UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F
(Mark One)
 
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
 
EXCHANGE ACT OF 1934
OR
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
 
For the fiscal year ended December 31, 2014
OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
Commission file number:  1-14554
 
BANCO SANTANDER-CHILE
(d/b/a Santander, Banco Santander, Banco Santander Santiago, and Santander Santiago)
(Exact name of Registrant as specified in its charter)
 
SANTANDER-CHILE BANK
(d/b/a Santander, Banco Santander, Santander Santiago Bank, and Santander Santiago)
(Translation of Registrant’s name into English)
 
Chile
(Jurisdiction of incorporation or organization)
 
Bandera 140
Santiago, Chile
Telephone: 011-562-320-2000
(Address of principal executive offices)
 
Robert Moreno Heimlich
Tel: 562-2320-8284, Fax: 562-696-1679, email:rmorenoh@santander.cl
Bandera 140, 19th Floor, Santiago, Chile
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
American Depositary Shares (“ADS”), each representing the right to receive 400 Shares of Common Stock without par value
New York Stock Exchange
Shares of Common Stock, without par value*
New York Stock Exchange

*
Santander-Chile’s shares of common stock are not listed for trading, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the New York Stock Exchange.
 
 
 

 
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
None
(Title of Class)
 
The number of outstanding shares of each class of common stock of Banco Santander-Chile at December 31, 2014, was:
 
188,446,126,794 Shares of Common Stock, without par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes
No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes
No
 
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer  
Accelerated Filer  
Non-accelerated Filer  
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
    U.S. GAAP
    International Financial Reporting Standards as issued by the International Accounting Standards Board
    Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17
Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
No



 
 
 
 
 
TABLE OF CONTENTS

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
 
We have made statements in this Annual Report on Form 20-F that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this report and include statements regarding our intent, belief or current expectations regarding:
 
 
·
asset growth and alternative sources of funding
 
 
·
growth of our fee-based business
 
 
·
financing plans
 
 
·
impact of competition
 
 
·
impact of regulation
 
 
·
exposure to market risks including:
 
 
·
interest rate risk
 
 
·
foreign exchange risk
 
 
·
equity price risk
 
 
·
projected capital expenditures
 
 
·
liquidity
 
 
·
trends affecting:
 
 
·
our financial condition
 
 
·
our results of operation
 
The sections of this Annual Report which contain forward-looking statements include, without limitation, “Item 3. Key Information—Risk Factors,” “Item 4.  Information on the Company—C. Business Overview—Competition,” “Item 5.  Operating and Financial Review and Prospects,” “Item 8.  Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings,” and “Item 11.  Quantitative and Qualitative Disclosures About Market Risk.” Our forward-looking statements also may be identified by words such as “believes,” “expects,” “anticipates,” “projects,” “intends,” “should,” “could,” “may,” “seeks,” “aim,” “combined,” “estimates,” “probability,” “risk,” “VaR,” “target,” “goal,” “objective,” “future” or similar expressions.
 
You should understand that the following important factors, in addition to those discussed elsewhere in this Annual Report and in the documents which are incorporated by reference, could affect our future results and could cause those results or other outcomes to differ materially from those expressed in our forward-looking statements:
 
 
·
changes in capital markets in general that may affect policies or attitudes towards lending to Chile or Chilean companies;
 
 
·
changes in economic conditions;
 
 
·
the monetary and interest rate policies of Central Bank (as defined below);
 
 
·
inflation;
 
 
·
deflation;
 
 
·
unemployment;
 
 
·
increases in defaults by our customers and in impairment losses;
 
 
·
decreases in deposits;
 
 
·
customer loss or revenue loss;
 
 
·
unanticipated turbulence in interest rates;
 
 
·
movements in foreign exchange rates;
 
 
·
movements in equity prices or other rates or prices;
 
 
·
the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR model we use;
 
 
·
changes in Chilean and foreign laws and regulations;
 
 
·
changes in taxes;
 
 
·
competition, changes in competition and pricing environments;
 
 
·
our inability to hedge certain risks economically;
 
 
·
the adequacy of loss allowances;
 
 
·
technological changes;
 
 
·
changes in consumer spending and saving habits;
 
 
·
changes in demographics, consumer spending, investment or saving habits;
 
 
·
increased costs;
 
 
·
unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms;
 
 
·
changes in, or failure to comply with, banking regulations;
 
 
·
acquisitions or restructurings of businesses that may not perform in accordance with our expectations;
 
 
·
our ability to successfully market and sell additional services to our existing customers;
 
 
·
disruptions in client service;
 
 
·
damage to our reputation;
 
 
·
natural disasters;
 
 
·
implementation of new technologies;
 
 
·
the Group’s exposure to operational losses (e.g., failed internal or external processes, people and systems); and
 
 
·
an inaccurate or ineffective client segmentation model.
 
You should not place undue reliance on such statements, which speak only as of the date at which they were made. The forward-looking statements contained in this report speak only as of the date of this Annual Report, and we do not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
CERTAIN TERMS AND CONVENTIONS
 
As used in this annual report (the “Annual Report”), “Santander-Chile”, “the Bank”, “we,” “our” and “us” or similar terms refer to Banco Santander-Chile together with its consolidated subsidiaries.
 
When we refer to “Santander Spain,” we refer to our parent company, Banco Santander, S.A. References to “the Group,” “Santander Group” or “Grupo Santander” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Santander-Chile.
 
As used in this Annual Report, the term “billion” means one thousand million (1,000,000,000).
 
In this Annual Report, references to “$”, “U.S.$”, “U.S. dollars” and “dollars” are to United States dollars; references to “Chilean pesos,” “pesos” or “Ch$” are to Chilean pesos; references to “CHF” or “CHF$” are to Swiss francs; references to “CNY” or “CNY$” are to Chinese yuan renminbi); 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. See “Item 3.  Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates.
 
As used in this Annual Report, the terms “write-offs” and “charge-offs” are synonyms.
 
In this Annual Report, references to the Audit Committee are to the Bank’s Comité de Directores y Auditoría.
 
In this Annual Report, references to “BIS” are to the Bank for International Settlement, and references to “BIS ratio” are to the capital adequacy ratio as calculated in accordance with the Basel Capital Accord.  References to the “Central Bank” are to the Banco Central de Chile.  References to the SBIF are to the Superintendency of Banks and Financial Institutions.
 
Certain figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
 
PRESENTATION OF FINANCIAL INFORMATION
 
Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Any reference to IFRS in this document is to IFRS as issued by the IASB.
 
As required by local regulations, our locally filed consolidated financial statements have been prepared in accordance with Chilean accounting principles issued by the SBIF (“Chilean Bank GAAP”).  Therefore, our locally filed consolidated financial statements have been adjusted to IFRS in order to comply with the requirements of the Securities and Exchange Commission (the “SEC”).  Chilean Bank GAAP principles are substantially similar to IFRS but there are some exceptions.  For further details and a discussion of the main differences between Chilean Bank GAAP and IFRS, see to “Item 5.  Operating and Financial Review and Prospects—A. Accounting Standards Applied in 2014.”
 
This Annual Report contains our consolidated financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 (the “Audited Consolidated Financial Statements”).  Such Audited Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB, and have been audited by Deloitte Auditores y Consultores Limitada, independent registered public accountants.  See page F-2 of the Audited Consolidated Financial Statements for the 2014 report prepared by Deloitte Auditores y Consultores Limitada. The Audited Consolidated Financial Statements have been prepared from accounting records maintained by the Bank and its subsidiaries.
 
The notes to the Audited Consolidated Financial Statements form an integral part of the Audited Consolidated Financial Statements and contain additional information and narrative descriptions or details of these financial statements.
 
We have formatted our financial information according to the classification format for banks in Chile for purposes of IFRS. We have not reclassified the line items to comply with Article 9 of Regulation S-X. Article 9 is a regulation of the SEC that contains formatting requirements for bank holding company financial statements.
 
Functional and Presentation Currency
 
The Chilean peso is the currency of the primary economic environment in which the Bank operates and the currency that influences its structure of costs and revenues, and in accordance with International Accounting Standard 21 – The Effects of Changes in Foreign Exchange Rates has been defined as the functional and presentation currency.  Accordingly, all balances and transactions denominated in currencies other than the Chilean peso are treated as “foreign currency.”
 
For presentational purposes, we have translated millions of Chilean pesos (Ch$ million) into thousands of U.S. dollars (U.S.$ thousand) using the rate as indicated below under “Exchange Rates,” for the financial information included in this Annual Report. See “Note 1Summary of Significant Accounting Principles—(e) Functional and presentation currency.
 
Loans
 
Unless otherwise specified, all references herein (except in the Audited Consolidated Financial Statements) to loans are to loans and financial leases before deduction for loan loss allowance, and, except as otherwise specified, all market share data presented herein is based on information published periodically by the SBIF. Non-performing loans include the entire principal amount and accrued but unpaid interest on loans for which either principal or interest is past-due for 90 days or more and which do not accrue interest. Restructured loans for which no payments are past-due are not ordinarily classified as non-performing loans. See “Item 5.  Operating and Financial Review and Prospects—F. Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”
 
Under IFRS, a loan is evaluated on each financial statement reporting date to determine whether objective evidence of impairment exists. A loan will be impaired if, and only if, objective evidence of impairment exists as a result of one or more events that occurred after the initial recognition of the loan, and such event or events have an impact on the estimated future cash flows of such loan that can be reliably estimated. It may not be possible to identify a single event that was the individual cause of the impairment.
 
An impairment loss relating to a loan is calculated as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the effective interest rate.
 
Individually significant loans are individually tested for impairment. The remaining financial assets are evaluated collectively in groups with similar credit risk characteristics.
 
The reversal of an impairment loss occurs only if it can be objectively related to an event occurring after the initial impairment loss was recorded. In the case of loans recorded at amortized cost, the reversal is recorded in income. See “Item 5.  Operating and Financial Review and Prospects—F. Selected Statistical Information—Analysis of Loan Loss Allowances.”
 
Outstanding loans and the related percentages of our loan portfolio consisting of corporate and consumer loans in the section entitled “Item 4.  Information on the Company—C. Business Overview” are categorized based on the nature of the borrower. Outstanding loans and related percentages of our loan portfolio consisting of corporate and consumer loans in the section entitled “Item 5.  Operating and Financial Review and Prospects—F. Selected Statistical Information” are categorized in accordance with the reporting requirements of the SBIF, which are based on the type and term of loans. This disclosure is consistent with IFRS.
 
Effect of Rounding
 
Certain figures included in this Annual Report and in the Audited Consolidated Financial Statements have been rounded up for ease of presentation. Percentage figures included in this Annual Report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this Annual Report may vary from those obtained by performing the same calculations using the figures in the Audited Consolidated Financial Statements. Certain other amounts that appear in this Annual Report may not sum due to rounding.
 
Economic and Market Data
 
In this Annual Report, unless otherwise indicated, all macroeconomic data related to the Chilean economy is based on information published by the Central Bank, and all market share and other data related to the Chilean financial system is based on information published by the SBIF and our analysis of such information. Information regarding the consolidated risk index of the Chilean financial system as a whole is not available.
 
Exchange Rates
 
This Annual Report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars at the rate indicated in preparing the Audited Consolidated Financial Statements, could be converted into U.S. dollars at the rate indicated, were converted or will be converted at all.
 
Unless otherwise indicated, all U.S. dollar amounts at any year end, for any period have been translated from Chilean pesos based on the interbank market rate published by Reuters at 1:30 pm on the last business day of the period. On December 31, 2013 and 2014 the exchange rate in the Informal Exchange Market as published by Reuters at 1:30 pm on these days was Ch$524.20 and Ch$608.33 respectively, or 0.08% and 0.16% more, respectively, than the observed exchange rate published by the Central Bank for such date of Ch$523.76 and Ch$607.38, respectively, per U.S.$1.00.  The Federal Reserve Bank of New York does not report a noon buying rate for the Chilean peso. For more information on the observed exchange rate, see “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” of the Annual Report.
 
As of December 31, 2013 and 2014, one UF was equivalent to Ch$ 23,309.56 and Ch$24,627.10, respectively. The U.S. dollar equivalent of one UF was U.S.$40.55 as of December 31, 2014, using the observed exchange rate reported by the Central Bank as of December 30, 2014 of Ch$ 607.38 per U.S.$1.00.
 

 
 
PART I
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3. KEY INFORMATION
 
A. Selected Financial Data
 
The following table presents selected historical financial information for Santander-Chile as of the dates and for each of the periods indicated.  Financial information for Santander-Chile as of and for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 has been derived from our audited consolidated financial statements prepared in accordance with IFRS. These consolidated financial statements differ in some respects from our locally filed financial statements at and for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 prepared in accordance with Chilean Bank GAAP.
 
The following table should be read in conjunction with, and is qualified in its entirety by reference to, our Audited Consolidated Financial Statements appearing elsewhere in this Annual Report.
 
   
As of and for the years ended December 31,
 
   
2014
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
In U.S.$ thousands(1)
   
In Ch$ millions (2)
 
CONSOLIDATED STATEMENT OF INCOME DATA (IFRS)
                                   
Net interest income
    2,165,115       1,317,104       1,076,762       1,042,734       972,300       939,719  
Net fee and commission income
    373,617       227,283       229,836       270,572       277,836       263,582  
Financial transactions, net
    185,039       112,565       124,437       82,299       94,197       95,988  
Other operating income
    10,759       6,545       88,155       13,105       18,749       43,608  
Net operating profit before loan losses
    2,734,530       1,663,497       1,519,190       1,408,710       1,363,082       1,342,897  
Provision for loan losses
    (583,405 )     (354,903 )     (371,462 )     (403,692 )     (316,137 )     (253,915 )
Net operating profit
    2,151,125       1,308,594       1,147,728       1,005,018       1,046,945       1,088,982  
Total operating expenses
    (1,124,092 )     (683,819 )     (610,191 )     (599,379 )     (564,655 )     (497,338 )
Operating income
    1,027,033       624,775       537,537       405,639       482,290       591,644  
Income from investments in other companies
    3,559       2,165       1,422       267       2,140       1,171  
Income before tax
    1,030,592       626,940       538,959       405,906       484,430       592,815  
Income tax expense
    (83,918 )     (51,050 )     (94,530 )     (44,473 )     (77,308 )     (85,343 )
Net income for the year
    946,674       575,910       444,429       361,433       407,122       507,472  
Net income for the period attributable to:
                                               
Equity holders of the Bank
    936,844       569,910       442,294       356,808       402,191       505,393  
Non-controlling interests
    9,830       5,980       2,135       4,625       4,931       2,079  
Net income attributable to Equity holders of the Bank per share
    4.97       3.02       2.35       1.89       2.13       2.68  
Net income attributable to Equity holders of the Bank per ADS (3)
    1.99       1,208.00       938.83       757.37       2,217.48       2,786.48  
Weighted-average shares outstanding (in millions)
    188,446.1       188,446.1       188,446.1       188,446.1       188,446.1       188,446.1  
Weighted-average ADS outstanding (in millions) (3)
    471.1       471.1       471.1       471.1       181.4       181.4  
                                                 
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA (IFRS)
                                               
Cash and deposits in banks
    2,644,762       1,608,888       1,571,810       1,250,414       2,793,701       1,762,198  
Cash items in process of collection
    873,495       531,373       604,077       520,267       276,454       374,368  
Trading investments
    1,273,675       774,815       287,567       338,287       409,763       379,670  
Investments under resale agreements
    -       -       17,469       6,993       12,928       170,985  
Financial derivative contracts
    4,483,690       2,727,563       1,494,018       1,293,212       1,601,896       1,624,378  
Interbank loans, net
    19,631       11,942       124,954       90,414       87,677       69,672  
Loans and accounts receivable from customers, net
    36,487,416       22,196,390       20,320,874       18,326,190       16,858,637       15,232,163  
Available for sale investments
    2,714,970       1,651,598       1,700,993       1,826,158       1,661,311       1,473,980  
Investments in associates and other companies
    29,448       17,914       9,681       7,614       8,728       7,275  
Intangible assets
    67,370       40,983       66,703       87,347       80,739       77,990  
Property, plant, and equipment
    347,773       211,561       180,215       162,214       153,059       154,985  
 
   
As of and for the years ended December 31,
 
   
2014
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
In U.S.$ thousands(1)
   
In Ch$ millions (2)
 
Current taxes
    3,684       2,241       1,643       10,227       37,253       12,499  
Deferred taxes
    447,319       272,118       227,285       181,875       136,521       100,470  
Other assets
    1,525,424       927,961       514,938       657,890       550,326       650,081  
TOTAL ASSETS
    50,918,657       30,975,347       27,122,227       24,759,102       24,668,993       22,090,714  
Deposits and other demand liabilities
    10,652,930       6,480,497       5,620,763       4,970,019       4,413,815       4,236,434  
Cash items in process of being cleared
    462,346       281,259       276,379       284,953       89,486       300,125  
Obligations under repurchase agreements
    644,594       392,126       208,972       304,117       544,381       294,725  
Time deposits and other time liabilities
    17,118,899       10,413,940       9,675,272       9,112,213       8,921,114       7,258,757  
Financial derivative contracts
    4,210,517       2,561,384       1,291,785       1,146,161       1,292,402       1,643,979  
Interbank borrowings
    2,024,561       1,231,601       1,682,377       1,438,003       1,920,092       1,584,057  
Issued debt instruments
    9,509,825       5,785,112       5,198,658       4,571,289       4,623,239       4,190,888  
Other financial liabilities
    337,194       205,125       189,781       192,611       176,599       166,289  
Current taxes
    1,771       1,077       50,242       525       1,498       1,293  
Deferred taxes
    12,544       7,631       26,753       9,544       5,315       5,441  
Provisions
    470,090       285,970       217,310       191,892       187,557       209,421  
Other liabilities
    1,075,990       654,557       311,479       341,274       398,977       261,328  
TOTAL LIABILITIES
    46,521,261       28,300,279       24,749,771       22,562,601       22,574,475       20,152,737  
Capital
    1,465,164       891,303       891,303       891,303       891,303       891,303  
Reserves
    2,149,756       1,307,761       1,130,991       975,460       802,528       51,539  
Valuation adjustments
    42,082       25,600       (5,964 )     (3,781 )     2,832       (5,180 )
Retained earnings
    686,011       417,321       327,622       299,254       364,054       968,506  
Equity attributable to the Bank's shareholders
    4,343,013       2,641,985       2,343,952       2,162,236       2,060,717       1,906,168  
Non-controlling interest
    54,383       33,083       28,504       34,265       33,801       31,809  
TOTAL EQUITY
    4,397,396       2,675,068       2,372,456       2,196,501       2,094,518       1,937,977  
TOTAL LIABILITIES AND EQUITY
    50,918,657       30,975,347       27,122,227       24,759,102       24,668,933       22,090,714  
 
   
As of and for the years ended December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
CONSOLIDATED RATIOS
                             
(IFRS)
                             
Profitability and performance:
                             
Net interest margin (5)
    4.9 %     4.6 %     4.8 %     4.8 %     5.4 %
Return on average total assets (6)
    1.8 %     1.6 %     1.4 %     1.7 %     2.4 %
Return on average equity (7)
    21.4 %     18.9 %     16.5 %     20.4 %     29.0 %
Capital:
                                       
Average equity as a percentage of average total assets (8)
    8.2 %     8.7 %     8.7 %     8.3 %     8.4 %
Total liabilities as a multiple of equity (9)
    10.6       10.4       10.3       10.8       10.4  
Credit Quality:
                                       
Non-performing loans as a percentage of total loans (10)
    2.8 %     2.9 %     3.2 %     2.9 %     2.7 %
Allowance for loan losses as percentage of total loans
    2.9 %     2.9 %     2.9 %     2.8 %     2.7 %
Operating Ratios:
                                       
Operating expenses /operating revenue (11)
    41.1 %     40.2 %     42.5 %     41.4 %     37.0 %
Operating expenses /average total assets
    2.1 %     2.3 %     2.4 %     2.3 %     2.2 %
                                         
OTHER DATA
                                       
CPI Inflation Rate (12)
    4.7 %     3.0 %     1.5 %     4.4 %     3.0 %
Revaluation (devaluation) rate (Ch$/U.S.$) at year end (12)
    16.0 %     9.4 %     (8.2 %)     11.3 %     (7.5 %)
Number of employees at period end
    11,478       11,516       11,713       11,566       11,001  
Number of branches and offices at period end
    474       493       504       499       504  

 

(1)
Amounts stated in U.S. dollars at and for the year ended December 31, 2014 have been translated from Chilean pesos at the interbank market exchange rate of Ch$608.33 = U.S.$1.00 as of December 31, 2014 based on the interbank market rate published by Reuters at 1:30 pm on the last business day of the period.
 
(2)
Except per share data, percentages and ratios, share numbers, employee numbers and branch numbers.
 
(3)
On October 22, 2012 the Bank performed an ADR split:  for each old ADR, an ADR holder received 2.5975 new ADRs, and the ratio of ADS to shares became 1 ADS = 400 shares. For the years 2010-2011,1 ADS = 1,039 shares of common stock.
 
(4)
Total equity includes equity attributable to Equity holders of the Bank plus non-controlling interests.
 
(5)
Net interest income divided by average interest earning assets (as presented in “Item 5.  Operating and Financial Review and Prospects— F. Selected Statistical Information”).
 
(6)
Net income for the year divided by average total assets (as presented in “Item 5.  Operating and Financial Review and Prospects— F. Selected Statistical Information”).
 
(7)
Net income for the year divided by average equity (as presented in “Item 5.  Operating and Financial Review and Prospects—F. Selected Statistical Information”).
 
(8)
This ratio is calculated using total average equity (as presented in “Item 5.  Operating and Financial Review and Prospects—F. Selected Statistical Information”) including non-controlling interest.
 
(9)
Total liabilities divided by equity.
 
(10)
Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loans with at least one installment over 90 days past-due.
 
(11)
The efficiency ratio is equal to operating expenses over operating income. Operating expenses includes personnel salaries and expenses, administrative expenses, depreciation and amortization, impairment and other operating expenses. Operating income includes net interest income, net fee and commission income, net income from financial operations (net trading income), foreign exchange profit (loss), net and other operating income.
 
(12)
Based on information published by the Central Bank.
 
Exchange Rates
 
Chile has two currency markets, the Mercado Cambiario Formal, or the Formal Exchange Market, and the Mercado Cambiario Informal, or the Informal Exchange Market. According to Law 18,840, the organic law of the Central Bank and the Central Bank Act (Ley Orgánica Constitucional del Banco Central de Chile), the Central Bank determines which purchases and sales of foreign currencies must be carried out in the Formal Exchange Market. Pursuant to Central Bank regulations currently in effect, all payments, remittances or transfers of foreign currency abroad which are required to be effected through the Formal Exchange Market may be effected with foreign currency procured outside the Formal Exchange Market. The Formal Exchange Market is comprised of the banks and other entities so authorized by the Central Bank. The Informal Exchange Market is comprised of entities that are not expressly authorized to operate in the Formal Exchange Market, such as certain foreign exchange houses and travel agencies, among others. The Central Bank is empowered to require that certain purchases and sales of foreign currencies be carried out on the Formal Exchange Market. The conversion from pesos to U.S. dollars of all payments and distributions with respect to the ADSs described in this Annual Report must be transacted at the spot market rate in the Formal Exchange Market.
 
Both the Formal and Informal Exchange Markets are driven by free market forces. Current regulations require that the Central Bank be informed of certain transactions and that they be effected through the Formal Exchange Market. In order to keep the average exchange rate within certain limits, the Central Bank may intervene by buying or selling foreign currency on the Formal Exchange Market.
 
The U.S.$ Observed Exchange Rate (dólar observado), which is reported by the Central Bank and published daily in the Chilean newspapers, is the weighted average exchange rate of the previous business day’s transactions in the Formal Exchange Market. The Central Bank has the power to intervene by buying or selling foreign currency on the Formal Exchange Market to attempt to maintain the Observed Exchange Rate within a desired range.  Even though the Central Bank is authorized to carry out its transactions at the Observed Exchange Rate, it generally uses spot rates for its transactions.  Other banks generally carry out authorized transactions at spot rates as well.
 
Purchases and sales of foreign currencies may be legally carried out in the Informal Exchange Market. The Informal Exchange Market reflects transactions carried out at informal exchange rates by entities not expressly authorized to operate in the Formal Exchange Market. There are no limits imposed on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the Observed Exchange Rate. In recent years, the variation between the Observed Exchange Rate and the Informal Exchange Rate has not been significant. On December 31, 2013 and 2014 the exchange rate in the Informal Exchange Market as published by Reuters at 1:30 pm on these days was Ch$524.20 and Ch$608.33 respectively, or 0.08% and 0.16% more, respectively, than the Central Bank’s published observed exchange rate for such date of Ch$523.76 and Ch$607.38, respectively, per U.S.$1.00.
 
The following table sets forth the annual low, high, average and period-end observed exchange rate for U.S. dollars for each of the following periods, as reported by the Central Bank. We make no representation that the Chilean peso or the U.S. dollar amounts referred to herein actually represent, could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated, at any particular rate or at all. The Federal Reserve Bank of New York does not report a noon buying rate for pesos.
 

   
Daily Observed Exchange Rate Ch$ Per U.S.$(1)
 
Year
 
Low(2)
   
High(2)
   
Average(3)
   
Period End
 
                         
2010
    468.37       549.17       510.38       468.37  
2011
    455.91       533.74       483.36       521.46  
2012
    469.65       519.69       494.99       478.60  
2013
    466.50       533.95       495.09       523.76  
2014
    524.61       621.41       570.01       607.38  


   
Daily Observed Exchange Rate Ch$ Per U.S.$(1)
 
Month
 
Low(2)
   
High(2)
   
Average(3)
   
Period End
 
October 2014
    576.65       599.22       589.98       576.65  
November 2014
    576.50       600.37       592.46       598.94  
December 2014
    605.46       621.41       612.92       607.38  
January 2015
    606.75       629.09       620.91       626.48  
February 2015
    616.86       632.19       623.62       617.67  
March 2015
    617.38       642.18       628.50       626.87  
April 2015
    606.39       626.58       614.73       606.82  
May 2015 (through May 11)
 
605.77
   
614.48
   
610.48
   
605.77
 

Source: Central Bank.
 
(1)
Nominal figures.
 
(2)
Exchange rates are the actual low and high, on a day-by-day basis for each period.
 
(3)
The average of monthly average rates during the year.
 
Dividends
 
Under the current General Banking Law, a Chilean bank may only pay a single dividend per year (i.e., interim dividends are not permitted). Santander-Chile’s annual dividend is proposed by its Board of Directors and is approved by the shareholders at the annual ordinary shareholders’ meeting held the year following that in which the dividend is generated. For example, the 2014 dividend must be proposed and approved during the first four months of 2015. Following shareholder approval, the proposed dividend is declared and paid. Historically, the dividend for a particular year has been declared and paid no later than one month following the shareholders’ meeting. Dividends are paid to shareholders of record on the fifth day preceding the date set for payment of the dividend. The applicable record dates for the payment of dividends to holders of ADSs will, to the extent practicable, be the same.
 
Under the General Banking Law, a bank must distribute cash dividends in respect of any fiscal year in an amount equal to at least 30% of its net income for that year, as long as the dividend does not result in the infringement of minimum capital requirements. The balances of our distributable net income are generally retained for use in our business (including for the maintenance of any required legal reserves). Although our Board of Directors currently intends to pay regular annual dividends, the amount of dividend payments will depend upon, among other factors, our then current level of earnings, capital and legal reserve requirements, as well as market conditions, and there can be no assurance as to the amount or timing of future dividends.
 
Dividends payable to holders of ADSs are net of foreign currency conversion expenses of JPMorgan Chase Bank, N.A., as depositary (the “Depositary”) and will be subject to the Chilean withholding tax currently at the rate of 35% (subject to credits in certain cases as described in “Item 10.  Additional Information—E. Taxation—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs”).
 
Under the Foreign Investment Contract (as defined herein), the Depositary, on behalf of ADS holders, is granted access to the Formal Exchange Market to convert cash dividends from Chilean pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile, net of taxes, and no separate registration by ADS holders is required. In the past, Chilean law required that holders of shares of Chilean companies who were not residents of Chile to register as foreign investors under one of the foreign investment regimes contemplated by Chilean law in
 
 
order to have dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market. On April 19, 2001, the Central Bank deregulated the Exchange Market and eliminated the need to obtain approval from the Central Bank in order to remit dividends, but at the same time this eliminated the possibility of accessing the Formal Exchange Market. These changes do not affect the current Foreign Investment Contract, which was signed prior to April 19, 2001, which grants access to the Formal Exchange Market with prior approval of the Central Bank. See “Item 10.  Additional Information—D. Exchange Controls.”
 
The following table presents dividends declared and paid by us in nominal terms in the past four years:
 
Year
 
Dividend
Ch$ mn (1)
   
Per share Ch$/share (2)
   
Per ADR Ch$/ADR (3)
   
% over earnings (4)
   
% over earnings (5)
 
2011
    286,294       1.52       1,578.48       60       57  
2012
    261,051       1.39       1,439.10       60       65  
2013
    232,780       1.24       494.10       60       65  
2014
    265,156       1.41       562.83       60       60  
2015(6)
    330,198       1.75       700.89       60       58  

(1)
Millions of nominal pesos.
 
(2)
Calculated on the basis of 188,446 million shares.
 
(3)
Calculated on the basis of 1,039 shares per ADS for the periods for 2011 and 2012. For 2013, 2014 and 2015, it is calculated on the basis of 400 shares per ADS.
 
(4)
Calculated by dividing dividend paid in the year by net income attributable to shareholders for the previous year under Chilean GAAP.
 
(5)
Calculated by dividing dividend paid in the year by net income attributable to shareholders for the previous year under IFRS.
 
(6)
Dividend proposed by the Board for shareholders’ approval on April 28, 2015.
 
B. Capitalization and Indebtedness
 
Not applicable.
 
C. Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D. Risk Factors
 
You should carefully consider the following risk factors, which should be read in conjunction with all the other information presented in this Annual Report. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we do not know about or that we currently think are immaterial may also impair our business operations. Any of the following risks, if they actually occur, could materially and adversely affect our business, results of operations, prospects and financial condition.
 
We are subject to market risks that are presented both in this subsection and in “Item 5.  Operating and Financial Review and Prospects” and “Item 11.  Quantitative and Qualitative Disclosures about Market Risk.”
 
Risks Associated with Our Business
 
We are vulnerable to the current disruptions and volatility in the global financial markets.
 
In the recent past, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates. Global economic conditions deteriorated significantly between 2007 and 2009, and many countries fell into recession.  Although macroeconomic conditions have slightly improved in the past three years, global imbalances and risks remain. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies experienced, and some continue to experience, significant difficulties. Around the world, there have also
 
 
been runs on deposits at several financial institutions, numerous institutions have sought additional capital or have been assisted by governments, and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions).
 
Increased disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.
 
In particular, we may face, among others, the following economic risks:
 
 
·
Increased regulation of our industry. Compliance with such regulation will increase our costs and may affect the pricing for our products and services and limit our ability to pursue business opportunities.
 
 
·
Reduced demand for our products and services.
 
 
·
Inability of our borrowers to timely or fully comply with their existing obligations.
 
 
·
The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances.
 
 
·
The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.
 
 
·
Any worsening of global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results of operations.
 
 
·
The recoverability of our retail loans in particular may be increasingly vulnerable to macroeconomic shocks that could negatively impact the household income of our retail customers and result in increased loan losses.
 
Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in Chile’s, our controlling shareholders or our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.
 
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength, conditions that affect the financial services industry generally and the economic environment in which the company operates. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Chile’s sovereign debt. If Chile’s sovereign debt is downgraded, our credit rating would also likely be downgraded by an equivalent amount.
 
In addition, our ratings may be adversely affected by any downgrade in the ratings of our parent company, Santander Spain. The long-term debt of Santander Spain is currently rated investment grade by the major rating agencies—Baa1 by Moody’s Investors Service España, S.A., (“Moody’s”) BBB+ by Standard & Poor’s Ratings Services (“S&P”) and A- by Fitch Ratings Ltd. (“Fitch”)—all of which have a stable outlook due to the gradual economic improvement in Spain.
 
Any downgrade in our debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest.  In
 
 
addition, under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or terminate such contracts.  Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.
 
While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although, unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on us.
 
In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.
 
In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain the current ratings or outlooks. Failure to maintain favorable ratings and outlooks would likely increase the cost of funding to us and adversely affect interest margins, which could have a material adverse effect on us.

Increased competition and industry consolidation may adversely affect our results of operations.
 
The Chilean market for financial services is highly competitive. We compete with other private sector Chilean and non-Chilean banks, with Banco del Estado, the principal government-owned sector bank, with department stores and with larger supermarket chains that make consumer loans and sell other financial products to a large portion of the Chilean population. The lower to middle-income segments of the Chilean population and the small- and mid- sized corporate segments have become the target markets of several banks and competition in these segments may increase. We also face competition from non-bank (such as department stores, insurance companies, cajas de compensación and cooperativas) and non-finance competitors (principally department stores and larger supermarket chains) with respect to some of our credit products, such as credit cards, consumer loans and insurance brokerage. In addition, we face competition from non-bank finance competitors, such as leasing, factoring and automobile finance companies, with respect to credit products, and from mutual funds, pension funds and insurance companies with respect to savings products. Increasing competition could require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
 
The increase in competition within the Chilean banking industry in recent years has led to consolidation in the industry. We expect the trends of increased competition and consolidation to continue and to result in the formation of large new financial groups with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations.
 
In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.
 
 
Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.
 
The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.
 
As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions where we operate, we will be exposed to new and potentially increasingly complex risks and development expenses in those markets, with respect to which our experience and the experience of our partners may not be helpful. Our employees and our risk management systems may not be adequate to handle such risks. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.
 
Our strong position in the credit card market is in part due to our credit card co-branding agreement with Chile’s largest airline. This agreement expires in August 2020 and no assurance can be given that it will be renewed, which may materially and adversely affect our results of operations and financial condition in the credit card business.
 
The financial problems faced by our customers could adversely affect us.
 
Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our own non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general.  In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
 
We may generate lower revenues from fee and commission based businesses.
 
The fees and commissions that we earn from the different banking and other financial services that we provide  represent a significant source of our revenues. Market downturns have led, and are likely to continue to lead, to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in our non-interest revenues. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management, private banking and custody businesses and adversely affect our results of operations. Moreover, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect us, including our fee and commission income.
 
Even in the absence of a market downturn, below-market performance by the mutual funds we broker may result in increased withdrawals and reduced inflows, which would reduce the revenue we receive from the asset management business we broker and adversely affect our results of operations.
 
Market conditions have, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.
 
In the recent past, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-
 
 
prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.
 
In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.
 
If we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our loan loss reserves are insufficient to cover future loan losses, this could have a material adverse effect on us.
 
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past and can continue to negatively impact our results of operations. We cannot assure you that we will be able to effectively control the level of the impaired loans in our total loan portfolio. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Chile or global economic conditions, impact of political events, events affecting certain industries or events affecting financial markets and global economies.
 
As of December 31, 2014, our non-performing loans were Ch$644,327 million, and the ratio of our non-performing loans to total loans was 2.81%. As of December 31, 2014, our allowance for loan losses was Ch$684,317  million, and the ratio of our allowance for loan losses to total loans was 2.99%. For additional information on our asset quality, see “Item 5. Operating and Financial Review and Prospects— F. Selected Statistical Information–Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”
 
Our current allowance for loan losses may not be adequate to cover an increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our allowance for loan losses is based on our current assessment of and expectations concerning various factors affecting us, including the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, Chile’s economy, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global financial crisis has demonstrated, many of these factors are beyond our control. In addition, as these factors evolve, the models we use to determine the appropriate level of allowance for loan losses and other assets require recalibration, which can lead to increased provision expense. See “Item 5. Operating and Financial Review and Prospects—C. Operating Results–Results of Operations for the Years ended December 31, 2014, 2013 and 2012—Provision for loan losses, net of recoveries.”
 
As a result, there is no precise method for predicting loan and credit losses, and we cannot assure you that our allowance for loan losses will be sufficient in the future to cover actual loan and credit losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and SMEs, the volume increase in the consumer loan portfolio and the introduction of new products, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our provisions and allowance for loan losses, which may adversely affect us.  If we are unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.
 
The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.
 
The value of the collateral securing our loan portfolio may significantly fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting Chile’s economy. The real estate market is particularly vulnerable in the current economic climate and this may affect us, as real estate represents a significant portion of the collateral securing our residential mortgage loan portfolio. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If this were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.
 
The growth of our loan portfolio may expose us to increased loan losses. Our exposure to individuals and small and mid-sized businesses could lead to higher levels of past due loans, allowances for loan losses and charge-offs.
 
The further expansion of our loan portfolio (particularly in the consumer, small- and mid-sized companies and real estate segments) can be expected to expose us to a higher level of loan losses and require us to establish higher levels of provisions for loan losses. See “Note 8—Interbank Loans” and “Note 9—Loans and Accounts Receivables from Customers” in our Audited Consolidated Financial Statements for a description and presentation of our loan portfolio as well as “Item 5-Selected Statistical Information—Loan Portfolio.”
 
A substantial number of our customers consist of individuals (51.7% of the value of the total loan portfolio as of December 31, 2014, if interbank loans are included) and, to a lesser extent, small- and mid-sized companies (those with annual revenues of less than U.S.$2.0 million), which comprised approximately 14.7% of the value of the total loan portfolio as of December 31, 2014. As part of our business strategy, we seek to increase lending and other services to small companies and individuals. Small companies and lower- to middle-income individuals are, however, more likely to be adversely affected by downturns in the Chilean economy than large corporations and higher-income individuals. In addition, as of December 31, 2014, our residential mortgage loan portfolio totaled Ch$6,632,031 million, representing 28.9% of our total loans. See “Note 9—Loans and Accounts Receivables from Customers” in our Audited Consolidated Financial Statements for a description and presentation of our residential mortgage loan portfolio. If the economy and real estate market in Chile experience a significant downturn, this could materially adversely affect the liquidity, businesses and financial conditions of our customers, which may in turn cause us to experience higher levels of past-due loans, thereby resulting in higher provisions for loan losses and subsequent charge-offs. This may materially and adversely affect our asset quality, results of operations and financial condition.
 
Our loan portfolio may not continue to grow at the same rate and economic turmoil may lead to a contraction in our loan portfolio.
 
There can be no assurance that our loan portfolio will continue to grow at similar rates to the historical growth rate described above. A reversal of the rate of growth of the Chilean economy, a slowdown in the growth of customer demand, an increase in market competition or changes in governmental regulations could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowances for loan losses. An economic turmoil could materially adversely affect the liquidity, businesses and financial condition of our customers as well as lead to a general decline in consumer spending and a rise in unemployment. All this could in turn lead to decreased demand for borrowings in general.
 
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.
 
Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rate, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:
 
 
·
net interest income;
 
 
·
the volume of loans originated;
 
 
·
the market value of our securities holdings; and
 
 
·
gains from sales of loans and securities.
 
Variations in short-term interest rates could affect our net interest income, which comprises the majority of our revenue. Interest rate variations could adversely affect us, including our net interest income, reducing our growth rate or even resulting in losses. When interest rates rise, we may be required to pay higher interest on our floating-rate borrowings while interest earned on our predominately fixed-rate assets does not rise as quickly, which could cause profits to grow at a reduced rate or decline in some parts of our portfolio. Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, the reserve policies of the Central Bank, deregulation of the financial sector in Chile, monetary policies, domestic and international economic and political conditions and other factors.
 
Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.
 
If interest rates decrease, although this is likely to decrease our funding costs, it is likely to adversely impact the income we receive arising from our investments in securities as well as loans with similar maturities. In addition, we may also experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.
 
The market value of a security with a fixed interest rate generally decreases when the prevailing interest rates rise, which may have an adverse effect on our earnings and financial condition. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure. The market value of an obligation with a floating interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms or an inability to refinance at lower rates.
 
We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities. Therefore, while the Bank seeks not to maintain a significant mismatch in foreign currency, from time to time, we may have a mismatch. “See Item 11. Quantitative and Qualitative Disclosure About Market Risks— E. Market Risks—Foreign exchange fluctuations.”
 
The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income or the market value of our assets and liabilities could be materially adversely affected.
 
Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.
 
The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.
 
Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing
 
 
those risks could prove insufficient, exposing us to material unanticipated losses. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits.
 
As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating system.
 
In addition, we continue to refine our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect these risks before they occur, or due to limited tools available to us, our employees may not be able to effectively implement them, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.
 
The effectiveness of our credit risk management is affected by the quality and scope of information available in Chile.
 
In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, the SBIF, Dicom en Capital, a Chilean nationwide credit bureau, and other sources. Due to limitations in the availability of information and the developing information infrastructure in Chile, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. In addition, although we have been improving our credit scoring systems to better assess borrowers’ credit risk profiles, we cannot assure you that our credit scoring systems will collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly. Without complete, accurate and reliable information, we will have to rely on other publicly available resources and our internal resources, which may not be effective. As a result, our ability to effectively manage our credit risk and subsequently our loan loss allowances may be materially adversely affected.
 
Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.
 
Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate completely these risks. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, has affected and may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations as well as limit growth possibilities.
 
Disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us.
 
Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.
 
If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.
 
 
We rely, and will continue to rely, primarily on commercial deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy, in general, and the financial services industry in particular, and the availability and extent of deposit guarantees, as well as competition between banks for deposits. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.
 
We anticipate that our customers will continue, in the near future, to make short-term deposits (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. As of December 31, 2014, 98.9% of our customer deposits had remaining maturities of one year or less, or were payable on demand. A significant portion of our assets have longer maturities, resulting in a mismatch between the maturities of liabilities and the maturities of assets.  Historically, one of our principal sources of funds has been time deposits. Time deposits represented 33.6% and 35.7% of our total liabilities and equity as of December 31, 2014 and 2013, respectively. The Chilean time deposit market is concentrated given the importance in size of various large institutional investors such as pension funds and corporations relative to the total size of the economy. As of December 31, 2014, the Bank’s top 20 time deposits represented 28.3% of total time deposits, or 10.3% of total liabilities and equity, and totaled U.S.$4.8 billion. No assurance can be given that future economic stability in the Chilean market will not negatively affect our ability to continue funding our business or to maintain our current levels of funding without incurring increased funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.
 
The short-term nature of this funding source could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.
 
We are subject to regulatory capital and liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects.
 
Chilean banks are required by the General Banking Law to maintain regulatory capital of at least 8% of risk-weighted assets, net of required loan loss allowance and deductions, and paid-in capital and reserves (“basic capital”) of at least 3% of total assets, net of required loan loss allowances. As we are the result of the merger between two predecessors with a relevant market share in the Chilean market, we are currently required to maintain a minimum regulatory capital to risk-weighted assets ratio of 11%. As of December 31, 2014, the ratio of our regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, was 14.00%. Certain developments could affect our ability to continue to satisfy the current capital adequacy requirements applicable to us, including:
 
 
·
the increase of risk-weighted assets as a result of the expansion of our business or regulatory changes;
 
 
·
the failure to increase our capital correspondingly;
 
 
·
losses resulting from a deterioration in our asset quality;
 
 
·
declines in the value of our investment instrument portfolio;
 
 
·
changes in accounting rules;
 
 
·
changes in provisioning guidelines that are charged directly against our equity or net income; and
 
 
·
changes in the guidelines regarding the calculation of the capital adequacy ratios of banks in Chile.
 
Chilean banks are gradually being required to adopt the guidelines set forth under the Basel III Capital Accord with adjustments incorporated by the SBIF once these changes are approved by the Chilean Congress in 2015 or
 
 
2016. Following this approval, Chilean banks will most likely have to fully comply with Basel III requirements by 2018 or 2019. This could result in a different level of minimum capital required to be maintained by us. According to initial estimates of the impact of market risk on regulatory capital, published by the SBIF for informational purposes only, our ratio of regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, including an initial estimate of the adjustments for market risk was 12.54% as of December 31, 2014. No assurance can be given that the adoption of the Basel III capital requirements will not have a material impact on our capitalization ratio.
 
We may also be required to raise additional capital in the future in order to maintain our capital adequacy ratios above the minimum required levels. Our ability to raise additional capital may be limited by numerous factors, including: our future financial condition, results of operations and cash flows; any necessary government regulatory approvals; our credit ratings; general market conditions for capital raising activities by commercial banks and other financial institutions; and domestic and international economic, political and other conditions.  If we require additional capital in the future, we cannot assure you that we will be able to obtain such capital on favorable terms, in a timely manner or at all. Furthermore, the SBIF may increase the minimum capital adequacy requirements applicable to us. Accordingly, although we currently meet the applicable capital adequacy requirements, we may face difficulties in meeting these requirements in the future. If we fail to meet the capital adequacy requirements, we may be required to take corrective actions. These measures could materially and adversely affect our business reputation, financial condition and results of operations. In addition, if we are unable to raise sufficient capital in a timely manner, the growth of our loan portfolio and other risk-weighted assets may be restricted, and we may face significant challenges in implementing our business strategy. As a result, our prospects, results of operations and financial condition could be materially and adversely affected.
 
The SBIF and the Central Bank published new liquidity standards in 2015 and ratios that must be implemented and calculated by all banks. These will eventually replace the current regulatory limits imposed by the SBIF and the Central Bank described above. These new liquidity standards are in line with those established in Basel III. The most important liquidity ratios that will eventually be adopted by Chilean banks are:
 
 
·
Liability concentration per institutional and wholesale counterparty. Banks will have to calculate the percentage of their liabilities coming from institutional and wholesale counterparties, including ratios regarding renovation, renewals, restructurings, maturity and product concentration of these counterparties.
 
 
·
Liquidity coverage ratio (LCR), which measures the percentage of liquid Assets over net cash outflows. The new guidelines also define liquid assets and the formulas for calculating net cash outflows.
 
 
·
Net Stable Funding Ratio (NSFR) which will measure a bank’s available stable funding relative to its required stable funding. Both concepts are also defined in the new regulations.
 
Beginning on August 1, 2015, banks must report these ratios to the Central Bank and the SBIF. The evolution of these indicators will be monitored for a 12 month period and adjustments to the required ratios could be made. The final limits and results should begin to be published in the second half of 2016. The initial limits banks must meet to meet in order to comply with these new ratios have not been published yet.  For this reason, we cannot yet determine the effect that the implementation of these models will have on our business. Such effect could be material and adverse if it materially increases the liquidity we are required to maintain.
 
We are subject to regulatory risk, or the risk of not being able to meet all of the applicable regulatory requirements and guidelines.
 
As a financial institution, we are subject to extensive regulation, inspections, examinations, inquiries, audits and other regulatory requirements by Chilean regulatory authorities, which materially affect our businesses. We cannot assure you that we will be able to meet all of the applicable regulatory requirements and guidelines, or that we will not be subject to sanctions, fines, restrictions on our business or other penalties in the future as a result of noncompliance. If sanctions, fines, restrictions on our business or other penalties are imposed on us for failure to comply with applicable requirements, guidelines or regulations, our business, financial condition, results of operations and our reputation and ability to engage in business may be materially and adversely affected.
 
Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, it may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.
 
Modifications to reserve requirements may affect our business.
 
Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits (with terms of less than one year). The Central Bank has statutory authority to require banks to maintain reserves of up to an average of 40.0% for demand deposits and up to 20.0% for time deposits (irrespective, in each case, of the currency in which these deposits are denominated) to implement monetary policy. In addition, to the extent that the aggregate amount of the following types of liabilities exceeds 2.5 times the amount of a bank’s regulatory capital, a bank must maintain a 100% “technical reserve” against them: demand deposits, deposits in checking accounts, obligations payable on sight incurred in the ordinary course of business and, in general, all deposits unconditionally payable immediately. If the Central Bank were to increase reserve requirements, this could lead to lower loan growth and have a negative effect on our business.
 
Our business could be affected if its capital is not managed effectively or if changes limiting our ability to manage our capital position are adopted.
 
Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy.  However, in response to the global financial crisis, a number of changes to the regulatory capital framework have been adopted or continue to be considered. As these and other changes are implemented or future changes are considered or adopted that limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms, we may experience a material adverse effect on our financial condition and regulatory capital position.
 
The legal restrictions on the exposure of Chilean pension funds may affect our access to funding.
 
Chilean regulations impose a series of restrictions on how Chilean pension fund management companies (Administradora de Fondos de Pensión, or “AFPs”) may allocate their assets. In the particular case of financial issuers’ there are three restrictions, each involving different assets and different limits determined by the amount of assets in each fund and the market and book value of the issuer’s equity. As a consequence, limits vary within funds of AFPs and issuers. As of December 31, 2014, the AFP system had US$3,465 million invested in the Bank via equity, deposits and fixed income. According to the latest information published in November 2014, the AFPs still had the possibility of being able to invest another 7.0% of their assets in deposits and fixed income securities of the Bank and 0.43% in equity of the Bank, or US$12,553 million in total of the AFPs’ assets under management at that time. If the exposure of any AFP to Santander-Chile exceeds the regulatory limits, we would need to seek alternative sources of funding, which could be more expensive and, as a consequence, may have a material adverse effect on our financial condition and results of operations.
 
Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.
 
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provision for liabilities.
 
The valuation of financial instruments measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove to be inaccurate.
 
If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.
 
Changes in accounting standards could impact reported earnings.
 
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
 
The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities.
 
We are subject to the income tax laws of Chile and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws.
 
If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.
 
Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.
 
Disclosure controls and procedures over financial reporting are designed to reasonably assure that information required to be disclosed by the company in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Any disclosure controls and procedures over financial reporting or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
 
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by any unauthorized override of the controls. Consequently, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.
 
We engage in transactions with related parties that others may not consider to be on an arm’s-length basis.
 
We and our affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.
 
 
Chilean law applicable to public companies and financial groups and institutions, as well as our bylaws, provide for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries do not deviate from prevailing market conditions for those types of transactions, including the requirement that our board of directors approve such transactions. Furthermore, all significant related party transactions must be approved by the Audit Committee and the Board. These significant transactions are also reported in our annual shareholders meeting. Please see note 34 of our financial statements and “Item 7. Major Shareholders and Related Party Transactions.”
 
We are likely to continue to engage in transactions with our affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.
 
Operational risks, including risks relating to data collection, processing and storage systems are inherent in our business.
 
Our businesses depend on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks.  The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events that interrupt normal business operations.  We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented.  Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent against cyber-attacks, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber-attacks. If we cannot maintain an effective data collection, management and processing system, we may be materially and adversely affected.
 
We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact.  An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm. There can be no assurance that we will not suffer material losses from operational risk in the future, including relating to cyber-attacks or other such security breaches.  Further, as cyber-attacks continue to evolve, we may incur significant costs in its attempt to modify or enhance our protective measures or investigate or remediate any vulnerability. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us.
 
We manage and hold confidential personal information of customers in the conduct of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our results of operations and financial condition.
 
In addition, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective.
 
 
Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.
 
Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.
 
We rely on third parties for important products and services.
 
Third party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third party vendors could also entail significant delays and expense.
 
Damage to our reputation could cause harm to our business prospects.
 
Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees. Damage to our reputation can therefore cause significant harm to our business and prospects.  Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties.  Further, negative publicity regarding us, whether or not true, may result in harm to our prospects.
 
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation.  For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.
 
We could suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
 
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.
 
Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units.  If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.
 
In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.
 
We may not be able to detect or prevent money laundering and other financial crime activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.
 
We are required to comply with applicable anti-money laundering (“AML”), anti-terrorism, sanctions and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to conduct full customer due diligence regarding sanctions and politically-exposed person screening, keep our customer, account and transaction information up to date and have implemented effective financial crime policies and procedures detailing what is required from those responsible. Our requirements also include AML training for our employees, reporting suspicious transactions and activity to appropriate law enforcement following full investigation by our AML team.
 
 
 
Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML sanctions, laws and regulations are increasingly complex and detailed and have become the subject of enhanced regulatory supervision, requiring improved systems, sophisticated monitoring and skilled compliance personnel.
 
We have developed policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. These require implementation and embedding within our business effective controls and monitoring, which in turn require on-going changes to systems and operational activities. Financial crime is continually evolving and subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to effectively deter threats and criminality. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight, there remains a risk of regulatory breach.
 
If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of our banking license.
 
The reputational damage to our business and global brand would be severe if we were found to have breached AML or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers or our business from being used by criminals for illegal or improper purposes.
 
In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for money laundering (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering, then our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.
 
Any such risks could have a material adverse effect on our operating results, financial condition and prospects.
 
We are exposed to risk of loss from legal and regulatory proceedings.
 
We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment in the jurisdictions in which we operate, which reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs.
 
We are from time to time subject to certain claims and parties to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. See note 20 of our Consolidated Financial Statements. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.
 
We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.
 
We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).
 
Market practices and documentation for derivative transactions in Chile may differ from those in other countries. For example, documentation may not incorporate terms and conditions of derivatives transactions as commonly understood in other countries. In addition, the execution and performance of these transactions depends on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a
 
 
great extent, on our information technology systems. This factor further increases the risks associated with these transactions and could have a material adverse effect on us.
 
We are subject to counterparty risk in our banking business.
 
We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.
 
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.
 
Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.
 
Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on us.
 
Current economic conditions may make it more difficult for us to continue funding our business on favorable terms with institutional investors.
 
Large-denominations of funding from time deposits from institutional investors may, under some circumstances, be a less stable source of funding than savings and bonds, such as during periods of significant changes in market interest rates for these types of deposit products and any resulting increased competition for such funds. As of December 31, 2014 short-term funding from institutional investors totaled US$3.1 billion or 6.7% of total liabilities and equity. The liquidity crisis triggered by the U.S. subprime market impacted global markets and affected sources of funding, including time deposits. Although our results of operations and financial position have not suffered a significant impact as a consequence of the recent credit market instability in the U.S., future market instability in the U.S. or in European markets, specifically the Spanish market, may negatively affect our ability to continue funding our business or maintain our current levels of funding without incurring higher funding costs or having to liquidate certain assets.
 
If we are unable to manage the growth of our operations, this could have an adverse impact on our profitability.
 
We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. We can give no assurances that our expectations with regards to
 
integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:
 
 
·
manage efficiently the operations and employees of expanding businesses;
 
 
·
maintain or grow our existing customer base;
 
 
·
assess the value, strengths and weaknesses of investment or acquisition candidates;
 
 
·
finance strategic investments or acquisitions;
 
 
·
fully integrate strategic investments, or newly-established entities or acquisitions in line with its strategy;
 
 
·
align our current information technology systems adequately with those of an enlarged group;
 
 
·
apply our risk management policy effectively to an enlarged group; and
 
 
·
manage a growing number of entities without over-committing management or losing key personnel.
 
Any failure to manage growth effectively, including relating to any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects.
 
Risks Relating to Chile
 
Portions of our loan portfolio are subject to risks relating to force majeure events and any such event could materially adversely affect our operating results.
 
Chile lies on the Nazca tectonic plate, making it one of the world’s most seismically active regions. Our financial and operating performance may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region.
 
Changes in taxes, including the corporate tax rate, in Chile may have an adverse effect on us and our clients.
 
