---

 

FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Report of Foreign Issuer

 

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

 

Commission File Number: 001-14554

Banco Santander Chile

Santander Chile Bank

(Translation of Registrant’s Name into English)

Bandera 140

Santiago, Chile

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F

x

Form 40-F

¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes

¨

No

x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes

¨

No

x

 

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes

¨

No

x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

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IMPORTANT NOTICE

  

The unaudited financial statements included in this 6K have been prepared in accordance with the Compendium of Accounting Standards issued by the Superintendency of Banks and Financial Institutions (SBIF) of Chile. The accounting principles issued by the SBIF are substantially similar to IFRS, but there are some exceptions.  The SBIF is the banking industry regulator that according to article 15 of the General Banking Law, establishes the accounting principles to be used by the banking industry. For those principles not covered by the Compendium of Accounting Standards, banks can use generally accepted accounting principles issued by the Chilean Accountant’s Association AG and which coincides with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). In the event that discrepancies exist between the accounting principles issued by the SBIF (Compendium of Accounting Standards) and IFRS, the Compendium of Accounting Standards will take precedence. The Notes to the unaudited consolidated financial statements contain additional information to that submitted in the Unaudited Consolidated Statement of Financial Position, Unaudited Consolidated Statement of Income, Unaudited Consolidated Statement of Comprehensive Income, Unaudited Consolidated Statement of Changes in Equity and Unaudited Consolidated Statement of Cash Flows. These notes provide a narrative description of such statements in a clear, reliable and comparable manner.

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	BANCO SANTANDER-CHILE
	By:	/s/ Cristian Florence
	Name:	Cristian Florence
	Title:	General Counsel

Date: May 29, 2014

 

 

 

 

 

CONTENT

 

Consolidated Interim Financial Statements
CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION	3
CONSOLIDATED INTERIM STATEMENTS OF INCOME FOR THE PERIOD	4
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME FOR THE PERIOD	5
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY FOR THE PERIOD	6
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS FOR THE PERIOD	7
Notes to the Consolidated Interim Financial Statements
NOTE 01  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	9
NOTE 02  SIGNIFICANT EVENTS	35
NOTE 03  OPERATING SEGMENTS	36
NOTE 04  CASH AND CASH EQUIVALENTS	40
NOTE 05  TRADING INVESTMENTS	41
NOTE 06  DERIVATIVE FINANCIAL INSTRUMENTS, AND HEDGE ACCOUNTING	42
NOTE 07  INTERBANK LOANS	50
NOTE 08  LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS	51
NOTE 09  LOAN PURCHASES, SALES, AND SUBSTITUTIONS	58
NOTE 10  AVAILABLE FOR SALE INVESTMENTS	59
NOTE 11  INTANGIBLE ASSETS	60
NOTE 12  PROPERTY, PLANT AND EQUIPMENT	62
NOTE 13  CURRENT AND DEFERRED TAXES	65
NOTE 14  OTHER ASSETS	68
NOTE 15  TIME DEPOSITS AND OTHER TIME LIABILITIES	69
NOTE 16  ISSUED DEBT INSTRUMENTS, AND OTHER FINANCIAL LIABILITIES	70
NOTE 17  MATURITY OF ASSETS AND LIABILITIES	76
NOTE 18  OTHER LIABILITIES	78
NOTE 19  CONTINGENCIES AND COMMITMENTS	79
NOTE 20  EQUITY	81
NOTE 21  CAPITAL REQUIREMENTS (BASEL)	84
NOTE 22  NON-CONTROLLING INTEREST	86
NOTE 23  INTEREST INCOME AND INFLAXION-INDEXIN ADJUSTMENTS	89
NOTE 24  FEES AND COMMISSIONS	91
NOTE 25  PROFIT AND LOSS FROM FINANCIAL OPERATIONS	92
NOTE 26  NET FOREIGN EXCHANGE GAING (LOSS)	92
NOTE 27  PROVISION FOR LOAN LOSSES	93
NOTE 28  PERSONNEL SALARIES AND EXPENSES	95
NOTE 29  ADMINISTRATIVE EXPENSES	96
NOTE 30  DEPRECIATION, AMORTIZATION, AND IMPAIRMENT	97
NOTE 31  OTHER OPERATING INCOME AND EXPENSES	98
NOTE 32  TRANSACTIONS WITH RELATED PARTIES	99
NOTE 33  FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES	103
NOTE 34  SUBSEQUENT EVENTS	106

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

 

						As of March 31,				As of December 31,
						2014				2013
		NOTE				MCh$				MCh$
ASSETS
Cash and deposits in banks			4				1,344,228				1,571,810
Cash items in process of collection			4				740,648				604,077
Trading investments			5				424,728				287,567
Investments under resale agreements							-				17,469
Financial derivative contracts			6				1,940,836				1,494,018
Interbank loans, net			7				4,256				125,395
Loans and accounts receivable from customers, net			8				20,829,418				20,327,021
Available for sale investments			10				1,844,534				1,700,993
Held to maturity investments							-				-
Investments in associates and other companies							9,965				9,681
Intangible assets			11				61,885				66,703
Property, plant, and equipment			12				177,061				180,215
Current taxes			13				2,092				1,643
Deferred taxes			13				191,472				230,215
Other assets			14				336,803				400,025
TOTAL ASSETS							27,907,926				27,016,832
LIABILITIES
Deposits and other demand liabilities			15				5,610,373				5,620,763
Cash items in process of being cleared			4				425,438				276,379
Obligations under repurchase agreements							193,787				208,972
Time deposits and other time liabilities			15				9,640,601				9,675,272
Financial derivative contracts							1,723,849				1,300,109
Interbank borrowing							1,859,698				1,682,377
Issued debt instruments			16				5,104,699				5,198,658
Other financial liabilities			16				201,040				189,781
Current taxes			13				19,047				50,242
Deferred taxes			13				21,145				25,088
Provisions							271,262				236,232
Other liabilities			18				383,277				198,777
TOTAL LIABILITIES							25,454,216				24,662,650
EQUITY
Attributable to the Bank`s shareholders:							2,424,863				2,325,678
Capital			20				891,303				891,303
Reserves			20				1,130,991				1,130,991
Valuation adjustments			20				(6,069	)			(5,964	)
Retained earnings							408,638				309,348
Retained earnings from prior years							441,926				-
Income for the year							141,843				441,926
Minus:  Provision for mandatory dividends							(175,131	)			(132,578	)
Non-controlling interest			22				28,847				28,504
TOTAL EQUITY							2,453,710				2,354,182
TOTAL LIABILITIES AND EQUITY							27,907,926				27,016,832

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED INTERIM STATEMENTS OF INCOME FOR THE PERIOD

For the period ended

 

						March 31,
						2014				2013
		NOTE				MCh$				MCh$
OPERATING INCOME
Interest income			23				540,907				425,797
Interest expense			23				(227,414	)			(179,316	)
Net interest income							313,493				246,481
Fee and commission income			24				90,681				87,540
Fee and commission expense			24				(34,917	)			(26,919	)
Net fee and commission income							55,764				60,621
Net profit (loss) from financial operations (net trading profit loss)			25				29,542				(16,873	)
Net foreign exchange gain (loss)			26				3,430				39,135
Other operating income			31				5,510				4,569
Net operating profit before provision for loan losses							407,739				333,933
Provision for loan losses			27				(81,234	)			(92,858	)
NET OPERATING PROFIT							326,505				241,075
Personnel salaries and expenses			28				(74,667	)			(71,533	)
Administrative expenses			29				(49,427	)			(45,860	)
Depreciation and amortization			30				(13,467	)			(15,653	)
Impairment of property, plant, and equipment			30				(13	)			(27	)
Other operating expenses			31				(20,879	)			(12,802	)
Total operating expenses							(158,453	)			(145,875	)
OPERATING INCOME							168,052				95,200
Income from investments in associates and other companies							287				482
Income before tax							168,339				95,682
Income tax expense			13				(26,152	)			(14,237	)
NET INCOME FOR THE YEAR							142,187				81,445
Attributable to:
Equity holder of the Bank							141,843				80,879
Non-controlling interest			22				344				566
Earnings per share attributable to Equity holders of the Bank:
(expressed in Chilean pesos)
Basic earnings			20				0.753				0.429
Diluted earnings			20				0.753				0.429

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED INTERIM STATEMENTS OF OTHER COMPREHENSIVE INCOME

For the periods ended

 

						March 31,
						2014				2013
		NOTE				MCh$				MCh$
NET INCOME FOR THE PERIOD							142,187				81,445
OTHER COMPREHENSIVE INCOME - ITEMS WICH MAY BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS
Available for sale investments			10				8,381				2,790
Cash flow hedge			20				(8,528	)			508
Other comprehensive income which may be reclassified subsequently to profit or loss, before tax a la renta							(147	)			3,298
Income tax related to items which may be reclassified subsequently to profit or loss			13				29				(659	)
Other comprehensive income for the year which may be reclassified subsequently to profit or loss, net of tax							(118	)			2,639
OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS							-				-
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD							142,069				84,084
Attributable to:
Equity holders of the Bank							141,738				83,508
Non-controlling interest			22				331				576

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY

For the periods ended March 31, 2014 and 2013 and December 31, 2013

 

						RESERVES								VALUATION ADJUSTMENTS												RETAINED EARNINGS
		Capital				Reserves and other retained earnings				Effects of merger of companies under common control				Available for sale investments				Cash flow hedge				Income tax effects				Retained earnings of prior years				Income for the period				Provision for mandatory dividends				Total attributable to shareholders				Non- controlling interest				Total Equity
		MCH$				MCH$				MCH$				MCH$				MCH$				MCH$				MCH$				MCH$				MCH$				MCH$				MCH$				MCH$
Equity as of December 31, 2012			891,303				977,684				(2,224	)			(10,041	)			5,315				945				-				388,282				(116,486	)			2,134,778				34,265				2,169,043
Distribution of income from previous period			-				-				-				-				-				-				388,282				(388,282	)			-				-				-				-
Equity as of January 1, 2013			891,303				977,684				(2,224	)			(10,041	)			5,315				945				388,282				-				(116,486	)			2,134,778				34,265				2,169,043
Increase or decrease of capital and reserves			-				-				-				-				-				-				-				-				-				-				-				-
Dividends distributions/ withdrawals made			-				-				-				-				-				-				-				-				-				-				-				-
Transfer of retained earnings to reserves			-				-				-				-				-				-				-				-				-				-				(11	)			(11	)
Provision for mandatory dividends			-				-				-				-				-				-				-				-				(24,264	)			(24,264	)			-				(24,261	)
Subtotals			-				-				-				-				-				-				-				-				(24,264	)			(24,264	)			(11	)			(24,275	)
Other comprehensive income			-				-				-				2,778				508				(657	)			-				-				-				2,629				10				2,639
Income for the year			-				-				-				-				-				-				-				80,879				-				80,879				566				81,445
Subtotals			-				-				-				2,778				508				(657	)			-				80,879				-				83,508				576				84,084
Equity as of March 31, 2013			891,303				977,684				(2,224	)			(7,263	)			5,823				288				388,282				80,879				(140,750	)			2,194,022				34,830				2,228,852
Equity as of December 31, 2013			891,303				1,133,215				(2,224	)			802				(8,257	)			1,491				-				441,926				(132,578	)			2,325,678				28,504				2,354,182
Distribution of income from previous period			-				-				-				-				-				-				441,926				(441,926	)			-				-				-				-
Equity as of January 1, 2014			891,303				1,133,215				(2,224	)			802				(8,257	)			1,491				441,926				-				(132,578	)			2,325,678				28,504				2,354,182
Increase or decrease of capital and reserves			-				-				-				-				-				-				-				-				-				-				-				-
Dividends distributions/ withdrawals made			-				-				-				-				-				-				-				-				-				-				-				-
Transfer of retained earnings to reserves			-				-				-				-				-				-				-				-				-				-				-				-
Provision for mandatory dividends			-				-				-				-				-				-				-				-				(42,553	)			(42,553	)			12				(42,541	)
Subtotals			-				-				-				-				-				-				-				-				(42,553	)			(42,553	)			12				(42,541	)
Other comprehensive income			-				-				-				8,397				(8,528	)			26				-				-				-				(105	)			(13	)			(118	)
Income for the year			-				-				-				-				-				-				-				141,823				-				141,843				344				142,187
Subtotals			-				-				-				8,397				(8,528	)			26				-				141,843				-				141,738				331				142,069
Equity as of March 31, 2014			891,303				1,133,215				(2,224	)			9,199				(16,785	)			1,517				441,926				141,843				(175,131	)			2,424,863				28,847				2,453,710

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

For the periods ended

 

						March 31,
						2014				2013
		NOTE				MCh$				MCh$
A – CASH FLOWS FROM OPERATING ACTIVITIES:
CONSOLIDATED INCOME BEFORE TAX							168,339				95,682
Debits (credits) to income that do not represent cash flows
Depreciation and amortization			30				13,467				15,653
Impairments of property, plant, and equipment			12				13				27
Provision for loan losses			27				95,655				103,409
Mark to market of trading investments							(4,631	)			(4,147	)
Income from investments in associates and other companies							(287	)			(482	)
Net gain on sale of assets received in lieu of payment			31				(4,689	)			(4,257	)
Provision on assets received in lieu of payment							1,518				799
Net gain on sale of property, plant, and equipment			31				(87	)			(109	)
Charge off of assets received in lieu of payment			31				957				1,769
Net interest income			23				(313,493	)			(246,481	)
Net fee and commission income			24				(55,763	)			(60,621	)
Debits (credits) to income that do not represent cash flows							(78,390	)			(9,992	)
Changes in deferred taxes			13				34,830				(3,652	)
Increase/decrease in operating assets and liabilities
Decrease (increase) of loans and accounts receivables from customers, net							(433,478	)			(237,543	)
Decrease (increase) of financial investments							(280,703	)			40,927
Decrease (increase) due to resale agreements (assets)							17,469				6,993
Decrease (increase) of interbank loans							121,139				49,439
Decrease (increase) of assets received or awarded in lieu of payments							2,029				(1,770	)
Increase of debits in customers checking accounts							94,228				(51,878	)
Increase (decrease) of time deposits and other time liabilities							(34,672	)			44,653
Increase (decrease) of obligations with domestic banks							49,500				(109	)
Increase (decrease) of other demand liabilities or time obligations							(104,617	)			46,099
Increase (decrease) of obligations with foreign banks							127,858				(58,117	)
Increase (decrease) of obligations with Central Bank of Chile							(36	)			(57	)
Increase (decrease) of obligations under repurchase agreements							(15,185	)			(80,415	)
Increase (decrease) in other financial liabilities							11,259				17,599
Net increase of other assets and liabilities							4,745				(106,546	)
Redemption of letters of credit							(7,590	)			(9,781	)
Senior bond issuances							259,490				187,713
Redemption of senior bonds and payments of interest							(359,812	)			(131,197	)
Interest received							618,715				406,453
Interest paid							(198,662	)			(124,670	)
Fees and commissions received			24				90,681				87,540
Fees and commissions paid			24				(34,917	)			(26,919	)
Income tax			13				(26,152	)			(14,237	)
Total cash flow provided by (used in) operating activities							(241,273	)			(68,225	)

 

 

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

For the periods ended

 

						March 31,
						2014				2013
		NOTE				MCh$				MCh$
B – CASH FLOWS FROM INVESTMENT ACTIVITIES:
Purchases of property, plant, and equipment			12				(2,883	)			(2,912	)
Sales of property, plant, and equipment							46				33
Purchases of investments in associates and other companies							-				-
Sales of investments in associates and other companies							-				-
Purchases of intangible assets			11				(2,715	)			(139	)
Total cash flow provided by (used in) investment activities							(5,502	)			(3,018	)
C – CASH FLOW FROM FINANCING ACTIVITIES:
From shareholder´s financing activities							(82	)			(19,846	)
Increased of other obligations							-				169
Redemption of subordinated bonds and payments of interest							(82	)			(20,015	)
From non-controlling interest financing activities							-				-
Dividends and/or withdrawals paid							-				-
Total cash flow used in financing activities							(82	)			(19,846	)
D – NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE PERIOD							(246,857	)			(91,089	)
E – EFFECTS OF FOREIGN EXCHANGE RATE FLUCTUATIONS							6,787				(4,052	)
F – INICIAL BALANCE OF CASH AND CASH EQUIVALENTS							1,899,508				1,485,729
FINAL BALANCE OF CASH AND CASH EQUIVALENTS			4				1,659,437				1,390,588

 

		March 31,
Reconciliation of provisions for the Consolidated Interim Statements of Cash Flows		2014				2013
For the periods ended		MCh$				MCh$
Provision for loan losses for cash flow purposes			95,655				103,409
Recovery of loans previously charged off			(14,421	)			(10,551	)
Provision for loan losses - net			81,234				92,858

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

CORPORATE INFORMATION

 

Banco Santander Chile (formerly Banco Santiago) is a corporation (limited company bank) organized under the laws of the Republic of Chile, headquartered at Bandera #140, Santiago, which provides a broad range of general banking services to its customers, from individuals to major corporations. Banco Santander Chile and its subsidiaries (collectively referred to herein as the “Bank” or “Banco Santander Chile”) offers commercial and consumer banking services, as well as other services, including factoring, collection, leasing, securities and insurance brokerage, mutual and investment fund management, and investment banking.

 

Banco Santander Spain controls Banco Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones Ltda. and Santander-Chile Holding S.A., which are controlled subsidiaries of Banco Santander Spain. As of December 31, 2013 Banco Santander Spain owns or controls directly and indirectly 99.5% of Santander-Chile Holding S.A. and 100% of Teatinos Siglo XXI Inversiones Ltda. This gives Banco Santander Spain control over 67.18% of the Bank’s shares.

 

a)

Basis of preparation

 

These Consolidated Interim Financial Statements have been prepared in accordance with the Compendium of Accounting Standards issued by the Superintendency of Banks and Financial Institutions (SBIF), the Chilean regulatory agency. The General Banking Law set out in its article 15 indicates that, those banks must apply accounting standards established by SBIF. In any other matter, the Bank must apply general accepted standards issued by the Colegio de Contadores de Chile A.G (Association of Chilean Accountants), which coincide with International Financial Reporting Standards (IFRS). In the event of discrepancies between the accounting principles and accounting standards issued by the SBIF (Compendium of Accounting Standards), the latter shall prevail.

 

For purposes of these financial statements we use certain terms and conventions. References to “US$”, “U.S. dollars” and “dollars” are to United States dollars, references to “EUR” are to European Economic Community Euro, references to “CNY” are to Chinese Yuan or renminbi , references to “CHF” are to Swiss franc, references to “Chilean pesos,” “pesos” or “Ch$” are to Chilean pesos, and references to “UF” are to Unidades de Fomento. The UF is an inflation-indexed Chilean monetary unit with a value in Chilean pesos that changes daily to reflect changes in the official Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the Chilean National Institute of Statistics) for the previous month.

 

The Notes to the Consolidated Interim Financial Statements contain additional information to that submitted in the Consolidated Interim Statement of Financial Position, Consolidated Interim Statement of Income, Consolidated Interim Statement of Comprehensive Income, Consolidated Interim Statement of Changes in Equity and Consolidated Interim Statement of Cash Flows for the Period. The notes provide narrative descriptions and other information regarding those statements in a clear, relevant, reliable and comparable manner.

 

b)

Basis of preparation for the Consolidated Interim Financial Statements

 

The Consolidated Interim Financial Statements as of March 31, 2014 and 2013 and December 31, 2013 incorporate the financial statements of the Bank entities over which the bank has control (including structured entities); and includes the adjustments, reclassifications and eliminations needed to comply with the accounting and valuation criteria established by IFRS issued by IASB. Control is achieved when the Bank:

 

I.

has power over the investee;

II.

is exposed, or has rights, to variable returns from its involvement with the investee; and

III.

has the ability to use its power to affect its returns.

 

The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

 

When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities over the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank’s voting rights in an investee are sufficient to give it power, including:

 

·

the size of the Bank’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

·

potential voting rights held by the Bank, other vote holders or other parties;

·

rights arising from other agreements; and

·

any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

 

Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control over the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the Consolidated Statement of Income and in the Consolidated Statement of Other Comprehensive Income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary.

 

Profit or loss and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

 

When necessary, adjustments are made to the financial statements of the subsidiaries to bring their accounting policies into line with the Bank accounting policies.

 

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between consolidated entities are eliminated in full on consolidation.

 

Changes in the consolidated entities ownership interests in subsidiaries that do not result in losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interest and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Bank.

 

In addition, third parties’ shares in the Consolidated Bank’s equity are presented as “Non-controlling interests” in the Consolidated Statement of Changes in Equity. Their share in the income for the year is presented as “Attributable to non-controlling interests” in the Consolidated Statement of Income

 

The following companies are considered entities controlled by the Bank and are therefore within the scope of consolidation:

 

i.

Entities controlled by the Bank through participation in equity

 

						Percent ownership share
						As of March 31,												As of December 31,												As of March 31,
				Place of		2014												2013												2013
				Incorporation and		Direct				Indirect				Total				Direct				Indirect				Total				Direct				Indirect				Total
Name of the Subsidiary		Main Activity		operation		%				%				%				%				%				%				%				%				%
Santander Corredora de Seguros Limitada		Insurance brokerage		Santiago, Chile			99.75				0.01				99.76				99.75				0.01				99.76				99.75				0.01				99.76
Santander S.A. Corredores de Bolsa		Financial instruments brokerage		Santiago, Chile			50.59				0.41				51.00				50.59				0.41				51.00				50.59				0.41				51.00
Santander Asset Management S.A. Administradora General de Fondos (*)		Third-party funds administration		Santiago, Chile			-				-				-				99.96				0.02				99.98				99.96				0.02				99.98
Santander Agente de Valores Limitada		Securities brokerage		Santiago, Chile			99.03				-				99.03				99.03				-				99.03				99.03				-				99.03
Santander S.A. Sociedad Securitizadora		Purchase of credits and issuance of debt instruments		Santiago, Chile			99.64				-				99.64				99.64				-				99.64				99.64				-				99.64
Santander Servicios de Recaudación y Pagos Limitada		Support society, making and receiving payments		Santiago, Chile			99.90				0.10				100.00				99.90				0.10				100.00				99.90				0.10				100.00

(*) Santander Asset Management S.A. Administradora General de Fondos was sold in December 2013.

 

The Bank only holds complete controlling participation in Santander Servicios de Recaudación y Pagos Limitada. The detail of non-controlling participation on all the remaining subsidiaries can be seen in Note 22 – Non-controlling interest.

 

ii.

Entities controlled by the Bank through other considerations

 

The following companies have been consolidated based on the determination that the Bank has control as previously defined above and in accordance with IFRS 10, Consolidated Financial Statements:

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

-

Santander Gestión de Recaudación y Cobranza Limitada

-

Multinegocios S.A.

-

Servicios Administrativos y Financieros Limitada

-

Fiscalex Limitada

-

Multiservicios de Negocios Limitada

-

Bansa Santander S.A.

 

iii.

Associates

 

An associate is an entity over which the Bank has significant influence. Significant influence, in this case, is defined as the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate.

 

The following companies are considered “Associates” in which the Bank accounts for its participation using the equity method:

 

						Percent ownership share
				Place of Incorporation		As of March 31,				As of December 31,				As of March 31,
				and		2014				2013				2013
Associates		Main activity		operation		%				%				%
Redbanc S.A.		ATM service		Santiago, Chile			33.43				33.43				33.43
Transbank S.A.		Debit and credit card services		Santiago, Chile			25.00				25.00				32.71
Centro de Compensación Automatizado		Electronic fund transfer and compensation services		Santiago, Chile			33.33				33.33				33.33
Sociedad Interbancaria de Depósito de Valores S.A.		Delivery of securities on public offer		Santiago, Chile			29.28				29.28				29.28
Cámara Compensación de Alto Valor S.A.		Payments clearing		Santiago, Chile			14.14				14.14				12.65
Administrador Financiero del Transantiago S.A.		Administration of boarding passes to public transportation		Santiago, Chile			20.00				20.00				20.00
Sociedad Nexus S.A.		Credit card processor		Santiago, Chile			12.90				12.90				12.90
Servicios de Infraestructura de Mercado OTC S.A.		Administration of the infrastructure for the financial market of derivative instruments		Santiago, Chile			11.11				11.11				-

 

In the case of Nexus S.A. and Cámara Compensación de Alto Valor S.A., Banco Santander Chile has a representative on the Board of Directors. According to this fact and definitions previously mentioned, the Bank has concluded that it exerts significant influence over those entities.

 

In July, 2013 national banks jointly created the company Servicios de Infraestructura de Mercado OTC S.A., and its objective is to offer certain services to the financial market, granting services of registration, confirmation, storage, consolidation and reconciliation of operations with derivative financial instruments. Banco Santander possesses 11.11% equity participation. This investee is considered an associate since, through its executives; the Bank has been actively involved in managing the company, in the process of organization and in the implementation of the functional structure of this company, resulting in significant influence over this company.

 

iv.

Share or rights in other companies

 

Such entities represent those over which the Bank has no control or significant influences are presented in this category. These holdings are shown at purchase value.

 

c)

Non-controlling interest

 

Non-controlling interest represents the portion of net income and net assets which the Bank does not own, either directly or indirectly. It is presented as “Attributable to non-controlling interest” separately in the Consolidated Interim Statement of Income, and separately from shareholders’ equity in the Consolidated Interim Statement of Financial Position.

 

In the case of entities controlled by the Bank through other considerations, income and equity are presented in full as non-controlling interest, since the Bank controls them, but does not have any ownership expressed as a percentage.

 

d)

Operating segments

 

The Bank discloses separate information for each operating segment that:

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

i.

has been identified, and

ii.

exceeds the quantitative thresholds stipulated for a segment.

 

Operating segments with similar economic characteristics often have a similar long-term financial performance. Two or more segments can be combined only if aggregation is consistent with International Financial Reporting Standard 8 “Operating Segments” (IFRS 8) and the segments have similar economic characteristics and are similar in each of the following respects:

i.

the nature of the products and services;

ii.

the nature of the production processes;

iii.

the type or class of customers that use their products and services;

iv.

the methods used to distribute their products or services; and

v.

if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

 

The Bank reports separately on each operating segment that exceeds any of the following quantitative thresholds:

 

i.

