Elders Rural Bank is in the fortunate position of funding more than 90 per cent of its loan book from customer deposits, but this did not save it from margin erosion due to higher cost of funds during the December half.Yesterday the bank reported net profit of $19.4 million for the six months to December. The result was six per cent higher than the $18.3 million profit reported for the previous corresponding period.Asset and liability growth was strong, with the loan portfolio growing 16 per cent to $3.37 billion and deposits also up 16 per cent to $3.39 billion.Credit quality was sound. The bank's ratio of non-performing loans to gross loans under management improved from 0.42 per cent to 0.36 per cent.Elders' chief financial officer Steven Laidlaw said the net interest margin came off 20 basis points during the half.Laidlaw said: "That is more than we would like but we made a decision not to pass on the all the increase in funding costs."He said having a strong deposit book was an advantage but not so much of an advantage as was often assumed. Some of those retail savings are in bills, and increased competition for deposits has meant that changes in wholesale funding rates are more likely to leak into deposit rates. Laidlaw said: "We were not immune."The lower margin accounted in part for the modest six per cent increase in earnings over the previous period. Laidlaw said another factor was that the profit for the first half in 2006 was unusually high, due to a couple of one-off results. He said he preferred to compare the latest figures to results from the June half last year. Net profit was up 10 per cent in December compared to the June profit.Elders' managing director Paul Hutchinson said the agribusiness market was seeing a return to more favourable seasonal conditions, with recent good rains across large areas of Australia.For those farmers who have been able to make use of the rain to plant a crop, market prices have been very good. But most growers will need another season to catch up.In the meantime Elders is expanding its business by developing a range of commercial, non-farm finance products. Hutchinson said: "A lot of farmers have diversified their business and investment portfolios off farm. Farming families are looking for second incomes from jobs in town, they are investing in commercial property and they are getting involved in local industries. "They are looking for an income hedge and we are developing products that will assist them in that diversification."Hutchinson said the bank was writing bigger finance deals. He said that was a reflection of the fact the business was eight years old, had established a track record and some credibility and had improved its credit rating.