The Chilean Government enacted in 2014 a reform to the tax and other assessment regimes to which we are subject in order to finance greater expenditure in education. The most important changes approved were:
 
 
1.
The statutory corporate tax rate increased from 20% to 21% in 2014 and 22.5% in 2015.
 
 
2.
By the end of 2016, national pensions that are Chilean taxpayers must opt between two new tax systems for a period of five years. In one called sistema de renta atribuida (SRA, or attributable income system) the statutory income tax rate will rise to 24% in 2016 and 25% in 2017 and onward with personal taxes paid on an accrued basis.
 
 
3.
In the other system called sistema integrado parcial (SIP or partially integrated system), the statutory tax rate will rise to 25.5% in 2016 and 27% in 2017 and onward with personal taxes paid on a dividend basis, therefore retaining some benefits for shareholders of companies that reinvest profits.
 
 
4.
The Taxable Profits Fund (FUT), a mechanism that gives shareholders tax exemptions on reinvested profits, will be eliminated in fiscal 2018. After that, shareholders will have to pay taxes on their total profit under one of the two systems described above.
 
 
5.
Decree-Law 600, which gives foreign investors certain tax and other guarantees, will be replaced by a new law, yet to be designed.
 
 
6.
The maximum personal income tax rate will be reduced from 40% to 35%, starting in 2018.
 
 
7.
Increase in stamp tax from 0.45% to 0.8%.
 
 
8.
Decree Law 600 to be eliminated by 2016, which could adversely affect foreign investment.
 
 
9.
Lowering of VAT exemption for construction of houses up to 2,000 UF to UF225 per dwelling.
 
 
10.
Charge VAT tax on real estate transactions beginning in 2016. VAT tax is 20% in Chile.
 
 
11.
Extension of certain tax benefits and simplified accounting for companies with annual sales lower than 50,000 UF.
 
 
12.
Withholding tax on dividends paid to ADR holders remains unchanged at 35% with the statutory corporate tax rate paid by the company still available as credit to the withholding tax.
 
We cannot predict at this time if these reforms will have a material impact on our business or clients or if further tax reforms will be implemented in the future. Banco Santander Chile’s effective corporate tax rate should rise in the future, which may have an adverse impact on our results of operations. Please see “Item 10-Additional information-E. Taxation” for more information regarding the impacts of this tax reform on ADR holders. This may have an adverse effect on the growth rate of mortgage loans and could slow down the rate of economic growth if tax receipts are not spent efficiently or for their intended purposes.
 
Our growth, asset quality and profitability may be adversely affected by macroeconomic and political conditions in Chile.
 
A substantial amount of our loans is to borrowers doing business in Chile. Chile’s economy has experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. The Chilean economy may not continue to grow at similar rates as in the past or future developments may negatively affect Chile’s overall levels of economic activity.
 
Negative and fluctuating economic conditions, such as a changing interest rate and inflationary environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in Chile could also result in government defaults on public debt.  This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in Chile.
 
In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies.
 
No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic and political conditions in Chile.
 
Developments in other countries may affect us, including the prices for our securities.
 
The prices of securities issued by Chilean companies, including banks, are influenced to varying degrees by economic and market considerations in other countries. We cannot assure you that future developments in or affecting the Chilean economy, including consequences of economic difficulties in other markets, will not materially and adversely affect our business, financial condition or results of operations.
 
We are exposed to risks related to the weakness and volatility of the economic and political situation in Asia, the United States, Europe (including Spain, where Santander Spain, our controlling shareholder, is based), Brazil, Argentina and other nations.  Even though the world economy and the financial and capital markets have been recovering from the 2008 crisis throughout 2010 and early 2011, the conditions of the global markets again deteriorated in 2011 and continued through 2012. European countries encountered serious fiscal problems, including high debt levels that impaired growth and increased the risk of sovereign default. Also in 2011, the United States faced fiscal difficulties, which culminated in the downgrade of the U.S. long-term sovereign credit rating by S&P.
 
 
Ongoing political debates in 2012 with respect to how the United States government would address the so-called “fiscal cliff” contributed to economic uncertainty. In 2012, spillovers from the crisis in Europe weighed negatively on activity and confidence and the global recovery slowed. In 2013, a general recovery was observed in the Eurozone and US economies. Although economic conditions in Europe and the United States may differ significantly from economic conditions in Chile, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Chilean issuers. In particular, investor perceptions of the risks associated with our securities may be affected by perception of risk conditions in Spain.
 
If these nations’ economic conditions deteriorate, the economy in Chile, as both a neighboring country and a trading partner, could also be affected and could experience slower growth than in recent years, with possible adverse impact on our borrowers and counterparties. If this were to occur, we would potentially need to increase our allowances for loan losses, thus affecting our financial results, our results of operations and the price of our securities. As of December 31, 2014, approximately 3.4% of our assets were held abroad. There can be no assurance that the ongoing effects of the global financial crisis will not negatively impact growth, consumption, unemployment, investment and the price of exports in Chile. Crises and political uncertainties in other Latin American countries could also have an adverse effect on Chile, the price of our securities or our business.
 
Chile has considerable economic ties with China. In 2014, 24.4% of Chile’s exports went to China, mainly copper. China’s economy has grown at a strong pace in recent times, but a slowdown in economic activity in China may affect Chile’s GDP and export growth as well as the price of copper, which is Chile’s main export.
 
Chile is also involved in an international litigation with Bolivia regarding maritime borders. We cannot assure you that crises and political uncertainty in other Latin American countries will not have an adverse effect on Chile, the price of our securities or our business.
 
Fluctuations in the rate of inflation may affect our results of operations.
 
High levels of inflation in Chile could adversely affect the Chilean economy and have an adverse effect on our business, financial condition and results of operations. Extended periods of deflation could also have an adverse effect on our business, financial condition and results of operations. In 2009, Chile experienced deflation of 1.4% as the global economy contracted. In 2014, CPI inflation was 4.4% compared to 1.8% in 2013.
 
Our assets and liabilities are denominated in Chilean pesos, UF and foreign currencies. The UF is revalued in monthly cycles. On each day in the period beginning on the tenth day of any given month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. For more information regarding the UF, see “Item 5.  Operating and Financial Review and Prospects—C. Operating Results—Impact of Inflation.” Although we benefit from inflation in Chile due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no corresponding features in deposits, or other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation, including from extended periods of inflation that adversely affect economic growth or periods of deflation.
 
Any change in the methodology of how the CPI index or the UF is calculated could also adversely affect our business, financial condition and results of operations.
 
Currency fluctuations could adversely affect our financial condition and results of operations and the value of our securities.
 
Any future changes in the value of the Chilean peso against the U.S. dollar will affect the U.S. dollar value of our securities. The Chilean peso has been subject to large devaluations and appreciations in the past and could be subject to significant fluctuations in the future. Our results of operations may be affected by fluctuations in the exchange rates between the peso and the dollar despite our policy and Chilean regulations relating to the general avoidance of material exchange rate exposure. In order to avoid material exchange rate exposure, we enter into forward exchange transactions. The following table shows the value of the Chilean peso relative to the U.S. dollar as reported by the Central Bank at year end for the last five years and the devaluation or appreciation of the peso relative to the U.S. dollar in each of those years.
 
Year
 
Exchange rate (Ch$) at year end
   
Devaluation (Appreciation) (%)
 
2010
    468.37       (7.5 )
2011
    521.46       11.3  
2012
    478.60       (8.2 )
2013
    523.76       9.4  
2014
    607.38       16.0  
2015 (until May 12, 2015)
   
606.92
      (0.1 )

Source: Central Bank.
 
We may decide to change our policy regarding exchange rate exposure. Regulations that limit such exposures may also be amended or eliminated. Greater exchange rate risk will increase our exposure to the devaluation of the peso, and any such devaluation may impair our capacity to service foreign currency obligations and may, therefore, materially and adversely affect our financial condition and results of operations. Notwithstanding the existence of general policies and regulations that limit material exchange rate exposures, the economic policies of the Chilean government and any future fluctuations of the peso against the dollar could affect our financial condition and results of operations.
 
Banking regulations and other regulatory factors may restrict our operations and thereby adversely affect our financial condition and results of operations.
 
We are subject to regulation by the SBIF. In addition, we are subject to regulation by the Central Bank with regard to certain matters, including reserve requirements, interest rates, foreign exchange mismatches and market risks. Changes in banking regulations may materially and adversely affect our business, financial condition and results of operations. Chilean laws, regulations, policies and interpretations of laws relating to the banking sector and financial institutions are continually evolving and changing. These new reforms could result in increased competition in the industry and thus may have a material adverse effect on our financial condition and results of operations.
 
As a result of the recent global financial crisis, there has been an increase in government regulation of the financial services industry in many countries. Such regulation may also be increased in Chile, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures.  In addition, novel regulatory proposals abound in the current environment. If enacted, new regulations could require us to inject further capital into our business as well as in businesses we acquire, restrict the type or volume of transactions we enter into, or set limits on or require the modification of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity.  Changes in regulations may also cause us to face increased compliance costs. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, it may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.
 
In addition, extensive legislation affecting the financial services industry has recently been adopted in regions that directly or indirectly affect our business, including Spain, the United States and the European Union and other jurisdictions, and regulations are in the process of being implemented.
 
Pursuant to the General Banking Law, all Chilean banks may, subject to the approval of the SBIF, engage in certain businesses other than commercial banking depending on the risk associated with such business and their financial strength. Such additional businesses include securities brokerage, mutual fund management, securitization, insurance brokerage, leasing, factoring, financial advisory, custody and transportation of securities, loan collection and financial services. The General Banking Law also applies to the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices and limits the discretion of the SBIF to deny new banking licenses. There can be no assurance that regulators will not in the future impose more restrictive limitations on the activities of banks, including us. Any such change could have a material adverse effect on our financial condition or results of operations.
 
Historically, Chilean banks have not paid interest on amounts deposited in checking accounts. We have begun to pay interest on some checking accounts under certain conditions. If competition or other factors lead us to pay higher interest rates on checking accounts, to relax the conditions under which we pay interest or to increase the number of checking accounts on which we pay interest, any such change could have a material adverse effect on our financial condition or results of operations.
 
On November 20, 2013, the Chilean Congress approved new legislation to reduce the maximum rates that can be charged on loans. This new legislation is aimed at loans of less than UF 200 (U.S.$8,097) and with a term of more than 90 days, and thus includes consumer loans in installments, lines of credit and credit card lines. Previously, the maximum interest rate for loans of less than UF 200 and with a term of more than 90 days was calculated as the average rate of all transactions undertaken within the banking industry over the previous month of loans of less than UF 200 and with a term of more than 90 days, multiplied by a factor of 1.5. The average and maximum rates are published daily by the SBIF. On December 13, 2013, the SBIF published the new maximum rates for loans between UF 0 and UF 50 (US$2,024).  The new maximum rate was 47.91%, compared to 53.85% as of September 30, 2013. Throughout 2014, further reductions were gradually implemented. The objective is to lower  the maximum rate to a level equal to the average interest rate for loans between UF 200 (US$8,097) to UF 5,000 (US$202,416) plus 21%, unless the flow of new loans in the industry decreases by 10%-20%, in which case the reduction will be partially or completely suspended until the next period. As of December 31, 2014, the maximum rate for loans between UF 0 and UF 50 (US$2,024) was 38.63%.  We estimate that by year-end 2015 the maximum rate will reach the 37% level the authorities are seeking for loans of this size.
 
On December 13, 2013, the SBIF published the new maximum rates for loans between UF 50 (US$2,024) and UF 200 (US$8,097).  The new maximum rate was 45.91%, compared to 53.85% as of September 30, 2013. Throughout 2014, further reductions were gradually implemented. The objective is to lower  the maximum rate to a level equal to the average interest rate for loans between UF 200 (US$8,097) to UF 5,000 (US$202,416) plus 14%, unless the flow of new loans in the industry decreases by 10%-20%, in which case the reduction will be partially or completely suspended until the next period. We estimate that it will take an additional 14 months for the maximum rate to reach the 31% level the authorities are seeking for loans of this size. As of December 31, 2014, the maximum rate for loans between UF 50 and UF 200 (US$8,097) was 36.63%.
 
In March 2012, a bill aimed at giving additional enforcement powers to the SERNAC (Chile’s Consumer Protection Agency) regarding financial services became effective and created the SERNAC Financiero, a specific consumer protection agency for the financial industry. The SERNAC Financiero has powers to supervise and regulate Bank products and services. The creation of the SERNAC Financiero has also resulted in additional scrutiny regarding prices and contracts for financial products and services, making it more difficult to raise prices and increasing competition among bank and non-bank competitors.
 
In July 2012, new regulations regarding the selling of mandatory insurance for loans introduced that will increase competition and that could lower our fees from collecting these premiums. This had a negative impact on fees in 2013 in an amount we estimated to be approximately Ch$6 billion. In 2014, we again auctioned our mortgage P&L insurance provider and prices fell once more. This had an impact of Ch$6.8 billion in 2014.
 
We estimate that in 2015, maximum rate regulation and regulation on fees could affect our income by Ch$89 billion. This estimate is only preliminary, as it is difficult to estimate the speed of implementation of the reduction and the effect on loan volumes
 
In line with the future adoption of Basel III regulations in Chile, the SBIF has recently proposed to increase the minimum regulatory capital ratio from 8% to 10%, which would require an amendment to the General Banking Law. Although we currently have a regulatory capital ratio of 14.0% as of December 31, 2014, this change could require us to inject additional capital to our business in the future. According to initial estimates of the impact of market risk on regulatory capital, published for informational purposes only by the SBIF, our ratio of regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, including an initial estimate of the adjustments for market risk was 12.54% as of December 31, 2014.  No assurance can be given that these changes will not have a material impact on our capitalization ratio.
 
A change in labor laws in Chile or a worsening of labor relations in the Bank could impact our business.
 
As of December 31, 2014 on a consolidated basis, we had 11,478 employees, of which 72.1% were unionized. In March 2014, a new collective bargaining agreement was signed with the main unions, which became effective on January 1, 2014, and which will expire on December 31, 2018. We generally apply the terms of our collective bargaining agreement to unionized and non-unionized employees. We have traditionally had good relations with our employees and their unions, but we cannot assure you that in the future, a strengthening of cross-industry labor movements will not materially and adversely affect our business, financial condition or results of operations.
 
Congress is currently discussing a new labor law which should be passed in 2015.  The main points included in this law are:
 
 
·
Expands the scope of collective bargaining. Currently some groups of workers are excluded from the collective bargaining process.
 
 
·
Gives union has sole collective bargaining rights. The ability of non-union groups to negotiate a collective bargaining agreement is eliminated.
 
 
·
Expands workers ability to switch unions and gives workers the same rights under a collective bargaining agreement if they affiliate themselves post-negotiations.
 
 
·
Expand the right to greater information of unions including the wages of each worker included in a collective bargaining agreement.
 
 
·
Simplifies the standard collective bargaining process.
 
 
·
Collective bargaining agreements must last maximum three years instead of four.
 
 
·
Eliminate the ability of the employer to replace workers on strike and establishes minimum service guidelines that workers must respect.
 
 
·
Establishes the current collective bargaining agreement as the bargaining floor for future collective bargaining agreements.
 
 
·
Amplifies the matters that can be negotiated in collective bargaining.
 
 
·
Greater hours for training of union representatives.
 
 
·
Strengthen the participation of women in unions.
 
The Bank currently has a high unionization level and good labor relations. At this time, we are unable to estimate the impact these new regulations will have on labor relations and costs. The current project may also suffer additional modification will being discussed in Congress.
 
These and any additional legislative or regulatory actions in Chile, Spain, the European Union, the United States or other countries, and any required changes to our business operations resulting from such legislation and regulations, could result in reduced capital availability, significant loss of revenue, limit our ability to continue organic growth (including increased lending), pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have an adverse effect on our business, results of operations or financial condition in the future.
 
Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.
 
Issuers of securities in Chile are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in the United States and other countries.  In particular, as a Chilean regulated financial institution, we are required to submit to the SBIF on a
 
 
monthly basis unaudited consolidated balance sheets and income statements, excluding any note disclosure, prepared in accordance with Chilean Bank GAAP and the rules of the SBIF.  This disclosure differs in a number of significant respects from generally accepted accounting principles in the United States and information generally available in the United States with respect to U.S. financial institutions. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.
 
Chile imposes controls on foreign investment and repatriation of investments that may affect your investment in, and earnings from, our ADSs.
 
Equity investments in Chile by persons who are not Chilean residents have generally been subject to various exchange control regulations, which restrict the repatriation of the investments and earnings therefrom. In April 2001, the Central Bank eliminated the regulations that affected foreign investors, except that investors are still required to provide the Central Bank with information relating to equity investments and conduct such operations within Chile’s Formal Exchange Market. The ADSs are subject to a contract, dated May 17, 1994, among the Depositary, us and the Central Bank (the “Foreign Investment Contract”) that remains in full force and effect. The ADSs continue to be governed by the provisions of the Foreign Investment Contract subject to the regulations in existence prior to April 2001. The Foreign Investment Contract grants the Depositary and the holders of the ADSs access to the Formal Exchange Market, which permits the Depositary to remit dividends it receives from us to the holders of the ADSs. The Foreign Investment Contract also permits ADS holders to repatriate the proceeds from the sale of shares of our common stock withdrawn from the ADR facility, or that have been received free of payment as a consequence of spin offs, mergers, capital increases, wind ups, share dividends or preemptive rights transfers, enabling them to acquire the foreign currency necessary to repatriate earnings from such investments. Pursuant to Chilean law, the Foreign Investment Contract cannot be amended unilaterally by the Central Bank, and there are judicial precedents (although not binding with respect to future judicial decisions) indicating that contracts of this type may not be abrogated by future legislative changes or resolutions of the Advisory Council of the Central Bank. Holders of shares of our common stock, except for shares of our common stock withdrawn from the ADS facility or received in the manner described above, are not entitled to the benefits of the Foreign Investment Contract, may not have access to the Formal Exchange Market, and may have restrictions on their ability to repatriate investments in shares of our common stock and earnings therefrom.
 
Holders of ADSs are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by holders of ADSs will be paid net of foreign currency exchange fees and expenses of the Depositary and will be subject to Chilean withholding tax, currently imposed at a rate of 35.0% (subject to credits in certain cases). If for any reason, including changes in Chilean law, the Depositary were unable to convert Chilean pesos to U.S. dollars, investors would receive dividends and other distributions, if any, in Chilean pesos.
 
We cannot assure you that additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them or the repatriation of the proceeds from such disposition or the payment of dividends will not be imposed in the future, nor can we advise you as to the duration or impact of such restrictions if imposed.
 
Investors may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.
 
We are a Chilean corporation. None of our directors are residents of the United States and most of our executive officers reside outside the United States. In addition, a substantial portion of our assets and the assets of our directors and executive officers are located outside the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADSs, none of our directors, officers or controlling persons has consented to service of process in the United States or to the jurisdiction of any United States court.  As a result, it may be difficult for investors to effect service of process within the United States on such persons.
 
It may also be difficult for ADS holders to enforce in the United States or in Chilean courts money judgments obtained in United States courts against us or our directors and executive officers based on civil
 
 
liability provisions of the U.S. federal securities laws. If a U.S. court grants a final money judgment in an action based on the civil liability provisions of the federal securities laws of the United States, enforceability of this money judgment in Chile will be subject to the obtaining of the relevant “exequatur” (i.e., recognition and enforcement of the foreign judgment) according to Chilean civil procedure law currently in force, and consequently, subject to the satisfaction of certain factors. The most important of these factors are the existence of reciprocity, the absence of a conflicting judgment by a Chilean court relating to the same parties and arising from the same facts and circumstances and the Chilean courts’ determination that the U.S. courts had jurisdiction, that process was appropriately served on the defendant and that enforcement would not violate Chilean public policy. Failure to satisfy any of such requirements may result in non-enforcement of your rights.
 
Risks Relating to Our Controlling Shareholder and our ADSs
 
Our controlling shareholder has a great deal of influence over our business and its interests could conflict with yours.
 
Santander Spain, our controlling shareholder, controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A., which are controlled subsidiaries. Santander Spain has control over 67.18% of our shares and actual participation, excluding non-controlling shareholders that participate in Santander Chile Holding, S.A. of 67.01%.
 
Due to its share ownership, our controlling shareholder has the ability to control us and our subsidiaries, including the ability to:
 
 
·
elect the majority of the directors and exercise control over our company and subsidiaries;
 
 
·
cause the appointment of our principal officers;
 
 
·
declare the payment of any dividends;
 
 
·
agree to sell or otherwise transfer its controlling stake in us; and
 
 
·
determine the outcome of substantially all actions requiring shareholder approval, including amendments of our bylaws, transactions with related parties, corporate reorganizations, acquisitions and disposals of assets and issuance of additional equity securities, if any.
 
In December 2012, primarily in response to the requirements of the European Banking Authority, the Bank of Spain and regulators in various jurisdictions, Santander Spain adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander). The purpose of the framework is to organize and standardize the corporate governance practices of Santander Spain and its most significant subsidiaries, including us.  (Our Board of Directors approved the adoption of this corporate governance framework in July 2013,) subject to certain overarching principles, such as the precedence of applicable laws and regulations over the framework to the extent they are in conflict. See “Item 16G. Corporate Governance.” Our adoption of this framework may increase Santander Spain’s control over us.
 
We operate as a stand-alone subsidiary within the Santander Group. Our controlling shareholder has no liability for our banking operations, except for the amount of its holdings of our capital stock. The interests of Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain will limit other shareholders’ ability to influence corporate matters. As a result, we may take actions that our other shareholders do not view as beneficial.
 
Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange (“NYSE”), limiting the protections afforded to investors.
 
We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance
 
 
committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the NYSE requirements for U.S. issuers; therefore we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.
 
There may be a lack of liquidity and market for our shares and ADSs.
 
Our ADSs are listed and traded on the NYSE. Our common stock is listed and traded on the Santiago Stock Exchange, the Chile Electronic Stock Exchange and the Valparaiso Stock Exchange, which we refer to collectively as the Chilean Stock Exchanges, although the trading market for the common stock is small by international standards. At December 31, 2014, we had 188,446,126,794 shares of common stock outstanding. The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. According to Article 14 of the Ley de Mercado de Valores, Ley No. 18,045, or the Chilean Securities Market Law, the Superintendencia de Valores y Seguros, or the Superintendency of Securities and Insurance, may suspend the offer, quotation or trading of shares of any company listed on one or more Chilean Stock Exchanges for up to 30 days if, in its opinion, such suspension is necessary to protect investors or is justified for reasons of public interest. Such suspension may be extended for up to 120 days. If, at the expiration of the extension, the circumstances giving rise to the original suspension have not changed, the Superintendency of Securities and Insurance will then cancel the relevant listing in the registry of securities. In addition, the Santiago Stock Exchange may inquire as to any movement in the price of any securities in excess of 10% and suspend trading in such securities for a day if it deems necessary.
 
Although our common stock is traded on the Chilean Stock Exchanges, there can be no assurance that a liquid trading market for our common stock will continue to exist. Approximately 33.0% of our outstanding common stock is held by the public (i.e., shareholders other than Santander Spain and its affiliates), including our shares that are represented by ADSs trading on the NYSE.  A limited trading market in general and our concentrated ownership in particular may impair the ability of an ADS holder to sell in the Chilean market shares of common stock obtained upon withdrawal of such shares from the ADR facility in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADSs.
 
You may be unable to exercise preemptive rights.
 
The Ley Sobre Sociedades Anónimas, Ley No. 18,046 and the Reglamento de Sociedades Anónimas, which we refer to collectively as the Chilean Companies Law, and applicable regulations require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Such an offering would not be possible in the United States unless a registration statement under the U.S. Securities Act of 1933 (“Securities Act”), as amended, were effective with respect to such rights and common stock or an exemption from the registration requirements thereunder were available.
 
Since we are not obligated to make a registration statement available with respect to such rights and the common stock, you may not be able to exercise your preemptive rights in the United States. If a registration statement is not filed or an applicable exemption is not available under U.S. securities law, the Depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of any such sale.
 
As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.
 
Our corporate affairs are governed by our estatutos, or by-laws, and the laws of Chile, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Chile. Under Chilean corporate law, you may have fewer and less well-defined rights to protect your interests relative to actions taken by our board of directors or the holders of our common shares than under the laws of other jurisdictions outside Chile.  For example, under legislation applicable to Chilean banks, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.
 
Although Chilean corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Chile, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.
 
Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.
 
Holders of ADSs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our by-laws and the laws of Chile.  Holders of ADSs may exercise voting rights with respect to the common stock represented by ADSs only in accordance with the deposit agreement governing the ADSs.  Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders.  Holders of our common stock will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy.  By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the Depositary following our notice to the Depositary requesting the Depository to do so.  To exercise their voting rights, holders of ADSs must instruct the Depositary on a timely basis on how they wish to vote.  This voting process necessarily will take longer for holders of ADSs than for holders of our common stock.  If the Depositary fails to receive timely voting instructions for all or part of the ADSs, the Depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.
 
Holders of ADSs also may not receive the voting materials in time to instruct the Depositary to vote the common stock underlying their ADSs.  In addition, the Depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions.  Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the common stocks underlying their ADSs are not voted as requested.
 
ADS holders may be subject to additional risks related to holding ADSs rather than shares.
 
Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:
 
 
·
as an ADS holder, we will not treat you as one of our direct shareholders and you may not be able to exercise shareholder rights;
 
 
·
we and the depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and
 
 
·
the depositary may take or be required to take actions under the Deposit Agreement that may have adverse consequences for some ADS holders in their particular circumstances.
 
ITEM 4. INFORMATION ON THE COMPANY
 
A. History and Development of the Company
 
Overview
 
We are the largest bank in Chile in terms of total assets and equity. As of December 31, 2014, we had total assets of Ch$ 30,975,347 million (U.S.$50,919 million), outstanding loans and interbank loans, net of allowances for loan losses of Ch$22,196,390 (U.S.$36,487million), total deposits of Ch$16,894,437 million (U.S.$27,772 million) and equity of Ch$ 2,675,068 million (U.S.$4,397 million). As of December 31, 2014, we employed 11,478 people and had the largest private branch network in Chile, with 474 branches. Our headquarters are located in Santiago and we operate in every major region of Chile.
 
We provide a broad range of commercial and retail banking services to our customers, including Chilean peso and foreign currency denominated loans to finance a variety of commercial transactions, trade, foreign currency
 
 
forward contracts and credit lines and a variety of retail banking services, including mortgage financing. We seek to offer our customers a wide range of products while providing high levels of service. In addition to our traditional banking operations, we offer a variety of financial services, including financial leasing, financial advisory services, mutual fund management, securities brokerage, insurance brokerage and investment management.
 
The legal predecessor of Santander-Chile was Banco Santiago (“Santiago”). Santiago was incorporated by public deed dated September 7, 1977 granted at the Notary Office of Alfredo Astaburuaga Gálvez. Santiago received its permission to incorporate and function as a bank by Resolution No. 118 of the SBIF on October 27, 1977. Santiago’s by-laws were approved by Resolution No. 103 of the SBIF on September 22, 1977. In January 1997, Santiago merged with Banco O’Higgins, with Santiago being the surviving entity. In 1999, Santiago became a controlled subsidiary of Santander Spain. As of June 30, 2002, Santiago was the second-largest private sector bank in Chile in terms of total assets, deposits, loans and shareholders’ equity.
 
Old Santander-Chile was established as a subsidiary of Santander Spain in 1978. In 1982, Old Santander-Chile acquired a significant portion of the assets and liabilities of Banco Español-Chile, a domestic bank that had become insolvent. In July 1996, Old Santander-Chile was merged into Banco Osorno y la Unión, becoming “Banco Santander-Chile,” the third-largest private bank in terms of outstanding loans at that date.
 
On August 1, 2002, Santiago and Old Santander Chile merged, whereby the latter ceased to exist and Santander-Chile (formerly known as Santiago) being the surviving entity.
 
Our principal executive offices are located at Bandera 140, Santiago, Chile. Our telephone number is +562-320-2000 and our website is www.santander.cl. None of the information contained on our website is incorporated by reference into, or forms part of, this Annual Report. Our agent for service of process in the United States is CT Corporation, located at 111 Eighth Avenue, 13th Floor, New York, New York 10011.
 
Relationship with Santander Spain
 
We believe that our relationship with our controlling shareholder, Santander Spain, offers us a significant competitive advantage over our peer Chilean banks. Santander Spain is one of the largest financial groups in Brazil and the rest of Latin America, in terms of total assets measured on a regional basis. It is the largest financial group in Spain and is a major player elsewhere in Europe, including the United Kingdom, Poland and Portugal, where it is the third-largest banking group. Through Santander Consumer, it also operates a leading consumer finance franchise in the United States, as well as in Germany, Italy, Spain, and several other European countries.
 
Our relationship with Santander Spain provides us with access to the group’s client base, while its multinational focus allows us to offer international solutions to our clients’ financial needs. We also have the benefit of selectively borrowing from Santander Spain’s product offerings in other countries, as well as of its know-how in systems management. We believe that our relationship with Santander Spain will also enhance our ability to manage credit and market risks by adopting policies and knowledge developed by Santander Spain. In addition, our internal auditing function has been strengthened as a result of the addition of an internal auditing department that concurrently reports directly to our Audit Committee and the audit committee of Santander Spain. We believe that this structure leads to improved monitoring and control of our exposure to operational risks.
 
Santander Spain’s support of Santander-Chile includes the assignment of managerial personnel to key supervisory areas of Santander-Chile, such as risks, auditing, accounting and financial control. Santander-Chile does not pay any management or other fees to Santander Spain in connection with these support services.
 
B. Organizational Structure
 
Santander Spain controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones Ltda. and Santander Chile Holding S.A. which are controlled subsidiaries. Santander Spain control over 67.18% of our shares and actual participation when excluding non-controlling interests participating in Santander Chile Holding S.A. of 67.01%.
 
Shareholder
 
Number of Shares
   
Percentage
 
Santander Chile Holding S.A.
    66,822,519,695       35.46  
Teatinos Siglo XXI Inversiones S.A.
    59,770,481,573       31.72  

The chart below sets forth the names and areas of responsibility of our senior managers as of April 2015.
 
 
 
 

C. Business Overview
 
We have 474 total branches, 273 of which are operated under the Santander brand name, with the remaining branches under certain specialty brand names, including 67 under the Santander Banefe brand name, 51 under the Select brand name, 5 specialized branches for the Middle Market, and 78 as auxiliary and payment centers. We provide a full range of financial services to corporate and individual customers. We divide our clients into the following groups: (i) Individuals and Small and mid-sized, (ii) Companies and Institutions, (iii) Global Banking and Markets and (iv) Corporate Activities (“Other”).
 
We have the following operating segments within each group:
 
(i) Individuals and Small and mid-sized (“SMEs”)
 
 
·
Santander Banefe serves individuals with monthly incomes from Ch$150,000 pesos (US$247) to Ch$400,000 pesos (US$658). This operating segment provides customers with a variety of services, including consumer loans, credit cards, auto loans, mortgage loans, debit cards, savings products, mutual funds and insurance brokerage.
 
 
·
Commercial Banking serves individuals with monthly incomes over Ch$400,000 pesos (US$658). This operating segment provides customers with 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, stock brokerage and insurance brokerage.
 
 
·
SMEs serves companies with annual sales less than Ch$1,200 million (US$2.0 million). This operating segment provides customers with a variety of products and services, including commercial loans, government-guaranteed loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, savings products, mutual funds and insurance brokerage.
 
(ii) Companies and Institutions
 
 
·
Middle Market serves companies with annual sales in excess of Ch$1,200 million (US$2.0 million) but not more than Ch$10,000 million (US$16.4 million) are included in this segment. The companies within this operating segment have access to many 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
 
 
·
Real Estate includes companies in the real estate industry who sell properties to third parties and have annual sales exceeding Ch$800 million (US$1.3 million). These clients are offered not only traditional banking services but also specialized assistance in financing projects, chiefly residential, with the aim of expanding sales of mortgage loans.
 
 
·
Large Corporations is made up of  companies with annual sales exceeding Ch$10,000 million (US$16.4 million). The companies within this segment have access to many 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.
 
 
·
Institutions serves  institutions such as universities and local and regional governments. The institutions within this segment have access to many products including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, savings products, mutual funds and insurance.
 
(iii) Global Banking and Markets
 
 
·
Corporate consists of foreign and domestic multinational companies with sales over Ch$10,000 million. The companies within this segment have access to many 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.
 
 
·
Treasury 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. Treasury may broker transactions and also manages the Bank’s investment portfolio.
 
 
(iv)  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 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.
 
The table below sets forth our lines of business and certain statistical information relating to each of them for the year ended December 31, 2014. Please see “Note 3—Business Segments” to our Audited Consolidated Financial Statements for details of revenue by business segment in the last three years.
 
   
As of December 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$
 
Individuals and SMEs
                                         
Santander Banefe
    752,267       91,979       21,257       1,352       (46,410 )     (44,657 )     23,521  
Commercial Banking
    11,083,815       519,541       128,891       10,577       (119,886 )     (350,964 )     188,159  
Small and mid-sized (SMEs)
    3,354,840       269,483       47,011       6,529       (160,581 )     (83,985 )     78,457  
Subtotal
    15,190,922       881,003       197,159       18,458       (326,877 )     (479,606 )     290,137  
Companies and Institutions
                                                       
Middle market
    1,888,557       80,497       13,460       8,420       (21,690 )     (31,225 )     49,462  
Large Corporations
    2,138,226       72,303       8,798       6,734       (9,374 )     (18,416 )     60,045  
Real estate
    1,027,191       32,899       4,700       533       3,048       (5,995 )     35,185  
Institutions
    390,895       33,608       2,447       655       697       (13,587 )     23,820  
Subtotal
    5,444,869       219,307       29,405       16,342       (27,319 )     (69,223 )     168,512  
Subtotal Commercial Banking
    20,635,791       1,100,310       226,564       34,800       (354,196 )     (548,829 )     458,649  
Global Banking and Markets
                                                       
Corporate
    2,201,913       72,747       21,188       (7,155 )     (701 )     (21,045 )     65,034  
Treasury
    -       14,990       764       54,011       -       (20,899 )     48,866  
Subtotal
    2,201,913       87,737       21,952       46,856       (701 )     (41,944 )     113,900  
Other
    54,945       129,057       (21,233 )     30,909       (6 )     2,564       141,291  
Total
    22,892,649       1,317,104       227,283       112,565       (354,903 )     (588,209 )     713,840  
Other operating income
                                                    6,545  
Other operating expenses and impairment
                                                    (95,610 )
Income from investments in associates and other companies
                                                    2,165  
Income tax expense
                                                    (51,050 )
Net income for the year
                                                    575,890  
 

(1)
Corresponds to loans and accounts receivable from customers, without deducting their allowances for loan losses.
 
(2)
Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.
 
(3)
Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.
 
Operations through Subsidiaries
 
Today, the General Banking Law permits us to directly provide the leasing and financial advisory services that we could formerly offer only through our subsidiaries, to offer investment advisory services outside of Chile and to undertake activities that we could not formerly offer directly or through subsidiaries, such as factoring, securitization, foreign investment funds, custody and transport of securities and insurance brokerage services. For the twelve–month period ended December 31, 2014, our subsidiaries collectively accounted for 1.6% of our total consolidated assets.
 
       
Percent ownership share As of December 31,
 
       
2014
   
2013
   
2012
 
Name of the Subsidiary
 
Main activity
 
Direct
   
Indirect
   
Total
   
Direct
   
Indirect
   
Total
   
Direct
   
Indirect
   
Total
 
       
%
   
%
   
%
   
%
   
%
   
%
   
%
   
%
   
%
 
Santander Corredora de Seguros Limitada
 
Insurance brokerage
    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
    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
                                        99.96       0.02       99.98  
Santander Agente de Valores Limitada
 
Securities brokerage
    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
    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
                      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.
 
(**) 
From May 1, 2014, this entity was absorbed by the Bank, with authorization for this transaction obtained from the SBIF on March 26, 2014.
 
The following companies have been consolidated based on the determination that they are controlled by the Bank, in accordance with IFRS 10 Consolidated Financial Statements:
 
 
-
Santander Gestión de Recaudación y Cobranza Limitada (collection services)
 
 
-
Multinegocios S.A. (management of sales force).
 
 
-
Servicios Administrativos y Financieros Limitada (management of sales force)
 
 
-
Multiservicios de Negocios Limitada (call center)
 
 
-
Bansa Santander S.A. (management of repossessed assets and leasing of properties)
 
 
-
Servicios de Cobranza Fiscalex Limitada (collection services). As of August 1, 2014, Servicios de Cobranza Fiscalex Limitada was absorbed by Santander Gestión de Recaudación y Cobranza Limitada. See Note 02 d) of the Audited Consolidated Financial Statements.
 
Competition
 
Overview
 
The Chilean financial services market consists of a variety of largely distinct sectors. The most important sector, commercial banking, includes a number of privately-owned banks and one public–sector bank, Banco del Estado (which operates within the same legal and regulatory framework as the private sector banks). The private-sector banks include local banks and a number of foreign-owned banks operating in Chile. The Chilean banking system is comprised of 24 banks, including one public-sector bank. The five largest banks accounted for 75.9% of all outstanding loans by Chilean financial institutions as of December 31, 2014 (excluding Corpbanca’s subsidiary in Colombia).
 
The Chilean banking system has experienced increased competition in recent years, largely due to consolidation in the industry and new legislation. We also face competition from non-bank and non-finance competitors, principally department stores, credit unions and cajas de compensación with respect to some of our credit products, such as credit cards, consumer loans and insurance brokerage. In addition, we face competition from non–bank finance competitors, such as leasing, factoring and automobile finance companies, with respect to credit products, and mutual funds, pension funds and insurance companies, with respect to savings products. Currently, banks continue to be the main suppliers of leasing, factoring and mutual funds, and the insurance sales business has grown rapidly.
 
All the competition data in the following sections is based on Chilean Bank GAAP.
 
The following tables set out certain statistics comparing our market position to that of our peer group, defined as the five largest banks in Chile in terms of total loans as of December 31, 2014.
 
   
As of December 31, 2014,
unless otherwise noted
 
   
Market Share
   
Rank
 
Commercial loans
    16.1 %     2  
Consumer loans
    22.8 %     1  
Residential mortgage loans
    20.6 %     1  
Total loans
    18.7 %     1  
Deposits
    16.0 %     2  
Credit card accounts
    19.4 %     2  
Checking accounts(1) 
    21.0 %     2  
Branches
    20.0 %     1  

Source: SBIF, excludes Corpbanca Colombia.
 
(1)
As of November 2014, the latest data available.
 

Loans
 
As of December 31, 2014, our loan portfolio was the largest among Chilean banks. Our loan portfolio, including interbank loans, represented 18.7% of the market for loans in the Chilean financial system as of such date. The following table sets forth our and our peer group’s market shares in terms of loans (excluding Corpbanca Colombia).
 
   
As of December 31, 2014
 
Loans
 
Ch$ million
   
U.S.$ million
   
Market
Share
 
Santander-Chile
    22,892,649     $ 37,632       18.7 %
Banco de Chile
    22,481,721     $ 36,956       18.4 %
Banco del Estado
    17,053,330     $ 28,033       13.9 %
Banco de Crédito e Inversiones
    16,103,283     $ 26,471       13.1 %
Corpbanca
    9,062,010     $ 14,897       7.4 %
BBVA, Chile
    8,383,434     $ 13,781       6.8 %
Others
    26,514,248     $ 43,585       21.7 %
Chilean financial system
    122,490,675     $ 201,355       100.0 %

Source: SBIF.
 
Deposits
 
We had a 16.8% market share in deposits, ranking second among banks in Chile as of December 31, 2014. Deposit market share is based on total time and demand deposits as of the respective dates. The following table sets forth our and our peer group’s market shares in terms of deposits (excluding Corpbanca Colombia).
 
   
As of December 31, 2014
 
 
Deposits
 
Ch$ million
   
U.S.$ million
   
Market Share
 
Santander-Chile
    16,894,437     $ 27,772       16.8 %
Banco de Chile
    16,655,619     $ 27,379       16.6 %
Banco del Estado
    19,295,095     $ 31,718       19.2 %
Banco de Crédito e Inversiones
    12,821,049     $ 21,076       12.8 %
Corpbanca
    6,931,517     $ 11,394       6.9 %
BBVA, Chile
    6,316,699     $ 10,384       6.3 %
Others
    21,468,356     $ 35,291       21.4 %
Chilean financial system
    100,382,772     $ 165,014       100.0 %

Source: SBIF.
 
Total equity
 
With Ch$2,642,979 million (U.S.$4,345 million) in equity in Chilean Bank GAAP as of December 31, 2014, we were the largest commercial bank in Chile in terms of shareholders’ equity. The following table sets forth our and our peer group’s shareholders’ equity.
 
   
As of December 31, 2014
 
 
Total Equity
 
Ch$ million
   
U.S.$ million
   
Market Share
 
Santander-Chile
    2,642,979     $ 4,345       18.3 %
Banco de Chile
    2,535,156     $ 4,167       17.6 %
Banco del Estado
    1,242,499     $ 2,042       8.6 %
Banco de Crédito e Inversiones
    1,800,964     $ 2,961       12.5 %
Corpbanca
    1,767,740     $ 2,906       12.3 %
BBVA, Chile
    715,544     $ 1,176       5.0 %
Others
    3,710,540     $ 6,100       25.7 %
Chilean financial system
    14,415,422     $ 23,697       100.0 %

Source: SBIF.
 
Efficiency
 
As of December 31, 2014, we were the most efficient bank in our peer group. The following table sets forth our and our peer group’s efficiency ratio (defined as operating expenses as a percentage of operating revenue, which is the aggregate of net interest income, fees and income from services (net), net gains from mark–to–market and trading, exchange differences (net) and other operating income (net)) in 2014.
 
 
Efficiency ratio as defined by the SBIF
 
As of
December 31, 2014
 
Santander-Chile
    41.1 %
Banco de Chile
    43.3 %
Banco del Estado
    58.1 %
Banco de Crédito e Inversiones
    46.0 %
BBVA, Chile
    65.4 %
Corpbanca
    52.0 %
Chilean financial system
    49.3 %

Source: SBIF.
 
Net income for the period attributable to shareholders
 
In 2014, we were the second largest bank in Chile in terms of net income attributable to shareholders of Ch$550,331 million (U.S.$905 million) measured under Chilean Bank GAAP. The following table sets forth our and our peer group’s net income.
 
   
As of December 31, 2014
 
 
Net income for the year (1)
 
Ch$ million
   
U.S.$ million
   
Market Share
 
Santander-Chile
    550,331       905       22.7 %
Banco de Chile
    591,080       972       24.4 %
Banco de Crédito e Inversiones
    342,972       564       14.1 %
Corpbanca
    226,260       372       9.3 %
BBVA, Chile
    73,328       121       3.0 %
Banco del Estado
    165,659       272       6.8 %
Others
    476,127       783       19.6 %
Chilean financial system
    2,425,757       3,655       100.0 %

Source: SBIF.
 
(1)
Net income attributable to shareholders in local Chilean Bank GAAP.
 
Return on equity
 
As of December 31, 2014, we were the second most profitable bank in our peer group (as measured by return on period-end equity under Chilean Bank GAAP) and the most capitalized bank as measured by the Chilean BIS ratio. The following table sets forth our and our peer group’s return on average equity and BIS ratio.
 
   
Return on period-end equity as of December 31, 2014
   
BIS Ratio as of December 31, 2014
 
Santander-Chile
    21.5 %     14.0 %
Banco de Chile
    23.3 %     13.3 %
Banco del Estado
    14.1 %     11.5 %
Banco de Crédito e Inversiones
    19.0 %     13.8 %
BBVA, Chile
    10.2 %     11.5 %
Corpbanca
    15.0 %     12.4 %
Chilean Financial System
    17.2 %     13.4 %

Source: SBIF.
 
Asset Quality
 
As of December 31, 2014, we had the second-highest non-performing loan to loan ratio in our peer group. The following table sets forth our and our peer group’s non-performing loan ratio as defined by the SBIF as of December 31, 2014.
 
   
Non-performing loans / total loans(1) as of December 31, 2014
 
Santander-Chile
    2.81  
Banco de Chile
    1.21  
Banco del Estado
    3.44  
Banco de Crédito e Inversiones
    2.24  
BBVA, Chile
    1.58  
Corpbanca
    1.48  
Chilean financial system
    2.10  

Source: SBIF.
 
(1)
Non-performing loans divided by total loans, excluding interbank loans.
 
Regulation and Supervision
 
General
 
In Chile, only banks may maintain checking accounts for their customers, conduct foreign trade operations, and, together with non-banking financial institutions, accept time deposits. The principal authorities that regulate financial institutions in Chile are the SBIF and the Central Bank. Chilean banks are primarily subject to the General Banking Law, and secondarily subject, to the extent not inconsistent with this statute, the provisions of the Chilean Companies Law governing public corporations, except for certain provisions which are expressly excluded.
 
The modern Chilean banking system dates from 1925 and has been characterized by periods of substantial regulation and state intervention, as well as periods of deregulation. The most recent period of deregulation commenced in 1975 and culminated in the adoption of a series of amendments to General Banking Law. That law, amended most recently in 2001, granted additional powers to banks, including general underwriting powers for new issues of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory and mutual fund services, administration of investment funds, factoring, securitization products and financial leasing services.
 
The Central Bank
 
The Central Bank is an autonomous legal entity created by the Chilean Constitution. It is subject to the Chilean Constitution and its own ley orgánica constitucional, or organic constitutional law. To the extent not inconsistent with the Chilean Constitution or the Central Bank’s organic constitutional law, the Central Bank is also subject to private sector laws (but in no event is it subject to the laws applicable to the public sector). It is directed and administered by a Board of Directors composed of five members designated by the President of Chile, subject to the approval of the Chilean Senate.
 
The legal purpose of the Central Bank is to maintain the stability of the Chilean peso and the orderly functioning of Chile’s internal and external payment systems. The Central Bank’s powers include setting reserve requirements, regulating the amount of money and credit in circulation, establishing regulations and guidelines regarding finance companies, foreign exchange (including the Formal Exchange Market) and banks’ deposit-taking activities.
 
The SBIF
 
Banks are supervised and controlled by the SBIF, an independent Chilean governmental agency. The SBIF authorizes the creation of new banks and has broad powers to interpret and enforce legal and regulatory requirements applicable to banks and financial companies. Furthermore, in cases of noncompliance with such legal and regulatory requirements, the SBIF has the ability to impose sanctions. In extreme cases, it can appoint, with the prior approval of the Board of Directors of the Central Bank, a provisional administrator to manage a bank. It must also approve any amendment to a bank’s by-laws or any increase in its capital.
 
The SBIF examines all banks from time to time, generally at least once a year. Banks are also required to submit their financial statements monthly to the SBIF, and a bank’s financial statements are published at least four times a year in a newspaper with countrywide coverage. In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the SBIF. A bank’s annual financial statements and the opinion of its independent auditors must also be submitted to the SBIF.
 
Any person wishing to acquire, directly or indirectly, 10.0% or more of the share capital of a bank must obtain the prior approval of the SBIF. Absent such approval, the acquiror of shares so acquired will not have the right to vote. The SBIF may only refuse to grant its approval, based on specific grounds set forth in the General Banking Law.
 
According to Article 35bis of the General Banking Law, the prior authorization of the SBIF is required for:
 
 
·
the merger of two or more banks;
 
 
·
the acquisition of all or a substantial portion of a bank’s assets and liabilities by another bank;
 
 
·
the control by the same person, or controlling group, of two or more banks; or
 
 
·
a substantial increase in the existing control of a bank by a controlling shareholder of that bank.
 
Such prior authorization is required solely when the acquiring bank or the resulting group of banks would own a significant market share in loans, defined by the SBIF to be more than 15.0% of all loans in the Chilean banking system. The intended purchase, merger or expansion may be denied by the SBIF; or, if the acquiring bank or resulting group would own a market share in loans determined to be more than 20.0% of all loans in the Chilean banking system, the purchase, merger or expansion may be conditioned on one or more of the following:
 
 
·
that the bank or banks maintain regulatory capital higher than 8.0% and up to 14.0% of their risk-weighted assets;
 
 
·
that the technical reserve established in Article 65 of the General Banking Law be applicable when deposits exceed one and a half times the resulting bank’s paid-in capital and reserves; or
 
 
·
that the margin for interbank loans be reduced to 20.0% of the resulting bank’s regulatory capital.
 
If the acquiring bank or resulting group would own a market share in loans determined by the SBIF to be more than 15% but less than 20%, the authorization will be conditioned on the bank or banks maintaining a regulatory capital not lower than 10% of their risks-weighted assets for the period specified by the SBIF, which may not be less than one year. The calculation of the risk-weighted assets is based on a five-category risk classification system applied to a bank’s assets that is based on the Basel Committee recommendations.
 
Pursuant to the regulations of the SBIF, the following ownership disclosures are required:
 
 
·
a bank is required to inform the SBIF of the identity of any person owning, directly or indirectly, 5.0% or more of such banks’ shares;
 
 
·
holders of ADSs must disclose to the Depositary the identity of beneficial owners of ADSs registered under such holders’ names;
 
 
·
the Depositary is required to notify the bank as to the identity of beneficial owners of ADSs which such Depositary has registered and the bank, in turn, is required to notify the SBIF as to the identity of the beneficial owners of the ADSs representing 5.0% or more of such banks’ shares; and
 
 
·
bank shareholders who individually hold 10.0% or more of a bank’s capital stock and who are controlling shareholders must periodically inform the SBIF of their financial condition.
 
Limitations on Types of Activities
 
Chilean banks can only conduct those activities allowed by the General Banking Law: making loans, accepting deposits and, subject to limitations, making investments and performing financial services. Investments are restricted to real estate for the bank’s own use, gold, foreign exchange and debt securities. Through subsidiaries, banks may also engage in other specific financial service activities such as securities brokerage services, equity investments, securities, mutual fund management, investment fund management, financial advisory and leasing activities. Subject to specific limitations and the prior approval of the SBIF and the Central Bank, Chilean banks may own majority or non-controlling interests in foreign banks.
 
Since June 1, 2002, Chilean banks are allowed to offer a new checking account product that pays interest. The SBIF also stated that these accounts may be subject to minimum balance limits and different interest rates depending on average balances held in the account and that banks may also charge fees for the use of this new product. For banks with a solvency score of less than A, the Central Bank has also imposed additional caps to the interest rate that can be paid.
 
On June 5, 2007, pursuant to Law 20.190, new regulations became effective authorizing banks to enter into transactions involving a wider range of derivatives, such as futures, options, swaps, forwards and other derivative instruments or contracts subject to specific limitations established by the Central Bank of Chile. Previously, banks were able to enter into transactions involving derivatives, but subject to more restrictive guidelines.
 
Deposit Insurance
 
The Chilean government guarantees up to 90.0% of the principal amount of certain time and demand deposits and savings accounts held by natural persons with a maximum value of UF120 per person (Ch$2,955,252 or U.S.$4,858 as of December 31, 2014) per calendar year in the entire financial system.
 
Reserve Requirements
 
Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits (with terms of less than one year). For purposes of calculating the reserve obligation, banks are authorized to deduct daily from their foreign currency denominated liabilities, the balance in foreign currency of certain loans and financial investments held outside of Chile, the most relevant of which include:
 
 
·
cash clearance account, which should be deducted from demand deposit for calculating reserve requirement;
 
 
·
certain payment orders issued by pension providers; and
 
 
·
the amount set aside for “technical reserve” (as described below), which can be deducted from reserve requirement.
 
The Central Bank has statutory authority to require banks to maintain reserves of up to an average of 40.0% for demand deposits and up to 20.0% for time deposits (irrespective, in each case, of the currency in which they are denominated) to implement monetary policy. In addition, to the extent that the aggregate amount of the following types of liabilities exceeds 2.5 times the amount of a bank’s regulatory capital, a bank must maintain a 100% “technical reserve” against them:  demand deposits, deposits in checking accounts, or obligations payable on sight incurred in the ordinary course of business, and in general all deposits unconditionally payable immediately but excluding interbank demand deposits.
 
Minimum Capital
 
Under the General Banking Law, a bank is required to have a minimum of UF800,000 (approximately Ch$19,702 million or U.S.$32.4 million as of December 31, 2014) of paid-in capital and reserves, calculated in accordance with Chilean GAAP, regulatory capital of at least 8% of its risk weighted assets, net of required allowances, and paid in capital and reserves of at least 3% of its total assets, net of required allowances, as calculated in accordance with Chilean GAAP.
 
Regulatory capital is defined as the aggregate of:
 
 
·
a bank’s paid-in capital and reserves, excluding capital attributable to subsidiaries and foreign branches or capital básico;
 
 
·
its subordinated bonds, valued at their placement price (but decreasing by 20.0% for each year during the period commencing six years prior to maturity), for an amount up to 50.0% of its basic capital; and
 
 
·
its voluntary allowances for loan losses for an amount of up to 1.25% of risk weighted-assets.
 
Capital Adequacy Requirements
 
According to the General Banking Law, each bank should have regulatory capital of at least 8.0% of its risk-weighted assets, net of required allowances. The calculation of risk weighted assets is based on a five-category risk classification system for bank assets that is based on the Basel Committee recommendations. The SBIF is expected to implement in 2015 the application of the third pillar of Basel II in Chile, which includes the implementation of capital limits with market risk and operational risk-weighted assets. These changes must be approved by the Chilean Congress, as it involves a modification to the General Banking Law.
 
Banks should also have capital básico, or basic capital, of at least 3.0% of their total assets, net of allowances. Basic capital is defined to include shareholders’ equity.
 
Within the scope of Basel III in Chile, further changes in regulation may occur. See “Item 3.  Key Information—D. Risk Factors—Risks Relating to Chile—Banking regulations may restrict our operations and thereby adversely affect our financial condition and results of operations.”
 
Lending Limits
 
Under the General Banking Law, Chilean banks are subject to certain lending limits, including the following material limits:
 
 
·
A bank may not extend to any entity or individual (or any one group of related entities), except for another financial institution, directly or indirectly, unsecured credit in an amount that exceeds 10.0% of the bank’s regulatory capital, or in an amount that exceeds 30.0% of its regulatory capital if the excess over 10.0% is secured by certain assets with a value equal to or higher than such excess. These limits were raised from 5.0% and 25.0%, respectively, in 2007 by the Reformas al Mercado de Capitales II (also known as MK2). In the case of financing infrastructure projects built by government concession, the 10.0% ceiling for unsecured credits is raised to 15.0% if secured by a pledge over the concession, or if granted by two or more banks or finance companies which have executed a credit agreement with the builder or holder of the concession;
 
 
·
a bank may not extend loans to another financial institution subject to the General Banking Law in an aggregate amount exceeding 30.0% of its regulatory capital;
 
 
·
a bank may not directly or indirectly grant a loan whose purpose is to allow an individual or entity to acquire shares of the lender bank;
 
 
·
a bank may not lend, directly or indirectly, to a director or any other person who has the power to act on behalf of the bank; and
 
 
·
a bank may not grant loans to related parties (including holders of more than 1.0% of its shares) on more favorable terms than those generally offered to non-related parties. Loans granted to related parties are subject to the limitations described in the first bullet point above. In addition, the aggregate amount of loans to related parties may not exceed a bank’s regulatory capital.
 
In addition, the General Banking Law limits the aggregate amount of loans that a bank may grant to its employees to 1.5% of its regulatory capital, and provides that no individual employee may receive loans in excess of 10.0% of this 1.5% limit. Notwithstanding these limitations, a bank may grant to each of its employees a single residential mortgage loan for personal use once during such employee’s term of employment.
 
