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PENSION AND OTHER POSTRETIREMENT PLANS

12 Months Ended

Dec. 31, 2018

NOTE 11

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PENSION AND OTHER POSTRETIREMENT PLANS

In April 2000, the Lakeland Financial Corporation Pension Plan was frozen. The Company also maintains a Supplemental Executive Retirement Plan (“SERP”) for select officers that was established as a funded, non-qualified deferred compensation plan. Currently, six retired officers are the only participants in the SERP. The measurement date for both the pension plan and SERP is December 31, 2018 and 2017.

Information as to the Company’s employee benefit plans at December 31, 2018 and 2017 is as follows:

	Pension Benefits		SERP Benefits
(dollars in thousands)	2018	2017	2018	2017
Change in benefit obligation:
Beginning benefit obligation	$2,862	$2,841	$1,086	$1,163
Interest cost	93	104	34	40
Actuarial (gain)/loss	(325)	134	(62)	20
Benefits paid	(512)	(217)	(134)	(137)
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,118	2,862	924	1,086

Change in plan assets (primarily equity and fixed
income investments and money market funds),
at fair value:
Beginning plan assets	2,356	2,063	1,047	1,000
Actual return	(61)	313	(28)	144
Employer contribution	368	197	0	40
Benefits paid	(512)	(217)	(134)	(137)
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,151	2,356	885	1,047
Funded status at end of year	$33	$(506)	$(39)	$(39)

Amounts recognized in the consolidated balance sheets consist of:

	Pension Benefits		SERP Benefits
(dollars in thousands)	2018	2017	2018	2017
Funded status included in other liabilities	$33	$(506)	$(39)	$(39)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefits		SERP Benefits
(dollars in thousands)	2018	2017	2018	2017
Net actuarial loss	$1,242	$1,731	$615	$661

The accumulated benefit obligation for the pension plan was $2.1 million and $2.9 million for December 31, 2018 and 2017, respectively. The accumulated benefit obligation for the SERP was $900,000 and $1.1 million for December 31, 2018 and 2017, respectively.

Net pension expense and other amounts recognized in other comprehensive income include the following:

	Pension Benefits			SERP Benefits
(dollars in thousands)	2018	2017	2016	2018	2017	2016
Net pension expense:
Service cost	$0	$0	$0	$0	$0	$0
Interest cost	93	104	105	34	40	45
Expected return on plan assets	(138)	(143)	(139)	(61)	(63)	(70)
Recognized net actuarial loss	193	185	135	73	80	80
Settlement cost	224	0	128	0	0	0
Net pension expense	$372	$146	$229	$46	$57	$55

Net (gain)/loss	$(296)	$(36)	$122	$27	$(61)	$29
Amortization of net loss	(193)	(185)	(135)	(73)	(80)	(80)
Total recognized in other comprehensive
income	(489)	(221)	(13)	(46)	(141)	(51)
Total recognized in net pension expense
and other comprehensive income	$(117)	$(75)	$216	$0	$(84)	$4

The estimated net loss (gain) for the defined benefit pension plan and SERP that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $132,000 for the pension plan and $73,000 for the SERP. The settlement costs in 2018 and 2016 were related to participants taking lump sum distributions from the pension plan during those years.

For 2018, 2017 and 2016, the assumed form of payment elected by active participants upon retirement was a lump sum to reflect participant trends. The lump sum assumed interest rates below for December 31, 2018, 2017 and 2016 reflect the mortality table in effect for 2018, 2017 and 2016, respectively. For 2018, the mortality assumption was changed to the RP-2014 Mortality Table, adjusted to 2006, with full generational Projection Scale MP-2018 as of December 31, 2018 to reflect improved mortality expectations. For 2017, the mortality assumption was changed to the RP-2014 Mortality Table, adjusted to 2006, with full generational Projection Scale MP-2017 as of December 31, 2017 to reflect improved mortality expectations. For 2016, the mortality assumption was changed to the RP-2014 Mortality Table, adjusted to 2006, with full generational Projection Scale MP-2016 as of December 31, 2016 to reflect improved mortality expectations.