Its reported revenue, from both external customers and intersegment sales or transfers, is 10% or more of the combined internal and external revenue of all the operating segments.

 

ii.

The absolute amount of its reported profit or loss is 10% or more of the greater in absolute amount of: (i) the combined reported profit of all the operating segments that did not report a loss; (ii) the combined reported loss of all the operating segments that reported a loss.

 

iii.

Its assets represent 10% or more of the combined assets of all the operating segments.

 

Operating segments that do not meet any of the quantitative thresholds may be treated as segments to be reported, in which case the information must be disclosed separately if management believes it could be useful for the users of the Consolidated Interim Financial Statements.

 

Information about other business activities of the operating segments not separately reported is combined and disclosed in the “Other segments” category.

 

According to the information presented, the Bank’s segments were determined under the following definitions: An operating segment is a component of an entity:

 

i.

that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses from transactions with other components of the same entity);

ii.

whose operating results are regularly reviewed by the entity’s chief executive officer, who makes decisions about resources allocated to the segment and assess its performance; and

iii.

for which discrete financial information is available.

 

e)

Functional and presentation currency

 

According to International Accounting Standard No.21 “The Effects of Changes in Foreign Exchange Rates” (IAS 21), the Chilean peso, which is the currency of the primary economic environment in which the Bank operates and the currency which influences its costs and revenues structure, has been defined as the Bank’s functional and presentation currency.

 

Accordingly, all balances and transactions denominated in currencies other than the Chilean Peso are treated as “foreign currency.”

 

f)

Foreign currency transactions

 

The Bank grants loans and accepts deposits in amounts denominated in foreign currencies, mainly the U.S. dollar. Assets and liabilities denominated in foreign currencies, held by the Bank are translated to Chilean pesos based on the market rate published by Reuters at 1:30 p.m. on the last business day of every month; the rate used was Ch$549.55 per US$1 as of March 31, 2014 (Ch$471.75 per US$1 as of March 31, 2013).

 

The amounts of net foreign exchange gains and losses includes recognition of the effects that exchange rate variations have on assets and liabilities denominated in foreign currencies and the profits and losses on foreign exchange spot and forward transactions undertaken by the Bank.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

g)

Definitions and classification of financial instruments

 

i.

Definitions

 

A “financial instrument” is any contract that gives rise to a financial asset of one entity, and a financial liability or equity instrument of another entity.

 

An “equity instrument” is a legal transaction that evidences a residual interest in the assets of an entity deducting all of its liabilities.

 

A “Financial derivative” is a financial instrument whose value changes in response to the changes in an observable market variable (such as an interest rate, a foreign exchange rate, a financial instrument’s price, or a market index, including credit ratings), whose initial investment is very small compared with other financial instruments having a similar response to changes in market factors, and which is generally settled at a future date.

 

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a financial derivative, known as an embedded derivative, which is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.

 

ii.

Classification of financial assets for measurement purposes

 

The financial assets are initially classified into the various categories used for management and measurement purposes.

 

Financial assets are included for measurement purposes in one of the following categories:

 

-

Trading investments portfolio (at fair value through profit and loss): this category includes the financial assets acquired for the purpose of generating profits in the short term from fluctuations in their prices. This category includes the portfolio of trading investments and financial derivative contracts not designated as hedging instruments.

 

-

Available for sale investments portfolio, includes debt instruments not classified as: “held-to-maturity investments,” “Credit investments (loans and accounts receivable from customers or interbank loans)” or “Financial assets at fair value through profit or loss.” Available for sale (AFS) investments are initially recorded at cost, which includes transaction costs that are directly attributable to the acquisition. AFS instruments are subsequently measured at fair value, or based on appraisals made with the use of internal models when appropriate. Unrealized gains or losses arising from changes in fair value are recorded as a debit or credit under the heading “Other comprehensive income” within equity. When these investments are disposed or become impaired, the cumulative gains or losses previously recognized in “Other comprehensive income” are transferred to the Consolidated Interim Statement of Income under “Net income from financial operations.”

 

-

Held to maturity instruments portfolio: this category includes debt securities traded on an active market, with a fixed maturity, and with fixed or determinable payments, for which the Bank has both the intent and a proven ability to hold to maturity. Held to maturity investments are recorded at their amortized cost plus interest earned, less any impairment losses established when their carrying amount exceeds the present value of estimated future cash flows.

 

-

Credit investments (loans and accounts receivable from customers or interbank loans): this category includes financing granted to third parties, based on their nature, regardless of the class of borrower and the form of financing. Includes loans and accounts receivable from customers, interbank loans, and financial lease transactions in which the Bank acts as lessor.

 

iii.

Classification of financial assets for presentation purposes

 

For presentation purposes, the financial assets are classified by their nature into the following line items in the Consolidated Interim Financial Statements:

 

-

Cash and deposits in banks: This line includes cash balances, checking accounts and on-demand deposits with the Central Bank of Chile and other domestic and foreign financial institutions. Amounts invested or received as overnight deposits are included in this item.

 

-

Cash items in process of collection: This item represents domestic transactions in the process of transfer through a central domestic clearinghouse or international transactions which may be delayed in settlement due to time differences, etc.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

-

Trading investments: This item includes financial instruments held-for-trading and investments in mutual funds which must be adjusted to their fair value in the same way as instruments acquired for trading.

 

-

Financial derivative contracts: Financial derivative contracts with positive fair values are presented in this item. It includes both independent contracts as well as derivatives that should and can be separated from a host contract, whether they are for trading or accounted for as hedging derivatives, as set forth in Note 6.

 

·

Trading derivatives: Includes the fair value in favor of the Bank of derivatives which do not qualify for hedge accounting, including embedded derivatives separated from hybrid financial instruments.

 

·

Hedging derivatives: Includes the fair value in favor of the Bank of derivatives designated as hedging instruments in hedge accounting, including the embedded derivatives separated from the hybrid financial instruments designated as hedging instruments in hedge accounting.

 

-

Interbank loans: This item includes the balances of transactions with domestic and foreign banks, including the Central Bank of Chile, other than those reflected in the preceding items.

 

-

Loans and accounts receivables from customers: These loans are non-derivative financial assets for which fixed or determined amounts are charged, that are not listed on an active market and which the Bank does not intend to sell immediately or in the short term. When the Bank is the lessor in a lease, and it substantially transfers the risks and benefits incidental to the leased asset, the transaction is presented in loans and accounts receivable from customers.

 

-

Investment instruments: Are classified into two categories: held-to-maturity investments, and available-for-sale investments. The held-to-maturity investment category includes only those instruments for which the Bank has the ability and intent to hold them until their maturity. The remaining investments are treated as available for sale.

 

iv.

Classification of financial liabilities for measurement purposes

 

The financial liabilities are initially classified into the various categories used for management and measurement purposes.

 

Financial liabilities are included, for measurement purposes, in one of the following categories:

 

-

Financial liabilities held for trading (at fair value through profit or loss): financial liabilities issued to generate short-term profits from fluctuations in their prices, financial derivatives not deemed to qualify for hedge accounting and financial liabilities arising from firm commitment of financial assets purchased under repurchase agreements or borrowed (“short positions”).

 

-

Financial liabilities at amortized cost: financial liabilities, regardless of their class and maturity, not included in any of the aforementioned categories which arise from the borrowing activities of financial institutions.

 

v.

Classification of financial liabilities for presentation purposes

 

The financial liabilities are classified by their nature into the following line items in Consolidated Interim Statement of Financial Position:

 

-

Deposits and other demand liabilities: this item includes all on-demand obligations except for term savings accounts, which are not considered on-demand instruments in view of their special characteristics. Obligations whose payment may be required during the period are deemed to be on-demand obligations. Operations which become callable the day after the closing date are not treated as on-demand obligations.

 

-

Cash items in process of being cleared: this item includes the balances of asset purchases that are not settled on the same day and for sales of foreign currencies not delivered.

 

-

Obligations under repurchase agreements: this item includes the balances of sales of financial instruments under repurchase and loan agreements. According to actual applicable regulation, the Bank does not record instruments acquired under repurchase agreements in its own portfolio.

 

-

Time deposits and other demand liabilities: this item shows the balances of deposit transactions in which a term at the end of which they become callable has been stipulated.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

-

Financial derivative contracts: this item includes financial derivative contracts with negative fair values (i.e. against the Bank), whether they are for trading or for hedge accounting, as set forth in Note 6.

 

·

Trading derivatives: Includes the fair value of derivatives which do not qualify for hedge accounting, including embedded derivatives separated from hybrid financial instruments.

 

·

Hedging derivatives: Includes the fair value of the derivatives designated as hedging instruments, including embedded derivatives separated from hybrid financial instruments and designated as hedging instruments.

 

-

Interbank borrowings: This item includes obligations due to other domestic banks, foreign banks, or the Central Bank of Chile, which were not classified in any of the previous categories.

 

-

Debt instruments issued: This encompasses three items; Obligations under letters of credit, Subordinated bonds and Senior bonds placed in the local and foreign market.

 

-

Other financial liabilities: This item includes credit obligations to persons other than domestic banks, foreign banks, or the Central Bank of Chile, for financing purposes or operations in the normal course of business.

 

h)

Valuation of financial instruments and recognition of fair value changes

 

In general, financial assets and liabilities are initially recorded at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss includes transaction costs. Subsequently, and at the end of each reporting period, they are measured pursuant to the following criteria:

 

i.

Valuation of financial assets

 

Financial assets are measured according to their fair value, gross of any transaction costs that may be incurred for their sale, except for loans and accounts receivable.

 

According to IFRS 13 Fair Value Measurement (effective date from January 1, 2013), “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

 

A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for the asset or liability. Even when there is no observable market to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owns the liability. That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability.

 

When using valuation techniques, the Bank shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs as available. If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value regardless of where the input is categorised within the fair value hierarchy (i.e. Level 1, 2 or 3). IFRS 13 establishes a fair value hierarchy that categories into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

 

All derivatives are recorded in the Consolidated Interim Statements of Financial Position at the fair value from their trade date. If their fair value is positive, they are recorded as an asset, and if their fair value is negative, they are recorded as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recorded in “Net income from financial operations” in the Consolidated Interim Statement of Income.

 

 

NOTE 01 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Specifically, the fair value of financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price. If, for exceptional reasons, the quoted price cannot be determined on a given date, the fair value is determined using similar methods to those used to measure over the counter (OTC) derivatives. The fair value of OTC derivatives is the sum of the future cash flows resulting from the instrument, discounted to present value at the date of valuation (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets: “net present value” (NPV) and option pricing models, among other methods. Also, within the fair value of derivatives are included Credit Valuation Adjustment (CVA), all with the objective that the fair value of each instrument includes the credit risk of its counterparty.

 

“Loans and accounts receivable from customers” and “Held-to-maturity investments” are measured at amortized cost using the “effective interest method.” “Amortized cost” is the acquisition cost of a financial asset or liability, plus or minus, as appropriate, prepayments of principal and the cumulative amortization (recorded in the consolidated income statement) of the difference between the initial cost and the maturity amount as calculated under the effective interest rate method. For financial assets, amortized cost also includes any reductions for impairment or uncollectibility. For loans and accounts receivable designated as hedged items in fair value hedges, the changes in their fair value related to the risk or risks being hedged is recorded in “Net income from financial operations”.

 

The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to all its estimated cash flows over its remaining life. For fixed-rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, are a part of the financial return. For floating-rate financial instruments, the effective interest rate coincides with the rate of return prevailing until the next benchmark interest reset date.

 

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying assets and are settled by delivery of those instruments are measured at acquisition cost, adjusted, where appropriate, by any related impairment loss.

 

The amounts at which the financial assets are recorded represent, in all material respects, the Bank’s maximum exposure to credit risk at each reporting date. The Bank has also received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, equity instruments and personal securities, assets leased out under leasing and rental agreements, assets acquired under repurchase agreements, securities loans and derivatives.

 

ii.

Valuation of financial liabilities

 

In general, financial liabilities are measured at amortized cost, as defined above, except for those financial liabilities designated as hedged items or hedging instruments and financial liabilities held for trading, which are measured at fair value.

 

iii.

Valuation techniques

 

Financial instruments at fair value, determined on the basis of price quotations in active markets, include government debt securities, private sector debt securities, equity shares, short positions, and fixed-income securities issued.

 

In cases where price quotations cannot be observed, the Management makes its best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs and, in very specific cases, they use significant inputs not observable in market data. Various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

 

The main techniques used as of March 31, 2014 and 2013 and as of December, 2013 by the Bank’s internal models to determine the fair value of the financial instruments are as follows:

 

i.

In the valuation of financial instruments permitting static hedging (mainly “forwards” and “swaps”), the “present value” method is used. Estimated future cash flows are discounted using the interest rate curves of the related currencies. The interest rate curves are generally observable market data.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

ii.

In the valuation of financial instruments requiring dynamic hedging (mainly structured options and other structured instruments), the Black-Scholes model is normally used. Where appropriate, observable market inputs are used to obtain factors such as the bid-offer spread, exchange rates, volatility, correlation indexes and market liquidity.

 

iii.

In the valuation of certain financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors, the present value method (futures) and the Black-Scholes model (plain vanilla options) are used. The main inputs used in these models are observable market data, including the related interest rate curves, volatilities, correlations and exchange rates.

 

The fair value of the financial instruments arising from the aforementioned internal models considers contractual terms and observable market data, which include interest rates, credit risk, exchange rates, quoted market price of shares, volatility and prepayments, among others. The valuation models are not significantly subjective, since these methodologies can be adjusted and evaluated, as appropriate, through the internal calculation of fair value and the subsequent comparison with the related actively traded price.

 

iv.

Recording result

 

As a general rule, changes in the carrying amount of financial assets and liabilities are recorded in the Consolidated Interim Statement of Income, distinguishing between those arising from the accrual of interest, which are recorded under interest income or interest expense as appropriate, and those arising for other reasons, which are recorded at their net amount under “Net income from financial operations”.

 

In the case of trading investments, the fair value adjustments, interest income, indexation adjustment and foreign exchange, are included in the Consolidated Interim Statement of Income under “Net income from financial operations.”

 

Adjustments due to changes in fair value from:

 

-

“Available-for-sale instruments” are recorded and accumulated under the heading “Other comprehensive income” within Equity.

 

-

When available-for-sale instruments are disposed of or determined to be impaired, the cumulative gain or loss previously accumulated as “Other comprehensive income” is reclassified to the Consolidated Interim Statement of Income.

 

v.

Hedging transactions

 

The Bank uses financial derivatives for the following purposes:

 

i)

to sell to customers who request these instruments in the management of their market and credit risks,

ii)

to use these derivatives in the management of the risks of the Bank entities’ own positions and assets and liabilities (“hedging derivatives”), and

iii)

to obtain profits from changes in the price of these derivatives (“trading derivatives”).

 

All financial derivatives that do not qualify for hedge accounting are accounted for as “trading derivatives.”

 

A derivative qualifies for hedge accounting if all the following conditions are met:

 

1.

The derivative hedges one of the following three types of exposure:

 

a.

Changes in the value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);

b.

Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecasted transactions (“cash flow hedge”);

c.

The net investment in a foreign operation (“hedge of a net investment in a foreign operation”).

 

2.

It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

 

a.

At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (“prospective effectiveness”).

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

b.

There is sufficient evidence that the hedge was actually effective during the life of the hedged item or position (“retrospective effectiveness”).

 

3.

There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Bank’s management of own risks.

 

The changes in the value of financial instruments qualifying for hedge accounting are recorded as follows:

 

a.

In fair value hedges, the gains or losses arising on both hedging instruments and the hedged items (attributable to the type of risk being hedged) are recorded directly in the Consolidated Interim Statement of Income.

 

b.

In fair value hedges of interest rate risk on a portfolio of financial instruments, gains or losses that arise in measuring hedging instruments are recorded directly in the Consolidated Interim Statement of Income, whereas gains or losses due to changes in fair value of the hedged item (attributable to the hedged risk) are recorded in the Consolidated Interim Statement of Income as a charge or credit, as applicable, to “Net income from financial operations”.

 

c.

In cash flow hedges, the effective portion of the change in value of the hedging instrument is recorded under the heading “Cash flow hedge” within Equity component “Other comprehensive income”, until the hedged transaction occurs, thereafter being recorded in the Consolidated Interim Statement of Income, unless the hedged transaction results in the recognition of non–financial assets or liabilities, in which case it is included in the cost of the non-financial asset or liability.

 

d.

The differences in valuation of the hedging instrument corresponding to the ineffective portion of the cash flow hedging transactions are recorded directly in the Consolidated Interim Statement of Income under “Net income from financial operations”.

 

If a derivative designated as a hedging instrument no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified as a “trading derivative.” When “fair value hedging” is discontinued, the fair value adjustments to the carrying amount of the hedged item arising from the hedged risk are amortized to gain or loss from that date.

 

When cash flow hedges are discontinued, any cumulative gain or loss of the hedging instrument recognized in other comprehensive income under “Other comprehensive income” (from the period when the hedge was effective) remains recorded in equity until the hedged transaction occurs, at which time it is recorded in the Consolidated Interim Statement of Income, unless the transaction is no longer expected to occur, in which case any cumulative gain or loss is recorded immediately in the Consolidated Interim Statement of Income.

 

vi.

Derivatives embedded in hybrid financial instruments

 

Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as “Other financial assets (liabilities) at fair value through profit or loss” or as “Trading investments portfolio”.

 

vii.

Offsetting of financial instruments

 

Financial asset and liability balances are offset, i.e., reported in the Consolidated Interim Statements of Financial Position at their net amount, only if there is a legally enforceable right to offset the recorded amounts and the Banks intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.

 

viii.

Derecognition of financial assets and liabilities

 

The accounting treatment of transfers of financial assets depends on the extent and the manner in which the risks and rewards associated with the transferred assets are transferred to third parties:

 

i.

If the Bank transfers substantially all the risks and rewards of ownership to third parties, as in the case of unconditional sales of financial assets, sales under repurchase agreements at fair value at the date of repurchase, sales of financial assets with a purchased call option or written put option deeply out of the money, utilization of assets in which the transferor does not retain subordinated debt nor grants any credit enhancement to the new holders, and other similar cases, the transferred financial asset is derecognized from the Consolidated Interim Statements of Financial Position and any rights or obligations retained or created in the transfer are simultaneously recorded.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

ii.

If the Bank retains substantially all the risks and rewards of ownership associated with the transferred financial asset, as in the case of sales of financial assets under repurchase agreements at a fixed price or at the sale price plus interest, securities lending agreements under which the borrower undertakes to return the same or similar assets, and other similar cases, the transferred financial asset is not derecognized from the Consolidated Interim Statements of Financial Position and continues to be measured by the same criteria as those used before the transfer. However, the following items are recorded:

 

-

An associated financial liability for an amount equal to the consideration received; this liability is subsequently measured at amortized cost.

-

Both the income from the transferred (but not removed) financial asset as well as any expenses incurred on the new financial liability.

 

iii.

If the Bank neither transfers nor substantially retains all the risks and rewards of ownership associated with the transferred financial asset—as in the case of sales of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases—the following distinction is made:

 

a.

If the transferor does not retain control of the transferred financial asset: the asset is removed from the Consolidated Interim Statements of Financial Position and any rights or obligations retained or created in the transfer are recorded.

 

b.

If the transferor retains control of the transferred financial asset: it continues to be recorded in the Consolidated Interim Statements of Financial Position for an amount equal to its exposure to changes in value and a financial liability associated with the transferred financial asset is recorded. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

 

Accordingly, financial assets are only removed from the Consolidated Interim Statements of Financial Position when the rights over the cash flows they generate have terminated or when all the inherent risks and rewards of ownership have been substantially transferred to third parties. Similarly, financial liabilities are only derecognized from the Consolidated Interim Statements of Financial Position when the obligations specified in the contract are discharged or cancelled or the contract has matured.

 

i)

Recognizing income and expenses

 

The most significant criteria used by the Bank to recognize its revenues and expenses are summarized as follows:

 

i.

Interest revenue, interest expense, and similar items

 

Interest revenue and expense are recorded on an accrual basis using the effective interest method.

 

However, when a given operation or transaction is past due by 90 days or more, when it originated from a refinancing or renegotiation, or when the Bank believes that the debtor poses a high risk of default, the interest and adjustments pertaining to these transactions are not recorded directly in the Consolidated Interim Statement of Income unless they have been actually received.

 

This interest and these adjustments are generally referred to as “suspended” and are recorded in suspense accounts which are not part of the Consolidated Interim Statements of Income. Instead, they are reported as part of the complementary information thereto and as memorandum accounts (Note 23). This interest is recognized as income, when collected.

 

The resumption of interest income recognition of previously impaired loans only occurs when such loans became current (i.e., payments were received such that the loans are contractually past-due for less than 90 days) or they are no longer classified under the C3, C4, C5, or C6 categories (for loans individually evaluated for impairment).

 

Dividends received from companies classified as “Investments in associates and other companies” are recorded as income when the right to receive them arises.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

ii.

Commissions, fees and similar items

 

Fee and commission income and expenses are recognized in the Consolidated Interim Statement of Income using criteria that vary according to their nature. The main criteria are:

 

-

Fee and commission income and expenses relating to financial assets and liabilities measured at fair value through profit or loss are recognized when they are earned or paid.

-

Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.

-

Those relating to services provided in a single act are recognized when the single act is performed.

 

iii.

Non-financial income and expenses

 

These are recognized for accounting purposes on an accrual basis.

 

iv.

Loan arrangement fees

 

Fees that arise as a result of the origination of a loan, mainly application and analysis-related fees, are deferred and charged to in the Consolidated Interim Statement of Income over the term of the loan.

 

Regarding fees arising as a result of new products, the Bank immediately records within the Consolidated Interim Statements of Income the portion that corresponds to direct costs related to loan origination.

 

j)

Impairment

 

i.

Financial assets

 

A financial asset, other than that at fair value through profit and loss, is evaluated on each financial statement filing date to determine whether objective evidence of impairment exists.

 

A financial asset or group of financial assets will be impaired if, and only if, objective evidence of impairment exists as a result of one or more events that occurred after initial recognition of the asset (“event causing the loss”), and this event or events causing the loss have an impact on the estimated future cash flows of a financial asset or group of financial assets.

 

An impairment loss relating to financial assets recorded at amortized cost is calculated as the difference between the recorded amount of the asset and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

 

An impairment loss relating to a financial asset available for sale is calculated based on a significant or prolonged decline in its fair value.

 

Individually significant financial assets are individually tested to determine their impairment. The remaining financial assets are evaluated collectively in groups that share similar credit risk characteristics.

 

All impairment losses are recorded in income. Any impairment loss relating to a financial asset available for sale previously recorded in equity is transferred to profit or loss.

 

The reversal of an impairment loss only occurs if it can be objectively related to an event occurring after the initial impairment loss was recorded.

 

ii.

Non-financial assets

 

The Bank’s non-financial assets, excluding investment properties, are reviewed at reporting date to determine whether they show signs of impairment (i.e. its carrying amount exceeds its recoverable amount). If such evidence exists, the amount to be recovered from the assets is then estimated.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

In connection with other assets, impairment losses recorded in prior periods are assessed at each reporting date to determine whether the loss has decreased and should be reversed. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

 

k)

Property, plant, and equipment

 

This category includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Assets are classified according to their use as follows:

 

i.

Property, plant, and equipment for own use

 

Property, plant and equipment for own use (including, among other things, tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing accounts receivable from third parties which are intended to be held for continuing own use and tangible assets acquired under finance leases) are presented at acquisition cost less the related accumulated depreciation and, if applicable, any impairment losses (when net carrying amount was higher than recoverable amount).

 

Depreciation is calculated using the straight line method over the acquisition cost of assets less their residual value, assuming that the land on which buildings and other structures stand has an indefinite life and, therefore, is not subject to depreciation.

 

The Bank must apply the following useful lives for the tangible assets that comprise its assets:

 

ITEM		Useful life (Months)
Land			-
Paintings and works of art			-
Assets retired for disposal			-
Carpets and curtains			36
Computers and hardware			36
Vehicles			36
Computational systems and software			36
ATM’s			60
Machines and equipment in general			60
Office furniture			60
Telephone and communication systems			60
Security systems			60
Rights over telephone lines			60
Air conditioning systems			84
Installations in general			120
Security systems (acquisitions up to October 2002)			120
Buildings			1,200

 

The consolidated entities assess at each reporting date whether there is any indication that the carrying amount of any of their tangible assets’ exceeds its recoverable amount. If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life, if the useful life needs to be revised.

 

Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities record the reversal of the impairment loss recorded in prior periods and adjust the future depreciation charges accordingly. In no circumstance may the reversal of an impairment loss on an asset increase its carrying value above the one it would have had if no impairment losses had been recorded in prior years.

 

The estimated useful lives of the items of property, plant and equipment held for own use are reviewed at least at the end of each reporting period to detect significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recorded in the Consolidated Statement of Income in future years on the basis of the new useful lives.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Maintenance expenses relating to tangible assets (property, plant and equipment) held for own use are recorded as an expense in the period in which they are incurred.

 

ii.

Assets leased out under operating leases

 

The criteria used to record the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives, and to record the impairment losses thereof, are consistent with those described in relation to property, plant and equipment held for own use.

 

l)

Leasing

 

i.

Finance leases

 

Finance leases are leases that substantially transfer all the risks and rewards incidental to ownership of the leased asset to the lessee.

 

When the consolidated entities act as the lessor of an asset, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term, which is equivalent to one additional lease payment and so is reasonably certain to be exercised, is recognized as lending to third parties and is therefore included under “Loans and accounts receivables from customers” in the Consolidated Interim Statements of Financial Position.

 

When the consolidated entities act as lessees, they show the cost of the leased assets in the Consolidated Interim Statements of Financial Position based on the nature of the leased asset, and simultaneously record a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.

 

In both cases, the finance income and finance expenses arising from these contracts are credited and debited, respectively, to “Interest income” and “Interest expense” in the Consolidated Interim Statement of Income so as to achieve a constant rate of return over the lease term.

