PENSION AND OTHER POSTRETIREMENT PLANS

12 Months Ended

Dec. 31, 2017

NOTE 11 – 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, 2017 and 2016.

Information as to the Company's employee benefit plans at December 31, 2017 and 2016 is as follows:

	Pension Benefits		SERP Benefits
(dollars in thousands)	2017	2016	2017	2016
Change in benefit obligation:
Beginning benefit obligation	$2,841	$2,795	$1,163	$1,223
Interest cost	104	105	40	45
Actuarial (gain)/loss	134	256	20	32
Benefits paid	(217)	(315)	(137)	(137)
Ending benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,862	2,841	1,086	1,163

Change in plan assets (primarily equity and fixed
income investments and money market funds),
at fair value:
Beginning plan assets	2,063	1,910	1,000	988
Actual return	313	151	144	73
Employer contribution	197	317	40	76
Benefits paid	(217)	(315)	(137)	(137)
Ending plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,356	2,063	1,047	1,000
Funded status at end of year	$(506)	$(778)	$(39)	$(163)

Amounts recognized in the consolidated balance sheets consist of:

	Pension Benefits		SERP Benefits
(dollars in thousands)	2017	2016	2017	2016
Funded status included in other liabilities	$(506)	$(778)	$(39)	$(163)

Amounts recognized in accumulated other comprehensive income consist of:

	Pension Benefits		SERP Benefits
(dollars in thousands)	2017	2016	2017	2016
Net actuarial loss	$1,731	$1,953	$661	$801

The accumulated benefit obligation for the pension plan was $2.9 million and $2.8 million for December 31, 2017 and 2016, respectively. The accumulated benefit obligation for the SERP was $1.1 million and $1.2 million for December 31, 2017 and 2016, respectively.

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

	Pension Benefits			SERP Benefits
(dollars in thousands)	2017	2016	2015	2017	2016	2015
Net pension expense:
Service cost	$0	$0	$0	$0	$0	$0
Interest cost	104	105	103	40	45	46
Expected return on plan assets	(143)	(139)	(139)	(63)	(70)	(76)
Recognized net actuarial loss	185	135	162	80	80	82
Settlement cost	0	128	78	0	0	0
Net pension expense	$146	$229	$204	$57	$55	$52

Net (gain)/loss	$(36)	$122	$203	$(61)	$29	$122
Amortization of net loss	(185)	(135)	(162)	(80)	(80)	(82)
Total recognized in other comprehensive
income	(221)	(13)	41	(141)	(51)	40
Total recognized in net pension expense
and other comprehensive income	$(75)	$216	$245	$(84)	$4	$92

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 $193,000 for the pension plan and $73,000 for the SERP. The settlement costs in 2016 and 2015 were related to participants taking lump sum distributions from the pension plan during those years.

For 2017, 2016 and 2015, the assumed form of payment elected by active participants upon retirement was changed from a single life annuity to a lump sum to reflect participant trends. The lump sum assumed interest rates below for December 31, 2017, 2016 and 2015 reflect the mortality table in effect for 2017, 2016 and 2015, respectively. 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. For 2015, the mortality assumption was changed to the RP-2014 Mortality Table projected to 2024 with Projection Scale MP-2015 as of December 31, 2015 to reflect improved mortality expectations.

	Pension Benefits			SERP Benefits
	2017	2016	2015	2017	2016	2015
The following assumptions were used in calculating the net benefit obligation:

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
Lump sum assumed interest rates
First 5 years	2.05%	1.57%	1.61%	N/A	N/A	N/A
Next 15 years	3.61%	3.45%	4.02%	N/A	N/A	N/A
All future years	4.27%	4.39%	5.03%	N/A	N/A	N/A

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

Weighted average discount rate	3.86%	3.96%	3.61%	3.86%	3.96%	3.61%
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%	7.00%	7.75%	6.50%	7.00%	7.75%

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 2017 and 2016, target allocation for 2018, 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	2018	2017	2016	of Return
Equity securities	55-65%	63%	60%	8.69%
Debt securities	35-45%	33%	37%	3.00%
Other	5-10%	4%	3%	0.10%
Total		100%	100%	6.50%

The Company's SERP plan asset allocation at year-end 2017 and 2016, target allocation for 2018, 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	2018	2017	2016	of Return
Equity securities	55-65%	66%	62%	8.69%
Debt securities	35-45%	32%	37%	3.00%
Other	5-10%	2%	1%	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, 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 large cap stock mutual funds	0	0	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.

The fair values of the Company's pension plan assets at December 31, 2016, 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	$550	$550	$0	$0
Equity securities - US large cap stock mutual funds	335	335	0	0
Equity securities - US mid cap stock mutual funds	138	138	0	0
Equity securities - US small cap stock mutual funds	53	53	0	0
Equity securities - international stock mutual funds	147	147	0	0
Equity securities - emerging markets stock mutual funds	24	24	0	0
Debt securities - intermediate term bond mutual funds	413	413	0	0
Debt securities - short term bond mutual funds	288	288	0	0
Debt securities - commercial	52	0	52	0
Cash - money market account	59	59	0	0
Total	$2,059	$2,007	$52	$0

Total pension plan assets available for benefits also include $4,000 in accrued interest and dividend income.

There were no significant transfers between Level 1 and Level 2 during 2017 and 2016.

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.

The fair values of the Company's SERP assets at December 31, 2016, 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	$132	$132	$0	$0
Equity securities - US large cap stock mutual funds	380	380	0	0
Equity securities - US mid cap stock mutual funds	40	40	0	0
Equity securities - US small cap stock mutual funds	15	15	0	0
Equity securities - international stock mutual funds	49	49	0	0
Debt securities - intermediate term bond mutual funds	153	153	0	0
Debt securities - short term bond mutual funds	166	166	0	0
Debt securities - commercial	57	0	57	0
Cash - money market account	4	4	0	0
Total	$996	$939	$57	$0

Total SERP plan assets available for benefits also include $4,000 in accrued interest and dividend income.

There were no significant transfers between Level 1 and Level 2 during 2017 and 2016.

Contributions

The Company expects to contribute $0 to its pension plan and $0 to its SERP plan in 2018.

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)
2018	$266	$133
2019	228	128
2020	207	123
2021	245	117
2022	226	110
2023-2027	927	419