Allowance for Loan Losses
 
Chilean banks are required to provide to the SBIF detailed information regarding their loan portfolio on a monthly basis. The SBIF examines and evaluates each financial institution’s credit management process, including its compliance with the loan classification guidelines. Banks are classified into four categories: 1, 2, 3 and 4. Each bank’s category depends on the models and methods used by the bank to classify its loan portfolio, as determined by the SBIF. Category 1 banks are those banks whose methods and models are satisfactory to the SBIF. Category 1 banks will be entitled to continue using the same methods and models they currently have in place. A bank classified as a category 2 bank will have to maintain the minimum levels of reserves established by the SBIF while its Board of Directors will be made aware of the problems detected by the SBIF and required to take steps to correct them. Banks classified as categories 3 and 4 will have to maintain the minimum levels of reserves established by the SBIF until they are authorized by the SBIF to do otherwise. Santander-Chile is categorized as a “Category 1” bank.
 
On December 30, 2014, the SBIF published new guidelines for provisioning a bank’s residential mortgage loan portfolio. The regulations include:
 
 
·
an expected loss model to calculate allowances for housing mortgage loans that explicitly considers loan delinquency and loan / collateral (LTV) ratios, in order to promote active management of credit risk; and
 
 
·
proposal for a new way of evaluating collateral in the context of determining provisions, which would specify certain required conditions that would need to be met by an asset in order for it to be eligible to be used as collateral for mitigating credit risk, as well as more specific requirements of how collateral would be valued for purposes of setting loan loss levels.
 
These above changes will be implemented in January 2016. We also expect the SBIF in 2015 and 2016 to publish new expected loss models for small and mid-sized companies and consumer loans.
 
Differences between IFRS and Chilean Bank GAAP
 
As stated above, Chilean Bank GAAP, as prescribed by the Compendium of Accounting Standards (the “Compendium”), differs in certain respects from IFRS. The main differences that should be considered by an investor are the following:
 
Suspension of Income Recognition on Accrual Basis
 
In accordance with the Compendium, financial institutions must suspend recognition of income on an accrual basis in their statements of income for certain loans included in the impaired portfolio. IFRS does not allow the suspension of accrual of interest on financial assets for which an impairment loss has been determined. We do not believe that this difference materially impacts our financial statements.
 
Charge-offs and Accounts Receivable
 
The Compendium requires companies to establish deadlines for the charge-off of loans and accounts receivable. IFRS does not require any such deadline for charge-offs. A charge-off due to impairment would be recorded, if and only if, all efforts at collection of the loan or account receivable had been exhausted. We do not believe that this difference materially impacts our financial statements.
 
Assets Received in Lieu of Payment
 
The Compendium requires that the initial value of assets received in lieu of payment be the value agreed upon with a debtor as a result of the loan settlement or the value awarded in an auction, as applicable. These assets are required to be written off one year after their acquisition, if the assets have not been previously disposed of. IFRS requires that assets received in lieu of payment be initially accounted for at fair value. Subsequently, asset valuation depends on the classification provided by the entity for that type of asset. No deadline is established for charging-off an asset.
 
Goodwill and Intangible Assets
 
With respect to goodwill and intangible assets, the Compendium provides that:
 
 
·
The value of “goodwill” and other depreciable intangible assets will be supported by two reports issued by specialists independent from the (i) bank, (ii) the bank’s external auditors, and (iii) each other.
 
With respect to goodwill and intangible assets, IFRS provides that:
 
 
·
The use of independent experts’ valuations is not mandatory.
 
Since we have no goodwill, we do not believe that this difference impacts our financial statements.
 
Fair Value Option with Respect to Financial Assets and Liabilities
 
According to the Compendium, banks are not allowed to value assets or liabilities at their fair value in place of the amortized cost method.
 
IFRS allows an entity to designate a financial asset or liability (or a group of financial assets or liabilities, or both), on initial recognition as one to be measured at fair value, with changes in fair value to be recognized in profit or loss. Once this option has been taken, it is irrevocable. The fair value option is not applicable to investments in capital instruments which do not have a quoted market price in an active market, and whose fair value cannot be reliably measured.
 
We do not believe that this difference impacts our financial statements because this accounting treatment is optional.
 
Loan loss allowances
 
The main difference between Chilean bank GAAP and IFRS regarding loan loss allowances is that under Chilean Bank GAAP, we use an expected loss model, and under IFRS, we use an incurred loss approach. Additionally, Chilean Bank GAAP includes the following norms, which are not included in our IFRS loan loss allowance:
 
On December 29, 2009, the SBIF issued Circular No. 3,489, which incorporates changes to several provisions of the Compendium. Among other changes, it states that effective January 2010, companies must complement the basis on which insolvency provisions related to contingent operations are determined, including unrestricted lines of credit, other contingent loans, and other loan commitments. In addition, companies should also apply the changes in risk exposure applicable to contingent loans, found in Chapter B-3 of the Compendium. According to specific instructions from the SBIF in Letter to Management No. 10 dated December 21, 2010, the SBIF stated that it would not be necessary to calculate the adjustment retrospectively for 2009. On June 10, 2010, the SBIF issued Circular No. 3,502 which, among other things, requires that Banks maintain a 0.5% minimum provision for the non-impaired part of the loan portfolio analyzed on an individual basis. In addition, on December 21, 2010, in the Letter to Management No. 9, the SBIF specified that the accounting treatment for the effects originating from the application of this minimum provision is to record it in the income for the period. However, the Bank reverses this minimum provision for purposes of its IFRS consolidated financial statements.
 
On August 12, 2010, Circular No. 3,503 was issued, which modified how we must classify loans included in Chapters B-1, B-2, B-3 and C1 of the Compendium of Accounting Standards, which are loans analyzed on an individual basis. Such modifications were effective from January 1, 2011, except for those modifications relating to additional provisions included in the Letter to Management No. 9 relating to Chapter B-1 which took effect in 2010. As a supplement to the Circular, the Letter to Management No. 9 was issued on December 21, 2010, which specifies that adjustments resulting from the adoption of these modifications starting on January 1, 2011 could be recorded during the first quarter of 2011; however, entities may anticipate recognition of the impact of these adjustments, in whole or in part, in 2010. As of December 31, 2010, we have chosen to recognize the entire provision adjustments aforementioned
 
Capital Markets
 
Under the General Banking Law, banks in Chile may purchase, sell, place, underwrite and act as paying agents with respect to certain debt securities. Likewise, banks in Chile may place and underwrite certain equity securities. Bank subsidiaries may also engage in debt placement and dealing, equity issuance advice and securities brokerage, as well as in financial leasing, mutual fund and investment fund administration, investment advisory services and
 
 
merger and acquisition services. These subsidiaries are regulated by the SBIF and, in some cases, also by the Superintendency of Securities and Insurance, the regulator of the Chilean securities market, open-stock corporations and insurance companies.
 
Legal Provisions Regarding Banking Institutions with Economic Difficulties
 
The General Banking Law provides that if specified adverse circumstances exist at any bank, its Board of Directors must correct the situation within 30 days from the date of receipt of the relevant financial statements. If the Board of Directors is unable to do so, it must call a special shareholders’ meeting to increase the capital of the bank by the amount necessary to return the bank to financial stability. If the shareholders reject the capital increase, or if it is not effected within the term and in the manner agreed to at the meeting, or if the SBIF does not approve the Board of Directors’ proposal, the bank will be barred from increasing its loan portfolio beyond that stated in the financial statements presented to the Board of Directors and from making any further investments in any instrument other than in instruments issued by the Central Bank. In such a case, or in the event that a bank is unable to make timely payment in respect of its obligations, or if a bank is under provisional administration of the SBIF, the General Banking Law provides that the bank may receive a two-year term loan from another bank. The terms and conditions of such a loan must be approved by the directors of both banks, as well as by the SBIF, but need not be submitted to the borrowing bank’s shareholders for their approval. In any event, a creditor bank cannot grant interbank loans to an insolvent bank in an amount exceeding 25.0% of the creditor bank’s regulatory capital. The Board of Directors of a bank that is unable to make timely payment of its obligations must present a reorganization plan to its creditors in order to capitalize the credits, extend their respective terms, condone debts or take other measures for the payment of the debts. If the Board of Directors of a bank submits a reorganization plan to its creditors and such arrangement is approved, all subordinated debt issued by the bank, whether or not matured, will be converted by operation of law into common stock in the amount required for the ratio of regulatory capital to risk-weighted assets to be not lower than 12.0%. If a bank fails to pay an obligation, it must notify the SBIF, which shall determine if the bank is solvent.
 
Dissolution and Liquidation of Banks
 
The SBIF may establish that a bank should be liquidated for the benefit of its depositors or other creditors when such bank does not have the necessary solvency to continue its operations. In such case, the SBIF must revoke a bank’s authorization to exist and order its mandatory liquidation, subject to agreement by the Central Bank. The SBIF must also revoke a bank’s authorization if the reorganization plan of such bank has been rejected twice. The resolution by the SBIF must state the reason for ordering the liquidation and must name a liquidator, unless the SBIF assumes this responsibility. When a liquidation is declared, all checking accounts and other demand deposits received in the ordinary course of business, are required to be paid by using existing funds of the bank, its deposits with the Central Bank or its investments in instruments that represent its reserves. If these funds are insufficient to pay these obligations, the liquidator may seize the rest of the bank’s assets, as needed. If necessary and in specified circumstances, the Central Bank will lend the bank the funds necessary to pay these obligations. Any such loans are preferential to any claims of other creditors of the liquidated bank.
 
Obligations Denominated in Foreign Currencies
 
Santander-Chile must also comply with various regulatory and internal limits regarding exposure to movements in foreign exchange rates (See “Item 11. Quantitative and Qualitative Disclosures About Market Risk”).
 
Loans and Investments in Foreign Securities
 
Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain securities of foreign issuers. Banks may grant commercial loans and foreign trade loans, and can buy loans granted by banks abroad. Banks in Chile may also invest in debt securities traded in formal secondary markets. Such debt securities must be (1) securities issued or guaranteed by foreign sovereign states or their central banks or other foreign or international financial entities, and (2) bonds issued by foreign companies. If the sum of investment in foreign securities and loans granted outside of Chile surpasses 70% of regulatory capital, the amount that exceeds 70% is subject to a mandatory reserve of 100%.
 
Table 1
 
 
Rating Agency
 
Short Term
 
 
Long Term
Moody’s
    P2  
Baa3
Standard and Poor’s
    A3  
BBB-
Fitch
    F2  
BBB-
Dominion Bond Rating (DBRS)
    R-2  
BBB (low)

In the event that the sum of: (a) loans granted abroad that are not to subsidiaries of Chilean companies, and that have a rating of BB- or less and do not trade on a foreign stock exchange, and (b) the investments in foreign securities which have a rating that is below that indicated in Table 1 above, but is equal to or exceeds the ratings mentioned in the Table 2 below and exceeds 20% (and 30% for banks with a BIS ratio equal or exceeding 10% of the regulatory capital of such bank), the excess is subject to a mandatory reserve of 100%.
 
Table 2
 
 
Rating Agency
 
Short Term
 
 
Long Term
Moody’s
    P2  
Ba3
Standard and Poor’s
    A-2  
BB-
Fitch
    F2  
BB-
Dominion Bond Rating (DBRS)
    R-2  
BB (low)

In addition, banks may invest in foreign securities whose ratings are equal or exceeds those mentioned in Table 3 below for an additional amount equal to 70% of their regulatory capital. This limit constitutes an additional margin and is not subject to the 100% mandatory reserve.
 
Additionally, a Chilean bank may invest in foreign securities whose rating is equal to or exceeds those mentioned in Table 3 below in: (i) sight deposits with foreign banks, including overnight deposits in a single entity; and (ii) securities issued or guaranteed by sovereign states or their central banks or securities issued or guaranteed by foreign entities within the Chilean State, though investment will be subject to the limits by issuer up to 30% and 50%, respectively, of the regulatory capital of the Chilean bank that makes the investment. If these foreign securities do not have a rating, the individual limit will be 10% of regulatory capital.
 
Table 3
 
 
Rating Agency
 
Short Term
 
 
Long Term
Moody’s
    P1  
Aa3
Standard and Poor’s
    A1+  
AA-
Fitch
    F1+  
AA-
DBRS
 
R-1 (high)
 
AA(low)

Moreover, the sum of all demand deposits with foreign banks, including overnight deposits to related parties, as defined by the Central Bank and the SBIF, cannot surpass 25% of a bank’s regulatory capital.  This limit excludes foreign branches of Chilean banks or their subsidiaries, but must include amounts deposited by these entities in related parties abroad.
 
Chilean banks may only invest in equity securities of foreign banks and certain other foreign companies which may be affiliates of the bank or which would be complementary to the bank’s business if such companies were incorporated in Chile.
 
New Regulations for “Mortgage Bonds”
 
In 2012, the mortgage-covered bond legislation was approved by the Chilean congress.  The new class of bonds, known as “mortgage bonds,” are debt backed by the company that sells them, as well as by a pool of mortgages that in the event of insolvency the pool of mortgages are auctioned with the corresponding mortgage bond. Unlike covered bonds, they are not be limited to banks. These bonds, if bought by banks, will be available for immediate liquidity in the Central Bank liquidity window and will have other restrictions as to the type of mortgage they will be funding, i.e. mortgage loans with loan-to-values of maximum 80%.
 
U.S. Banking Regulation - Volcker Rule
 
On July 21, 2010, the United States enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which provides a broad framework for significant regulatory changes that extend to almost every area of U.S. financial regulation.  Within the Dodd-Frank Act, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in certain covered funds, in each case subject to certain limited exceptions.  The Volcker Rule became effective on July 21, 2012 and on December 10, 2013, U.S. regulators issued final rules implementing the Volcker Rule.  The final rules also limit the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships.  The final rules contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained.  The final rules implementing the Volcker Rule extended the period for all banking entities to conform with the Volcker Rule and implement a compliance program until July 21, 2015, and additional extensions are possible.  Banking entities such as Santander Spain must bring their activities and investments worldwide into compliance with the requirements of the Volcker Rule by the end of the conformance period.  Santander Spain is assessing how the final rules implementing the Volcker Rule will affect its businesses, including Santander-Chile, and is developing and implementing plans to bring affected businesses into compliance.
 
U.S. Anti-Money Laundering, Anti-Terrorist Financing, and Foreign Corrupt Practices Act Regulations
 
The Bank, as a foreign private issuer whose securities are registered under the U.S. Securities Exchange Act of 1934, is subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”).  The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment of the Bank’s officers and/or directors can be imposed for violations of the FCPA.
 
Furthermore, the Bank is subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, such as the Bank Secrecy Act of 1970, as amended, and the USA PATRIOT ACT of 2001, as amended, and a violation of such laws and regulations may result in substantial penalties, fines and imprisonment of the Bank’s officers and/or directors.
 
Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
 
Santander-Chile has no exposure to Iran or Syria. As we are part of Grupo Santander, we must disclose the exposure of other entities of the Group to Iran and Syria.
 
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
 
The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander UK within the Santander Group. During the period covered by this report:
 
(a) Santander UK holds frozen savings and current accounts for three customers resident in the U.K. who are currently designated by the U.S. for terrorism. The accounts held by each customer were blocked after the customer’s designation and have remained blocked and dormant throughout 2014. No revenue has been generated by Santander UK on these accounts. The bank account held for one of these customers was closed in the fourth quarter of 2014.
 
(b) An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Non-Proliferation of Weapons of Mass Destruction (“NPWMD”) designation, holds a mortgage with Santander UK that was issued prior to any such designation. No further drawdown has been made (or would be allowed) under this mortgage although we continue to receive repayment instalments. In 2014, total revenue in connection with the mortgage was approximately £2,580 while net profits were negligible relative to the overall profits of Santander UK. Santander UK does not intend to enter into any new relationships with this customer, and any disbursements will only be made in accordance with applicable sanctions. The same Iranian national also holds two investment accounts with Santander Asset Management UK Limited. The accounts have remained frozen during 2014. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue for the Group in connection with the investment accounts was approximately £250 while net profits in 2014 were negligible relative to the overall profits of Santander Spain.
 
(c) In addition, during the third quarter 2014, Santander UK has identified two additional customers. A U.K. national designated by the U.S. under the NPWMD sanctions program held a business account. No transactions were made and the account was closed in the fourth quarter of 2014. No revenue or profit has been generated. A second U.K. national designated by the U.S. for terrorism held a personal current account and a personal credit card account, both of which were closed in the third quarter. Although transactions took place on the current account during the third quarter of 2014, revenue and profits generated were negligible. No transactions took place on the credit card.
 
In addition, the Santander Group has certain legacy export credits and performance guarantees with Bank Mellat, which are included in the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List. The Bank entered into two bilateral credit facilities in February 2000 in an aggregate principal amount of €25.9 million. Both credit facilities matured in 2012. In addition, in 2005 Santander Spain participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matures on July 6, 2015. As of December 31, 2014, the Santander Group was owed €2.3 million under this credit facility.
 
Santander Spain has not been receiving payments from Bank Mellat under any of these credit facilities in recent years. Santander Spain has been and expects to continue to be repaid any amounts due by official export credit agencies, which insure between 95% and 99% of the outstanding amounts under these credit facilities. No funds have been extended by Santander under these facilities since they were granted.
 
The Santander Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations—either under tender documents or under contracting agreements—of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. However, should any of the contractors default in their obligations under the public bids, the Santander Group would not be able to pay any amounts due to Bank Sepah or Bank Mellat because any such payments would be frozen pursuant to Council Regulation (EU) No. 961/2010.
 
In the aggregate, all of the transactions described above resulted in approximately €41,000 gross revenues and approximately €80,500 net loss to the Santander Group in the year ended December 31, 2014, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Santander Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount—which payment would be frozen as explained above (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
 
D. Property, Plant and Equipment
 
We are domiciled in Chile and own our principal executive offices located at Bandera 140, Santiago, Chile. We also own twelve other buildings in the vicinity of our headquarters, and we rent six other buildings. At December 31, 2014, we owned the locations at which 24.7% of our branches were located. The remaining branches operate at rented locations. We believe that our existing physical facilities are adequate for our needs.
 
 
Main properties as of December 31, 2014
 
Number
 
Central Offices
     
Owned
    4  
Rented
    6  
Total
    10  
         
Branches(1)
       
Owned
    115  
Rented
    359  
Total
    474  
         
Other property(2)
       
Owned
    49  
Rented
    6  
Total
    55  

(1)
Some branches are located inside central office buildings and other properties. Including these branches, the total number of branches is 474. Special payment centers are included in Other property.
 
(2)
Consists mainly of parking lots, mini-branches and property owned by our subsidiaries.
 
The following table sets forth a summary of the main computer hardware and other systems-equipment that we own.
 
Category
 
Brand
 
Application
Mainframe
 
IBM
 
Back-end, Core-System Altair, Payment means and foreign trade.
Midrange
 
IBM
 
Interconnections between Mainframe and mid-range
Midrange
 
SUN/Unix
 
Interconnections applications Credit & debit cards
   
SUN/UNIX
 
Treasury, MIS, Work Flow, Accounting
Midrange
 
IBM
 
WEB
Desktop
 
HP/Lenovo
 
Platform applications
Call Center
 
Avaya
 
Telephone system
   
Genesys
 
Integration Voice/data
   
Nice
 
Voice recorder
   
Nortel
 
IVR

The main software systems that we use are:
 
 
Category
 
 
Product
 
 
Origin
Core-System
 
ALTAIR
 
Accenture
Data base
 
DB2
 
IBM
Data base
 
Oracle
 
Oracle
Data base
 
SQL Server
 
Microsoft
WEB Service
 
Internet Information Server
 
Microsoft
Message Service
 
MQSeries
 
IBM
Transformation
 
MQIntegrator
 
IBM

ITEM 4A. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
A. Accounting Standards Applied in 2014
 
Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with IFRS-IASB in order to comply with requirements of the SEC. As required by the General Banking Law, which subjects Chilean banks to the regulatory supervision of the SBIF, and which mandates that Chilean banks abide by the accounting standards stipulated by the SBIF, our locally-
 
 
filed consolidated financial statements have been prepared in accordance with Chilean Bank GAAP as issued by the SBIF. The accounting principles issued by the SBIF are substantially similar to IFRS but there are some exceptions, as described further below. Therefore, our locally-filed consolidated financial statements have been adjusted according to IFRS as issued by the IASB.
 
Santander-Chile’s transition date to IFRS was January 1, 2008. The Bank prepared its opening balance under these standards as of such date. Consequently, the date of adoption of the new standards by the Bank and its subsidiaries was January 1, 2009.
 
B. Critical Accounting Policies
 
Our consolidated financial statements include various estimates and assumptions, including but not limited to the adequacy of the allowance for loan losses, estimates of the fair value of certain financial instruments and the selection of useful lives of certain assets.
 
We evaluate these estimates and assumptions on an ongoing basis. Management bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results in future periods could differ from those estimates and assumptions, and if these differences were significant enough, our reported results of operations would be affected materially. We believe that the following are the most critical judgment areas or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations.
 
Allowance for loan losses
 
The Bank records its allowances following its internal models for the recording of incurred debt. These models have been approved by the Board. To establish impairment losses, the Bank carries out an evaluation of outstanding loans and accounts receivable from customers, as detailed below:
 
 
·
Individual assessment of debtors: when debtors are recorded as individually significant, i.e., when they have significant debt levels or, even for those that do not have these levels, could be classified in a group of financial assets with similar credit risk features and who, due to the size, complexity or level of exposure, require detailed information. See “Item 5. Operating and Financial Review and Prospects—F. Selected Statistical Information—Classification of Loan Portfolio—Classification of Loan Portfolio—Credit Approval: Loans approved on an individual basis” and “Note 1—Summary of Significant Accounting Policies—(p) Provisions for loan losses” of our Audited Consolidated Financial Statements.
 
 
·
Group assessment of debtors: when there is no evidence of impairment for individually-assessed debtors—whether or not significant—the Bank groups debtors with similar risk credit features and assesses them for impairment. Debtors individually assessed for impairment and for whom a loss due to impairment has been recorded, are not included in the group assessment of impairment. See “Item 5. Operating and Financial Review and Prospects—F. Selected Statistical Information—Classification of Loan Portfolio—Classification of Loan Portfolio—Credit Approval: Loans approved on a group basis” and “Note 1—Summary of Significant Accounting Policies—(p) Provisions for loan losses” of our Audited Consolidated Financial Statements.
 
Derivative activities
 
Derivatives are measured at fair value on the statement of financial position and the net unrealized gain (loss) on derivatives is classified as a separate line item within the income statement. Under IFRS, banks must mark-to-market derivatives. A derivative financial instrument held for trading purposes must be marked to market and the unrealized gain or loss must be recognized in the income statement. The Bank recognizes three kinds of hedge accounting: (i) cash flow hedges, (ii) fair value hedges and (iii) hedging of foreign net investments.
 
 
·
When a cash flow hedge exists, the fair value movements on the part of the hedging instrument and the hedged item that is effective are recognized in other comprehensive income as “valuation adjustments”. Any ineffective portion of the fair value movement on the hedging instrument and the hedged item is recognized in the income statement.
 
 
·
When a fair value hedge exists, the fair value movements on the hedging instrument and the fair value movements on the hedged item attributable to the hedged risk are recognized in the income statement.
 
 
·
When a hedge of net investment in a foreign operation exists, as defined in IAS 21, it is accounted for similarly to a cash flow hedge. Any ineffective portion of the fair value movement on the hedging instrument is recognized in the income statement.
 
C. Operating Results
 
Chilean Economy
 
All of our operations and substantially all of our customers are located in Chile. Accordingly, our financial condition and results of operations are substantially dependent upon economic conditions prevailing in Chile. In 2014, the Chilean economy grew approximately 1.9% compared to 4.1% in 2013 and 5.5% in 2012.  In the same period, internal demand decreased 0.6% compared to an increase of 3.4% in 2013. This reduction in internal demand was led by a 6.1% fall in investment in 2014. The reduction of investments was mainly due to a fall in investments in the mining sector due to concerns regarding China’s economic growth. At the same time, the temporary political uncertainty caused by the discussion in Congress of the tax and labor reform also cooled investment rates.
 
As of December 2014, the unemployment rate was 6.0% compared to 5.7% in 2013 and 6.1% in 2012. The exchange rate depreciated in 2014 by 16.0%. As a result of this depreciation of the peso, CPI inflation reached 4.7% in 2014 compared to 3.0% in 2013 and 1.5% in 2012. Despite the higher inflation rate, the Central Bank commenced a process of lowering interest rates as the economy began to show signs of deceleration, especially in investment levels. At year-end 2013, the policy rate was 4.5% and was reduced to 3% by year-end 2014. Going forward, economic activity is expected to continue to increase, but with continued uncertainty regarding growth in China, which impacts Chile’s mining sector, and internal political issues.
 
The growth of the Chilean banking sector evolved in line with overall economic developments, with an increase in the volume of loans and deposits. Total loans as of December 31, 2014 in the Chilean financial system were Ch$122,490,675 million (US$201 billion), excluding Corpbanca’s banking operations in Colombia, an increase of 11.1% in the last twelve months. Total customer deposits (defined as time deposits plus checking accounts), excluding Corpbanca’s operations in Colombia, totaled Ch$100,382,772 million (US$165 billion) as of December 31, 2014, an increase of 8.9% in the last twelve months. The non-performing loan (defined as loans with an installment that is at least 90 days past-due) to total loans ratio has remained constant at 2.1% and 2.2% in 2014 and 2013.
 
Impact of inflation
 
Our assets and liabilities are denominated in Chilean pesos, Unidades de Fomento (UF) and foreign currencies. The Bank no longer recognizes inflation accounting and has eliminated price-level restatement in line with IFRS, but inflation impacts our results of operations as some loan and deposit products are contracted in UF. The UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF equaled Ch$24,627.10 at December 31, 2014, Ch$23,309.56 at December 31, 2013 and Ch$22,840.75 at December 31, 2012. High levels of inflation in Chile could adversely affect the Chilean economy and could have an adverse effect on our business, financial condition and results of operations. Negative inflation rates also negatively impact our results. Inflation measured as the annual variation of the UF was 5.7% in 2014, 2.1% in 2013, and 2.5% in 2012. There can be no assurance that Chilean inflation will not change significantly from the current level. Although we currently benefit from moderate levels of inflation, due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no corresponding features in deposits or other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation. In summary:
 
 
·
UF-denominated assets and liabilities. The effect of any changes in the nominal peso value of our UF-denominated interest earning assets and interest bearing liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest income and expense, respectively. Our net
 
 
interest income will be positively affected by an inflationary environment to the extent that our average UF-denominated interest earning assets exceed our average UF-denominated interest bearing liabilities. Our net interest income will be negatively affected in a deflationary environment if our average UF-denominated interest earning assets exceed our average UF-denominated interest bearing liabilities. Our net interest income will be negatively affected by inflation in any period in which our average UF-denominated interest bearing liabilities exceed our average UF-denominated interest earning assets.
 
 
·
Inflation and interest rate hedge. A key component of our asset and liability policy is the management of interest rate risk. The Bank’s assets generally have a longer maturity than our liabilities. As the Bank’s mortgage portfolio grows, the maturity gap tends to rise as these loans, which are contracted in UF, have a longer maturity than the average maturity of our funding base. As most of our long term financial instruments and mortgage loans are contracted in UF and most of our deposits are in nominal pesos, the rise in mortgage lending increases the Bank’s exposure to inflation and to interest rate risk. The size of this gap is limited by internal and regulatory guidelines in order to avoid excessive potential losses due to strong shifts in interest rates. In order to keep this duration gap below regulatory limits, the Bank issues long term bonds denominated in UF or interest rate swaps. The financial cost of the bonds and the efficient part of these hedges is recorded as net interest income. In 2014, the loss from the swaps taken in order to hedge mainly for inflation and interest rate risk and included in net interest income totaled a loss of Ch$130,254 million compared to a loss of Ch$67,239 million in 2013 and a loss of Ch$57,118 million in 2012. The average gap between our total assets and total liabilities linked to the inflation, including hedging was Ch$4,168,678 million in 2014, Ch$3,581,959 million in 2013 and Ch$3,034,112 million in 2012.
 
 
·
The financial impact of the gap between our assets and liabilities denominated in UFs including hedges was Ch$229,946 million in 2014, Ch$71,842 million in 2013 and Ch$71,238 million in 2012. The higher gain in 2014 can be explained by the greater UF inflation in 2014 compared to previous periods and the greater UF gap in 2014.
 
   
As of December 31,
   
% Change
   
% Change
 
Impact of inflation on net interest income
 
2014
   
2013
   
2012
      2014/2013       2013/2012  
   
(In millions of Ch$)
 
Results from UF GAP (1)
    229,946       71,842       71,238       220.1 %     0.8 %
Annual  UF inflation
    5.7 %     2.1 %     2.5 %                

(1)
UF GAP is net interest income from asset and liabilities denominated in UFs and include the results from hedging the size of this gap via interest rate swaps.
 
 
·
Peso-denominated assets and liabilities. Interest rates prevailing in Chile during any period primarily reflect the inflation rate during the period and the expectations of future inflation. The sensitivity of our peso-denominated interest earning assets and interest bearing liabilities to changes to such prevailing rates varies. See “Item 5.  Operating and Financial Review and Prospects—C. Operating Results—Interest Rates.” We maintain a substantial amount of non-interest bearing peso-denominated demand deposits. Because such deposits are not sensitive to inflation, any decline in the rate of inflation would adversely affect our net interest margin on inflation indexed assets funded with such deposits, and any increase in the rate of inflation would increase the net interest margin on such assets. The ratio of the average of such demand deposits and average shareholder’s equity to average interest-earning assets was 30.2%, 30.0% and 29.4% for the years ended December 31, 2014, 2013, and 2012, respectively.
 
Interest Rates
 
Interest rates earned and paid on our assets and liabilities reflect, to a certain degree, inflation, expectations regarding inflation, changes in short term interest rates set by the Central Bank and movements in long term real rates. The Central Bank manages short term interest rates based on its objectives of balancing low inflation and economic growth. Because our liabilities are generally re-priced sooner than our assets, changes in the rate of inflation or short term rates in the economy are reflected in the rates of interest paid by us on our liabilities before such changes are reflected in the rates of interest earned by us on our assets. Therefore, when short term interest rates fall, our net interest margin is positively impacted, but when short term rates increase, our interest margin is negatively affected. At the same time, our net interest margin tends to be adversely affected in the short term by a decrease in inflation rates since generally our UF-denominated assets exceed our UF-denominated liabilities. See
 
 
“Item 5.  Operating and Financial Review and Prospects—C. Operating Results—Impact of Inflation—Peso-denominated assets and liabilities.” An increase in long term rates has a positive effect on our net interest margin, because our interest earning assets generally have longer terms than our interest bearing liabilities. In addition, because our peso-denominated liabilities have relatively short re-pricing periods, they are generally more responsive to changes in inflation or short term rates than our UF-denominated liabilities. As a result, during periods when or expected inflation exceeds the previous period’s inflation, customers often switch funds from UF-denominated deposits to peso-denominated deposits, which generally bear higher interest rates, thereby adversely affecting our net interest margin.
 
Foreign Exchange Fluctuations
 
The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar could adversely affect our financial condition and results of operations. The Chilean peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. The Central Bank exchange rate depreciated 16.0% in 2014, which led to a pickup in CPI inflation in 2014. See “Item 3.  Key Information—A. Selected Financial Data—Exchange Rates.” A significant portion of our assets and liabilities are denominated in foreign currencies, principally the U.S. dollar, and we historically have maintained and may continue to maintain material gaps between the balances of such assets and liabilities. Our current strategy is not to maintain a significant difference between the balances of our assets and liabilities in foreign currencies. In 2014, 2013 and 2012, the Bank, in its spot position, held more liabilities than assets in foreign currencies, mainly the U.S. dollar, as a result of an ample supply of U.S. dollar deposits from companies that receive export revenues, foreign correspondent bank loans and bonds issued abroad. This difference is usually hedged using forwards and cross-currency swaps.  Including derivatives, the Bank seeks to run no foreign currency risk in its non-trading balance sheet. Because such assets and liabilities, as well as interest earned or paid on such assets and liabilities, and gains and losses realized upon the sale of such assets, are translated to Chilean pesos in preparing our financial statements, our reported income is affected by changes in the value of the Chilean peso relative to foreign currencies (principally the U.S. dollar). The translation gain or loss over assets and liabilities (excluding derivatives held for trading) is included as foreign exchange transactions in the income statement. The translation and mark-to-market of foreign currency derivatives held for trading is recognized as a gain or loss in the net results from mark-to-market and trading. See “Item 11.  Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Foreign exchange fluctuations” for more detail on the Bank’s exposure to foreign currency.
 
The Bank also uses a sensitivity analysis with both internal limits and regulatory limits to seek to manage the potential loss in net interest income resulting from fluctuations of interest rates on U.S. dollar denominated assets and liabilities and a VaR model to limit foreign currency trading risk.
 
We also set an absolute limit on the size of Santander-Chile’s consolidated net foreign currency trading position. At December 31, 2013, the Bank’s consolidated net foreign currency position was equal to US$200 million. As the Bank’s non-trading portfolio has no net exposure to foreign currency risk, the Bank’s total exposure to foreign currency is reflected in the trading portfolio exposure to foreign currency. The Bank’s average exposure to foreign currency was US$1.5 million in 2013. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Volume limits.” The limit on the size of the net foreign currency position is determined by the Asset and Liability Committee and is calculated and monitored by our Market Risk and Control Department.
 
Segmentation criteria
 
The accounting policies used to determine the Bank’s income and expenses by business segment are the same as those described in the summary of accounting policies in “Note 1—Summary of Significant Accounting Policies” of the Bank’s Consolidated Financial Statements, and are customized to meet the needs of the Bank’s management. 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, the highest decision-making authority for the segment bases his assessment on the segment’s interest income, fee and commission income, and expenses. This assessment helps the Bank make decisions over the resources that will be allocated to each segment.
 
Results of Operations for the Years Ended December 31, 2014, 2013 and 2012
 
The following discussion is based upon and should be read in conjunction with the Audited Consolidated Financial Statements.  The Audited Consolidated Financial Statements have been prepared in accordance with IFRS
 
 
as issued by the IASB. The following table sets forth the principal components of our net income for the years ended December 31, 2014, 2013 and 2012.
 
   
2014
   
2014
   
2013
   
2012
             
CONSOLIDATED INCOME STATEMENT DATA  
(ThU.S.$)(1)
   
(Ch$ million)
   
% Change
2014 / 2013
   
% Change
2013 / 2012
 
IFRS:                                    
Interest income and expense                                    
Interest income
    3,660,872       2,227,018       1,871,204       1,890,953       19.0 %     (1.0 %)
Interest expense
    (1,495,757 )     (909,914 )     (794,442 )     (848,219 )     14.5 %     (6.3 %)
Net interest income
    2,165,115       1,317,104       1,076,762       1,042,734       22.3 %     3.3 %
Fees and income from services
                                               
Fees and commission income
    602,845       366,729       346,120       360,427       6.0 %     (4.0 %)
Fees and commission expense
    (229,228 )     (139,446 )     (116,284 )     (97,391 )     19.9 %     29.4 %
Total net fees and commission income
    373,617       227,283       229,836       270,572       (1.1 %)     (15.1 %)
Financial transactions, net
                                               
Net income from financial operations
    (262,435 )     (159,647 )     (20,289 )     (64,079 )     686.9 %     (68.3 %)
Foreign exchange profit (loss), net
    447,474       272,212       144,726       146,378       88.1 %     (1.1 %)
Financial transactions, net
    185,039       112,565       124,437       82,299       (9.5 %)     51.2 %
Other operating income
    10,759       6,545       88,155       13,105       (92.6 %)     572.7 %
Net operating profit before loan losses
    2,734,530       1,663,497       1,519,190       1,408,710       9.5 %     7.8 %
Provision for loan losses
    (583,405 )     (354,903 )     (371,462 )     (403,692 )     (4.5 %)     (8.0 %)
Net operating profit
    2,151,125       1,308,594       1,147,728       1,005,018       14.0 %     14.2 %
Operating expenses
                                               
Personnel salaries and expenses
    (557,079 )     (338,888 )     (308,344 )     (299,904 )     9.9 %     2.8 %
Administrative expenses
    (337,233 )     (205,149 )     (188,191 )     (183,379 )     9.0 %     2.6 %
Depreciation and amortization
    (72,612 )     (44,172 )     (61,074 )     (56,369 )     (27.7 %)     8.3 %
Impairment
    (60,270 )     (36,664 )     (244 )     (90 )     14,926.2 %     171.1 %
Other operating expenses
    (96,898 )     (58,946 )     (52,338 )     (59,637 )     12.6 %     (12.2 %)
Total operating expenses
    (1,124,092 )     (683,819 )     (610,191 )     (599,379 )     12.1 %     1.8 %
Net Operating income
    1,027,033       624,775       537,537       405,639       16.2 %     32.5 %
Income from investments in other companies
    3,559       2,165       1,422       267       52.3 %     432.6 %
Income before tax
    1,030,592       626,940       538,959       405,906       16.3 %     32.8 %
Income tax
    (83,918 )     (51,050 )     (94,530 )     (44,473 )     (46.0 %)     112.6 %
Consolidated Net income for the period
    946,674       575,890       444,429       361,433       29.6 %     23.0 %
Net income for the period attributable to:
                                               
Equity holders of the Bank
    936,844       569,910       442,294       356,808       28.9 %     24.0 %
Non-controlling interests
    9,830       5,980       2,135       4,625       180.1 %     (53.8 %)

(1)
Amounts stated in U.S. dollars at and for the year ended December 31, 2014 have been translated from Chilean pesos at the exchange rate of Ch$608.33 = U.S.$1.00 as of December 31, 2013. See “Item 3.  Key Information—A. Selected Financial Data—Exchange Rates” for more information on exchange rate.
 
Results of operations for the years ended December 31, 2014 and 2013. Consolidated net income for the year ended December 31, 2014 increased 29.6% to Ch$575,890 million. Our return on annualized average equity was 21.0% in 2014 compared to 18.9% in 2013.
 
In 2014, net operating profit before loan losses was Ch$1,663,497 million, an increase of 9.5% compared to 2013. Our net interest income increased 22.3% to Ch$1,317,104 million in 2014 compared to 2013. The average balance of our interest-earning assets increased by 15.0% in 2014 compared to 2013.  Our net interest margin increased to 4.92% in 2014 compared to 4.63% in 2013. Net interest margins were positively affected by the increase of the average nominal rate we earned on our interest earning assets. This was mainly due to a rise in the UF inflation rate in 2014 compared to 2013 and higher loan yields in Companies and institutions and Global banking and markets. This was only partially offset by the negative impact of maximum rate regulation on consumer loan yields, a lower interest rate environment and loan growth focused in lower yielding, but less risky segments.
 
Net fees and commission income decreased 1.1% to Ch$227,283 million in the twelve-month period ended December 31, 2014 compared to the same period in 2013.  In 2014, the Bank continued to experience positive client base and product growth. These positive commercial efforts continued to be offset by regulations that lowered fees from brokering mandatory insurance for mortgage loans (mainly fire and earthquake insurance) and the difficulties in increasing fees following stricter regulations issued by the SERNAC Financiero, the newly formed consumer protection agency for financial services.
 
Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange profit (loss), totaled Ch$112,565 million in the year ended December 31, 2014, a decrease of 9.5% compared to the same period in 2013. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well the results of our non-client treasury operations, mainly the Financial Management Division. The positive results from our client Treasury business, which increased 6.0% compared to 2013 and totaled Ch$83,837 million, were offset by a 36.6% decrease in results from non-client treasury income, which totaled a gain of Ch$28,728 million in 2014. The fall in results from non-client treasury income was mainly due to lower gains obtained from short-term interest rate differential between the U.S. dollar and Chilean peso. The Bank has a greater spot position in liabilities denominated in foreign currency as compared to assets. These principally U.S. dollar-denominated liabilities are hedged through derivatives, leaving minimal foreign currency exposure, but this does result in a short-term interest rate differential between the U.S. dollar and Chilean peso, which produces the financial result discussed here. This result is positive when interest rates in the United States are trending up and local rates are falling and is negative when the opposite occurs. In 2014 and 2013, local rates went down relative to U.S. rates, but this impact was more significant in 2013 when the end of quantitative easing was announced.
 
Other operating income totaled a gain of Ch$6,545 million in the year ended December 31, 2014, a 92.6% decrease compared to 2013. The main reasons for this decrease was the gain of Ch$78,122 million recognized from the sale of our asset management subsidiary, Santander Asset Management S.A. Administradora General de Fondos in 2013.
 
Provisions for loan losses, net of recoveries totaled Ch$354,903 million in 2014 and decreased 4.5% compared to the amount of provisions recorded in 2013. This rise was mainly due to the ongoing improvement performed on the allowances models for commercial loans analyzed on a group basis. The model was calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and decisional approvals at different points of the approval process, more robust statistical processes and more historical information, allowing stronger parameters of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in an increase in provisions for commercial loans of Ch$45,141 million in 2014. Additionally, the lower economic growth in 2014 resulted in a rise in charge-off of loans analyzed on an individual basis that totaled Ch$10,811 million in 2014 and rose 33.9% compared to 2013.
 
This was offset by better asset quality in consumer and mortgage lending. Provisions established for the Bank’s consumer loans decreased by 19.0% to Ch$180,666 million in 2014 compared to 2013.  During the second half of 2014, the Bank updated its allowances model for consumer loans. The models were calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. This resulted in the release of consumer provisions of Ch$26,563 million in 2014. The non-performing ratio for consumer loans declined from 2.6% in 2013 to 2.5% in 2014 and the impaired mortgage loans ratio also improved from 9.7% in 2013 to 9.3% in 2014.
 
Provisions for mortgage loans decreased 44.9% in 2014 compared to 2013.  The non-performing ratio for mortgage loans declined from 2.8% in 2013 to 2.7% in 2014 and the impaired mortgage loans ratio also improved from 5.7% in 2013 to 5.6% in 2014.
 
Recoveries on loans previously charged-off increased 6.7% in 2014 compared to 2013. This was due to higher recoveries of charged-off commercial loans, a result of higher recovery of charge-offs in the SME segment.
 
As a result of the factors mentioned above, net operating profit increased 14.0% in 2014 compared to 2013 and totaled Ch$1,308,594 million.
 
Operating expenses increased 12.1% compared to 2013. The efficiency ratio was 41.1% in 2014 compared to 40.2% in 2013. The 9.9% increase in personnel salaries and expenses was mainly due to higher salaries and bonuses. Total salary expenses and bonuses increased 9.4% in 2014 compared to 2013, totaling Ch$290,509 million.
 
Administrative expenses increased 9.0% in the year ended December 31, 2014 compared to the corresponding period in 2013. The increase in administrative expenses was mainly due to the 13.9% increase in maintenance, repair of property, plant and equipment, which totaled Ch$17,498 million and the 7.6% rise in security services expenses that totaled Ch$17,089 million. In 2014, the Bank continued to refurbish branches, open new Santander Select branches and close Santander Banefe branches.
 
Depreciation and amortization expense decreased 27.7%, mainly due to the lower depreciation and amortization of intangible assets. In 2014, the Bank, following an extensive analysis of it intangible assets, performed an extraordinary charge-off of those intangible assets, mainly software, that were obsolete or were not contributing to the Bank’s business or earnings.
 
Impairment charges increased 14,926.2% in 2014 compared to 2013 and totaled Ch$36,664 million. The Bank, in its strategic objectives, initiated a plan to transform its business and operating model with a better focus on the client. Therefore, there have arisen a number of new requirements for the Bank to adapt to changing customer demands and establish new ways to interact with customers. In conjunction with this change in strategic focus, we tested a number of applications that were in use or in development for impairment. Following the testing, in accordance with IAS 36, the Bank has recognized an impairment of Ch$36,556 million in 2014.
 
Other operating expenses were Ch$58,946 million in 2014, a 12.6% increase compared to 2013. This increase was mainly due to higher provisions for contingencies that totaled Ch$13,080 million in 2014 compared to Ch$5,805 million in 2013. Compared to 2013, the rise in provision for contingencies was due to Ch$5 billion for future severance payments and Ch$2.4 billion for future costs related to chip technology for cards. This reflects the pending expense for customers that have yet to change their debit or credit card with the new chip technology, which is an on-going process.  See “Note 33—Other operating income and expenses” and “Note 20-Provisions” to our Audited Consolidated Financial Statements for more detail on Other operating expenses.
 
Total income tax expense in 2014 totaled Ch$51,050 million a 46.0% decrease compared to 2013.  The Bank paid an effective tax rate of 8.1% in 2014 compared to 17.5% in 2013. The Chilean Government enacted in 2014 a reform to the corporate tax structure.  The statutory corporate tax rate increased from 20% to 21% in 2014 and will rise to 22.5% in 2015. By the end of 2016 a corporation’s shareholders must opt between two new tax systems for a minimum period of five years. In one, the statutory income tax rate will rise to 24% in 2016 and 25% in 2017 and onward. In the other system, the statutory tax rate will rise to 25.5% in 2016 and 27% in 2017 and onward.
 
The lower effective tax rate was mainly due to the fact that income tax expenses in 2014 included a one-time non-cash gain of Ch$39,262 million from the re-adjustments made to the Bank’s deferred tax asset base following passage of the new tax law. The Bank has more deferred tax assets than liabilities. This gain arises from the difference between the Bank’s accounting and tax books regarding how provisions and charge-offs are recognized. When the statutory rates were modified, the Bank’s net deferred tax assets increased as the future tax rates used to calculate this asset were gradually increased from 20% to 27%. Also, higher CPI inflation resulted in a greater revaluation of our capital, which resulted in a lower effective tax rate.
 
Results of operations for the years ended December 31, 2013 and 2012. Net income for the year ended December 31, 2013 increased 23.0% to Ch$444,429 million. Our return on annualized average equity was 18.9% in 2013 compared to 16.5% in 2012.
 
 In 2013, net operating profit before loan losses was Ch$1,519,190 million, an increase of 7.8% compared to 2012. Our net interest income increased 3.3% to Ch$1,076,762 million in 2013 from Ch$1,042,734 million in 2012. The average balance of our interest-earning assets increased by 7.6% in 2013 compared to 2012. Our net interest margin decreased to 4.63% in 2013 from 4.82% in 2012. Net interest margins were negatively affected by the fall in the average nominal rate we earned on our interest earning assets. This was mainly due to: (i) a switch in the loan mix away from higher yielding, but riskier segments such as Banefe, a lower interest rate environment and a decline in the UF inflation rate in 2013 compared to 2012.
 
Net fees and commission income decreased 15.1% to Ch$229,836 million in the year ended December 31, 2013 compared to the same period in 2012. Fees in 2013 were negatively affected by new regulations that lowered brokerage fees from mandatory insurance for mortgage loans and the difficulties in increasing fees following stricter regulations issued by the SERNAC Financiero, the newly formed consumer protection agency for financial services.
 
Results of financial transactions, net, which is the sum of net profit from financial operations and net foreign exchange gains (loss), totaled Ch$124,437 million in the year ended December 31, 2013, an increase of 51.2% compared to the same period in 2012. These results include the results of our Treasury Division’s trading business and financial transactions with customers as well the results of our Financial Management Division. Client treasury
 
 
services decreased 9.8% in 2013 compared to 2012 and represented the majority of our financial transaction income. In 2013, the results from Santander Global Connect decreased 14.9% compared to 2012. In the first half of 2013, demand for hedging and derivative products on behalf of our clients was low given the low volatility of the exchange rate. Once the U.S. federal reserve announced the tapering of quantitative easing, the volatility of the exchange rate increased and business volumes recovered. The results from market-making with client services decreased 2.1% in 2013, mainly due to lower business volumes of tailor-made treasury services sold to specific corporate clients, especially in the first half of the year. The results from non-client treasury income totaled a gain of Ch$45,319 million in 2013 compared to a loss of Ch$5,395 million in 2012. In 2013, the net results of our Financial Management Division were positive, since the Bank has a greater spot position in liabilities denominated in foreign currency than assets. These principally U.S. dollar-denominated liabilities are hedged through derivatives (short term foreign currency swaps) with minimal foreign currency exposure, but this does result in the existence of a short-term interest rate differential between U.S. dollars and Chilean pesos, which produces a financial result registered in financial transactions, net. This result is positive when interest rates in the US are trending up and local rates are falling and vice versa. In 2013, local rates, especially in the second half of the year decreased relative to US rates
 
Other operating income totaled a gain of Ch$88,155 million in the year ended December 31, 2013, a 572.7% increase from the corresponding period in 2012. The main reasons for this increase was the gain of Ch$78,122 million recognized from the sale of our asset management subsidiary, Santander Asset Management S.A. Administradora General de Fondos.
 
Provisions for loan losses, net of recoveries totaled Ch$371,462 million in 2013 and decreased 8.0% compared to the amount of provisions recorded in 2012. This decline was mainly due to the 20.4% decrease in net provision expense from consumer loans. In June 2012, the Bank updated its allowance model for consumer loans, which mainly impacted the provisions established for renegotiated loans, and resulted in a provision of Ch$24,753 million. Excluding this effect, provisions for consumer loans decreased 12.7% in 2013 compared to 2012. In 2013, the Bank in order to lower credit risk in its consumer loan book modified its strategy by focusing growth in less risky segments to individuals in Commercial banking and by decreasing consumer loans in Santander Banefe. As a result of this shift in strategy, impaired consumer loans decreased 11.1% and non-performing consumer loans decreased 21.1% in 2013 compared to 2012.
 
As a result of the factors mentioned above, net operating profit increased 14.2% in 2013 compared to 2012 and totaled Ch$1,147,728 million.
 
Operating expenses increased 1.8% compared to 2012. The efficiency ratio was 40.2% in 2013 compared to 42.5% in 2012. The 2.8% increase in personnel salaries and expenses was mainly due to higher salaries. Total salary expenses, including bonuses increased 4.0% in 2013 compared to 2012, totaling Ch$265,500 million.
 
Administrative expenses increased 2.6% in 2013 compared to 2012. The increase in administrative expenses was mainly due to: (i) the 33.1% increase in security and valuable transport services which increased from Ch$11,929 million in 2012 to Ch$15,879 million in 2013. In 2013 the Bank had to increase the expenditure dedicated to securing and protecting ATM machines given the increase in theft and more regulations regarding ATM security, (ii) the 17.2% increase in expenses relating to IT and communication systems from Ch$24,873 million in 2013 to Ch$29,144 million in 2012, in line with the Bank’s improvements of its CRM systems, phone banking and internet banking services; (iii) the 15.0% increase in expenses relating to outsourced computer services related to various IT upgrades, (iv) a 7.1% rise in branch rental expenses due to the greater number of branches rented following the sale of branches in 2012 and 2011 and (v) a 7.5% rise in expenses relating to the maintenance and repair of property as the Bank refurbished branches and introduced its new brand Santander Select and transformed 44 branches into this new format for mid-higher income clients.
 
Other operating expenses were Ch$52,338 million in 2013, a 12.2% decrease compared to 2012. This decrease was mainly due to lower provisions and expenses for repossessed assets that totaled Ch$4,824 million in 2013 compared to Ch$10,176 million in 2012. This was offset by higher customer service expenses that includes costs related to our call center and higher other costs, which increased due to the Ch$2,283 million in expenses recorded in 2013 from the costs incurred in adopting chip technology for our ATM and credit cards.
 
Our income tax expense increased by 112.6% in the year ended December 31, 2013 compared to the same period in 2012. The effective tax rate was 17.5% in 2013 compared to 11.0% in 2012. The higher effective tax rate
 
 
in 2013 compared to 2012 was due to the fact that in September 2012, the statutory tax rate was increased from 18.5% to 20.0% and this created an income tax reversal of Ch$16,221 million in 2012, corresponding to the adjustment of deferred tax assets to the higher statutory rate.
 
Net interest income
 
   
Year ended December 31,
   
% Change
 
   
2014
   
2013
   
2012
      2014/2013       2013/2012  
   
(in millions of Ch$, except percentages)
 
Individuals (Commercial banking)
    519,541       506,192       499,422       2.6 %     1.4 %
Individuals (Santander Banefe)
    91,979       99,182       123,043       (7.3 %)     (19.4 %)
Small and mid-sized companies
    269,483       260,856       233,622       3.3 %     11.7 %
Companies and institutions
    219,307       193,749       176,649       13.2 %     9.7 %
Total commercial banking
    1,100,310       1,059,979       1,032,736       3.8 %     2.6 %
Global banking & markets
    87,737       72,932       50,477       20.3 %     44.5 %
Other (1)
    129,057       (56,149 )     (40,479 )     -- %     38.7 %
Net interest income
    1,317,104       1,076,762       1,042,734       22.3 %     3.3 %
Average interest-earning assets
    26,759,696       23,267,735       21,620,090       15.0 %     7.6 %
Average non-interest-bearing demand deposits
    5,386,272       4,620,849       4,177,432       16.6 %     10.6 %
Net interest margin (2)
    4.92 %     4.63 %     4.82 %                
Average shareholders’ equity and average non-interest-bearing demand deposits to total average interest-earning assets
    30.2 %     30.0 %     29.4 %                

(1)
Consists mainly of net interest income from the Financial Management Division and the cost of funding our fixed income trading portfolio.  Each segment obtains funding from its clients. Any surplus deposits are transferred to the Financial Management Division, which in turn makes such excess available to other areas that need funding. The Financial Management Division also sells the funds it obtains in the institutional funding market at a transfer price equal to the market price of the funds.
 
(2)
Net interest margin is net interest income divided by average interest-earning assets.
 
For the years ended December 31, 2014 and 2013.  Our net interest income totaled Ch$1,317,104 million in the year ended December 31, 2014, an increase of 22.3% from Ch$1,076,762 million in 2013. Average interest earning assets increased 15.0% in the same period, driven mainly by lending to Individuals in commercial banking to companies and institutions and to a lesser extent loan growth in small and mid-sized companies and Santander Banefe. Net interest margin in 2014 was 4.92% compared to 4.63% in 2013. Net interest margins were positively affected by the increase of the average nominal rate we earned on our interest earning assets. This was mainly due to a rise in the UF inflation rate in 2014 compared to 2013 and higher loan yields in Companies and institutions and Global banking and markets. As financing sources from abroad became more expensive for Chilean companies, this permitted higher loan yields locally. This was only partially offset by the negative impacts of maximum rate regulation on consumer loan yields, a lower interest rate environment and loan growth focused in lower yielding, but less risky segments.
 
 
Average nominal interest rate earned on interest earning assets
 
2014
   
2013
   
2012
 
Ch$
    10.3 %     11.7 %     12.2 %
UF
    9.3 %     6.5 %     7.1 %
Foreign currencies
    1.5 %     1.7 %     2.0 %
Total
    8.3 %     8.0 %     8.8 %

The average rate paid on our interest bearing liabilities increased from 4.6% in 2013 to 4.7% in 2014. This was mainly due to a higher rate paid on UF denominated liabilities as a result of the higher UF inflation in the year. The Bank’s funding mix also improved in 2014. The ratio of average shareholders’ equity and average non-interest bearing demand deposits to total average interest earning assets increased from 30.0% in 2013 to 30.2% in 2014. Average non-interest bearing demand deposits increased 16.6% in 2014 compared to 2013.
 