	Pension Benefits			SERP Benefits
	2018	2017	2016	2018	2017	2016
The following assumptions were used in calculating the net benefit obligation:

Weighted average discount rate	4.08%	3.46%	3.86%	4.08%	3.46%	3.86%
Rate of increase in future compensation	N/A	N/A	N/A	N/A	N/A	N/A
Lump sum assumed interest rates
First 5 years	3.33%	2.05%	1.57%	N/A	N/A	N/A
Next 15 years	4.39%	3.61%	3.45%	N/A	N/A	N/A
All future years	4.72%	4.27%	4.39%	N/A	N/A	N/A

The following assumptions were used in calculating the net pension expense:

Weighted average discount rate	3.46%	3.86%	3.96%	3.46%	3.86%	3.96%
Rate of increase in future compensation	N/A	N/A	N/A	N/A	N/A	N/A
Expected long-term rate of return	6.50%	6.50%	7.00%	6.50%	6.50%	7.00%

Pension Plan and SERP Assets

The Company's investment strategies are to invest in a prudent manner for the purpose of providing benefits to participants in the pension plan and the SERP. The investment strategies are targeted to maximize the total return of the portfolio net of inflation, spending and expenses. Risk is controlled through diversification of asset types and investments in domestic and international equities and fixed income securities. The target allocations for plan assets are shown in the tables below. Equity securities primarily include investments in common stocks. Debt securities include government agency and commercial bonds. Other investments consist of money market mutual funds.

The weighted average expected long-term rate of return on pension plan and SERP assets is developed in consultation with the plans actuary. It is primarily based upon industry trends and consensus rates of return which are then adjusted to reflect the specific asset allocations and historical rates of return of the Company's plan assets. The following assumptions were used in determining the total long term rate of return: equity securities were assumed to have a long-term rate of return of approximately 8.70% and debt securities were assumed to have a long-term rate of return of approximately 3.0%. These rates of return were adjusted to reflect an approximate target allocation of 60% equity securities and 40% debt securities with a small downward adjustment due to investments in the “Other” category, which consist of low yielding money market mutual funds.

Certain asset types and investment strategies are prohibited including, the investment in commodities, options, futures, short sales, margin transactions and non-marketable securities.

The Company's pension plan asset allocation at year-end 2018 and 2017, target allocation for 2019, and expected long-term rate of return by asset category are as follows:

		Percentage of Plan		Weighted
	Target	Assets		Average Expected
	Allocation	at Year End		Long-Term Rate
Asset Category	2019	2018	2017	of Return
Equity securities	55-65%	59%	63%	8.69%
Debt securities	35-45%	40%	33%	3.00%
Other	5-10%	1%	4%	0.10%
Total		100%	100%	6.50%

The Company's SERP plan asset allocation at year-end 2018 and 2017, target allocation for 2019, and expected long-term rate of return by asset category are as follows:

		Percentage of Plan		Weighted
	Target	Assets		Average Expected
	Allocation	at Year End		Long-Term Rate
Asset Category	2019	2018	2017	of Return
Equity securities	55-65%	58%	66%	8.69%
Debt securities	35-45%	40%	32%	3.00%
Other	5-10%	2%	2%	0.10%
Total		100%	100%	6.50%

Fair Value of Pension Plan and SERP Assets

Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. Also a fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Equity and debt securities: The fair values of securities are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models, which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair values of the Company's pension plan assets at December 31, 2018, by asset category are as follows:

		Quoted Prices
		in Active	Significant	Significant
		Markets for	Observable	Unobservable
		Identical Assets	Inputs	Inputs
Asset Category	Total	(Level 1)	(Level 2 )	(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks	$784	$784	$0	$0
Equity securities - US mid cap stock mutual funds	107	107	0	0
Equity securities - US small cap stock mutual funds	114	114	0	0
Equity securities - international stock mutual funds	225	225	0	0
Equity securities - emerging markets stock mutual funds	49	49	0	0
Debt securities - intermediate term bond mutual funds	309	309	0	0
Debt securities - short term bond mutual funds	543	543	0	0
Cash - money market account	17	17	0	0
Total	$2,148	$2,148	$0	$0

Total pension plan assets available for benefits also include $3,000 in accrued interest and dividend income.

