Deposit Guaranty Corp. is wrestling with a pleasant problem: Deciding when to shift funds out of its hefty loan-loss reserve and put them to more profitable use.

As Mississippi's largest bank continues to whittle down its nonperformers, its reserve coverage is a Fort Knox-like 544% of nonperforming loans. The company has not had to post loan-loss provisions in the last two quarters.

The parent of Deposit Guaranty National Bank is now considering when to take a so-called negative provision - siphoning money out of the reserve to the bottom line or to shareholders.

"The reserve-to-problem-asset coverage ratios are all moving up, across the board," said Arlen L. McDonald, chief financial officer and treasurer of the Jackson-based company. Other banks are also going to be faced with the question of what to do with the provision."

Regional Pattern

Indeed, Deposit Guaranty's situation is occurring elsewhere in the Southeast, where credit quality and the regional economy have been snapping back faster than in many other regions. At least two Louisiana-based regionals - Premier Bancorp and Whitney Holding Corp. - also have not added to reserves for the last two quarters.

Mr. McDonald declined to say if Deposit Guaranty has made a decision about drawing down the reserve.

But Susan Leadem, an analyst at Atlanta-based Robinson-Humphrey Co., said she believes it may do so as early as this quarter.

She speculated that the bank could whittle as much as $10 million from its $76 million reserve, a move that could add about 35 cents a share to earnings.

Bad Memories

Making the move to deplete reserves, however, won't be easy. Memories of bad real estate and unpaid debt remain fresh, and investors are wary.

Ms. Leadem said a negative provision would increase Deposit Guaranty's book value but could hasten the day when the company would have to resume taking provisions.

Deposit Guaranty, which has $4.8 billion of assets, earned $13.9 million, or 79 cents a share, in the first quarter, up 80% from $7.7 million in the year-ago period.

Profits have improved steadily since their nadir in 1990.

In that year, Deposit Guaranty earned only $24.5 million, primarily because of heavy provisioning to cover bad credits.

By 1992, the company had rebounded to net $45.5 million.

Deposit Guaranty is now benefiting from Mississippi's stable economy.

A recent study by the Federal Reserve Bank of Atlanta said that Mississippi emerged from the recession of 1990-91 in relatively good shape, because of military shipbuilding contracts and expansion in the apparel and food-processing industries.

However, the Fed added a cautionary note on the long-term outlook:

"The state is more dependent on defense contracts than any other state in the Southeast," it said. "As a result, Mississippi will be hit harder as post-cold war defense spending is reduced further."

Mr. McDonald said Deposit Guaranty has seen a "slight pickup" in loan demand.

Although total loans have continued to drop in recent quarters, the bank expects the trend to reverse itself in the next few quarters and eventually "level out to a modest increase," he said.

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