 
Average nominal interest rate paid on interest bearing liabilities
 
2014
   
2013
   
2012
 
Ch$
    6.0 %     6.0 %     6.2 %
UF
    8.4 %     5.9 %     6.6 %
Foreign currencies
    0.7 %     1.9 %     2.7 %
Total
    4.7 %     4.6 %     5.3 %
 
 
The changes in net interest income by segment in 2014 as compared to 2013 were as follows:
 
 
·
Net interest income from Individuals in Commercial banking increased 2.6%, mainly as a result of the 14.1% increase in loan volumes in this segment. The Bank focused growth in the high end of this segment in order to focus on margins net of risks, especially considering that in 2014 the new maximum rate legislation was going to begin to affect the low end of the consumer market. The Bank’s strategy was to focus on lower yielding loans, but with lower risk in order to maximize margins net of provisions.
 
 
·
Net interest income from Individuals in Santander Banefe decreased 7.2% in 2014. Loans in this segment grew only 3.4% as the Bank focused growth in the higher income levels in this segment to increase profitability net of provisions, especially considering that in 2014 the new maximum rate legislation was going to begin to affect the profitability of this segment.
 
 
·
Net interest income from Small and mid-sized companies increased 3.3% in 2014, mainly as a result of the 4.1% increase in loans to this sub-segment and an improved funding mix.
 
 
·
Net interest income from Companies and institutions increased 13.2% in 2014, mainly as a result of the 8.2% increase in loans to this sub-segment and an improved funding mix. This segment was of significant strategic focus in 2014 as the Bank increased business volumes in this segment both in lending and non-lending while maintaining positive asset quality indicators in this segment.
 
 
·
Net interest income from the Global banking and markets segment increased 20.3% in 2014 despite a 0.8% decrease in loan volumes. Yields on emerging market debt in 2014 increased as the U.S. Federal Reserve Bank commenced its program of tapering of quantitative easing. This led to greater loan yields in this segment. This segment also saw an improvement in cash management services that improved the funding mix.
 
 
·
Other net interest income consists mainly of net interest income from the available for sale investment portfolio and deposits in the Central Bank and the financial cost of supporting our cash position and investment portfolio for trading, the interest income from which is recognized as net income from financial operations and not interest income. The result of the Bank’s inflation gap is also included in this line. The net interest income included as “other” totaled a gain of Ch$129,057 million in 2014 compared to a loss of Ch$56,149 million in 2013.  The financial impact of the gap between our assets and liabilities denominated in UFs including hedges was Ch$229,946 million in 2014, Ch$71,842 million in 2013 and Ch$71,238 million in 2012. The higher gain in 2014 can be explained by the greater UF inflation in 2014 compared to previous periods and the greater UF gap in 2014.
 
The following table shows our balances of loans and accounts receivable from customers and interbank loans by segment and sub-segment at the dates indicated.
 
   
Year ended December 31,
   
% Change
 
   
2014
   
2013
   
2012
      2014/2013       2013/2012  
   
(in millions of Ch$, except percentages)
 
Individuals (Commercial banking)
    11,083,815       9,710,249       8,941,860       14.1 %     8.6 %
Individuals (Santander Banefe)
    752,267       727,452       730,362       3.4 %     (0.4 %)
Small and mid-sized companies
    3,354,840       3,223,215       2,890,251       4.1 %     11.5 %
Companies and institutions
    5,444,869       5,031,752       4,414,211       8.2 %     14.0 %
Global banking & markets
    2,201,913       2,219,045       1,863,595       (0.8 %)     19.1 %
Other (1)
    54,945       149,048       126,373       63.1 %     17.9 %
Total loans
    22,892,649       21,060,761       18,966,652       8.7 %     11.0 %

(1)
Includes interbank loans.
 
For the years ended December 31, 2013 and 2012.  Our net interest income totaled Ch$1,076,762 million in the year ended December 31, 2013, an increase of 3.3% from Ch$1,042,734 million in 2012. Average interest earning assets increased 7.6% in the same period, driven mainly by lending to Individuals in commercial banking, Companies, SME and Global banking & markets. Net interest margin in 2013 was 4.63% compared to 4.82% in 2012. Net interest margins were negatively affected by the decrease of the average nominal rate we earned on our
 
 
interest earning assets. This was mainly due to: (i) a switch in the loan mix away from higher yielding, but riskier segments such as Banefe, (ii) a lower interest rate environment and (iii) a decline in the UF inflation rate in 2013 compared to 2012.
 
The average rate paid on our interest bearing liabilities decreased from 5.3% in 2012 to 4.6% in 2013. This was mainly due to a lower rate paid on UF denominated liabilities as a result of the lower UF inflation in the year. The Bank’s funding mix also improved in 2013.  The ratio of average shareholders’ equity and average non-interest bearing demand deposits to total average interest earning assets increased from 29.4% in 2012 to 30.0% in 2013. Average non-interest bearing demand deposits increased 10.6% in 2013 compared to 2012.
 
The changes in net interest income by segment in 2013 as compared to 2012 were as follows:
 
 
·
Net interest income from Individuals in Commercial banking increased 1.4%, mainly as a result of the 8.6% increase in loan volumes in this segment. The Bank focused growth in the high end of this segment in order to focus on margins net of risks, especially considering that in 2014 the new maximum rate legislation was going to begin to affect the low end of the consumer market.
 
 
·
Net interest income from Individuals in Santander Banefe decreased 19.4% in 2013. Loans in this segment grew just 0.4% as the Bank focused growth in the higher income levels in this segment to increase profitability net of provisions, especially considering that in 2014 the new maximum rate legislation was going to begin to affect the profitability of this segment.
 
 
·
Net interest income from Small and mid-sized companies increased 11.7% in 2013, mainly as a result of the 11.5% increase in loans to this sub-segment and an improved funding mix.
 
 
·
Net interest income from Companies and institutions increased 9.7% in 2013, mainly as a result of the 14.0% increase in loans to this sub-segment due to the positive evolution of the Chilean economy. This was partially offset by increased competition in this sub-segment, which lowered loan yields, but this sub-segment has a less risky loan profile, which was a focus of the Bank in 2013.
 
 
·
Loans in the Global banking and markets segment increased 19.1% in 2013, which led to a 44.5% increase in net interest income in this segment.  Yields on emerging market debt in 2013 increased as the U.S. Federal Reserve Bank commenced its program of tapering of quantitative easing. This led to greater domestic demand for financing on behalf of large corporations and higher loan yields.
 
 
·
Other net interest income consists mainly of net interest income from the available for sale investment portfolio and deposits in the Central Bank and the financial cost of supporting our cash position and investment portfolio for trading, the interest income from which is recognized as net income from financial operations and not interest income. The result of the Bank’s inflation gap is also included in this line. The net interest income included as “other” totaled a loss of Ch$56,149 million in 2013 compared to a loss of Ch$40,479 million in 2012.  The lower UF inflation rate negatively affected net interest income from this segment. At the same time, in 2013, the Bank continued to reduce its excess cash position and to lend more, which resulted in lower financial investment income.
 
Fee and commission income
 
For the years ended December 31, 2014 and 2013.  Net fees and commission income decreased 1.1% to Ch$227,283 million in the twelve-month period ended December 31, 2014 compared to the same period in 2013. In 2014, the Bank continued to experience positive client base and product growth. These positive commercial efforts continued to be offset by regulations that lowered fees from collecting mandatory insurance for mortgage loans (mainly fire and earthquake insurance) and the difficulties in increasing fees following stricter regulations issued by the SERNAC Financiero, the newly formed consumer protection agency for financial services. See “Item 3.  Key Information—D. Risk Factors—Chile’s banking regulatory and capital markets environment is continually evolving and may change.”
 
The following table sets forth certain components of our income from services (net of fees paid to third parties directly connected to providing those services, principally fees relating to credit card processing and ATM network administration) in the years ended December 31, 2014, 2013 and 2012.
 
   
Year ended December 31,
   
% Change
 
   
2014
   
2013
   
2012
      2014/2013       2013/2012  
   
(in millions of Ch$)
 
Credit, debit and ATM cards 
    43,161       39,325       53,934       9.8 %     (27.1 %)
Collections 
    35,355       45,190       56,472       (21.8 %)     (20.0 %)
Insurance brokerage 
    34,695       32,253       32,499       7.6 %     (0.8 %)
Letters of credit 
    32,403       30,131       28,523       7.5 %     5.6 %
Checking accounts 
    29,031       28,044       28,755       3.5 %     (2.5 %)
Custody and brokerage services 
    8,307       6,195       9,585       34.1 %     (35.4 %)
Lines of credit 
    7,015       7,025       9,296       (0.1 %)     (24.4 %)
Asset management 
          31,154       33,414       (100.0 %)     (6.8 %)
Others 
    37,316       10,519       18,094       254.7 %     (41.9 %)
Total fees and commission income, net 
    227,283       229,836       270,572       (1.1 %)     (15.1 %)

Fees from credit, debit and ATM cards increased by 9.8% in 2014, reflecting the positive growth of the usage of the Bank’s credit and debit cards. Active credit cards totaled 1,877,589 at year-end 2014 and increased 3.3% compared to year-end 2013.
 
Fees from collections decreased by 21.8% in 2014 compared to 2013. In 2014, we once gain auctioned to the lowest bidder the mandatory insurance products that are sold with mortgage loans. This negatively impacted collection fees where this income is recognized. At the same time in 2014, per new regulations, we began provisioning as a fee expense a portion of the life insurance fees collected by the Bank on behalf of insurance companies. We provisioned a total of Ch$6.8 billion of such fees in 2014. Several of the loan products that the Bank sells, mainly consumer and mortgage loans, are sold with a life insurance that covers the value of the loan in case of death. This insurance premium is collected by the Bank on behalf of insurance companies upfront at the moment the loan is originated to cover a period equal to the maturity of the loan. Therefore, if the client pre-pays the loan, we must return to the insurance company a portion of the fee collected. Insurance brokerage fees increased 7.6% as business volumes recovered in line with a recovery in client and product growth.
 
Fees from letters of credit and other contingent operations increased 7.5% in 2014. This increase was mainly due to positive performance of our international and foreign trade financing businesses with clients and also due to the depreciation of the peso against the U.S. dollar since this business is mainly transacted in foreign currency.
 
Fees from checking accounts increased 3.5% in 2014 compared to 2013. This was mainly due to a rise in the Bank’s checking account base. According to the latest data published by the SBIF as of November 2014, the Bank’s checking accounts totaled 815,182 compared to 772,436 in 2013 or a growth of 5.5%. Higher checking account balances both in retail banking as well as an increase in corporate cash management services also boosted fee growth in this product.
 
Brokerage and custody fees increased 34.1% in 2014 as compared to 2013. Despite lack luster performance of local equity markets, which hurt brokerage activity, the depreciation of the peso against the dollar positively affected brokerage and custody fees. At the same time the placing of local fixed income instruments on behalf of our clients drove income in this product as well.
 
Fees from lines of credit were essentially flat compared to 2013. Fee income from this product has stabilized as the client base expanded in 2014. This following various years of decline due to regulations, a decrease in lines of credit as the Bank reduced its exposure to clients with unhealthy financial behavior and restrictions on the increase of fees following the creation of the SERNAC Financiero.
 
Fees from our asset management business totaled Ch$0 in 2014. In December 2013, our Asset Management business was sold. In 2014, the Bank continued to broker asset management products for Santander Asset Management. These brokerage fees are included as other income from fees.
 
The rise in other fee income of 254.7% in 2014 compared to 2014 was mainly due to higher fees from the brokerage of asset management services. As mentioned in the paragraph above, the Bank is no longer in the asset management business, but serves as an exclusive broker for Santander Asset Management, the acquirer of our asset management business. In 2014, asset management brokerage fees totaled Ch$30,984 million.
 
The following table sets forth, for the periods indicated our fee income broken down by segment and sub-segment for the periods indicated:
 
   
Year ended December 31,
   
% Change
   
% Change
 
   
2014
   
2013
   
2012
      2014/2013       2013/2012  
   
(in millions of Ch$)
 
Individuals (Commercial banking)
    128,891       123,496       141,946       4.4 %     (13.0 %)
Individuals (Santander Banefe)
    21,257       25,648       33,853       (17.1 %)     (24.2 %)
Small and mid-sized companies
    47,011       37,641       38,115       24.9 %     (1.2 %)
Companies and institutions
    29,405       29,249       28,373       0.5 %     3.1 %
Global banking and markets
    21,952       18,022       19,159       21.8 %     (5.9 %)
Other
    (21,233 )     (4,220 )     9,126       403.2 %     %
Total fees and commission income, net
    227,283       229,836       270,572       (1.1 %)     (15.1 %)

Fees from Individuals in Commercial banking increased 4.4% in 2014 compared to 2013. Fees from Individuals in Santander Banefe decreased 17.1% in the same period. A key strategic focus in 2014 was to increase business activity in Individuals (commercial banking) which comprise mid-high income segments.  In mid-2013, the Bank executed a profound overhaul of its Client Relationship Management (CRM) systems and other changes to its commercial team front-office functions, which has continued to led to greater product sales and usage in this segment in 2014. At the same time, the Bank has de-emphasized growth in Santander Banefe which resulted in lower business activity and client growth in this segment, which is mainly dedicated to banking lower income individuals. Additionally, fees in this segment were impacted by the SERNAC Financiero’s restrictions on the increase of fees and the new regulations regarding the selling of mandatory insurance for mortgage loans.
 
The 24.9% increase in fees in 2014 from Small and mid-sized companies was mainly due to higher prices for some services in this segment.
 
The 0.5% increase in fees in Companies and institutions sub-segments, respectively, reflects the timid increase in business activity in general in line with the overall growth of the economy in 2014.
 
Fees from the Global banking and markets segment increased 21.8%. In 2014, this segment saw an important increase in cash management services, custody, financial advisory and other corporate services. Despite lower GDP growth in 2014, many Chilean companies performed various important transactions locally with the Bank. Other income fee income that was not attributed to any business segment totaled a loss of Ch$21,233 million in 2014 compared to a loss of Ch$1,561 million in 2013. This was mainly due to the fact that several of the regulations that affected fee income in 2014, mainly collection fees, were not attributed to any segment.
 
For the years ended December 31, 2013 and 2012.  Net fees and commission income decreased 15.1% to Ch$229,836 million in the twelve-month period ended December 31, 2013 compared to the same period in 2012. In 2013, the Bank completed the overhaul of its Client Relationship Management (CRM) systems and other changes to its commercial team front-office functions. This has resulted in greater client base and product growth. This was offset by the new regulations that lowered fees from brokering mandatory insurance for mortgage loans (mainly fire and earthquake insurance) and the difficulties in increasing fees following stricter regulations issued by the SERNAC Financiero, the newly formed consumer protection agency for financial services. See “Item 3.  Key Information—D. Risk Factors—Chile’s banking regulatory and capital markets environment is continually evolving and may change.”
 
Fees from credit, debit and ATM cards decreased by 27.1%, reflecting the reduction of clients in the Bank’s Santander Banefe unit, as the Bank reduced its exposure to clients with unhealthy financial behavior.  This had a negative impact on certain fees, specifically credit card, checking account and line of credit fees, but the Bank expects this to have a positive impact on asset quality in this segment in future periods. The Bank also reduced or eliminated fees on ATM and debit cards in line with the new guidelines set by the SBIF and Sernac Financiero.
 
Fees from collections decreased by 20.0% in 2013 compared to 2012. In July 2012, new regulations regarding the sale of mandatory insurance for mortgage loans was introduced. At year-end 2012, as per new regulations, we auctioned to the lowest bidder the mandatory insurance products that are sold with mortgage loans. This negatively impacted collection fees where this income is recognized.
 
Insurance brokerage fees decreased by 0.8% in 2013. This was mainly due to lower business volumes in our insurance brokerage subsidiary.
 
Fees from letters of credit and other contingent operations increased 5.6% in 2013. This increase was mainly due to positive performance of our international and foreign trade financing businesses with clients and also due to the depreciation of the peso against the U.S. dollar since this business is mainly transacted in foreign currency.
 
Fees from checking accounts decreased 2.5% in 2013 compared to 2012.  This was mainly due to competitive pressures on checking account maintenance fees and increased restrictions on the increase of fees following the creation of the SERNAC Financiero.
 
Brokerage and custody fees decreased 35.4% in 2013 as compared to 2012. This fall was mainly due to the poor performance of the local equity markets, which hurt brokerage activity.
 
Fees from lines of credit decreased 24.4% in 2013 compared to 2012.  This decrease was mainly due to a decrease in lines of credit as the Bank reduced its exposure to clients with unhealthy financial behavior, though the Bank expects this to have a positive impact on asset quality in the Individuals segment in future periods. The decrease was also due to increased restrictions on the increase of fees following the creation of the SERNAC Financiero.
 
Fees from our asset management business decreased 6.8% in 2013 compared to 2012 due to lower growth of equity funds given the poor performance of the local stock market. In December 2013, our Asset Management business was sold for a price of Ch$90,281 million. This operation generated Ch$78,122 million of profit recorded within Other operating income.
 
The fall in other fee income of 41.9% in 2013 compared to 2012 was mainly due to higher fee expenses paid related to fees paid for our collection efforts. This was offset by higher fees in our Companies, SMEs and Institutions business segments as the Bank focused on increasing banking services and activities with these clients. Fees from foreign currency exchange services increased 9.9% to Ch$3,554 million in 2013 compared to 2012. Financial advisory fees increased 5.8% to Ch$6,146 million in 2013 compared to 2012. Fees from office banking totaled Ch$1,812 million and increased 22.3% in 2013 compared to 2012 due to greater usage of this platform by Company segment clients.
 
Fees from Individuals in Commercial banking decreased 13.0% in 2013 compared to 2012. Fees from Individuals in Santander Banefe decreased 24.2% in the same period. As mentioned, the Bank executed a profound overhaul of its Client Relationship Management (CRM) systems and other changes to its commercial team front-office functions. At the same time, the Bank modified its admission policies for loan origination, which resulted in lower business activity and client growth, especially in lower income individuals. Additionally, fees in this segment were impacted by the SERNAC Financiero’s restrictions on the increase of fees and the new regulations regarding the selling of mandatory insurance for mortgage loans.
 
The 1.2% decrease in fees in 2013 from Small and mid-sized companies was mainly due to a hike in prices and greater business growth in this segment.
 
The 3.1% increase in fees in Companies and institutions sub-segments, respectively, reflects the higher fees from letters of credits, office banking and foreign currency services, as well as greater business activity in general with these clients.
 
Fees from the Global banking and markets segment decreased by 5.9%, primarily due to a fall in volumes our brokerage unit and other corporate fees.
 
Financial transactions, net
 
The following table sets forth information regarding our income (loss) from financial transactions for the years ended December 31, 2014, 2013 and 2012.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Net income from financial operations
    (159,647 )     (20,289 )     (64,079 )     686.9 %     (68.3 %)
Foreign exchange profit (loss), net
    272,212       144,726       146,378       88.1 %     (1.1 %)
Total financial transactions, net
    112,565       124,437       82,299       (9.5 %)     51.2 %

For the years ended December 31, 2014 and 2013.  Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange profit (loss), totaled Ch$112,565 million in the year ended December 31, 2014, a decrease of 9.5% compared to the same period in 2013. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well the results of our Financial Management Division.
 
Net income from financial operations was a loss of Ch$159,647 million in 2014 compared to a loss of Ch$20,289 million in 2013.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Derivatives classified as trading
    (224,015 )     (68,201 )     (104,344 )     228.5 %     (34.6 %)
Trading investments
    45,952       29,985       36,338       53.2 %     (17.5 %)
Sale of loans
    6,070       3,177       4,835       91.1 %     (34.3 %)
Available-for-sale instruments sales
    6,934       10,258       (1,764 )     (32.4 %)      
Other results
    5,412       4,492       856       20.5 %     424.8 %
Net income (loss) from financial operations
    (159,647 )     (20,289 )     (64,079 )     686.9 %     (68.3 %)

The higher loss from financial operations in 2014 compared to 2013 was mainly due to:
 
 
(i)
Higher losses from derivatives classified as trading. In 2014, the average yearly exchange rate depreciated 15.2% compared to 1.8% in 2013. Movements in foreign currency affect this line item because it includes the valuation adjustments of our derivatives classified as trading. The Bank’s spot position includes all assets and liabilities in foreign currency and assets and liabilities in Ch$ linked to U.S.$ that are not derivatives. Internal policy prohibits us from opening a large exposure in foreign currency, but we usually have more liabilities in foreign currency (mainly US$) than assets in our spot position due to our long-term funding in foreign currency and deposits denominated in foreign currencies from Chilean exporters. This net foreign currency liability spot position is hedged using different instruments. Our long-term foreign currency funding is hedged with cross-currency swaps that are matched and are accounted under hedge accounting rules. Therefore, the liability and the corresponding hedge are recognized in foreign exchange profits, described below and not in this line item. Excluding this part of our funding in foreign currency, we are left with the foreign currency deposits and other short-term foreign currency funding mechanisms, which are larger than the foreign currency assets, mainly loans and cash. This difference is hedged with derivatives that are accounted as trading derivatives. As the peso depreciated against the dollar in 2014 at a higher rate than in 2013, the loss from derivatives classified as trading rose. For more details, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management— Market risk – local and foreign financial management.”
 
 
(ii)
This was partially offset by higher gains from our investment portfolio classified as trading. In this line item the mark-to-market and interest income of the trading portfolio are recognized. In 2014, the higher UF inflation increased interest from this portfolio and falling interest rates increased the mark-to-market gains. This explains the 53.2% increase in results from the trading portfolio compared to 2013, which totaled Ch$45,952 million.
 
The net result from foreign exchange transactions totaled a gain of Ch$272,212 million in 2014 compared to  Ch$144,726 million This difference was mainly the result of the greater depreciation of the Chilean peso against the U.S. dollar in 2014 compared to 2013. This line item includes the net result of our spot position in foreign currency.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Net profit or loss from foreign currency exchange differences
    (370,282 )     (242,841 )     270,990       52.5 %      
Hedge-accounting derivatives
    621,767       379,910       (120,610 )     63.7 %      
Translation gains and losses over  assets and liabilities indexed to foreign currencies, net
    20,727       7,657       (4,002 )     170.7 %      
Net results from foreign exchange profit (loss)
    272,212       144,726       146,378       88.1 %     (1.1 %)

The effects on net income from the change in value of our spot foreign currency position are generally positive if the peso appreciates and negative if the peso depreciates as our spot funding base in foreign currency is larger than our spot asset position in foreign currency. As mentioned above, in general we do not open large exposures in foreign currency. The net foreign currency liability spot position is hedged using different instruments. Our long-term funding is hedged with cross-currency swaps that are matched and are accounted under hedge accounting rules. Therefore, the net liability spot position and the portion hedge with derivatives that are valued under hedge accounting are recognized in foreign exchange profits. The depreciation of the peso in 2014 led to a larger loss in the net profit or loss from foreign currency exchange, which reflects the value of our spot foreign currency position. This loss totaled Ch$370,282 million in 2014 compared to a loss of Ch$242,841 million in 2013. At the same time, the results from hedge-accounting derivatives increased from Ch$379,910 million in 2013 to Ch$621,767 million in 2014 arising from the net long position we have in hedge accounting derivatives that hedge our long-term foreign currency funding. For more details, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management— Market risk – local and foreign financial management.”
 
In order to more easily compare the results from financial transactions, net, we present the following table that separates the results by line of business for 2014, 2013 and 2012.
 
   
Year ended December 31,
   
% Change
 
   
2014
   
2013
   
2012
      2014/2013       2013/2012  
   
(in millions of Ch$)
 
Santander Global Connect
    50,740       44,860       52,703       13.1 %     (14.9 %)
Market-making with clients
    33,097       34,258       34,991       (3.4 %)     (2.1 %)
Client treasury services
    83,837       79,118       87,694       6.0 %     (9.8 %)
Sale of loans and charged-off loans
    6,070       3,218       4,835       88.6 %     (33.4 %)
Proprietary trading
    (1,113 )     (1,963 )     8,213       (43.3 %)     %
Financial Management Division (1)
    23,771       44,064       (18,443 )     (46.1 %)     %
Non-client treasury income (loss)
    28,728       45,319       (5,395 )     (36.6 %)     %
Total financial transactions, net
    112,565       124,437       82,299       (9.5 %)     51.2 %

(1)
The Financial Management Division manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, capital requirements and liquidity levels. The aim of the Financial Management Division is to provide stability and continuity in our net interest income from commercial activities, and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk.
 
Client treasury services totaled Ch$83,837 million and increased 6.0% in 2014 compared to 2013. The results from Santander Global Connect and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2014, the results from Santander Global Connect increased 13.1%. The depreciation of the peso led to a larger demand for hedging from our Corporate and Companies clients driving this income line. The results from market-making with client services decreased 3.4% in 2014, mainly due to lower business volumes of tailor-made treasury services sold to specific corporate clients. These results may vary year-to-year as some large operations with corporate clients may not be repeated in subsequent years.
 
The results from non-client treasury income decreased 36.6% and totaled a gain of Ch$28,728 million in 2014 compared to Ch$45,319 million in 2013. These results include the income from sale of loans, including charged-off loans, proprietary trading and the results from our Financial Management Division. The results from the sale of loans increased 88.6% to Ch$6,070 million in 2014. The results from proprietary trading totaled a loss of Ch$1,113 million. The Bank since year-end 2012, no longer has a proprietary trading area and these results are from residual positions that are being closed.
 
In 2014, income from the Bank’s Financial Management Division decreased 46.1% to Ch$23,771 million. This department manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, capital requirements and liquidity levels. The aim of the Financial Management Division is to provide stability and continuity in our net interest income from commercial activities, and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk. This lower result was mainly due to lower gains obtained from short-term interest rate differential between the U.S. dollar and the Chilean peso. As mentioned, the Bank has a greater spot position in liabilities denominated in foreign currency than assets. These principally U.S. dollar-denominated liabilities are hedged through derivatives, resulting in minimal foreign currency exposure, but this does result in the existence of a short-term interest rate differential between U.S. dollars and Chilean pesos, which produces a financial result registered here. This result is positive when interest rates in the US are trending up and local rates are falling and vice versa. At the same time, our interest expense related to foreign currency exchange rose proportionally. In 2014 and 2013, local rates went down relative to US rates, but this impact was more significant in 2013 when the end of quantitative easing was announced. This lower result is also partially offset by higher yield on liquidity recognized in net interest income, since the rise in inflation resulted in higher nominal yields earned over the Bank’s available for sale fixed income portfolio.
 
For the years ended December 31, 2013 and 2012.  Total financial transactions, net, which is the sum of trading activities, fair value adjustments in our securities portfolio and foreign exchange transactions, totaled Ch$124,437 million in the year ended December 31, 2013, an increase of 51.2% compared to the same period in 2012. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well the results of our Financial Management Division.
 
Net income from financial operations was a loss of Ch$20,289 million in 2013 compared to a loss of Ch$64,079 million in 2012. The lower loss compared to 2012 was mainly due to:
 
 
(i)
Lower losses from derivatives classified as trading.  This was mainly due to lower losses from the Bank’s forwards that hedge foreign currency risk and are recognized as results from our Asset and Liability Management.  Derivatives are mainly composed of forward and swap contracts that hedge our spot position in foreign currency. Our spot position includes all assets and liabilities in foreign currency and assets and liabilities in Ch$ linked to U.S.$ that are not derivatives. For more details, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management— Market risk – local and foreign financial management.” If we have more foreign currency assets than liabilities in our spot position, as hedges and the Chilean peso appreciates, we usually record a low or negative result from the fair value of derivatives held for trading. In the same situation, but if the Chilean peso depreciates, we usually record a better result from the fair value of derivatives held for trading compared to the previous period. This is offset by foreign exchange transaction results, which include the mark-to-market of our spot foreign currency position, net of hedge-accounted derivatives. In 2013, the period end exchange rate depreciated 9.4% compared to the period end exchange rate of 2012. The average exchange rate in 2013 depreciated 1.2% compared to the average exchange rate in 2012. This explains the difference in results from derivatives classified as trading, which totaled a loss of Ch$68,201 million in 2013 compared to a loss of Ch$104,344 million in 2012.
 
 
(ii)
In 2013, the derivatives classified as trading include the debit value adjustments (DVA) for those derivatives in which the Bank has a net liability position with its counterparty. This resulted in income of Ch$8,324 million in 2013.
 
 
(ii)
Falling long-term interest rates. which resulted in higher realized gains from the sales of our available-for-instruments, which totaled Ch$10,258 million, and
 
 
(iv)
Higher other results due to a Ch$4,502 million gain from the re-purchase of issued bonds. This was offset by lower realized gains and interest from our trading investment portfolio given the reduction in the size of this portfolio between 2013 and 2012.
 
The net result from foreign exchange transactions totaled a gain of Ch$144,726 million compared to a gain of Ch$146,378 million in 2012. As mentioned, in 2013, the period end exchange rate depreciated 9.4% compared to
 
 
the period end exchange rate of 2012. The average exchange rate in 2013 depreciated 1.2% compared to the average exchange rate in 2012. Foreign currency exchange differences totaled a net loss of Ch$242,841 million in 2013 compared to a gain of Ch$270,990 million in 2012. This difference was mainly the result of the depreciation of the Chilean peso against the U.S. dollar in 2013 compared to an appreciation in 2012.
 
By line of business, client treasury services decreased 9.8% in 2013 compared to 2012 and represented the majority of our financial transaction income. The results from Santander Global Connect and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2013, the results from Santander Global Connect decreased 14.9% compared to 2012. In the first half of 2013, demand for hedging and derivative products on behalf of our clients was low given the low volatility of the exchange rate. Once the U.S. federal reserve announced the tapering of quantitative easing, the volatility of the exchange rate increased and business volumes recovered. The results from market-making with client services decreased 2.1% in 2013, mainly due to lower business volumes of tailor-made treasury services sold to specific corporate clients, especially in the first half of the year. These results may vary year-to-year as some large operations with corporate clients may not be repeated in subsequent years.
 
The results from non-client treasury income totaled a gain of Ch$45,319 million in 2013 compared to a loss of Ch$5,395 million in 2012. In 2013, the net results of our Financial Management Division were positive, since the Bank has a greater spot position in liabilities denominated in foreign currency than assets. These principally U.S. dollar-denominated liabilities are hedged through derivatives (short term foreign currency swaps) with minimal foreign currency exposure, but this does result in the existence of a short-term interest rate differential between U.S. dollars and Chilean pesos, which produces a financial result registered in financial transactions, net. This result is positive when interest rates in the US are trending up and local rates are falling and vice versa. In 2013, local rates, especially in the second half of the year began, to go down relative to US rates.   This better result from our Financial Management division in this line is partially offset by lower net interest income where the interest earned on peso- or UF-denominated asset is declining and the interest expense of the lower-yielding U.S.$-denominated liabilities is rising.
 
Other operating income
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(In millions of Ch$)
 
Income from assets received in lieu of payment
    2,811       6,571       2,654       (57.2 %)     147.6 %
Net results from sale of investment in other companies
          78,122       599       %     12942.1 %
Operational leases
    805       328       142       145.4 %     131.0 %
Gain on sale of Bank property, plant and equipment
    687       176       9,194       290.3 %     (98.1 %)
Recovery of generic provisions for contingencies
    315       77             309.1 %     100.0 %
Insurance coverage for earthquake
    661       725       262       (8.8 %)     176.7 %
Other
    1,266       2,156       254       (41.3 %)     748.8 %
Sub-total other income
    3,734       3,462       9,852       7.9 %     (64.9 %)
Total other operating income
    6,545       88,155       13,105       (92.6 %)     572.7 %

For the years ended December 31, 2014 and 2013.  Total other operating income fell 92.6% in 2014 compared to 2013 and totaled a gain of Ch$6,545 million. This fall was mainly due to the fact that in 2013 we recognized a non-recurring gain from the sale of our asset management subsidiary, Santander Asset Management S.A. Administradora General de Fondos. In December 2013 our subsidiary Santander Asset Management S.A. Administradora General de Fondos was sold through a formal offer of purchase received in May 2013. The sale price was Ch$90,281 million for 100% of the shares. 99.99% were acquired by SAM Investment Holdings Limited and the remaining 0.01% by Santander Asset Management UK Holdings Limited, both related to Grupo Santander.  This operation generated a gain of Ch$78,122 million recorded within the net results from sale of investments in other companies. Additionally, the entities entered into a management service agreement for a 10-year period. This transaction was reviewed by independent external evaluators who were of the opinion that the price offered was reasonable in consideration of their fair value appraisals.  Based on this appraisal, the Audit Committee and the Board of Directors recommended the transaction. On December 5, 2013 an Extraordinary Shareholders’ meeting was held. The offer was accepted and thus, on December 6, 2013 the SBIF was informed of this transaction.
 
Apart from this item, other operating income was negatively affected by lower gains from income received from assets in lieu of payment as 2013 included various large operations that were not repeated in 2014.
 
For the years ended December 31, 2013 and 2012.  Total other operating income totaled a gain of Ch$88,155 million in the year ended December 31, 2013, a 572.7% increase from the corresponding period in 2012. The main reason for this increase was the gain recognized from the sale of our asset management subsidiary, Santander Asset Management S.A. Administradora General de Fondos.  Apart from this item, other operating income was positively affected by the higher gains from income received from assets in lieu of payment and negatively affected from lower gains from the sale of branches as we did not sell branches in 2013.
 
Provision for loan losses
 
The following table sets forth, for the periods indicated, certain information relating to our provision for loan losses.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Provision for loan losses
    (403,069 )     (418,675 )     (431,237 )     (3.7 %)     (2.9 %)
Charge-off of loans analyzed on an individual basis
    (10,811 )     (8,071 )     (5,470 )     33.9 %     47.6 %
Recoveries on loans previously charged-off
    58,977       55,284       33,015       6.7 %     67.5 %
Provision for loan losses, net
    (354,903 )     (371,462 )     (403,692 )     (4.5 %)     (8.0 %)
Year end loans (1)
    22,892,649       21,060,761       18,966,652       8.7 %     11.0 %
Non-performing loans (2)
    644,327       613,301       597,767       5.1 %     2.6 %
Impaired loans (3)
    1,617,251       1,477,701       1,338,137       9.4 %     10.4 %
Allowance for loan losses (4)
    684,317       614,933       550,048       11.3 %     11.8 %
Impaired loans / Year end loans (5)
    7.06 %     7.02 %     7.06 %                
Non-performing loans / Year end loans (2)
    2.81 %     2.91 %     3.15 %                
Allowances for loan losses / Total loans
    2.99 %     2.92 %     2.90 %                
Coverage ratio non-performing loans (5)
    106.21 %     100.27 %     92.02 %                

(1)
Includes Ch$11,943 million in 2014, Ch$125,449 million in 2013 and  Ch$90,573 million in 2012  in interbank loans.
 
(2)
Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loans with at least one installment at least 90 days past-due.
 
(3)
Impaired loans include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan  to that client is not performing or has been renegotiated. See “Note 9—Loans and Accounts Receivables from Customers—(a) Loans and accounts receivables from customers” in the Audited Consolidated Financial Statements.
 
(4)
Includes Ch$1 million in 2014, Ch$495 million in 2013 and Ch$159 million in 2012 in allowance for loan losses for interbank loans.
 
(5)
Calculated as allowance for loan losses divided by non-performing loans.
 
For the years ended December 31, 2014 and 2013. Provisions for loan losses, net of recoveries totaled Ch$354,903 million in 2013 and increased 3.7% compared to the amount of provisions recorded in 2013.
 
Provision for loan losses, which includes the full amount of provisions recognized as a result of loan growth and change in risk classification as well as the net result of provisions and charge-offs of loans analyzed on a group basis,  totaled Ch$403,069 million in 2014 compared to Ch$418,675 million in 2013 and decreased 3.7%. The following table breaks down provision for loans losses by loan product for the years ended December 31, 2014, 2013 and 2012.
 
                     
% Change
 
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Interbank loans
    494       (336 )     (148 )           127.0 %
Commercial loans
    (203,454 )     (157,558 )     (129,583 )     29.1 %     21.6 %
Mortgage loans
    (18,346 )     (33,271 )     (17,865 )     (44.9 %)     86.2 %
Consumer loans
    (180,666 )     (222,964 )     (280,094 )     (19.0 %)     (20.4 %)
Contingent loans
    (1,097 )     (4,546 )     (3,547 )     (75.9 %)     28.2 %
Total(1)
    (403,069 )     (418,675 )     (431,237 )     3.7 %     (2.9 %)

(1)
Includes the full amount of provisions recognized as a result of loan growth and change in risk classification as well as the net result of provisions and charge-offs of loans analyzed on a group basis
 
Provisions established for the Bank’s consumer loans decreased by 19.0% to Ch$180,666 million in 2014 compared to 2013.  During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for consumer loans. The models were calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and decisional approvals at different points of the approval process, more robust statistical processes and more historical information, allowing stronger parameters of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in the release of consumer provisions of Ch$26,563 million in 2014. As this is a change in estimation, this improvement was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8. See “Item 5. Operating and Financial Review and Prospects—F. Selected Statistical Information-Classification of Loan Portfolio— Classification of Loan Portfolio-Loans analyzed on a group basis—Allowances for consumer loans.”
 
 

It is also important to point out that since 2012, the Bank has been pursuing a strategy of growing in higher income and less riskier segments in consumer lending and reducing relative exposure to the lower end of the consumer segment, which is mainly attended by Santander Banefe. This has resulted in improvements in asset quality of our consumer loan book as seen in the adjacent graph, despite the slowdown in economic growth in 2014.
 
 
This reduction in provision expense in consumer lending was offset by the 29.1% rise in provision for loan losses in commercial lending, which totaled Ch$203,454 million in 2014. During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for commercial loans analyzed on a group basis. The models were calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and decisional approvals at different points of the approval process, more robust techniques of statistical processes and more historical information, allowing stronger parameters of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in an increase in commercial provisions of Ch$45,141 million. As this is a change in estimation, this impact was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8.
 
At the same time in 2014, the lower economic growth also negatively affected asset quality in commercial loans, especially in the SME segment. This is reflected in the ratio of commercial impaired loans to total commercial loans rose from 6.9% in 2013 to 7.2% in 2014, mainly due to a rise in impaired loans in the SME segment that is more sensitive to economic cycles and the lower investment rates. In the middle-market and institutions and the global banking and markets segments, asset quality indicators were stable in 2014 compared to 2013.
 
Provisions for mortgage loans decreased 44.9% in 2014 compared to 2013.  This decrease was due to:
 
 
(i)
In the second quarter of 2013, the model for the renegotiated mortgage loan portfolio was updated. This was driven by the fact that after the 2010 earthquake the Bank offered temporary relief to some mortgage clients. A portion of this portfolio continued to perform out of range with our model. For this reason, the Risk Committee decided that the model needed to be updated in order to capture this event.
 
 
(ii)
The non-performing ratio for mortgage loans declined from 2.8% in 2013 to 2.7% in 2014 and the impaired mortgage loans ratio also improved from 5.7% in 2013 to 5.6% in 2014.
 
 
(ii)
Simultaneously in 2013, the Bank resolved a class action suit brought by CONADECUS, a consumer protection group, and renegotiated a group of residential mortgage loans that had a bullet payment due in 2013, which were offered to clients in 2010, following the earthquake. This also led to the rise in impaired residential mortgage loans and provisions in that year.
 
For a description of the provisions related to our residential mortgage loans and commercial loans analyzed on a group basis, please see “Item 5. Operating and Financial Review and Prospects—F. Selected Statistical Information—Classification of Loan Portfolio—Classification of Loan Portfolio—Loans analyzed on a group basis—Allowances for residential mortgage loans” and “—Loans analyzed on a group basis—Small and mid-sized commercial loans.”
 
 
 
Additionally, the lower economic growth in 2014 resulted in a rise in charge-off of loans analyzed on an individual basis that totaled Ch$10,811 million in 2014 and rose 33.9% compared to 2013.
 
Recoveries on loans previously charged-off increased 6.7% in 2014 compared to 2013. This was due to higher recoveries of charged-off commercial loans, indirectly a reflection of higher charge-offs in the SME segment As the Bank has improved the asset quality in consumer lending, the growth rate of recoveries has also diminished.  The following table shows recoveries of loans previously charged-off by type of loan.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Recovery of loans previously charged-off
                                 
Consumer loans
    36,908       36,004       22,015       2.5 %     63.5 %
Residential mortgage loans
    5,122       4,735       2,305       8.2 %     105.4 %
Commercial loans
    16,947       14,545       8,695       16.5 %     67.3 %
Total recoveries
    58,977       55,284       33,015       6.7 %     67.5 %

In some instances, we will sell a portfolio of charged-off loans to a third party. Gain (loss) on these charged-off loans is recognized as net income from financial transactions as disclosed in “Note 27—Profit and Loss from Financial Operations” of our Audited Consolidated Financial Statements. The following table sets forth information about our sale of charged-off loans for the year ended December 31, 2014, 2013 and 2012.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Gains on sale of loans previously charged-off
    4,809       1,500       2,090       220.6 %     (28.2 %)

The following table sets forth, for the periods indicated, our net provision expense broken down by business segment:
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Individuals (Commercial banking)
    (119,886 )     (157,697 )     (229,958 )     (24.0 %)     (31.4 %)
Individuals (Santander Banefe)
    (46,410 )     (56,309 )     (73,882 )     (17.6 %)     (23.8 %)
Small and mid-sized companies (SMEs)
    (160,581 )     (101,611 )     (80,144 )     58.0 %     26.8 %
Companies and institutions
    (27,319 )     (41,497 )     (24,532 )     (34.2 %)     69.2 %
Global banking & markets
    (701 )     (14,739 )     5,546       (95.2 %)     %
Other
    (6 )     391       (722 )     %     %
Total provisions, net
    (354,903 )     (371,462 )     (403,692 )     (4.5 %)     (8.0 %)

Net provisions expense from individuals both in commercial banking and Santander Banefe decreased in 2014 compared to 2013 mainly due to improved credit quality of consumer loans as well as the modifications made to the consumer loan provisioning model, as mentioned above .
 
Net provision expense from SMEs increased 58.0%. This was due to the change in the provisioning model mentioned above and an increase in risk in this segment due to the slowdown in economic growth and the contraction of investment that the Chilean economy experienced in 2014.
 
Net provision expense from Companies and institutions decreased 34.2%. In 2013, the Bank performed various downgrades of specific clients in the retails, salmon, fishery and construction sectors that were not repeated in 2014.
 
 
 
Net provision expense from global banking and markets decreased 95.2% since 2013, when the Bank downgraded specific clients in the construction and retail sectors, which did not occur in 2014.
 
We believe that our loan loss allowances are currently adequate for all known and estimated incurred losses.
 
For the years ended December 31, 2013 and 2012. Provisions for loan losses, net of recoveries totaled Ch$371,462 million in 2013 and decreased 8.0% compared to the amount of provisions recorded in 2012.
 
Provision for loan losses, which includes the full amount of provisions recognized as a result of loan growth and change in risk classification as well as the net result of provisions and charge-offs of loans analyzed on a group basis,  totaled Ch$418,675 million in 2013 and decreased 2.9% from 2012.
 
Provisions established for the Bank’s consumer loans decreased by 20.4% to Ch$222,964 million in 2013 compared to 2012. In June 2012, the Bank updated its allowance model for consumer loans, which mainly impacted the provisions established for renegotiated loans, and resulted in a provision of Ch$24,753 million. Before the June 2012 allowance model update, estimated loss rates were established by the historical behavior of charge-offs net of recoveries for each risk profile. This methodology only considered historical charge-off data for each specific profile and did not include the use of any other statistical information. Since June 2012, the loss rate has been estimated as the product of the Probability of Non-Performance (PNP) and Severity (SEV). PNP and SEV have been established according to the historical behavior of the profiles, and take into account a wider range of variables. See “Item 5. Operating and Financial Review and Prospects—F. Selected Statistical Information-Classification of Loan Portfolio— Classification of Loan Portfolio-Loans analyzed on a group basis—Allowances for consumer loans.”
 
Excluding this effect, provisions for consumer loans decreased 12.7% in 2013 compared to 2012. In 2013, the Bank, in order to lower credit risk in its consumer loan book, modified its strategy by focusing growth in less risky segments to individuals in Commercial banking and by decreasing consumer loans in Santander Banefe.  As a result of this shift in strategy, impaired consumer loans decreased 11.1% and non-performing consumer loans decreased 21.1% in 2013 compared to 2012.
 
Provision expense for commercial loans increased 21.6% in 2013 compared to 2012. This rise was mainly due to commercial loan growth of 11.6% in the year, which increased gross provisions. At the same time, greater provisions were recognized as a result of the increase in the commercial impaired loan ratio from 6.8% in 2012 to 6.9% in 2013. The ratio of non-performing commercial loans to total commercial loans remained stable at 3.1% in both periods.
 
Provisions for mortgage loans increased 86.2% in 2013 compared to 2012.  This rise was due to an increase in impaired mortgage loans from 4.3% in 2012 to 5.7% in 2013. The non-performing ratio for mortgage loans declined from 3.0% in 2012 to 2.8% in 2013.  During the year, the indicators corresponding to the renegotiated (including renegotiated loans and modified loans, See “Item 5. Loan Portfolio—Renegotiated loans”)  showed values that required updating of the model with more recent loan history and accordingly we updated it with the information available as of March, 2013. It should be noted that this loan category has changed materially in recent years, since after the earthquake of 2010, the Bank offered to its clients certain new restructuring solutions, which led to an increase in the impaired and modified mortgage loan portfolio from 5.9% in 2010 to 8.1% of our total loan portfolio by the end of 2013. Under this scenario the Risk Committee decided that the model needed to be updated in order to capture all relevant information associated with this fluctuation.  Simultaneously in 2013, the Bank resolved a class action suit brought forth by CONADECUS, a consumer protection group, and renegotiated a group of residential mortgage loans that had a bullet payment due in 2013, which were offered to clients in 2010, following the earthquake. This also led to the rise in impaired residential mortgage loans and provisions.  The Bank’s non-renegotiated loan portfolio had a stable evolution in the year, reflecting the positive economic and employment environment.
 
Recoveries on loans previously charged-off increased 67.5% in the year ended December 31, 2013 compared to the corresponding period in 2012. This was a direct result of higher incentives and a reorganization of our collection areas in 2012 and 2013 that has led to an overall improvement in recoveries.
 
Net provisions expense from individuals both in commercial banking and Santander Banefe decreased in 2013 compared to 2012 mainly due to the lower provisions from consumer loans as mentioned above.
 
Net provision expense from SMEs increased 26.8%. This was due to the 11.5% increase in lending and the increase in credit risk of SME loans.
 
Net provision expense from Companies and institutions increased 69.2%. This was mainly due to the 14.0% increase in lending and to the downgrade of specific clients in the salmon, fishery, retail and construction sectors.
 
Net provision expense from global banking and markets totaled Ch$14,739 million compared to a reversal of Ch$5,546 million in 2012. This rise was mainly due to the downgrade of specific clients in the construction and retail sectors.
 
Operating expenses
 
The following table sets forth information regarding our operating expenses in the years ended December 31, 2014, 2013 and 2012.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Personnel salaries and expenses
    (338,888 )     (308,344 )     (299,904 )     9.9 %     2.8 %
Administrative expenses
    (205,149 )     (188,191 )     (183,379 )     9.0 %     2.6 %
Depreciation and amortization
    (44,172 )     (61,074 )     (56,369 )     (27.7 %)     8.3 %
Impairment
    (36,664 )     (244 )     (90 )     14,926.2 %     171.1 %
Other operating expenses
    (58,946 )     (52,338 )     (59,637 )     12.6 %     (12.2 %)
Total operating expenses
    (683,819 )     (610,191 )     (599,379 )     12.1 %     1.8 %
Efficiency ratio(1)
    41.1 %     40.2 %     42.5 %                

(1)
The efficiency ratio is the ratio of total operating expenses to total operating income. Total operating income consists of net interest income, fee income, financial transactions, net and other operating income.
 
For the years ended December 31, 2014 and 2013. Operating expenses in the year ended December 31, 2014 increased 12.1% compared to the corresponding period in 2013. The efficiency ratio was 41.1% in 2014 compared to 40.2% in 2013.
 
The 9.9% increase in personnel salaries and expenses was mainly due to: (i) a 7.9% increase in personnel compensation which totaled Ch$213,364 million in 2014. Total headcount fell 0.3% to 11,478 people, but the higher inflation rate resulted in larger wage increases as well as the impact of the Bank’s meritocracy policies; (ii) a 13.8% increase in bonuses which totaled Ch$77,145 million, following a positive year for the Bank both in terms of financial and business goals; (iii) severance payments increased 19.5%  to Ch$10,551 million; and (iv) in March 2014, a new collective bargaining agreement was signed with the main unions, which became effective on October 1, 2014, and which will expire on December 31, 2018. This resulted in an increase in certain benefits related to the Bank’s health insurance fund and other benefits.
 
Administrative expenses increased 9.0% in the year ended December 31, 2014 compared to the corresponding period in 2013. The increase in administrative expenses was mainly due to the 13.9% increase in maintenance, repair of property, plant and equipment, which totaled Ch$17,498 million and the 7.6% rise in security services expenses that totaled Ch$17,089 million. In 2014, the Bank continued to refurbish branches, open new Santander Select branches and close Santander Banefe branches. The Bank also had to continue to increase the expenditure dedicated to securing and protecting ATM machines given the increase in theft and more regulations regarding ATM security. The rise in costs was also due to the 8.6% increase in office lease due to the higher inflation rate as these contracts are indexed to inflation. The Bank’s total branch network decreased from 493 offices to 474, but increased in areas of higher leasing costs due to the strategic shift towards higher income clients.
 
Depreciation and amortization expense decreased 27.7%, mainly due to the lower depreciation and amortization of intangible assets. In 2014, the Bank, following an extensive analysis of its intangible assets, performed an extraordinary charge-off of those intangible assets, mainly software, that were obsolete or were not contributing to the Bank’s business or earnings.
 
Impairment charges increased 14,926.2% in 2014 compared to 2013 and totaled Ch$36,664 million. The Bank initiated a plan to transform its business and operating model with a better focus on the client. Therefore, there have arisen a number of new requirements for the Bank to adapt to changing customer demands and establish new ways to interact with them. As a result of this change in strategy, the Bank evaluated a number of applications that were in use or in development and tested them for impairment. Following the testing, in accordance with IAS 36, the Bank has recognized an impairment of Ch$36,556 million in 2014 due to the abandonment of unnecessary systems.
 
The following table sets forth, for the periods indicated, our personnel salaries, administrative and depreciation and amortization expenses broken down by business segment. These amounts exclude impairment and other operating expenses.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Individuals (Commercial banking)
    (350,964 )     (298,173 )     (291,562 )     17.7 %     2.3 %
Individuals (Santander Banefe)
    (44,657 )     (52,370 )     (51,797 )     (14.7 %)     1.1 %
Small and mid-sized companies
    (83,985 )     (79,633 )     (76,560 )     5.5 %     4.0 %
Companies and institutions
    (69,223 )     (69,828 )     (65,672 )     (0.9 %)     6.3 %
Global banking and markets
    (41,944 )     (37,728 )     (35,476 )     11.2 %     6.3 %
Other
    2,564       (19,877 )     (18,585 )     %     7.0 %
Total personnel, administrative expenses, depreciation and amortization (1)
    (588,209 )     (557,609 )     (539,652 )     5.5 %     3.3 %

(1)
Excludes impairment and other operating expenses.
 
By business segment, the 5.5% increase in costs excluding impairment and other operating expenses in 2014 compared to the corresponding period in 2013 was mainly due to the 17.7% increase in costs incurred by the Individuals (commercial banking). In 2014, the Bank continued with its strategy of increasing presence in this segment, which implied additional costs as a result of this expansion plan mainly in our distribution network and technology.  Costs in the Companies and institutions segment grew 5.5% in 2014 compared to 2013 as this segment was also priority for growth in 2013, increasing in terms of size of balance sheet and headcount. Costs in the SME segment increased 0.9%, reflecting the lower growth and lower results that led to an inferior growth of salaries and administrative expenses. Finally, costs in GBM rose 11.2% in line with business growth in this segment.
 
The following table sets forth information regarding Other operating expenses in the years ended December 31, 2014, 2013 and 2012.
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Provisions and expenses for assets received in lieu of payment
    4,066       4,824       10,176       (15.7 %)     (52.6 %)
Credit card expenses
    2,638       2,157       6,362       22.3 %     (66.1 %)
Customer services
    9,940       10,954       8,674       (9.3 %)     26.3 %
Operating charge-offs
    6,153       8,222       8,366       (25.2 %)     (1.7 %)
Life insurance and general product insurance policies
    8,919       7,348       7,211       21.4 %     1.9 %
Additional tax on expenses paid overseas
    3,055       2,862       3,283       6.7 %     (12.8 %)
Provisions for contingencies
    13,080       5,805       7,964       158.5 %     (27.1 %)
 Expense for adopting chip technology on cards
    2,400       2,283             5.1 %     %
Other
    8,695       7,883       7,601       10.3 %     3.7 %
Total
    58,946       52,338       59,637       12.6 %     (12.2 %)

Other operating expenses were Ch$58,946 million in 2014, a 12.6% increase compared to 2013. This increase was mainly due to higher provisions for contingencies that totaled Ch$13,080 million in 2014 compared to Ch$5,805 million in 2013. Compared to 2013, the rise in provision for contingencies was due to Ch$5 billion for future severance payments and Ch$2.4 billion for future costs related to chip technology for cards. This reflects the pending expense for customers that have yet to change their debit or credit card with the new chip technology, which is an on-going process.  See “Note 33—Other operating income and expenses” and “Note 20-Provisions” to our Audited Consolidated Financial Statements for more detail on Other operating expenses.
 
For the years ended December 31, 2013 and 2012. Operating expenses in the year ended December 31, 2013 increased 1.8% compared to the corresponding period in 2012. The efficiency ratio was 40.2% in 2013 compared to 42.5% in 2012.
 
The 2.8% increase in personnel salaries and expenses was mainly due to higher salaries. Total salary expenses, including bonuses increased 4.0% in 2013 compared to 2012, totaling Ch$265,500 million. This rise was partially offset by lower costs of the Bank’s stock based compensation plan as the 2013 goals were not achieved and lower costs of the Bank’s pension plan.  Some of the executives that qualified for this benefit are no longer employees for the Bank lowering the amount of this cost.  Headcount as of December 31, 2013 totaled 11,516, a decrease of 1.7% from 2012. In December 2013, the Bank sold its asset management subsidiary which reduced headcount by 90 persons.
 
Administrative expenses increased 2.6% in the year ended December 31, 2013 compared to the corresponding period in 2012. The increase in administrative expenses was mainly due to: (i) the 33.1% increase in security and valuable transport services which increased from Ch$11,929 million in 2012 to Ch$15,879 million in 2013. In 2013 the Bank had to increase the expenditure dedicated to securing and protecting ATM machines given the increase in theft and more regulations regarding ATM security, (ii) the 17.2% increase in expenses relating to the IT and communication systems from Ch$24,873 million to Ch$29,144 million in 2012, in line with the Bank’s improvements of its CRM systems, phone banking and internet banking services; (iii) the 8.0% increase in expenses relating to outsourced computer services related to various IT upgrades, (iv) a 7.1% rise in branch rental expenses due to the greater number of branches rented following the sale of branches in 2012 and 2011 and (v) a 7.5% rise in expenses relating to the maintenance and repair of property as the bank refurbished branches and introduced its new brand Santander Select and transformed 44 branches into this new format for mid-higher income clients.
 
