly due to the strong earnings and the impact of the Macatawa acquisition. Turning to the income statement results, this was a very solid operating quarter for us, but as Tim mentioned, the quarter had a few moving pieces.
To that end, I'll start off by highlighting what we consider the uncommon items and what they were for the quarter. From our perspective, the quarter included a non-recurring day-one provision for credit losses related to the Macatawa Bank acquisition of $15.5 million, unfavorable mortgage servicing rights activity of $11.4 million, acquisition costs of approximately $1.6 million, with a negative impact of those items offset by security gains of $3.2 million.
Each of those items are discussed on the second page of the earnings release if you'd like to refer to them later. The quarter was also impacted by the inclusion of Macatawa's operations for two-thirds of the quarter. So I'll touch on each of these topics during the remainder of my comments, but I just wanted to set the table with those items.
Our net interest income increased $32 million from the prior quarter and represented a record high level amount of quarterly net interest income. A $3.1 billion increase in the average earning assets, including the addition of the Macatawa franchise for the last two months of the quarter, and a stable net interest margin contributed to the increase in net interest income.
Our second-quarter net interest margin was 3.51%, which was stable compared to the 3.52% net interest margin in the prior quarter. Yields and rates on the major balance sheet categories were relatively flat with the loan yields at 6.90% for both the second and the third quarter, and interest-bearing deposit costs were down 1 basis point from the second quarter.
Given the current rate environment and the consensus forecast for additional interest rate cuts by the Federal Reserve, we remain confident that our net interest margin continued to be in a narrow range around 3.5%. in the fourth quarter of 2024 and into 2025. Given our relatively stable net interest margin outlook and the projected continued growth in earning assets, we would expect to again increase net interest income in the fourth quarter.
We recorded a provision for credit losses of $22.3 million in the third quarter, which included the one-time non-recurring day-one CECL provision of $15.5 million related to the Macatawa Bank acquisition. Excluding this one-time day-one acquisition-related provision, the provision for credit losses would have been approximately $6.8 million, which is down from a provision of $40.1 million recorded in the prior quarter and the $20 million amount recorded in the third quarter of last year.
The lower provision expense in the third quarter relative to the second quarter was primarily attributable to lower specific reserves and non-accrual loans, improved forecasted macroeconomic conditions, and to a lesser extent, portfolio changes related to an improved risk rating mix in an overall shorter life of the loan portfolio. Rich Murphy will talk about credit and loan portfolio characteristics in just a bit.
Regarding the other non-interest income and non-interest expense areas, non-interest income totaled $113.1 million in the third quarter, which was down approximately $8 million when compared to the prior quarter. The primary reason for the decline was due to the unfavorable mortgage servicing rights related revenue of $11.4 million, mostly due to negative valuation adjustments as mortgage rates dipped near the end of the quarter.
Mortgage production revenue was also down slightly as gain-on-sale margins narrowed on what was slightly higher originations for sale production volume. Those reductions in mortgage revenues were offset somewhat by a $7 million positive change in gains and losses on securities. I should also note that the prior quarter included an approximately $5 million gain on the sale of certain premium finance loans, which did not reoccur in the third quarter.
And although we don't -- although we do hedge a portion of the MSRs, large movements in interest rates may cause some valuation impacts, both positive and negative. And the dip in the interest rates at the end of the third quarter was the cause of the current quarter negative valuation adjustment. But as Tim noted in his comments, subsequent to the end of the quarter, mortgage rates have risen, which if the quarter were to end at these levels, would cause a positive valuation adjustment in the fourth quarter.
Turning to non-interest expenses, non-interest expenses totaled $360.7 million in the third quarter and were up approximately $20.3 million from the second quarter. The primary reasons for the increase were, first, the non-interest-bearing expenses associated with the Macatawa Bank acquisition were approximately $10.1 million, including a $3 million core deposit and tangible amortization expense.
As this additional $10 million is only for two months of the quarter, we would expect approximately $5 million of additional Macatawa-related expense in the fourth quarter to account for a full quarter's worth of activity. Non-operating acquisition-related expenses were approximately $1.6 million in the third quarter compared to $0.5 million in the prior quarter.
The remaining increase of approximately $9 million was primarily related to salary costs for increased staffing to support the company's growth, higher incentive compensation expense accruals, and increased software expenses associated with upgrading and maintaining IT and information security infrastructure and furthering our investments in digital products and services.
The non-interest expenses we believe were well controlled when considering the impact of the acquisition. Even with that impact of the acquisition, non-interest expenses as a percent of average assets declined to 2.36% for the third quarter compared to 2.38% in the prior quarter and 2.41% in the third quarter of last year. This demonstrates improved expense operating leverage, and we'll continue to try to bring those numbers down.
In summary, the third-quarter results included a record level of quarterly net interest income supported by strong loan and deposit growth and a stable and solid net interest margin. The quarterly results also had good expense control and stable credit metrics. Said another way, excluding the impact on costs by the non-recurring Macatawa day-one related provision for credit losses and the MSR valuation adjustments, it was a really solid quarter for Wintrust, and we're very excited about the prospects for the remainder of the year and throughout 2025.
We also continued to build our tangible book value per share during the quarter. And as you can see on slide 12 of the presentation deck, we've grown tangible book value per share every year since we've been a public company, and we're certainly on track to do that again in 2024.
Additionally, as we've recently attended several investor conferences where the topic of total shareholder returns was discussed on various occasions, we included a new slide, slide 13, in the presentation deck that provides a graphical illustration of Wintrust total shareholder returns for the last one, three, five, and 10-year periods compared to the KBW Regional Bank Index total returns. As you can see from that slide, Wintrust has consistently outperformed that regional bank index, which I think illustrates the resiliency of our operating model through a variety of economic cycles.
So with that, I will conclude my comments and turn it over to Rich to discuss credit.

