What happened

Shares of the roughly $80-billion-asset, Tennessee-based regional bank First Horizon (FHN -1.54%) plunged more than 26% in premarket trading before recouping a good chunk of those losses. 

The move came after First Horizon disclosed in a regulatory filing that Toronto-Dominion Bank (TD -1.34%) would not be able to complete its previously announced acquisition of First Horizon by the anticipated closing date of May 27. Shares of First Horizon traded more than 15% down as of 10:11 a.m. ET.

So what

TD announced its acquisition of First Horizon more than a year ago, as it sought to boost its North American presence in the attractive U.S. Southern banking market.

But like other acquisitions announced under the Biden administration's banking regime, it has been met with pushback and delays. Last June, Sen. Elizabeth Warren wrote a letter to the U.S. Office of the Comptroller of the Currency (OCC), which regulates national banks, requesting that the OCC block the transaction, citing customer abuse by TD.

In February of this year, TD announced that it would extend its merger agreement with First Horizon from Feb. 27 to May 27. Such extensions are not uncommon these days. But now, with another delay, investors are clearly spooked, and First Horizon also said in a regulatory filing that TD could not provide it with a new projected closing date right now. However, it did say that TD had started the conversation about extending the merger agreement again.

While regulators have not outright blocked a large bank deal yet, several banks, most of them smaller institutions, have terminated or walked away from mergers and acquisitions because the longer an acquisition takes to close the more costly it gets. First Horizon noted that preparation for the acquisition resulted in "significant expenses in 2022 unrelated to the ordinary course of business."

Now what

Regulators continue to sharpen their fangs on large bank mergers, and banks at some point will abandon deals if they believe that the cost of closing the merger is going to detract from the deal's initial expected value.

Given the time and resources already devoted to this deal, I suspect TD is going to try to see it through, but the regulatory landscape has gotten much stricter, so completion of the deal is by no means a guarantee.