Depreciation and amortization expense increased 8.3%, mainly due to higher amortization expenses of intangible assets such as software and other computer systems that have been updated in recent periods.
 
By business segment, the 3.3% increase in costs in 2013 compared to the corresponding period in 2012 was mainly due to the 8.4% increase in costs incurred by Individuals in commercial banking. In 2013, the Bank continued with its strategy of increasing presence in this segment, which implied additional costs as a result of this expansion plan mainly in our distribution network and technology. At the same time clients were transferred form Santander Banefe to Individuals in commercial banking with their respective cost structure. Costs in Santander Banefe in 2013 fell 12.4% as the Bank continued with its strategy of reducing exposure to the lower end of the consumer market and increasing presence in other segments. Costs in the Companies and institutional segment fell 4.3% in 2013 compared to 2012 as some clients were re-segmented to the GBM segment. For this reason costs in GBM grew 7.9% in 2013 compared to 2012.
 
Other operating expenses were Ch$52,338 million in 2013, a 12.2% decrease compared to 2012. This decrease was mainly due to lower provisions and expenses for repossessed assets that totaled Ch$4,824 million in 2013 compared to Ch$10,176 million in 2012. This was offset by higher customer service expenses that includes costs related to our call center and higher other costs, which increased due to the Ch$2,283 million in expenses recorded in 2013 from the costs incurred in adopting chip technology for our ATM and credit cards.  See “Note 33—Other operating income and expenses” to our Audited Consolidated Financial Statements for more detail on Other operating expenses.
 
Income tax
 
   
Year ended December 31,
   
% Change
 
% Change
   
2014
   
2013
   
2012
      2014/2013     2013/2012
   
(in millions of Ch$)
 
Net income before tax
    626,940       538,959       405,906       16.3 %     32.8 %
Income tax expense
    (51,050 )     (94,530 )     (44,473 )     (46.0 %)     112.6 %
Effective tax rate(1)
    8.1 %     17.5 %     11.0 %                

(1)
The effective tax rate is the income tax expense divided by net income before tax.
 
For the years ended December 31, 2014 and 2013.  The Chilean Government enacted in 2014 a reform to the corporate tax structure. The statutory corporate tax rate increased from 20% to 21% in 2014 and will rise to 22.5% in 2015.
 
Total income tax expense by the Bank in 2014 totaled Ch$51,050 million, a 46.0% decrease compared to 2013.  The Bank paid an effective tax rate of 8.1% in 2014 compared to 17.5% in 2014. Income tax expenses in 2014 included a one-time non-cash income of Ch$39,262 million from the re-adjustments made to the Bank’s deferred tax asset base following passage of the new tax law. The Bank has more deferred tax assets than liabilities. This gain arises from the difference between the Bank’s accounting and tax books regarding how provisions and charge-offs are recognized. When the statutory rates were modified, the Bank’s net deferred tax assets increased as the future tax rates used to calculate this asset were gradually increased from 20% to 27%. The higher CPI inflation rate in 2014 compared to 2013 also resulted in greater permanent differences since the Bank, for Chilean tax purposes, must re-value its capital each year for the variation in CPI inflation. The table below demonstrates the effective tax rate reconciliation. See “Note 14—Current and Deferred Taxes” of the Audited Consolidated Financial Statements for more detail on income tax expense.
 
   
As of December 31,
 
   
2014
   
2013
 
   
Tax rate
   
Amount
   
Tax rate
   
Amount
 
   
%
   
Ch$mn
   
%
   
Ch$mn
 
Tax calculated over profit before tax
    21.00       131,657       20.00       107,792  
Permanent differences
    (6.18 )     (38,724 )     (2.04 )     (11,012 )
Single penalty tax (rejected expenses)
    0.12       746       0.07       392  
Effect of tax reform changes on deferred tax
    (6.26 )     (39,262 )            
Real estate taxes
    (0.54 )     (3,357 )     (0.55 )     (2,987 )
Other
          (10 )     0.06       345  
Effective rates and expenses for income tax
    8.14       51,050       17.54       94,530  

For the years ended December 31, 2013 and 2012.  Our income tax expense increased by 112.6% in the year ended December 31, 2013 compared to the same period in 2012.  The statutory corporate tax rate in 2013 and 2012 was 20%. The Bank’s effective tax rate tends to be below the Chilean statutory rate because for tax purposes, the Bank is still required to recognize the effects of price level restatement on equity. The effective tax rate was 17.5% in 2013 compared to 11.0% in 2012. The higher effective tax rate in 2013 compared to 2012 was due to the fact that in September 2012, the statutory tax rate was increased from 18.5% to 20.0% and this created an income tax reversal of Ch$16,221 million in 2012, corresponding to the adjustment of deferred tax assets to the higher statutory rate. See “Note 14—Current and Deferred Taxes” of the Audited Consolidated Financial Statements for more detail on income tax expense.
 
E. Liquidity and Capital Resources
 
Sources of Liquidity
 
Santander-Chile’s liquidity depends upon its (i) capital, (ii) reserves and (iii) financial investments, including investments in government securities. To cover any liquidity shortfalls and to augment its liquidity position, Santander-Chile has established lines of credit with foreign and domestic banks and also has access to Central Bank borrowings.
 
The following table sets forth our contractual obligations and commercial commitments by time remaining to maturity.  As of the date of the filing of this Annual Report, the Bank does not have significant purchase obligations. As of December 31, 2014, the scheduled maturities of our contractual obligations and of other commercial commitments, including accrued interest, were as follows:
 
 
Contractual Obligations
 
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 after 1 year
   
Total
 
   
(in millions of Ch$)
 
Obligations under repurchase agreements
          390,331       1,453       342       392,126                         392,126  
Checking accounts, time deposits and other time liabilities (1)
    6,873,781       5,343,226       2,480,158       2,289,405       16,986,570       130,427       58,699       189,126       17,175,696  
Financial derivative contracts
          125,884       176,048       319,488       621,420       1,028,017       911,947       1,939,964       2,561,384  
Interbank borrowings
    4,133       137,921       227,898       413,564       783,516       435,309       12,776       448,085       1,231,601  
Issued debt instruments
          176,649       319,516       691,227       1,187,392       2,693,946       1,903,774       4,597,720       5,785,112  
Other financial
liabilities (2)
    114,564       1,934       746       3,305       120,549       41,733       42,843       84,576       205,125  
Subtotal
    6,992,478       6,175,945       3,205,819       3,717,331       20,091,573       4,329,432       2,930,039       7,259,471       27,351,044  
Contractual interest payments (3)
    2,301       43,155       126,047       445,275       616,778       1,362,292       786,150       2,148,442       2,765,220  
Total
    6,994,779       6,219,100       3,331,866       4,162,606       20,708,351       5,691,724       3,716,189       9,407,913       30,116,264  

(1)
Includes demand deposits and other demand liabilities, cash items in process of being cleared and time deposits and other time liabilities.
 
(2)
Mainly includes amounts owed to credit card processors and to the Chilean Production Development Corporation (Corporación de Fomento de la Producción de Chile), the state development agency.
 
(3)
The table above includes future cash interest payments.  For variable rate obligations, we assume the same rate as the last rate known. Various of the payment obligations in the table above are variable debt instruments, since they are denominated in UF, for which we have estimated a long-term inflation rate equal to 3%, which is at the center of the Central Bank’s long-term inflation target. No exclusions requiring further explanation have been made in this table.
 
Operational Leases
 
Certain bank premises and equipment are leased under various operating leases. Future minimum rental commitments as of December 31, 2014 under non-cancelable leases are as follows:
 
   
As of
December 31, 2014
 
   
(in millions of Ch$)
 
Due within 1 year
    19,225  
Due after 1 year but within 2 years
    17,509  
Due after 2 years but within 3 years
    16,416  
Due after 3 years but within 4 years
    15,206  
Due after 4 years but within 5 years
    13,012  
Due after 5 years
    58,213  
Total
    139,581  

Other Commercial Commitments
 
As of December 31, 2014, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:
 
 
Other Commercial Commitments
 
Up to 1 month
   
Between 1 and 3 months
   
Between 3 and 12 months
   
Between 1 and 5 years
   
More than 5 years
   
Total
 
   
(in millions of Ch$)
 
Guarantees
    122,176       188,378       620,143       522,233       28,224       1,481,154  
Confirmed foreign letters of credit
    54,701       108,218       43,001                   205,920  
Letters of credit issued
    17,626       6,858       169,875       54,126       13,684       262,169  
Pledges and other commercial commitments
    2,426       26,807       4,085       42,495             75,813  
Total other commercial commitments
    196,929       330,261       837,104       618,854       41,908       2,025,056  

Risk-Weighted Assets and Regulatory Capital
 
We currently have regulatory capital in excess of the minimum requirement under the current Chilean regulations. According to the General Banking Law, a bank is required to have regulatory capital of at least 8% of its risk-weighted assets, net of required loan loss allowances, and paid-in capital and reserves (i.e., basic capital) of at least 3% of its total assets, net of required loan loss allowances. For these purposes, the regulatory capital of a
 
 
bank is the sum of: (1) the bank’s basic capital; (2) subordinated bonds issued by the bank valued at their placement price for an amount up to 50% of its basic capital, provided that the value of the bonds is required to be decreased by 20% for each year that elapses during the period commencing six years prior to their maturity; and (3) its voluntary allowances for loan losses, for an amount of up to 1.25% of its risk-weighted assets. Santander-Chile does not have goodwill, but if it did, this value would be required to be deducted from regulatory capital. When calculating risk weighted assets, we also include off-balance sheet contingent loans. The merger of Old Santander Chile and Santiago on August 1, 2002 required a special regulatory pre-approval of the SBIF, which was granted on May 16, 2002. The resolution granting this pre-approval imposed a regulatory capital to risk weighted assets ratio of 12% for the merged bank. This requirement was reduced to 11% by the SBIF effective January 1, 2005. For purposes of weighing the risk of a bank’s assets, the General Banking Law considers five different categories of assets, based on the nature of the issuer, the availability of funds, and the nature of the assets and the existence of collateral securing such assets.
 
The following table sets forth our consolidated and risk-weighted assets and regulatory capital as of December 31, 2014 and 2013 as required by the SBIF.
 
   
Consolidated assets as of
   
Risk-weighted assets(1)
 
   
December 31, 2014
   
December 31, 2013
   
December 31, 2014
   
December 31, 2013
 
   
(Ch$ million)
 
Asset Balance (Net of allowances)
                       
Cash and deposits in bank
    1,608,888       1,571,810              
Unsettled transactions
    531,373       604,077       90,203       66,672  
Trading investments
    774,815       287,567       89,605       40,924  
Investments under resale agreements
          17,469             3,494  
Financial derivative contracts(4) 
    1,154,471       1,008,026       996,334       862,810  
Interbank loans
    11,918       125,395       2,384       25,079  
Loans and accounts receivables from customers
    22,179,938       20,327,021       19,519,483       18,071,792  
Available for sale investments
    1,651,598       1,700,993       190,137       238,835  
Investments in other companies
    17,914       9,681       17,914       9,681  
Intangibles assets
    40,983       66,703       40,983       66,703  
Property, plant and equipment
    211,561       180,215       211,561       180,215  
Current taxes
    2,241       1,643       224       164  
Deferred taxes
    282,173       230,215       28,221       23,022  
Other assets
    493,173       400,025       493,173       346,533  
Off-balance sheet assets
                               
Contingent loans
    3,976,465       3,436,773       2,265,904       2,013,057  
Total
    32,937,549       29,967,613       23,946,126       21,948,981  
 
               
Ratio
 
   
December 31, 2014
   
December 31, 2013
   
December 31, 2014
   
December 31, 2013
 
   
(Ch$ million)
   
%
   
%
 
Basic capital(2)
    2,609,896       2,325,678       7.92       7.73  
Regulatory capital(3)
    3,354,702       3,033,741       14.00       13.71  

(1)
As required by local regulations.
 
(2)
As a percentage of total assets.
 
(3)
As a percentage of risk weighted assets (BIS ratio).
 
(4)
Include note to indicate that derivatives are shown as required by Chapter 12-1 RAN.
 
Financial Investments
 
Financial assets are classified into the following specified categories: financial assets trading investments “at fair value through profit or loss” (FVTPL), “held to maturity” investments, “available for sale investments” (AFS)
 
 
financial assets and “loans and accounts receivable from customers.”  The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.
 
Effective interest method
 
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
 
Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at fair value through profit or loss.
 
Financial assets at FVTPL - Trading investments
 
Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at fair value through profit or loss.
 
A financial asset is classified as held for trading if:
 
 
·
it has been acquired principally for the purpose of selling it in the near term; or
 
 
·
on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or
 
 
·
it is a derivative that is not designated and effective as a hedging instrument.
 
A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:
 
 
·
such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
 
 
·
the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
 
 
·
it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as at FVTPL.
 
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘net profit (loss) from financial operations' line item
 
Held to maturity investments
 
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method less any impairment.
 
Available for sale investments (AFS investments)
 
AFS investments are non-derivatives that are either designated as AFS or are not classified as (a) loans and accounts receivable from customers, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss (trading investments).
 
Financial instruments held by the Bank that are traded in an active market are classified as AFS and are stated at fair value at the end of each reporting period. The Bank also has investments in financial instruments that are not traded in an active market but that are also classified as AFS investments and stated at fair value at the end of each reporting period (because the directors consider that fair value can be reliably measured). Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognised in profit or loss. Other changes in the carrying amount of available for sale investments are recognised in other comprehensive income and accumulated under the heading of Valuation Adjustment. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.
 
Dividends on AFS equity instruments are recognised in profit or loss when the Bank's right to receive the dividends is established.
 
The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated as the described in f) above. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset.
 
AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period.
 
a) Trading
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
(in millions of Ch$)
 
Central Bank and Government Securities
                 
Chilean Central Bank bonds
    270,004       75,577       267,008  
Chilean Central Bank notes  
          100       3,397  
Other Chilean Central Bank and government securities
    461,340       189,962       48,160  
Subtotal
    731,344       265,639       318,565  
Other Chilean Securities
                       
Time deposits in Chilean financial institutions
                3,531  
Mortgage bonds of Chilean financial institutions
                 
Chilean financial institutions bonds
          10,042        
Chilean corporate bonds
    36,339       2,229        
Other Chilean securities
                 
Subtotal
    36,339       12,271       3,531  
Foreign securities
                       
Foreign Financial Securities
                 
Other foreign financial instruments
                 
Subtotal
                   
Investments in mutual funds
                 
Funds managed by related entities
    7,132       9,657       16,191  
Subtotal
    7,132       9,657       16,191  
                         
Total
    774,815       287,567       338,287  

b) Available for sale
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
(in millions of Ch$)
 
Central Bank and Government Securities
                 
Chilean Central Bank bonds
    381,117       364,821       712,278  
Chilean Central Bank notes
    384       1,078       8,270  
Other Chilean Central Bank and government securities
    353,419       146,295       296,010  
Subtotal
    734,920       512,194       1,016,558  
Other Chilean Securities
                       
Time deposits in Chilean financial institutions
    590,382       1,011,354       756,136  
Mortgage bonds of Chilean financial institutions
    31,693       33,856       37,319  
Chilean financial institution bonds
                 
Chilean corporate bonds
                 
Other Chilean securities
                321  
Subtotal
    622,075       1,045,210       793,776  
Foreign Financial Securities
                       
Central Bank and Government Foreign Securities
                 
Other Foreign financial securities
    294,603       143,589       15,824  
Subtotal
    294,603       143,589       15,824  
Total
    1,651,598       1,700,993       1,826,158  

c) Held-to-maturity
 
No financial investments were classified as held-to-maturity as of December 31, 2014, 2013 and 2012.
 
The following table sets forth an analysis of our investments as of December 31, 2014 by remaining maturity and the weighted average nominal rates of such investments.
 
 
   
Within one year
   
Weighted average Nominal Rate
   
After one year but within five years
   
Weighted average Nominal Rate
   
After five years but within ten years
   
Weighted average Nominal Rate
   
After ten years
   
Weighted average Nominal Rate
   
Total
   
Weighted average Nominal Rate
 
      (in millions of Ch$ , except rates)  
Trading
                                                           
Central Bank and Government Securities
                                                           
Central Bank bonds
    112,400       2.6       124,712       2.2       32,573       4.0       319       1.7       270,004       2.6  
Central Bank notes
                                                           
Central Bank and government securities
    308,325       3.8       46,659       2.6       100,394       2.1       5,962       4.4       461,341       3.3  
Subtotal
    420,725               171,371               132,967               6,281               731,344          
Other Chilean Securities
                                                                               
Time deposits in Chilean financial institutions
                                                           
Mortgage bonds of Chilean financial institutions
                                                           
Chilean financial institutions bonds
                                                           
Chilean corporate bonds
                249       2.9       36,090       3.0       -       -       36,339       3.0  
Other Chilean securities
                                                           
Subtotal
                249             36,090                         36,339          
Investment in mutual funds
                                                                               
Mutual funds administered by related parties
    7,132       0.3                                           7,132       0.3  
Subtotal
    7,132                                                 7,132        
Total
    427,857               171,620               169,057               6,281               774,815          

   
Within one year
   
Weighted average Nominal Rate
   
After one year but within five years
   
Weighted average Nominal Rate
   
After five years but within ten years
   
Weighted average Nominal Rate
   
After ten years
   
Weighted average Nominal Rate
   
Total
   
Weighted average Nominal Rate
 
   
(in millions of Ch$ , except rates)
 
Available for sale
                                                           
Central Bank and Government Securities
                                                           
Central Bank bonds
    103,580       2.9       87,262       3.0       190,275       4.1                   381,117       3.5  
Central Bank notes
    384       4.6                                           384       4.7  
Central Bank and government securities
    12,659       3.9       95,621       3.0       244,987       4.0       152       3.2       353,419       3.9  
Subtotal
    116,623               182,883               435,262               -               734,920          
Other Chilean Securities
                                                                               
Time deposits in Chilean financial institutions
    590,382       2.4                                           590,382       2.4  
Mortgage bonds of Chilean financial institutions
    71       4.9       1,493       3.4       9,504       3.8       20,625       3.6       31,693       3.7  
Chilean financial institutions bonds
                                                           
Chilean corporate bonds
                                                           
Other Chilean securities
                                                           
Subtotal
    590,453               1,493               9,504               20,625               622,075          
Other financial securities
                                                                               
Central Bank and Government Foreign Securities
                                                           
Other Foreign financial securities
                            294,603       3.2                   294,603       3.2  
Subtotal
                            294,603                         294,603        
Total
    707,076               184,376               739,369               20,777               1,651,598          

Working Capital
 
As a bank, we satisfy our working capital needs through general funding, the majority of which derives from deposits and other borrowings from the public. (See “Item 5.  Operating and Financial Review and Prospects—E. Liquidity and Capital Resources—Deposits and Other Borrowings”). In our opinion, our working capital is sufficient for our present needs.
 
Liquidity Management
 
Liquidity management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated.
 
The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO has determined that our liquidity portfolio must be comprised of cash plus assets that can be readily convertible into cash either through the Central Bank window, overnight deposits or instruments or the local secondary market. The management of the Bank’s liquidity portfolio is performed by the Financial Management Division under rules determined by the ALCO.
 
   
December 31, 2014
   
December 31, 2013
 
   
Ch$ million
 
Balance as of (1):
           
Financial investments for trading
    774,815       287,567  
Available for sale investments
    1,651,598       1,700,993  
Encumbered assets (net) (2)
    (112,015 )     (71,896 )
Net cash (3)
    14,774       248,073  
Net interbank deposits (4)
    890,274       984,666  
Total liquidity portfolio
    3,219,446       3,149,403  


   
December 31, 2014
   
December 31, 2013
 
   
Ch$ million
 
Average balance as of:
           
Financial investments for trading
    571,479       412,012  
Available for sale investments
    1,673,423       1,706,631  
Encumbered assets (net) (1)
    (97,712 )     (100,021 )
Net cash (2)
    (50,554 )     29,812  
Net interbank deposits (3)
    788,958       858,699  
Total liquidity portfolio
    2,885,594       2,907,134  

(1)
Assets encumbered through repurchase agreements are deducted from the liquidity portfolio
 
(2)
Cash minus reserve requirements
 
(3)
Includes overnight deposits in the Central Bank, domestic banks and foreign banks
 
Our general policy is to maintain liquidity adequate to ensure our ability to honor withdrawals of deposits, make repayments of other liabilities at maturity, extend loans and meet our own working capital needs. Our minimum amount of liquidity is determined by the statutory reserve requirements of the Central Bank. Deposits are subject to a statutory reserve requirement of 9% for demand deposits and 3.6% for Chilean peso-, UF- and foreign currency denominated time deposits with a term of less than a year. See “Item 4.  Information on the Company—C. Business Overview—Competition—Regulation and Supervision.” The Central Bank has statutory authority to increase these percentages to up to 40% for demand deposits and up to 20% for time deposits. In addition, a 100% special reserve (reserva técnica) applies to demand deposits, deposits in checking accounts, other demand deposits received or obligations payable on sight and incurred in the ordinary course of business, other than deposits unconditionally payable immediately. This special reserve requirement applies to the amount by which the total of such deposits exceeds 2.5 times the amount of a bank’s regulatory capital. Interbank loans are deemed to have a maturity of more than 30 days, even if payable within the following 10 days.
 
The Central Bank also requires us to comply with the following liquidity limits:
 
 
·
The sum of the liabilities with a maturity of less than 30 days may not exceed the sum of the assets with a maturity of less than 30 days by an amount greater than our capital. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 2014 the percentage of (i) our liabilities with a maturity of less than 30 days in excess of our assets with a maturity of less than 30 days to (ii) our capital and reserves was 32%.
 
 
·
The sum of the liabilities in foreign currency with a maturity of less than 30 days may not exceed the sum of the assets in foreign currency with a maturity of less than 30 days by more than an amount greater than our capital. At December 31, 2014 the percentage of (i) our liabilities with a maturity of less than 30 days in foreign currency in excess of our assets in foreign currency with a maturity of less than 30 days to (ii) our capital and reserves was 0%, as the Bank had more foreign currency assets than liabilities for the calculation of this limit.
 
 
·
The sum of the liabilities with a maturity of less than 90 days may not exceed the sum of the assets with a maturity of less than 90 days by more than 2 times our capital. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 2013 the percentage of (i) our liabilities with a maturity of less than 90 days in excess of our assets with a maturity of less than 90 days to (ii) our capital and reserves was 15%.
 
We have set other liquidity limits and ratios that minimize liquidity risk. See “Item 11.  Quantitative and Qualitative Disclosures About Market Risk.”
 
Cash Flow
 
The tables below set forth our main sources of cash. The subsidiaries are not an important source of cash flow for us and therefore have no impact on our ability to meet our cash obligations. No legal or economic restrictions exist on the ability of subsidiaries to transfer funds to us in the form of loans or cash dividends as long as these subsidiaries abide by the regulations of the Ley de Sociedad Anónimas regarding loans to related parties and minimum dividend payments. See our Consolidated Statements of Cash Flows in our Audited Consolidated Financial Statements for a detailed breakdown of the Bank’s cash flow.
 
   
Year ended December 31,
 
   
2014
   
2013
   
2012
 
   
Millions of Ch$
 
Net cash provided by (used in) operating activities
    282,423       645,166       (1,153,932 )

Our operating activities generated cash of Ch$282,423 million in 2014. The consumption of cash due to loan growth was more than offset by growth of deposits and other liabilities. In 2013, operating activities generated cash in an amount of Ch$535,422million. In the fourth quarter of 2011 and first quarter of 2012, the Bank increased its cash position in light of greater market uncertainty abroad. As market conditions improved in the second half of 2012, the ALCO permitted the Financial Management Division to return to more normal levels of liquidity by prepaying costlier liabilities. Loan growth was also a factor in the consumption of cash in operating activities in 2012.
 
     
Year ended December 31,
 
     
2014
     
2013
     
2012
 
      Millions of Ch$  
Net cash (used in) provided by investment activities
    (92,666 )     30,000       (72,087 )

In 2014, the Bank’s investment activities consumed cash in an amount of Ch$92,666 million. This was mainly due to the purchases of property, plant and equipment and the acquisition of intangibles. In 2013 we sold our asset management business for Ch$90,281 million. In 2012, cash used in investing activities was Ch$72,087 million, mainly due to investments in property, equipment and technology as part of investment programs to modernize and improve the efficiency in retail banking activities.
 
   
Year ended December 31,
 
   
2014
   
2013
   
2012
 
   
Millions of Ch$
 
Net cash used in financing activities
    (265,156 )     (240,687 )     (289,416 )

In 2014, 2013 and 2012, the net cash used in financing activities can be explained by the Bank’s annual dividend payment each year partially offset by issuances of subordinated debt in 2013.
 
Deposits and Other Borrowings
 
The following table sets forth our average balance of liabilities for the years ended December 31, 2014, 2013 and, 2012, in each case together with the related average nominal interest rates paid thereon.
 
   
2014
   
2013
   
2012
 
   
Average Balance
   
% of Total Average Liabilities
   
Average Nominal Rate
   
Average Balance
   
% of Total Average Liabilities
   
Average Nominal Rate
   
Average Balance
   
% of Total Average Liabilities
   
Average Nominal Rate
 
   
(millions of Ch$, except percentages)
 
Interest-bearing liabilities
                                                     
Savings accounts
    108,185       0.3 %     5.0 %     103,760       0.4 %     1.9 %     102,420       0.4 %     2.5 %
Time deposits
    11,952,994       36.5 %     3.4 %     9,949,401       36.8 %     4.5 %     9,659,815       38.5 %     5.2 %
Central Bank borrowings
    6,906             0.2 %     221             6.3 %     4,469             5.2 %
Repurchase agreements
    413,263       1.3 %     2.0 %     266,883       1.0 %     5.6 %     369,338       1.5 %     4.2 %
Mortgage finance bonds
    81,805       0.2 %     11.9 %     102,778       0.4 %     8.0 %     131,070       0.5 %     8.6 %
Other interest bearing liabilities
    6,865,084       21.0 %     6.9 %     6,850,953       25.3 %     4.7 %     5,927,893       23.6 %     5.3 %
Subtotal interest-bearing liabilities
    19,428,237       59.4 %     4.6 %     17,273,996       63.9 %     4.6 %     16,195,005       64.5 %     5.3 %
                                                                         
Non-interest bearing liabilities
                                                                       
Non-interest bearing deposits
    5,386,272       16.5 %             4,620,849       17.1 %             4,177,432       16.6 %        
Derivatives
    2,719,386       8.3 %             1,467,723       5.4 %             1,141,169       4.5 %        
Other non-interest bearing liabilities
    2,501,651       7.6 %             1,325,975       4.9 %             1,395,112       5.6 %        
Shareholders’ equity
    2,689,037       8.2 %             2,349,448       8.7 %             2,187,716       8.8 %        
Subtotal non-interest bearing liabilities
    13,296,346       40.6 %             9,763,995       36.1 %             8,901,429       35.5 %        
Total liabilities
    32,724,583       100.0 %             27,037,991       100.0 %             25,096,434       100.0 %        

Our most important source of funding is our deposits. Average time deposits plus non-interest bearing demand deposits represented 53.0% of our average total liabilities and shareholders’ equity in 2014. Our current funding strategy is to continue to utilize all sources of funding in accordance with their costs, their availability and our general asset and liability management strategy. Special emphasis is being placed on lengthening the maturities of funding with institutional clients, diversifying our bond holder base and broadening our core deposit funding. We believe that broadening our deposit base by increasing the number of account holders has created a more stable funding source.
 
Composition of Deposits
 
The following table sets forth the composition of our deposits and similar commitments at December 31, 2014, 2013, 2012, 2011 and 2010.
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(in millions of Ch$)
 
Demand deposits and other demand obligations
                             
Current accounts
    5,131,130       4,403,526       4,006,143       3,543,776       3,330,352  
Other deposits and demand accounts
    554,785       569,395       455,315       350,519       368,934  
Other demand obligations
    794,582       647,842       508,561       519,520       537,148  
Subtotals
    6,480,497       5,620,763       4,970,019       4,413,815       4,236,434  
Time deposits and other time deposits
                                       
Time deposits
    10,303,167       9,567,855       9,008,902       8,816,766       7,154,396  
Time saving accounts
    107,599       104,143       101,702       102,831       103,191  
Other time deposits
    3,174       3,274       1,609       1,517       1,170  
Subtotals
    10,413,940       9,675,272       9,112,213       8,921,114       7,258,757  
Total deposits and other commitments
    16,894,437       15,296,035       14,082,232       13,334,929       11,495,191  

Maturity of Interest Bearing Deposits
 
The following table sets forth information regarding the currency and maturity of our interest bearing deposits as of December 31, 2014, expressed in percentages of our total deposits in each currency category. UF-denominated deposits are similar to peso-denominated deposits in all respects, except that the principal is readjusted periodically based on variations in the Chilean consumer price index.
 
   
Ch$
   
UF
   
Foreign Currencies
   
Total
 
Demand deposits
    0.03 %     0.09 %     0.00 %     0.03 %
Savings accounts
    0.02 %     7.12 %     0.00 %     1.03 %
Time deposits:
                               
Maturing within 3 months
    76.00 %     45.46 %     93.56 %     74.73 %
Maturing after 3 but within 6 months
    15.83 %     22.91 %     5.47 %     15.02 %
Maturing after 6 but within 12 months
    6.95 %     16.86 %     0.94 %     7.31 %
Maturing after 12 months
    1.17 %     7.56 %     0.03 %     1.88 %
Total time deposits
    99.95 %     92.79 %     100.00 %     98.94 %
Total deposits
    100.00 %     100.00 %     100.00 %     100.00 %

The following table sets forth information regarding the maturity of our outstanding time deposits in excess of U.S.$100,000 as of December 31, 2014.
 
   
Ch$
   
UF
   
Foreign Currencies
   
Total
 
   
(in millions of Ch$)
 
Time deposits:
                       
Maturing within 3 months
    5,377,657       679,321       1,724,906       7,781,884  
Maturing after 3 but within 6 months
    1,120,528       342,400       100,933       1,563,861  
Maturing after 6 but within 12 months
    492,057       251,859       17,361       761,277  
Maturing after 12 months
    82,752       112,888       504       196,144  
Total time deposits
    7,072,994       1,386,468       1,843,704       10,303,166  

Short-term Borrowings
 
The principal categories of our short-term borrowings are repurchase agreements and interbank borrowings. The table below presents the amounts outstanding at each year-end indicated and the weighted-average nominal interest rate for each such year by type of short-term borrowing.
 
   
2014
   
2013
   
2012
 
   
Balance
   
Weighted-Average Nominal Interest Rate
   
Balance
   
Weighted-Average Nominal Interest Rate
   
Balance
   
Weighted-Average Nominal Interest Rate
 
   
(in millions of Ch$, except percentages)
 
Obligations arising from repurchase agreements
    392,126       0.2 %     208,972       0.3 %     304,117       0.4 %
Obligations with the Central Bank
    94       0.5 %     220       0.5 %     398       0.5 %
Loans from domestic financial institutions
    66,006       0.2 %     500       0.1 %            
Foreign obligations
    717,416       0.2 %     1,529,511       0.3 %     1,272,994       0.4 %
Total short-term borrowings
    1,175,642       0.2 %     1,739,203       0.3 %     1,577,509       0.4 %

The following table shows the average balance and the average nominal rate for each short-term borrowing category for the years indicated.
 
   
2014
   
2013
   
2012
 
   
Average Balance
   
Average Nominal Interest Rate
   
Average Balance
   
Average Nominal Interest Rate
   
Average Balance
   
Average Nominal Interest Rate
 
   
(in millions of Ch$, except percentages)
 
Obligations arising from repurchase agreements
    413,263       2.0 %     266,883       5.6 %     369,338       4.2 %
Obligations with the Central Bank
    6,906       0.2 %     221       6.3 %     4,469       5.2 %
Loans from domestic financial institutions
    100,513       4.9 %     33,834       4.6 %     6,171       3.7 %
Foreign obligations
    1,508,559       1.3 %     1,543,337       1.0 %     1,578,051       0.8 %
Total short-term borrowings
    2,029,241       1.6 %     1,844,275       1.8 %     1,958,029       1.4 %

The following table presents the maximum month-end balances of our principal sources of short-term borrowings during the years indicated.
 
   
Maximum 2014 Month-End Balance
   
Maximum 2013 Month-End Balance
   
Maximum 2012 Month-End Balance
 
   
(in millions of Ch$)
 
Obligations arising from repurchase agreements
    392,126       471,486       571,211  
Obligations with the Central Bank
    205       370       766  
Loans from domestic financial institutions
    206,530       251,600       70,000  
Foreign obligations
    1,809,514       1,802,127       1,854,398  
Total short-term borrowings
    2,408,375       2,525,583       2,496,375  

Total Borrowings
 
   
As of December 31, 2014
 
   
Long-term
   
Short-term
   
Total
 
   
(in millions of Ch$)
 
Central Bank credit lines for renegotiations of loans (a)
          94       94  
Obligations under repurchase agreements
          392,126       392,126  
Mortgage finance bonds (b)
    74,948       6,561       81,509  
Senior bonds (c)
    3,701,885       1,166,602       4,868,487  
Mortgage bonds(d)
    105,422       3,778       109,200  
Subordinated bonds(e)
    715,465       10,451       725,916  
Borrowings from domestic financial institutions
          66,006       66,006  
Foreign borrowings(f)
    448,085       717,416       1,165,501  
Other obligations(g)
    84,576       120,549       205,125  
Total borrowings
    5,130,381       2,483,583       7,613,964  
 
   
As of December 31, 2013
 
   
Long-term
   
Short-term
   
Total
 
   
(in millions of Ch$)
 
Central Bank credit lines for renegotiations of loans (a)
          220       220  
Obligations under repurchase agreements
          208,972       208,972  
Mortgage finance bonds (b)
    95,174       6,493       101,667  
Senior bonds (c)
    2,586,989       1,603,929       4,190,918  
Mortgage bonds(d)
    70,339             70,339  
Subordinated bonds(e)
    697,268       138,466       835,734  
Borrowings from domestic financial institutions
          500       500  
Foreign borrowings(f)
    152,146       1,529,511       1,681,657  
Other obligations(g)
    88,083       101,698       189,781  
Total borrowings
    3,689,999       3,589,789       7,279,788  
 
   
As of December 31, 2012
 
   
Long-term
   
Short-term
   
Total
 
   
(in millions of Ch$)
 
Central Bank credit lines for renegotiations of loans
          398       398  
Obligations under repurchase agreements
          304,117       304,117  
Mortgage finance bonds
    6,863       121,223       128,086  
Senior bonds
    534,852       3,182,361       3,717,213  
Subordinated bonds
    16,037       709,953       725,990  
Borrowings from domestic financial institutions
                 
Foreign borrowings
    164,611       1,272,994       1,437,605  
Other obligations
    101,335       91,276       192,611  
Total borrowings
    823,698       5,682,322       6,506,020  
 
 
(a) Credit lines for renegotiations of loans
 
Central Bank borrowings include credit lines for the renegotiations of loans and other Central Bank borrowings. The maturities of the outstanding amounts due are as follows:
 
   
As of December 31, 2014
   
As of December 31, 2013
 
   
(in millions of Ch$)
 
Due within 1 year
    94       220  
Total
    94       220  

(b) 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 pay a yearly interest rate of 5.83% as of December 31, 2014.
 
   
As of December 31, 2014
 
   
(in millions of Ch$)
 
Due within 1 year
    6,561  
Due after 1 year but within 2 years
    6,971  
Due after 2 years but within 3 years
    8,282  
Due after 3 years but within 4 years
    10,366  
Due after 4 years but within 5 years
    6,198  
Due after 5 years
    43,131  
Total mortgage finance bonds 
    81,509  
 
The following table sets forth, at the dates indicated, our issued senior bonds. The bonds are denominated principally in UFs or U.S. dollars, and are principally used to fund assets with similar durations.
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
(in millions of Ch$)
 
Senior Bonds in UF
    1,797,438       1,964,905       2,025,105  
Senior Bonds in U.S.$
    2,191,347       1,658,789       1,269,454  
Senior Bonds in CHF
    443,186       246,284       90,249  
Senior Bonds in Ch$
    236,025       277,530       293,933  
Senior Bonds in CNY
          43,410       38,472  
Current bonds in AUD
    62,472              
Santander bonds in JPY
    138,019              
Total senior bonds
    4,868,487       4,190,918       3,717,213  

The maturities of these bonds are as follows:
 
   
As of December 31, 2014
 
   
(in millions of Ch$)
 
Due within 1 year
    1,166,602  
Due after 1 year but within 2 years
    646,380  
Due after 2 years but within 3 years
    1,037,521  
Due after 3 years but within 4 years
    381,263  
Due after 4 years but within 5 years
    566,430  
Due after 5 years
    1,070,291  
Total bonds
    4,868,487  

In 2014, the Bank issued bonds for UF11,400,000; CLP 75,000,000,000; CHF 300,000,000; USD 750,000,000, AUD 125,000,000, and JPY 27,300,000,000 detailed as follows:
 
Series
 
Amount
 
Term
 
Issuance rate
 
Issuance date
 
Series issued amount
  Maturity date
EB Series
 
UF
2,000,000
 
5 years
 
3.50% per annum simple
 
02-21-2014
 
UF
2,000,000
 
10-01-2018
ED Series
 
UF
2,000,000
 
7 years
 
3.50% per annum simple
 
08-28-2014
 
UF
2,000,000
 
01-01-2021
EF Series
 
UF
2,400,000
 
10 years
 
3.40% biannually
 
10-29-2014
 
UF
2,400,000
 
01-01-2024
SB Series
 
UF
3,000,000
 
5 years
 
2.65% biannually
 
12-11-2014
 
UF
3,000,000
 
07-01-2019
SA Series
 
UF
2,000,000
 
10 years
 
3.00% biannually
 
12-16-2014
 
UF
2,000,000
 
01-01-2024
UF Total
 
UF
11,400,000
                     
EA Series
 
CLP
25,000,000,000
 
5 years
 
6.20% per annum simple
 
02-22-2014
 
CLP
25,000,000,000
 
09-01-2018
SE Series
 
CLP
50,000,000,000
 
5 years
 
5.50% per annum simple
 
11-21-2014
 
CLP
50,000,000,000
 
07-01-2019
CLP Total
 
CLP
75,000,000,000
                     
CHF Bond
 
CHF
300,000,000
 
3 years
 
1.0% 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) + 75 bp
 
02-19-2014
 
USD
250,000,000
 
02-19-2019
Floating Bond
 
USD
500,000,000
 
5 years
 
Libor (3 months) + 90 bp
 
04-15-2014
 
USD
500,000,000
 
04-11-2017
USD Total
 
USD
750,000,000
                     
AUD Bond
 
AUD
125,000,000
 
3 years
 
4.50% per annum simple
 
03-13-2014
 
AUD
125,000,000
 
03-13-2017
AUD Total
 
AUD
125,000,000
                     
JPY Floating Bond
 
JP
Y6,600,000,000
 
3 years
 
Libor (3 months) + 65 bp
 
04-24-2014
 
JP
Y6,600,000,000
 
04-24-2017
JPY Current Bond
 
JP
Y2,000,000,000
 
3 years
 
0.72% per annum simple
 
04-24-2014
 
JP
Y2,000,000,000
 
04-24-2017
JPY Current Bond
 
JP
Y18,700,000,000
 
5 years
 
0.97% per annum simple
 
04-24-2014
 
JP
Y18,700,000,000
 
04-24-2019
                             
JPY Total
 
JP
Y27,300,000,000
                     

During 2014, the Bank repurchased bonds for CLP 118,409,000,000 and UF 6,000,000.
 
(d) Mortgage bonds
 
These bonds are used to finance mortgage loans with certain characteristics such as loan-to-value ratios below 80% and a debt servicing ratio of the client lower than 20%. All outstanding mortgage bonds are UF denominated.
 
The maturities of our mortgage bonds are as follows:
 
   
As of December 31,
 
   
2014
   
2013
 
   
Ch$mn
   
Ch$mn
 
             
Due within 1 year
    3,778        
Due after 1 year but within 2 years
    6,065        
Due after 2 year but within 3 years
    6,261        
Due after 3 year but within 4 years
    6,463        
Due after 4 year but within 5 years
    6,671        
Due after 5 years
    79,962       70,339  
Total senior bonds
    109,200       70,339  

In 2014, the Bank issued bonds for UF 1,500,000, detailed as follows:
 
 
Amount
 
Term
 
Issuance rate
 
Issuance date
 
Series issued amount
 
Maturity
AB Series
UF1,500,000
 
18 years
 
3.20% biannually
 
09-01-2014
 
UF1,500,000
 
04-01-2032
Total UF
UF1,500,000
                   
 
(e) Subordinated bonds
 
The following table sets forth, at the dates indicated, the balances of our subordinated bonds. The following table sets forth, at the dates indicated, our issued subordinated bonds. The bonds are denominated principally in UFs or U.S. dollars, and are principally used to fund the Bank’s mortgage portfolio and are considered to be a part of our regulatory capital.
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
(in millions of Ch$)
 
Subordinated bonds denominated in U.S.$
    3       139,802       174,285  
Subordinated bonds linked to the UF
    725,913       695,932       551,705  
Total subordinated bonds
    725,916       835,734       725,990  

The maturities of these bonds, which are considered long-term, are as follows.
 
   
As of December 31, 2014
 
   
(in millions of Ch$)
 
Due within 1 year
    10,451  
Due after 1 year but within 2 years
    6,311  
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
    709,154  
Total subordinated bonds
    725,916  

During 2014, the Bank did not issue subordinated bonds.
 
(f) Foreign borrowings
 
These are short-term and long-term borrowings from foreign banks used to fund our foreign trade business. The maturities of these borrowings are as follows.
 
   
As of December 31, 2014
 
   
(in millions of Ch$)
 
Due within 1 year
    717,416  
Due after 1 year but within 2 years
    242,863  
Due after 2 years but within 3 years
    192,522  
Due after 3 years but within 4 years
     
Due after 5 years
    12,700  
Total loans from foreign financial institutions
    1,165,501  
 
(g) Other obligations
 
Other obligations are summarized as follows:
 
   
As of December 31, 2014
 
   
MCh$
 
Long term obligations
     
Due after 1 years but within 2 years
    3,380  
Due after 2 years but within 3 years
    2,248  
Due after 3 years but within 4 years
    20,988  
Due after 4 years but within 5 years
    15,116  
Due after 5 years
    42,844  
Long-term financial obligations subtotals
    84,576  
         
Short term obligations:
       
Amounts due to credit card operators
    112,530  
Acceptance of letters of credit
    2,496  
Other long-term financial obligations, short-term portion
    5,523  
Short-term financial obligations subtotals
    120,549  
         
Other financial obligations totals
    205,125  

Other Off-Balance Sheet Arrangements and Commitments
 
In the normal course of our business, we are party to transactions with off-balance sheet risk. These transactions expose us to credit risk in addition to amounts recognized in the consolidated financial statements. The most important off-balance sheet item is contingent loans. Contingent loans consist of guarantees granted by us in Ch$, UF and foreign currencies (principally U.S.$), unused letters of credit and commitments to extend credit such as overdraft protection and credit card lines of credit. Such commitments are agreements to lend to a customer at a future date, subject to the customer compliance with the contractual terms. Since a substantial portion of these commitments is expected to expire without being drawn upon, the total amount of commitments does not necessarily represent our actual future cash requirements. We use the same credit policies in making commitments to extend credit as we do for granting loans, therefore, in the opinion of our management, our outstanding commitments represent normal credit risk.
 
The following table presents the Bank’s outstanding contingent loans as of December 31, 2014, 2013 and 2012:
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
(in millions of Ch$)
 
Issued and documented letters of credit
    205,920       218,032       199,420  
Confirmed foreign letters of credit
    75,813       127,600       113,878  
Documented guarantees
    1,481,154       1,212,799       1,046,114  
Other guarantees
    262,169       181,416       139,059  
Subtotals
    2,025,056       1,739,847       1,498,471  
Lines of credit with immediate availability
    5,699,573       5,141,831       4,933,335  
Other irrevocable obligation
    109,520       47,376       63,828  
Totals
    7,834,149       6,929,054       6,495,634  

Asset and Liability Management
 
Please refer to “Item 11.  Quantitative and Qualitative Disclosures about Market Risk” for information regarding our policies with respect to asset and liability management.
 
Capital Expenditures
 
The following table reflects capital expenditures in each of the three years ended December 31, 2014, 2013 and 2012:
 
   
Year Ended December 31,
 
   
2014
   
2013
   
2012
 
   
(in millions of Ch$)
 
Land and Buildings
    24,957       17,470       17,177  
Machinery, Systems and Equipment
    22,785       20,171       14,570  
Furniture, Vehicles, Other(1)
    11,346       3,148       4,991  
Total
    59,088       40,789       36,738  

(1)
Includes assets ceded under operating leases.
 
The increase in capital expenditures in 2014 was mainly due to higher investments in IT hardware and software, and to refurbish branches.
 
F. Selected Statistical Information
 
The following information is included for analytical purposes and should be read in conjunction with our Audited Consolidated Financial Statements, as well as the discussion in this “Item 5. Item 5.  Operating and Financial Review and Prospects.” The UF is linked to, and is adjusted daily to reflect changes in, the previous month’s Chilean consumer price index. See “Item 5.  Operating and Financial Review and Prospects—C. Operating Results—Impact of Inflation.”
 
Average Balances, Income Earned from Interest-Earning Assets and Interest Paid on Interest-Bearing Liabilities
 
The average balances for interest-earning assets and interest-bearing liabilities, including interest and readjustments received and paid, have been calculated on the basis of daily balances for us on an unconsolidated basis. Such average balances are presented in Chilean pesos, UFs and in foreign currencies (principally U.S. dollars). Figures from our subsidiaries have been calculated on the basis of monthly balances. The average balances of our subsidiaries, except Santander S.A. Agente de Valores, have not been categorized by currency. As such it is not possible to calculate average balances by currency for such subsidiaries on the basis of daily, weekly or monthly balances.
 
The nominal interest rate has been calculated by dividing the amount of interest and principal changes in the UF index (gain or loss) during the period by the related average balance, both amounts expressed in constant pesos. The nominal rates calculated for each period have been converted into real rates using the following formulas:
 
 
Where:
 
Rp
=
real average rate for peso-denominated assets and liabilities (in Ch$ and UF) for the period;
     
Rd
=
real average rate for foreign currency-denominated assets and liabilities for the period;
     
Np
=
nominal average rate for peso-denominated assets and liabilities for the period;
     
Nd
=
nominal average rate for foreign currency-denominated assets and liabilities for the period;
     
D
=
devaluation rate of the Chilean peso to the U.S. dollar for the period; and
     
I
=
inflation rate in Chile for the period (based on the variation of the Chilean Consumer Price Index).

The real interest rate can be negative for a portfolio of peso-denominated loans when the inflation rate for the period is higher than the average nominal rate of the loan portfolio for the same period. A similar effect could occur for a portfolio of foreign currency denominated loans when the inflation rate for the period is higher than the sum of the devaluation rate for the period and the corresponding average nominal rate of the portfolio.
 
The formula for the average real rate for foreign currency denominated assets and liabilities (Rd) reflects a gain or loss in purchasing power caused by the difference between the devaluation rate of the Chilean peso and the inflation rate in Chile during the period. The following example illustrates the calculation of the real interest rate for a dollar-denominated asset bearing a nominal annual interest rate of 10.0% (Nd = 0.10), assuming a 5.0% annual devaluation rate (D = 0.05) and a 12.0% annual inflation rate (I = 0.12):
 

In the example, since the inflation rate was higher than the devaluation rate, the real rate is lower than the nominal rate in dollars. If, for example, the annual devaluation rate were 15.0%, using the same numbers, the real rate in Chilean pesos would be 12.9%, which is higher than the nominal rate in U.S. dollars. Using the same numbers, if the annual inflation rate were greater than 15.5%, the real rate would be negative.
 
Foreign exchange gains or losses on foreign currency-denominated assets and liabilities are not included in interest income or expense. Similarly, interest on the available for sale investment portfolio does not include trading or mark-to-market gains or losses on these investments. Interest is not recognized on non-performing loans.   Non-performing loans that are past-due for 90 days or less have been included in each of the various categories of loans, and therefore affect the various averages. Non-performing loans consist of loans as to which either principal or interest is past-due (i.e., non-accrual loans) and restructured loans earning no interest.
 
Included in interbank deposits are checking accounts maintained in the Central Bank and foreign banks. Such assets have a distorting effect on the average interest rate earned on total interest-earning assets because currently balances maintained in Chilean peso amounts do not earn interest, and the only balances held in a foreign currency that earn interest are those maintained in U.S. dollars, but those only earn interest on the amounts that are legally required to be held for liquidity purposes. Additionally, this account includes interest earned by overnight investments. Consequently, the average interest earned on such assets is comparatively low. We maintain these deposits in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income.
 
The following tables show, by currency of denomination, average balances and, where applicable, interest amounts and real rates for our assets and liabilities for the years ended December 31, 2014, 2013 and 2012.
 