Richard Murphy

Thanks, Dave. As Tim and Dave both noted, credit performance continued to be very solid in the third quarter. As detailed in the earnings release, loan growth for the quarter was $1.1 billion, or 10% annualized, excluding the $1.3 billion in loans, which we acquired through the purchase of Macatawa Bank.
As detailed on slide 8, we saw strong growth across all major portfolios. A couple of specific areas of note include our asset-based portfolio, which grew by $243 million as a result of bringing in a number of new customers and higher line utilization. The mortgage warehouse team had another strong quarter as a result of onboarding a number of new relationships, which also come with some great deposit opportunities.
We also saw continued growth in core commercial loans, commercial real estate loans, and portfolio residential loans. I would also note that we remain highly focused on getting paid appropriately for our risk. As noted on slide 8, we were able to keep our average loan yields consistent quarter over quarter. We believe that loan growth for the fourth quarter will continue to be strong and align with our previous guidance of mid to high single digits for a number of reasons.
Fourth-quarter volume for commercial premium finance loans has historically been very strong. We believe the hard market for insurance premiums should continue into next year. In addition, our core C&I and leasing pipelines remain very solid. Finally, we saw core C&I line utilization rates continue their upward trend from 37% to 39% quarter over quarter. Offsetting this growth will be pressure on our CRE portfolio as we anticipate higher volumes of payoffs as borrowers seek long-term fixed rate refinancing opportunities.
In summary, we continue to be optimistic about our ability to grow loans at attractive rates and maintain our credit discipline. From a credit quality perspective, as detailed on slide 18, we continue to see strong credit performance with signs of stabilization across the portfolio. This can be seen in a number of metrics.
Non-performing loans as a percentage of total loans was down slightly from 39 basis points to 38 basis points. While NPLs in total were up slightly for the quarter, it's interesting to note that MPLs in our CRE portfolio dropped by $6 million. We've also seen two straight quarters of lower MPLs in our commercial premium finance portfolio as we continue to manage the stress from the transportation segment of that portfolio. And we are pleased to see this trend improve as a result of tighter loan structures and enhanced underwriting.
Charge-offs for the quarter were $26.7 million, or 23 basis points, down from 30 million, or 28 basis points in Q2. This reduction in charge-offs is a result of improved performance in our commercial premium finance portfolio and our core CRE portfolio. Our portfolio continues to be very solid, well diversified, and very granular. Additional evidence of this could be seen in slide 18 where we saw stable levels in our special mentioned and substandard loans. We believe that this quarter's level of NPLs and charge-offs reflect a return to a more stabilized credit environment as evidenced by the chart of historical non-performing asset levels on slide 19.
Finally, we are firmly committed to identifying problems early and charging them down where appropriate. It is evidenced by $18 million of this quarter's charge-offs, which have been previously reserved. Our goal, as always, is to stay ahead of any credit challenges. As noted in our last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly a quarter of our total portfolio.
Higher borrowing costs and pressure on occupancy and lease rates continue to affect CRE valuations, particularly in the office category. As detailed on slide 22, we saw promising signs of stabilization during the third quarter as CRE NPLs decreased from 0.40% to 0.33%. And as noted earlier, we also saw CRE charge-offs reduced from 53 basis points to essentially zero for the third quarter.
