In certain interest rate environments, cannibalization of the balance sheet can be very costly.  A certain percentage of your deposits (high balance DDA's, Savings, MMDA's) are at risk to move internally when you run specials.  Let's assume that you have $25,000,000 dollars in "at risk" deposits on your balance sheet.  Currently you are paying a blended interest rate of 2.00%.  You would like to raise an additional $6,000,000 dollars in new deposits by running a local CD special.  You anticipate paying 5.00% on the local CD special.  Wholesale rates (QwickRate) are currently 5.35%.  Would it be beneficial to raise the money locally at 5.00% or should you look to the national market for these deposits and pay the 5.35%?

Let's evaluate the costs:

At 5.35% your additional $6,000,000 million dollars of deposits in the QwickRate market will cost you $321,000.00 annually.

If you look to your local market to draw that same funding, you must assume that a portion of your existing deposits are going to see the higher rate and want to convert from their existing rate to the new CD special rate.  Let's assume that 20% of your "at risk" money will move to the CD special.  Your costs associated with running the CD special and acquiring an additional $6,000,000 in your local market will be increased by the additional cost of the existing at risk deposit accounts being converted to the new CD rate.

The effective rate for local special is now 7.50% or $450,000.00

The effective rate for QwickRate deposits is 5.35% or $321,000.00