   
For the year ended December 31,
 
   
2014
   
2013
   
2012
 
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
 
Assets
                                                                       
Interest earning assets
                                                                       
Deposits in Central Bank
                                                                       
Ch$
    477,977       8,728       1.9 %     1.8 %     246,757       4,092       (0.7 )%     1.7 %     528,682       18,346       2.0 %     3.5 %
UF
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Foreign currency
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Total
    477,977       8,728       1.9 %     1.8 %     246,757       4,092       (0.7 )%     1.7 %     528,682       18,346       2.0 %     3.5 %
Financial investments
                                                                                               
Ch$
    1,339,117       40,701       3.0 %     3.0 %     1,067,737       68,060       3.9 %     6.4 %     1,593,870       82,257       3.6 %     5.2 %
UF
    295,570       38,906       13.1 %     13.2 %     434,485       14,945       1.0 %     3.4 %     132,209       10,961       6.7 %     8.3 %
Foreign currency
    1,368,089       6,047       16.6 %     0.4 %     523,584       2,013       7.4 %     0.4 %     593,645       636       (9.5 )%     0.1 %
Total
    3,002,776       85,654       10.2 %     2.8 %     2,025,806       85,018       4.2 %     4.2 %     2,319,724       93,854       0.4 %     4.0 %
Commercial Loans
                                                                                               
Ch$
    5,658,176       474,537       8.4 %     8.4 %     5,474,890       496,055       6.5 %     9.1 %     4,874,036       559,194       9.8 %     11.5 %
UF
    4,077,560       381,244       9.3 %     9.3 %     3,689,570       250,748       4.3 %     6.8 %     3,746,119       261,493       5.4 %     7.0 %
Foreign currency
    2,874,210       67,140       18.8 %     2.3 %     2,645,594       57,157       9.3 %     2.2 %     1,907,824       53,175       (7.0 )%     2.8 %
Total
    12,609,946       922,921       11.1 %     7.3 %     11,810,054       803,960       6.4 %     6.8 %     10,527,979       873,862       5.2 %     8.3 %
 
 
   
For the year ended December 31,
 
   
2014
   
2013
   
2012
 
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
 
Consumer loans
                                                                                               
Ch$
    3,502,026       600,869       22.2 %     17.2 %     3,196,286       607,136       16.2 %     19.0 %     2,735,628       525,209       17.4 %     19.2 %
UF
    91,668       11,191       17.0 %     12.2 %     100,042       9,951       7.4 %     9.9 %     120,620       11,570       8.0 %     9.6 %
Foreign currency
    27,606       -       21.0 %     - %     22,187       1       7.0 %     - %     16,009       -       (9.6 )%     - %
Total
    3,621,300       612,060       22.1 %     16.9 %     3,318,515       617,088       15.9 %     18.6 %     2,872,257       536,779       16.9 %     18.7 %
Mortgage loans
                                                                                               
Ch$
    23,758       4,918       20.7 %     20.7 %     31,403       2,267       4.7 %     7.2 %     28,170       2,236       6.4 %     7.9 %
UF
    6,535,989       591,446       9.0 %     9.0 %     5,554,152       356,304       4.0 %     6.4 %     5,157,859       363,496       5.5 %     7.0 %
Foreign currency
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Total
    6,559,747       596,364       9.0 %     9.0 %     5,585,555       358,571       4.0 %     6.4 %     5,186,029       365,732       5.5 %     7.2 %
Interbank loans
                                                                                               
Ch$
    4,356       139       3.1 %     3.2 %     5,102       195       1.4 %     3.8 %     214       -       (1.5 %)     - %
UF
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Foreign currency
    1       -       16.1 %     - %     3       -       7.0 %     - %     129,581       790       (9.0 )%     0.6 %
Total
    4,357       139       3.1 %     3.2 %     5,105       195       1.4 %     3.8 %     129,795       790       (9.0 )%     0.6 %
Investment Agreements to resell
                                                                                               
Ch$
    4,074       793       19.5 %     19.5 %     31,446       2,050       4.1 %     6.5 %     2,580       163       4.8 %     6.3 %
UF
    -       95       - %     - %     90       5       3.1 %     5.6 %     17,900       1,074       4.4 %     6.0 %
Foreign currency
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Total
    4,074       888       19.5 %     19.5 %     31,536       2,055       4.1 %     6.5 %     20,480       1,237       4.5 %     6.0 %
Threshold
                                                                                               
Ch$
    31       -       - %     - %     -       -       - %     - %     2       -       (1.5 )%     - %
UF
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Foreign currency
    479,488       264       16.1 %     0.1 %     244,407       225       7.1 %     0.1 %     35,142       353       (8.7 )%     1.0 %
Total
    479,519       264       16.1 %     0.1 %     244,407       225       7.1 %     0.1 %     35,144       353       (8.7 )%     1.0 %
Total interest earning assets
                                                                                               
Ch$
    11,009,515       1,130,685       10.3 %     10.3 %     10,053,621       1,179,855       9.1 %     11.7 %     9,763,182       1,187,405       10.5 %     12.2 %
UF
    11,000,787       1,022,882       9.3 %     9.3 %     9,778,339       631,953       4.0 %     6.5 %     9,174,707       648,594       5.5 %     7.1 %
Foreign currency
    4,749,394       73,451       17.8 %     1.5 %     3,435,775       59,396       8.8 %     1.7 %     2,682,201       54,954       (7.7 )%     2.0 %
Total
    26,759,696       2,227,018       11.2 %     8.3 %     23,267,735       1,871,204       6.9 %     8.0 %     21,620,090       1,890,953       6.1 %     8.8 %
                                                                                                 
                                                                                                 
Non-interest earning assets
                                                                                               
Cash
                                                                                               
Ch$
    677,003                               678,021                               544,044                          
UF
    -                               -                               -                          
Foreign currency
    78,195                               74,779                               17,304                          
Total
    755,198                               752,800                               561,348                          
Allowance for loan losses
                                                                                               
Ch$
    (722,660 )                             (625,960 )                             (582,581 )                        
UF
    -                               -                               -                          
Foreign currency
    -                               -                               -                          
Total
    (722,660 )                             (625,960 )                             (582,581 )                        
Fixed assets
                                                                                               
Ch$
    202,902                               131,372                               174,948                          
UF
    -                               -                               -                          
Foreign currency
    -                               -                               -                          
Total
    202,902                               131,372                               174,948                          
Derivatives
                                                                                               
Ch$
    2,910,369                               1,686,654                               1,334,464                          
UF
    -                               -                               -                          
Foreign currency
    -                               2,459                               (26,517 )                        
Total
    2,910,369                               1,689,113                               1,307,947                          
Financial Investment (Trading)
                                                                                               
Ch$
    114,875                               215,003                               185,018                          
UF
    600,005                               166,124                               257,719                          
Foreign currency
    7                               86                               4                          
Total
    714,887                               381,213                               442,741                          
Other assets
                                                                                               
Ch$
    1,065,307                               952,902                               975,585                          
UF
    71,241                               64,511                               69,937                          
Foreign currency
    967,643                               424,305                               526,419                          
Total
    2,104,191                               1,441,718                               1,571,941                          
Total non-interest earning assets
                                                                                               
Ch$
    4,247,703                               3,037,992                               2,631,478                          
UF
    671,363                               230,635                               327,656                          
Foreign currency
    1,045,821                               501,629                               517,210                          
Total
    5,964,887                               3,770,256                               3,476,344                          
Total assets
                                                                                               
Ch$
    15,257,218       1,130,685                       13,091,613       1,179,855                       12,394,660       1,187,405                  
UF
    11,672,150       1,022,882                       10,008,974       631,953                       9,502,363       648,594                  
Foreign currency
    5,795,215       73,451                       3,937,404       59,396                       3,199,411       54,954                  
Total
    32,724,583       2,227,018                       27,037,991       1,871,204                       25,096,434       1,890,953                  
 
 
      For the year ended December 31,
   
2014
 
2013
 
2012
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
   
Average Balance
   
Interest Earned
   
Average Real Rate
   
Average Nominal Rate
 
Liabilities And Share-Holders’ Equity
                                                                       
Interest bearing liabilities
                                                                       
Savings accounts
                                                                       
Ch$
    1,213       3       0.2 %     0.2 %     1,105       3       (2.0 )%     0.3 %     1,015       2       (1.3 )%     0.2 %
UF
    106,972       5,461       5.2 %     5.1 %     102,655       1,906       (0.5 )%     1.9 %     101,405       2,537       1.0 %     2.5 %
Foreign currency
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Total
    108,185       5,464       5.1 %     5.0 %     103,760       1,909       (0.5 )%     1.9 %     102,420       2,539       1.0 %     2.5 %
Time deposits
                                                                                               
Ch$
    7,891,805       307,868       3.9 %     3.9 %     7,148,978       386,545       3.0 %     5.4 %     6,383,384       384,895       4.5 %     6.0 %
UF
    1,345,965       93,624       6.9 %     7.0 %     819,695       57,379       4.5 %     7.0 %     1,430,807       109,163       6.0 %     7.6 %
Foreign currency
    2,715,224       8,443       16.4 %     0.3 %     1,980,728       6,061       7.3 %     0.3 %     1,845,624       9,048       (9.1 )%     0.5 %
Total
    11,952,994       409,935       7.1 %     3.4 %     9,949,401       449,985       4.0 %     4.5 %     9,659,815       503,106       2.1 %     5.2 %
Central bank borrowings
                                                                                               
Ch$
    6,815       5       0.1 %     0.1 %     -       -       - %     - %     4,070       218       3.8 %     5.4 %
UF
    91       9       9.8 %     9.9 %     221       14       3.9 %     6.3 %     399       14       2.0 %     3.5 %
Foreign currency
    -       -       - %     - %     -       -       - %     0.0 %     -       -       - %     - %
Total
    6,906       14       0.2 %     0.2 %     221       14       3.9 %     6.3 %     4,469       232       3.6 %     5.2 %
Repurchase Agreements
                                                                                               
Ch$
    400,673       8,267       2.0 %     2.1 %     258,971       15,089       3.4 %     5.8 %     360,538       15,326       2.7 %     4.3 %
UF
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
Foreign currency
    12,590       27       16.3 %     0.2 %     7,912       9       7.1 %     0.1 %     8,800       73       (8.8 )%     0.8 %
Total
    413,263       8,294       2.4 %     2.0 %     266,883       15,098       3.5 %     5.6 %     369,338       15,399       2.4 %     4.2 %
Mortgage finance bonds
                                                                                               
Ch$
    -       -       - %     - %     -       -       - %     - %     -       -       - %     - %
UF
    81,805       9,698       11.8 %     11.9 %     102,778       8,235       5.5 %     8.0 %     131,070       11,254       7.0 %     8.6 %
Foreign currency
    -       -       - %     - %     -       -       - %     - %     -       0       - %     - %
Total
    81,805       9,698       11.8 %     11.9 %     102,778       8,235       5.5 %     8.0 %     131,070       11,254       7.0 %     8.6 %
Other interest bearing liabilities
                                                                                               
Ch$
    409,021       203,374       49.7 %     49.7 %     393,354       62,642       13.2 %     15.9 %     395,033       39,171       8.3 %     9.9 %
UF
    2,538,094       234,284       9.3 %     9.2 %     2,654,931       150,770       3.2 %     5.7 %     2,570,059       157,727       4.6 %     6.1 %
Foreign currency
    3,917,969       38,851       17.2 %     1.0 %     3,802,668       105,789       10.0 %     2.8 %     2,962,801       118,791       (5.9 )%     4.0 %
Total
    6,865,084       476,509       16.2 %     6.9 %     6,850,953       319,201       7.5 %     4.7 %     5,927,893       315,689       (0.4 )%     5.3 %
Total interest bearing liabilities
                                                                                               
Ch$
    8,709,527       519,517       5.0 %     6.0 %     7,802,408       464,279       3.5 %     6.0 %     7,144,040       439,612       4.6 %     6.2 %
UF
    4,072,927       343,076       8.4 %     8.4 %     3,680,280       218,304       3.5 %     5.9 %     4,233,740       280,695       5.1 %     6.6 %
Foreign currency
    6,645,783       47,321       16.9 %     0.7 %     5,791,308       111,859       9.1 %     1.9 %     4,817,225       127,912       (7.2 )%     2.7 %
Total
    19,428,237       909,914       9.8 %     4.7 %     17,273,996       794,442       5.4 %     4.6 %     16,195,005       848,219       1.2 %     5.3 %
                                                                                                 
Non interest bearing liabilities
                                                                                               
Non interest bearing demand deposits
                                                                                               
Ch$
    5,282,135                               4,520,789                               4,150,121                          
UF
    35,333                               32,787                               23,047                          
Foreign currency
    68,804                               67,273                               4,264                          
Total
    5,386,272                               4,620,849                               4,177,432                          
Derivatives
                                                                                               
Ch$
    2,719,386                               1,466,096                               1,140,913                          
UF
    -                               -                               -                          
Foreign currency
    -                               1,627                               256                          
Total
    2,719,386                               1,467,723                               1,141,169                          
Other non-interest bearing liabilities
                                                                                               
Ch$
    762,367                               615,977                               621,920                          
UF
    398,108                               247,400                               204,532                          
Foreign currency
    1,341,176                               462,598                               568,660                          
Total
    2,501,651                               1,325,975                               1,395,112                          
Shareholders’ equity
                                                                                               
Ch$
    2,689,037                               2,349,448                               2,187,716                          
UF
    -                               -                               -                          
Foreign currency
    -                               -                               -                          
Total
    2,689,037                               2,349,448                               2,187,716                          
Total non-interest bearing liabilities and shareholders’ equity
                                                                                               
Ch$
    11,452,925                               8,952,310                               8,100,670                          
UF
    433,441                               280,187                               227,579                          
Foreign currency
    1,409,980                               531,498                               573,180                          
Total
    13,296,346                               9,763,995                               8,901,429                          
Total Liabilities and Share-Holders’ Equity
                                                                                               
Ch$
    20,162,452       519,517                       16,754,718       464,279                       15,244,710       439,612                  
UF
    4,506,368       343,076                       3,960,467       218,304                       4,461,319       280,695                  
Foreign currency
    8,055,763       47,321                       6,322,806       111,859                       5,390,405       127,912                  
Total
    32,724,583       909,914                       27,037,991       794,442                       25,096,434       848,219                  

 
102

 
Changes in Net Interest Revenue and Interest Expense: Volume and Rate Analysis
 
The following table allocates, by currency of denomination, changes in our net interest revenue and interest expense between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective nominal interest rates for 2014 compared to 2013 and 2013 compared to 2012. Volume and rate variances have been calculated based on movements in average balances over the period and changes in nominal interest rates on average interest-earning assets and average interest-bearing liabilities.
 
   
Increase (Decrease) from 2013 to 2014
Due to Changes in
   
Increase (Decrease) from 2012 to 2013
Due to Changes in
 
   
Volume
   
Rate
   
Rate and Volume
   
Net Change from 2013 to 2014
   
Volume
   
Rate
   
Rate and Volume
   
Net Change from 2012 to 2013
 
Assets
                                               
Interest earning assets
                                               
Deposits in Central Bank
                                               
Ch$
    3,931       247       458       4,636       (9,867 )     (9,516 )     5,129       (14,254 )
UF
                                               
Foreign currency
                                               
Subtotal
    3,931       247       458       4,636       (9,867 )     (9,516 )     5,129       (14,254 )
Financial investments
                                                               
Ch$
    17,368       (36,303 )     (8,424 )     (27,359 )     (27,359 )     19,126       (5,964 )     (14,197 )
UF
    (4,723 )     42,580       (13,896 )     23,961       25,089       (6,478 )     (14,627 )     3,984  
Foreign currency
    3,378             656       4,034       (70 )     1,781       (334 )     1,377  
Subtotal
    16,023       6,277       (21,664 )     636       (2,340 )     14,429       (20,925 )     (8,836 )
Commercial loans
                                                               
Ch$
    16,679       (38,324 )     127       (21,518 )     69,098       (116,977 )     (15,260 )     (63,139 )
UF
    26,383       92,239       11,874       130,496       (3,958 )     (7,492 )     705       (10,745 )
Foreign currency
    5,030       2,646       2,307       9,983       20,658       (11,447 )     (5,229 )     3,982  
Subtotal
    48,092       56,561       14,308       118,961       85,798       (135,916 )     (19,784 )     (69,902 )
Consumer loans
                                                               
Ch$
    58,091       (57,533 )     (6,825 )     (6,267 )     88,446       (5,471 )     (1,048 )     81,927  
UF
    (829 )     2,301       (232 )     1,240       (1,975 )     362       (6 )     (1,619 )
Foreign currency
                (1 )     (1 )                 1       1  
Subtotal
    57,262       (55,232 )     (7,058 )     (5,028 )     86,471       (5,109 )     (1,053 )     80,309  
Mortgage loans
                                                               
Ch$
    (550 )     4,239       (1,038 )     2,651       255       (197 )     (27 )     31  
UF
    62,838       144,408       27,896       235,142       27,741       (32,555 )     (2,378 )     (7,192 )
Foreign currency
                                               
Subtotal
    62,288       148,647       26,858       237,793       27,996       (32,752 )     (2,405 )     (7,161 )
Interbank loans
                                                               
Ch$
    (28 )     (31 )     3       (56 )           8       187       195  
UF
                                               
Foreign currency
                            (777 )     (777 )     764       (790 )
Subtotal
    (28 )     (31 )     3       (56 )     (777 )     (769 )     951       (595 )
Investment under agreement to resell
                                                               
Ch$
    (1,779 )     4,088       (3,566 )     (1,257 )     1,819       5       63       1,887  
UF
    (5 )     (5 )     100       90       (1,069 )     (72 )     72       (1,069 )
Foreign currency
                                               
Subtotal
    (1,784 )     4,083       (3,466 )     (1,167 )     750       (67 )     135       818  
Threshold
                                                               
Ch$
                                               
UF
                                               
Foreign currency
    235             (196 )     39       2,093       (316 )     (1,905 )     (128 )
Subtotal
    235             (196 )     39       2,093       (316 )     (1,905 )     (128 )
Total interest earnings assets
                                                               
Ch$
    93,712       (123,617 )     (19,265 )     (49,170 )     122,392       (113,022 )     (16,920 )     (7,550 )
UF
    83,664       281,523       25,742       390,929       45,828       (46,235 )     (16,234 )     (16,641 )
Foreign currency
    8,643       2,646       2,766       14,055       21,904       (10,759 )     (6,703 )     4,442  
Total
    186,019       160,552       9,243       355,814       190,124       (170,016 )     (39,857 )     (19,749 )
 
 
103

 
   
Increase (Decrease) from 2013 to 2014
Due to Changes in
   
Increase (Decrease) from 2012 to 2013
Due to Changes in
 
   
Volume
   
Rate
   
Rate and Volume
   
Net Change from 2013 to 2014
   
Volume
   
Rate
   
Rate and Volume
   
Net Change from 2012 to 2013
 
Liabilities and Shareholders’ Equity
                                                               
Interest bearing liabilities
                                                               
Savings accounts
                                                               
Ch$
                                  1             1  
UF
    82       3,285       188       3,555       31       (608 )     (54 )     (631 )
Foreign currency
                                               
Subtotal
    82       3,284       189       3,555       31       (607 )     (54 )     (630 )
Time deposits
                                                               
Ch$
    40,113       (107,235 )     (11,555 )     (78,677 )     45,936       (38,300 )     (5,986 )     1,650  
UF
    36,839             (594 )     36,245       (46,445 )     (8,585 )     3,246       (51,784 )
Foreign currency
    2,203             179       2,382       676       (3,691 )     28       (2,987 )
Subtotal
    79,155       (107,235 )     (11,970 )     (40,050 )     167       (50,576 )     (2,712 )     (53,121 )
Central bank borrowings
                                                               
Ch$
                5       5       (220 )     (220 )     222       (218 )
UF
    (8 )     8       (5 )     (5 )     (6 )     11       (5 )      
Foreign currency
                                               
Subtotal
    (8 )     8                   (226 )     (209 )     217       (218 )
Repurchase agreements
                                                               
Ch$
    8,219       (9,582 )     (5,459 )     (6,822 )     (4,367 )     5,408       (1,278 )     (237 )
UF
                                               
Foreign currency
    5       8       5       18       (7 )     (62 )     5       (64 )
Subtotal
    8,224       (9,574 )     (5,454 )     (6,804 )     (4,374 )     5,346       (1,273 )     (301 )
Mortgage finance bonds
                                                               
Ch$
                                               
UF
    (1,678 )     4,008       (867 )     1,463       (2,433 )     (786 )     200       (3,019 )
Foreign currency
                                               
Subtotal
    (1,678 )     4,008       (867 )     1,463       (2,433 )     (786 )     200       (3,019 )
Other interest bearing liabilities
                                                               
Ch$
    2,491       132,954       5,287       140,732       (166 )     23,702       (65 )     23,471  
UF
    (6,660 )     92,923       (2,749 )     83,514       5,177       (10,280 )     (1,854 )     (6,957 )
Foreign currency
    3,228       (68,448 )     (1,718 )     (66,938 )     33,595       (35,554 )     (11,043 )     (13,002 )
Subtotal
    (941 )     157,429       820       157,308       38,606       (22,132 )     (12,962 )     3,512  
Total interest bearing liabilities
                                                               
Ch$
    50,823       16,136       (11,721 )     55,238       41,183       (9,409 )     (7,107 )     24,667  
UF
    28,575       100,224       (4,027 )     124,772       (43,676 )     (20,248 )     1,533       (62,391 )
Foreign currency
    5,436       (68,440 )     (1,534 )     (64,538 )     34,264       (39,307 )     (11,010 )     (16,053 )
Total
    84,834       47,920       (17,282 )     115,472       31,771       (68,964 )     (16,584 )     (53,777 )

 
Interest-Earning Assets: Net Interest Margin
 
The following table analyzes, by currency of denomination, the levels of average interest-earning assets and net interest earned by Santander-Chile, and illustrates the comparative net interest margins obtained, for each of the years indicated in the table.
 
   
Year ended December 31,
 
   
2014
   
2013
   
2012
 
   
(in millions of Ch$)
 
Total average interest-earning assets
                 
Ch$
    11,009,515       10,053,621       9,763,182  
UF
    11,000,787       9,778,339       9,174,707  
Foreign currencies
    4,749,384       3,435,775       2,682,201  
Total
    26,759,696       23,267,735       21,620,090  
Net interest earned (1)
                       
Ch$
    611,168       715,576       747,793  
UF
    679,806       413,649       367,899  
Foreign currencies
    26,130       (52,463 )     (72,958 )
Total
    1,317,104       1,076,762       1,042,734  
Net interest margin (2)
                       
Ch$
    5.55 %     7.12 %     7.66 %
UF
    6.18 %     4.23 %     4.01 %
Foreign currencies
    0.55 %     (1.53 )%     (2.72 %)
Total
    4.92 %     4.63 %     4.82 %

(1)
Net interest earned is defined as interest revenue earned less interest expense incurred.
 
(2)
Net interest margin is defined as net interest earned divided by total average interest-earning assets.
 
Return on Equity and Assets; Dividend Payout
 
The following table presents certain information and selected financial ratios for Santander-Chile for the years indicated.
 
   
Year ended December 31,
 
 
Ch$ million
 
2014
   
2013
   
2012
 
Net income
    575,910       444,429       361,433  
Net income attributable to shareholders
    569,910       442,294       356,808  
Average total assets
    32,724,583       27,037,991       25,096,434  
Average equity
    2,689,037       2,349,448       2,187,716  
Net income as a percentage of:
                       
Average total assets
    1.8 %     1.6 %     1.4 %
Average equity
    21.4 %     18.9 %     16.5 %
Average equity as a percentage of:
                       
Average total assets
    8.2 %     8.7 %     8.7 %
Cash dividend (1)
    330,198       265,156       232,780  
Dividend payout ratio, based on net income attributable to shareholders (1)
    58.0 %     60.0 %     65.2 %

(1)
Cash dividend for 2014 represents cash dividend approved by shareholders on April 28, 2015.
 
 
105

 
The following table presents dividends declared and paid by us in nominal terms in the following years:
 
 
Year
 
Dividend
Ch$ mn (1)
   
Per share Ch$/share (2)
   
Per ADR Ch$/ADR (3)
   
% over earnings (4)
   
% over earnings (5)
 
2011
    286,294       1.52       1,578.48       60       57  
2012
    261,051       1.39       1,439.10       60       65  
2013
    232,780       1.24       494.10       60       65  
2014
    265,156       1.41       562.83       60       60  
2015(6)
    330,198       1.75       700.89       60       58  

(1)
Millions of nominal pesos.
(2)
Calculated on the basis of 188,446 million shares.
(3)
Calculated on the basis of 1,039 shares per ADS for the periods from 2009-2012. In 2014, it is calculated on the basis of 400 shares per ADS.
(4)
Calculated by dividing dividend paid in the year by net income attributable to shareholders for the previous year under Chilean GAAP.
(5)
Calculated by dividing dividend paid in the year by net income attributable to shareholders for the previous year under IFRS.
(6)
Dividend proposed by the Board for shareholders’ approval on April 28, 2015.

 
Loan Portfolio
 
The following table analyzes our loans by product type. Except where otherwise specified, all loan amounts stated below are before deduction for loan loss allowances. Total loans reflect our loan portfolio, including principal amounts of past due loan and substandard loans. Any collateral provided generally consists of a mortgage on real estate, a pledge of marketable securities, a letter of credit or cash. The existence and amount of collateral generally vary from loan to loan.
 
   
As of December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(in millions of Ch$)
 
Commercial Loans:
                             
Commercial loans
    8,324,949       7,797,682       7,316,417       6,602,372       6,107,117  
Foreign trade loans
    1,786,232       1,840,334       1,270,423       1,042,024       783,552  
Checking account debtors
    266,231       279,657       205,355       132,383       67,956  
Factoring transactions
    327,841       316,114       322,242       188,630       206,140  
Leasing transactions
    1,489,384       1,349,814       1,277,555       1,237,675       1,122,916  
Other loans and accounts receivable
    135,663       118,651       97,029       84,501       17,948  
Subtotal
    12,330,300       11,702,252       10,489,021       9,287,585       8,305,629  
                                         
Mortgage loans:
                                       
Mortgage mutual loans
    57,356       71,833       46,105       71,878       184,364  
Mortgage finance bond backed loans
    116,150       72,297       92,204       113,858       138,094  
Other mortgage mutual loans
    6,458,525       5,481,682       5,133,272       4,929,927       4,328,679  
Subtotal
    6,632,031       5,625,812       5,271,581       5,115,663       4,651,137  
                                         
Consumer loans:
                                       
Installment consumer loans
    2,320,775       2,168,121       1,857,657       1,808,594       1,604,603  
Credit card loans
    1,362,587       1,235,881       1,054,473       920,852       794,216  
Consumer leasing contracts
    5,270       3,451       3,688       3,727       3,735  
Other consumer loans
    229,743       199,795       199,659       210,673       298,236  
Subtotal
    3,918,375       3,607,248       3,115,477       2,943,846       2,700,790  
                                         
Subtotal Loans to customers
    22,880,706       20,935,312       18,876,079       17,347,094       15,657,556  
                                         
Interbank loans
    11,943       125,449       90,573       87,688       69,726  
                                         
Total
    22,892,649       21,060,761       18,966,652       17,434,782       15,727,282  

The loan categories are as follows:
 
Commercial loans
 
Commercial loans are long-term and short-term loans, including checking overdraft lines for companies, granted in Chilean pesos, inflation linked, U.S.$ linked or denominated in U.S.$. The interest on these loans is fixed or variable and is used primarily to finance working capital or investments. General commercial loans also include factoring operations.
 
 
106

 
Foreign trade loans are fixed rate, short-term loans made in foreign currencies (principally U.S.$) to finance imports and exports.
 
Checking account debtors mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These loans can be endorsed to a third party.
 
Factoring transactions mainly include short-term loans to companies with a fixed monthly nominal rate backed by a company invoice.
 
Leasing transactions are agreements for the financial leasing of capital equipment and other property.
 
Other loans and accounts receivable loans include other loans and accounts payable.
 
Mortgage loans
 
Mortgage mutual loans mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These are financed by issuing mortgage bonds.
 
Mortgage finance bond backed loans are inflation-indexed, fixed or variable rate, long-term loans with monthly payments of principal and interest secured by a real property mortgage that are financed with mortgage finance bonds. At the time of approval, these types of mortgage loans cannot be more than 75% of the lower of the purchase price or the appraised value of the mortgaged property or such loan will be classified as a commercial loan. Mortgage bonds are our general obligations, and we are liable for all principal and accrued interest on such bonds. In addition, if the issuer of a mortgage finance bond becomes insolvent, the General Banking Law’s liquidation procedures provide that these types of mortgage loans with their corresponding mortgage bonds shall be auctioned as a unit and the acquirer must continue paying the mortgage finance bonds under the same conditions as the original issuer.
 
Other mortgage mutual loans mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These are financed by our general borrowings.
 
Consumer loans
 
Installment consumer loans are loans to individuals, granted in Chilean pesos, generally on a fixed rate nominal basis, to finance the purchase of consumer goods or to pay for services.
 
Consumer loans through lines of credit are checking overdraft lines to individuals, granted in Chilean pesos, generally on a fixed rate nominal basis and linked to an individual’s checking account.
 
Credit card loans include credit card balances subject to nominal fixed rate interest charges.
 
Consumer leasing contracts are agreements for the financial leasing of automobiles and other property to individuals.
 
Other loans and accounts receivable from customers include draft lines for individuals.
 
Non-client loans
 
Interbank loans are fixed rate, short-term loans to financial institutions that operate in Chile.
 

Maturity and Interest Rate Sensitivity of Loans
 
The following table sets forth an analysis by type and time remaining to maturity of our loans as of December 31, 2014.
 
   
Due in 1 year or less
   
Due after 1 year through 5 years
   
Due after 5 years
   
Total balance as of December 31, 2014
 
   
(in millions of Ch$)
 
General commercial loans
    4,507,601       3,115,686       1,666,258       9,289,545  
Foreign trade loans
    1,313,811       194,474       31,669       1,539,954  
Leasing contracts
    330,698       716,916       445,245       1,492,859  
Other outstanding loans
    7,942                   7,942  
Subtotal commercial loans
    6,160,052       4,027,076       2,143,172       12,330,300  
Residential loans backed by mortgage bonds
    14,602       36,389       16,663       67,654  
Other residential mortgage loans
    374,596       1,223,166       4,966,615       6,564,377  
Subtotal residential mortgage loans
    389,198       1,259,555       4,983,278       6,632,031  
Consumer loans
    1,982,047       1,797,571       138,757       3,918,375  
Subtotal
    8,531,297       7,084,202       7,265,207       22,880,706  
Interbank loans
    11,943                   11,943  
Total loans
    8,543,240       7,084,202       7,265,207       22,892,649  

The following tables present the total amount of loans due after one year that have fixed and variable interest rates as of December 31, 2014. See also “Item 5.  Operating and Financial Review and Prospects –C. Operating Results—Interest Rates.”
 
   
As of December 31, 2014
 
   
(in millions of Ch$)
 
Variable Rate
     
Ch$
    1,645  
UF
    947,534  
Foreign currencies
     
Subtotal
    949,179  
Fixed Rate
       
Ch$
    3,638,302  
UF
    9,255,250  
Foreign currencies
    506,678  
Subtotal
    13,400,230  
Total
    14,349,409  

Loans by Economic Activity
 
The following table sets forth, at the dates indicated, an analysis of our client loan portfolio based on the borrower’s principal economic activity and geographic distribution. Loans to individuals for business purposes are allocated to their economic activity.
 
 
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Domestic loans (*) as of December 31,
   
Foreign loans (**) as of December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(in millions of Ch$)
   
(in millions of Ch$)
 
Commercial loans
                                                           
Manufacturing
    1,126,268       1,216,914       1,014,777       834,011       838,324                                
Mining
    428,847       464,865       292,217       266,442       106,119                                
Electricity, gas and water
    567,548       222,110       337,269       221,039       149,907                                
Agriculture and livestock
    871,247       806,092       770,558       760,527       679,159                                
Forestry
    98,039       183,716       120,002       89,353       84,375                                
Fishing
    256,818       265,917       188,803       144,162       133,930                                
Transport
    758,339       721,931       511,407       473,414       449,508                                
Communications
    167,004       249,499       179,544       252,528       214,881                                
Construction
    1,365,841       1,337,791       1,130,194       980,797       839,316                                
Commerce
    2,773,410       2,578,979       2,396,428       1,916,400       1,732,800       11,899       125,383       90,546       87,041       69,709  
Services
    469,141       447,861       400,716       384,061       358,314                                
Other
    3,447,842       3,206,643       3,147,133       2,965,498       2,719,013                                
Subtotals
    12,330,344       11,702,318       10,489,048       9,288,232       8,305,646       11,899       125,383       90,546       87,041       69,709  
Mortgage loans
    6,632,031       5,625,812       5,271,581       5,115,663       4,651,137                                
Consumer loans
    3,918,375       3,607,248       3,115,477       2,943,846       2,700,790                                
Total
    22,880,750       20,935,378       18,876,106       17,347,741       15,657,573       11,899       125,383       90,546       87,041       69,709  
                                                                                 
                                                                                 
   
Total loans as of December 31,
   
% of total loans as of December 31,
 
      2014       2013       2012       2011       2010       2014       2013       2012       2011       2010  
   
(in millions of Ch$)
   
(in millions of Ch$)
 
Commercial loans
                                                                               
Manufacturing
    1,126,268       1,216,914       1,014,777       834,011       838,324       4.92 %     5.78 %     5.35 %     4.78 %     5.33 %
Mining
    428,847       464,865       292,217       266,442       106,119       1.87 %     2.21 %     1.54 %     1.53 %     0.67 %
Electricity, gas and water
    567,548       222,110       337,269       221,039       149,907       2.48 %     1.05 %     1.78 %     1.27 %     0.95 %
Agriculture and livestock
    871,247       806,092       770,558       760,527       679,159       3.81 %     3.83 %     4.06 %     4.36 %     4.32 %
Forestry
    98,039       183,716       120,002       89,353       84,375       0.43 %     0.87 %     0.63 %     0.51 %     0.54 %
Fishing
    256,818       265,917       188,803       144,162       133,930       1.12 %     1.26 %     1.00 %     0.83 %     0.85 %
Transport
    758,339       721,931       511,407       473,414       449,508       3.31 %     3.43 %     2.70 %     2.72 %     2.86 %
Communications
    167,004       249,499       179,544       252,528       214,881       0.73 %     1.18 %     0.95 %     1.45 %     1.37 %
Construction
    1,365,841       1,337,791       1,130,194       980,797       839,316       5.97 %     6.35 %     5.96 %     5.63 %     5.34 %
Commerce
    2,773,410       2,704,362       2,486,974       2,003,441       1,802,509       12.12 %     12.84 %     13.11 %     11.49 %     11.46 %
Services
    469,141       447,861       400,716       384,061       358,314       2.05 %     2.13 %     2.11 %     2.20 %     2.28 %
Other
    3,447,842       3,206,643       3,147,133       2,965,498       2,719,013       15.07 %     15.23 %     16.59 %     17.01 %     17.29 %
Subtotals
    12,330,344       11,827,701       10,579,594       9,375,273       8,375,355       53.89 %     56.16 %     55.78 %     53.78 %     53.26 %
Mortgage loans
    6,632,031       5,625,812       5,271,581       5,115,663       4,651,137       28.99 %     26.71 %     27.79 %     29.34 %     29.57 %
Consumer loans
    3,918,375       3,607,248       3,115,477       2,943,846       2,700,790       17.13 %     17.13 %     16.43 %     16.88 %     17.17 %
Total
    22,880,750       21,060,761       18,966,652       17,434,782       15,727,282       100.00 %     100.00 %     100.00 %     100.00 %     100.00 %

 
Foreign Assets and Loans
 
Santander-Chile’s Asset and Liability Committee, or ALCO, is responsible for determining the maximum foreign country exposure the Bank is permitted to have. The ALCO has determined that the total foreign country exposure cannot be greater than 1-time regulatory capital. To determine this, each country is classified using a ranking system from 1 to 6 based on the definition promulgated by the SBIF, in which the main consideration is the international rating of each country. The ALCO has also set a higher limit if the foreign exposure is to related parties. As of December 31, 2014, the Bank’s foreign exposure, including the estimate of counterparty risk in our derivatives portfolio, was U.S.$1,711 million, or 3.4% of our assets. For more information please see note 37 of our Consolidated Financial Statements.
 
Below, there are additional details regarding our exposure to countries in category 2 and 3, the riskiest categories we have exposure to as of December 31, 2014, considering fair value of derivative instruments. In this category Italy is the largest exposure and is also broke down below. We do not have sovereign exposure to Italy.
 
Country
 
Classification (1)
   
Derivative Instruments (adjusted to market)
   
Deposits
   
Loans
   
Financial Investments USD Mn
   
Total Exposure USD Mn
 
         
USD Mn
   
USD Mn
   
USD Mn
             
Italy
    2       49.65       3.28       0.18             53.11  
Colombia
    2       4.13             0.09             4.22  
Peru
    2       1.08             0.25             1.33  
Brazil
    2                   0.28             0.28  
Mexico
    2             0.21                   0.21  
Total Category 2
            54.86       3.49       0.8             59.15  
Panama
    3       0.29                         0.29  
Total Category 3
            0.29                         0.29  
Total
            55.15       3.49       0.80             59.44  

(1)
Corresponds to country’s classification established in Chapter B-6 of the Compendium of Accounting Standards issued by the SBIF.
 
Below, there are additional details regarding our exposure to Spain as of December 31, 2014, considering the fair value of derivative instruments. We do not have sovereign exposure to Spain.
 
 
Country
 
Classification (1)
   
Derivative Instruments (adjusted to market)
USD Mn
   
Deposits
USD Mn
   
Loans
USD Mn
   
Financial Investments USD Mn
   
Total Exposure USD Mn
 
Spain
    1       4.79       311.26       1.34             317.39  

(1)
Corresponds to country’s classification established in Chapter B-6 of the Compendium of Accounting Standards issued by the SBIF.
 
Our exposure to Spain within the group is as follows:
 
 
Counterpart
 
 
Country
 
Classification
   
Derivative instruments (market adjusted)* USD Mn
   
Deposits USD Mn
   
Loans
USD Mn
   
Financial Investments USD Mn
   
Total Exposure USD Mn
 
Banco Santander España**
 
Spain
    1       4.79       311.79                   316.05  

*
The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, the net credit exposure is US$ 4.79 million.
 
**
We have included our exposure to Santander branches in New York and Hong Kong as exposure to Spain.
 
 
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Furthermore, is additional detail regarding our exposure to the United State, which is the only country with more than 1% of exposure over total assets. Below we detail exposure to assets in the USA as of December 31, 2014, considering fair value of derivative instruments.
 
 
Country
 
Classification (1)
   
Derivative Instruments (adjusted to market)
USD Mn
   
Deposits
USD Mn
   
Loans
USD Mn
   
Financial Investments USD Mn
   
Total Exposure USD Mn
 
USA
    1       41.54       1,039.34       0.00       0.00       1,080.88  

As of December 31, 2014, we had no applicable sovereign exposure, no unfunded exposure, no credit default protection and no current developments.
 
Classification of Loan Portfolio
 
Credit Review Process
 
The Risk Division, our credit analysis and risk management group, is largely independent of our Commercial Division. Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.
 
Santander-Chile’s governance rules have established the existence of two high-level committees to monitor and control credit risks: the Executive Credit Committee and the Risk Committee.  See “Item 11.  Quantitative and Qualitative Disclosures About Market Risk—A. Credit Risk” for more information.
 
Credit Approval
 
The following table lists our committees from which credit approval is required depending on total risk exposure for loans evaluated on an individual basis:
 
 
Approved By
 
Maximum approval (thousands of U.S.$)
 
Executive Credit Committee
 
>60,000
 
Loan analyzed on an individual basis Committee
    20,000  
Business Segment Committee
    8,000-12,000  
Large companies
    12,000  
Real estate sector
    12,000  
Medium-sized companies
    8,000  
Zonal Committee
    5,000  
Territorial Committee
    2,000  
Branch Committee
    300  
SMEs
    140  
Commercial mortgage
    300  
Residential Mortgage
    240  
Persons
    120  
 
We also have a department designated to monitor the quality of the loan portfolio on a continuous basis. The purpose of this special supervision is to maintain constant scrutiny over the portions of the portfolio that represent the greatest risk and to anticipate any deterioration. Based on this ongoing review of the loan portfolio, we believe that we are able to detect potentially problematic loans and make a decision on a client’s status. This includes measures such as reducing or extinguishing a loan, or requiring better collateral from the client. The control systems require that these loans be reviewed at least three times per year for those clients in the lowest category of credit watch.
 
 
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Credit Approval: Loans approved on an individual basis
 
In preparing a credit proposal for a corporate client whose loans are approved on an individual basis, Santander-Chile’s personnel verifies such parameters as debt servicing capacity (typically including projected cash flows), the company’s financial history and projections for the economic sector in which it operates. The Risk Division is closely involved in this process, and prepares the credit application for the client. All proposals contain an analysis of the client’s strengths and weaknesses, a rating and a recommendation. Credit limits are determined not on the basis of outstanding balances of individual clients, but on the direct and indirect credit risk of entire financial groups. For example, a corporation will be evaluated together with its subsidiaries and affiliates.
 
Credit Approval: Loans approved on a group basis
 
The majority of loans to individuals and small and mid-sized companies are approved by the Standardized Risk Area through an automated credit scoring system. This system is decentralized, automated and based on multiple parameters, including demographic and information regarding credit behavior from external sources and the SBIF.
 
Classification of Loan Portfolio
 
Loans are divided into: (i) consumer loans (including loans granted to individuals for the purpose of financing the acquisition of consumer goods or payment of services); (ii) residential mortgage loans (including loans granted to individuals for the acquisition, construction or repair of residential real estate, in which the value of the property covers at least 100% of the amount of the loan); and (iii) commercial loans (including all loans other than consumer loans and residential mortgage loans). The models and methods used to classify our loan portfolio and establish credit loss allowances must follow the following guiding principles, which have been approved by our Board of Directors.
 
Loans analyzed on an individual basis
 
For loans that are greater than Ch$150 million (US$286,000), the Bank uses internal models to assign a risk category level to each borrower and its respective loans. We consider the following risk factors: industry or sector of the borrower, the borrower’s competitive position in its markets, owners or managers of the borrower, the borrower’s financial situation, the borrower’s payment capacity and the borrower’s payment behavior to calculate the estimated incurred loan loss. Through these categories, we differentiate the normal loan portfolio from the impaired one.
 
These are our categories:
 
1.      Debtors may be classified in risk categories A1, A2, A3 or B (if they are current on their payment obligations and show no sign of deterioration in their credit quality). B is different from the A categories by a certain history of late payments. The A categories are distinguished by different PNPs (as defined below).

2.      Debtors classified as C1, C2, C3, C4, D1 or D2 include debtors whose loans with us have been charged off or administered by our Recovery Unit, or classified as Precontenciosos (PRECO or deteriorated).

For loans classified as A1, A2, A3 and B, we assign a specific provision level on an individual basis to each borrower and, therefore, the amount of loan loss allowance is determined on a case by case basis.
 
Estimated Incurred Loan Loss = Loan Loss Allowance
 
The estimated incurred loss is obtained by multiplying all risk factors defined in the following equation:
 
EIL= EXP x PNP x SEV
 
 
·
EIL = Estimated Incurred Loan Loss. The estimated incurred loan loss is how much could be lost in the event a debtor does not perform the obligations under the loan.
 
·
EXP = Exposure. This corresponds to the value of commercial loans.
 
·
PNP = Probability of Non-Performance. This variable, expressed as a percentage, indicates the probability that a debtor will default. This percentage is associated with the internal rating that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity.
 
·
SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for us for each segment.

 
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Every year, models together with PNP and SEV assumptions, are tested by the Bank’s Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and real losses is reduced.

These tests focus on the validation of the sufficiency of the Bank’s allowances, and consist of comparisons between actual write-offs to allowances established by the model, and the coverage of the total allowance to actual write-offs in the most current periods. Individual loan classification and improvements to any customer classification are also presented for approval to our Risk Committee.
 
Our internal policy requires us to update appraisals of the fair value of collateral every 24 months, which policy does not vary by loan product. The appraisal is required to be performed within a shorter period if market conditions in general or conditions in a specific sector or with respect to certain customers indicate that the fair value of the collateral may have changed and any updated fair value of the collateral is factored into our allowance for loan loss calculations. A change in fair value of the collateral may change the risk category or profile of a customer which could result in lower or higher allowance for loan losses.
 
In accordance with such policy, every year we update appraisals of fair value of collateral before the end of the 24 month period for certain customers and such updated appraisals are considered in the calculation of the allowance for loan losses. The number of updated appraisals performed in 2011 was 59, in 2012 was 72, in 2013 was 113 and in 2014 was 98, and such updated appraisals were performed mainly because of changes in customer conditions (renegotiation deterioration of financial situation increase in credit line).
 
For loans classified in the C and D categories, loan loss allowances are based mainly on the fair value of the collateral, adjusted for an estimate cost to sell, that each of these loans have. Allowance percentage for each category is then based on the fair value of the collateral, or the expected future cash flow from the loan for each individually evaluated non-performing loans.  As of December 31, 2014, loans classified in the C and D risk categories had the following associated loan loss allowance levels:
 
Classification
 
Allowance
C1
 
2%
C2
 
10%
C3
 
25%
C4
 
40%
D1
 
65%
D2
 
90%

Loans analyzed on a group basis
 
The Bank uses the concept of estimated incurred loss to quantify the allowances levels over loan analyzed on a group basis. Incurred loss is the expected provision expense that will appear one year away from the balance date of the transaction’s credit risk, considering the counterpart risk and the collateral associated to each transaction.
 
Following the Bank’s definition, the Bank uses group evaluation to approach transactions that have similar credit risk features, which indicate the debtor’s payment capacity of the entire debt, capital and interests, pursuant to the contract’s terms. In addition, this allows us to assess a high number of transactions with low individual amounts, whether they belong to individuals or small sized companies. Therefore, debtors and loans with similar features are grouped together and each group has a risk level assigned to it. These models are meant to be used mainly to analyze loans granted to individuals (including consumer loans, credit lines, mortgage loans and commercial loans) and commercial loans to SMEs.
 
Allowances are established using these models, taking into account the historical impairment and other known circumstances at the time of evaluation. After this, a historical loss rate is assigned to each portfolio profile
 
 
constituting each segment. The method for assigning a profile is established based on a statistical building method, establishing a relation through a logistic regression various variables, such as payment behavior in the Bank, payment behavior outside the Bank, various socio-demographic data, among others, and a response variable that determines a client’s risk level, which in this case is 90 days of non-performance. Afterwards, common profiles are established related to a logical order and with differentiate default rates, applying the real historical loss the Bank has had with that portfolio.
 
Our models for loans analyzed on a group basis (consumer loans, residential mortgage loans and small-and-mid-sized commercial loans) are monitored on a monthly basis with respect to predictability and stability, using indices that seek to capture the underlying need to update the models for current loss trends. Therefore, the periods of historical net charge-offs used in the allowance model may be more than a year old as we only update the historical net charge-offs only when our assessment of predictability and stability indicators determine it is necessary.
 
The different risk categories are constructed and updated periodically based on the payment behavior of the client’s profile to which they belong, as well as his or her socio-demographic characteristics. Therefore, when a customer has past due balance or has missed some payments, the outcome is that the customer will move to a different segment with a higher loss rate, therefore capturing current trends for each risk profile.
 
Once the customers have been classified, the loan loss allowance is the product of three factors: Exposure (EXP), Probability of Non-Performance (PNP) and Severity (SEV).
 
EXP = Exposure. This corresponds to the value of commercial loans.
 
PNP = Probability of Non-Performing. This variable, expressed as a percentage, indicates the probability that a debtor will default. This percentage is associated with the internal score that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity (including, usually, projected cash flows), the company’s financial history, the solvency and capacity of shareholders and management, and projections for the economic sector in which it operates. The internal rating can be different from ratings obtained from external third parties.
 
SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for us for each segment.
 
PNP and SEV are reviewed and updated every three years. Every year, models together with PNP and SEV assumptions, are tested by the Bank’s Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and real losses is reduced.
 
Allowances for consumer loans
 
The estimated incurred loss rates for consumer loans correspond to charge-offs net of recoveries. The methodology establishes the period in which the estimated incurred loss for each risk profile emerges. Once the loss has been considered to have been incurred, the estimated incurred loss rates are applied to the corresponding risk profile to obtain the net charge-off level associated with this period. The loss rates applied to each risk profile are based only on the historical net charge-off data for that specific profile within one of the four groups of consumer loans. No other statistical or other information other than net charge-offs is used to determine the loss rates.
 
The following table sets forth the allowances required by our models for consumer loans from September 30, 2010 until June 2012:
 
Bank:
 
       
Allowance Level(1)
 
       
Not renegotiated
       
 
Loan type
 
 
Risk Profile
 
New Clients*
   
Existing Clients
   
Renegotiated
 
Consumer
 
Profile 1
    33.78 %     10.39 %     41.95 %
   
Profile 2
    10.82 %     2.01 %     26.29 %
   
Profile 3
    6.05 %     0.82 %     15.63 %
   
Profile 4
    5.70 %     0.38 %     7.01 %
   
Profile 5
    4.12 %     0.22 %     3.00 %
   
Profile 6
    2.51 %           1.25 %
   
Profile 7
    1.40 %           0.50 %

 
         
Allowance Level
 
         
Not renegotiated
       
 
Loan type
 
Days Past Due
   
New Clients*
   
Existing Clients
   
Renegotiated
 
Consumer
    90-120       44.58 %     56.39 %     52.82 %
      120-150       44.58 %     67.33 %     62.96 %
      150-180       44.58 %     75.49 %     70.08 %
 
Santander Banefe:
 
       
Allowance Level(1)
 
       
Not renegotiated
       
 
Loan type
 
 
Risk Profile
 
New Clients*
   
Existing Clients
   
Renegotiated
 
Consumer
 
Profile 1
    57.60 %     33.24 %     51.13 %
   
Profile 2
    22.97 %     14.23 %     32.79 %
   
Profile 3
    19.40 %     7.16 %     28.85 %
   
Profile 4
    14.62 %     4.10 %     19.23 %
   
Profile 5
    10.77 %     2.52 %     13.31 %
   
Profile 6
    5.88 %     1.34 %     8.57 %
   
Profile 7
    3.09 %     0.94 %     4.37 %
   
Profile 8
                2.69 %
 
         
Allowance Level
 
         
Not renegotiated
       
 
Loan type
 
Days Past Due
   
New Clients*
   
Existing Clients
   
Renegotiated
 
Consumer
    90-120       82.95 %     56.36 %     53.55 %
      120-150       82.95 %     68.00 %     64.05 %
      150-180       82.95 %     78.54 %     74.72 %

(1)
Percentage of total outstanding.
 
*
A client is considered to be “new” if it has less than 6 months of payment history with the Bank. Therefore, its behavior is very similar and it is rare for a client to receive a loan and not pay from the onset of the relationship; usually, the client starts to default when he or she is already classified as an “existing client.”
 
There are three renegotiated categories in our consumer loan portfolio:
 
 
1.
Renegotiated Consumer:  This category relates to loans which were less than 90 days past due at the time of renegotiation.  The allowance for loan loss percentages (or loss rates) are assigned based on six different risk profiles which are determined based on demographic and payment behavior variables.
 
 
2.
Renegotiated Consumer with three months of non-payment:  This category relates to loans which were more than 90 days past due at the time of renegotiation.  The loss rates are assigned based on four different risk profiles which are determined based on the number of days overdue at the time of renegotiation:
 
Profile 1:  180 or more days past due
Profile 2:  between 150 and 180 days past due
Profile 3:  between 120 and 150 days past due
Profile 4:  between 90 and 120 days past due

 
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After the customer has made three consecutive monthly payments, he/she will be reassigned to one of the seven risk profiles for “Renegotiated Consumer” (number 1 above).  If the customer is not able to make the required monthly payment under the renegotiated terms and days past due increase, the customer will move to a more risky profile within the same group “Renegotiated Consumer with three months of non-payment”.   For example, a customer in Profile 1 (180 or more days past due) that increases days past due will remain in the same category and profile and, therefore, will continue to have a 100% loss rate.  A customer in Profile 4 (between 90 and  120 days past due) who  reaches more than 120 days past due will move to Profile 3, increasing their loss rate from 38.5% to 47.0%.
 
 
3.
Non-performing consumer – renegotiated: This category relates only to loans which were in category 1, renegotiated with less than 90 days past due at the time of renegotiation, and have reached  90 days past due subsequent to renegotiation.  For example, a customer initially categorized as “Renegotiated Consumer” (less than 90 days past due at the time of renegotiation), under risk profile 1 (29.7% loss rate) who reaches  more than 90 days past due since renegotiation will migrate to the  “Non-performing Consumer – Renegotiated” category  90 -120 days past due with a 41.6% loss rate.   The customer will move to higher risk profiles as number of days past due increases until the loan reaches 180 days past due, when it is charged-off. On the other hand, after the customer has made three consecutive monthly payments,  he/she will be reassigned to one of the six risk profiles for “Renegotiated Consumer” (number 1 above).
 
The following table sets forth the allowances required by our models for consumer loans since June 2012:
 
Bank:
 
       
Allowance Level(1) (Loss rate)
 
       
Not renegotiated
 
 
Loan type
 
 
Risk Profile
 
New Clients
   
Existing Clients
 
Performing Consumer
 
Profile 1
    24.5 %     20.9 %
   
Profile 2
    14.0 %     10.1 %
   
Profile 3
    7.3 %     5.0 %
   
Profile 4
    3.4 %     2.1 %
   
Profile 5
    2.1 %     1.4 %
   
Profile 6
    1.3 %     0.9 %
   
Profile 7
    0.8 %     0.5 %
   
Profile 8
    0.4 %     0.3 %

       
Allowance Level(1) (Loss rate)
 
Loan type
 
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were less than 90 days past due at the time of renegotiation
 
Profile 1
    29.7 %
   
Profile 2
    21.5 %
   
Profile 3
    10.7 %
   
Profile 4
    6.5 %
   
Profile 5
    4.2 %
   
Profile 6
    3.2 %
 
       
Allowance Level(1) (Loss rate)
 
Loan type
 
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were more than 90 days past due at the time of renegotiation (2)
 
Profile 1
    100.0 %
   
Profile 2
    56.0 %
   
Profile 3
    47.0 %
   
Profile 4
    38.5 %

 
116

 
         
Allowance Level(1) (Loss rate)
 
         
Not renegotiated
       
 
Loan type
 
Days Past Due
   
New Clients
   
Existing Clients
   
Renegotiated
 
Non-performing Consumer
    90-120       38.5 %     38.5 %     41.6 %
      120-150       47.0 %     47.0 %     48.8 %
      150-180       55.0 %     55.0 %     55.9 %
   
>180
           
Charged-off
         

Santander Banefe:
 
       
Allowance Level(1) (Loss rate)
 
       
Not renegotiated
 
Loan type
 
Risk Profile
 
New Clients
   
Existing Clients
 
Performing Consumer
 
Profile 1
    26.7 %     22.3 %
   
Profile 2
    14.2 %     12.3 %
   
Profile 3
    9.0 %     4.4 %
   
Profile 4
    5.8 %     2.2 %
   
Profile 5
    3.1 %     0.7 %
   
Profile 6
    1.3 %     0.2 %
   
Profile 7
          0.1 %
 
       
Allowance Level(1) (Loss rate)
 
Loan type
 
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were less than 90 days past due at the time of renegotiation
 
Profile 1
    36.6 %
   
Profile 2
    29.6 %
   
Profile 3
    21.0 %
   
Profile 4
    12.2 %
   
Profile 5
    7.1 %
   
Profile 6
    5.2 %

     
Allowance Level(1) (Loss rate)
 
Loan type
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were more than 90 days past due at the time of renegotiation(2)
Profile 1
    100.0 %
 
Profile 2
    64.7 %
 
Profile 3
    48.9 %
 
Profile 4
    32.1 %

         
Allowance Level(1)
 
         
Not renegotiated
       
Loan type
 
Past-due Days
   
New Clients
   
Existing Clients
   
Renegotiated (2)
 
Non-performing Consumer
    90-120       32.1 %     32.1 %     48.9 %
      120-150       37.4 %     37.4 %     55.8 %
      150-180       42.7 %     42.7 %     64.7 %
   
>180
           
Charged-off
         

 
1.
Percentage of loans outstanding
 
2.
This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.


During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for consumer loans. The model was calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these
 
 
improvements consisted of implementing more robust techniques of statistical processes and more historical information, resulting in stronger parameters for the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in the release of consumer provisions of Ch$26,563 million in 2014. As this is a change in estimation, the impact of this improvement was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8. The most important improvement was the development of a separate model for our Santander Select customers, which are higher income clients. This is in line with the Bank’s strategy of reducing exposure to the low-end of the consumer market and growing in less risky segments. The following table sets forth the allowances required by our models for consumer loans since December 2014:
 
Bank:
 
       
Allowance Level(1) (Loss rate)
       
       
Not renegotiated
       
 
Loan type
 
 
Risk Profile
 
New Clients
   
Existing Clients
   
Santander Select*
 
Performing Consumer
 
Profile 1
    19.03 %     20.81 %     10.70 %
   
Profile 2
    7.53 %     6.53 %     2.35 %
   
Profile 3
    4.52 %     3.06 %     1.02 %
   
Profile 4
    2.99 %     1.67 %     0.47 %
   
Profile 5
    1.91 %     0.93 %     0.23 %
   
Profile 6
    1.38 %     0.43 %     0.14 %
   
Profile 7
    0.77 %     0.20 %     0.08 %
   
Profile 8
    0.30 %     0.08 %     0.04 %

 
*
Santander Select includes those clients attended to within the Santander Select distribution network, which is part of the Individuals in Commercial Banking segment.
 
       
Allowance Level(1) (Loss rate)
 
 
Loan type
 
 
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were less than 90 days past due at the time of renegotiation (2)
 
Profile 1
    29.14 %
   
Profile 2
    25.78 %
   
Profile 3
    21.57 %
   
Profile 4
    17.58 %
   
Profile 5
    13.47 %
   
Profile 6
    10.84 %
   
Profile 7
    8.12 %
   
Profile 8
    5.37 %

       
Allowance Level(1) (Loss rate)
 
Loan type
 
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were more than 90 days past due at the time of renegotiation (2)
 
Profile 1
    100.0 %
   
Profile 2
    52.92 %
   
Profile 3
    44.99 %
   
Profile 4
    37.17 %

               
Allowance Level(1) (Loss rate)
 
               
Not renegotiated
       
 
Loan type
 
Days Past Due
   
New Clients
   
Existing Clients
   
Select
   
Renegotiated
 
Non-performing Consumer
    90-120       37.17 %     37.17 %     37.17 %     41.72 %
      120-150       44.99 %     44.99 %     44.99 %     47.68 %
      150-180       52.92 %     52.92 %     52.92 %     54.14 %
   
>180
                   
Charged-off
         

 
118

 
Santander Banefe:
 
       
Allowance Level(1) (Loss rate)
 
       
Not renegotiated
 
 
Loan type
 
 
Risk Profile
 
New Clients
   
Existing Clients
 
Performing Consumer
 
Profile 1
    24.45 %     18.95 %
   
Profile 2
    13.53 %     7.14 %
   
Profile 3
    9.12 %     3.27 %
   
Profile 4
    7.39 %     1.90 %
   
Profile 5
    6.47 %     0.94 %
   
Profile 6
    4.74 %     0.60 %
   
Profile 7
    3.68 %     0.28 %
   
Profile 8
    1.35 %     0.17 %
                     

       
Allowance Level(1) (Loss rate)
 
 
Loan type
 
 
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were less than 90 days past due at the time of renegotiation
 
Profile 1
    32.09 %
   
Profile 2
    29.67 %
   
Profile 3
    27.96 %
   
Profile 4
    24.17 %
   
Profile 5
    18.67 %
   
Profile 6
    14.79 %
   
Profile 7
    11.22 %
   
Profile 8
    8.78 %
             
 
       
Allowance Level(1) (Loss rate)
 
Loan type
 
Risk Profile
 
Renegotiated
 
Renegotiated Consumer which were more than 90 days past due at the time of renegotiation(2)
 
Profile 1
    100.0 %
   
Profile 2
    42.04 %
   
Profile 3
    35.97 %
   
Profile 4
    31.48 %

         
Allowance Level(1)
 
         
Not renegotiated
       
 
Loan type
 
Past-due Days
   
New Clients
   
Existing Clients
   
Renegotiated (2)
 
Non-performing Consumer
    90-120       31.48 %     31.48 %     44.50 %
      120-150       35.97 %     35.97 %     50.06 %
      150-180       42.04 %     42.04 %     58.56 %
   
>180
           
Charged-off
         

 
1.
Percentage of loans outstanding
 
2.
This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.

Allowances for residential mortgage loans
 
As of June 2011, our provision methodology for residential mortgage loans takes into consideration different factors in order to group customers with less the 90 days past due into seven different risk profiles.  Factors considered, in the first place, are whether the customer is a new customer or with prior history with the Bank or if it is a Banefe customer. For each of these three main categories additional factors are considered in order to develop risk profiles within each risk category, including payment behavior, non-performance less than 90 days, collateral
 
 
levels, renegotiation history with the Bank, and historical amounts of net charge-offs, among others.  The explanation for the initial segregation into three categories, existing, new or Banefe customer, is as follows: Banefe customers have a different risk profile as they relate to low income individuals; an existing customer (Banefe or Bank) is a customer for which there is a broader level of information and history of payment behavior with the Bank, while for a new customer the Bank has no history of payment behavior and only information from the banking system and credit bureaus is available. The risk categories are such that when a customer’s payment behavior deteriorates, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing the current status of the customer.