On slide 23, we continue to provide enhanced detail in our CRE office exposure. Currently, this portfolio remains steady at $1.7 billion or 13.1% of our total CRE portfolio, and only 3.6% of our total loan portfolio. Of the $1.7 billion of office exposure, 44% is medical office or owner occupied. The average size of a loan in this office portfolio is only $1.5 million. We have only eight loans above $20 million, and only five of which are non-medical or owner occupied.
We continue to perform portfolio reviews on our CRE portfolio, and we stay very engaged with our borrowers. As mentioned on prior calls, our CRE credit team regularly updates their deep-dive analysis of every non-owner-occupied loan over $2.5 million, which will be renewing between now and the end of the second quarter of 2025. This analysis, which covered 84% of all non-owner occupied CRE loans during this period, resulted in the following.
Roughly half the loans reviewed will clearly qualify for a renewal at prevailing rates. Roughly 28% of the loans are anticipated to be paid off or will require a short-term extension at prevailing rates. The remaining loans will require some additional attention, which could include a paydown or pledge of additional collateral.
We continued to back-check the results of the portfolio reviews conducted during prior quarters and have found that the projected outcomes versus actual outcomes were very tightly correlated. And generally speaking, borrowers of loans deemed to require additional attention, continue to support the loans by providing enhancements, including principal reductions.
As we have stated on prior calls, our portfolio is not immune from the effects of higher rates and the market forces behind lease rates, but we continue to proactively identify weaknesses in the portfolio and work with our borrowers to identify the best possible outcomes. In summary, we are encouraged by the trends we saw in the third quarter, and we believe that our portfolio is in good shape and appropriately reserved.
That concludes my comments on credit, and I'll turn it back to Tim.

Timothy Crane

Okay, thank you. That was a lot. I hope helpful. To wrap up our prepared remarks, I'll be very brief. I would just emphasize Dave's reference to the historical charts that we've included in our presentation materials. We have performed well over various time periods and in different economic environments. We would expect that to continue.
Our pipelines remain strong. Our credit approach is disciplined. We remained well positioned to build share in our Midwest markets and within our niche businesses. And with respect to Macatawa, it's still early, but our integration activities are on target, and we remain very encouraged and bullish on the opportunities that we have in West Michigan. Overall, we like our position going into the last quarter of the year and into 2025, and certainly appreciate the support of all of our shareholders.
At this point, I'll pause, and we'll take some questions. Latif.

Question and Answer Session

Operator

(Operator Instructions) Jon Arfstrom, RBC Capital Markets.

Jon Arfstrom

Thanks. Good morning, everyone.

Timothy Crane

Hi, Jon.

Jon Arfstrom

Hey, Tim or Rich, you've touched on it, but can you talk a little bit more about the loan growth outlook and the drivers? Just jotting down notes, Rich, in your comments, you talked about both new customers and higher line utilization. And I think the line utilization is maybe a little bit different than what some of the peer banks are talking about. So can you break that down a little bit more and talk a little bit more about the mix and the expected drivers of loan growth?

