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PNC Financial Services

(PNC) - Get Report

said late Tuesday that it has reached an agreement with regulators to pay back nearly $8 billion in bailout funds received under the Troubled Asset Relief Program in 2008.

PNC plans to redeem the $7.6 billion in preferred shares it sold to the U.S. Treasury by raising $3 billion through a common stock offering. It will also use the proceeds from the sale of its PNC Global Investment Servicing business, which

Bank of New York Mellon

(BK) - Get Report

is purchasing for $2.3 billion in cash, and plans to issue between $1.5 billion and $2 billion worth of senior notes to provide additional liquidity in connection with the TARP redemption. The PNC-Bank of New York Mellon deal is expected to close in the third quarter.

PNC expects to record an after-tax gain of $500 million from the sale of the investment servicing business, formerly called PFPC. It will also increase its Tier-1 capital by approximately $1.6 billion after the release of $1.1 billion in capital related to goodwill and other intangible assets, it said.

The combination of the offering, TARP redemption and business sale is expected to boost PNC's Tier-1 common capital by approximately $4.3 billion and, based on Dec. 31 levels, bring the Tier-1 common capital ratio to 8% and Tier-1 risk-based capital ratio to 10.3%.

"With signs of an improving economic environment and stabilizing financial system, we believe now is the appropriate time for us to redeem the preferred shares held by the U.S. Treasury. As a result, we are pleased to have reached an agreement with our regulators to return the taxpayers' investment in PNC," Chairman and CEO James E. Rohr said in a statement. "These strategic actions are expected to improve the quality of our capital and position us for further growth."

PNC received the bailout funds in relation to its acquisition of troubled lender National City in 2008. CEO Rohr seemed to be in no rush to pay back the TARP funds as the economic downturn persisted last year. But in

the company's

latest earnings call last month, he acknowledged that the TARP funds would be repaid this year.

The U.S. Treasury will continue to hold warrants associated with the preferred shares. The warrants enable the U.S. Treasury to purchase up to approximately 16.9 million shares of PNC common stock at an exercise price of $67.33 a share until its expiration on December 31, 2018.

PNC shares closed down 2.1% to $54.65 on Tuesday. Volume of 9.2 million shares was more than double the issue's trailing three-month daily average of 4.1 million.

--Written by Laurie Kulikowski in New York.