Mortgage loans with more than 90 days past due balances are assigned a loss rate of 11.01%.  When the customer becomes current in its payments, such customer will migrate to one of the profiles in the table above. We determined that 90 days is the appropriate loss emergence period for these loans based on historical analysis of customer’s behavior, which has shown that after a customer has reached the 90-day threshold he/she will likely default on his/her obligation, and that, over succeeding periods, the loss incurred does not increase given the high fair value of collateral percentage to loan amount required under our credit policies for this type of loan. Also, we note that the Chilean economy´s stability over the last few years has not resulted in other than insignificant fluctuations in collateral fair values on residential mortgage loan properties.

 
The following table sets forth the required loan loss allowance for residential mortgage loans since June 2011 and in 2012.
 
       
Allowance Level(1) (Loss rate)
 
 
Loan type
 
 
Risk Profile
 
New client*
   
Old
   
Banefe
 
Residential mortgage
 
Profile 1
    5.47 %     4.72 %     5.68 %
   
Profile 2
    1.66 %     1.41 %     2.51 %
   
Profile 3
    0.45 %     0.59 %     0.71 %
   
Profile 4
    0.15 %     0.26 %     0.24 %
   
Profile 5
    0.10 %     0.12 %     0.08 %
   
Profile 6
    0.03 %     0.03 %     0.06 %
   
Profile 7
            0.02 %        

*
A client is considered to be “new” if it has less than 6 months of payment history with the Bank. Therefore, its behavior is very similar and it is rare for a client to receive a loan and not pay from the onset of the relationship; usually, the client starts to default when he or she is already classified as an “existing client.”
 

In 2013, the model for the renegotiated mortgage loan portfolio was updated. This was driven by the fact that after the 2010 earthquake the Bank offered temporary relief to some mortgage clients. A portion of this portfolio continued to perform out of range with our model. For this reason, the Risk Committee decided that the model needed to be updated in order to capture this event.  The following table sets forth the required loan loss allowance for residential mortgage loans in 2013.

       
Allowance Level(1) (Loss rate)
 
Loan type
 
Risk Profile
 
New client*
   
Old
   
Banefe
 
Residential mortgage
 
Profile 1
    5.96 %     5.14 %     6.19 %
   
Profile 2
    1.81 %     1.54 %     2.74 %
   
Profile 3
    0.49 %     0.64 %     0.77 %
   
Profile 4
    0.17 %     0.28 %     0.26 %
   
Profile 5
    0.11 %     0.13 %     0.08 %
   
Profile 6
    0.03 %     0.03 %     0.07 %
   
Profile 7
            0.02 %        

Small- and mid-sized commercial loans
 
To determine the estimated incurred loss for individuals (natural persons), small- and mid-sized commercial loans collectively evaluated for impairment, we mainly analyze the payment behavior of clients, particularly the payment behavior of clients with payments that are 90 days or more past-due, clients with other weaknesses, such as early non-performance (i.e., payments that are past-due, though by less than 90 days), clients with modified loans and clients with renegotiated loans, as well as success in recovery against these clients.  We also consider whether the loan has underlying mortage collateral.

The risk categories are such that when a customer has a past-due balance or has missed some payments, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing current trends of the customer and, in the aggregate, current trends in the market.  In order to calculate the estimated incurred loan loss for all commercial loans collectively evaluated for impairment, the Bank sub-divided the portfolio in the following way:
 
Allowance Level
Small- and mid-sized commercial loans collectively evaluated for impairment
Loan type
 
Non-renegotiated, w/o mortgage
collateral, new client, %
 
 
Non-renegotiated, w/o mortgage
collateral, existing client, %
 
 
Non-renegotiated, with mortgage
 collateral, %
Profile 1
37.20%
 
Profile 1
37.20%
 
Profile 1
10.60%
Profile 2
31.93%
 
Profile 2
18.11%
 
Profile 2
  4.42%
Profile 3
13.25%
 
Profile 3
  4.45%
 
Profile 3
  0.68%
 
 
Allowance Level
Small- and mid-sized commercial loans collectively evaluated for impairment
Loan type
Non-renegotiated, w/o mortgage
collateral, new client, %
 
Non-renegotiated, w/o mortgage
collateral, existing client, %
 
Non-renegotiated, with mortgage
collateral, %
Profile 4
5.09%
 
Profile 4
2.06%
 
Profile 4
0.17%
Profile 5
1.50%
 
Profile 5
0.52%
 
Profile 5
0.11%
Profile 6
0.55%
       
Profile 6
0.02%
Profile 7
0.05%
           
 
             
Renegotiated, %
           
Profile 1
29.20%
           
Profile 2
19.42%
           
Profile 3
10.28%
           
Profile 4
3.75%
           
Profile 5
1.13%
           
Profile 6
0.13%
           
 
During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for commercial loans. The model was calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of implementing more robust statistical processes and more historical information, resulting in stronger parameters for the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in an increase in commercial provisions of Ch$45,141 million in 2014. Considering this impact and the reversal of Ch$26,563 million in the consumer loan provisioning model, the net increase of these improvements (Ch$18,578 million) was recognized under the “Provisions for loan losses” in the Consolidated Statement of Income for the year in accordance with IAS 8. The following table sets forth the allowances required by our models for commercial loans assessed on a group basis since December 2014:
 
       
Allowance Level(1) (Loss rate)
 
       
Non-renegotiated client
 
Loan type
 
Risk Profile
 
Commercial loan to individuals w/o mortgage collateral
   
Commercial loan to individuals with mortgage collateral
   
Small Enterprise
   
Mid-sized Enterprise
 
Performing commercial loan
 
Profile 1
    30.60 %     6.66 %     13.24 %     11.31 %
   
Profile 2
    26.81 %     2.73 %     5.34 %     6.24 %
   
Profile 3
    20.37 %     0.95 %     2.87 %     3.23 %
   
Profile 4
    10.80 %     0.45 %     1.67 %     2.43 %
   
Profile 5
    5.69 %     0.23 %     0.90 %     1.28 %
   
Profile 6
    4.48 %     0.11 %     0.44 %     0.66 %
   
Profile 7
    1.96 %     0.03 %     0.19 %     0.32 %
   
Profile 8
    1.15 %     6.66 %             0.11 %
 
 
       
Allowance Level(1) (Loss rate)
 
Loan type
 
Risk Profile
 
Renegotiated client
 
Renegotiated client that was less than 90 days past due at the time of renegotiation
 
Profile 1
    20.77 %
   
Profile 2
    17.99 %
   
Profile 3
    14.51 %
   
Profile 4
    11.30 %
   
Profile 5
    7.95 %
   
Profile 6
    6.40 %
   
Profile 7
    4.66 %
 
     
Allowance level (loss rate) (1)
 
Loan type
Risk Profile
(Days past due)
 
Commercial loan to individuals w/o mortgage collateral
   
Commercial loan to individuals with mortgage collateral
   
Small Enterprise
   
Mid-sized 
Enterprise
 
Renegotiated commercial
Profile 1 (90-179 days)
    52.61 %     15.58 %     27.89 %     21.90 %
loans which were more than
Profile 2 (180-359 days)
    52.61 %     23.46 %     42.33 %     37.15 %
90 days past due at the
Profile 3 (360-719 days)
    58.85 %     33.13 %     51.59 %     48.68 %
time of renegotiation (2)
Profile 4 (>720 days)
    60.92 %     41.30 %     54.77 %     49.20 %
 
     
Allowance level (loss rate) (1)
 
Loan type
   
Days past-due
   
Commercial loan to individuals w/o mortgage collateral
   
Commercial loan to individuals with mortgage collateral
   
Small Enterprise
   
Mid-sized Enterprise
   
Renegotiated
 
Non-
    90-179       52.61 %     15.58 %     27.89 %     21.90 %     24.92 %
performing
    180-359       52.61 %     23.46 %     42.33 %     37.15 %     40.47 %
commercial
    360-719       58.85 %     33.13 %     51.59 %     48.68 %     51.52 %
loan
   
>720
      60.92 %     41.30 %     54.77 %     49.20 %     57.18 %
 

(1)
Percentage of loans outstanding
 
(2)
This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.
 
 
123

 
Analysis of Santander-Chile’s Loan Classification
 
The following tables provide statistical data regarding the classification of our loans analyzed on an individual basis as of December 31, 2014, 2013 and 2012.
 
      As of December 31,
      2014    2-13   2-12
Category
   
Individual
   
Percentage
   
Allowance
   
Percentage
   
Individual
   
Percentage
   
Allowance
   
Percentage
   
Individual
   
Percentage
   
Allowance
   
Percentage
 
     
Ch$mn
   
%
   
Ch$mn
   
%
   
Ch$mn
   
%
   
Ch$mn
   
%
   
Ch$mn
   
%
   
Ch$mn
   
%
 
Individu-alized business
                                                                             
  A1       1,911,035       8.35       998       0.15       2,395,371       11.4       1,589       0.3       2,114,853       11.2       1,306       0.2  
  A2       5,564,372       24.30       16,334       2.39       4,846,240       23.0       20,416       3.3       4,119,414       21.7       14,853       2.7  
  A3       1,334,042       5.83       19,630       2.87       1,281,756       6.1       27,982       4.6       1,037,593       5.5       26,279       4.8  
  B       398,611       1.74       29,189       4.27       374,051       1.8       30,536       5.0       287,897       1.5       23,095       4.2  
  C1       79,148       0.35       1,583       0.23       56,040       0.3       1,121       0.2       45,104       0.2       902       0.2  
  C2       66,267       0.29       6,627       0.97       46,996       0.2       4,700       0.8       30,796       0.2       3,080       0.6  
  C3       16,742       0.07       4,185       0.61       20,780       0.1       5,195       0.8       34,685       0.2       8,672       1.6  
  C4       33,074       0.14       13,229       1.93       43,109       0.2       17,243       2.8       28,246       0.1       11,298       2.1  
  D1       59,585       0.26       38,730       5.66       61,246       0.3       39,811       6.5       36,545       0.2       23,754       4.3  
  D2       94,832       0.41       85,348       12.47       64,755       0.3       58,279       9.5       46,246       0.2       41,622       7.6  
Total
      9,557,708       41.74       215,853       31.55       9,190,344       43.7       206,872       33.8       7,781,379       41.0       154,861       28.3  
 
Classification of Loan Portfolio Based on the Borrower’s Payment Performance
 
Non-performing loans include the aggregate principal and accrued but unpaid interest of any loan with one installment that is at least 90 days past-due, and do not accrue interest.
 
Impaired loans include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan  to that client is not performing or has been renegotiated. See “Note 9—Loans and Accounts Receivables from Customers” of the Audited Consolidated Financial Statements. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing loans, but do not accrue interest.
 
Charge-offs
 
As a general rule, charge-offs should be done when all collection efforts have been exhausted. These charge-offs consist of derecognition from the Consolidated Statements of Financial Position of the corresponding loans operations in its entirety, and, therefore, include portions not past-due of a loan in the case of installments loans or leasing operations (no partial charge-offs exists). Subsequent payments obtained from charged-off loans will be recognized in the Consolidated Statement of Income as a recovery of loans previously charged-off. Loan and accounts receivable charge-offs are recorded for overdue, past due, and current installments based on the time periods expired since reaching overdue status, as described below:
 
Type of loan
 
Term
     
Consumer loans with or without collateral
 
6 months
Other transactions without collateral
 
24 months
Commercial loans 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 payment agreement 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 are accounted for as a recovery from loans previously charged-off.  In general, legal collection proceedings are commenced with respect to consumer loans once they are past-due for at least 90 days and, with respect to mortgage loans, once they are past-due for at least 120 days. Legal collection proceedings are always commenced within one year of such loans becoming past-due, unless we determine that the size of the past-due amount does not warrant such proceedings. In addition, the majority of our commercial loans are short-term, with single payments at maturity. Past-due loans are required to be covered by individual loan loss reserves equivalent to 100.0% of any unsecured portion thereof.
 
 
124

 
The following table sets forth all of our non-performing loans and impaired loans as of December 31, 2014, 2013, 2012, 2011 and 2010.
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(in millions of Ch$, except percentages)
 
Non-performing loans (1)
    644,327       613,301       597,767       511,357       416,739  
Impaired loans (2)
    1,617,251       1,477,701       1,338,137       1,323,355       1,480,476  
Allowance for loan losses (3)
    684,317       614,933       550,048       488,468       425,447  
Total loans (4)
    22,892,649       21,060,761       18,966,652       17,434,782       15,727,282  
Allowance for loan losses / loans
    2.99 %     2.92 %     2.90 %     2.80 %     2.71 %
Non-performing loans as a percentage of total loans
    2.81 %     2.91 %     3.15 %     2.93 %     2.65 %
Loan loss allowance as a percentage of non-performing loans
    106.21 %     100.27 %     92.02 %     95.52 %     102.09 %

(1)
Non-performing loans include the aggregate principal and accrued but unpaid interest of any loan with one installment that is at least 90 days past-due, and do not accrue interest.
 
(2)
Impaired loans include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan  to that client is not performing or has been renegotiated. See “Note 9—Loans and Accounts Receivables from Customers” of the Audited Consolidated Financial Statements. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing loans, but do not accrue interest.
 
(3)
Includes allowance for interbank loans.
 
(4)
Includes interbank loans.
 
We suspend the accrual of interest and readjustments on all past-due loans. Interest revenue and expense are recorded on an accrual basis using the effective interest method.  However, when a loan is past-due by 90 days or more, when an obligation originated from a refinancing or renegotiation or when the Bank believes that the debtor poses a high risk of default, the interest pertaining to these is not recorded directly in the Consolidated Statement of Income unless it has been actually received. See “Note 1—Summary of Significant Accounting Principles—(h) Valuation of financial assets and liabilities and recognition of fair value changes” and “Note 25—Interest and Adjustments” of the Audited Consolidated Financial Statements.  These interest and adjustments balances are generally referred to as “suspended” and are recorded in suspense accounts which are not part of the Consolidated Statements of Financial Position. Instead, they are reported as part of the complementary information thereto. See “Note 25—Interest and Adjustments” of the Audited Consolidated Financial Statements. This interest is recognized as income, when collected, and as a reversal of the related impairment losses.
 
The Bank ceases accruing interest on the basis of contractual terms on the principal amount of any asset that is classified as an impaired asset. Thereafter, the Bank recognizes as interest income the accretion of the net present value of the written down amount of the loan due to the passage of time based on the original effective interest rate of the loan. On the other hand, any collected interest for any assets classified as impaired are accounted for on a cash basis.
 
At the period end, the detail of income from suspended interest is as follows:
 
   
Year ended December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
Suspended interest
 
Ch$ million
 
Commercial loans
    24,753       21,645       20,595       17,554       26,020  
Mortgage loans
    12,454       8,484       8,844       9,343       7,457  
Consumer loans
    6,336       6,753       8,742       9,246       16,780  
Totals
    43,543       36,882       38,181       36,143       50,257  

 
125

 
Analysis of Impaired and Non-Performing Loans
 
The following table analyzes our impaired loans. Impaired loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing, (ii) all renegotiated consumer loans and (iii) all commercial loans at risk of default. See “Note 9—Loans and Accounts Receivables from Customers—(a) Loans and accounts receivable from customers” in the Audited Consolidated Financial Statements.
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(Ch$ million)
 
Total loans
    22,892,649       21,060,761       18,966,652       17,434,782       15,727,282  
Allowance for loan losses
    684,317       614,933       550,048       488,468       425,447  
Impaired loans(1)
    1,617,251       1,477,701       1,338,137       1,323,355       1,480,476  
Impaired loans as a percentage of total loans
    7.06 %     7.02 %     7.06 %     7.59 %     9.41 %
Amounts non-performing
    644,327       613,301       597,767       511,357       416,739  
To the extent secured(2)
    296,899       295,503       306,782       264,355       214,786  
To the extent unsecured
    347,428       317,798       290,985       247,002       201,953  
Amounts non-performing as a percentage of total loans
    2.81 %     2.91 %     3.15 %     2.93 %     2.65 %
To the extent secured(2)
    1.30 %     1.40 %     1.62 %     1.52 %     1.37 %
To the extent unsecured
    1.52 %     1.51 %     1.53 %     1.42 %     1.28 %
Loans loss allowances as a percentage of:
                                       
Total loans
    2.99 %     2.92 %     2.90 %     2.80 %     2.71 %
Total amounts non-performing
    106.21 %     100.27 %     92.02 %     95.52 %     102.09 %
Total amounts non-performing-unsecured
    196.97 %     193.50 %     189.03 %     197.76 %     210.67 %

(1)
Impaired loans include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan  to that client is not performing or has been renegotiated. See “Note 9—Loans and Accounts Receivables from Customers” in the Audited Consolidated Financial Statements. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing loans, but do not accrue interest.
 
(2)
Security generally consists of mortgages on real estate, pledges of marketable securities, letters of credit or cash.
 
A break-down of the loans included in the previous table which have been classified as impaired, including renegotiated loans, is as follows:
 
As of December 31, 2014
 
 
Impaired loans
 
Commercial
   
Residential mortgage
   
Consumer
   
Total
 
   
(in millions of Ch$)
 
Non-performing loans
    367,791       179,417       97,119       644,327  
Commercial loans at risk of default (1)
    420,038                   420,038  
Other impaired loans consisting mainly of renegotiated loans (2)
    95,335       191,186       266,365       552,886  
Total
    883,164       370,603       363,484       1,617,251  
 
As of December 31, 2013
 
 
Impaired loans
 
Commercial
   
Residential mortgage
   
Consumer
   
Total
 
   
(in millions of Ch$)
 
Non-performing loans
    364,890       155,688       92,723       613,301  
Commercial loans at risk of default (1)
    317,534                   317,534  
Other impaired loans consisting mainly of renegotiated loans (2)
    122,464       167,713       256,689       546,866  
Total
    804,888       323,401       349,412       1,477,701  

 
126

 
As of December 31, 2012
 
 
Impaired loans
 
Commercial
   
Residential mortgage
   
Consumer
   
Total
 
   
(in millions of Ch$)
 
Non-performing loans
    320,461       159,802       117,504       597,767  
Commercial loans at risk of default (1)
    298,868                   298,868  
Other impaired loans consisting mainly of renegotiated loans (2)
    96,793       69,228       275,481       441,502  
Total
    716,122       229,030       392,985       1,338,137  
                                 
 
As of December 31, 2011
 
 
Impaired loans
 
Commercial
   
Residential mortgage
   
Consumer
   
Total
 
   
(in millions of Ch$)
 
Non-performing loans
    251,881       152,911       106,565       511,357  
Commercial loans at risk of default (1)
    285,930                   285,930  
Other impaired loans consisting mainly of renegotiated loans (2)
    164,158       46,785       315,125       526,068  
Total
    701,969       199,696       421,690       1,323,355  
 
As of December 31, 2010
 
 
Impaired loans
 
Commercial
   
Residential mortgage
   
Consumer
   
Total
 
   
(in millions of Ch$)
 
Non-performing loans
    213,872       121,911       80,956       416,739  
Commercial loans at risk of default (1)
    444,129                   444,129  
Other impaired loans consisting mainly of renegotiated loans (2)
    230,810       20,735       368,063       618,608  
Total
    888,811       142,646       449,019       1,480,476  

(1)
Total loans to a debtor, whose allowance level is determined on an individual basis with a risk of defaulting.
 
(2)
Renegotiated loans for loans whose loan loss allowance is analyzed on a group basis.
 
Renegotiated Loans
 
In certain instances, we renegotiate loans that have one or more principal or interest payments past-due. The type of concession we most often afford when renegotiating a loan is a reduction in interest payment or, on rare occasions, forgiveness of principal.  We estimate that less than 0.5% of renegotiated loans relate to the forgiveness of principal, and the remaining 99.5% relates to reduction of interest payments. Any amount of principal forgiven is charged off directly to income as of the date the loan is renegotiated, if not already covered by an allowance for loan loss. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing, but do not accrue interest, and they are considered to be impaired for the life of the loan, both for disclosure purposes and in our determination of our allowances for loan losses, and never moved out of renegotiated status.  The effects of the amount of interest to be accrued were not material to “Loans and receivables from customers, net” on our Consolidated Statement of Financial Position.
 
The following table shows the success rate, for the periods indicated, for renegotiated consumer and residential mortgage loans. The success rate for consumer loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2013 or 2014, as applicable, minus the amount of such renegotiated loans that have been charged off as of December 31, 2013 or 2014, as applicable, divided by (ii) the total amount of such renegotiated loans. The success rate for residential mortgage loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2013 or 2014, as applicable, divided by (ii) the total amount of such renegotiated loans. A charge-off of a residential mortgage loan is not generally included in measuring the success rate of mortgage renegotiations since the period to charge-off a mortgage loan is 48 months after an installment is past-due.
 
 
127

 
Period of renegotiation
   
Success rate
Consumer Loans
   
Success rate
Residential mortgage loans
 
  1Q 2013       48.9 %     86.0 %
  2Q 2013       57.2 %     81.2 %
  3Q 2013       61.7 %     85.3 %
  4Q 2013       65.0 %     80.6 %
  1Q 2014       67.5 %     83.1 %
  2Q 2014       73.7 %     88.3 %
  3Q 2014       85.5 %     91.0 %
  4Q 2014       100.0 %     100.0 %

From time to time, we modify loans that are not classified as non-performing if a client is confronting a financial difficulty, such as unemployment or another temporary situation. These loans are not classified as renegotiated for disclosure purposes, but are considered as renegotiated for our provisioning models. The following table provides information regarding loans collectively evaluated for impairment that are classified as “modified:”
 
Modified loans(1) (Ch$mn)
 
2014
   
2013
   
2012
 
Commercial loans collectively evaluated for impairment
    169,725       169,285       114,949  
Residential mortgage loans
    228,856       287,730       263,454  
Consumer loans
    243,441       251,795       324,666  
Total modified loans
    642,022       708,810       703,069  

(1)
Modified loans include loans collectively evaluated for impairment that were not classified as non-performing in which certain concessions were made to the client. The main type of concession given by the Bank is a reduction of interest, with forgiveness of principal occurring on rare occasions.
 
The modified loans included in the table above represent the full balance of all modified loans regardless of the date of modification. When a loan is marked as modified, we do not remove it from this status until paid in full. Our provisioning models currently consider a modified loan to be renegotiated for the life of the loan.
 
Modified loans are included in the same pool of loans together with renegotiated loans for the life of the loans.
 
Analysis of Loan Loss Allowances
 
The following table provides the details of the roll-forwards in 2014, 2013, 2012, 2011 and 2010 of our allowance for loan losses, including decrease of allowances due to charge-offs, allowances established, allowances released, gross provision expense and opening and closing balance:
 

   
Commercial loans
   
Mortgage loans
   
Consumer loans
   
Interbank loan
       
Activity during 2014
 
Individual
   
Group
   
Group
   
Group
         
Total
 
   
(in millions of Ch$)
       
                                     
Balance as of December 31, 2013
    206,377       100,170       43,306       264,585       495       614,933  
Allowances established (1)
    52,240       99,648       14,959       129,410       60       296,317  
Allowances released (2)
    (15,903 )     (7,127 )     (6,561 )     (38,275 )     (554 )     (68,420 )
Released allowances by charge-off (3)
    (26,862 )     (26,994 )     (2,960 )     (101,697 )           (158,513 )
Balances as of December 31, 2014
    215,852       165,697       48,744       254,023       1       684,317  

   
Commercial loans
   
Mortgage loans
   
Consumer loans
   
Interbank loan
       
Activity during 2013
 
Individual
   
Group
   
Group
   
Group
         
Total
 
   
(in millions of Ch$)
       
Balance as of December 31, 2012
    154,702       95,938       35,990       263,259       159       550,048  
Allowances established (1)
    92,008       36,724       21,314       155,921       455       306,422  
Allowances released (2)
    (22,014 )     (11,151 )     (9,216 )     (35,482 )     (119 )     (77,982 )
Released allowances by charge-off (3)
    (18,319 )     (21,341 )     (4,782 )     (119,113 )           (163,555 )
Balances as of December 31, 2013
    206,377       100,170       43,306       264,585       495       614,933  

   
Commercial loans
   
Mortgage loans
   
Consumer loans
   
Interbank loan
       
 
Activity during 2012
 
Individual
MCh$
   
Group
MCh$
   
Group
MCh$
   
Group
MCh$
         
Total
 
Balances as of December 31, 2011
    112,687       97,115       35,633       243,022       11       488,468  
Allowances established (1)
    83,742       31,772       10,741       239,607       548       366,410  
Allowances released (2)
    (20,716 )     (16,624 )     (7,449 )     (38,471 )     (400 )     (83,660 )
Charge-off released allowances (3)
    (21,011 )     (16,325 )     (2,935 )     (180,899 )           (221,170 )
Balances as of December 31, 2012
    154,702       95,938       35,990       263,259       159       550,048  

   
Commercial loans
   
Mortgage loans
   
Consumer loans
   
Interbank loan
       
 
Activity during 2011
 
Individual
MCh$
   
Group
MCh$
   
Group
MCh$
   
Group
MCh$
         
Total
 
Balances as of December 31, 2010
    96,560       85,942       17,332       225,559       54       425,447  
Allowances established (1)
    72,927       72,601       27,406       184,488       464       357,886  
Allowances released (2)
    (41,741 )     (26,582 )     (7,645 )     (25,185 )     (507 )     (101,660 )
Charge-off released allowances (3)
    (15,059 )     (34,846 )     (1,460 )     (141,840 )           (193,205 )
Balances as of December 31, 2011
    112,687       97,115       35,633       243,022       11       488,468  

   
Commercial loans
   
Mortgage loans
   
Consumer loans
   
Interbank loan
       
 
Activity during 2010
 
Individual
MCh$
   
Group
MCh$
   
Group
MCh$
   
Group
MCh$
         
Total
 
Balances as of December 31, 2009
    78,297       88,142       16,534       166,512       42       349,527  
Allowances established (1)
    37,561       44,627       7,305       131,973       131       221,597  
Allowances released (2)
    (10,828 )     (8,683 )     (952 )     (7,135 )     (119 )     (27,717 )
Charge-off released allowances (3)
    (8,470 )     (38,144 )     (5,555 )     (65,791 )           (117,960 )
Balances as of December 31, 2010
    96,560       85,942       17,332       225,559       54       425,447  

(1)
Represents gross allowances made in respect of increased risk of loss during the period and loan growth.
(2)
Represents the gross amount of loan loss allowances released during the year as a consequence of reduction in the level of risk existing in the loan portfolio, including as a result of improvement in the credit risk classification of borrowers and loans paid.
(3)
Represents the gross amount of loan loss allowances removed due to charge-off.

 
The following table shows recoveries by type of loan:
 
   
Year ended December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
   
(in millions of Ch$)
 
Recovery of loans previously charged-off
                             
Consumer loans
    36,908       36,004       22,015       12,474       22,096  
Residential mortgage loans
    5,122       4,735       2,305       16,135       1,389  
Commercial loans
    16,947       14,545       8,695       7,216       6,994  
Total recoveries
    58,977       55,284       33,015       35,825       30,479  

Allocation of the Loan Loss Allowances
 
The following tables set forth, as of December 31 of each of the five years listed below, the proportions of our required minimum loan loss allowances that were attributable to our commercial, consumer and residential mortgage loans at each such date.
 
 
   
As of December 31, 2014
   
As of December 31, 2013
   
As of December 31, 2012
 
   
Total Allowance
   
Allowance amount as a percentage of loans in category
   
Allowance amount as a percentage of total loans
   
Allowance amount as a percentage of total allocated allowances
   
Total Allowance
   
Allowance amount as a percentage of loans in category
   
Allowance amount as a percentage of total loans
   
Allowance amount as a percentage of total allocated allowances
   
Total Allowance
   
Allowance amount as a percentage of loans in category
   
Allowance amount as a percentage of total loans
   
Allowance amount as a percentage of total allocated allowances
 
   
Ch$ million
   
Ch$ million
   
Ch$ million
 
Commercial loans
 
 
         
 
                                                       
Commercial loans
    269,185       3.2 %     1.2 %     39.3 %     208,619       2.7 %     1.0 %     33.9 %     199,841       2.7 %     1.1 %     36.3 %
Foreign trade loans
    56,800       3.2 %     0.2 %     8.3 %     53,005       2.9 %     0.3 %     8.6 %     18,535       1.5 %     0.1 %     3.4 %
Checking accounts debtors
    10,009       3.8 %           1.4 %     8,376       3.0 %           1.3 %     3,033       1.5 %           0.6 %
Factoring transactions
    4,868       1.5 %           0.7 %     5,054       1.6 %           0.8 %     3,683       1.1 %           0.7 %
Leasing transactions
    23,734       1.6 %     0.1 %     3.5 %     19,177       1.4 %     0.1 %     3.1 %     23,426       1.8 %     0.1 %     4.3 %
Other loans and accounts receivable
    16,953       12.5 %     0.1 %     2.5 %     12,316       10.4 %     0.1 %     2.0 %     2,122       2.2 %           0.4 %
Subtotals
    381,549       3.1 %     1.6 %     55.7 %     306,547       2.6 %     1.5 %     49.7 %     250,640       2.4 %     1.3 %     45.7 %
Residential mortgage loans
                                                                                               
Loans with mortgage finance bonds
    353       0.6 %           0.1 %     470       0.7 %           0.1 %     493       0.5 %           0.1 %
Mortgage mutual loans
    552       0.5 %           0.1 %     380       0.5 %           0.1 %     936       2.0 %           0.2 %
Other mortgage mutual loans
    47,839       0.7 %     0.2 %     7.0 %     42,456       0.8 %     0.2 %     6.9 %     34,561       0.7 %     0.2 %     6.3 %
Subtotals
    48,744       0.7 %     0.2 %     7.2 %     43,306       0.8 %     0.2 %     7.1 %     35,990       0.7 %     0.2 %     6.6 %
Consumer loans
                                                                                               
Installment consumer loans
    201,931       8.7 %     0.9 %     29.5 %     221,723       10.2 %     1.1 %     36.1 %     218,474       11.8 %     1.2 %     39.7 %
Credit card balances
    44,050       3.2 %     0.2 %     6.4 %     37,300       3.0 %     0.2 %     6.1 %     38,719       3.7 %     0.2 %     7.0 %
Consumer leasing contracts
    80       1.5 %                 68       2.0 %                 160       4.3 %            
Other consumer loans
    7,962       3.5 %           1.2 %     5,494       2.7 %           0.9 %     5,906       3.0 %           1.0 %
Subtotals
    254,023       6.5 %     1.1 %     37.1 %     264,585       7.3 %     1.3 %     43.1 %     263,259       8.5 %     1.4 %     47.7 %
Totals loans to clients
    648,316       3.11 %     2.9 %     100.0 %     614,438       2.9 %     3.0 %     99.9 %     549,889       2.9 %     2.9 %     100.0 %
Interbank loans
    1                         495       0.4 %           0.1 %     159       0.2 %            
Totals
    648,317       3.0 %     2.9 %     100.0 %     614,933       2.9 %     3.0 %     100.0 %     550,048       2.9 %     2.9 %     100.0 %

 
   
As of December 31, 2011
   
As of December 31, 2010
 
   
Total
Allowance
   
Allowance amount
as a percentage of loans in category
   
Allowance amount
as a percentage of total loans
   
Allowance amount
 as a percentage of total allocated allowances
   
Total
Allowance
   
Allowance amount
as a percentage of loans in category
   
Allowance amount
as a percentage of total loans
   
Allowance amount
as a percentage of total allocated allowances
 
 
 
Ch$ million
   
Ch$ million
 
Commercial loans
 
 
                                           
Commercial loans
    161,289       2.4 %     0.9 %     33.0 %     132,775       2.2 %     0.8 %     31.2 %
Foreign trade loans
    19,764       1.9 %     0.1 %     4.1 %     18,888       2.4 %     0.1 %     4.4 %
Draft loans
    3,384       2.6 %     0.0 %     0.7 %     4,350       6.4 %           1.0 %
Factoring transactions
    1,861       1.0 %     0.0 %     0.4 %     2,083       1.0 %           0.5 %
Leasing transactions
    19,266       1.6 %     0.1 %     3.9 %     14,742       1.3 %     0.1 %     3.5 %
Other loans and accounts receivable
    4,238       5.0 %     0.0 %     0.9 %     9,664       53.8 %     0.1 %     2.3 %
Subtotals
    209,802       2.3 %     1.2 %     4.3 %     182,502       2.2 %     1.2 %     42.9 %
Residential mortgage loans
                                                               
Loans with letters of credit
    707       0.6 %           0.1 %     446       0.3 %           0.1 %
Mortgage mutual loans
    1,241       1.7 %           0.2 %     11,319       6.1 %     0.1 %     2.7 %
Other mortgage mutual loans
    33,685       0.7 %     0.2 %     6.9 %     5,567       0.1 %           1.3 %
Subtotals
    35,633       0.7 %     0.2 %     7.2 %     17,332       0.4 %     0.1 %     4.1 %
Consumer loans
                                                               
Installment consumer loans
    193,874       10.7 %     1.1 %     39.7 %     176,219       11.0 %     1.1 %     41.4 %
Credit card balances
    43,922       4.8 %     0.3 %     9.0 %     36,156       4.6 %     0.2 %     8.5 %
Consumer leasing contracts
    109       2.9 %                 121       3.2 %            
Other consumer loans
    5,117       2.4 %           1.1 %     13,063       4.4 %     0.1 %     3.1 %
Subtotals
    243,022       8.3 %     1.4 %     49.8 %     225,559       8.4 %     1.4 %     53.0 %
Totals loans to clients
    488,457       2.8 %     2.8 %     100.0 %     425,393       2.7 %     2.7 %     100.0 %
Interbank
    11                         54       0.1 %            
Totals
    488,468       2.8 %     2.8 %     100.0 %     425,447       2.7 %     2.7 %     100.0 %

Based on information available regarding our borrowers, we believe that our loan loss allowances are sufficient to cover known potential losses and losses inherent in a loan portfolio of the size and nature of our loan portfolio.
 
 
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
A.  Directors and Senior Management
 
Directors
 
We are managed by our Board of Directors, which, in accordance with our by-laws, consists of 11 directors and two alternates who are elected at our ordinary shareholders’ meetings. Except as noted below, the current members of the Board of Directors were elected by the shareholders in the ordinary shareholders’ meeting held on April 28, 2015. Members of the Board of Directors are elected for three-year terms. Except as noted below, the term of each of the current board members expires in April of 2017. Cumulative voting is permitted for the election of directors. The Board of Directors may appoint replacements to fill any vacancies that occur during periods between elections. If any member of the Board of Directors resigns before his or her term has ended, and no other alternate director is available to take the position at the next annual ordinary shareholders’ meeting a new replacing member will be elected. Our executive officers are appointed by the Board of Directors and hold office at its discretion. Scheduled meetings of the Board of Directors are held monthly. Extraordinary meetings can be held when called in one of three ways: by the Chairman of the Board of Directors, by three directors with the consent of the Chairman of the Board of Directors or by the majority of directors. None of the members of our Board of Directors has a service contract which entitles any Director to any benefits upon termination of employment with Santander-Chile.
 
 
132

 
Our current directors are as follows:
 
 
Directors
 
 
Position
 
 
Committees
 
 
Term Expires
 
Vittorio Corbo Lioi
Chairman and Director
Asset and Liability Committee
Apr-17
Market Committee
Executive Credit Committee
Strategy Committee
Risk Committee
Oscar von Chrismar Carvajal
Director
Asset and Liability Committee
Apr-17
Executive Credit Committee
Human Resources Committee
Market Committee
Marketing, Communications and Institutional Image Committee
Risk Committee
Strategy Committee
Roberto Méndez Torres
Director
Executive Credit Committee
Apr-17
Marketing, Communications and Institutional Image Committee
Risk Committee
Strategy Committee
Juan Pedro Santa Maria Perez
Director
Analysis and Resolution Committee
Apr-17
Executive Credit Committee
Risk Committee
Marco Colodro Hadjes
Director
Asset and Liability Committee
Apr-17
Executive Credit Committee
Audit Committee
Market Committee
Mauricio Larraín Garcés
Director
Asset and Liability Committee
Apr-17
Executive Credit Committee
Human Resources Committee
Víctor Arbulú Crousillat
Director
Audit Committee
Apr-17
Lucía Santa Cruz Sutil
Director
Marketing, Communications and Institutional Image Committee
Apr-17
Lisandro Serrano Spoerer
Director
Analysis and Resolution Committee
Apr-17
Audit Committee
Orlando Poblete Iturrate
Director
Risk Committee
Apr-17
Analysis and Resolution Committee
Roberto Zahler Mayanz
Director
Asset and Liability Committee
Apr-17
Market Committee
Blanca Bustamante Bravo
Alternate Director
 
Apr-17
 
Raimundo Monge Zegers
Alternate Director
Asset and Liability Committee
Apr-17
Risk Committee
Strategy Committee
Marketing, Communications and Institutional Image Committee

 
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Vittorio Corbo Lioi is our Chairman as of April 2014.  He is one of Chile’s leading economists. In 2003, Mr. Corbo was named President of Chile’s Central Bank. Following the end of his tenure there, Mr. Corbo has been named to various boards and is currently a Senior Investigator at the Centro de Estudio Públicos (CEP), a local think tank. Mr. Corbo is a Director of Santander Spain and Banco Santander Mexico. Between 1991 and 1995 Mr. Corbo was an economic advisor to the Bank, and a member of the Board of Santander-Chile between 1995 and 2003. Mr. Corbo is a member of the Asset and Liability Committee, the Market Committee, the Executive Credit Committee, the Strategy Committee and the Risk Committee. Mr. Corbo has a Business Administration Degree from the Universidad de Chile and a Ph.D. in Economics from MIT.
 
Oscar von Chrismar Carvajal became Executive Vice-Chairman of the Board on January 1, 2010 after having served as the chief executive officer of Santander-Chile since August 2003. Mr. Von Chrismar is a member of the Asset and Liability Committee, the Executive Credit Committee, the Human Resources Committee, the Market Committee, the Marketing, Communications and Institutional Image Committee, the Risk Committee and Strategy Committee. Prior to assuming the chief executive officer post, he was the Manager of Global Banking. Prior to the merger, he was the former chief executive officer of Old Santander-Chile since September 1997, after being General Manager of Banco Santander-Peru since September 1995. Mr. von Chrismar is also a board member of Banco Santander Argentina and Banco Santander Peru. He is also the Alternate Director of Universia Chile S.A. Prior to that, Mr. von Chrismar was the manager of the Finance Division of Santander-Chile, a position that he had held since joining Santander-Chile in 1990. Mr. von Chrismar holds an Engineering degree from the Universidad de Santiago de Chile.
 
Roberto Méndez Torres is our Second Vice Chairman.  He is a former member of the Board of Old Santander-Chile, to which he was appointed in 1996. He is a member of the Executive Credit Committee, the Marketing, Communications and Institutional Image Committee, the Risk Committee and the Strategy Committee. He is a professor of Economics at Universidad Católica de Chile. He has been Advisor to Grupo Santander-Chile since 1989. Mr. Méndez is President and Director of Adimark Chile Gfk and on the Board of the Chilean and German Chamber of Commerce. He is also a Director of Enex S.A. and Vice-Chairman of Universia S.A. Mr. Méndez is also a member of the Council of Paz Ciudadana and was a former President of ICARE. He graduated with a degree in Business Administration from Universidad Católica de Chile, and holds an MBA and a Ph.D. from the Graduate School of Business at Stanford University.
 
Juan Pedro Santa María Pérez became a Director on July 24, 2012 after having served as Corporate Legal Director for Grupo Santander Chile and Legal Counsel for Santander-Chile. He is also a Director at Santander Asset Management S.A. Mr. Santa María joined Santander-Chile in 2002, after the merger with Banco Santiago. Previous to that he was Legal Counsel for Banco Santiago and Banco O’Higgins. He has also been President of the Legal Committee of the Asociación de Bancos e Instituciones Financieras de Chile for over 20 years and President Pro-Tempore of the Financial Law Committee of the Federación Lationamericana de Bancos (FELABAN). Mr. Santa María holds a degree in Law from the Pontificia Universidad Católica de Chile.
 
Marco Colodro Hadjes became a Director on April 19, 2005. Mr. Colodro is a member of the Asset and Liability Committee, the Executive Credit Committee, the Audit Committee, and the Market Committee. Mr. Colodro was President of the Board of Telefónica Chile and a Director of Codelco. He is a former chairman of TVN (national television network) and former vice chairman of Banco del Estado (state bank). He was also owner of Agencia de Valores Alfa S.A. Prior to that, he was Foreign Trade Director at the Central Bank of Chile. Mr. Colodro holds a degree in Economics from the Universidad de Chile, and has done post-graduate studies at the École Pratique des Hautes Etudes of the University of Paris.
 
Mauricio Larraín Garcés became a Board member in April 2014. Previously he was our Chairman. He is a member of the Asset and Liability Committee, the Executive Credit Committee, the Human Resources Committee, the Marketing Committee, the Strategy Committee, and the University Committee. He is also President of Santander
 
 
Chile Holding S.A. and Universia Chile S.A. He is also a Director of the Asociación de Bancos e Instituciones Financieras de Chile and Inversiones Volcán Choshuenco S.A. He is also a member of the Council of Paz Ciudadana and was a former President of ICARE. He is General Director of ESE Business School from Universidad de Los Andes. Mr. Larraín began working at Santander-Chile in 1989. Previously, he was Intendente (Director) of the SBIF, Manager of External Debt at Banco Central de Chile and a Senior Finance Specialist at the World Bank in Washington. He holds degrees in Law from Universidad Católica de Chile and from Harvard University.
 
Víctor Arbulú Crousillat became a Director on May 6, 1999. He is a member of the Audit Committee and has been designated as a Financial Expert. He was a Managing Director of JPMorgan, member of its European management committee and Chief Executive Officer for Spain and Portugal from 1988 until 1998. He has worked for JPMorgan for over 25 years in various positions in Europe, North America and Latin America. Mr. Arbulú also worked for the Inter-American Development Bank. Mr. Arbulú holds a degree in Engineering and a Master's in Business Administration.
 
Lucía Santa Cruz Sutil became a Director on August 19, 2003. Ms. Santa Cruz was a member of our Audit Committee until May 2010. She is a member of the Marketing Committee and the University Committee. Ms. Santa Cruz holds a degree in History and a Master's Degree in Philosophy from Oxford University. She is the Dean of the College of Liberal Arts of the Universidad Adolfo Ibañez. Ms. Santa Cruz is also a Director of Universia Chile S.A. She is also on the Board of Compañía de Seguros Generales y de Vida La Chilena Consolidada, on the Advisory Board of Nestle Chile and the Fundación Educacional Santa Teresa de Avila. She is also a member of the Self-Regulation Committee for Insurance Companies in Chile.
 
Lisandro Serrano Spoerer was elected to the Board in January 2011. He is a member of the Analysis and Resolution Committee and the Audit Committee. He is currently Dean of the Universidad Gabriel Mistral and Professor of Law and Tax at the Law School. He is also a member of the Regulation Committee of the Santiago Stock Exchange and the Self-Regulation Committee of the Chilean Electronic Stock Exchange. Previously, he worked at PricewaterhouseCoopers from 1977 to 2003 where he was a partner in the tax division and later a Principal partner. He was also member of the board of the Hong Kong & Shanghai Bank branch in Chile. Mr. Serrano holds a degree in law and an MBA from the Pontificia Universidad Católica de Chile.
 
Orlando Poblete Iturrate became a Director on April 25, 2015. He previously became an Alternate Director on April 22, 2014. Since 1991 Mr. Poblete has been a professor at the Universidad Los Andes. Between 1997 and 2004, he was Dean of the Law School and since 2014 he has been Chancellor of the university. He is also a partner at the law firm Orlando Poblete & Company. He is an arbitrator of the Centro de Arbitraje y Mediación de la Cámara de Comercio de Santiago. He has also been a Professor of Law at the University of Chile. Mr. Poblete is a lawyer from the University of Chile and has masters from the same university.
 
Roberto Zahler Mayanz became a Director on August 31, 1999. He is a member of the Asset and Liability Committee and the Market Committee. Currently, he is President of Zahler & Co, a consulting firm. He is also a member of the CLAAF or the Latin American Committee for Financial Affairs. He was formerly President of the Board of Siemens Chile and Director of Air Liquide-Chile. He was also a visiting professor at the IMF’s Research Department. Between 1991 and 1996, he was President of the Central Bank of Chile and Vice-President from 1989 to 1991. He also serves as a consultant for the World Bank, the IDB, the IMF and the International Bank of Settlements. Mr. Zahler has also provided technical assistance to various Central Banks and Finance Ministries in most countries of Latin America, Indonesia and Kosovo. Mr. Zahler holds a degree in Business Administration from the Universidad de Chile and a Masters in Economics from the University of Chicago.
 
Raimundo Monge Zegers became an Alternate Director on April 29, 2003. He is currently a member of the Asset and Liability Committee, the Risk Committee, the Strategy Committee and the Marketing, Communications and Institutional Image Committee. He is Corporate Director of Strategic and Financial Planning for Grupo Santander-Chile and is CEO of Santander-Chile Holding S.A. He is also President of Santander S.A. Sociedad Securitizadora and Santander Factoring S.A. He is a Director of Aurum S.A. and Bansa Santander S.A. Mr. Monge has a degree in business from the Universidad Católica de Chile and an MBA from the University of California, Los Angeles.
 
Blanca Bustamante Bravo became an Alternate Director on April 28, 2015. In 1998, she joined Concha y Toro as Head of Investor Relations with the responsibility to present business strategy and achievements of the company to the financial community, a position held until 2010. In parallel, in May 2001, she became Assistant Manager of
 
 
Corporate Communications. In 2011, she became responsible for relations with the community in order to focus the efforts of the company in projects that create value for the community and the environment in which it operates. Since 2013, she is a director in the Center for Innovation for Concha y Toro which focus is on social responsibility for companies. She holds a degree in business from Universidad Católica de Chile.
 
Senior Management
 
Our senior managers are as follows:
 
Senior Manager
 
Position
 
Date Appointed
Claudio Melandri
 
Chief Executive Officer
 
January 1, 2010
Miguel Mata
 
Chief Financial Officer
 
November 1, 2011
Gabriel Montoya
 
Financial Controller
 
April 1, 2009
Ricardo Martinez
 
Corporate Director of Internal Audit
 
September 1, 2013
Fred Meller
 
Global Banking and Markets
 
January 1, 2011
Julian Acuña
 
Manager Commercial Banking
 
July 1, 2013
Franco Rizza
 
Manager Credit Risk
 
February 1, 2014
Jose Manuel Manzano
 
Manager Human Resources & Administration
 
September 1, 2013
Felipe Contreras
 
Chief Accounting Officer
 
October 1, 2008
Pablo Correa
 
Manager Corporate Communications
 
March 1, 2012
Carlos Volante
 
Manager Clients and Service Quality
 
January 1, 2014
Cristian Florence
 
General Counsel
 
September 3, 2012
 
Claudio Melandri became the Chief Executive Officer of Santander-Chile in January 2010 after being our Retail Banking Manager since February 21, 2008. He started his career at Santander-Chile in 1990 becoming a regional branch manager and manager of Santander-Chile’s branch network. He was also a Vice-President at Banco Santander Venezuela from 2005 to 2007. In 2007, he was appointed Corporate Director of Human Resources of Banco Santander-Chile. He is also a Director of Santander Chile Holding S.A. and Universia Chile S.A. Mr. Melandri has a Business Degree from the Universidad Tecnológica Metropolitana in Chile and holds a Master's degree in Business Administration from the Universidad Adolfo Ibañez.
 
Miguel Mata became the Chief Financial Officer for Santander-Chile on November 2011. Prior to that he served in several staff positions related to Business Strategy. Mr. Mata joined Santander-Chile in 2002 when Santander-Chile merged with Banco Santiago. Previously he was Financial Controller for Banco Santiago. He has been working in the banking industry since 1990, when he joined Banco O’Higgins, one of the predecessors of Banco Santiago. He is also a Director of Santander S.A. Corredores de Bolsa. Mr. Mata holds a degree in Engineering from Universidad Católica de Chile.
 
Gabriel Montoya was appointed Financial Controller of Santander-Chile in April 2009 and has been working for Santander Spain and its affiliates since 1997. Between 2005 and 2009, Mr. Montoya was Director of the MIS America Project and was responsible for implementing management information systems in Chile, Mexico, Puerto Rico, Argentina and Brazil. Previous to that Mr. Montoya was Financial Controller of Santander Puerto Rico, Head of Financial Control for the Americas Division of Santander and various other management positions in Santander Colombia. Mr. Montoya has a Business Administration Degree from Universidad del Rosario and an Executive Administration Diploma from the Universidad de los Andes, both in Colombia.
 
Ricardo Martinez is the Corporate Director of Internal Auditing, a position he has held since September 1, 2013. He has worked for Grupo Santander since 1998 in different position in Internal Auditing, including the Internal Director of Accounting, Audit Manager of Insurance and Asset Management and head auditor of Financial Risks. Mr. Martinez has a degree in Economic Sciences and Business from the Universidad Complutense of Madrid and a Master's in Business from the CIFF of the Universidad de Alcalá de Henares.
 
Fred Meller became Manager of Global Banking & Market in January 2011. Prior to that he was Manager of Market Making for Europe and UK for Santander Spain. Previously, he served as Treasurer for Santander-Chile since 2008. He was also General Manager of Santander Agente de Valores and Director of Deposito Central de Valores Chile. Mr. Meller is also President of Santander S.A. Corredores de Bolsa. Mr. Meller holds a degree in Business Administration from Universidad Central de Chile.
 
Julian Acuña Moreno became Manager of the Commercial Banking Division in July 2013. He joined Banco Santander in 1986, playing various roles of responsibility, including agent, Regional Manager, Product Manager and Retail Manager Corporate & Institutional Banking. He also held the position of vice president of Banco Santander’s business in Colombia. He is also a director of Santander Asset Management Santander Consumer. Mr. Julian Acuña is an accountant auditor from the Universidad Diego Portales.
 
 
136

 
José Manuel Manzano became Manager of Personnel, Organization and Cost of Banco Santander Chile Division in September 2013. Prior to that he was Corporate Director of Risk since July 2007, and Corporate Director of Human Resources for Santander-Chile since October 31, 2002. Previously, he served as Manager of Human Resources for Old Santander-Chile since 1999. He was also General Manager of Santander Fund Management and Managing Director of Bancassurance. He is also a Director of Santander Chile Holding S.A., Santander Asset Management S.A. and Santander S.A. Sociedad Securitizadora. Mr. Manzano holds an MBA and a degree in Business from Universidad Católica de Chile.
 
Felipe Contreras was named Chief Accounting Officer of Santander-Chile in October 2008. He has worked for 14 years in our Accounting Department, most recently as Manager of the Consolidation and Reporting Departments, overseeing our Chilean, U.S. and Spanish GAAP reporting requirements. He was in charge of our recent transition to International Financial Reporting Standards. Mr. Contreras is a Public Accountant from the University of Santiago and is currently a candidate to a Master's in Advanced Finance from the Universidad Adolfo Ibáñez.
 
Pablo Correa became Manager of Corporate Communications and Public Policy in March 2012. Prior to that he was Capital Markets Coordinator in the Ministry of Finance. Prior to that he was Chief Economist of Santander-Chile from 2006 until 2010 and an advisor to the Minister of Finance and the IBD from 2005 to 2006. Mr. Correa has an economics Degree from Universidad Católica de Chile and a Master's degree from the Harvard Kennedy School of Government.
 
Carlos Volante became manager Customers and Quality of Banco Santander in January 2014. Joined the Santander Group in 1990, holding various responsibilities within the organization, including manager of the Branch Network, general manager of the Administrator of Mutual Funds , Mortgage manager, Product Manager and Monitoring Commercial Banking. He was also Executive Vice President of Commercial Banking at Banco de Venezuela Grupo Santander. Between 2012 and 2013 he was general manager of the Company Corona Commercial Credit Group. Carlos Volante is an accountant auditor from the University of Talca and attended the DPA and an MBA from the Universidad Adolfo Ibáñez and participates in the PADE program at the Universidad de los Andes.
 
Franco Rizza Is the Risk Division Manager since February 2014. Previously, he was director of the Department of Santander Global Recoveries, with scope for all countries where the Group has commercial banking activities outside Spain. Between 2010 and 2013 he was in charge of the operation of Banco Santander Risk in Uruguay. He joined the Group in 1989 in Argentina, where he held various positions of responsibility, including: Territorial Manager, Product Manager and Director of Standardized Risk. He has degrees in Business and Risk Management in Argentina and Spain.
 
Cristian Florence is our General Counsel, a position he has held since September 2012. Prior to that he served as Chief Lawyer at Santander-Chile. Mr. Florence joined Santander-Chile in 2002 when Santander-Chile merged with Banco Santiago. He started working in the banking industry in 1991, when he joined Centrobanco, a predecessor of Banco O’Higgins and Banco Santiago serving at several positions in the law departments. Mr. Florence is also a Director of Administrador Financiero de Transantiago S.A. He has a degree in Law from the Universidad Gabriela Mistral and a Master of Laws (LLM) from the same university.
 
B.  Compensation
 
For the year ended December 31, 2014, the aggregate amount of compensation paid by us to all of our directors was Ch$1,235 million, in monthly stipends. For the year ended December 31, 2014, the aggregate amount of compensation paid by us to all of our executive officers and our management members was Ch$32,577 million (U.S.$53.6 million). At our annual shareholder meeting to be held on April 28, 2015, shareholders will be asked to approve a monthly stipend per director of UF 230 (U.S.$9,311), UF 460 (U.S.$18,622) for the Chairman of the
 
 
Board and UF 345 (U.S.$13,966) for the Vice-Chairman of the Board. This amount will be increased by UF 30 per month (U.S.$1,214) if a Board member is named to one or more committees of the Board. The additional amount will be UF 60 (U.S.$2,429) for the President of a committee and UF 45 (U.S.$1,822) for the Vice-President of a committee. Shareholders will also be asked to approve the Audit Committee 2014 remuneration for its members. The remuneration is a 33% additional compensation over the monthly stipend received by a regular board member, or UF 77 (U.S.$3,117), totaling a monthly stipend of UF 307 (U.S.$12,428). This remuneration is in line with the new Chilean corporate governance law. In addition, we pay certain directors professional service fees for the consulting services that they render to us in their fields of expertise. For the year ended December 31, 2014, payments to our directors for consulting fees totaled Ch$759 million (U.S.$1.2 million).
 
Santander-Chile and its affiliates have designed variable-compensation plans for their employees, based on performance targets and objectives, the achievement of which are evaluated and paid on a quarterly and/or annual basis.
 
Share-based compensation (settled in cash)
 
In accordance with IFRS 2, equity instruments settled in cash are allocated to executives of the Bank and its Subsidiaries as a form of compensation for their services. The Bank measures the services received and the cash obligation at fair value at the end of each reporting period and on the settlement date, recognizing any change in fair value in the income statement for the period. For the years ended December 31, 2014, 2013 and 2012, share-based compensation amounted to Ch$ 329 million, Ch$ 684 million and Ch$ 1,747 million.
 