 

ii.

Operating leases

 

In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.

 

When the consolidated entities act as the lessor, they present the acquisition cost of the leased assets under "Property, plant and equipment”. The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment held for own use and revenues from operating leases is recorded on a straight line basis under “Other operating income” in the Consolidated Interim Statement of Income.

 

When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight line basis to “Administrative and other expenses” in the Consolidated Interim Statement of Income.

 

iii.

Sale and leaseback transactions

 

For sale at fair value and operating leasebacks, the profit or loss generated is recorded at the time of sale. In the case of finance leasebacks, the profit or loss generated is amortized over the lease term.

 

m)

Factored receivables

 

Factored receivables are valued at the amount disbursed by the Bank in exchange of invoices or other commercial instruments representing the credit which the transferor assigns to the Bank. The price difference between the amounts disbursed and the actual face value of the credits is recorded as interest income in the Consolidated Interim Statement of Income through the effective interest method over the financing period.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

When the assignment of these instruments involves no liability for the assignee, the Bank assumes the risks of insolvency of the parties responsible for payment.

 

n)

Intangible assets

 

Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of a legal transaction (contractual terms) or are developed internally by the consolidated entities. They are assets whose cost can be estimated reliably and over which the consolidated entities have control and consider it probable that future economic benefits will be generated.

 

Intangible assets are recorded initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

 

Internally developed computer software

 

Internally developed computer software is recorded as an intangible asset if, among other requirements (basically the Bank’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated. The estimated useful life for software is 3 years.

 

Intangible assets are amortized on a straight-line basis over their estimated useful life; which has been defined as 36 months.

 

Expenditure on research activities is recorded as an expense in the year in which it is incurred and cannot be subsequently capitalized.

 

o)

Cash and cash equivalents

 

For the preparation of the cash flow statement, the indirect method was used, beginning with the Bank’s consolidated pre-tax income and incorporating non-cash transactions, as well as income and expenses associated with cash flows, which are classified as investment or financing activities.

 

For the preparation of the cash flow statement, the following items are considered:

 

i.

Cash flows: Inflows and outflows of cash and cash equivalents, such as deposits in Central Bank of Chile, deposits in domestic banks and deposits in foreign banks.

ii.

Operating activities: Principal revenue-producing activities performed by banks and other activities that cannot be classified as investing or financing activities.

iii.

Investing activities: The acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

iv.

Financing activities: Activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

 

p)

Allowances for loan losses

 

The Bank models determine allowances and provisions for loan losses according to the type of portfolio or operations. Loans and accounts receivables from customers are divided into three categories:

 

i.

Consumer loans,

ii.

Mortgage loans, and

iii.

Commercial loans.

 

The Bank performs an assessment of the risk associated with loans and accounts receivable from customers to determine their allowance for loan losses as described below:

 

-

Individual assessment - represents the case where the Bank assesses a debtor as individually significant, or when he/she cannot be classified within a group of financial assets with similar credit risk characteristics, due to their size, complexity or level of exposure.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

-

Group assessment - a group assessment is relevant for analyzing a large number of operations with small individual balances from individuals or small-size companies. The Bank groups debtors with similar credit risk characteristics giving to each group a default probability and recovery rate based on a historical analysis.

 

The models used to determine credit risk allowances are described as follows:

 

I.

Allowances for individual assessment

 

An individual assessment of commercial debtors is necessary in accordance with the SBIF, in the case of companies which, due to their size, complexity or level of exposure, must be known and analyzed in detail.

 

The Bank assigns to each debtor, his contingent loans and loans a risk category, after assigning them to one of the following portfolio categories: Normal, Substandard and Impaired. The risk factors used are: industry or economic sector, owners or managers, financial situation and payment capacity, and payment behavior.

 

The portfolio categories and their definitions are as follows:

 

i.

Normal Portfolio includes debtors with a payment capacity that allows them to comply with their obligations and commitments and there is not likely to change, based on the current economic and financial situation. The classifications assigned to this portfolio are categories from A1 to A6.

 

ii.

Substandard Portfolio includes debtors with financial difficulties or a significant deterioration of their payment capacity and about which are reasonable doubts about the reimbursement of the capital and interest within the contractual terms, showing low margin to fulfill their short-term financial obligations. The classifications assigned to this portfolio are categories from B1 to B4.

 

iii.

Impaired Portfolio includes debtors and their loans from which payment is considered remote since they show a deteriorated or null payment capacity, with signs of a possible bankruptcy, who required a forced debt restructuring or any debtor who has been in default for over 90 days in his payment of interest or capital, are included in this portfolio. The classifications assigned to this portfolio are categories from C1 to C6.

 

Normal and Substandard Compliance Portfolio

 

As part of individual assessment, the Bank classifies debtors into the following categories, assigning them a probability of non-performance (PNP) and severity (SEV), which result in the expected loss percentages.

 

Type of Portfolio		Debtor’s Category		Probability of Non- Performance (%)				Severity (%)				Expected Loss (%)
		A1			0.04				90.0				0.03600
		A2			0.10				82.5				0.08250
Normal portfolio		A3			0.25				87.5				0.21875
		A4			2.00				87.5				1.75000
		A5			4.75				90.0				4.27500
		A6			10.00				90.0				9.00000
		B1			15.00				92.5				13.87500
Substandard portfolio		B2			22.00				92.5				20.35000
		B3			33.00				97.5				32.17500
		B4			45.00				97.5				43.87500

 

At the beginning, the Bank determines all credit exposure, which includes the accounting balances of loans and accounts receivable from customers plus contingent loans, minus any amount recovered through executing the guarantees. To the exposure amount thus determined is applied the respective expected loss percentages.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Impaired Portfolio

 

The provisions over impaired portfolio include determining, at first, the expected loss rate, deducting any amount recovered by guarantee execution and the present value of recoveries through collection actions, net of related expenses.

 

Once expected loss range is determined, the related allowance percentage is applied over the exposure amount, which include loans plus contingent loans related to a debtor.

 

The allowance percentages applied over exposure are as follows:

 

Classification				Estimated range of loss		Allowance
	C1			Up to 3			2	%
	C2			More than 3% and up to 20%			10	%
	C3			More than 20% and up to 30%			25	%
	C4			More than 30% and up to 50%			40	%
	C5			More than 50% and up to 80%			65	%
	C6			More than 80%			90	%

 

II.

Allowances for group evaluations

 

The collective evaluation is relevant to address a large number of smaller balance loans related to individuals and small-size companies.

 

Levels of required allowances have been established by the Bank, in accordance with loan losses methodology by classifying and grouping the loan portfolio based on similar credit risk characteristic indicative of debtor’s ability to pay all amounts due according to the contractual terms. The Bank uses models based on debtors’ characteristics, payment history, due and default loans, among others.

 

The Bank uses methodologies to establish credit risk, based on internal models to estimate the allowances for the group-evaluated portfolio, which include non-individually commercial significant loans, mortgage and consumer loans (including installment loans, credit cards and overdraft lines). These methodologies allow the Bank to independently identify the portfolio behavior and establish the provision required to cover losses arising during the year.

 

The customers are classified according to their internal and external characteristics, using customer-portfolio model to differentiate each portfolio’s risk in an appropriate manner. This is known as the allocation profile method.

 

The allocation profile method is based on a statistical construction model that establishes a relation through logistic regression between variables such as default, payment behavior outside the Bank, socio-demographic data, among others, and a response variable which determines the client’s risk, in this case is 90 or more delinquency days. Afterwards, common profiles are established and assigned a Probability of Non-Performance (PNP) and a recovery rate based on a historical analysis known as Severity (SEV).

 

Therefore, once the customers have been profiled and assigned a PNP and a SEV relating to the loan’s profile, the exposure at default (EXP) is calculated. This exposure includes the book value of the loans and accounts receivable from the customer, plus contingent loans, minus any amount that can be recovered by executing guarantees (for credits other than consumer loans).

 

III.

Additional provisions

 

According to SBIF regulation, banks are allowed to establish provisions over the limits described below so as to protect themselves from the risk of non-predictable economical fluctuations that could affect the macroeconomical environment or the situation of a specific economical sector.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

According to No. 10 of Chapter B-1 from the SBIF Compendium of Accounting Standards, these provisions will be recorded in liabilities, similar to provisions for contingent loans. The Bank has not recorded provisions for this concept as of March 31, 2014.

 

IV.

Charge-offs

 

As a general rule, charge-offs should be done when the contract rights over cash flow expire. In the case of loans and account receivable from customers, even if the above does not happen, the Bank will charge-off these amounts in accordance with Title II of Chapter B-2 of the Compendium of Accounting Standards (SBIF).

 

These charge-offs refer to derecognition from Consolidated Interim Statements of Financial Position of the corresponding loans operations, therefore, includes a no past due portion of a loan in the case of installments loans or leasing operations (no partial charge-offs exists).

 

Charge-offs are always recorded under provision for loan losses through the Consolidated Interim Statement of Income for the period in accordance with Chapter B-1 of the Compendium of Accounting Standards (SBIF), no matter what causes the charge-off. Subsequent payments obtained from charge-off operations will be recognized at the Consolidated Interim Statement of Income as recovery of loan previously charge-off.

 

Loan and accounts receivable charge-offs are recorded on overdue, past due, and current installments based on the past due deadlines presented below:

 

Type of loan		Term
Consumer loans with or without collateral			6 months
Other transactions without collateral			24 months
Business credits with collateral			36 months
Mortgage loans			48 months
Consumer leasing			6 months
Other non-mortgage leasing transactions			12 months
Mortgage leasing (household and business)			36 months

 

Any renegotiation of an already charged-off loan will not give rise to income—as long as the operation is still in an impaired status—and the effective payments received when removed from impaired status are accounted as recovery from loans previously charged off.

 

Renegotiated loans shall recognized as an asset if no longer impaired.

 

V.

Recovery of loans previously charged off and accounts receivable from clients

 

Recovery of previously charged off loans and accounts receivable from customers, are recorded in the Consolidated Interim Statement of Income as a reduction of provision for loan losses.

 

q)

Provisions, contingent assets, and contingent liabilities

 

Provisions are liabilities of uncertain timing or amount. Provisions are recognized in the Consolidated Interim Statements of Financial Position when the Bank:

 

i.

has a present obligation (legal or constructive) as a result of past events, and

ii.

It is probable that an outflow of resources will be required to settle these obligations and the amount of these resources can be reliably measured.

 

Contingent assets or contingent liabilities are any potential rights or obligations arising from past events whose existence will be confirmed only by the occurrence or non-occurrence if one or more uncertain future events that are not wholly within control of the Bank.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The following are classified as contingent in the supplementary information:

 

i.

Guarantees and bonds: Encompasses guarantees, bonds, standby letters of credit and guarantees of payment from buyers in factored receivables.

 

ii.

Confirmed foreign letters of credit: Encompasses letters of credit confirmed by the Bank.

 

iii.

Documentary letters of credit: Includes documentary letters of credit issued by the Bank, which have not yet been negotiated.

 

iv.

Documented guarantees: Guarantees with promissory notes.

 

v.

Interbank guarantee: Guarantees issued.

 

vi.

Unrestricted credit lines: The unused amount of credit lines that allow customers to draw without prior approval by the Bank (for example, using credit cards or overdrafts in checking accounts).

 

vii.

Other credit commitments: Amounts not yet lent under committed loans, which must be disbursed at an agreed future date when events contractually agreed upon with the customer occur, such as in the case of lines of credit linked to the progress of a construction or similar projects.

 

viii.

Other contingent credits: Includes any other kind of commitment by the Bank which may exist and give rise to lending when certain future events occur. In general, this includes unusual transactions such as pledges made to secure the payment of loans among third parties or derivative contracts made by third parties that may result in a payment obligation and are not covered by deposits.

 

The consolidated interim, as well as annual, accounts reflect all significant provisions for which it is estimated that the probability of having to meet the obligation is more likely than not. Provisions are quantified using the best available information on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each reporting period and are used to address the specific liabilities for which they were originally recognized. Partial or total reversals are recognized when such obligations cease to exist or are reduced.

 

Provisions are classified according to the obligation covered as follows:

 

-

Provision for employee salaries and expenses

-

Provision for mandatory dividends

-

Allowance for contingent credit risks

-

Provisions for contingencies

 

r)

Deferred income taxes and other deferred taxes

 

The Bank records, when appropriate, deferred tax assets and liabilities for the estimated future tax effects attributable to differences between the carrying amount of assets and liabilities and their tax bases. The measurement of deferred tax assets and liabilities is based on the tax rate, according to the applicable tax laws, using the tax rate that applies to the period when the deferred asset and liability will be settled. The future effects of changes in tax legislation or tax rates are recorded in deferred taxes beginning on the date on which the law approving such changes is published.

 

s)

Use of estimates

 

The preparation of the financial statements requires Management to make estimates and assumptions that affect the application of the accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates.

 

In certain cases, generally accepted accounting policies require that assets or liabilities be recorded or disclosed at their fair values. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, quoted market prices in active markets have been used as the basis for measurement. When quoted market prices in active markets are not available, the Bank has estimated such values based on the best information available, including the use of modeling and other valuation techniques.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The Bank has established allowances to cover incurred losses, therefore, to estimate the allowances, they must be regularly evaluated taking into consideration factors such as changes in the nature and volume of the loan portfolio, trends in forecasted portfolio quality, credit quality and economic conditions that may adversely affect the borrowers’ payment capacity. Increases in the allowances for loan losses are reflected as “Provision for loan losses” in the Consolidated Interim Statement of Income. Loans are charged-off when Management determines that a loan or a portion thereof is uncollectible. Charge-offs are recorded as a reduction of the allowance for loan losses.

 

The relevant estimates and assumptions are regularly reviewed by the Bank’s Management to quantify certain assets, liabilities, revenues, expenses, and commitments. Revised accounting estimates are recorded in the period in which the estimate is revised and in any affected future period.

 

-

Impairment losses of certain assets (Notes 7, 8, 11, 12 y 30)

-

The useful lives of tangible and intangible assets (Notes 11, 12 y 30)

-

The fair value of assets and liabilities (Notes 5, 6, 10 y 33)

-

Commitments and contingencies (Note 19)

-

Current and deferred taxes (Note 13)

 

t)

Non-current assets held for sale

 

Non-current assets (or a group which includes assets and liabilities for disposal) expected to be recovered mainly through sales rather than through continued use, are classified as held for sale. Immediately prior to this classification, assets (or elements of a disposable group) are re-measured in accordance with the Bank’s policies. The assets (or disposal group) are measured at the lower of carrying amount or fair value minus cost of sales.

 

As of March 31, 20143 and 2013 and December 31, 2013 the Bank has not classified any non-current assets as held for sale.

 

Assets received or awarded in lieu of payment

 

Assets received or awarded in lieu of payment of loans and accounts receivable from clients are recognized at their fair value (as determined by an independent appraisal). A price is agreed upon by the parties through negotiation, or, when the parties do not reach an agreement, at the amount at which the Bank is awarded those assets at a judicial auction. In the both cases, an independent appraisal is performed.

 

The excess of the outstanding loan balance over the fair value is charged to net income for the period, under “Provision for loan losses”.

 

These assets are subsequently adjusted to their net realizable value less cost to sale (assuming a forced sale). The difference between the carrying value of the asset and the estimated fair value less costs to sell is charged to net income for the period, under “Other operating expenses”.

 

Independent appraisals are obtained at least every 18 months and fair values are adjusted accordingly.

 

u)

Earnings per share

 

Basic earnings per share are determined by dividing the net income attributable to the Bank shareholders for the reported period by the weighted average number of shares outstanding during the reported period.

 

Diluted earnings per share are determined in the same way as basic earnings, but the weighted average number of outstanding shares is adjusted to take into consideration the potential diluting effect of stock options, warrants, and convertible debt.

 

As of March 31, 2014 and 2013 and December 31, 2013 the Bank did not have any instruments that generated diluting effects over equity.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

v)

Temporary acquisition (assignment) of assets

 

Purchases (sales) of financial assets under non-optional resale (repurchase) agreements at a fixed price (“repos”) are recorded in the Consolidated Statements of Financial Position based on the nature of the debtor (creditor) under “Deposits in the Central Bank of Chile,” “Deposits in financial institutions” or “Loans and accounts receivable from customers” (“Central Bank of Chile deposits,” “Deposits from financial institutions” or “Customer deposits”).

 

Differences between the purchase and sale prices are recorded as financial interest over the term of the contract.

 

w)

Assets under management and investment funds managed by the Bank

 

Assets owned by third parties and managed by certain companies that are within the Bank’s scope of consolidation (Santander Asset Management S.A., Administradora General de Fondos and Santander S.A. Sociedad Securitizadora), are not included in the Consolidated Interim Statements of Financial Position. Management fees are included in “Fee and commission income” in the Consolidated Interim Statement of Income.

 

x)

Provision for mandatory dividends

 

As of March 31, 2014 and 2013, and December 31, 2013 the Bank recorded a provision for mandatory dividends. This provision is made pursuant to Article 79 of the Corporations Act, which is in accordance with the Bank’s internal policy, pursuant to which at least 30% of net income for the period is distributed, except in the case of a contrary resolution adopted at the respective shareholders’ meeting by unanimous vote of the outstanding shares. This provision is recorded, as a deducting item, under the “Retained earnings – provisions for mandatory dividends” line of the Consolidated Interim Statement of Changes in Equity with offset to Provisions.

 

y)

Employee benefits

 

i.

Post-employment benefits – Defined Benefit Plan

 

According to current collective labor agreements and other agreements, the Bank has an additional benefit available to its principal executives, consisting of a pension plan whose purpose is to endow them with funds for a better supplementary pension upon their retirement.

 

Features of the Plan:

 

The main features of the Post-Employment Benefits Plan promoted by the Banco Santander Chile are:

 

a.

Aimed at the Group’s management

b.

The general requisite to apply for this benefit is that the employee must be carrying out his/her duties when turning 60 years old.

c.

The Santander Group will take on insurance (pension fund) on their behalf that it will pay up periodically.

d.

The Santander Group will be responsible for granting the benefits directly.

 

To determine the present value of the defined benefit obligation and the current service cost, the method of projected unit credit is used.

 

Components of defined benefit cost include:

 

-

current service cost and any past service cost, which are recognized in profit or loss for the period;

-

net interest on the liability (asset) for net defined benefit, which is recognized in profit or loss for the period;

	-	new liability (asset) remeasurements for net defined benefit include: (a) actuarial gains and losses;
		(b) changes in the performance of the plan assets and; (c) changes in the effect of the asset ceiling, which are recognized in other comprehensive income.

 

The liability (asset) for net defined benefit is the deficit or surplus, determined as the difference between the present value of the defined benefit obligation minus the fair value of plan assets.

 

Plan assets comprise the insurance policies taken out by the Bank with a third party that is not a related party. These assets are held by an entity legally separated from the Bank and exist solely to pay benefits to employees.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The Bank presents the present service cost and the net interest of the Personnel wages and expenses on the Consolidated Statement of Income.

 

The liability for post-employment benefits recognized in the Consolidated Interim Statement of Financial Position represents the deficit or surplus in the defined benefit plans of the Bank. Any surplus resulting from the calculation is limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions.

 

When employees leave the plan before meeting the requirements to be eligible for the benefit, contributions made ​​by the Bank are reduced.

 

ii.

Severance provision

 

Severance provision for years of employment are recorded only when they actually occur or upon the availability of a formal and detailed plan in which the fundamental modifications to be made are identified, provided that such plan has already started to be implemented or its principal features have been publicly announced, or objective facts about its execution are known.

 

iii.

Cash-settled share based compensation

 

The allocation of equity instruments to executives of the Bank and its Subsidiaries as a form of compensation for their services, when those instruments are provided at the end of a specific period of employment, is recorded as an expense in the Consolidated Statement of Income under the “Personnel expenses” item, as the relevant executives provide their services over the course of the period. The Bank pays the parent for the equity instruments granted to its employees. The cash obligation is determined at the grant date in an amount equal to the fair value of the liability with employees at that date. The Bank receives invoices from the parent on a bi-annual basis. Therefore, at the end of each six-month period, the liability recorded is reversed by the payment to the parent.

 

Our stock performance plan corresponds to cash-settled share-based payment in accordance with IFRS 2 “Share based payments”. The fair value at grant date is determined using a Monte Carlo model which represents the basis of the payment amount, and is recorded on a straight-line basis over the life of the plan. IFRS 2 requires that the fair value of the liability be remeasured at the end of each reporting period and that fair value changes attributable to rendered services to date be reflected in the statement of income. Given the immateriality of any changes to the fair value of the liability over the 3-year life of the plan, the fair value remeasurement was not recorded. As a cash-settled share-based payment award, the offset of the journal entry to record the compensation expense is a liability for share-based payment awards.

 

z)

Reclassification of items

 

Banco Santander Chile has reclassified some items in the Interim Financial Statements to provide relevant, reliable, comparable and understandable information.

 

These reclassifications, which did not affect the Bank’s results, have no significant or material impact on the current Consolidated Interim Financial Statements.

 

aa)

Application of new and revised International Financial Reporting Standards

 

i.

New and revised standards affecting amounts reported and/or disclosures in the financial statements

 

In the current year, the Bank has applied a number of new revised IFRSs issued by the international Accounting Standard Boar (IASB) as well as accounting standards as issued by the both the SBIF that are mandatory effective for an accounting period that begins on or after 1 January 2014. These standards have been fully incorporate by the Bank and are detailed as follows:

 

1.

Accounting Regulations Issued by the SBIF, effective in current year

 

As of March 31, 2014, there are no new accounting regulations issued by SBIF to be implemented.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

2.

New and revised IFRS standards effective in current year

 

Amendment to IFRS 1, First Time Adoption of international financial reporting standards IFRS – On December 20, 2010 the IASB published certain modifications to IFRS 1, specifically:

 

(i) Elimination of Set Dates for First Time Adopters - These modifications help first time adopters of IFRS by replacing the back application date of the un-record of financial assets and liabilities of ‘January 1, 2004’ with the ‘transition date to IFRS’. In this way, first time IFRS adopters do not have to apply the un-record requirements of IAS 39 retrospectively to a previous date and free adopters to recalculate profit and losses of ‘day 1’ over transactions that took place before the transition date to IFRS.

 

(ii) Severe hyperinflation – These modifications provide guidelines for entities coming from a sever hyperinflation, allowing them at the date of transaction of entities, to measure all assets and liabilities held before the normalization of functional currency date to fair value on the transition to IFRS date and use that fair value as the attributed cost for those assets and liabilities in the statements of opening financial position under IFRS. Entities using this exemption will have to describe the circumstances of how and why their functional currency was subjected to sever hyperinflation and the circumstances that led to end those conditions.

 

These modifications will be mandatorily applied for yearly periods beginning on or after July 1, 2012. Early implementation is permitted. The implementation of this amendment did not have an impact on the Bank’s Consolidated Financial Statements since we are already preparing our Statements according to IFRS.

 

Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities - The amendments to IAS 32 c1arify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments c1arify the meaning of 'currently has a legally enforceable right of set-off' and 'simultaneous realization and settlement'. Management does not anticipate that the application of these amendments to IAS 32 will have a significant impact on the Bank's consolidated financial statements as the Bank does not have any financial assets and financial liabilities that qualify for offset. The implantation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Investment entities – Amendments to IFRS 10 – Consolidated Financial Statements; IFRS 12 – Disclosures of Interests in Other Entities and IAS 27 – Separated Financial Statements - On October 31, 2012, the IASB issued “Investment entities (amendments to IFRS 10, IFRS 12 and IAS 27)”, providing an exception to the consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities that follow the definition of “investment entity”, as well as some investment funds. Instead, said entities will measure their investments in subsidiaries at fair value through profit and loss, pursuant to IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement.

 

Amendments also require additional disclosure about whether the entity is considered an investment entity, details of non-consolidated subsidiaries, the nature of the relationship and certain transactions between the investment entity and its subsidiaries. On the other hand, amendments force an investment entity to account for its investment in a subsidiary in the same way in the consolidated financial statements as well as in its individual financial statements (or just provide individual financial statements if all subsidiaries are not consolidated). These modifications will be effective for yearly periods beginning on or after January 1, 2014. In-advance enforcement is allowed. Early application permitted. Management believes this new regulation will be adopted in the Bank’s Consolidated Financial Statements for the period beginning on January 1, 2014. Management is currently evaluating the possible impact this might have. The implantation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

IFRIC 21 - Levies – On May 20, 2013 the IASB issued this interpretation addressing the accounting for a liability to pay a levy if such liability is within the IAS 37. It also addresses the accounting for a liability to pay a levy which amount and maturity is true. For the purposes of this Interpretation, a levy is an outflow of resources embodying economic benefits imposed by governments to entities according to legislation (laws and regulations). This is different from the outflow of resources within the reach of IAS 12 Income Tax, and fines or other penalties imposed for breaches of the legislation. An entity shall apply these modifications retrospectively for annual periods beginning on or after January 1, 2014. Earlier application permitted. If an entity applies this Interpretation for prior periods shall disclose this fact. Changes in accounting policies resulting from the application of this Interpretation shall be accounted for retrospectively in accordance with IAS 8 - Accounting policies, changes in accounting estimates and errors. The implantation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

Amendment IAS 36, Impairment of the Assets – On May 29, 2013 the IASB issued Recoverable Amount Disclosures for Non-Financial Assets. The objective of this amendment is to harmonize the disclosure requirements about fair value without the disposal costs and value in use, when present value techniques are used to measure the recoverable amount of assets that are consideredvalue impaired, requiring an entity to disclose the discount rates that have been used to determine the recoverable amount of assets that are considered value impaired. An entity shall apply these modifications retrospectively for annual periods beginning on or after January 1, 2014. In-advance enforcement is allowed. An entity shall not apply these modifications to periods (including comparative periods) in which IFRS 13 is not applied. The implantation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Amendment IAS 39, Financial instruments: recognition and measurement – On June, 27, 2013 the IASB issued the amendment Novation of Derivatives and Continuation of Hedge Accounting, establishing that a derived contract novation with a central counterparty (clearing house) would generate a hedged interruption, derecognition of the original derivative and the recognition of the new derivative contract novated. While product novation laws or regulations do not qualify for derecognition and therefore hedge accounting will not be interrupted (if requirements are met). The effective date of application for annual periods beginning on January 1, 2014, may be applied in advance. An entity shall apply the amendment retrospectively in accordance with IAS 8 - Accounting policies, changes in accounting estimates and errors. The implantation of this amendment had no material impact on the consolidated financial statements of the Bank.