Richard Murphy

Yes. I mean, Jon, as you know, I think one of the keys for us is just having this really diversified asset portfolio because when some things are working, some things may not be working. A good example is during the period of very low interest rates, we saw life finance having very solid growth and that as rates came up, their growth is more muted.
Similarly, over the course of the last year and a half, we saw very strong performance out of our P&C premium finance group. And so that has been a huge driver. So if you start with that for the course of this year, they were up a meaningful part of the increases we saw in the overall loan portfolio. But then, getting back to your specific question, you add on some of these other areas.
So we have seen in just the core C&I and core CRE portfolios some incredibly good opportunities just as the competitive landscape in Chicago has changed so much. And so we are seeing -- our pipeline right now is probably as full as I've ever seen it in terms of really quality mid-market companies in particular.
Our asset-based team has seen a fairly substantial pickup in new opportunities. And then coupled with that, we've also seen -- we talked about it in previous calls, we picked up a warehouse line of credit group out of Comerica that we brought on about just over a year ago, and they've been able to bring over a fairly substantial number of clients that they had. And that's added, as I pointed out in my comments, a fairly substantial increase in those balances as well.
Leasing has also been a good part of the story for this year, and so again, it's not one thing that I would point to, but it's a number of these different things that all kind of contribute to the total. So the utilization number, we're encouraged by that. We think that as rates went up, we saw that utilization coming out.
So it's possible that that may not be longstanding, but we would anticipate that utilization rates are probably at a level where we would anticipate them continuing for a while here. So hopefully, that gets at what you were asking.

Jon Arfstrom

Yes, it does, okay. So this feels like a comfortable pace of growth for the company, what you just put up from an organic perspective.

Richard Murphy

Yes -- no, I think that's right. I mean, we're not changing our guidance. We haven't changed our guidance in many years, just because, again, when something's working, something else may not. But when collectively, you add them all up, it kind of hits in that spot.

Jon Arfstrom

Okay, that's helpful. And then Richie, it's either you or Dave on this one, but I appreciate the carve-out of that, the day-one CECL provision, the $15.5 million, and we would carve that out. It suggests a higher run rate for EPS, but the $6.8 million for, call it, legacy Wintrust core seemed a little bit lower than we were expecting.
So I don't know if you can help us think through what the provision might look like in the fourth quarter. I know that's a little bit granular, but that might help us set expectations a little bit. Is this a new lower core run rate for provision, or should we think about maybe a reversion to a higher number? Thanks.

David Dykstra

Well, we gave some detail on slide 18 for the changes for the allowance, but from the provision, there was some benefit. The macroeconomic conditions got better, and so some of the forecast for commercial real estate pricing and some of the other factors that go into the model improved. So that was helpful to keep the provision lower this quarter.
Prior quarter, we also had $9.7 million net more specific reserves. And those relate to some of the charge us that we took this quarter. So it got ahead of those and then blew them out. So that was beneficial that we didn't have similar specific reserves and actually released some of them this quarter.
So I'm not really sure, Jon, depending on where macroeconomic conditions go. But we would expect to have that mid to high single digits growth that Rich talked about and have to provide for that. And then you look at portfolio mix. Our criticized classified numbers have stayed very consistent. And we don't expect those to necessarily get worse. And they're pretty good right now. So there are not a lot of change there.
I think it's probably just growth that we would provide for going forward, adjusted for whatever the economists do out there. But I don't know if the election will impact it, positive or negative, for the fourth quarter. But if you would provide growth for mid to high single digits and the standard provision for that, that's probably my best guess because I just don't know which way the economic factors are going to go.

Jon Arfstrom

Yes, yes, okay. I think that gets us there. I think you saw Moody's upgraded the banking sector last night, so maybe that helps. But thank you, guys, I appreciate it.

Timothy Crane

Yes, thanks. Thanks, Jon.

