Bendigo and Adelaide Bank's management is optimistic about its ability to maintain the improvement in margins experienced over the last half year, as conditions in wholesale funding markets improve and deposit pricing eases.Bendigo said its net interest margin increased by five basis points over the six months and by 10 bps over the 12 months, to 2.18 per cent.The bank reported a four per cent rise in cash profit, to A$169.7 million, in the half year to December 2012. Statutory net profit increased 38 per cent, to $137 million.Richard Fennell, the bank's chief financial officer, said the rise in margins was "supported by a differentiated value proposition that gives us the ability to price towards the top end of the range on the asset side and the bottom end on the liability side of the balance sheet."Mike Hirst, the bank's chief executive, said he expected an "abatement' in deposit costs over the coming months, in line with trends over recent weeks.The bank expects to find scope to lower wholesale funding costs, with prices holding up in the secondary market after last year's sale of unsecured bonds and abundant demand recently for its sale of mortgage-backed securities.The bank is also evaluating demand for a covered bond issue.Loan losses in the half-year more than doubled, to $32 million. A fall in the value of Queensland cattle stations, funded through Rural Bank, a Bendigo and Adelaide Bank subsidiary, was a factor behind the rise. The bankruptcy of some investors in Great Southern managed investment schemes was another.Hirst emphasised that the bankruptcies of these customers were driven by the actions of other lenders, with Bendigo's freedom to act being constrained by the class action presently making its way through the courts.Fennel said $278 million of the remaining $390 million in Great Southern loans was past due.Fennell said that forward indicators of loan losses, such as arrears, were improving.He said the bank would look to "non-dilutionary" options to raise capital to fund growth, including through more securitisation of loans.The bank put its return on equity on a cash basis for the half at 13.4 per cent, down from 14.8 per cent a year ago.The bank's internal hurdle for return on tangible equity is 15 per cent, a hurdle it is meeting at present on new home loans.Staffing levels increased by 38, to 4227, over the half year, reflecting the takeover of Southern Finance and more investment in risk management.