 

ii.

New accounting regulations and instructions issued by the SBIF as well as by the IASB not enforced as of March 31, 2014

 

At the end date of these financial statements new IFRS had been published as well as interpretations of these regulations that were not mandatory as of March 31, 2014. Though in some cases, the IASB has allowed for their in-advance adoption, the Bank has not done so up to said date.

 

1.

Accounting regulations issued by the SBIF

 

As of March 31, 2014 there are no new accounting regulations issued by SBIF to be implemented.

 

2.

New and revised IFRS issued

 

IFRS 9, Financial Instruments – On November 12, 2009 the IASB issued IFRS 9, Financial Instruments. This regulation incorporates new requirements for the classification and measurement of financial assets and it is effective for yearly periods beginning on or after January 1, 2013. Early application is permitted. IFRS 9 specifies how an entity should classify and measure its financial assets. It requires that all financial assets be classified in their entirely on the basis of the entity’s business model for the management of financial assets and the features of the financial assets agreement cash flows.

 

Financial assets are measured whether by amortized cost or fair value. Only financial assets classified as measured to amortize cost will be tested for Impairment. On October 28, 2010, the IFRS issued a revised version of IFRS 9, Financial Instruments. The revised Standard keeps the requirements for classification and measurement of financial assets published on November 2009 but it adds guidelines on classification and measurement of financial liabilities. As part of the restructuring of IFRS 9, the IASB has also reproduced the guidelines on un-record of financial instruments and related implementation guidelines from IAS 39 to IFRS 9. These new guidelines constitute the first stage of the IASB project to replace IAS 39. The other stages, impairment and hedge accounting, have not been finished yet.

 

The guidelines included in IFRS 9 about the classification and measurements of financial assets have not changed from those established in IAS 39. In other words, financial liabilities will continue to be measured whether by amortized cost or fair value with change in income. The concept of bifurcation of embedded derivatives in a contract by financial asset has not change either. Financial liabilities held for trade will continue to be measured at fair value with changes in profit and loss, and all other financial assets will be measured at amortized cost unless the fair value option is applied using currently existing criteria in IAS 39.

 

Notwithstanding the latter, there are two differences with regards to IAS 39:

 

·

The presentation of effects from changes in fair value attributable to a liability’s credit risk; and

·

The elimination of the cost exemption for liability derivatives to be settled by giving non traded equity instruments.

 

On December 16, 2012 the IASB issued Mandatory Implementation Date of IFRS 9 and Transition Disclosures, deferring the effective date versions of both 2009 and 2010 for annual periods beginning on or after 01 January 2015. Prior to the amendments, the application of IFRS 9 was mandatory for annual periods beginning on or after 2013. Modifications change the requirements for the transition from IAS 39 Financial Instruments:

 

Recognition and Measurement to IFRS 9. In addition, the amendments also modify IFRS 7 Financial Instruments: Disclosures, to add certain requirements in the reporting period including the enforcement date of IFRS 9.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Amendments are effective for yearly periods beginning on or after January 1, 2018; early application is permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

IFRS 9 - Financial Instruments – Coverage and Amendments accounting for IFRS 9, IFRS 7 and IAS 39 – On November 19, 2013 the IASB issued this amendment which includes a new coverage accounting general model. It is more closely aligned with risk management, providing more useful information to users of financial statements. Moreover, the requirements relating to the fair value option for financial liabilities were changed to address own credit risk. This improvement requires that the effects of changes in credit risk of liability should not affect the income of the period unless the liabilities are hold for trading. Early adoption of this amendment is allowed without the application of the other requirements of IFRS 9. Additionally, it conditions the effective date of entry into force to the end of the draft IFRS 9, allowing equally to be adopted. The Bank’s management is assessing the potential impact of the adoption of these modifications regarding IFRS 7 and IAS 39.

 

Amendment IAS 19 – Defined benefit plans: employee contributions – On November 21, 2013 the IASB issued these modifications establishing the treatment for employee or third party contributions when accounting for the defined benefit plans. Therefore, if the amount of the contributions is independent of the number of years of service, it allows an entity to recognize these contributions as a reduction in service costs in the period in which the related service is rendered, instead of attributing contributions to periods of service, and if the amount of the contribution depends on the number of years of service, an entity to attribute these contributions to periods of service is required, using the same method of allocation required by paragraph 70 of the IAS 19, for gross proceeds (that is, using the contribution plan formula or a linear basis). These modifications apply for annual periods starting as of July 1, 2014 retroactively, as stated by IAS 8 - Accounting policies changes in accounting estimates and errors. Earlier application permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Annual modifications, cycle 2010-2012 – On December 12, 2013 this document covering seven standards was issued:

 

- IFRS 2 -

Share-based Payments: It modifies the definition of 'concession consolidation condition (irrevocability)' y 'market conditions' and adds the definition of 'execution conditions' and ' service condition' (which was a part of the definition of the concession consolidation condition).

- IFRS 3 -

Business Combinations: it states that the contingent considerations classified as assets or liabilities must be measure to fair value on each report date.

- IFRS 8 -

Operating Segments: it required that and entity reveals the judgments made by the administration regarding the implementations of the criteria for the operating segments aggregation and it states that the entity must only provide reconciliation between all the assets of the reportable segment and the entity's assets if the previous ones are reported regularly.

- IFRS 13 -

Fair value measurement: it states that the issuing of IFRS 13 and the modification of IFRS 9 and IAS 39 did not eliminate the possibility of measuring the accounts receivable and pay in the short term those that lack an established interest rate on the invoice amount without discounting if the effect of such action is intangible.

- IAS 16 -

Property, plant and equipment: it states that when a property, plant and equipment element is revaluated, the gross carrying value is adjusted consistently with the revaluation of the carrying value.

- IAS 24 -

Related party disclosures: it states that an entity providing administration personnel services key to the informing entity or to the parent of the reporting entity, this is a related party of the reporting entity.

- IAS 38 -

Intangibles: it states that when an intangible element is revaluated, the gross carrying value is adjusted consistently with the revaluation of the carrying value.

 

IFRS annual modifications, 2010-2012 cycle, must be implemented for annual periods starting on or after July 1, 2014. Early application permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

Annual modifications, cycle 2011-2013 – On December 12, 2013 this document covering four standards was issued:

 

- IFRS 1 -

First-time Adoption: It states that an entity, on its first financial statements under IFRS, has the possibility of choosing between applying an existing and currently effective IFRS, and applying a new or revised IFRS which is not currently mandatory, provided earlier application is permitted. It is required that the entity applies the same version of the IFRS throughout the periods covered by the first financial statements according to IFRS.

 

- IFRS 3 -

Business Combinations: It states that the IFRS 3 excludes from its scope the accounting for the formation of a joint agreement on the financial statements of the joint arrangement itself.

 

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

- IFRS 13 -

Fair Value Measurement: It states that the scope of the exception of portfolio defined in paragraph 52 of IFRS 13, includes all contracts included under the scope of 'IAS 39 - Financial Instruments: Recognition and measurement' and 'IFRS 9 - Financial Instruments', regardless of whether they conform to the definition of financial assets or financial liabilities as set out in 'IAS 32 - Financial Instruments: Presentation'.

 

- IAS 40 -

Investment Property: It states that if a certain transaction complies with the definition of a business combination -as defined by IFRS 3 -Business Combinations- and of investment properties -as defined by IAS 40 Investment Property-, it needs to implement both norms independently and separately.

 

IFRS annual modifications, 2011-2013 cycle, must be implemented for annual periods beginning on or after July 1, 2014. Earlier application permitted. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

IFRS 14, Regulatory Deferral Accounts – On January 1, 2014, the IASB issued IFRS 14 “Regulatory Deferral Accounts”, which, specify the financial reporting requirements for regulatory deferral account balances that arise when an entity provides goods or services to customers at price or rate that is subject to rate regulation. This standard requires:

 

-

limited changes to accounting policies that were applied in accordance with its previous GAAP for regulatory deferral account balances;

-

disclosure that were identify and explain the amounts recognized in the entity`s financial statements that arise from rate regulation;

-

disclosure that help users of the financial statements to understand the amounts, timing and uncertainty of future cash flows from any regulatory deferral accounts balances that are recognized.

 

This standard is effective to first-time adopters IFRS for annual periods beginning on or after January 1, 2016. The Bank’s management is assessing the potential impact of the adoption of these modifications.

 

 

NOTE 02

SIGNIFICANT EVENTS

 

As of March 31, 2014, the following significant events have occurred had an impact on the Bank`s operations on the Consolidated Interim Financial Statements.

 

a)

The Board

 

The Board had no significant events to be reported in these financial statements.

 

b)

Issuance of bonds

 

In first quarter of 2014, the Bank issued senior bonds in the amount of CHF300,000,000, UF2,000,000, USD250,000,000, CLP25,000,000,000 y AUD125,000,000. The placement detail is included in Note 16.

 

b.1)

Senior bonds

 

Series		Amount			Term		Issuance rate		Issuance date		Maturity date
Bond		CHF	300,000,000		3 years		1.00% per annum simple		01-31-2014		07-31-2017
Total		CHF	300,000,000
Bond		UF	2,000,000		4 years		3.0% per annum simple		02-22-2014		10-01-2018
Total		UF	2,000,000
Bond			25,000,000,000		4 years		5.76% per annum simple		02-22-2014		10-01-2018
Total			25,000,000,000
USD floating bond		USD	250,000,000		5 years		Libor (3 months)+100 bp		02-19-2014		02-19-2019
Total		USD	250,000,000
Bond		AUD	125,000,000		3 years		Libor (3 months)+140 bp		03-13-2014		03-13-2017
Total		AUD	125,000,000

 

b.2) Subordinated bonds

 

In first quarter of 2014, the Bank has not issued subordinated bonds.

 

b.3) Repurchase of bonds

 

El Banco has conducted the following repurchase of bonds during the first quarter of 2014:

 

Date		Series		Amount
02-21-2014		Senior bond		CLP	118,409,000,000
03-03-2014		Senior bond		UF	6,000,000

 

 

NOTE 03

OPERATING SEGMENTS

 

The Bank manages and measures the performance of its operations by operating segment which function under three divisions. The information disclosed in this note is not necessarily comparable to that of other financial institutions, since it is based on management’s internal information system by segment.

 

Inter-segment transactions are conducted under normal arm’s length commercial terms and conditions. Each segment’s assets, liabilities, and income include items directly attributable to the segment to which they can be allocated on a reasonable basis.

 

To achieve the strategic objectives adopted by management and adapt to changing market conditions, the Bank makes changes in its organization from time to time, which in turn have a greater or lesser impact on how it is managed or administered. Hence, this disclosure furnishes information on how the Bank is managed as of March 31, 2014. The prior year segment information presented herein has been recast to reflect the change in segment mentioned in the following paragraph.

 

The Bank has the following operating segment:

 

Individuals and SME`s

 

Individuals

 

a.

Santander Banefe

Serves individuals with monthly incomes from Ch$150,000 pesos to Ch$400,000 pesos, who receive services through Santander Banefe. This segment gives customers a variety of services, including consumer loans, credit cards, auto loans, mortgage loans, debit cards, savings products, mutual funds, and insurance brokerage.

 

b.

Commercial Banking

Serves individuals with monthly incomes over Ch$400,000 pesos. This segment gives customers a variety of services, including consumer loans, credit cards, auto loans, commercial loans, foreign exchange, mortgage loans, debit cards, checking accounts, savings products, mutual funds, stockbrokerage, and insurance brokerage.

 

SME`s

Considers small companies with annual sales lower than Ch$1,200 million. This segment gives customers a variety of products, including commercial loans, government-guaranteed loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, savings products, mutual funds, and insurance brokerage.

 

Companies and Institutional

 

Companies

 

The Companies segment includes the Companies, Real Estate and Large Corporations sub segments:

 

a.

Companies

Considers companies with annual sales over Ch$1,200 million up to Ch$10,000 million. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, savings products, mutual funds, and insurance brokerage.

 

b.

Real estate

This segment includes all the companies engaged in the real estate industry who carry out projects to sell properties to third parties and all builders with annual sales exceeding Ch$800 million with no ceiling. These clients are offered not only the traditional banking services but also specialized services to finance projects, chiefly residential, with the aim of expanding sales of mortgage loans.

 

c.

Large Corporations

Considers companies with annual sales exceeding Ch$10.000 million. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, investment, savings products, mutual funds, and insurance.

 

 

NOTE 03

OPERATING SEGMENTS, continued

 

Institutional

 

Serves institutions such as universities, government entities, local and regional governments. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, savings products, mutual funds, and insurance.

 

Global Banking and Markets

 

The Global Banking and Markets segment is comprised of:

 

a.

Corporate

Foreign and domestic multinational companies with sales over MCh$10.000. This segment provides a wide variety of products, including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, investments, savings products, mutual funds, and insurance brokerage.

 

b.

Treasury

The Treasury Division provides sophisticated financial products, mainly to companies in the Wholesale Banking area and the Companies segment. These include products such as short-term financing and fund raising, brokerage services, derivatives, securitization, and other tailor-made products. The Treasury area may act as brokers to transactions and also manages the Bank’s investment portfolio.

 

Corporate Activities (“Other”)

 

This segment includes Financial Management, which develops global management functions, involving the parent company’s structural interest risk and liquidity risk. Liquidity risk is managed mainly through debt issuances. This segment also manages the Bank’s personal funds, capital allocation by unit, and the financing of investments made. The foregoing usually results in a negative contribution to income.

 

In addition, this segment encompasses all the intra-segment income and all the activities not assigned to a given segment or product with customers.

 

The segments’ accounting policies are the same as those described in the summary of accounting policies. The Bank earns most of its income in the form of interest income, fee and commission income and income from financial operations. To evaluate a segment’s financial performance and make decisions regarding the resources to be assigned to segments, the Chief Operating Decision Maker (CODM) bases his assessment on the segment's interest income, fee and commission income, and expenses.

 

 

NOTE 03

OPERATING SEGMENTS, continued

 

Below are the tables showing the Bank’s results by business segment, for the periods ending as of March 31, 2014 and 2013, and December 31, 2013 in addition to the corresponding balances of loans and accounts receivable from customers:

 

		As of March 31, 2014
		Loans and accounts receivable from customers (1)				Net interest income				Net fee and commission income				Financial transactions, net (2)				Provision for loan losses				Support expenses (3)				Segment`s net contribution
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Segments
Individuals			10,827,707				146,872				34,962				1,424				(44,978	)			(90,253	)			48,027
Santander Banefe			739,849				23,340				5,221				10				(13,628	)			(11,106	)			3,837
Commercial Banking			10,087,858				123,532				29,741				1,414				(31,350	)			(79,147	)			44,190
SMEs			3,289,191				65,372				10,875				1,276				(27,754	)			(18,583	)			31,186
Individuals+SMEs			14,116,898				212,244				45,837				2,700				(72,732	)			(108,836	)			79,213
Companies			4,753,927				44,962				6,927				3,910				(8,208	)			(12,785	)			34,806
Companies			1,806,443				19,398				3,449				2,022				(5,396	)			(7,095	)			12,378
Large Corporations			1,951,257				17,521				2,215				1,819				(2,887	)			(4,377	)			14,291
Real estate			996,227				8,043				1,263				69				75				(1,313	)			8,137
Institutional			362,860				8,374				612				172				93				(3,086	)			6,165
Companies and institutional			5,116,787				53,336				7,539				4,082				(8,115	)			(15,871	)			40,971
Commercial Bank			19,233,685				265,580				53,376				6,782				(80,847	)			(124,707	)			120,184
Global banking and markets			2,168,967				20,646				5,798				17,873				(588	)			(9,700	)			34,029
Corporate			2,168,967				16,948				5,795				127				(588	)			(5,752	)			16,530
Treasure			-				3,698				3				17,746				-				(3,948	)			17,499
Other			57,483				27,267				(3,410	)			8,317				201				(3,167	)			29,208
Total			21,460,135				313,493				55,764				32,972				(81,234	)			(137,574	)			183,421
Other operating income																											5,510
Other operating expenses																											(20,879	)
Income from investments in associates and other companies																											287
Income tax expense																											(26,152	)
Net income for the period																											142,187

  

(1)

Corresponds to loans and accounts receivable from customers, net, without deducting their allowances for loan losses.

(2)

Corresponds to the sum of the net income from financial operations and the foreign exchange profit.

(3)

Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation, amortization, and impairment.

 

 

NOTE 03

OPERATING SEGMENTS, continued

 

		As of December 31, 2013				As of March 31, 2013
		Loans and accounts receivable from customers (1)				Net interest income				Net fee and commission income				Financial transactions, net (2)				Provision for loan losses				Support expenses (3)				Segment`s net contribution
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Segments
Individuals			10,474,663				150,862				38,201				1,388				(61,273	)			(86,208	)			42,970
Santander Banefe			730,979				27,000				5,949				37				(16,845	)			(10,158	)			5,983
Commercial Banking			9,743,684				123,862				32,252				1,351				(44,428	)			(76,050	)			36,987
SMEs			3,228,865				61,814				10,946				756				(24,223	)			(18,054	)			31,239
Individuals+SMEs			13,703,528				212,676				49,147				2,144				(85,496	)			(104,262	)			74,209
Companies			4,682,221				38,706				7,055				3,105				(5,022	)			(12,944	)			30,900
Companies			1,757,977				18,711				3,753				1,685				(2,619	)			(7,059	)			14,471
Large Corporations			1,927,075				13,989				2,515				1,356				(2,042	)			(4,527	)			11,291
Real estate			997,169				6,006				787				64				(361	)			(1,358	)			5,138
Institutional			353,559				6,785				622				52				45				(3,030	)			4,474
Companies and institutional			5,035,780				45,491				7,677				3,157				(4,977	)			(15,974	)			35,374
Commercial Bank			18,739,308				258,167				56,824				5,301				(90,473	)			(120,236	)			109,583
Global banking and markets			2,268,440				17,635				4,912				10,645				(3,213	)			(9,514	)			20,465
Corporate			2,268,440				15,062				3,871				27				(3,213	)			(5,805	)			9,942
Treasure			-				2,573				1,041				10,618				-				(3,709	)			10,523
Other			53,013				(29,321	)			(1,115	)			6,316				828				(3,323	)			(26,615	)
Total			21,060,761				246,481				60,621				22,262				(92,858	)			(133,073	)			103,433
Other operating income																											4,569
Other operating expenses																											(12,802)
Income from investments in associates and other companies																											482
Income tax expense																											(14,237)
Net income for the period																											81,445

 

(1)

Corresponds to loans and accounts receivable from customers, net, without deducting their allowances for loan losses.

(2)

Corresponds to the sum of the net income from financial operations and the foreign exchange profit.

(3)

Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation, amortization, and impairment.

 

 

NOTE 04

CASH AND CASH EQUIVALENTS

 

a)

The detail of the balances included under cash and cash equivalents is as follows:

  

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Cash and deposit in banks
Cash			534,967				551,136
Deposit in the Central Bank of Chile			511,550				797,363
Deposit in domestic banks			162				81
Deposit in foreign banks			297,548				223,230
Subtotals – Cash and deposit in banks			1,344,227				1,571,810
Cash in process of collection, net			315,210				327,698
Cash and cash equivalents			1,659,437				1,899,508

 

 

The level of funds in cash and at the Central Bank of Chile, which are included in the

 

The level of funds in cash and at the Central Bank of Chile, which are included in the “Deposits in the Central Bank of Chile” line, reflects regulations governing the reserves that the Bank must maintain on average each month.

 

b)

Cash in process of collection and in process of being cleared:

 

Cash items in process of collection and in process of being cleared are transactions in which only settlement remains pending, which will increase assets or decrease liabilities funds in the Central Bank of Chile or in foreign banks, normally within the next 24 to 48 business hours from the end of each period. These transactions are presented according to the following detail:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Assets
Documents held by other banks (document to be cleared)			241,169				289,723
Funds receivable			499,479				314,354
Subtotal			740,648				604,077
Liabilities
Funds payable			425,438				276,379
Subtotal			425,438				276,379
Cash in process of collection, net			315,210				327,698

 

 

NOTE 05

TRADING INVESTMENTS

 

The detail of instruments deemed as financial trading investments is a follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Chilean Central Bank and Government securities
Chilean Central Bank Bonds			65,367				75,577
Chilean Central Bank Notes			85				100
Other Chilean Central Bank and Government securities			339,039				189,962
Subtotal			404,491				265,639
Other Chilean securities
Time deposits in Chilean financial institutions			1,439				-
Mortgage finance bonds of Chilean financial institutions			-				-
Chilean financial institutions bonds			18,798				10,042
Chilean corporate bonds			-				2,229
Other Chilean securities			-				-
Subtotal			20,237				12,271
Foreign financial securities
Foreign Central Banks and Government securities			-				-
Other foreign financial instruments			-				-
Subtotal			-				-
Investments in mutual funds
Funds managed by related entities			-				9,657
Funds managed by others			-				-
Subtotal			-				9,657
Total			424,728				287,567

 

As of March 31, 2014 and December 31, 2013, there are no securities sold with repurchase agreement to clients and financial institutions.

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

 

a)

As of March 31, 2014 and December 31, 2013 the Bank holds the following portfolio of derivative instruments:

 

		As of March 31, 2014
		Notional amount																Fair value
		Up to 3  months				More than 3  months to  1 year				More than  1 year				Total				Assets				Liabilities
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Fair value hedge derivatives
Currency forwards			-				-				-				-				-				-
Interest rate swaps			45,000				171,000				256,115				472,115				4,036				43
Cross currency swaps			-				244,504				1,210,954				1,455,458				110,756				2,326
Call currency options			-				-				-				-				-				-
Call interest rate options			-				-				-				-				-				-
Put currency options			-				-				-				-				-				-
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			-				-				-				-				-				-
Subtotal			45,000				415,504				1,467,069				1,927,573				114,792				2,369
Cash flow hedge derivatives
Currency forwards			-				-				-				-				-				-
Interest rate swaps			-				-				-				-				-				-
Cross currency swaps			600,646				767,620				1,054,215				2,422,481				68,902				27,506
Call currency options			-				-				-				-				-				-
Call interest rate options			-				-				-				-				-				-
Put currency options			-				-				-				-				-				-
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives
Subtotal			600,646				767,620				1,054,215				2,422,481				68,902				27,506
Trading derivatives
Currency forwards			19,058,519				12,541,453				1,788,507				33,388,479				399,000				317,263
Interest rate swaps			4,219,373				11,565,225				27,848,133				43,632,731				356,738				337,845
Cross currency swaps			1,510,613				4,027,245				14,829,755				20,367,613				994,957				1,034,696
Call currency options			216,932				85,281				67,978				370,191				1,741				1,550
Call interest rate options			-				7,371				62,317				69,688				896				896
Put currency options			295,740				60,780				2,913				359,433				3,473				1,477
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			270,034				-				-				270,034				337				247
Subtotal			25,571,211				28,287,355				44,599,603				98,458,169				1,757,142				1,693,974
Total			26,216,857				29,470,479				47,120,887				102,808,223				1,940,836				1,723,849

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

		As of December 31, 2013
		Notional amount																Fair value
		Up to 3  months				More than 3  months to  1 year				More than  1 year				Total				Assets				Liabilities
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Fair value hedge derivatives
Currency forwards			-				-				-				-				-				-
Interest rate swaps			-				55,000				375,599				430,599				9,951				1,020
Cross currency swaps			-				233,824				899,293				1,133,117				63,528				1,754
Call currency options			-				-				-				-				-				-
Call interest rate options			-				-				-				-				-				-
Put currency options			-				-				-				-				-				-
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			-				-				-				-				-				-
Subtotal			-				288,824				1,274,892				1,563,716				73,479				2,774
Cash flow hedge derivatives
Currency forwards			-				-				-				-				-				-
Interest rate swaps			-				-				-				-				-				-
Cross currency swaps			522,451				937,529				661,676				2,121,656				60,453				13,927
Call currency options			-				-				-				-				-				-
Call interest rate options			-				-				-				-				-				-
Put currency options			-				-				-				-				-				-
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			-				-				-				-				-				-
Subtotal			522,451				937,529				661,676				2,121,656				60,453				13,927
Trading derivatives
Currency forwards			14,972,304				9,801,554				1,749,378				26,523,236				198,130				188,745
Interest rate swaps			4,526,349				11,332,697				25,005,852				40,864,898				241,528				243,326
Cross currency swaps			1,634,855				3,927,402				14,246,746				19,809,003				915,099				847,821
Call currency options			443,944				42,805				5,557				492,306				1,327				2,403
Call interest rate options			-				7,031				-				7,031				-				-
Put currency options			428,638				38,450				2,936				470,024				3,831				1,108
Put interest rate options			-				-				-				-				-				-
Interest rate futures			-				-				-				-				-				-
Other derivatives			54,777				-				-				54,777				171				5
Subtotal			22,060,867				25,149,939				41,010,469				88,221,275				1,360,086				1,283,408
Total			22,583,318				26,376,292				42,947,037				91,906,647				1,494,018				1,300,109

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b)

Hedge accounting

 

Fair value hedge

 

The Bank uses cross-currency swaps, interest rate swaps, and call money swaps to hedge its exposure to changes in fair value of hedged items attributable to interest rates. The aforementioned hedging instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate.