Operator

(Operator Instructions) David Long, Raymond James.

Timothy Crane

Good morning, Dave.

David Long

Morning, everyone. Good morning. Now that we've got a rate cut out there, how has your deposit cost trended? I mean, what has been your deposit beta since then, and how have you seen the competition react to this first rate cut, both on the commercial side and then maybe on the consumer side too?

Timothy Crane

Yes, David. It's Tim. So on the way up, our beta was in mid-60s, and we would anticipate that it would be similar on the way down. And that, in fact, has been our experience with the first cut, which obviously we're not very far into.
But what we can tell you is that since the end of the quarter and as we start to see more of the cut work through the portfolio, the reduction in deposit costs and the reduction in loan yields have been about the same, which gives us confidence the spread and ultimately the margin should be in the same level going forward here.
With respect to competitors, we've seen rates come down, promotional type rates from the low fives and 5% level to the 4.25%, 4.5% level. And we believe just given the kind of tepid loan growth that many competitors have had that as rates trend down that they'll continue to try and move down. But obviously, that's the risk is that if we get some strange competitive behavior with respect to loan or deposit pricing that we'll have to respond. We have not seen that.

David Long

Got it. Thank you, Tim. And then closing the acquisition of Macatawa and Grand Rapids, I know that's still going through the integration process, but as you look forward there, what are your plans for potentially adding veteran bankers and really leveraging that franchise?

Timothy Crane

Yes, well, they have a terrific team. So number one, we like a lot where we start from. And over time, as we identify opportunities in the market, we'll certainly add the resources that they believe are necessary to fully penetrate the market.
We are seeing inbound inquiries on ESOP loans and construction loans and other kind of specialty areas that they might not have pursued organically. And so we're very encouraged by the early feedback from the market.

David Long

Great. Thanks, Tim.

Timothy Crane

You bet.

Operator

Jeff Rulis, D.A. Davidson.

Jeff Rulis

Thanks, good morning. A couple questions on the credit side. I think you said the majority of the charge-offs came in that C&I segment, and particularly one relationship. Could you just remind us, again, the industry there, and is that fully exited?

Richard Murphy

It was more than just one, but where I would say the most, if I were categorizing, the bulk of the losses that we saw in the quarter were transportation related.

Jeff Rulis

Got it. Okay. And Rich, hopping over to the office slide, it was an increase in that 30 to 89 bucket. Your commentary was pretty positive. I just want to see if that increase was largely administrative. Any kind of concerns with that early delinquency number?

Richard Murphy

No, it's interesting, and it kind of touches on something that -- kind of how the sausage is made. When you're sitting here, having these conversations with customers as it relates to rightsizing a loan or thinking through how you go about renewing it appropriately, those conversations don't happen overnight.
And so occasionally, you will see things go past maturity as we work through those. But ultimately, it's time well spent because we believe strongly that it's in everyone's best interest to get those repositioned appropriately. I'm not overly concerned about that. I think that periodically, that will happen as we work with customers to try to make sure we get a good outcome there.

Jeff Rulis

Okay, sounds like the overriding thread was more positive. It's the front end, just some mechanics. Maybe just one last one, maybe for Dave, just on the expense run rate, trying to figure out. We've got full quarter of Macatawa, maybe some cost saves in there. X outs and merger costs. So any type of discussion about where that settles in, and if you could hazard a guess on maybe '25 growth rate, that would be great, thanks.

David Dykstra

Well, as I said in my comments, we had two-thirds of the quarter with Macatawa at roughly $10 million for the fourth quarter, because we have not gotten through the full integration and conversion yet. I would expect that to add another $5 million just as the run rate -- it gets in there. I don't suspect there's much change in the other line items too much, but plus or minus $2 million -- I mean, a pretty big company, so you can have some fluctuations here and there.
But I would expect sort of adding $5 million plus or minus to the run rate. And then going forward, we've always sort of, in the last few years, sort of been -- in the sort of the mid-single-digit expense growth rate, but that's under the assumption we're sort of high single-digit deposit and loan growth rate.
So you get some operating leverage, but not necessarily ready to make a call on that yet. We need to see how the mortgage business goes and the like, because that could certainly add some additional commissions and costs if that picks up, but we don't have great visibility into that right now.

