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TD Bank Group reported a drop in third quarter profits Thursday as it took a large adjustment related to its pending acquisition of U.S.-based First Horizon Bank and set aside money for potential loan losses ahead on a worsening economic outlook.

The bank said it had income of $3.21 billion for the quarter ended July 31 compared with $3.55 billion a year ago. The earnings included a net loss of $678 million to account for interest rate volatility that could affect how much it will cost to close the US$13.4-billion First Horizon deal.

While rising interest rates have pushed up the cost of the deal, TD chief financial officer Kelvin Tran said in an interview the bank will overall benefit from higher rates.

“Rising rates in general is good for TD because we have a strong consumer deposit franchise … sometimes too much of a good thing could be not so good from a slowing demand perspective, but in Q3 we continued to see strong customer activity.”

The bank reported revenue of $10.93 billion, up from $10.71 billion last year, including record revenue of $7 billion for Canadian retail banking as loan volumes rose 9%.

TD set aside $351 million in the latest quarter for potential loan losses as rising interest rates to tame inflation increase the chances of driving the economy into a recession. Last year the bank had a $37-million recovery of credit losses as banks unwound the provisions they had set aside early in the pandemic.

Its Canadian retail banking business, which includes the wealth management and insurance businesses, earned $2.25 billion, up from $2.13 billion in the same quarter last year, an increase of 6%.

Reflecting market depreciation, assets under administration were $526 billion at the end of the quarter, a decrease of $12 billion, or 2%, from the same quarter last year. Assets under management were $408 billion, a decrease of $12 billion, or 3%, from last year.

U.S. retail banking earned $1.44 billion, up from $1.30 billion a year earlier.

The bank is actively pushing further into the U.S., both through its proposed First Horizon deal first announced in February and its US$1.3-billion deal announced Aug. 2 to buy New York brokerage Cowen Inc.

TD has, however, faced some pushback on its expansion, including a letter this week issued by the Center for Responsible Lending calling for the First Horizon deal to be blocked. The Center, and the several other groups that signed it, raised concerns both about increased consolidation in U.S. banking and TD’s track record on overdraft fees in recent years where the bank had a US$122-million settlement with regulators over unfair and deceptive practices.

Tran said he expects the merger to close on time by the end of January, while TD plans to invest to benefit communities.

“It is about growth. It is about investing in community, and we look forward to our ongoing community engagement efforts and the announcement of our forthcoming community benefits package.”

TD’s wholesale banking arm earned $271 million compared with a profit of $330 million a year ago. Its corporate segment reported a loss of $752 million, largely related to the First Horizon adjustment, compared with a loss of $205 million last year.

The bank said its profits amounted to $1.75 per diluted share for the quarter ended July 31, down from $1.92 per diluted share in the same quarter last year. On an adjusted basis, TD says it earned $2.09 per diluted share in its third quarter, up from an adjusted profit of $1.96 per diluted share in the same quarter last year.

Analysts on average had expected an adjusted profit of $2.04 per diluted share, according to financial markets data firm Refinitiv.

Scott Chan, an analyst with Canaccord Genuity Corp., said in a note that the earnings beat was driven by higher than expected revenues.