International Bancshares Corp. in Laredo, Texas, has proven that repurchasing common shares is not out of the question for recipients of government capital.

The Treasury Department restricts such repurchases, since its infusions under the Troubled Asset Relief Program were meant to boost capital levels. But the $12.4 billion-asset International won the department's blessing for a buyback with an inventive proposal that observers say other companies might want to copy.

Under the agreement with the Treasury that gave it $216 million in December, International was allowed to pay shareholders a dividend this year equal to what it paid last year — 33 cents a share every six months. A few weeks ago the company asked if it could cut the dividend to 17 cents and use the savings to repurchase its common stock.

Diverting dividend payments to the repurchase would not affect International's capital one way or the other.

"We laid out the logic of it," Dennis Nixon, its chairman, president and chief executive officer, said in an interview this week. "They accepted the logic and approved it" within a few weeks.

Several industry watchers said they were surprised the Treasury approved the plan, but they interpreted the decision as evidence of its flexibility.

They said they believed International is the first Tarp recipient allowed to conduct a buyback, though more could use that strategy, particularly since so many banking stocks are trading below book value.

"This shows the Treasury is willing to consider rational approaches to dealing with technical issues," said Robert Klingler, an associate at Bryan Cave LLP in Atlanta. "They aren't just going to say no. There is someone there to listen when a proposal is put in front of them, and that someone is willing to give approval."

Allowing companies with depressed shares to conduct buybacks might also help the Treasury itself, since the department typically has warrants to buy common shares of companies that have received its capital.

Those warrants are not worth much as long as the shares trade below the strike price. Repurchases would make the shares scarcer, driving up their price and hence making the Treasury's warrants more valuable.

"It should make Treasury's investment in the company more valuable," said Chet Fenimore, the managing partner in the Austin office of Hunton & Williams LLP. "At least it could get the price back up so they will be in the money."

The Treasury has warrants to buy 1.3 million of International's shares at $24.43 each — more than double what the shares were trading at this week.

The department "saw the wisdom in improving stock value, because they hold the warrants," according to Nixon. "We are on the same page and same team in terms of maintaining value in the security."

Klingler said that he had not heard of another company that made a request to the Treasury like International's.

The company's strategy for winning approval was "brilliant," he said. "This is definitely a creative approach for those companies who have historically done dividends and repurchases, albeit with lower dividends."

The Treasury did not return calls for this story.

Nixon said that his company is eager to buy back its common shares, because they have been hurt by short sellers.

About 15% of the shares have been sold short, he said.

The stock's price has plunged as much as 66% this year, closing at $7.36 a share on March 30.

Since then the shares have regained some of that ground, but this week they were still down about 45% from the beginning of the year, trading late Wednesday at $11.59 a share — well below book value.

International has historically paid out dividends and repurchased its common shares. But when it accepted Tarp funds, it discontinued its share repurchasing plan.

Last week the company announced that the Treasury had allowed it to buy back up to $40 million of its outstanding shares over the next 12 months.

In an interview last week, before the company announced the buyback approval, Nixon said he believed International's stock was being sold short because of a "malicious" report put out by Citron Research. The report focused on the concentration of construction loans in International's portfolio and the slowing economy in its home state.

The Citron report did not mention any of the valuable pieces of International, he said, and it was meant to encourage others to sell the company short after the author had done so.

"I think the whole interpretation was wrong," Nixon said. "The whole report is designed to damage and hurt us."

The report pulled information from the annual report International filed with the Securities and Exchange Commission, which showed that 73% of its construction portfolio, or $1.4 billion of loans, is scheduled to mature over the next 12 months.

In the fourth quarter the delinquent and nonaccrual share of International's construction and land loans nearly tripled from a quarter earlier, to 9.8%.

According to Foresight Analytics LLC, the total delinquency rate for construction loans was 11.4% for banks nationwide.

Andrew Left, the publisher of Citron Research, acknowledged that he has a short position in the stock. He said his issue with International is its lack of disclosure about what is going on in the portfolio.

He said the company is not acting as if it believed the stock were undervalued, because if it did, it would offer more disclosure and do what other publicly traded companies do in that situation: Take its case directly to investors and analysts.

"You get on your plane. You fly to New York," he said. "Call an investment banker and say, 'Make me some meetings,' and you hit the road. You speak to a few funds, and you say, 'Wall Street has it wrong.' "

Brett Rabatin, an analyst with Sterne, Agee & Leach Inc., said the permission to repurchase shares is a sign that the Treasury Department has confidence in International. However, he said it is unlikely the department will allow many Tarp recipients to spend capital on share buybacks, because the whole point of the Tarp investments was to strengthen capital.

"We are in a period of time when the economic outlook is uncertain," Rabatin said. "When that happens. the regulators want three things: One, a high level of capital, two, a higher loan-loss reserve, and three, intense monitoring of the loan portfolio. They are generally not excited about banks becoming more levered by buying back their own shares."

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