Jeff Rulis

Okay. That's helpful. Thank you.

Timothy Crane

Thanks, Jeff.

Operator

Chris McGratty, KBW.

Chris McGratty

Good morning. Dave or team, the capital improvement from the deal, that was, I think, telegraphed, but a nice bump up for the growth. As you go into the next few quarters, can you just remind us where you'd like that CET1 ratio? Dave, I believe you have some preferreds that get reset. Maybe there's a swap opportunity, but just capital philosophy going into next year.

David Dykstra

Well, I think you're right. We picked up some capital with the Macatawa acquisition. They had a lot of excess capital and not a lot of marks in their portfolio. So that was beneficial to our capital ratios. Like we've said in the past, we're in a position now where we think our earnings support our mid to high single-digit loan growth, so we should build capital steadily going forward, assuming we don't have outsized growth. And I guess that would be a good problem to have if you had it.
So we would expect that to continue to just grow, and you probably get it, so you're -- our CET1 is close to 10% now. It would get into the 10% range sometime during 2025. And then for the preferreds, we'll just have to see what the market's like at the time. Most likely refinance them out at a lower spread, but there's a lot of time between now and then.
So we'll see what happens, but we have our eye on that, and we can either swap them out, pay some of them down, or -- but we'll have to make a decision at the time based upon what market conditions and rates are.

Chris McGratty

Okay, perfect. And then maybe a couple of housekeeping on the average share count for the fourth quarter and then the tax rate, Dave? Thanks.

David Stoehr

Yes, I think the tax rate this quarter was pretty clean, so you probably do that. Macatawa added 4.7 million shares to the total, and we would have had two-thirds of the quarter for that, so you can just do the math on that.

Chris McGratty

Okay, perfect. Thank you.

Operator

Terry McEvoy, Stephens, Inc.

Brandon Rud

Good morning. This is Brandon Rud on for Terry.

Timothy Crane

Hi, Brandon.

Brandon Rud

Most of my questions have been asked and answered. It's maybe a couple modeling questions. Kind of following up on the expense question earlier, I heard the mid-single-digit comment. Maybe it's more of a medium or longer-term target for expenses. I think historically, you've looked at the net overhead ratio. And Dave, today, you mentioned the expenses to average assets. Do you have maybe a target you could maybe share for us where you like those ratios to settle out over the medium term?

David Dykstra

Yes, well, it's hard to do a target on that unless you know what the mortgage business is. Because when the mortgage business is really strong, that number, the net overhead ratio comes down. We certainly would like it less than 150 basis points to grow into there for the net overhead ratio. And then we just sort of expect to get continued operating leverage. But I don't think we have a long-term goal that we pointed out there.
There are certain things in the operating expenses, like lease depreciation expense. We hope that goes up, because the leasing income goes up on the non-interest income side. So I think we tend to focus for the net overhead ratio more than the expense ratio, because some of our non-interest income categories, like wealth management and mortgages, bring a lot of commissions with them.
We'd like those businesses to grow, but they bring with them operating expenses too. So we sort of like to look at it as the net overhead ratio, which incorporates both the non-interest income and non-interest expense rather than to have a specific non-interest expense target. And our growth on the non-interest expenses, that's sort of what we've said the last two years, and we would expect just to continue at that pace.

Brandon Rud

Okay. Thank you for that. And maybe just my last one. On the mid to high single-digit loan growth, I'm sorry if we said this, but where are those incremental yields coming on at or maybe a spread because of the SOFR or something?

Richard Murphy

It really depends on -- again, we have these different asset categories, so I mean they can range all over. I mean, the opportunities that are going to be more mid-market, deposit-heavy spreads will be in the low 200 range. But on the P&C side, we're going to get substantially more than that, and everything else is kind of in between. We continue to be, as we talked about, very, very focused on getting appropriately paid for the risk. So far, we've been able to hold the line pretty well on pricing.