The fair values of the Company's pension plan assets at December 31, 2017, by asset category are as follows:

		Quoted Prices
		in Active	Significant	Significant
		Markets for	Observable	Unobservable
		Identical Assets	Inputs	Inputs
Asset Category	Total	(Level 1)	(Level 2 )	(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks	$911	$911	$0	$0
Equity securities - US mid cap stock mutual funds	119	119	0	0
Equity securities - US small cap stock mutual funds	125	125	0	0
Equity securities - international stock mutual funds	240	240	0	0
Equity securities - emerging markets stock mutual funds	95	95	0	0
Debt securities - intermediate term bond mutual funds	344	344	0	0
Debt securities - short term bond mutual funds	387	387	0	0
Debt securities - commercial	50	0	50	0
Cash - money market account	82	82	0	0
Total	$2,353	$2,303	$50	$0

Total pension plan assets available for benefits also include $3,000 in accrued interest and dividend income.

There were no significant transfers between Level 1 and Level 2 during 2018 and 2017.

The fair values of the Company's SERP assets at December 31, 2018, by asset category are as follows:

		Quoted Prices
		in Active	Significant	Significant
		Markets for	Observable	Unobservable
		Identical Assets	Inputs	Inputs
Asset Category	Total	(Level 1)	(Level 2 )	(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks	$322	$322	$0	$0
Equity securities - US mid cap stock mutual funds	43	43	0	0
Equity securities - US small cap stock mutual funds	43	43	0	0
Equity securities - emerging markets stock mutual funds	18	18	0	0
Equity securities - international stock mutual funds	89	89	0	0
Debt securities - intermediate term bond mutual funds	123	123	0	0
Debt securities - short term bond mutual funds	231	231	0	0
Cash - money market account	15	15	0	0
Total	$884	$884	$0	$0

Total SERP plan assets available for benefits also include $1,000 in accrued interest and dividend income.

The fair values of the Company's SERP assets at December 31, 2017, by asset category are as follows:

		Quoted Prices
		in Active	Significant	Significant
		Markets for	Observable	Unobservable
		Identical Assets	Inputs	Inputs
Asset Category	Total	(Level 1)	(Level 2 )	(Level 3)
(dollars in thousands)
Equity securities - US large cap common stocks	$422	$422	$0	$0
Equity securities - US mid cap stock mutual funds	58	58	0	0
Equity securities - US small cap stock mutual funds	60	60	0	0
Equity securities - emerging markets stock mutual funds	42	42	0	0
Equity securities - international stock mutual funds	115	115	0	0
Debt securities - intermediate term bond mutual funds	146	146	0	0
Debt securities - short term bond mutual funds	158	158	0	0
Debt securities - commercial	30	0	30	0
Cash - money market account	15	15	0	0
Total	$1,046	$1,016	$30	$0

Total SERP plan assets available for benefits also include $2,000 in accrued interest and dividend income.

There were no significant transfers between Level 1 and Level 2 during 2018 and 2017.

Contributions

The Company expects to contribute $0 to its pension plan and $0 to its SERP plan in 2019.

Estimated Future Benefit Payments

The following benefit payments are expected to be paid over the next ten years:

	Pension	SERP
Plan Year	Benefits	Benefits
(dollars in thousands)
2019	$223	$133
2020	183	127
2021	195	121
2022	194	114
2023	180	106
2024-2028	829	392