NOTE 10 — BORROWINGS AND BORROWING CAPACITY

Customer Repurchase Agreements

Customer repurchase agreements are overnight customer sweep arrangements. Information concerning customer repurchase agreements is summarized as follows:

	December 31,			December 31,
(Dollars in thousands)	2017			2016
Amount outstanding at end of the year	$	11,488		$	10,490
Weighted average interest rate at end of the year		0.02	%		0.02	%
Average daily balance during the year	$	12,906		$	11,984
Weighted average interest rate during the year		0.02	%		0.02	%
Maximum month-end balance during the year	$	21,041		$	15,329

Customer repurchase agreements are secured by pledged securities with carrying amounts as follows:

	December 31,		December 31,
(Dollars in thousands)	2017		2016
U.S. Government agency obligations	$	13,460	$	10,488
Mortgage-backed securities, residential		—		2,998
	$	13,460	$	13,486

FHLB Advances

FHLB advances are collateralized by assets, including a blanket pledge of certain loans. FHLB advances and weighted average interest rates at end of period by contractual maturity are summarized as follows:

	Fixed Rate					Variable Rate
(Dollars in thousands)	Balance Outstanding		Weighted Average Interest Rate			Balance Outstanding		Weighted Average Interest Rate
2018	$	290,000		1.40	%	$	45,000		1.33	%
2027		—		—			30,000		1.39	%
	$	290,000		1.40	%	$	75,000		1.35	%

Information concerning FHLB advances is summarized as follows:

	December 31,			December 31,
(Dollars in thousands)	2017			2016
Amount outstanding at end of the year	$	365,000		$	230,000
Weighted average interest rate at end of the year		1.39	%		0.58	%
Average daily balance during the year	$	300,451		$	174,784
Weighted average interest rate during the year		1.05	%		0.41	%
Maximum month-end balance during the year	$	385,000		$	291,000

The Company’s unused borrowing capacity with the FHLB is as follows:

	December 31,		December 31,
(Dollars in thousands)	2017		2016
Borrowing capacity	$	596,230	$	497,147
Borrowings outstanding		365,000		230,000
Unused borrowing capacity	$	231,230	$	267,147

Federal Funds Purchased

The Company had no federal funds purchased at December 31, 2017 or 2016. However, as of December 31, 2017 the Company had unsecured federal funds lines of credit with seven unaffiliated banks totaling $137,500,000.

Subordinated Notes

On September 30, 2016, the Company issued $50,000,000 of Fixed-to-Floating Rate Subordinated Notes due 2026 (the “Notes”). The Notes initially bear interest at 6.50% per annum, payable semi-annually in arrears, to, but excluding, September 30, 2021, and, thereafter and to, but excluding, the maturity date or earlier redemption, interest shall be payable quarterly in arrears, at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus 5.345%. The Company may, at its option, beginning on September 30, 2021 and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. The Notes are subordinated in right of payment to the Company’s existing and future senior indebtedness and are structurally subordinated to the Company’s subsidiaries’ existing and future indebtedness and other obligations.

The Notes are included on the consolidated balance sheets as liabilities at their carrying values of $48,828,000 and $48,734,000 at December 31, 2017 and 2016, respectively; however, for regulatory purposes, the carrying value of these obligations were eligible for inclusion in Tier 2 regulatory capital.

Issuance costs related to the Notes totaled $1,324,000, including an underwriting discount of 1.5%, or $750,000, and have been netted against the subordinated notes liability on the balance sheet. The underwriting discount and other debt issuance costs are being amortized using the effective interest method through maturity and recognized as a component of interest expense.

Junior Subordinated Debentures

The following provides a summary of the Company’s junior subordinated debentures:

						Variable	Interest Rate At
(Dollars in thousands)	Face Value		Carrying Value		Maturity Date	Interest Rate	December 31, 2017
National Bancshares Capital Trust II	$	15,464	$	12,861	September 2033	LIBOR + 3.00%	4.59%
National Bancshares Capital Trust III		17,526		12,389	July 2036	LIBOR + 1.64%	3.00%
ColoEast Capital Trust I		5,155		3,417	September 2035	LIBOR + 1.60%	3.29%
ColoEast Capital Trust II		6,700		4,485	March 2037	LIBOR + 1.79%	3.48%
Valley Bancorp Statutory Trust I		3,093		2,844	September 2032	LIBOR + 3.40%	5.07%
Valley Bancorp Statutory Trust II		3,093		2,627	July 2034	LIBOR + 2.75%	4.35%
	$	51,031	$	38,623

These debentures are unsecured obligations due to trusts that are unconsolidated subsidiaries. The debentures were issued in conjunction with the trusts’ issuances of obligated capital securities. The trusts used the proceeds from the issuances of their capital securities to buy floating rate junior subordinated deferrable interest debentures that bear the same interest rate and terms as the capital securities. These debentures are the trusts’ only assets and the interest payments from the debentures finance the distributions paid on the capital securities. These debentures rank junior and are subordinate in the right of payment to all other debt of the Company.

As part of the purchase accounting adjustments made with the National Bancshares, Inc. acquisition on October 15, 2013, the ColoEast acquisition on August 1, 2016, and the Valley acquisition on December 9, 2017, the Company adjusted the carrying value of the junior subordinated debentures to fair value as of the respective acquisition dates. The discount on the debentures will continue to be amortized through maturity and recognized as a component of interest expense.

The debentures may be called by the Company at par plus any accrued but unpaid interest. Interest on the debentures is calculated quarterly. The distribution rate payable on the capital securities is cumulative and payable quarterly in arrears. The Company has the right to defer payments on interest on the debentures at any time by extending the interest payment period for a period not exceeding 20 consecutive quarters with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the debentures.

The debentures are included on the consolidated balance sheet as liabilities; however, for regulatory purposes, the carrying value of these obligations are eligible for inclusion in Tier I regulatory capital, subject to certain limitations. All of the carrying value of $38,623,000 and $32,740,000 was allowed in the calculation of Tier I regulatory capital as of December 31, 2017 and 2016, respectively.