Toronto-Dominion Bank and First Horizon Corp. scrapped their US$13.4 billion deal after the Canadian lender said it couldn’t see a clear path to getting regulatory approval. 

First Horizon Chief Executive Officer Bryan Jordan said the two banks made the decision very recently and signed the termination late Wednesday. Toronto-Dominion will make a $200 million cash payment on top of a $25 million reimbursement that was part of the merger agreement.

The move ends weeks of speculation about the fate of a deal that was announced in February 2022, right before the world’s major central banks began a historic campaign of interest rate increases. The rapid change in the rate environment has strained the balance sheets of some U.S. regional banks, causing deposit outflows and contributing to the collapse of firms including Silicon Valley Bank and First Republic Bank. 

Shares in First Horizon tumbled 35 per cent to $9.82 as of 9:58 a.m. in New York. The Memphis-based bank held an early-morning conference call, aiming to reassure investors that it has stable funding and plenty of capital. “We have seen no notable changes to our outflows. It’s been consistent since the beginning of March,” Chief Financial Officer Hope Dmuchowski said. 

The two banks said the unspecified regulatory issues clouding the deal weren’t related to First Horizon. TD shares rose 1.5 per cent in Toronto. 

 “While today’s announcement is unfortunate and unexpected, First Horizon will continue on its growth path,” Jordan said in the statement. Toronto-Dominion CEO Bharat Masrani said the decision provides “colleagues and shareholders with clarity.”

TD’s deal for First Horizon for $13.4 billion would have been its largest ever, expanding its U.S. footprint by adding more than 400 branches in the US Southeast. For Masrani, the deal was a major milestone, his most significant strategic M&A decision since taking the role in 2014.

The deal’s collapse leaves with TD with a large amount of capital, with a common equity tier 1 ratio of 15.5 per cent as of Jan. 31, giving it the balance sheet to potentially seek other deals.  

“Given the precipitous drop in regional bank valuations since TD made its announcement to purchase First Horizon, the fact that it is not preceding at the original valuation is a positive,” Barclays analyst John Aiken said in note to investors. “However, we are surprised that the parties could not come to an agreed upon lower price and believe that there could be broader repercussions from walking away from the deal.” 

The transaction had valued First Horizon at just over double its tangible book value. The KBW Regional Banking Index traded at a weighted average of 2.05 times tangible book at the time the deal was announced, but now has fallen to about 1.4 times, according to data compiled by Bloomberg.

Even before the recent market turmoil, doubts about the deal had been swirling for months. President Joe Biden has been urging tougher oversight of mergers and Senator Elizabeth Warren criticized the Toronto-based bank over its sales practices. First Horizon closed Wednesday at $15.05 a share in New York, far below TD’s $25 offer.