 

Below is a detail of the hedged elements and hedge instruments under fair value hedges as of March 31, 2014 and December 31, 2013, classified by term to maturity:

  

		As of March 31, 2014
		Within 1 year				Between 1 and 3 years				Between 3 and 6 years				Over 6 years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan			12,165				-				-				-				12,165
Available for sale investments
Yankee bond			-				-				-				-				-
Mortgage finance bonds			-				-				-				3,563				3,563
Time deposits and other demand liabilities
Time deposits			216,000				-				-				28,328				244,328
Issued debt instruments
Senior bonds			-				415,948				351,962				667,268				1,435,178
Subordinated bonds			109,910				-				-				-				109,910
Interbank borrowings
Interbank loans			122,429				-				-				-				122,429
Total			460,504				415,948				351,962				699,159				1,927,573
Hedging instrument
Cross currency swaps			244,504				251,083				326,962				632,909				1,455,458
Interest rate swaps			216,000				164,865				25,000				66,250				472,115
Total			460,504				415,948				351,962				699,159				1,927,573

 

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

		As of December 31, 2013
		Within 1 year				Between 1 and 3 years				Between 3 and 6 years				Over 6 years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan			12,213				-				-				-				12,213
Available for sale investments
Yankee bond			-				-				-				28,308				28,308
Mortgage finance bonds			-				-				-				3,652				3,652
Time deposits and other demand liabilities
Time deposits			55,000				-				-				27,971				82,971
Issued debt instruments
Senior bonds			-				335,805				109,497				769,659				1,214,961
Subordinated bonds			104,840				-				-				-				104,840
Interbank borrowings
Interbank loans			116,771				-				-				-				116,771
Total			288,824				335,805				109,497				829,590				1,563,716
Hedging instrument
Cross currency swaps			233,824				178,545				109,497				611,251				1,133,117
Interest rate swaps			55,000				157,260				-				218,339				430,599
Total			288,824				335,805				109,497				829,590				1,563,716

 

Cash flow hedges

 

The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates of bonds and interbank loans at a variable rate. To cover the inflation risk in some items, both forwards as well as currency swaps are used.

 

Below is the notional amount of the hedged items as of March 31, 2014 and December 31, 2013, and the period when the cash flows will be generated:

 

		As of March 31, 2014
		Within 1 year				Between 1 and 3  years				Between 3 and 6  years				Over 6 years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan			70,586				-				-				-				70,586
Available for sale investments
Yankee bond			-				-				-				158,965				158,965
Chilean Central Bank bonds			-				-				-				-				-
Time deposits and other time liabilities
Time deposits			473,735				22,958				-				18,084				514,777
Issued debt instruments
Senior bonds (variable rate)			-				502,499				137,388				-				639,887
Senior bonds (fixed rate)			44,196				-				-				-				44,196
Interbank borrowings
Interbank loans			779,749				214,321				-				-				994,070
Total			1,368,266				739,778				137,388				177,049				2,422,481
Hedging instrument
Cross currency swaps			1,368,266				739,778				137,388				177,049				2,422,481
Total			1,368,266				739,778				137,388				177,049				2,422,481

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

		As of December 31, 2013
		Within 1 year				Between 1 and 3  years				Between 3 and 6  years				Over 6 years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Loans and accounts receivables from customers
Mortgage loan			21,623				69,502				-				-				91,125
Available for sale investments
Yankee bond			-				-				-				118,577				118,577
Chilean Central Bank bonds			-				22,958				-				18,084				41,042
Time deposits and other time liabilities
Time deposits			379,331				11,328				-				-				390,659
Issued debt instruments
Senior bonds (variable rate)			288,310				102,062				219,567				-				609,939
Senior bonds (fixed rate)			43,189				-				-				-				43,189
Interbank borrowings
Interbank loans			727,527				99,598				-				-				827,125
Total			1,459,980				305,448				219,567				136,661				2,121,656
Hedging instrument
Cross currency swaps			1,459,980				305,448				219,567				136,661				2,121,656
Total			1,459,980				305,448				219,567				136,661				2,121,656

 

Below is an estimate of the periods in which flows are expected to be produced:

 

b.1) Forecasted cash flows for interest rate risk:

 

		As of March 31, 2014
		Within 1  year				Between 1 and 3 years				Between 3 and 6 years				Over 6  years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Inflows			25,244				16,566				6,191				1,937				49,938
Outflows			(20,591	)			(17,692	)			(5,229	)			-				(43,512	)
Net flows			4,653				(1,126	)			(962	)			1,937				6,426
Hedging instrument
Inflows			20,591				17,692				5,229				-				43,512
Outflows (*)			(25,244	)			(16,566	)			(6,191	)			(1,937	)			(49,938	)
Net flows			(4,653	)			1,126				(962	)			(1,937	)			(6,246	)

 

(*) Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk.

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

		As of December 31, 2013
		Within 1  year				Between 1 and 3 years				Between 3 and 6 years				Over 6  years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Inflows			21,532				10,870				4,102				1,614				38,118
Outflows			(12,180	)			(10,667	)			(6,107	)			-				(28,954	)
Net flows			9,352				203				(2,005	)			1,614				9,164
Hedging instrument
Inflows			12,180				10,667				6,107				-				28,954
Outflows (*)			(21,532	)			(10,870	)			(4,102	)			(1,614	)			(38,118	)
Net flows			(9,352	)			(203	)			2,005				(1,614	)			(9,164	)

 

(*) Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk.

 

b.2) Forecasted cash flows for inflation risk:

 

		As of March 31, 2014
		Within 1  year				Between 1  and 3 years				Between 3 and 6 years				Over 6  years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Inflows			86,531				688				-				-				87,219
Outflows			(514	)			(911	)			(1,836	)			(1,381	)			(4,642	)
Net flows			86,017				(223	)			(1,836	)			(1,381	)			82,577
Hedging instrument
Inflows			514				911				1,836				1,381				4,642
Outflows			(86,531	)			(688	)			-				-				(87,219	)
Net flows			(86,017	)			223				1,836				1,381				(82,577	)

 

		As of December 31, 2013
		Within 1  year				Between 1 and 3 years				Between 3 and 6 years				Over 6  years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Inflows			104,730				10,861				-				-				115,591
Outflows			(425	)			(927	)			(1,783	)			(1,709	)			(4,844	)
Net flows			104,305				9,934				(1,783	)			(1,709	)			110,747
Hedging instrument
Inflows			425				927				1,783				1,709				4,844
Outflows			(104,730	)			(10,861	)			-				-				(115,591	)
Net flows			(104,305	)			(9,934	)			1,783				1,709				(110,747	)

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b.3) Forecasted cash flows for exchange rate risk:

 

		As of March 31, 2014
		Within 1  year				Between 1  and 3 years				Between 3 and 6 years				Over 6  years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Inflows			-				-				-				-				-
Outflows			(64,772	)			-				-				-				(64,772	)
Net flows			(64,772	)			-				-				-				(64,772	)
Hedging instrument
Inflows			64,772				-				-				-				64,772
Outflows			-				-				-				-				-
Net flows			64,772				-				-				-				64,772

 

		As of December 31, 2013
		Within 1  year				Between 1 and 3 years				Between 3 and 6 years				Over 6  years				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
Hedged item
Inflows			-				-				-				-				-
Outflows			(64,772	)			-				-				-				(64,772	)
Net flows			(64,772	)			-				-				-				(64,772	)
Hedging instrument
Inflows			64,772				-				-				-				64,772
Outflows			-				-				-				-				-
Net flows			64,772				-				-				-				64,772

 

c)

The accumulated effect of the mark to market adjustment of cash flow hedges validation produced by hedge instruments used in hedged cash flow was recorded in the Consolidated Interim Statement of Changes in Equity, specifically within Other comprehensive income, as of March 31, 2014 and 2013, and is as follows:

 

		As of March 31,
Hedged item		2014				2013
		MCh$				MCh$
Interbank loans			(6,875	)			581
Time deposits and other time liabilities			-				-
Issued debt instruments			(9,563	)			4,436
Available for sale investments			(166	)			240
Loans and accounts receivable from customers			(180	)			566
Net flows			(16,784	)			5,823

 

 

NOTE 06

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

Since the inflows and outflows for both the hedged element and the hedging instrument mirror each other, the hedges are nearly 100% effective, which means that the fluctuations of fair value attributable to risk components are almost completely offset. As of March 31, 2014 and 2013, Ch$299 million and Ch$78 million loss respectively, were recognized in income.

 

During the year, the Bank did not have any cash flow hedges of forecast transactions.

 

d)

Below is a presentation of income generated by cash flow hedges amount that were reclassified from other comprehensive income to income for the year:

 

		For the period ended March 31,
		2014				2013
		MCh$				MCh$
Bond hedging derivatives			(7	)			(36	)
Interbank loans hedging derivatives			382				382
Cash flow hedge net income			375				346

 

See Note 20 “Equity”, letter d)

 

e)

Net investment hedges in foreign operations:

 

As of March 31, 2014 and December 31, 2013, the Bank does not have any foreign net investment hedges in its hedge accounting portfolio.

 

 

NOTE 07

INTERBANK LOANS

 

a)

As of March 31, 2014 and December 31, 2013, balances of “Interbank loans” are as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Domestic banks
Loans and advances to banks			-				-
Deposits in the Central Bank of Chile – not available			-				-
Non-transferable Chilean Central Bank Bonds			-				-
Other Central Bank of Chile loans			-				-
Interbank loans			245				66
Overdrafts in checking accounts			-				-
Non-transferable domestic bank loans			-				-
Other domestic bank loans			-				-
Allowances and impairment for domestic bank loans			-				-
Foreign interbank loans
Interbank loans - Foreign			4,020				125,383
Overdrafts in checking accounts			-				-
Non-transferable foreign bank deposits			-				-
Other foreign bank loans			-				-
Allowances and impairment for foreign bank loans			(9	)			(54	)
Total			4,256				125,395

 

b)

The amount in each period for provisions and impairment of interbank loans is show below:

 

		As of March 31,												As of December 31,
		2014												2013
		Domestic banks				Foreign banks				Total				Domestic banks				Foreign banks				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Balance as of January 1			-				54				54				-				46				46
Charge-offs			-				-				-				-				-				-
Provisions established			-				-				-				-				127				127
Provisions release			-				(45	)			(45	)			-				(119	)			(119	)
Total			-				9				9				-				54				54

 

 

NOTE 08

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS

 

a)

Loans and accounts receivable from customers

 

As of March 31, 2014 and December 31, 2013, the composition of the loan portfolio is as follows:

 

		Assets before allowances																Allowances established
		Normal portfolio				Substandard Portfolio				Impaired portfolio				Total				Individual allowances				Group allowances				Total				Assets net balance
As of March 31, 2014		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Commercial loans
Commercial loans			7,112,905				244,632				550,375				7,907,912				129,102				82,637				211,739				7,696,173
Foreign trade loans			1,835,054				50,206				66,909				1,952,169				53,794				825				54,619				1,897,550
Checking accounts debtors			278,393				2,945				11,136				292,474				3,440				4,867				8,307				284,167
Factoring transactions			253,122				1,811				3,036				257,969				3,780				656				4,436				253,533
Leasing transactions			1,264,240				73,493				43,137				1,380,870				14,431				4,720				19,151				1,361,719
Other loans and account receivable			106,918				1,150				19,058				127,126				5,078				7,990				13,068				114,058
Subtotal			10,850,632				374,237				693,651				11,918,520				209,625				101,695				311,320				11,607,200
Mortgage loans
Loans with mortgage finance bonds			65,665				-				2,971				68,636				-				454				454				68,182
Mortgage mutual loans			109,983				-				2,276				112,259				-				459				459				111,800
Other mortgage mutual loans			5,330,690				-				329,567				5,660,257				-				43,754				43,754				5,616,503
Subtotal			5,506,338				-				334,814				5,841,152				-				44,667				44,667				5,796,485
Consumer loans
Installment consumer loans			1,880,450				-				321,675				2,202,125				-				225,610				225,610				1,976,515
Credit card balances			1,259,095				-				23,033				1,282,128				-				38,945				38,945				1,243,183
Leasing transactions			3,349				-				70				3,419				-				106				106				3,313
Other consumer loans			203,954				-				4,572				208,526				-				5,804				5,804				202,722
Subtotal			3,346,848				-				349,350				3,696,198				-				270,465				270,465				3,425,733
Total			19,703,818				374,237				1,377,815				21,455,870				209,625				416,827				626,452				20,829,418

 

 

NOTE 08

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

		Assets before allowances																Allowances established
		Normal portfolio				Substandard Portfolio				Impaired portfolio				Total				Individual allowances				Group allowances				Total				Assets net balance
As of December 31, 2013		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Commercial loans
Commercial loans			6,993,770				246,661				557,251				7,797,682				123,354				81,478				204,832				7,592,850
Foreign trade loans			1,731,328				47,164				61,842				1,840,334				50,574				878				51,452				1,788,882
Checking accounts debtors			264,957				3,176				11,524				279,657				3,513				4,755				8,268				271,389
Factoring transactions			310,228				2,613				3,273				316,114				4,305				617				4,922				311,192
Leasing transactions			1,235,369				73,819				40,626				1,349,814				13,739				5,016				18,755				1,331,059
Other loans and account receivable			99,524				617				18,510				118,651				4,745				7,426				12,171				106,480
Subtotal			10,635,176				374,050				693,026				11,702,252				200,230				100,170				300,400				11,401,852
Mortgage loans
Loans with mortgage finance bonds			69,273				-				3,024				72,297				-				470				470				71,827
Mortgage mutual loans			69,742				-				2,091				71,833				-				380				380				71,453
Other mortgage mutual loans			5,163,396				-				318,286				5,481,682				-				42,456				42,456				5,439,226
Subtotal			5,302,411				-				323,401				5,625,812				-				43,306				43,306				5,582,506
Consumer loans
Installment consumer loans			1,847,289				-				320,832				2,168,121				-				221,723				221,723				1,946,398
Credit card balances			1,212,134				-				23,747				1,235,881				-				37,300				37,300				1,198,581
Leasing transactions			3,383				-				68				3,451				-				68				68				3,383
Other consumer loans			195,030				-				4,765				199,795				-				5,494				5,494				194,301
Subtotal			3,257,836				-				349,412				3,607,248				-				264,585				264,585				3,342,663
Total			19,195,423				374,050				1,365,839				20,935,312				200,230				408,061				608,291				20,327,021

 

 

NOTE 08

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

b)

Portfolio characteristics

 

As of March 31, 2014 and December 31, 2013, the portfolio before allowances is as follows, by customer`s economic activity:

 

		Domestic loans (*)								Foreign loans (**)								Total loans								Distribution percentage
		As of March 31,				As of December 31,				As of March 31,				As of December 31,				As of March 31,				As of December 31,				As of March 31,				As of December 31,
		2014				2013				2014				2013				2014				2013				2014				2013
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				%				%
Commercial loans
Manufacturing			1,211,871				1,216,914				-				-				1,211,871				1,216,914				5.65				5.78
Mining			486,387				464,865				-				-				486,387				464,865				2.27				2.21
Electricity, gas, and water			217,055				222,110				-				-				217,055				222,110				1.01				1.05
Agriculture and livestock			829,004				806,092				-				-				829,004				806,092				3.86				3.83
Forest			217,588				183,716				-				-				217,588				183,716				1.01				0.87
Fishing			268,964				265,917				-				-				268,964				265,917				1.25				1.26
Transport			676,766				721,931				-				-				676,766				721,931				3.15				3.43
Communications			255,000				249,499				-				-				255,000				249,499				1.19				1.18
Construction			1,311,299				1,337,791				-				-				1,311,299				1,337,791				6.11				6.35
Commerce			2,702,968				2,578,979				4,020				125,383				2,706,988				2,704,362				12.61				12.84
Services			473,261				447,861				-				-				473,261				447,861				2.21				2.13
Other			3,268,602				3,206,643				-				-				3,268,602				3,206,643				15.23				15.23
Subtotal			11,918,765				11,702,318				4,020				125,383				11,922,785				11,827,701				55.56				56.16
Mortgage loans			5,841,152				5,625,812				-				-				5,841,152				5,625,812				27.22				26.71
Consumer loans			3,696,198				3,607,248				-				-				3,696,198				3,607,248				17.22				17.13
Total			21,456,115				20,935,378				4,020				125,383				21,460,135				21,060,761				100.00				100.00

 

(*)

Includes domestic interbank loans for Ch$245 million as of March 31, 2014 (Ch$66 million as of December 31, 2013), see Note 7.

 

(**)

Includes foreign interbank loans for Ch$4.020 million as of March 31, 2014 (Ch$125.383 million as of December 31, 2013), see Note 7.

 

 

NOTE 08

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

c)

Impaired portfolio (*)

 

i)

As of March 31, 2014 and December 31, 2013, the impaired portfolio is as follows:

 

		As of March 31,																As of December 31,
		2014																2013
		Commercial				Mortgage				Consumer				Total				Commercial				Mortgage				Consumer				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Individual impaired portfolio			329,164				-				-				329,164				317,534				-				-				317,534
Non-performing loans			362,043				139,997				83,437				585,477				364,890				155,688				92,723				613,301
Other impaired portfolio			112,611				194,817				265,913				573,341				122,464				167,713				256,689				546,866
Total			803,818				334,814				349,350				1,487,982				804,888				323,401				349,412				1,477,701

 

(*)

Impaired portfolio includes loans classified as substandard in groups B3 and B4, as well as the impaired portfolio.

 

ii)

The impaired portfolio with or without guarantee as of March 31, 2014 and December 31, 2013 is as follows:

 

		As of March 31,																As of December 31,
		2014																2013
		Commercial				Mortgage				Consumer				Total				Commercial				Mortgage				Consumer				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Secured debt			379,836				312,888				48,661				741,385				385,712				302,219				49,051				736,982
Unsecured debt			423,982				21,926				300,689				746,597				419,176				21,182				300,361				740,719
Total			803,818				334,814				349,350				1,487,982				804,888				323,401				349,412				1,477,701

 

iii)

The portfolio of non-performing loans as of March 31, 2014 and December 31, 2013 is as follows:

 

		As of March 31,																As of December 31,
		2014																2013
		Commercial				Mortgage				Consumer				Total				Commercial				Mortgage				Consumer				Total
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Secured debt			137,513				123,235				6,343				267,091				151,494				136,768				7,241				295,503
Unsecured debt			224,530				16,762				77,094				318,386				213,396				18,920				85,482				317,798
Total			362,043				139,997				83,437				585,477				364,890				155,688				92,723				613,301

 

 

NOTE 08

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

d)

Allowances

 

The changes in allowances balances during 2014 and 2013 are as follows:

 

		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
Activity during 2014		MCh$				MCh$				MCh$				MCh$				MCh$
January 1, 2014			200,230				100,170				43,306				264,585				608,291
Allowances established			18,058				9,627				2,830				33,340				63,855
Allowances release			(2,548	)			(3,405	)			(868	)			(1,713	)			(8,534	)
Allowances released due to charge-off			(6,115	)			(4,697	)			(601	)			(25,747	)			(37,160	)
Balance as of March 31, 2014			209,625				101,695				44,667				270,465				626,452

 

Activity during 2013		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
		MCh$				MCh$				MCh$				MCh$				MCh$
January 1, 2013			154,935				95,938				35,990				263,259				550,122
Allowances established			85,628				36,724				21,314				155,921				299,587
Allowances release			(22,014	)			(11,151	)			(9,216	)			(35,482	)			(77,863	)
Allowances released due to charge-off			(18,319	)			(21,341	)			(4,782	)			(119,113	)			(163,555	)
Balance as of December 31, 2013			200,230				100,170				43,306				264,585				608,291

 

In addition to credit risk allowances, there are allowances held for:

 

i)

Country risk to cover the risk taken when holding or committing resources with any foreign country. These allowances are established over country classifications performed by the Bank, according to the provisions established on Chapter 7-13 of the Updated Compilation of Rules, issued by the SBIF. The balances of allowances as of March 31, 2014 and December 31, 2013 are Ch$244 million and Ch$470 million, respectively.

 

ii)

According to standards in force issued by the SBIF, the Bank has established allowances related to the unused balances of lines of credit with free disposal. The balances of allowances as of March 31, 2014 and December 31, 2013 are Ch$17.737 million and Ch$18.767 million, respectively.

 

e)

Allowances established on customer and interbank loans

 

The following chart shows the balance of allowances established, associated with credits granted to customers and banks:

 

		As of March 31,				As of December 31,
		2014				2013
Customers loans			63,855				299,587
Interbank loans			-				127
Total			63,855				299,714

 

 

 

NOTE 08

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

f)

Portfolio by its impaired and non-impaired status

 

		As of March 31, 2014
		Non-impaired																Impaired																Total portfolio
		Commercial				Mortgage				Consumer				Total non- impaired				Commercial				Mortgage				Consumer				Total impaired				Commercial				Mortgage				Consumer				Total portfolio
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Current portfolio			10,811,354				5,218,568				3,157,379				19,187,301				325,158				110,335				168,937				604,430				11,136,512				5,328,903				3,326,316				19,791,731
Overdue for 1-29 days			206,570				95,863				117,183				419,616				46,434				22,982				52,265				121,681				253,004				118,845				169,448				541,297
Overdue for 30-89 days			96,778				191,907				72,286				360,971				71,640				51,528				50,481				173,649				168,418				243,435				122,767				534,620
Overdue for 90 days or more			-				-				-				-				360,586				149,969				77,667				588,222				360,586				149,969				77,667				588,222
Total portfolio before allowances			11,114,702				5,506,338				3,346,848				19,967,888				803,818				334,814				349,350				1,487,982				11,918,520				5,841,152				3,696,198				21,455,870
Overdue loans (less than 90 days) presented as portfolio percentage			2.73	%			5.23	%			5.66	%			3.91	%			14.69	%			22.25	%			29.41	%			19.85	%			3.54	%			6.20	%			7.91	%			5.01	%
Overdue loans (90 days or more) presented as portfolio percentage			-				-				-				-				44.86	%			44.79	%			22.23	%			39.53	%			3.03	%			2.57	%			2.10	%			2.74	%

 

 

NOTE 08

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 

		As of December 31, 2013
		Non-impaired																Impaired																Total portfolio
		Commercial				Mortgage				Consumer				Total non- impaired				Commercial				Mortgage				Consumer				Total impaired				Commercial				Mortgage				Consumer				Total portfolio
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Current portfolio			10,665,404				5,017,319				3,071,977				18,754,700				335,382				102,214				151,804				589,400				11,000,786				5,119,533				3,223,781				19,344,100
Overdue for 1-29 days			142,613				103,335				122,088				368,036				34,715				23,111				57,693				115,519				177,328				126,446				179,781				483,555
Overdue for 30-89 days			89,347				181,757				63,771				334,875				74,863				51,143				54,202				180,208				164,210				232,900				117,973				515,083
Overdue for 90 days or more			-				-				-				-				359,928				146,933				85,713				592,574				359,928				146,933				85,713				592,574
Total portfolio before allowances			10,897,364				5,302,411				3,257,836				19,457,611				804,888				323,401				349,412				1,477,701				11,702,252				5,625,812				3,607,248				20,935,312
Overdue loans (less than 90 days) presented as portfolio percentage			2.13	%			5.38	%			5.70	%			3.61	%			13.61	%			22.96	%			32.02	%			20.01	%			2.92	%			6.39	%			8.25	%			4.77	%
Overdue loans (90 days or more) presented as portfolio percentage			-				-				-				-				44.72	%			45.43	%			24.53	%			40.10	%			3.08	%			2.61	%			2.38	%			2.83	%

 

 

NOTE 09

LOAN PURCHASE, SALES AND SUBSTITUTIONS

 

a)

Sales of loans

 

		As of March 31, 2014
		Book value				Selling price				Other income from financial operations				Provisions for loan losses				Net income total
		MCh$				MCh$				MCh$				MCh$				MCh$
Sale of charged-off loans			-				-				-				-				-
Sale of current loans			-				-				-				-				-
Charged-off portfolio (*)			-				30				30				-				30
Total			-				30				30				-				30

(*)   Difference in selling price of charged-off portfolios from previous years is Ch$30 million profit.

 

		As of March 31, 2013
		Book value				Selling price				Other income from financial operations				Provisions for loan losses				Net income total
		MCh$				MCh$				MCh$				MCh$				MCh$
Sale of Charged-off loans (1)			-				82				82				-				82
Sale of Current loans (2)			109				26				(83	)			38				(45	)
Charged-off portfolio (*)			-				(24	)			(24	)			-				(24	)
Total			109				84				(25	)			38				13

(*)Difference in selling price of charged-off portfolios from previous years is Ch$24 million loss.

 

(1)

Sale of charged-off loans

 

As of March 31, 2014, Banco Santander Chile has not performed sale of portfolio previously charge-off.

As of March 31, 2013, Banco Santander Chile signed assignment agreements of loans previously charged off with Matic Kart S.A.:

 

		Nominal portfolio sale				Selling price
Date		MCh$				MCh$
03-01-2013			2,035				82
Total			2,035				82

 

(2)

Sale of current loans

 

As of March 31, 2014, Banco Santander Chile has not performed sale of current loans.

As of March 31, 2013, signed an agreement to sell current loans to Matic Kart S.A., detail of this transaction is as follows:

 

		Nominal portfolio sale				Selling price
Date		MCh$				MCh$
03-01-2013(*)			179				26
Total			179				26

 

b)

Loan purchase

 

On January 10, 2014, the Bank purchased a loan portfolio to Ripley for an amount of Ch$ 22.074 million. This purchase was made at par value, then no effect on income was recorded.

 

 

NOTE 10

AVAILABLE FOR SALE INVESTMENTS

 

As of March 31, 2014 and December 31, 2013, detail of instruments deemed as available for sale investments is as follows:

 

		As of March 31,				As of December 31,
		2014 MCh$				2013 MCh$
Chilean Central Bank and Government securities
Chilean Central Bank Bonds			360,846				364,821
Chilean Central Bank Notes			59,429				1,078
Other Chilean Central Bank and Government securities			164,382				146,295
Subtotal			584,657				512,194
Other Chilean securities
Time deposits in Chilean financial institutions			1,051,860				1,011,354
Mortgage finance bonds of Chilean financial institutions			33,632				33,856
Chilean financial institution bonds			-				-
Chilean corporate bonds			-				-
Other Chilean securities			-				-
Subtotal			1,085,492				1,045,210
Foreign financial securities
Foreign Central Banks and Government securities			163,398				143,589
Other foreign financial securities			10,987				-
Subtotal			174,385				143,589
Total			1,844,534				1,700,993

 

As of March 31, 2014 and December 31, 2013, the line item Chilean Central Bank and Government securities item includes securities sold under repurchase agreements to clients and financial institutions for Ch$90,237 million and Ch$90,818 million, respectively.