Brandon Rud

Got it. Thanks very much.

Operator

(Operator Instructions) Jared Shaw, Barclays.

Jared Shaw

Hi, thanks. Yes, I think just the last thing I had was the impact of the hedges to margin going forward. I think it was 17 basis points in this quarter. What's the ballpark that we should expect going forward?

Richard Murphy

I think sort of the rule of thumb, generally, Jared, is for every 25 basis points of a reduction in SOFR, we should benefit by about 2.5 basis points. A little bit of timing difference because some of these reset at the beginning of the month, et cetera, versus the daily. But I think we're 17-basis-point drag in the third quarter, and it should be, unless the SOFR goes down. If you sort of use -- we give all the detail in the slides, but right now, the average is about 2.5 basis points per 25-basis-point cut benefit

Jared Shaw

Great. Thanks a lot.

Operator

Nathan Race, Piper Sandler.

Nathan Race

Yes. Hey, guys. Good morning. Thanks for taking the time.

Timothy Crane

Morning, Nate.

Nathan Race

I apologize I got in a little late. But just in terms of the gain-on-sale margin compression that we saw this quarter, it was a little bit more so than what we saw from some other larger banks that reported last week. So just curious if you have any thoughts on maybe a starting point for 4Q.

David Dykstra

Yes, it was a little lower than we'd hoped, but a little volatility when rates were falling in some of the secondary market hedging that we do when we do locks on those. We would expect that the gain-on-sale margins would be closer to the 2% range in the fourth quarter. Probably, volumes are somewhat similar. As Tim said, the rates backed up a little bit, so there's just not a lot of activity there. But we would not expect the gain-on-sale margin to be that low in the fourth quarter. We'd expect it to pop back up in closer to 2.

Nathan Race

Okay, great, very helpful. Thanks, Dave. And again, I apologize if you already touched on it, but in terms of NII growth expectations, I know it's kind of a fluid environment in terms of thinking about next year. But assuming the margin kind of holds in around 350, even if we get another 100 basis points of Fed cuts next year, just any thoughts on just how much NII can grow, assuming balance sheet growth remains in that mid to high single-digit range?

David Dykstra

Well, I guess it's just math then, right? If we think the margin is going to be relatively stable and you have mid to high single-digit asset growth, you'd have the mid to high single-digit NII. So that's the way we look at it. It's a relatively stable margin in mid to high single-digit earning asset growth, which should produce NII growth.

Nathan Race

Okay, great. Always helpful just to hear you guys indicate that. And then just lastly, just in terms of the expected growth in capital going forward, I think you mentioned you're just going to kind of remain optimistic on the M&A front going forward. But just any other thoughts on just how you would like to manage capital? Are you guys just comfortable kind of building excess capital over the next several quarters here in light of the preferred reset next year?

Timothy Crane

Yes, I mean, as Dave said, Nate, we'll look at the preferred options that exist as we get into the summer next year. But otherwise, absent a lot of loan growth, we should be building capital and are comfortable to kind of gradually continue to improve the company's capital ratios.

Nathan Race

Okay, great. Thanks, guys.

Timothy Crane

Yes. Thank you, Nate.

Operator

Thank you. I would now like to turn the conference back to Tim Crane for closing remarks. Sir?

Timothy Crane

Latif, thank you very much, and thank you again for everybody that's joined us on the call. Good questions. And again, I would just characterize this quarter as solid growth organically as well as the addition of Macatawa, a stable margin, which we believe we've positioned the bank well for going forward.
Good credit at the moment, we're knocking on wood as we say that, and then continued investment in the franchise's future. And that's in technology and building share in the markets and hiring the right people. So we're actually very optimistic going into the fourth quarter and into 2025, and we appreciate all of your support and your questions. And if there's anything you didn't get answered on the call, please feel free to call us afterwards.
Latif, that's it. Thank you very much, everybody.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.