What happened

Shares of the roughly $80 billion asset First Horizon (FHN -0.87%), based in Memphis, Tennessee, treaded nearly 40% down as of 10:14 a.m. ET today after it and Toronto-Dominion Bank (TD 0.75%) announced they had mutually agreed to terminate their merger deal.

So what

TD, which is based in Canada but has a very large U.S. presence, first announced its plan to acquire First Horizon for $25 per share back in February 2022. Since then, however, regulators have really clamped down on large bank mergers and acquisitions since the Biden administration took over. Many have taken a very long time to obtain regulatory approval, which has forced some to abandon their previously announced deals.

In February of this year, TD and First Horizon announced that they would need to extend their merger agreement until May because they didn't believe they were going to be able to get the deal done in time. But following that, both banks disclosed they also didn't think they would be able to close the deal by May either.

The banking crisis didn't help the matter, significantly pushing down bank valuations, and some TD shareholders believed the bank should walk away from the deal. In its announcement this morning, TD said it did not have a "timetable" for when or if the deal could be completed, which is why the bank chose to walk away. As part of the termination agreement, TD will pay First Horizon $200 million as well as a $25 million reimbursement fee.

"While today's announcement is unfortunate and unexpected, First Horizon will continue on its growth path operating from a position of strength and stability," First Horizon's president and CEO Bryan Jordan said in a statement.

Now what

I had thought that TD might still be able to close the deal but these are uncertain times and the sell-off is likely exacerbated today by struggles in the broader regional banking sector.

The unfortunate part for First Horizon is that it had to dedicate significant time and resources to prepare for the deal to close and likely didn't pay as much attention to the core franchise as it would have had it not been planning to get acquired.

Still, First Horizon is a solid franchise in the very attractive Southeast banking market. Like most banks, First Horizon experienced funding pressure in the first quarter, but its margin held up pretty well, all things considered.

While it may take the bank some time to regroup, I think the sell-off is likely overdone here and more a result of broader banking struggles and volatile trading conditions.