 

As of March 31, 2014 and December 31, 2013, the line item Other National Institutions Securities includes securities sold to customers and financial institutions under repurchase agreements totaling Ch$104,586 million and Ch$118,195 million, respectively.

 

As of March 31, 2014 available for sale investments included a net unrealized profit of Ch$9,221 million, recorded as a “Valuation adjustment” in Equity, distributed between a profit of Ch$9,199 million attributable to Bank shareholders and a profit of Ch$22 million attributable to non-controlling interest.

 

 

NOTE 11

INTANGIBLE ASSETS

 

a)

As of March 31, 2014 and December 31, 2013 the composition of intangible assets is as follows:

 

														As of March 31, 2014
		Years of useful  life				Average remaining useful life				Net opening balance as of January 1, 2014				Gross balance				Accumulated amortization				Net balance
										MCh$				MCh$				MCh$				MCh$
Licenses			3				1.3				2,197				10,067				(7,957	)			2,110
Software development			3				1.9				64,506				244,626				(184,851	)			59,775
Total											66,703				254,693				(192,808	)			61,885

 

														As of December 31, 2013
		Years of useful  life				Average remaining useful life				Net opening balance as of January 1, 2013				Gross balance				Accumulated amortization				Net balance
										MCh$				MCh$				MCh$				MCh$
Licenses			3				2				2,621				9,955				(7,758	)			2,197
Software development			3				2				84,726				242,023				(177,517	)			64,506
Total											87,347				251,978				(185,275	)			66,703

 

b)

The activity in intangible assets during de periods ended March 31, 2014 and December 31, 2013 is as follows:

 

b.1)

Gross balance

 

Gross balances		Licenses				Software development				Total
		MCh$				MCh$				MCh$
Balances as of January 1, 2014			9,955				242,023				251,978
Acquisitions			112				2,603				2,715
Disposals			-				-				-
Other			-				-				-
Balances as of March 31, 2014			10,067				244,626				254,693
Balances as of January 1, 2013			9,329				224,671				234,000
Acquisitions			626				17,774				18,400
Disposals			-				-				-
Other			-				(422	)			(422	)
Balances as of December 31, 2013			9,955				242,023				251,978

 

 

NOTE 11

INTANGIBLE ASSETS, continued

 

b.2) Accumulated amortization

 

Accumulated amortization		Licenses				Software development				Total
		MCh$				MCh$				MCh$
Balances as of January 1, 2014			(7,758	)			(177,517	)			(185,275	)
Year`s amortization			(199	)			(7,334	)			(7,533	)
Other changes			-				-				-
Balances as of March 31, 2014			(7,957	)			(184,851	)			(192,808	)
Balances as of January 1, 2013			(6,708	)			(139,945	)			(146,653	)
Year`s amortization			(1,050	)			(37,572	)			(38,622	)
Other changes			-				-				-
Balances as of December 31, 2013			(7,758	)			(177,517	)			(185,275	)

 

c)

The Bank has no restriction on intangible assets as of March 31, 2014 and December 31, 2013. Additionally, the intangible assets have not been pledged as guarantee for fulfillment of financial liabilities. Also, the Bank has no debt related intangible assets as of those dates.

 

 

NOTE 12

PROPERTY, PLANT, AND EQUIPMENT

 

a)

As of March 31, 2014 and December 31, 2013 the composition of property, plant and equipment is as follows:

 

						As of March 31, 2014
		Net opening balance as of January 1, 2014				Gross balance				Accumulated depreciation				Net balance
		MCh$				MCh$				MCh$				MCh$
Land and building			128,119				185,389				(59,029	)			126,360
Equipment			38,841				87,950				(49,619	)			38,331
Ceded under operating leases			4,329				4,888				(579	)			4,309
Other			8,926				32,210				(24,149	)			8,061
Total			180,215				310,437				(133,376	)			177,061

 

						As of December 31, 2013
		Net opening balance as of January 1, 2013				Gross balance				Accumulated depreciation				Net balance
		MCh$				MCh$				MCh$				MCh$
Land and building			119,853				184,711				(56,592	)			128,119
Equipment			28,625				85,857				(47,016	)			38,841
Ceded under operating leases			4,507				4,888				(559	)			4,329
Other			9,229				32,207				(23,281	)			8,926
Total			162,214				307,663				(127,448	)			180,215

 

b)

The activity in property, plant and equipment during de periods ended March 31, 2014 and December 31, 2013 is as follows:

 

b.1) Gross balance

 

		Land and buildings				Equipment				Ceded under operating leases				Other				Total
2014		MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1, 2014			184,711				85,857				4,888				32,207				307,663
Additions			678				2,119				-				36				2,833
Disposals			-				(13	)			-				(33	)			(46	)
Impairment due to damage (i)			-				(13	)			-				-				(13	)
Transfers			-				-				-				-				-
Other			-				-				-				-				-
Balances as of March 31, 2014			185,389				87,950				4,888				32,210				310,437

 

 

NOTE 12

PROPERTY, PLANT, AND EQUIPMENT, continued

 

		Land and buildings				Equipment				Ceded under operating leases				Other				Total
2013		MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1, 2013			167,241				66,170				4,996				28,957				267,364
Additions			17,470				20,171				-				3,148				40,789
Disposals			-				(240	)			(108	)			-				(348	)
Impairment due to damage (i)			-				(244	)			-				-				(244	)
Transfers			-				-				-				-				-
Other			-				-				-				102				102
Balances as of December 31, 2013			184,711				85,857				4,888				32,207				307,663

 

i)

Banco Santander Chile recognized on its financial statements as of March 31, 2014 Ch$13 million impairment from damages to ATMs. Compensation received from insurance totaled Ch$240 million, which is presented within Other operating income (see Note 31).

 

b.2) Accumulated depreciation

 

		Land and buildings				Equipment				Ceded under operating leases				Other				Total
2014		MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1, 2014			(56,592	)			(47,016	)			(559	)			(23,281	)			(127,448	)
Depreciation charges in the period			(2,437	)			(2,604	)			(20	)			(873	)			(5,934	)
Sales and disposals in the period			-				1				-				5				6
Transfers			-				-				-				-			-
Others			-				-				-				-				-
Balances as of March 31, 2014			(59,029	)			(49,619	)			(579	)			(24,149	)			(133,376	)

 

		Land and buildings				Equipment				Ceded under operating leases				Other				Total
2013		MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1, 2013			(47.388	)			(37.545	)			(489	)			(19.728	)			(105.150	)
Depreciation charges in the period			(9.207	)			(9.554	)			(89	)			(3.602	)			(22.452	)
Sales and disposals in the period			3				83				19				49				154
Transfers			-				-				-				-				-
Others			-				-				-				-				-
Balances as of December 31, 2013			(56.592	)			(47.016	)			(559	)			(23.281	)			(127.448	)

 

 

NOTE 12

PROPERTY, PLANT, AND EQUIPMENT, continued

 

c)

Operational leases - Lessor

 

As of March 31, 2014 and December 31, 2013, the future minimum lease cash inflows under non-cancellable operating leases are as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			715				637
Due after 1 year but within 2 years			956				508
Due after 2 years but within 3 years			294				300
Due after 3 years but within 4 years			267				263
Due after 4 years but within 5 years			267				263
Due after 5 years			1,883				2,148
Total			4,382				4,119

 

d)

Operational leases - Lessee

 

Certain Bank`s premises and equipment are leased under various operating leases. Future minimum rental payments under non-cancellable leases are as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			19,090				18,941
Due after 1 year but within 2 years			16,671				16,948
Due after 2 years but within 3 years			15,306				15,161
Due after 3 years but within 4 years			14,188				14,083
Due after 4 years but within 5 years			12,897				12,902
Due after 5 years			60,345				61,730
Total			138,497				139,765

 

e)

As of March 31, 2014 and December 31, 2013 the Bank has not financial leases which cannot be unilaterally rescinded.

 

f)

The Bank has no restriction on intangible assets as of March 31, 2014 and December 31, 2013. Additionally, the property, plant, and equipment have not been surrendered as guarantees for the compliance of financial liabilities. Also, the Bank has no debt regarding property, plant and equipment as those dates.

 

 

NOTE 13

CURRENT AND DEFERRED TAXES

 

a)

Current taxes

 

As of March 31, 2014 and December 31, 2014, the Bank recognizes an income tax provision, which is determined based on the currently applicable tax legislation. This provision is recorded net of recoverable taxes, as shown as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Summary of current tax liabilities (assets)
Current tax (assets)			(2,092	)			(1,643	)
Current tax liabilities			19,047				50,242
Total tax payable (recoverable)			16,955				48,599
(Assets) liabilities current taxes detail (net)
Income tax, tax rate 20%			140,340				117,095
Minus:
Provisional monthly payments (PPM)			(117,569	)			(61,730	)
Credit for training expenses			(1,959	)			(1,656	)
Land taxes leasing			(3,629	)			(2,987	)
Grant credits			(2,220	)			(1,892	)
Other			1,992				(231	)
Total tax payable (recoverable)			16,955				48,599

 

b)

Effect on income

 

The effect of tax expense on income for the periods from January 1 and March 31, 2014 and 2013 is comprised of the following items:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
Income tax expense
Current tax			23,245				11,166
Credits (debits) for deferred taxes
Origination and reversal of temporary differences			2,830				2,993
Subtotals			26,075				14,159
Tax for rejected expenses (Article No.21)			77				78
Other			-				-
Net charges for income tax expense			26,152				14,237

 

 

NOTE 13

CURRENT AND DEFERRED TAXES, continued

 

c)

Effective tax rate reconciliation

 

The reconciliation between the income tax rate and the effective rate applied in determining tax expenses as of March 31, 2014 and 2013 is as follows:

 

		As of March 31,
		2014								2013
		Tax rate				Amount				Tax rate				Amount
		%				MCh$				%				MCh$
Tax calculated over profit before tax			20.00				33,668				20.00				19,136
Permanent differences			(4.12	)			(6,942	)			(4.12	)			(3,946	)
Single penalty tax (rejected expenses)			0.05				82				0.00				-
Real estate taxes			(0.38	)			(643	)			(0.30	)			(291	)
Other			(0.01	)			(13	)			(0.70	)			(662	)
Effective rates and expenses for income tax			15.54				26,152				14.88				14,237

 

d)

Effect of deferred taxes on comprehensive income

 

Below is a summary of the separate effect of deferred tax on equity, showing the asset and liability balances, for the periods ended March 31, 2014 and December 31, 2013:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Deferred tax assets
Available for sale investments			45				31
Cash flow hedges			3,357				1,651
Total deferred tax assets affecting other with effect in other comprehensive income			3,402				1,682
Deferred tax liabilities
Available for sale investments			(1,889	)			(199	)
Cash flow hedges			-				-
Total deferred tax liabilities affecting other with effect in other comprehensive income			(1,889	)			(199	)
Net deferred tax balances in equity			1,513				1,483
Deferred taxes in equity attributable to Bank shareholders			1,518				1,491
Deferred tax in equity attributable to non-controlling interests			(5	)			(8	)

 

 

 

NOTE 13

CURRENT AND DEFERRED TAXES, continued

 

e)

Effect of deferred taxes on income

 

Below are effects of deferred taxes on assets, liabilities and income:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Deferred tax assets
Interests and adjustments			7,573				7,203
Non-recurring charge-offs			8,777				9,787
Assets received in lieu of payment			888				1,149
Property, plant and equipment			4,182				3,579
Allowance for loan losses			93,667				92,088
Provision for expenses			14,139				19,130
Derivatives			18				19
Leased assets			51,570				52,447
Subsidiaries tax losses			6,537				5,716
Other			719				37,415
Total deferred tax assets			188,070				228,533
Deferred tax liabilities
Valuation of investments			(16,847	)			(11,593	)
Depreciation			(295	)			(315	)
Prepaid expenses			(58	)			-
Other			(2,056	)			(12,981	)
Total deferred tax liabilities			(19,256	)			(24,889	)

 

f)

Summary of deferred tax assets and liabilities

 

Below is a summary of the deferred taxes impact on equity and income.

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Deferred tax assets
Recognized through other comprehensive income			3,402				1,682
Recognized through profit or loss			188,070				228,533
Total deferred tax assets			191,472				230,215
Deferred tax liabilities
Recognized through other comprehensive income			(1,889	)			(199	)
Recognized through profit or loss			(19,256	)			(24,889	)
Total deferred tax liabilities			(21,145	)			(25,088	)

 

 

NOTE 14

OTHER ASSETS

 

Other assets item includes the following:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Assets for leasing (*)			43,404				41,402
Assets received or awarded in lieu of payment
Assets received in lieu of payment			11,520				14,448
Assets awarded at judicial sale			7,430				6,530
Provision on assets received in lieu of payment or awarded			(2,829	)			(2,914	)
Subtotal			16,121				18,064
Other assets
Guarantee deposits			3,252				68,330
Gold investments			416				373
VAT credit			11,158				8,705
Income tax recoverable			38,728				42,354
Prepaid expenses			33,274				34,970
Assets recovered from leasing for sale			6,245				5,747
Pension plan assets			1,852				1,822
Accounts and notes receivable			50,507				60,256
Notes receivable through brokerage and simultaneous transactions			84,602				75,145
Other receivable assets			9,772				9,746
Other assets			37,472				33,111
Subtotal			277,278				340,559
Total			336,803				400,025

 

(*)

Assets available to be granted under the financial leasing agreements.

 

(**)

Assets received in lieu of payment correspond to assets received as payment of overdue debts.  The assets acquired must at no time exceed, in the aggregate, 20% of the Bank’s effective equity. These assets currently represent 0.39% as of March 31, 2014 (0.48% as of December 31, 2013) of the Bank’s effective equity.

 

Assets acquired through judicial auction are considered in the above mentioned limit, those are classified as available or sale assets. The Bank is expected to complete the sale within one year from the date on which the asset are received or acquired. When are not sold within that period of time, the Bank must to write-off those assets.

 

Additionally, the Bank records a provision for the difference between the initial award value plus any additions and its estimated realizable value (appraisal), when the first is greater.

 

 

NOTE 17

TIME DEPOSITS AND OTHER TIME LIABILITIES

 

As of March 31, 2014 and December 31, 2013, the composition of this item is as a follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Deposits and other demand liabilities
Checking accounts			4,497,754				4,403,526
Other deposits and demand accounts			474,205				569,395
Other demand liabilities			638,414				647,842
Total			5,610,373				5,620,763
Time deposits and other time liabilities
Time deposits			9,533,734				9,567,855
Time savings account			103,577				104,143
Other time liabilities			3,290				3,274
Total			9,640,601				9,675,272

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES

 

As of Mach 31, 2013 and December 31, 2014, the composition of this item is as a follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Other financial liabilities
Obligations to public sector			68,276				68,075
Other domestic obligations			127,886				118,683
Foreign obligations			4,878				3,023
Subtotals			201,040				189,781
Issued debt instruments
Mortgage finance bonds			96,152				101,667
Senior bonds			4,090,595				4,190,918
Mortgage bond			68,806				70,339
Subordinated bonds			849,146				835,734
Subtotals			5,104,699				5,198,658
Total			5,305,739				5,338,439

 

Debts classified as current are either demand obligations or will mature in one year or less. All others debts are classified as non-current. The Bank`s debts, both current and non-current, are summarized below:

 

		As of March 31, 2014
		Current				Non-current				Total
		MCh$				MCh$				MCh$
Mortgage finance bonds			9,614				86,538				96,152
Senior bonds			1,462,266				2,628,329				4,090,595
Mortgage bonds			-				68,806				68,806
Subordinated bonds			148,087				701,059				849,146
Issued debt instruments			1,619,967				3,484,732				5,104,699
Other financial liabilities			114,957				86,083				201,040
Total			1,734,924				3,570,815				5,305,739

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

		As of December 31, 2013
		Current				Non-current				Total
		MCh$				MCh$				MCh$
Mortgage finance bonds			6,493				95,174				101,667
Senior bonds			1,603,929				2,586,989				4,190,918
Mortgage bonds			-				70,339				70,339
Subordinated bonds			138,466				697,268				835,734
Issued debt instruments			1,748,888				3,449,770				5,198,658
Other financial liabilities			101,698				88,083				189,781
Total			1,850,586				3,537,853				5,388,439

 

a)

Mortgage finance bonds

 

These bonds are used to finance mortgage loans. Their principal amounts are amortized on a quarterly basis. The range of maturities of these bonds is between five and twenty years. Loans are indexed to UF and create a yearly interest rate of 5.83% as of March 31, 2014 (5.21% as of December 31, 2013).

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			9,614				6,493
Due after 1 year but within 2 years			9,546				9,760
Due after 2 years but within 3 years			9,045				8,768
Due after 3 years but within 4 years			9,514				9,921
Due after 4 years but within 5 years			8,893				12,511
Due after 5 years			49,540				54,214
Total mortgage finance bonds			96,152				101,667

 

b)

Senior bonds

 

The following table shows senior bonds by currency:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Santander bonds in UF			1,743,163				1,964,905
Santander bonds in USD			1,610,783				1,658,789
Santander bonds in CHF			444,663				246,284
Santander bonds in Ch$			183,929				277,530
Santander bonds in CNY			44,735				43,410
Santander bonds in AUD			63,322				-
Total senior bonds			4,090,595				4,190,918

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

i.

Placement of senior bonds:

 

In 2014, the Bank placed bonds for UF 2,000,000; CLP 25,000,000,000; CHF 300,000,000; USD 250,000,000 and AUD 125,000,000, detailed as follows:

 

Series

Amount

Term

Issuance rate

Issuance date

Series issued amount

Maturity date

EB Series

UF

2,000,000

4 years

3.0% per annum simple

02-22-2014

UF

2,000,000

10-01-2018

UF Total

UF

2,000,000

EA Series

CLP

25,000,000,000

4 years

5.76% per annum simple

02-22-2014

CLP

25,000,000,000

10-01-2018

CLP Total

CLP

25,000,000,000

CHF Bond

CHF

300,000,000

3 years

1% per annum simple

01-31-2014

CHF

300,000,000

07-31-2017

CHF Total

CHF

300,000,000

DN Current Bond

USD

250,000,000

5 years

Libor (3 months) + 100 bp

02-19-2014

USD

250,000,000

02-19-2019

USD Total

USD

250,000,000

AUD Bond

AUD

125,000,000

3 years

Libor (3 months) + 140 bp

03-13-2014

AUD

125,000,000

03-13-2017

AUD Total

AUD

125,000,000

 

During 2014, the Bank repurchased bonds for CLP 118,409,000,000 and UF 6,000,000.

 

During 2013, the Bank placed bonds for UF 13,768,000; CLP 32,500,000,000; USD 250,000,000 and CHF 300,000,000 detailed as follows:

 

Series		Amount				Term		Issuance rate		Issuance date		Series issued amount				Maturity date
E1 Series		UF	2,742,000			5 years		3.00% annum simple		02-01-2011		UF	4,000,000			02-01-2016
E2 Series		UF	952,000			7 years		3.00% annum simple		01-01-2012		UF	4,000,000			07-01-2018
E3 Series		UF	2,244,000			8,5 years		3.50% annum simple		01-01-2011		UF	4,000,000			07-01-2019
E6 Series		UF	3,720,,000			10 years		3.50% annum simple		04-01-2013		UF	4,000,000			04-01-2022
E9 Series		UF	2,000,000			10 years		3.60% annum simple		01-01-2013		UF	2,000,000			12-25-2018
FD Series		UF	110,000			5 years		3.00% annum simple		08-01-2010		UF	110,000			12-25-2018
EC Series		UF	2,000,000			10 years		3.50% annum simple		11-28-2013		UF	2,000,000			09-01-2023
UF Total		UF	13,768,000
E4 Series		CLP	7,500,000,000			5 years		6.75% annum simple		06-01-2012		CLP	7,500,000,000			06-01-2016
E8 Series		CLP	25,000,000,000			10 years		6.60% annum simple		11-01-2012		CLP	10,000,000,000			11-01-2022
CLP Total		CLP	32,500,000,000
CHF Floating Bond		CHF	150,000,000			4 years		Libor (3 months) + 100 bp		03-28-2013		CHF	150,000,000			03-28-2017
CHF Bond		CHF	150,000,000			6 years		1.75% annum simple		09-26-2013		CHF	150,000,000			09-26-2019
CHF Total		CHF	300,000,000
DN Current Bond		USD	250,000,000			5 years		Libor (3 months) + 100 bp		06-07-2013		USD	250,000,000			06-07-2018
USD TOTAL		USD	250,000,000

 

During 2013, the Bank performed a partial repurchase of bonds for CLP 49,245,000,000.

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

ii.

Nominal bonds to be placed:

 

As of March 31, 2014, there are no outstanding amounts of bonds, not previously authorized, to be placed.

 

Maturities of senior bonds are as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			1,462,266				1,603,929
Due after 1 year but within 2 years			625,362				674,784
Due after 2 years but within 3 years			279,477				338,853
Due after 3 years but within 4 years			534,159				321,589
Due after 4 years but within 5 years			171,892				154,368
Due after 5 years			1,017,439				1,097,395
Total senior bonds			4,090,595				4,190,918

 

c)

Mortgage bonds

 

Detail of mortgage bonds per currency is as a follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Mortgage bonds in UF			68,806				70,339
Total mortgage bonds			68,806				70,339

 

i.

Placement of mortgage bonds

 

During 2014, the Bank no has placed mortgage bonds.

During 2013, the Bank placed mortgage bonds for UF 3,000,000, detailed as follows:

 

Series

Amount

Term

Issuance rate

Issuance date

Series issued amount

Maturity date

BH

UF

3,000,000

15 years

3.2% annum simple

07-31-2013

UF

3,000,000

07-31-2028

UF Total

UF

3,000,000

 

Maturities of mortgage bonds are as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			-				-
Due after 1 year but within 2 years			-				-
Due after 2 years but within 3 years			-				-
Due after 3 years but within 4 years			-				-
Due after 4 years but within 5 years			-				-
Due after 5 years			68,806				70,339
Total mortgage bonds			68,806				70,339

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

d)

Subordinated bonds

 

Detail of subordinated bonds per currency is as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Subordinated bonds denominated in USD			146,608				139,802
Subordinated bonds denominated in UF			702,538				695,932
Total subordinated bonds			849,146				835,734

 

i. Placement of subordinated bonds

 

During 2013, the Bank placed subordinated bonds for UF 5,900,000.

 

The following chart shows details related to subordinated bonds placed:

 

Series

Amount

Term

Issuance rate

Issuance date

Series issued amount

Maturity date

G5

UF

1,900,000

20 years

3.9% annum simple

04-05-2011

UF

4,000,000

04-01-2031

H1

UF

4,000,000

30 years

3.9% annum simple

11-04-2011

UF

4,000,000

04-01-2041

Total

UF

5,900,000

 

During the first half of 2013, the Bank performed a partial repurchase of bonds for USD 47,786,000.

 

The maturities of subordinated bonds are as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Due within 1 year			148,087				138,466
Due after 1 year but within 2 years			15,250				14,039
Due after 2 years but within 3 years			4,887				4,140
Due after 3 years but within 4 years			-				-
Due after 4 years but within 5 years			-				-
Due after 5 years			680,922				679,089
Total subordinated bonds			849,146				835,734

 

 

NOTE 16

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

c)

Other financial liabilities

 

The composition of other financial liabilities, by maturity, is detailed below:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Non-current portion:
Due after 1 year but within 2 years			3,353				3,389
Due after 2 year but within 3 years			3,227				2,389
Due after 3 year but within 4 years			2,411				3,045
Due after 4 year but within 5 years			32,229				20,862
Due after 5 years			44,863				58,398
Non-current portion subtotals			86,083				88,083
Current portion:
Amounts due to credit card operators			104,755				97,027
Acceptance of letters of credit			4,005				741
Other long-term financial obligations, short-term portion			6,197				3,930
Current portion subtotals			114,957				101,698
Total other financial liabilities			201,040				189,781

 

 

NOTE 17

MATURITY OF ASSETS AND LIABILITIES

 

As of March 31, 2014 and December 31, 2013, the detail of the maturities of assets and liabilities is as follows:

 

		Demand				Up to 1 month				Between 1 and 3 months				Between 3 and 12 months				Subtotal up to 1 year				Between 1 and 5 years				More than 5 years				Subtotal More than 1 year				Total
As of March 31, 2014		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Assets
Cash and deposits in banks			1,344,228				-				-				-				1,344,228				-				-				-				1,344,228
Cash items in process of collection			740,648				-				-				-				740,648				-				-				-				740,648
Trading investments			-				-				1,439				171,178				172,617				97,382				154,729				252,111				424,728
Investments under resale agreements			-				-				-				-				-				-				-				-				-
Financial derivatives contracts			-				162,347				221,053				293,020				676,420				720,522				543,894				1,264,416				1,940,836
Interbank loans (*)			245				3,861				159				-				4,265				-				-				-				4,265
Loans and accounts receivables from customers (**)			718,893				2,198,494				2,353,477				3,247,562				8,518,426				6,448,451				6,488,993				12,937,444				21,455,870
Available for sale investments			-				233,681				376,184				614,167				1,224,032				261,740				358,762				620,502				1,844,534
Held to maturity investments			-				-				-				-				-				-				-				-				-
Total assets			2,804,014				2,598,383				2,952,312				4,325,927				12,680,636				7,528,095				7,546,378				15,074,473				27,755,109
Liabilities
Deposits and other demand liabilities			5,610,373				-				-				-				5,610,373				-				-				-				5,610,373
Cash items in process of collection			425,438				-				-				-				425,438				-				-				-				425,438
Obligations under repurchase agreements			-				188,257				4,894				635				193,787				-				-				-				193,787
Time deposits and other time liabilities			106,886				5,676,113				2,100,118				1,651,901				9,535,018				51,412				54,171				105,583				9,640,601
Financial derivatives contacts			-				104,143				198,684				295,636				598,463				679,303				446,083				1,125,386				1,723,849
Interbank borrowings			17,125				242,175				321,550				968,057				1,548,907				310,791				-				310,791				1,859,698
Issued debts instruments			-				470,752				616,037				533,178				1,619,967				1,668,025				1,816,707				3,484,732				5,104,699
Other financial liabilities			107,172				4,112				762				2,910				114,956				41,221				44,863				86,084				201,040
Total liabilities			6,266,994				6,685,552				3,242,045				3,452,317				19,646,909				2,750,752				2,361,824				5,112,576				24,759,485

 

(*)

Interbank loans are presented on a gross basis. The amount of allowances is Ch$9 million.

