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SAN FRANCISCO-Wells Fargo on Tuesday sold 426 million shares at $25 apiece, raising $10.65 billion to help it pay back $25 billion in government funds it used to right its ship last year. Citigroup is expected to conduct a similar sale later this week.

Wells Fargo sold the US Treasury $25 billion of series D preferred stock in October 2008. Under terms of the authorization from the Treasury and banking regulators to repay the investment, Wells Fargo agreed to not only sell common stock but also to increase equity by $1.5 billion through asset sales.

The asset sales must be approved by the Board of Governors of the Federal Reserve. To the extent those asset sales are not completed by the end of 2010, the company agreed it would raise a commensurate amount of common equity, the company said.

“TARP stabilized our country’s financial system when confidence in financial markets around the world was being tested unlike any other period in our history,” Wells Fargo President and CEO John Stumpf said in a prepared statement. “Its success also generated financial returns for taxpayers, including $1.4 billion in dividends paid to the U.S. Treasury by Wells Fargo.”

Today’s stock offering by Wells Fargo was priced and sold this morning at a 1.9% discount to Monday’s closing price of $25.49. The company’s share price has held up so far, opening at $26 and cresting that in late morning trading after falling slightly below that mark. The US Treasury continues to hold warrants to purchase approximately 110 million shares of Wells Fargo common stock at an exercise price of $34.01 per share.

Wells Fargo says repaying TARP will eliminate $1.25 billion in annual preferred stock dividends, and will be slightly accretive to earnings per share in 2010. The repayment will reduce income available to common shareholders in the fourth quarter by $2 billion, it said, because the book value of the preferred stock is less than the amount paid.

“Over the last decade Wells Fargo maintained capital ratios above peer levels, one of the main reasons we have been able to continue to profitably grow our company – including three consecutive quarters of record profits this year – despite the credit crisis of the last two years,” said Wells Fargo Chief Financial Officer Howard Atkins. “Upon the acquisition of Wachovia late last year, our capital ratios initially declined – as one might expect when doubling the size of the company and writing down Wachovia’s higher risk loans – but having already accounted for that risk to capital, our capital ratios are growing organically as we realize the revenue and expense synergies from the acquisition, and as Wells Fargo’s business model continues to generate capital internally – as we historically have. Excluding the impact of TARP funds, stockholders’ equity at Sept. 30, 2009 was up $50 billion from a year ago and including today’s…capital actions, $63 billion on a pro forma basis.”

Wells Fargo Securities and Goldman, Sachs & Co. acted as lead underwriters for the offering. They maintain an option to buy up to an additional $1.56 billion of Wells Fargo common stock, exercisable within 30 days from the date of the offering.

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