(**)

Loans and accounts receivables from customers are presented on a gross basis. Provisions amounts according to type of loan are detailed as follows: Commercial loans Ch$311,320 million, Mortgage loans Ch$44,667 million, Consumer loans Ch$270,465 million.

 

 

NOTE 17

MATURITY OF ASSETS AND LIABILITIES, continued

 

		Demand				Up to 1 month				Between 1 and 3 months				Between 3 and 12 months				Subtotal up to 1 year				Between 1 and 5 years				More than 5 years				Subtotal More than 1 year				Total
As of December 31, 2013		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Assets
Cash and deposits in banks			1,571,810				-				-				-				1,571,810				-				-				-				1,571,810
Cash items in process of collection			604,077				-				-				-				604,077				-				-				-				604,077
Trading investments			-				10,018				17				-				10,035				203,608				73,924				277,532				287,567
Investments under resale agreements			-				-				17,469				-				17,469				-				-				-				17,469
Financial derivatives contracts			-				168,785				99,471				225,617				493,873				565,329				434,816				1,000,145				1,494,018
Interbank loans (*)			1,224				66,264				56,901				1,060				125,449				-				-				-				125,449
Loans and accounts receivables from customers (**)			773,387				2,173,231				1,776,530				3,533,313				8,256,461				6,367,870				6,310,981				12,678,851				20,935,312
Available for sale investments			-				228,997				240,018				627,052				1,096,067				275,281				329,645				604,926				1,700,993
Held to maturity investments			-				-				-				-				-				-				-				-				-
Total assets			2,950,498				2,647,295				2,190,406				4,387,042				12,175,241				7,412,088				7,149,366				14,561,454				26,736,695
Liabilities
Deposits and other demand liabilities			5,620,763				-				-				-				5,620,763				-				-				-				5,620,763
Cash items in process of collection			276,379				-				-				-				276,379				-				-				-				276,379
Obligations under repurchase agreements			-				185,140				18,466				5,366				208,972				-				-				-				208,972
Time deposits and other time liabilities			104,233				5,351,489				2,333,001				1,743,525				9,532,248				87,380				55,644				143,024				9,675,272
Financial derivatives contacts			-				126,257				89,128				223,414				438,799				510,661				350,649				861,310				1,300,109
Interbank borrowings			8,199				104,490				216,472				1,201,070				1,530,231				152,146				-				152,146				1,682,377
Issued debts instruments			-				470,600				688,261				590,027				1,748,888				1,548,733				1,901,037				3,449,770				5,198,658
Other financial liabilities			97,027				568				1,111				2,992				101,698				29,685				58,398				88,083				189,781
Total liabilities			6,106,601				6,238,544				3,346,439				3,766,394				19,457,978				2,328,605				2,365,728				4,694,333				24,152,311

 

(*)

Interbank loans are presented on a gross basis. The amount of allowances is Ch$54 million.

(**)

Loans and accounts receivables from customers are presented on a gross basis. Provisions amounts according to type of loan are detailed as follows: Commercial loans Ch$300,400 million, Mortgage loans Ch$43,306 million, Consumer loans Ch$264,585 million.

 

 

NOTE 18

OTHER LIABILITIES

 

The composition of other liabilities is as a follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Accounts and notes payable			92,254				84,729
Unearned income			375				384
Guarantees received (threshold)			123,581				2,631
Notes payable through brokerage and simultaneous transactions			54,752				-
Other payable obligations			101,780				95,266
Other liabilities			10,535				15,767
Total			383,277				198,777

 

 

NOTE 19

CONTINGENCIES AND COMMITMENTS

 

a)

Lawsuits and legal procedures

 

As of the issuance date of these financial statements, the Bank and its affiliates were subject to certain legal actions in the normal course of their business. As of March 31, 2014, the Bank and its subsidiaries have provisions for this item of Ch$1,703 million (Ch$1,224 million as of December 31, 2013), which is included in “Provisions” in the Consolidated Interim Financial Statement as provisions for contingencies. In addition, there are other lawsuits for UF 26,178.71, which primarily relates to the litigation between Santander Corredores de Seguros Limitada and its clients for leasing assets.

 

b)

Contingent loans

 

The following table shows the Bank`s contractual obligations to issue loans:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Letters of credit issued			179,256				218,032
Foreign letters of credit confirmed			82,683				127,600
Guarantees			1,232,976				1,212,799
Personal guarantees			185,293				181,416
Subtotal			1,680,208				1,739,847
Available on demand credit lines			5,046,915				5,141,831
Other irrevocable credit commitments			45,866				47,376
Total			6,772,989				6,929,054

 

c)

Held securities

 

The Bank holds securities in the normal course of its business as follows:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Third party operations
Collections			163,278				217,948
Assets from third parties managed by the Bank and its affiliates (1)			1,095,730				1,015,817
Subtotal			1,259,008				1,233,765
Custody of securities
Securities held in custody			325,757				304,535
Securities held in custody deposited in other entity			556,079				532,072
Issued securities held in custody			15,734,208				15,351,545
Subtotal			16,616,044				16,188,152
Total			17,875,052				17,421,917

(1)

In 2014, portfolios managed by private banking were classified as third party resources managed by the Bank and its subsidiaries, as of March 31, 2014, the balance was Ch$884 million (Ch$ 1,016 million as of December 31, 2013).

 

d)

Guarantees

 

Banco Santander Chile has comprehensive officer fidelity insurance policy, No. 2823611, with the Chilena Consolidada de Seguros insurance company, for USD 5,000,000, which jointly covers both the Bank and its affiliates for the period from July 1, 2013 to June 30, 2014.

 

e)

Contingent loans and liabilities

 

To satisfy its clients` needs, the Bank took on several contingent loans and liabilities, yet these could not be recognized in the Consolidated Interim Financial Statement of Financial Position; these contain loan risks and they are, therefore, part of the Bank`s global risk.

 

 

NOTE 19

CONTINGENCIES AND COMMITMENTS, continued

 

Santander Agente de Valores Limitada

 

i)

To ensure correct and full performance of all its obligations as an agent, in conformity with the provisions of Articles No.30 and onward of Law No.18.045 on the Securities Market, the Company provided a guarantee in the amount of UF4,000 through Insurance Policy No. 213117286, underwritten by the Compañía de Seguros de Crédito Continental S.A., which matures on December 19, 2014.

 

Santander S.A. Corredores de Bolsa

 

i)

The Company has given guarantees to the Bolsa de Comercio de Santiago for a current value of Ch$ 31,168 million to cover simultaneous transactions of own portfolio.

 

ii)

In addition, the Company has issued a guarantee to CCLV Contraparte Central S.A. (formerly known as Cámara de Compensación) in cash, for a total Ch$ 3,000 million and additional guaranteed entered at the Electronical Stock Market for Ch$1,054 million as of March 31, 2014.

 

iii)

As of March 31, 2014, the following legal situations are in process:

 

-

Complaint procedures before the 27th Civil Court of Santiago, labeled “Nahum vs. Santander Investment S.A. Corredores de Bolsa” predecessor of Santander S.A. Corredores de Bolsa, File No. 16.703-2010 for Ch$200 million. Regarding its current state, the ruling granted the appeal and it is currently pending the review of the Court of Appeals of Santiago. There are no provisions recorded since they are not considered necessary given that the cause is in its preliminary stages.

 

-

Case of “Inverfam S.A. vs. Santander Investment S.A. Corredores de Bolsa” predecessor of Santander S.A. Corredores de Bolsa, followed in Santiago First Civil Court, File No. 32.543-2011; a claim for indemnity damages from the loss of some securities destined to Optimal Funds which were affected by the Madoff case, that amount to Ch$107 million, approximately. We are currently waiting for a conciliation meeting.

 

-

Case of “Bilbao vs. Santander Investment S.A. Corredores de Bolsa”, predecessor to Santander S.A. Corredores de Bolsa, followed in Santiago 20th Civil Court, File No. 15549-2012. As of March 2014, the period to show proofs has expired and probatory diligences are pending.

 

Santander Corredora de Seguros Limitada

 

i)

In accordance with Circular No. 1,160 of the Chilean Securities and Insurance Supervisor, the Company has an insurance policy in connection with its obligations as an intermediary in insurance contracts. The company purchased a guarantee policy No. 10023615, covering UF500 and professional liability policy No. 10023624 for its insurance brokers, covering UF 60.000; from the Seguros Generales Consorcio Nacional de Seguros S.A. Policies are valid from April 15, 2013 to Abril 14, 2014.

 

ii)

There are lawsuits for UF26,178.71; which corresponds mainly to goods given in leasing. Our lawyers have estimated a loss of Ch$106.3 million. The estimated loss amount was recorded as provisions.

 

 

NOTE 20

EQUITY

 

a)

Capital

 

As of March 31, 2014 and December 31, 2013, the Bank had 188,446,126,794 shares outstanding, all of which are subscribed for and paid in full. All shares have the same rights, and have no preferences or restrictions.

 

The activity with respect to shares during 2014 y 2013 was as follows:

 

		SHARES
		As of March 31, 2014				As of December 31, 2013
Issued as of January 1			188,446,126,794				188,446,126,794
Issuance of paid shares			-				-
Issuance of outstanding shares			-				-
Stock options exercised			-				-
Issued as period end			188,446,126,794				188,446,126,794

  

As of March 31, 2014 and December 31, 2013 the Bank does not have any of its own shares in treasury, nor do any of the consolidated companies.

 

As of March 31, 2014 the shareholder composition is as follows:

 

Corporate Name or Shareholder`s Name		Shares				ADRs (*)				Total				% of equity holding
Teatinos Siglo XXI Inversiones Limitada			59,770,481,573				-				59,770,481,573				31.72
Santander Chile Holding S.A.			66,822,519,695				-				66,822,519,695				35.46
J.P. Morgan Chase Bank			-				30,760,245,671				30,760,245,671				16.32
Banks on behalf of third parties			-				11,283,336,682				11,283,336,682				5.99
AFP on behalf of third parties			-				10,561,062,175				10,561,062,175				5.60
Other minority holders			3,651,477,491				5,597,003,507				9,248,480,998				4.91
Total											188,446,126,794				100.00

(*) American Depository Receipts (ADR) are certificates issued by a U.S. commercial bank to be traded on the U.S. securities markets

 

 

NOTE 20

EQUITY, continued

 

As of December 31, 2013 the shareholder composition is as follows:

 

Corporate Name or Shareholder`s Name		Shares				ADRs (*)				Total				% of equity holding
Teatinos Siglo XXI Inversiones Limitada			59,770,481,573				-				59,770,481,573				31.72
Santander Chile Holding S.A.			66,822,519,695				-				66,822,519,695				35.46
J.P. Morgan Chase Bank			-				30,087,328,471				30,087,328,471				15.97
Banks on behalf of third parties			12,264,223,820				-				12,264,223,820				6.15
AFP on behalf of third parties			10,554,397,845				-				10,554,397,845				5.59
Other minority holders			3,660,897,625				11,428,102,932				15,089,000,557				8.00
Total											188,446,126,794				100.00

(*) (*) American Depository Receipts (ADR) are certificates issued by a U.S. commercial bank to be traded on the U.S. securities markets

 

b)

Dividends

 

The distribution of dividends is detailed in the chart of the Consolidated Interim Statements of Changes in Equity of the period.

 

c)

Diluted earnings and basic earnings

 

As of March 31, 2014 and 2013, the composition of diluted earnings and basic earnings were as follows:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
a) Basic earnings per share
Total attributable to Bank`s shareholders			141,843				80,879
Weighted average number of outstanding shares			188,446,126,794				188,446,126,794
Basic earnings per share (in Ch$)			0.753				0.429
b) Diluted earnings per share
Total attributable to Bank`s shareholders			141,843				80,879
Weighted average number of outstanding shares			188,446,126,794				188,446,126,794
Assumed conversion of convertible debt			-				-
Adjusted number of shares			188,446,126,794				188,446,126,794
Diluted earnings per share (in Ch$)			0.753				0.429

 

As of March 31, 2013 and 2013, the Bank does not own instruments with dilutive effect.

 

 

NOTE 20

EQUITY, continued

 

d) Other comprehensive income from available for sale investments and cash flow hedges:

 

		As of March 31,				As of December 31,
		2014				2013
		MCh$				MCh$
Available for sale investments
Balances as of January 1,			840				(10,017	)
Gain (loss) on the re-measurement of available for sale investments, before tax			8,291				2,629
Reclassification adjustments on available for sale investments, before tax			90				8,228
Subtotals			8,381				10,857
Total			9,221				840
Cash flow hedges
Balances as of January 1,			(8,257	)			5,315
Gains (losses) on the re-measurement of cash flow hedges, before tax			(8,903	)			(15,089	)
Reclassification adjustments on cash flow hedges, before tax			375				1,517
Amounts removed from equity and included in carrying amount of non-financial asset (liability) which acquisition or incurrence was hedged as a highly probable transaction			-				-
Subtotals			(8,528	)			(13,572	)
Total			(16,785	)			(8,257	)
Other comprehensive income, before tax			(7,564	)			(7,417	)
Income tax related to other comprehensive income components
Income tax relating to available for sale investments			(1,844	)			(168	)
Income tax relating to cash flow hedges			3,357				1,651
Total			1,513				1,483
Other comprehensive income, net of tax			(6,051	)			(5,934	)
Attributable to:
Bank shareholders (Equity holders of the Bank)			(6,069	)			(5,964	)
Non-controlling interest			18				30

 

The Bank expects that the results included in "Other comprehensive income" will be reclassified to profit or loss when the specific conditions have been met.

 

 

NOTE 21

CAPITAL REQUIREMENTS (BASEL)

 

Pursuant to the Chilean General Banking Law, the Bank must maintain a minimum ratio of effective equity to risk-weighted consolidated assets of 8% net of required allowances, and a minimum ratio of basic equity to consolidated total assets of 3%, net of required allowances. However, as a result of the Bank’s merger in 2002, the SBIF has determined that the Bank’s combined effective equity cannot be lower than 11% of its risk-weighted assets. Effective net equity is defined for these purposes as basic equity (capital and reserves) plus subordinated bonds, up to a maximum of 50% of basic equity.

 

Assets are allocated to different risk categories, each of which is assigned a weighting percentage according to the amount of capital required to be held for each type of asset. For example, cash, deposits in banks and financial instruments issued by the Central Bank of Chile have a 0% risk weighting, meaning that it is not necessary to hold equity to back these assets according to current regulations. Property, plant and equipment have a 100% risk weighting, meaning that a minimum capital equivalent to 11% of these assets must be held. All derivatives traded off the exchanges are also assigned a risk weighting, using a conversion factor applied to their notional values, to determine the amount of their exposure to credit risk. Off-balance-sheet contingent credits are also included for weighting purposes, as “Credit equivalents.”

 

According to Chapter 12-1 of the SBIF’s Recopilación Actualizada de Normas [Updated Compilation of Rules] effective January 2010, the SBIF changed existing regulation with the enforcement of Chapter B-3 from the Compendium of Accounting Standards, with changed the risk exposure of contingent allocations from 100% exposition to the following:

 

Type of contingent loan		Exposure
a) Pledges and other commercial commitments			100	%
b) Foreign letters of credit confirmed			20	%
c) Letters of credit issued			20	%
d) Guarantees			50	%
e) Interbank guarantee letters			100	%
f) Available lines of credit			50	%
g) Other loan commitments:
- Higher education loans Law No. 20,027			15	%
- Other			100	%
h) Other contingent loans			100	%

  

 

NOTE 21

CAPITAL REQUIREMENTS (BASEL), Continued

 

The levels of basic capital and effective net equity as of March 31, 2014 and 2013, and December 31, 2014 and 2013, are as follows:

 

		Consolidated assets								Risk-weighted assets
		As of March 31,				As of December 31,				As of March 31,				As of December 31,
		2014				2013				2014				2013
		MCh$				MCh$				MCh$				MCh$
Balance-sheet assets (net of allowances)
Cash and deposits in banks			1,344,228				1,571,810				-				-
Cash in process of collection			740,648				604,077				176,367				66,672
Trading investments			424,728				287,567				52,990				40,924
Investments under resale agreements			-				17,469				-				3,494
Financial derivative contracts (*)			1,284,534				1,008,026				1,071,466				862,810
Interbank loans, net			4,256				125,395				851				25,079
Loans and accounts receivables from customers, net			20,829,418				20,327,021				18,512,415				18,071,792
Available for sale investments			1,844,534				1,700,993				261,705				238,835
Investments in associates and other companies			9,965				9,681				9,965				9,681
Intangible assets			61,885				66,703				61,885				66,703
Property, plant, and equipment			177,061				180,215				177,061				180,215
Current taxes			2,092				1,643				209				164
Deferred taxes			191,472				230,215				19,147				23,022
Other assets			336,804				400,025				336,804				346,533
Off-balance-sheet assets
Contingent loans			3,377,245				3,436,773				1,968,168				2,013,057
Total			30,628,870				29,967,613				22,649,033				21,948,981

 

(*)

“Financial derivative contracts” are presented at their “Credit Equivalent Risk” value as established in Chapter 12-1 of the Recopilación Actualizada de Normas – RAN – (Updated Compilation of Rules) issued by the SBIF.

 

The levels of basic capital and effective net equity as the close of each period are as follows:

 

										Ratio
		As of March 31,				As of December 31,				As of March 31,				As of December 31,
		2014				2013				2014				2013
		MCh$				MCh$				%				%
Basic capital			2,424,863				2,325,678				7.92				7.76
Effective net equity			3,139,873				3,033,741				13.86				13.82

 

 

NOTE 22

NON-CONTROLLING INTEREST

 

a)

This item reflects the net amount of the subsidiaries net equity attributable to equity instruments which do not belong to the Bank either directly or indirectly, including the part that has been attributed to income for the period.

 

The non-controlling interest in the subsidiaries and the entities controlled through other considerations is summarized as follows:

 

														Other comprehensive income
		Non- controlling				Equity				Income				Available for sale investments				Deferred tax				Total other comprehensive income				Comprehensive income
As of March 31, 2014		%				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Subsidiaries:
Santander Agente de Valores Limitada			0.97				494				23				-				-				-				23
Santander S.A. Sociedad Securitizadora			0.36				2				-				-				-				-				-
Santander S.A. Corredores de Bolsa			49.00				19,985				284				(16	)			3				(13	)			271
Santander Corredora de Seguros Limitada			0.25				150				(1	)			-				-				-				(1	)
Subtotals							20,631				306				(16	)			3				(13	)			293
Entities controlled through other considerations:
Bansa Santander S.A.			100.00				3,283				(151	)			-				-				-				(151	)
Santander Gestión de Recaudación y Cobranzas Limitada			100.00				122				(153	)			-				-				-				(153	)
Multinegocios S.A			100.00				530				53				-				-				-				53
Servicios Administrativos y Financieros Limitada			100.00				1,755				73				-				-				-				73
Servicios de Cobranzas Fiscalex Limitada			100.00				751				119				-				-				-				119
Multiservicios de Negocios Limitada			100.00				1,775				97				-				-				-				97
Subtotals							8,216				38				-				-				-				38
Total							28,847				344				(16	)			3				(13	)			331

 

 

NOTE 22

NON-CONTROLLING INTEREST, continued

 

														Other comprehensive income
		Non- controlling				Equity				Income				Available for sale investments				Deferred tax				Total other comprehensive income				Comprehensive income
As of March 31,2013		%				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Subsidiaries:
Santander Agente de Valores Limitada			0.97				676				21				-				-				-				21
Santander S.A. Sociedad Securitizadora			0.36				3				-				-				-				-				-
Santander S.A. Corredores de Bolsa			49.00				26,144				498				13				(3	)			10				508
Santander Asset Management S.A.    Administradora General de Fondos			0.02				11				1				-				-				-				1
Santander Corredora de Seguros Limitada			0.25				150				1				-				-				-				1
Subtotals							26,984				521				13				(3	)			10				531
Entities controlled through other considerations:
Bansa Santander S.A.			100.00				2,448				322				-				-				-				322
Santander Gestión de Recaudación y Cobranzas Limitada			100.00				1,998				(507	)			-				-				-				507
Multinegocios S.A			100.00				299				55				-				-				-				55
Servicios Administrativos y Financieros Limitada			100.00				1,473				62				-				-				-				62
Servicios de Cobranzas Fiscalex Limitada			100.00				240				24				-				-				-				24
Multiservicios de Negocios Limitada			100.00				1,388				89				-				-				-				89
Subtotals							7,848				45				-				-				-				45
Total							34,830				566				13				(3	)			10				576

 

 

NOTE 22

NON-CONTROLLING INTEREST, continued

 

b)

The overview of the financial information of the subsidiaries included in the consolidation of the Bank that possess non-controlling interests is as follows, which does not include consolidation or homogenization adjustments:

 

		As of March 31,																As of December 31,
		2014																2013
														Net																Net
		Assets				Liabilities				Capital				Income				Assets				Liabilities				Capital				Income
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Santander Corredora de Seguros Limitada			67,978				8,010				60,245				(277	)			67,956				8,484				59,012				460
Santander S.A. Corredores de Bolsa			106,284				65,585				40,119				581				110,917				70,799				36,735				3,383
Santander Agente de Valores Limitada			158,809				107,885				48,558				2,366				194,812				146,255				39,581				8,976
Santander S.A. Sociedad Securitizadora			686				66				651				(30	)			725				74				764				(113	)
Santander Gestión de Recaudación y Cobranzas Ltda.			3,251				3,129				275				(153	)			4,978				4,703				2,505				(2,230	)
Multinegocios S.A.			1,341				811				477				53				1,441				963				244				234
Servicios Administrativos y Financieros Ltda.			2,339				585				1,686				68				2,412				725				1,411				276
Servicio de Cobranza Fixcalex Ltda.			2,383				1,632				632				119				4,008				3,376				216				416
Multiservicios de Negocios Ltda.			3,140				1,365				1,679				97				3,049				1,371				1,299				379
Bansa Santander S.A.			28,410				25,127				3,435				(51	)			28,490				25,055				2,128				1,307
Total			374,621				214,195				157,757				2,673				418,788				261,805				143,895				13,088

(*) Santander Asset Management S.A. Administradora General de Fondos was sold in December 2013. See Note 2 “Significant events”.

 

 

NOTE 23

INTEREST INCOME AND INFLAXION-INDEXING ADJUSTMENTS

 

This item refers to interest earned in the period from the financial assets whose return, whether implicitly or explicitly, is determined by applying the effective interest rate method, regardless of the value at fair value, as well as the reclassifications as a consequence of hedge accounting.

 

a)

For the periods ended March 31, 2014 and 2013, the composition of income from interest and inflation-indexing adjustments, not including income from hedge accounting, is as follows:

 

		As of March 31,
		2014																2013
		Interest				Inflation- indexing adjustments				Total				Interest				Interest				Inflation- indexing adjustments				Prepaid  fees				Total
Items		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Resale agreements			347				-				-				347				377				-				-				377
Interbank loans			7				-				-				7				11				-				-				11
Commercial loans			180,518				46,339				1,399				228,256				178,218				4,713				1,169				184,100
Mortgage loans			59,464				70,792				4,154				134,410				56,779				6,763				2,875				66,417
Consumer loans			149,527				1,192				660				151,379				150,717				205				646				151,568
Investment instruments			17,638				6,791				-				24,429				22,817				68				-				22,885
Other interest income			2,278				117				-				2,395				1,012				(957	)			-				55
Interest income			409,779				125,231				6,213				541,223				409,931				10,792				4,690				425,413

 

b)

As stated in letter i) of Note 01, suspended interests and adjustments corresponding to operations with default equal or greater than 90 days, are recorded in off-balance sheet accounts (out of the Consolidated Interim Statements of Financial Position), as long as these are not effectively collected.

 

For the periods ended March 31, 2013 and 2014, the composition of suspended interest and adjustments income is as follows:

 

		As of March 31,
		2014												2013
		Interest				Inflation- indexing adjustments				Total				Interest				Inflation- indexing adjustments				Total
Items		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Commercial loans			17,416				5,605				23,021				17,455				3,565				21,020
Mortgage loans			4,009				5,686				9,695				4,206				4,407				8,613
Consumer loans			5,271				787				6,058				7,602				831				8,433
Total			26,696				12,078				38,774				29,263				8,803				38,066

 

 

NOTE 23

INTEREST INCOME AND INFLAXION-INDEXING ADJUSTMENTS, continued

 

c)

For the periods ended March 31, 2014 and 2013, the composition of expense from interest and inflation-indexing adjustments, excluding expense from hedge accounting is as follows:

 

		As of March 31,
		2014												2013
		Interest				Inflation- indexing adjustments				Total				Interest				Inflation- indexing adjustments				Total
Items		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Demand deposits			(1,624	)			(441	)			(2,065	)			(1,511	)			(33	)			(1,544	)
Repurchase agreements			(1,898	)			-				(1,898	)			(2,376	)			-				(2,376	)
Time deposits and liabilities			(93,882	)			(14,374	)			(108,256				(110,351	)			(1,159	)			(111,510	)
Interbank borrowings			(4,670	)			(2	)			(4,672	)			(5,884	)			-				(5,884	)
Issued debt instruments			(44,239	)			(34,059	)			(78,298	)			(41,358	)			(3,141	)			(44,499	)
Other financial liabilities			(774	)			(404	)			(1,178	)			(1,183	)			(42	)			(1,225	)
Other interest expense			(628	)			(3,331	)			(3,959	)			(575	)			(16	)			(591	)
Interest expense total			(147,715	)			(52,611	)			(200,326	)			(163,238	)			(4,391	)			(167,629	)

 

d)

For the periods ended March 31, 2014 and 2013, the overview of interest and inflation-indexing adjustments is as follows:

 

		As of March 31,
		2014				2013
Items		MCh$				MCh$
Interest income			541,223				425,413
Interest expense			(200,326	)			(167,629	)
Interest income			340,897				257,784
Income from hedge accounting, net			(27,404	)			(11,303	)
Total net interest income			313,493				246,481

 

 

NOTE 24

FEES AND COMMISSIONS

 

This item includes the amount of fees earned and paid during the year, except for those which are an integral part of the financial instrument`s effective interest rate:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
Fee and commission income
Fees and commissions for lines of credits and overdrafts			1,722				1,991
Fees and commissions for guarantees and letters of credit			7,941				7,408
Fees and commissions for card services			36,046				32,650
Fees and commissions for management of accounts			7,106				7,128
Fees and commissions for collections and payments			10,305				11,333
Fees and commissions for intermediation and management of  securities			2,291				2,987
Fees and commissions for investments in mutual funds or others (*)			-				8,390
Insurance brokerage fees			8,117				7,288
Office banking			4,167				3,489
Other fees earned			12,986				4,876
Total			90,681				87,540

(*) Santander Asset Management S.A. Administradora General de Fondos was sold in December 2013.

  

		As of March 31,
		2014				2013
		MCh$				MCh$
Fee and commission expense
Compensation for card operation			(25,986	)			(21,004	)
Fees and commissions for securities transactions			(275	)			(1,191	)
Office banking and other fees			(8,656	)			(4,724	)
Total			(34,917	)			(26,919	)
Net fees and commissions income			55,764				60,621

 

 

NOTE 25

PROFIT AND LOSS FROM FINANCIAL OPERATIONS

 

This item includes adjustments for changes in financial instruments, except for interest attributable to the application of the effective interest rate method for adjustments to asset values, as well as the income earned in purchases and sales of financial instruments.

 

For the periods ended March 31, 2014 and 2013, the detail of income from financial operations is as follows:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
Profit and loss from financial operations
Trading derivatives			12,860				(27,145	)
Trading investments			10,974				9,241
Sale of loans and accounts receivables from   customers
Current portfolio			-				(107	)
Charged-off portfolio			30				82
Available for sale investments			566				1,073
Repurchase of issued bonds			5,200				-
Other profit and loss from financial operations			(88	)			(17	)
Total			29,542				(16,873	)

 

NOTE 26

NET FOREIGN EXCHANGE GAIN (LOSS)

 

This item includes the income earned from foreign currency trading, differences arising from converting monetary items in a foreign currency to the functional currency, and those generated by non-monetary assets in a foreign currency at the time of their sale.

 

For the periods ended March 31, 2014 and 2013, the detail of foreign exchange income is as follows:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
Net foreign exchange gain (loss)
Net profit (loss) from currency exchange differences			(130,800	)			63,918
Hedging derivatives:			129,506				(23,770	)
Income from inflation-indexed assets in foreign currency			5,170				(1,119	)
Income from inflation-indexed liabilities in foreign currency			(446	)			106
Total			3,430				39,135

 

 

NOTE 27

PROVISIONS FOR LOAN LOSSES

 

a)

The 2014 and 2013 activity within income for provisions for loan losses is as follows:

 

						Loans and accounts receivable from customers
		Interbank loans				Commercial loans								Mortgage loans				Consumer loans				Contingent loans
		Individual				Individual				Group				Group				Group				Individual				Group				Total
As of March 31, 2014		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Charged-off loans, net of provisions:			-				(2,590	)			(15,450	)			(2,009	)			(21,875	)			-				-				(41,924	)
Provisions established			-				(18,058	)			(9,627	)			(2,830	)			(33,340	)			(590	)			(704	)			(65,149	)
Total provisions and charge-offs			-				(20,648	)			(25,077	)			(4,839	)			(55,215	)			(590	)			(704	)			(107,073	)
Provisions released			45				2,554				3,484				868				1,713				1,918				836				11,418
Recovery of loans previously charge-off			-				741				2,337				1,243				10,100				-				-				14,421
Net charge to income			45				(17,353	)			(19,256	)			(2,728	)			(43,402	)			1,328				132				(81,234	)

 

						Loans and accounts receivable from customers
		Interbank loans				Commercial loans								Mortgage loans				Consumer loans				Contingent loans
		Individual				Individual				Group				Group				Group				Individual				Group				Total
As of March 31, 2013		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Charged-off loans, net of provisions:			-				(1,067	)			(13,480	)			(4,198	)			(32,154	)			-				-				(50,899	)
Provisions established			(50	)			(12,911	)			(9,859	)			(5,947	)			(39,930	)			(1,879	)			(338	)			(70,914	)
Total provisions and charge-offs			(50	)			(13,978	)			(23,339	)			(10,145	)			(72,084	)			(1,879	)			(338	)			(121,813	)
Provisions released			16				5,400				2,021				2,258				6,575				330				1,804				18,404
Recovery of loans previously charge-off			-				594				2,025				966				6,966				-				-				10,551
Net charge to income			(34	)			(7,984	)			(19,293	)			(6,921	)			(58,543	)			(1,549	)			1,466				(92,858	)

 

 

NOTE 27

PROVISIONS FOR LOAN LOSSES, continued

 

b) Charged-off, net of provisions:

 

		Loans and accounts receivable from customers
		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
As of March 31, 2014		MCh$				MCh$				MCh$				MCh$				MCh$
Charge-off loans			8,705				20,147				2,610				47,622				79,084
Provisions used			(6,115	)			(4,697	)			(601	)			(25,747	)			(37,160	)
Charged-off loans, net of provisions			2,590				15,450				2,009				21,875				41,924

 

		Loans and accounts receivables from customers
		Commercial loans								Mortgage loans				Consumer loans
		Individual				Group				Group				Group				Total
As of March 31, 2014		MCh$				MCh$				MCh$				MCh$				MCh$
Charge-off loans			2,460				18,379				5,116				70,021				95,976
Provisions used			(1,393	)			(4,899	)			(918	)			(37,867	)			(45,077	)
Charged-off loans, net of provisions			1,067				13,480				4,198				32,154				50,899

 

 

NOTE 28

PERSONNEL SALARIES AND EXPENSES

 

a)

Composition of personnel salaries and expenses:

 

		As of March 31, 2014
		2014				2013
		MCh$				MCh$
Personnel compensation			45,098				43,886
Bonuses or gratifications			17,944				16,421
Stock-based benefits			165				54
Senior compensation			2,029				2,363
Pension plans			193				162
Training expenses			533				543
Day care and kindergarten			729				655
Health funds			878				800
Welfare fund			133				20
Other personnel expenses			6,965				6,629
Total			74,667				71,533

 

 

NOTE 29

ADMINISTRATIVE EXPENSES

 

For the periods ended March 31, 2014 and 2013, the composition of the item is as follows:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
General administrative expenses			29,967				28,804
Maintenance and repair of property, plant and equipment			3,808				4,086
Office lease			6,643				6,726
Equipment lease			26				25
Insurance payments			812				811
Office supplies			1,132				900
IT and communication expenses			7,634				6,484
Lighting, heating, and other utilities			1,044				970
Security and valuables transport services			4,182				4,088
Representation and personnel travel expenses			1,095				1,295
Judicial and notarial expenses			480				354
Fees for technical reports and auditing			1,439				1,566
Other general administrative expenses			1,672				1,499
Outsourced services			12,931				10,943
Data processing			7,704				6,724
Products sale			543				319
Archive service			1,076				711
Valuation service			440				329
Outsourcing			1,529				1,422
Other			1,639				1,438
Board expenses			303				272
Marketing expenses			3,618				3,233
Taxes, payroll taxes, and contributions			2,608				2,608
Real estate taxes			304				372
Patents			418				477
Other taxes			11				1
Contributions to SBIF			1,875				1,758
Total			49,427				45,860

 

 

NOTE 30

DEPRECIATION, AMORTIZATION, AND IMPAIRMENT

 

a)

The values of depreciation, amortization and impairment charges during the first quarter 2014 and 2013 are detailed below:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
Depreciation and amortization
Depreciation of property, plant, and equipment			(5,934	)			(5,325	)
Amortization of intangible assets			(7,533	)			(10,328	)
Total depreciation and amortization			(13,467	)			(15,653	)
Impairment of property, plant, and equipment			(13	)			(27	)
Total			(13,480	)			(15,680	)

 

As of March 31, 2014 and 2013, property, plant and equipment totals Ch$13 million, mainly due to damages to ATMs (Ch$27 million as of March 2013)

 

b)

The reconciliation between the book values and balances as of March 31, 2013 and 2013 is as follows:

 

		Depreciation and amortization
						2014
		Property, plant, and equipment				Intangible assets				Total
		MCh$				MCh$				MCh$
Balances as of January 1, 2014			(127,448	)			(185,275	)			(312,723	)
Depreciation and amortization charges in the period			(5,934	)			(7,533	)			(13,467	)
Sales and disposals in the period			6				-				6
Other			-				-				-
Balances as of March 31, 2014			(133,376	)			(192,808	)			(326,184	)

 

		Depreciation and amortization
		2013
		Property, plant, and equipment				Intangible assets				Total
		MCh$				MCh$				MCh$
Balances as of January 1, 2013			(105,150	)			(146,653	)			(251,803	)
Depreciation and amortization charges in the period			(5,325	)			(10,328	)			(15,653	)
Sales and disposals in the period			1				-				1
Other			-				-				-
Balances as of March 31, 2013			(110,474	)			(156,981	)			(267,455	)

 

 

NOTE 31

OTHER OPERATING INCOME AND EXPENSES

 

a)

Other operating expenses are detailed as follows:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
Income from assets received in lieu of payment
Income from sale of assets received in lieu of payment			609				1,544
Recovery of charge-offs and income from assets received in lieu of payment			4,080				2,713
Subtotals			4,689				4,257
Other income
Leases			180				26
Income from sale of property, plant and equipment			87				109
Recovery of provisions for contingencies			226				-
Compensation from insurance companies due to damages			240				73
Other			88				104
Subtotals			821				312
Total			5,510				4,569

 

b)

Other operating expenses are detailed as follows:

 

		As of December 31,
		2014				2013
		MCh$				MCh$
Allowances and expenses for assets received in lieu of payment
Charge-offs of assets received in lieu of payment			957				1,769
Provisions on assets received in lieu of payment			1,518				799
Expenses for maintenance of assets received in lieu of payment			666				597
Subtotals			3,141				3,165
Credit card expenses			653				464
Customer services			2,480				2,009
Other expenses
Operating charge-offs			2,049				1,228
Life insurance and general product insurance policies			2,222				1,705
Additional tax on expenses paid overseas			757				690
Provisions for contingencies			4,419				1,744
Expense for adopting chip technology on cards			244				223
Other			4,914				1,574
Subtotals			14,605				7,164
Total			20,879				12,802

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES

 

In addition to Affiliates and associated entities, the Bank’s “related parties” include its “key personnel” from the executive staff (members of the Bank’s Board and the Managers of Banco Santander Chile and its Affiliates, together with their close relatives), as well as the entities over which the key personnel could exercise significant influence or control.

 

The Bank also considers the companies that are part of the Santander Group worldwide as related parties, given that all of them have a common parent, i.e., Banco Santander S.A. (located in Spain).

 

Article 89 of the Ley de Sociedades Anónimas (Public Companies Act), which is also applicable to banks, provides that any transaction with a related party must be made under equitable conditions similar to those that customarily prevail in the market.

 

Moreover, Article 84 of the Ley General de Bancos (General Banking Act) establishes limits for loans that can be granted to related parties and prohibits lending to the Bank’s directors, managers, or representatives.

 

Transactions between the Bank and its related parties are specified below. To facilitate comprehension, we have divided the information into four categories:

 

Santander Group Companies

 

This category includes all the companies that are controlled by the Santander Group around the world, and hence, it also includes the companies over which the Bank exercises any degree of control (Affiliates and special-purpose entities).

 

Associated companies

 

This category includes the entities over which the Bank, in accordance with section b) of Note 1 to these Financial Statements, exercises a significant degree of influence and which generally belong to the group of entities known as “business support companies.”

 

Key personnel

 

This category includes members of the Bank’s Board and the managers of Banco Santander Chile and its Affiliates, together with their close relatives.

 

Other

 

This category encompasses the related parties that are not included in the groups identified above and which are, in general, entities over which the key personnel could exercise significant influence or control.

 

The terms for transactions with related parties are equivalent to those which prevail in transactions made under market conditions or to which the corresponding considerations in kind have been attributed.

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES, continued

 

a)

Loans to related parties

 

Below are loans and receivables, and contingent loans, corresponding to related entities:

 

		As of March 31,																As of December 31,
		2014																2013
		Companies of the Group				Associated Companies				Key personnel				Other				Companies of the Group				Associated Companies				Key personnel				Other
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Loans and accounts receivables:
Commercial loans			51,255				630				3,489				54,614				47,305				618				4,022				51,141
Mortgage loans			-				-				16,710				-				-				-				15,561				-
Consumer loans			-				-				1,951				-				-				-				2,061				-
Loans and account receivables:			51,255				630				22,150				54,614				47,305				618				21,644				51,141
Allowance for loan losses			(151	)			(3	)			(41	)			(10	)			(238	)			(3	)			(44	)			(6	)
Net loans			51,104				627				22,109				54,604				47,067				615				21,600				51,135
Guarantees			181,110				-				20,189				2,409				124,420				-				19,237				2,326
Contingent loans
Personal guarantees			-				-				-				-				-				-				-				-
Letters of credit			25,903				-				-				-				30,714				-				-				-
Guarantees			187,751				-				-				12,497				172,274				-				-				9,989
Contingent loans			213,654				-				-				12,497				202,988				-				-				9,989
Allowance for contingent loans			(5	)			-				-				(5	)			(22	)			-				-				(4	)
Net contingent loans			213,649				-				-				12,492				202,966				-				-				9,985

 

The activity of loans to related parties during the years 2014 and 2013 is show below:

 

		As of March 31,																As of December 31,
		2014																2013
		Companies of the Group				Associated Companies				Key personnel				Other				Companies of the Group				Associated Companies				Key personnel				Other
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Balances as of January 1,			250,293				618				21,644				61,130				107,384				668				19,512				59,166
Loans granted			60,497				16				2,006				6,308				161,763				377				7,313				14,858
Loans payments			(45,881	)			(4	)			(1,500	)			(327	)			(18,854	)			(427	)			(5,181	)			(12,894	)
Total			264,909				630				22,150				67,111				250,293				618				21,644				61,130

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES, continued

 

b)

Assets and liabilities with related parties

 

		As of March 31,																As of December 31,
		2014																2013
		Companies of the Group				Associated Companies				Key personnel				Other				Companies of the Group				Associated Companies				Key personnel				Other
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Assets
Cash and deposits in banks			8,190				-				-				-				5,306				-				-				-
Trading investments			-				-				-				-				-				-				-				-
Investments under resale agreements			-				-				-				-				-				-				-				-
Finance derivative contracts			836,729				-				-				-				557,026				-				-				-
Available for sale investments			-				-				-				-				-				-				-				-
Other assets			2,641				-				-				-				2,460				-				-				-
Liabilities
Deposits and other demand liabilities			59,012				15,230				3,189				6,210				58,030				10,406				2,783				23,300
Obligations under repurchase agreements			20,272				-				-				-				59,703				-				-				-
Time deposits and other time liabilities			5,641				94				3,856				110,166				54,212				299				3,774				156,977
Finance derivative contracts			831,002				-				-				-				537,162				-				-				-
Issued debs instruments			225,490				-				-				-				96,872				-				-				-
Other financial liabilities			6,561				-				-				-				3,912				-				-				-
Other liabilities			624				-				-				-				462				-				-				-

 

c)

Income (expenses) recorded due to transactions with related parties

 

		As of March 31,
		2014																2013
		Companies of the Group				Associated Companies				Key personnel				Other				Companies of the Group				Associated Companies				Key personnel				Other
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Income (expense) recorded
Interest income and expenses			(113	)			10				361				(1,387	)			(2,240	)			12				189				(782	)
Fee and commission income and expenses			6,419				17				32				51				-				15				38				52
Net profit (loss) from financial operations and net foreign exchange gain (loss) (*)			(35,010	)			-				18				(1,724	)			104,693				-				(2	)			661
Other operating income and expenses			282				-				-				-				175				-				-				-
Key personnel compensation and expenses			-				-				(7,928	)			-				-				-				(7,727	)			-
Administrative and other expenses			(7,749	)			(8,418	)			-				-				(7,205	)			(6,712	)			-				-
Total			(36,171	)			(8,391	)			(7,517	)			(3,060	)			95,423				(6,685	)			(7,502	)			(69	)

 

(*)

Primarily relates to derivative contracts used to financially cover exchange risk of assets and liabilities that cover positions of the Bank and its subsidiaries.

 

 

NOTE 32

TRANSACTIONS WITH RELATED PARTIES, continued

 

d)

Payment to Board members and key management personnel

 

The compensation received by key management personnel, including Board members and all the executives holding Manager positions, show in the “Personnel salaries and expenses” and/or “Administrative expenses” items of the Consolidated Interim Statements of Income, corresponds to the following categories:

 

		As of March 31,
		2014				2013
		MCh$				MCh$
Personnel compensation			4,139				4,317
Board member`s salaries and expenses			276				269
Bonuses or gratifications			2,867				2,733
Compensation in stock			165				54
Training expenses			10				10
Seniority compensation			118				3
Health funds			69				73
Other personnel expenses			91				106
Pension Plans			193				162
Total			7,928				7,727

 

e)

Composition of key personnel

 

As of March 31, 2014 and 2013, the composition of the Bank`s key personnel is as follows:

 

Cargos		No. of executives
		As of March 31,				As of December 31,
		2014				2013
Director			13				12
Division manager			17				16
Department manager			78				80
Manager			58				60
Total key personnel			166				168

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The measurement of fair value assumes the transaction to sale an asset or the transference of the liability happens within the main asset or liability market, or the most advantageous market for the asset or liability.

 

For financial instruments with no available market prices, fair values have been estimated by using recent transactions in analogous instruments, and in the absence thereof, the present values or other valuation techniques based on mathematical valuation models sufficiently accepted by the international financial community. In the use of these models, consideration is given to the specific particularities of the asset or liability to be valued, and especially to the different kinds of risks associated with the asset or liability.

 

Measurement of fair value and hierarchy

 

IFRS 13 - Fair Value Measurement, provides a hierarchy of reasonable values which separates the inputs and/or valuation technique assumptions used to measure the fair value of financial instruments. The hierarchy reflects the significance of the inputs used in making the measurement. The three levels of the hierarchy of fair values are the following:

 

• Level 1: the inputs are quoted prices (unadjusted) on active markets for identical assets and liabilities that the Bank can access on the measurement date.

 

• Level 2: inputs other than the quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

• Level 3: inputs are unobservable inputs for the asset or liability i.e. they are not based on observable market data.

 

The hierarchy level within which the fair value measurement is categorized in its entirety is determined based on the lowest level of input that is significant to the fair value measurement in its entirety.

 

The best evidence of a financial instrument’s fair value at the initial time is the transaction price (Level 1).

 

In cases where quoted market prices cannot be observed, Management makes its best estimate of the price that the market would set using its own internal models which in most cases use data based on observable market parameters as a significant input (Level 2) and, in very specific cases, significant inputs not observable in market data (Level 3). Various techniques are employed to make these estimates, including the extrapolation of observable market data.

 

Financial instruments at fair value and determined by quotations published in active markets (Level 1) include:

 

-

Chilean Government and Department of Treasury bonds

 

Instruments which cannot be 100% observable in the market are valued according to other inputs observable in the market (Level 2).

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following financial instruments are classified under Level 2:

 

Type of financial instrument		Model used in valuation		Description
· Mortgage and private bonds		Present Value of Cash Flows Model		Internal Rates of Return (“IRRs”) are provided by RiskAmerica, according to the following criterion:   If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given nemotechnic, the reported rate is the weighted average amount of the observed rates.   In the case there are no valid transactions for a given nemotechnic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on historical spread for the same item or similar ones.
· Time deposits		Present Value of Cash Flows Model		IRRs are provided by RiskAmerica, according to the following criterion: If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given nemotechnic, the reported rate is the weighted average amount of the observed rates. In the case there are no valid transactions for a given nemotechnic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on issuer curves.
· Constant Maturity Swaps (CMS), FX and Inflation Forward (Fwd) , Cross Currency Swaps (CCS), Interest Rate Swap (IRS)		Present Value of Cash Flows Model		IRRs are provided by ICAP, GFI, Tradition, and Bloomberg according to this criterion: With published market prices, a valuation curve is created by the bootstrapping method and is then used to value different derivative instruments.
· FX Options		Black-Scholes		Formula adjusted by the volatility smile (implicit volatility). Prices (volatility) are provided by BGC Partners, according to this criterion: With published market prices, a volatility surface is created by interpolation and then these volatilities are used to value options.

 

In limited occasions significant inputs not observable in market data are used (Level 3). To carry out this estimate, several techniques are used, including extrapolation of observable market data or a mix of observable data.

 

The following financial instruments are classified under Level 3:

 

Type of financial instrument		Model used in valuation		Description
· Caps/ Floors/ Swaptions		Black Normal Model for Cap/Floors and Swaptions		There is no observable input of implicit volatility.
· UF options		Black – Scholes		There is no observable input of implicit volatility.
· Cross currency swap with window		Hull-White		Hybrid HW model for rates and Brownian motion for FX There is no observable input of implicit volatility.
· CCS (special contracts)		Implicit Forward Rate Agreement (FRA)		Start Fwd unsupported by MUREX (platform) due to the UF forward estimate.
· Cross currency swap, Interest rate swap, Call money swap in Tasa Activa Bancaria (Active Bank Rate) TAB,		Present Value of Cash Flows Model		Validation obtained by using the interest curve and interpolating at flow maturities, but TAB is not a directly observable variable and is not correlated to any market input.
· Bonds (in our case, low liquidity bonds)		Present Value of Cash Flows Model		Valued by using similar instrument prices plus a charge/off rate by liquidity.

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following table presents the assets and liabilities that are measured at fair value on a recurrent basis, as of March 31, 2014 and December 31, 2013.

 

		Fair value measurement
		2014				Level 1				Level 2				Level 3
As of March 31,		MCh$				MCh$				MCh$				MCh$
Assets
Trading investments			424,728				404,491				20,237				-
Available for sale investments			1,844,534				746,944				1,096,721				986
Financial derivative contracts			1,940,836				-				1,892,381				48,455
Total			4,210,098				1,151,435				3,009,339				49,324
Liabilities
Financial derivative contracts			1,723,849				-				1,723,849				-
Total			1,723,849				-				1,723,849				-

 

		Fair value measurement
		2013				Level 1				Level 2				Level 3
As of December 31,		MCh$				MCh$				MCh$				MCh$
Assets
Trading investments			287,567				275,296				12,271				-
Available for sale investments			1,700,993				654,945				1,045,210				838
Financial derivative contracts			1,494,018				-				1,442,752				51,266
Total			3,482,578				930,241				2,500,233				52,104
Liabilities
Financial derivative contracts			1,300,109				-				1,298,690				1,419
Total			1,300,109				-				1,298,690				1,419

 

The following table presents the Bank`s activity for assets and liabilities measured at fair value on a recurrent basis using unobserved significant entries (Level3) as of March 31, 2014 and 2013:

 

		Assets				Liabilities
		MCh$				MCh$
Balances as of January 1, 2014			52,104				(1,419	)
Total realized and unrealized profits (losses)
Included in statement of income			(2,811	)			1,419
Included in other comprehensive income			-
Purchases, issuances, and loans (net)			31
Balances as of March 31, 2014			49,324				-
Total profits or losses included in comprehensive income for 2014 that are attributable to change in unrealized profit (losses) related to assets or liabilities as March 31, 2014			(2,780	)			1,419

 

		Assets				Liabilities
		MCh$				MCh$
Balances as of January 1, 2013			63,149				(1,106	)
Total realized and unrealized profits (losses)
Included in statement of income			(4,788	)			(197	)
Included in other comprehensive income			(128	)			-
Purchases, issuances, and loans (net)			-				-
Balances as of March 31, 2013			58,233				(1,303	)
Total profits or losses included in comprehensive income for 2013 that are attributable to change in unrealized profit (losses) related to assets or liabilities as March 31, 2013			(4,916	)			(197	)

 

 

NOTE 33

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The realized and unrealized profits (losses) included in comprehensive income for 2013 and 2012, in the assets and liabilities measured at fair value on a recurrent basis through unobservable market data (Level 3) are recorded in the Consolidated Interim Statement of Comprehensive Income in the associate line item.

 

The potential effect as of March 31, 2014 and 2013 on the valuation of assets and liabilities valued at fair value on a recurrent basis through unobservable significant entries (level 3), generated by changes in the principal assumptions if other reasonably possible assumptions that are less or more favorable were used, is not considered by the Bank to be significant.

 

The following sheet shows the financial instruments subject to offsetting according to IAS 32:

  

		As of March 31, 2014
		Linked financial instruments subject to offsetting												Linked financial instruments not subject to offsetting												Other financial instruments
Financial instrument		Gross value of financial  assets				Gross value of financial liabilities compensated on the balance sheet				Net amount ("+" or "-") of financial assets presented on the balance sheet				Financial instruments- Assets				Financial instruments- Liabilities				Net amount				Assets				Liabilities				Net amount
		MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$				MCh$
Financial derivative contracts			-				-				-				1,733,982				1,619,117				114,865				206,854				104,732				102,122
Repurchase agreements			-				-				-				-				-				-				-				193,787				(193,787	)
Total			-				-				-				1,733,982				1,619,117				114,865				206,854				298,519				(91,665	)

 

NOTE 34

SUBSEQUENT EVENTS

 

During April 2014, the Bank has issued the following bonds:

-

USD 500,000,000 with a floating rate (libor 3m + 90 bp) to 3 years.

-

JPY 27,300,000,000,000. This bond was structured such as a multitranche issuance with three difference maturities.

 

Between April 1, 2014 and the date on which these Consolidated Interim Financial Statements were issued (April 30), no other events have occurred which could significantly affect their interpretation.

 

FELIPE CONTRERAS FAJARDO Gerente de Contabilidad

CLAUDIO MELANDRI HINOJOSA Gerente General