Pension Plans:
 
The Bank has an additional benefit available to its principal executives, consisting of a pension plan. The purpose of the pension plan is to endow the executives with funds for a better supplementary pension upon their retirement. For this purpose, the Bank will match the voluntary contributions made by the beneficiaries for their future pensions with an equivalent contribution. The executives will be entitled to receive this benefit only when they fulfill the following conditions:

 
a.
Aimed at the Bank’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 Bank will create a pension fund, with life insurance, for each beneficiary in the plan. Periodic contributions into this fund are made by the manager and matched by the Bank.
 
d.
The Bank will be responsible for granting the benefits directly.

If the working relationship between the manager and the respective company ends, before s/he fulfills the abovementioned requirements, s/he will have no rights under this benefit plan. In the event of the executive’s death or total or partial disability, s/he will be entitled to receive this benefit. The Bank will make contributions to this benefit plan on the basis of mixed collective insurance policies whose beneficiary is the Bank. The life insurance company with whom such policies are executed is not an entity linked or related to the Bank or any other Santander Group company.  Plan Assets owned by the Bank at the end of 2014 totaled Ch$6,495 million (Ch$5,171 million in 2013).The amount of the defined benefit plans has been quantified by the Bank, based on the following criteria:
 
Calculation method:
 
Use of the projected unit credit  method which considers each working year as generating an additional amount of rights over benefits  and values each unit separately. It is calculated based primarily on fund contributions, as well as other factors such as the legal annual pension limit, seniority, age and yearly income for each unit valued individually.

 
138

 
Actuarial hypothesis assumptions:

Actuarial assumptions with respect to demographic and financial variables are non-biased and mutually compatible with each other.  The most significant actuarial hypotheses considered in the calculations were:

   
Plans
post-employment
   
Plans
post-employment
 
   
2014
   
2013
 
             
Mortality chart
 
RV-2009
   
RV-2009
 
Termination of contract rates
    5.0 %     5.0 %
Impairment chart
 
PDT 1985
   
PDT 1985
 

Assets related to the pension fund contributed by the Bank into the Seguros Euroamérica insurance company with respect to defined benefit plans are presented as net of associated commitments.  Activity for post-employment benefits is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
Plan assets
    6,495       5,171  
Commitments for defined-benefit plans
               
For active personnel
    (4,639 )     (3,888 )
Incurred by inactive personnel
           
Minus:
               
Unrealized actuarial (gain) losses
           
Balances at year end
    1,856       1,283  

Year’s cash flow for post-employment benefits is as follows:
 
   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
a) Fair value of plan assets
                 
Opening balance
    5,171       5,584       5,508  
Expected yield of insurance contracts
    446       247       326  
Employer contributions
    878       (660 )     (250 )
Actuarial (gain) losses 
                -  
Premiums paid
                 
Benefits paid
                 
Fair value of plan assets at year end
    6,495       5,171       5,584  
b) Present value of obligations
                       
Present value of obligations opening balance
    (3,244 )     (3,594 )     (3,143 )
Net incorporation of Group companies
                 
Service cost
    (1,395 )     (311 )     (452 )
Interest cost
                 
Curtailment/settlement effect
                 
Benefits paid
                 
Past service cost
                 
Actuarial (gain) losses
          17        
Other
                 
Present value of obligations at year end
    (4,639 )     (3,888 )     (3,595 )
Net balance at year end
    1,856       1,283       1,989  

 
139

 
Plan expected profit:

 
As of December 31,
 
2014
 
2013
 
2012
Type of expected yield from the plan’s assets
UF + 2.50% annual
 
UF + 2.50% annual
 
UF + 2.50% annual
Type of yield expected from the reimbursement rights
UF + 2.50% annual
 
UF + 2.50% annual
 
UF + 2.50% annual

Plan associated expenses:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Current period service expenses
    1,395       311       452  
Interest cost
                 
Expected yield from plan’s assets
    (446 )     (247 )     (326 )
Expected yield of insurance contracts linked to the Plan:
                       
Extraordinary allocations
                 
Actuarial (gain)/ losses recorded in the period
          (17 )      
Past service cost
                 
Other
                 
Total
    949       47       126  

C.  Board Practices
 
Audit Committee
 
 
Board member
 
 
Position in Committee
Marco Colodro
 
Chairman
Víctor Arbulú Crousillat
 
First Vice Chairman and Financial Expert
Lisandro Serrano
 
Second Vice Chairman

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors. The Committee Secretary is the alternate director Juan Pedro Santa María. The General Counsel is the Committee Secretary. The Chief Executive Officer, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the external auditors and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. This committee also performs functions of a remuneration committee as established in Chilean Law, and reviews annually the salary and bonus programs for the executive officers of the Bank. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.
 
This committee is also responsible for:
 
 
·
Presenting to the Board of Directors a list of candidates for the selection of an external auditor.
 
 
·
Presenting to the Board of Directors a list of candidates for the selection of rating agencies.
 
 
·
Overseeing and analyzing the results of the external audit and the internal reviews.
 
 
·
Coordinating the activities of internal auditing with the external auditors’ review.
 
 
·
Overseeing and coordinating the Bank’s operational risk policies
 
 
·
Analyzing the interim and year-end financial statements and reporting the results to the Board of Directors.
 
 
140

 
 
·
Analyzing the external auditors’ reports and their content, procedures and scope.
 
 
·
Analyzing the rating agencies’ reports and their content, procedures and scope.
 
 
·
Obtaining information regarding the effectiveness and reliability of the internal control systems and procedures.
 
 
·
Analyzing the information systems performance, and its sufficiency, reliability and use in connection with decision-making processes.
 
 
·
Obtaining information regarding compliance with the company’s policies regarding the due observance of laws, regulations and internal rules to which the company is subject.
 
 
·
Investigating suspicious and fraudulent activities (including conflicts).
 
 
·
Analyzing the reports of the inspection visits, instructions and presentations of the SBIF.
 
 
·
Obtaining information, analyzing and verifying the company’s compliance with the annual audit program prepared by the internal audit department.
 
 
·
Informing the Board of Directors of accounting changes and their effects.
 
 
·
Examining on an annual basis the compensation plans of high level executives and managers.
 
Asset and Liability Committee (ALCO)
 
The ALCO includes the Chairman of the Board and five additional members of the Board, the Chief Executive Officer, the Corporate Financial Controller, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, and other senior members of management. The ALCO meets monthly. All limits reviewed by the ALCO are measured and prepared by the Market Risk Department. The non-Board members of the ALCO meet weekly to review liquidity, funding, capital and market risk related matters.
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Mauricio Larraín
 
Vice-Chairman
Oscar von Chrismar
 
Second Vice-Chairman
Marco Colodro
 
Member
Roberto Zahler
 
Member
Raimundo Monge
 
Member
 
The main functions of the ALCO are:
 
 
·
Making the most important decisions regarding interest rate risk, funding, capital and liquidity levels.
 
 
·
Review of the Bank’s main gaps (foreign currency and inflation gap).
 
 
·
Review of the evolution of the most relevant local and international markets and monetary policies.
 
Market Committee
 
The Market Committee includes the Vice-Chairman of the Board, three additional members of the Board, the Chief Executive Officer, the Manager of Global Banking and Markets, the Manager of the Treasury Division, the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Oscar von Chrismar
 
Vice-Chairman
Roberto Zahler
 
Second Vice-Chairman
Mauricio Larraín
 
Member
Marco Colodro
 
Member

 
141

 
The Market Committee is responsible for:
 
 
·
Establishing a strategy for the Bank’s trading portfolio.
 
 
·
Establishing the Bank’s policies, procedures and limits with respect to its trading portfolio. The Bank’s Market Risk Department measures all risks and limits and reports these to the Market Committee.
 
 
·
Reviewing the evolution of the most relevant local and international markets and monetary policies.
 
Executive Credit Committee
 
The Executive Credit Committee is comprised of the following Board members:
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Marco Colodro
 
Vice-Chairman
Oscar von Chrismar
 
Second Vice-Chairman
Roberto Méndez
 
Member
Juan Pedro Santa María
 
Member

In addition, this committee also includes: the Corporate Director of Risk, the CEO, the Corporate Legal Counsel, the Manager of Global Banking, the Corporate Director of Human Resources and Administration (this is a newly-created position) and two senior members of the Credit Risk department, who present the loans being reviewed. The Executive Credit Committee meets weekly and performs the following main functions:
 
 
·
Reviews the main client exposures by:  economic sector, geography, type of risk and segment.
 
 
·
Supervises and review the main credit risk indicators (NPLs, coverage, impaired loans, etc.).
 
 
·
Takes notes, analyzes and follows up on the observations and recommendations of the regulatory bodies and the external and internal auditors on credit-risk-related issues.
 
 
·
Reviews the loan positions reviewed by the Senior Credit Committee above U.S.$10 million and approves those loan positions greater than U.S.$60 million.
 
The Credit Risk Department must present to the Board on a monthly basis. In this presentation all loans above U.S.$5 million that were granted in the previous month must be reviewed. In addition, any other theme or subject of importance regarding credit risk is also presented (for example a proposal to change a provisioning model must be presented and approved by the Board). Finally, at least once a year, the Credit Risk Department presents a report to assure the Board that our loan loss allowances are adequate for all known and estimated incurred losses.
 
Risk Committee
 
Board member
 
Position in Committee
Oscar von Chrismar
 
Chairman
Juan Pedro Santa María
 
Vice-Chairman
Raimundo Monge
 
Member
Orlando Poblete
 
Member
Roberto Méndez
 
Member
Juan Pedro Santa María
 
Member

 
142

 
The Risk Committee is responsible for revising and following all risks that may affect us, including reputational risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises the CRO. It also evaluates the reasonability of the systems for measurement and control of risks. This Committee includes the Vice Chairman of the Board and five Board members. Furthermore, the Board Risk Committee was created, and is comprised of the Vice-Chairman of the Bank and four independent board members.
 
Marketing, Communications and Institutional Image Committee
 
Board member
 
Position in Committee
Roberto Méndez
 
Chairman
Oscar Von-Chrismar
 
Vice-Chairman
Lucía Santa Cruz
 
Second Vice-Chairman
Raimundo Monge
 
Member

The Marketing, Communications and Institutional Image Committee is comprised of the Chairman of the Board and three additional Board members, the CEO, the Manager of Retail Banking, the Manager of Human Resources, the Manager of Corporate Communications, the Manager of Marketing and other senior managers. This committee
 
Strategy Committee
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Roberto Méndez
 
Vice Chairman
Oscar von Chrismar
 
Member
Raimundo Monge
 
Member

The Strategy Committee is in charge of our strategic planning process and follow-up, as well as the identification of broad business opportunities and threats. The Strategy Committee is comprised of the Chairman of the Board and four additional Board members.
 
Analysis and Prevention of Money Laundering Committee
 
Board member
 
Position in Committee
Juan Pedro Santa María
 
Chairman
Lisandro Serrano
 
Vice Chairman
Orlando Poblete
 
Member

This Committee defines and controls the policies regarding anti-money laundering and financing of terrorism in line with Chilean law and Grupo Santander’s governance.
 
Human Resources Committee
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Mauricio Larraín
 
Chairman
Oscar Von-Chrismar
 
Member

The Human Resources Committee is comprised of two Board members, the CEO, the Manager of Human Resources and Administration, the Manager of Human Resources and other senior managers. The Human Resources Committee dictates guidelines on management and general human resources policies, including incentive, selection, promotion and training policies.
 
 
143

 
D.  Employees
 
As of December 31, 2014, on a consolidated basis, we had 11,478 employees, 9,866 of whom were bank employees, 93 of whom were employees of our subsidiaries and 1,519 were employees of entities controlled by the Bank through other considerations.  We have traditionally enjoyed good relations with our employees and their unions. Of the total headcount of us and our subsidiaries, 8,266 or 72.0% were unionized. In May 2014, a new collective bargaining agreement was signed, which went into effect on January 1, 2014 and which expires on December 31, 2018, though it may be renegotiated ahead of schedule with the consent of management and the union. We generally apply the terms of our collective bargaining agreement to unionized and non-unionized employees. The following chart summarizes the number of employees employed by the bank.
 
 
Employees
 
As of
December 31, 2014
 
Executives
    702  
Professionals
    5,435  
Administrative
    5,341  
Total
    11,478  

 
E.  Share Ownership
 
No director or executive officer owns more than 1% of the shares of Santander-Chile. As of December 31, 2014, the following directors and executives held shares in Santander-Chile:
 
 
Directors
 
Shares
 
Mauricio Larraín Garcés
    568  

Santander-Chile currently does not have any arrangements for involving employees in its capital and there is no systematic arrangement for grant of options or shares or securities of Santander-Chile to them.
 
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
A.  Major Shareholders
 
Santander Spain controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A., which are controlled subsidiaries. Santander Spain has control over 67.18% of our shares and actual participation, excluding non-controlling shareholders that participate in Santander Chile Holding, S.A. of 67.01%.
 
 
Shareholder
 
Number of Shares
   
Percentage
 
Santander Chile Holding S.A.
    66,822,519,695       35.46 %
Teatinos Siglo XXI Inversiones S.A.
    59,770,481,573       31.72 %

Santander Spain is in a position to cause the election of a majority of the members of Santander-Chile’s Board of Directors, to determine its dividend and other policies and to determine substantially all matters to be decided by a vote of shareholders. Santander Spain holds ordinary shares to which no special voting rights are attached. Each share represents one vote and there are no shareholders with different voting rights.
 
The number of outstanding shares of Santander-Chile (of which there is only one class, being ordinary shares) at December 31, 2014, was 188,446,126,794 shares, without par value. Santander-Chile’s shares are listed for trading on the Chilean Stock Exchanges and on the NYSE in connection with the registration of ADRs. The market capitalization of Santander-Chile at December 31, 2014 on the Chilean stock exchange was Ch$ 5,651,625 million and U.S.$ 9,290 million on the NYSE. At December 31, 2014, Santander-Chile had 11,881 holders of its ordinary shares registered in Chile, including JP Morgan as Depositary (the “Depositary”) of Santander-Chile’s ADS Program. Other than the information disclosed in this section, there are no arrangements to the knowledge of Santander-Chile that can result in a change of control of Santander-Chile. As of December 31, 2014, there were a total of 25 ADR holders on record. Since some of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial holders
 
 
144

 
B.  Related Party Transactions
 
The Chilean Companies Law requires that our transactions with related parties be on a market basis, that is, on similar terms to those customarily prevailing in the market. We are required to compare the terms of any such transaction to those prevailing in the market at the date the transaction is to be entered into. Directors of companies that violate this provision are liable for losses resulting from such violations.
 
In addition, under the Chilean Companies Law, a company may not enter into a transaction with related parties unless (i) such transaction has received the prior approval of the company’s Board of Directors and (ii) the terms of such transaction are consistent with the terms of transactions of a similar type prevailing in the market. If it is not possible to make this determination, the board may appoint two independent evaluators. The evaluators’ final conclusions must be made available to shareholders and directors for a period of 20 business days, during which shareholders representing 5% or more of the issued voting shares may request the board to call a shareholders’ meeting to resolve the matter, with the agreement of two thirds of the issued voting shares required for approval. For purposes of this regulation, the law considers the amount of a proposed transaction to be material if (1) it exceeds 1% of the company’s net worth (provided that it also exceeds 20,000UF) or (2) it exceeds 20,000 UF.
 
All resolutions approving such transactions must be reported to the company’s shareholders at the next annual shareholders’ meeting. Violations of this provision may result in administrative or civil liability to the corporation, the shareholders and/or third parties who suffer losses as a result of such violation.
 
Loans granted to related parties
 
In addition to subsidiaries and associated entities, the Bank’s “related parties” include the “key personnel” of the Bank’s executive staff (members of the Bank’s Board of Directors and the Senior Managers of Santander-Chile and its subsidiaries, together with their close relatives), as well as the entities over which the key personnel could exert 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., Santander Spain. The table below shows loans and accounts receivable and contingent loans with related parties. For more information, see “Note 34—Transactions with Related Parties” in our Audited Consolidated Financial Statements appearing elsewhere in this Annual Report:
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
Companies of the Group
   
Associated companies
   
Key personnel
   
Other
   
Companies of the Group
   
Associated companies
   
Key personnel
   
Other
   
Companies of the Group
   
Associated companies
   
Key personnel
   
Other
 
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
   
Ch$mn
 
                                                                         
Loans and accounts receivables
                                                                       
Commercial loans
    51,647       9,614       4,348       8,743       47,305       618       4,022       51,141       46,790       668       2,910       57,723  
Mortgage loans
    -       -       19,941       -       -       -       15,561       -       -       -       15,089       -  
Consumer loans
    -       -       2,798       -       -       -       2,061       -       -       -       1,513       -  
Loans and accounts receivables
    51,647       9,614       27,087       8,743       47,305       618       21,644       51,141       46,790       668       19,512       57,723  
Provision for loan losses
    (139 )     (10 )     (46 )     (18 )     (238 )     (3 )     (44 )     (6 )     (329 )     (3 )     (39 )     (9 )
Net loans
    51,508       9,604       27,041       8,725       47,067       615       21,600       51,135       46,461       665       19,473       57,714  
Guarantees
    409,339       -       23,896       1,289       124,420       -       19,237       2,326       9       -       17,909       1,349  
Contingent loans
                                                                                               
Personal guarantees
    -       -       -               -       -       -       -       -       -       -       -  
Letters of credit
    16,000       -       -       11       30,714       -       -       -       25,697       -       -       -  
Guarantees
    432,802       -       -       762       172,274       -       -       9,989       34,897       -       -       1,443  
Contingent loans
    448,802       -       -       773       202,988       -       -       9,989       60,594       -       -       1,443  
Allowance for contingent loans
    (12 )     -       -       -       (22 )     -       -       (4 )     (15 )     -       -       (2 )
Net contingent loans
                                    202,966       -       -       9,985       60,579       -       -       1,441  

Loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and (c) did not involve more than the normal collection risk.
 
 
146

 
Under the Chilean General Banking Law, Chilean banks are subject to certain lending limits, including the following:
 
 
·
a bank may not extend to any person or legal entity (or group of related entities), directly or indirectly, unsecured loans in an amount that exceeds 5.0% of the bank’s regulatory capital, or secured loans in an amount that exceeds 25.0% of its regulatory capital. In the case of foreign export trade finance, this 5.0% ceiling is raised to: 10.0% for unsecured financing, 30.0% for secured financing. This ceiling is raised to 15.0% for loans granted to finance public works under the concessions system contemplated in the Decree with Force of Law 164 of 1991, of the Ministry of Public Works, provided that either the loan is secured on the concession, or the loan is granted as part of a loan syndication;
 
 
·
a bank may not grant loans bearing more favorable terms than those generally offered by banks in the same community to any entity (or group of related entities) that is directly or indirectly related to its owners or management;
 
 
·
a bank may not extend loans to another bank in an aggregate amount exceeding 30.0% of its regulatory capital;
 
 
·
a bank may not directly or indirectly grant a loan, the purpose of which is to allow the borrower to acquire shares in the lending bank;
 
 
·
a bank may not lend, directly or indirectly, to a Director or any other person who has the power to act on behalf of the bank, or to certain related parties; and
 
 
·
a bank may not grant loans to individuals or legal entities involved in the ownership or management of the bank, whether directly or indirectly (including holders of 1.0% or more of its shares), on more favorable terms than those generally offered to non-related parties. Loans may not be extended to senior executives and to companies in which such individuals have a participation of 5.0% or more of the equity or net earnings in such companies. The aggregate amount of loans to related parties may not exceed a bank’s regulatory capital.
 
We are not aware of any loans to any related parties exceeding the above lending limits.
 
The largest related party loan, which matures on May 27, 2015 and by the Bank is to Banco Santander Spain S.A., corresponds to a performance bond (boleta de garantía) and had an amount outstanding of U.S.$79 million, which was guaranteeing a corporate foreign trade loan. As this operation is a contingent loan, the Bank charges a fee which was 0.75% per annum.

 
 
 
The table below shows assets and liabilities with related parties:
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
Companies of the Group
   
Associated companies
   
Key personnel
   
Other
   
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$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Assets
                                                                       
Cash and deposits in banks
    193,377                         5,306                         5,357                    
Trading investments
                                                                       
Obligations under repurchase agreements
                                                                       
Loans
                                                                                               
Financial derivative contracts
    995,468                         557,026                         526,734                    
Available for sale investments
                                                                       
Other assets
    2,776                         2,460                         4,339                    
Liabilities
                                                                                               
Deposits and other demand liabilities
    5,061       1,168       2,403       4,602       58,030       10,406       2,783       23,300       65,386       2,563       2,286       17,211  
Obligations under repurchase agreements
    47,010                         59,703                         92,862                    
Loans
                                                                                               
Time deposits and other time liabilities
    269,381       2,320       81,079       81,079       54,212       299       3,774       156,977       97,449       373       2,842       39,193  
Financial derivative contracts
    1,395,507                         537,162                         387,903                    
Issued debt instruments
    336,323                         96,872                         67,368                    
Other financial liabilities
    846                         3,912                         103,207                    
Other liabilities
    771                         462                         1,241                    

 
148

 
Other transactions with related parties
 
During the years ended December 31, 2014, 2013 and 2012, the Bank had the following significant income (expenses) from services provided to (by) related parties:
 
   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
Companies of the Group
   
Associated Companies
   
Key personnel
   
Other
   
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$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Income (expense) recorded
                                                                       
Interest income and inflation—indexation adjustments
    (11,130 )     25       1,963       (2,509 )     (8,812 )     50       1,065       (1,082 )     (11,660 )     54       948       (2,819 )
Fee and commission income and expenses
    30,591       84       230       167             75       120       3,615       (1,191 )     59       114       214  
Net profit (loss) from financial operations and net foreign exchange gain (loss) (*)
    (315,918 )           20       (10,051 )     (8,690 )           (4 )     (1,534 )     241,424             (1 )     107  
Other operating income and expenses
    1,158                         955                         643                    
Income from sale of investments in other companies (**)
                            78,122                                            
Key personnel compensation and expenses
                (31,361 )                       (31,652 )                       (30,999 )      
Administrative and other expenses
    (30,342 )     (33,961 )                 (28,371 )     (30,758 )                 (23,121 )     (20,461 )            
Total
    (325,641 )     (33,852 )     (29,148 )     (12,393 )     33,204       (30,633 )     (30,471 )     999       206,095       (20,348 )     (29,938 )     (2,498 )

(*)
Primarily relates to derivative contracts used to financially cover exchange risk of assets and liabilities that cover positions of the Bank and its subsidiaries.
 
(**)
Corresponds to the profit from the sale of the subsidiary Santander Asset Management S.A. Administradora General de Fondos.
 

Only transactions with related parties equal to or greater than UF 5,000 are included individually in the table above. Transactions with related parties between UF 1,000 and up to UF 5,000 are included in other transactions with related parties. All transactions were conducted at arm’s length.
 
C.  Interests of Experts and Counsel
 
Not applicable.
 
ITEM 8. FINANCIAL INFORMATION
 
A.  Consolidated Statements and Other Financial Information
 
Financial Information
 
See “Item 18.  Financial Statements.”
 
Legal Proceedings
 
We are subject to certain claims and are party to certain legal and arbitration proceedings in the normal course of our business, including claims for alleged operational errors. We do not believe that the liabilities related to such claims and proceedings are likely to have, in the aggregate, a material adverse effect on our consolidated financial condition or results of operations. For the year ended December 31, 2014, the Disclosure Committee of Santander-Chile has defined a significant legal proceeding as that implying an estimated incurred loss greater than 0.56% of the average of pre-tax net income in the last two years. As of December 31, 2014, this cut-off totaled Ch$3,156 million (U.S.$5.2 million). As of December 31, 2014, there were no legal proceedings exceeding that amount. There are no material proceedings in which any of our directors, any members of our senior management, or any of our affiliates is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.
 
Upon the recommendation of our legal advisors, we estimate that our aggregate liability if all legal proceedings were determined adversely to us could result in significant losses not estimated by us. As of December 31, 2014, we have set aside Ch$2,175 million (U.S.$3.6 million) as provisions for these legal actions. These provisions are presented in “Contingency Provisions” in the Consolidated Statements of Financial Position. In addition, there are other lawsuits in our subsidiaries for (Ch$485 million or US$0.8 million), which primarily relate to the litigation between Santander Corredores de Seguros Limitada and its clients for leasing assets.
 
Dividends and dividend policy
 
See “Item 3.  Key Information—A. Selected Financial Data—Dividends.”
 
B.  Significant Changes
 
None.
 
ITEM 9. THE OFFER AND LISTING
 
A.  Historical Trading Information
 
The table below shows, for the periods indicated, the annual, quarterly and monthly high and low closing prices (in nominal Chilean pesos) of the shares of our common stock on the Santiago Stock Exchange and the annual, quarterly and monthly high and low closing prices (in U.S. dollars) as reported by the NYSE.
 
 
150

 
   
Santiago Stock Exchange
   
NYSE
 
   
Common Stock
   
ADS(2)
 
   
High
   
Low
   
High
   
Low
 
   
(Ch$ per share(1))
   
(U.S.$ per ADS)
 
Annual Price History
                       
2010
    47.37       30.74       64.78       31.22  
2011
    43.65       31.94       99.44       59.40  
2012
    41.01       31.40       33.96       26.10  
2013
    36.23       27.62       30.59       21.38  
2014
    37.32       26.81       26.91       19.19  
Quarterly Price History
                               
2013
                               
1st Quarter
    36.23       33.41       30.59       28.34  
2nd Quarter
    33.49       28.20       28.31       21.93  
3rd Quarter
    33.49       27.62       26.79       21.56  
4th Quarter
    33.15       28.21       26.20       21.38  
2014
                               
1st Quarter
    32.10       26.81       23.57       19.34  
2nd Quarter
    37.21       31.98       26.85       23.02  
3rd Quarter
    37.32       33.05       26.91       21.85  
4th Quarter
    34.08       29.74       22.91       21.19  
Monthly Price History
                               
Oct-14
    33.51       30.58       22.46       21.10  
Nov-14
    34.08       31.21       22.91       21.19  
Dec-14
    32.60       29.74       21.35       19.19  
Jan-15
    31.64       29.52       20.28       19.02  
Feb-15
    30.14       32.41       21.00       19.20  
Mar-15
    33.97       31.68       21.71       19.97  
Apr-15
    34.77       32.93       22.61       21.22  
May-15 (through May 8, 2015)
 
33.01
   
32.55
   
21.84
   
21.26
 

B.  Plan of Distribution
 
Not applicable
 
C.  Nature of Trading Market
 
Nature of Trading Market
 
Shares of our common stock are traded on the Chilean Stock Exchanges. Each ADS represents 400 shares of common stock. ADRs have been issued pursuant to the Deposit Agreement, dated as of August 4, 2008, among Santander-Chile, the Depositary and all holders from time to time of ADRs. On October 22, 2012, this agreement was amended and the number of shares per ADS was changed from 1,039 to 400 shares. As of December 31, 2014, 78,425,011ADSs were outstanding (equivalent to 31,370,004,471 shares of common stock or 16.66% of the total number of issued shares of common stock).
 
D.  Selling Shareholders
 
Not applicable.
 
E.   Dilution
 
Not applicable.
 
 
 
F.   Expenses of the Issue
 
Not applicable.
 
ITEM 10. ADDITIONAL INFORMATION
 
A.  Share Capital
 
Not applicable.
 
B.  Memorandum and Articles of Association
 
The legal predecessor of Santander-Chile was Banco Santiago (Santiago). Santiago was incorporated by public deed dated September 7, 1977 granted at the Notary Office of Alfredo Astaburuaga Gálvez. Santiago received its permission to incorporate and function as a bank by Resolution No. 118 of the SBIF on October 27, 1977. The Bank’s by-laws were approved by Resolution No. 103 of the SBIF on September 22, 1977. In January 1997, Santiago merged with Banco O’Higgins’ with Santiago as the surviving entity. In 1999, Santiago became a controlled subsidiary of Santander Spain.
 
On May 24, 2007, we changed our by-laws as our official name to Banco Santander-Chile (formerly: Banco Santander Chile) and that the Bank may also use the following names: Banco Santander Santiago, Santander Santiago, Banco Santander, or Santander (formerly only: Banco Santander Santiago and Santander Santiago).
 
Shareholder rights in a Chilean bank that is also an open stock (public) corporation are governed by (1) the corporation’s estatutos, which effectively serve the purpose of both the articles or certificate of incorporation and the by-laws of a company incorporated in the United States, (2) the General Banking Law and (3) to the extent not inconsistent with the General Banking Law, by the provisions of Chilean Companies Law applicable to open stock corporations, except for certain provisions that are expressly excluded. Article 137 of the Chilean Companies Law provides that all provisions of the Chilean Companies Law take precedence over any contrary provision in a corporation’s estatutos. Both the Chilean Companies Law and our estatutos provide that legal actions by shareholders against us (or our officers or directors) to enforce their rights as shareholders or by one shareholder against another in their capacity as such are to be brought in Chile in arbitration proceedings, notwithstanding the plaintiff’s right to submit the action to the ordinary courts of Chile.
 
The Chilean securities markets are principally regulated by the Superintendency of Securities and Insurance under the Chilean Securities Market Law and the Chilean Companies Law. In the case of banks, compliance with these laws is supervised by the SBIF. These two laws provide for disclosure requirements, restrictions on insider trading and price manipulation and protection of non-controlling investors. The Chilean Securities Market Law sets forth requirements relating to public offerings, stock exchanges and brokers, and outlines disclosure requirements for companies that issue publicly offered securities. The Chilean Companies Law sets forth the rules and requirements for establishing open stock corporations while eliminating government supervision of closed (closely-held) corporations. Open stock (public) corporations are those with 500 or more shareholders, or companies in which 100 or more shareholders own at least 10.0% of the subscribed capital (excluding those whose individual holdings exceed 10.0%), and all other companies that are registered in the Securities Registry of the Superintendency of Securities and Insurance.
 
Santander-Chile is a bank providing a broad range of commercial and retail banking services, as well as a variety of financial services. Our objects and purposes can be found in Article 4 of our estatutos.
 
Board of Directors
 
The Board of Directors has 11 regular members and 2 alternate members, elected by shareholder vote at General Shareholders’ Meetings. The directors may be either shareholders or non-shareholders of the Company. There is no age limit for directors.
 
A director remains in office for three years and may be reelected indefinitely. If for any reason, the General Shareholders’ Meeting where the newly appointments of directors are to be made is not held, the duties of those serving as such shall be extended until their replacements are designated, in which case, the Board of Director shall convene a Meeting at the earliest possible time in order to effect the appointments.
 
 
152

 
The directors are entitled to compensation for the performance of their duties. The amount of their compensation is determined annually by the General Shareholders’ Meeting. In addition, payments in the form of wages, fees, travel accounts, expense accounts, dues as representatives of the Board of Directors and other cash payments, payments in kind or royalties of any sort whatsoever, may be paid to certain directors for the performance of specific duties or tasks in addition to their functions as directors imposed upon them specifically by the General Shareholders’ Meeting. Any special compensation is authorized or approved at the General Shareholders’ Meeting, and for that purpose, a detailed and separate entry shall be made in the Annual Report, which shall expressly indicate the complete name of each of the directors receiving special compensation.
 
Without prejudice to any other incapacity or incompatibility established by law, the following may not be directors: (a) those persons who have been sentenced or are being tried, either as principals or accessories, for crimes punishable with a penalty of temporary or permanent suspension from or incapacity to hold public office; (b) those persons who have been declared bankrupt and have not been rehabilitated; (c) members of the House of Representatives and the Senate; (d) directors or employees of any other financial institution; employees appointed by the President of the Republic and employees or officers of (i) the State, (ii) any public service, public institution, semi-public institution, autonomous entity or state-controlled company (any such entity a “Public Entity”) or (iii) any enterprise, corporation or public or private entity in which the State or a Public Entity has a majority interest, has made capital contributions, or is represented or participating, provided that persons holding positions in teaching activities in any of the above entities may be directors; and (f) the Bank’s employees, which shall not prevent a director from holding on a temporary basis and for a term not to exceed ninety days the position of General Manager. Chief Executive Officers may not be elected as directors.
 
For purposes of the appointment of directors, each shareholder shall have the right to one vote per share for purposes of appointing a single person, or to distribute his votes in between candidates as he may deem convenient, and the persons obtaining the largest number of votes in the same and single process shall be awarded positions, until all positions have been filled. The election of the regular and alternate board members shall be carried out separately. For purposes of the casting of the vote, the Chairman and the Secretary, together with any other persons that may have been previously designated by the Meeting to sign the minutes thereof, shall issue a certificate giving evidence of the oral votes of shareholders attending, following the order of the list of attendance being taken.
 
Each shareholder shall be entitled, however, to cast his vote by means of a ballot signed by him, stating whether he signs for his own account or as a representative. This entitlement notwithstanding, in order to expedite the voting process, the Chairman of the Bank or the Superintendency, as the case may be, is entitled to order that the vote be taken alternatively or by oral vote or by means of ballots. At the time of polling, the Chairman may instruct that the votes be read aloud, in order for those in attendance to count for themselves the number of votes issued and verify the outcome of the voting process.
 
The Secretary tabulates the votes and the Chairman announces those who have obtained the largest majorities until all the director positions have been filled. The Secretary places the documents evidencing the outcome of the count, duly signed by the persons charged with the duty of verifying the number of votes issued, together with the ballots delivered by the shareholders who did not vote orally, in an envelope which shall be closed and sealed with the corporate seal and shall remain deposited with the Bank for a least two years.
 
Every appointment of directors, or any changes in the appointment of directors, shall be transcribed into a public deed before a notary public, published in a newspaper of Santiago and notified to the SBIF and Financial Institutions, by means of the filing of a copy of the respective public deed. Likewise, the appointments of General Manager, Manager and Deputy Managers shall be communicated and transcribed into a public deed.
 
If a director ceases to be able to perform his or her duties, whether by reason of conflict of interest, limitation, legal incapacity or bankruptcy, impossibility, resignation or any other legal cause, the vacancy shall be filled as follows: (a) the positions of regular directors shall be filled by an alternate director; and (b) the positions of alternate directors vacated upon the application of (a) above, and the positions of regular directors if a regular director’s position cannot be filled pursuant to clause (a) because both alternate members have already become regular members, shall be filled by the Board of Directors on its first meeting after the vacancy occurs. Board members appointed pursuant to clause (b) will remain in the position until the next General Shareholders’ Meeting, where the appointment may be ratified, in which case, the replacement director will remain in his or her position until the expiration of the term of the director he or she replaced.
 
 
153

 
The alternate directors may temporarily replace regular directors in case of their absence or temporary inability to attend a board meeting, or in a definitive manner in case of vacancy. The alternate board members are always entitled to attend and speak at board meetings. They will be entitled to vote at such meetings only when a regular member is absent and such alternate member acts as the absent member’s replacement.
 
During the first meeting following the General Shareholders’ Meeting, the Board of Directors shall elect in separate votes from among its members, a Chairman, a First Vice Chairman and a Second Vice Chairman. In the event of a tie, the appointment shall be decided by lottery.
 
The Board of Directors meet, in ordinary sessions at least once a month, held on pre-set dates and times determined by the Board. Extraordinary meetings are held whenever called by the Chairman, whether at his own will or upon the request of three or more directors, so long as the Chairman determines in advance that the meeting is justified, except if the request is made by the absolute majority of the directors in office, in which case the meeting shall be held without such prior determination. The extraordinary meetings may only address those matters specifically included in the agenda for the extraordinary meeting, except that, if the meeting is attended by all the directors in office, they may agree otherwise by a unanimous vote. Extraordinary meetings shall be called by means of a written instrument signed by the Chairman or the Secretary or his alternate and delivered to each of the directors at least three days prior to the date set for the meeting.
 
The quorum for the Board of Directors’ Meeting is six of its members. Resolutions shall be adopted by the affirmative vote of the absolute majority of the attending directors. In the event of a tie, the person acting as the Chairman of the meeting shall cast a deciding vote.
 
Directors having a vested interest in a negotiation, act, contract or transaction that is not related to the bank business, either as principal or as representative of another person, shall communicate such fact to the other directors. If the respective resolutions are approved by the Board, it shall be in accordance to the prevailing fair market conditions and director’s interest must be disclosed at the next General Shareholders’ Meeting.
 
The discussions and resolutions of the Board of Directors shall be recorded in a special book of minutes maintained by the Secretary. The relevant minutes shall be signed by the directors attending the meeting and by the Secretary, or his alternate. If a director determines that the minutes for a meeting are inaccurate or incomplete, he is entitled to record an objection before actually signing the minutes. The resolutions adopted may be carried out prior to the approval of the minutes at a subsequent meeting. In the event of death, refusal or incapacity for any reason of any of the directors attending to sign the minutes, such circumstance shall be recorded at the end of the minutes stating the reason for the impediment.
 
The directors are personally liable for all of the acts they effect in the performance of their duties. Any director who wishes to disclaim responsibility for any act or resolution of the Board of Directors must to record his opposition in the minutes, and the Chairman must report the opposition at the following General Shareholders’ Meeting.
 
The Board of Directors will represent the Bank in and out of court and, for the performance of the Bank’s business, a circumstance that will not be necessary to prove before third parties, it will be empowered with all the authorities and powers of administration that the law or the by-laws do not set as exclusive to the General Shareholders’ Meeting, without being necessary to grant any special power of attorney, even for those acts that the law requires to do so. This provision is notwithstanding the judicial representation of the Bank that is part of the General Manager’s authorities. The Board of Directors may delegate part of its authority to the General Manager, to the Managers, Deputy Managers or Attorneys of the Bank, a Director, a Commission of Directors, and for specifically determined purposes, in other persons.
 
Meetings and Voting Rights
 
An ordinary annual meeting of shareholders is held within the first four months of each year. The ordinary annual meeting of shareholders is the corporate body that approves the annual financial statements, approves all dividends in accordance with the dividend policy determined by our Board of Directors, elects the Board of
 
 
Directors and approves any other matter that does not require an extraordinary shareholders’ meeting. The last ordinary annual meeting of our shareholders was held on April 28, 2015. Extraordinary meetings may be called by our Board of Directors when deemed appropriate, and ordinary or extraordinary meetings must be called by our Board of Directors when requested by shareholders representing at least 10.0% of the issued voting shares or by the SBIF. Notice to convene the ordinary annual meeting or an extraordinary meeting is given by means of three notices which must be published in a newspaper of our corporate domicile (currently Santiago) or in the Official Gazette in a prescribed manner, and the first notice must be published not less than 15 days nor more than 20 days in advance of the scheduled meeting. Notice must also be mailed 15 days in advance to each shareholder and given to the SBIF and the Chilean Stock Exchanges. Currently, we publish our official notices in the El Mercurio newspaper of Santiago.
 
The quorum for a shareholders’ meeting is established by the presence, in person or by proxy, of shareholders representing at least an absolute majority of the issued shares. If a quorum is not present at the first meeting, the meeting can be reconvened (in accordance with the procedures described in the previous paragraph) and, upon the meeting being reconvened, shareholders present at the reconvened meeting are deemed to constitute a quorum regardless of the percentage of the shares represented. The shareholders’ meetings pass resolutions by the affirmative vote of an absolute majority of those voting shares present or represented at the meeting. The vote required at any shareholders’ meeting to approve any of the following actions, however, is a two-thirds majority of the issued shares:
 
 
·
a change in corporate form, spin-off or merger;
 
 
·
an amendment of the term of existence, if any, and the early dissolution of the bank;
 
 
·
a change in corporate domicile;
 
 
·
a decrease of corporate capital previously approved by the SBIF, provided it is not reduced below the legal minimum capital;
 
 
·
a decrease in the number of directors previously approved by the SBIF;
 
 
·
the approval of contributions and appraisal of properties other than cash, in those cases where it is permitted by the General Banking Act;
 
 
·
the amendment of authority of the general shareholders’ meeting or the restriction of the authority of the Board of Directors;
 
 
·
the transfer of 50.0% or more of the corporate assets, regardless of whether it includes liabilities, or the implementation or amendment of any business plan that contemplates the transfer of 50.0% or more of the corporate assets;
 
 
·
a change in the manner of distribution of profits established in the by-laws;
 
 
·
any non-cash distribution in respect of the shares;
 
 
·
the repurchase of shares of stock in the Bank; or
 
 
·
the approval of material related-party transactions when requested by shareholders representing at least 5.0% of the issued and outstanding shares with right to vote if they determine that the terms and conditions of those transactions are not favorable to the interests of the bank or if two independent assessments of those transactions requested by the Board materially differ from each other.
 
Shareholders may accumulate their votes for the election of directors and cast all of their votes in favor of one person.
 
In general, Chilean law does not require a Chilean open stock corporation to provide the level and type of information that U.S. securities laws require a reporting company to provide to its shareholders in connection with a solicitation of proxies. However, shareholders are entitled to examine the books of the bank within the 15-day period
 
 
before the ordinary annual meeting. Under Chilean law, a notice of a shareholders’ meeting listing matters to be addressed at the meeting must be mailed not fewer than 15 days prior to the date of such meeting, and, in cases of an ordinary annual meeting, shareholders holding a prescribed minimum investment must be sent an Annual Report of the bank’s activities which includes audited financial statements. Shareholders who do not fall into this category but who request it must also be sent a copy of the bank’s Annual Report. In addition to these requirements, we regularly provide, and management currently intends to continue to provide, together with the notice of shareholders’ meeting, a proposal for the final annual dividend.
 
The Chilean Corporations Law provides that whenever shareholders representing 10.0% or more of the issued voting shares so request, a Chilean company’s Annual Report must include, in addition to the materials provided by the Board of Directors to shareholders, such shareholders’ comments and proposals in relation to the company’s affairs. Similarly, the Chilean Corporations Law provides that whenever the Board of Directors of an open stock corporation convenes an ordinary shareholders’ meeting and solicits proxies for that meeting, or distributes information supporting its decisions, or other similar material, it is obligated to include as an annex to its Annual Report any pertinent comments and proposals that may have been made by shareholders owning 10.0% or more of the company’s voting shares who have requested that such comments and proposals be so included.
 
Only shareholders registered as such with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his proxy to attend and vote on his behalf. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed. Each share represents one vote and there are no special classes of shares with different rights. Our by-laws do not include any condition that is more significant than required by law to change the right of shareholders.
 
Capitalization
 
Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in such company’s capital. When an investor subscribes for issued shares, the shares are registered in such investor’s name, even if not paid for, and the investor is treated as a shareholder for all purposes except with regard to receipt of dividends and the return of capital, provided that the shareholders may, by amending the by-laws, also grant the right to receive dividends or distributions of capital. The investor becomes eligible to receive dividends and returns of capital once it has paid for the shares (if it has paid for only a portion of such shares, it is entitled to reserve a corresponding pro-rata portion of the dividends declared and/or returns of capital with respect to such shares unless the company’s by-laws provide otherwise). If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean law to auction the shares on the stock exchange and collect the difference, if any, between the subscription price and the auction proceeds. However, until such shares are sold at auction, the subscriber continues to exercise all the rights of a shareholder (except the right to receive dividends and return of capital).
 
Article 22 of the Chilean Corporations Law states that the purchaser of shares of a company implicitly accepts its by-laws and any agreements adopted at shareholders’ meetings.
 
Approval of Financial Statements
 
Our Board of Directors is required to submit our audited financial statements to the shareholders annually for their approval. The approval or rejection of such financial statements is entirely within our shareholders’ discretion. If our shareholders reject our financial statements, our Board of Directors must submit new financial statements not later than 60 days from the date of such rejection. If our shareholders reject our new financial statements, our entire Board of Directors is deemed removed from office and a new Board of Directors is elected at the same meeting. Directors who individually approved such rejected financial statements are disqualified for re-election for the ensuing period.
 
Registrations and Transfers
 
We act as our own registrar and transfer agent, as is customary among Chilean companies. In the case of jointly owned shares, an attorney-in-fact must be appointed to represent the joint owners in dealings with us.
 
 
156

 
Dividend, Liquidation and Appraisal Rights
 
Under the Chilean Corporations Law, Chilean companies are generally required to distribute at least 30.0% of their earnings as dividends.
 
In the event of any loss of capital, no dividends can be distributed so long as such loss is not recovered. Also, no dividends of a bank above the legal minimum can be distributed if doing so would result in the bank exceeding its ratio of risk-weighted assets to regulatory capital or total assets.
 
Dividends that are declared but not paid by the date set for payment at the time of declaration are adjusted from the date set for payment to the date such dividends are actually paid, and they accrue interest.
 
We may declare a dividend in cash or in shares. When a share dividend is declared above the legal minimum (which minimum must be paid in cash), our shareholders must be given the option to elect to receive cash. Our ADS holders may, in the absence of an effective registration statement under the Securities Act or an available exemption from the registration requirement thereunder, effectively be required to receive a dividend in cash. See “Item 10.  B.—Memorandum and Articles of Association—Preemptive Rights and Increases of Share Capital.” A dividend entitlement lapses after 5 years and the funds go to the Chilean Treasury.
 
In the event of our liquidation, the holders of fully paid shares would participate equally and pro rata, in proportion to the number of paid-in shares held by them, in the assets available after payment of all creditors. The holders of fully paid shares would not be required to contribute additional capital to the Bank in the event of our liquidation.
 
In accordance with the General Banking Law, our shareholders do not have appraisal rights.
 
Ownership Restrictions
 
Under Article 12 of the Chilean Securities Market Law and the regulations of the SBIF, shareholders of open stock corporations are required to report the following to the Superintendency of Securities and Insurance and the Chilean Stock Exchanges:
 
 
·
any direct or indirect acquisition or sale of shares that results in the holder’s acquiring or disposing, directly or indirectly, 10.0% or more of an open stock corporation’s share capital; and
 
 
·
any direct or indirect acquisition or sale of shares or options to buy or sell shares, in any amount, if made by a holder of 10.0% or more of an open stock corporation’s capital or if made by a director, liquidator, main officer, general manager or manager of such corporation.
 
In addition, majority shareholders must include in their report whether their purpose is to acquire control of the company or if they are making a financial investment. A beneficial owner of ADSs representing 10.0% or more of our share capital will be subject to these reporting requirements under Chilean law.
 
Under Article 54 of the Chilean Securities Market Law and the regulations of the Superintendency of Securities and Insurance, persons or entities intending to acquire control, directly or indirectly, of an open stock corporation, regardless of the acquisition vehicle or procedure, and including acquisitions made through direct subscriptions or private transactions, are also required to inform the public of such acquisition at least 10 business days before the date on which the transaction is to be completed, but in any case, as soon as negotiations regarding the change of control begin (i.e., when information and documents concerning the target are delivered to the potential acquiror) through a filing with the Superintendency of Securities and Insurance, the stock exchanges and the companies controlled by and that control the target and through a notice published in two Chilean newspapers, which notice must disclose, among other information, the person or entity purchasing or selling and the price and conditions of any negotiations.
 
Prior to such publication, a written communication to such effect must be sent to the target corporation, to the controlling corporation, to the corporations controlled by the target corporation, to the Superintendency of Securities and Insurance, and to the Chilean stock exchanges on which the securities are listed.
 
 
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In addition to the foregoing, Article 54A of the Chilean Securities Market Law requires that within two business days of the completion of the transactions pursuant to which a person has acquired control of a publicly traded company, a notice shall be published in the same newspapers in which the notice referred to above was published and notices shall be sent to the same persons mentioned in the preceding paragraphs.
 
The provisions of the aforementioned articles do not apply whenever the acquisition is being made through a tender or exchange offer.
 
Title XXV of the Chilean Securities Market Law on tender offers and the regulations of the Superintendency of Securities and Insurance provide that the following transactions must be carried out through a tender offer:
 
 
·
an offer which allows a person to take control of a publicly traded company, unless (i) the shares are being sold by a controlling shareholder of such company at a price in cash which is not substantially higher than the market price and the shares of such company are actively traded on a stock exchange and (ii) those shares are acquired (a) through a capital increase, (b) as a consequence of a merger, (c) by inheritance or (d) through a forced sale; and
 
 
·
an offer for a controlling percentage of the shares of a listed company if such person intends to take control of the parent company (whether listed or not) of such listed company, to the extent that the listed company represents 75.0% or more of the consolidated net worth of the parent company.
 
In addition, Article 69bis of the Companies Law requires that whenever a controlling shareholder acquires two thirds of the voting shares of a listed company, such controlling shareholder must offer to purchase the remaining shares from the non-controlling shareholders in a tender offer.
 
Article 200 of the Chilean Securities Market Law prohibits any shareholder that has taken control of a publicly traded company to acquire, for a period of 12 months from the date of the transaction in which it gained control of the publicly traded company, a number of shares equal to or greater than 3.0% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.
 
Title XV of the Chilean Securities Market Law sets forth the basis to determine what constitutes a controlling power, a direct holding and a related party. The Chilean Securities Market Law defines control as the power of a person or group of persons acting (either directly or through other entities or persons) pursuant to a joint action agreement, to direct the majority of the votes at the shareholders’ meetings of the corporation, to elect the majority of members of its Board of Directors, or to influence the management of the corporation significantly. Significant influence is deemed to exist in respect of the person or group of persons with an agreement to act jointly that holds, directly or indirectly, at least 25.0% of the voting share capital, unless:
 
 
·
another person or group of persons acting pursuant to joint action agreement, directly or indirectly, controls a stake equal to or greater than the percentage controlled by such person or group of persons;
 
 
·
the person or group does not control, directly or indirectly, more than 40.0% of the voting share capital and the percentage controlled is lower than the sum of the shares held by other shareholders holding more than 5.0% of the share capital (either directly or pursuant to a joint action agreement); or
 
 
·
in cases where the Superintendency of Securities and Insurance has ruled otherwise, based on the distribution or atomization of the overall shareholding.
 
According to the Chilean Securities Market Law, a joint action agreement is an agreement among two or more parties which, directly or indirectly, own shares in a corporation at the same time and whereby they agree to participate with the same interest in the management of the corporation or in taking control of the same. The law presumes that such an agreement exists between:
 
 
·
a principal and its agents;
 
 
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·
spouses and relatives within certain degrees of kinship;
 
 
·
entities within the same business group; and
 
 
·
an entity and its controller or any of the members of the controller.
 
Likewise, the Superintendency of Securities and Insurance may determine that a joint action agreement exists between two or more entities considering, among other things, the number of companies in which they participate and the frequency with which they vote identically in the election of directors, appointment of managers and other resolutions passed at extraordinary shareholders’ meetings.
 
According to Article 96 of the Chilean Securities Market Law, a business group is a group of entities with such ties in their ownership, management or credit liabilities that it may be assumed that the economic and financial action of such members is directed by, or subordinated to, the joint interests of the group, or that there are common credit risks in the credits granted to, or in the acquisition of securities issued by, them. According to the Chilean Securities Market Law, the following entities are part of the same business group:
 
 
·
a company and its controller;
 
 
·
all the companies with a common controller together with that controller;
 
 
·
all the entities that the Superintendency of Securities and Insurance declares to be part of the business group due to one or more of the following reasons:
 
 
·
a substantial part of the assets of the company is involved in the business group, whether as investments in securities, equity rights, loans or guaranties;
 
 
·
the company has a significant level of indebtedness and the business group has a material participation as a lender or guarantor;
 
 
·
any member of a group of controlling entities of a company mentioned in the first two bullets above and there are grounds to include it in the business group; or
 
 
·
the company is controlled by a member of a group of controlling entities and there are grounds to include it in the business group.
 
Article 36 of the General Banking Law states that as a matter of public policy, no person or company may acquire, directly or indirectly, more than 10.0% of the shares of a bank without the prior authorization of the SBIF, which may not be unreasonably withheld. The prohibition would also apply to beneficial owners of ADSs. In the absence of such authorization, any person or group of persons acting in concert would not be permitted to exercise voting rights with respect to the shares or ADSs acquired. In determining whether or not to issue such an authorization, the SBIF considers a number of factors enumerated in the General Banking Law, including the financial stability of the purchasing party.
 
According to Article 35bis of the General Banking Law, the prior authorization of the SBIF is required for:
 
 
·
the merger of two or more banks;
 
 
·
the acquisition of all or a substantial portion of a banks’ assets and liabilities by another bank;
 
 
·
the control by the same person, or controlling group, of two or more banks; or
 
 
·
a substantial increase in the existing control of a bank by a controlling shareholder of that bank.
 
This prior authorization is only required when the acquiring bank or the resulting group of banks would own a significant market share in loans, defined by the SBIF to be more than 15.0% of all loans in the Chilean banking system. The intended purchase, merger or expansion may be denied by the SBIF; or, if the acquiring bank or
 
 
resulting group would own a market share in loans determined to be more than 20.0% of all loans in the Chilean banking system, the purchase, merger, or expansion may be conditioned on one or more of the following:
 
 
·
the bank or banks maintaining regulatory capital higher than 8.0% and up to 14.0% of risk-weighted assets;
 
 
·
the technical reserve established in Article 65 of the General Banking Law being applicable when deposits exceed one and a half times the resulting bank’s paid-in capital and reserves; or
 
 
·
the margin for interbank loans be reduced to 20.0% of the resulting bank’s regulatory capital.
 
If the acquiring bank or resulting group would own a market share in loans determined by the SBIF to be more than 15% but less than 20%, the authorization will be conditioned on the bank or banks maintaining a regulatory capital not lower than 10% of their risks weighted assets for the period specified by the SBIF, which may not be less than one year. The calculation of the risk weighted assets is based on a five category risk classification system applied to a bank’s assets that is based on the Basel Committee recommendations.
 
According to the General Banking Law, a bank may not grant loans to related parties on terms more favorable than those generally offered to non-related parties. Article 84 No. 2 of the General Banking Law and the regulations issued by the SBIF creates the presumption that natural persons who are holders of shares and who beneficially own more than 1.0% of the shares are related to the bank and imposes certain restrictions on the amounts and terms of loans made by banks to related parties. This presumption would also apply to beneficial owners of ADSs representing more than 1.0% of the shares. Finally, according to the regulations of the SBIF, Chilean banks that issue ADSs are required to inform the SBIF if any person, directly or indirectly, acquires ADSs representing 5.0% or more of the total amount of shares of capital stock issued by such bank.
 
Article 16bis of the General Banking Law provides that the individuals or legal entities that, individually or with other people, directly control a bank and who individually own more than 10.0% of its shares must send to the SBIF reliable information on their financial situation in the form and in the opportunity set forth in Resolution No. 3,156 of the SBIF.
 
There are no limitations for non-resident or foreign shareholders to hold or exercise voting rights on the securities.
 
Preemptive Rights and Increases of Share Capital
 
The Chilean Corporations Law provides that whenever a Chilean company issues new shares for cash, it must offer its existing shareholders the right to purchase a number of shares sufficient to maintain their existing ownership percentages in the company. Pursuant to this requirement, preemptive rights in connection with any future issue of shares will be offered by us to the Depositary as the registered owner of the shares underlying the ADRs. However, the Depositary will not be able to make such preemptive rights available to holders of ADSs unless a registration statement under the Securities Act is effective with respect to the underlying shares or an exemption from the registration requirements thereunder is available.
 
We intend to evaluate, at the time of any preemptive rights offering, the practicality under Chilean law and Central Bank regulations in effect at the time of making such rights available to our ADS holders, as well as the costs and potential liabilities associated with registration of such rights and the related shares of common stock under the Securities Act, and the indirect benefits to us of thereby enabling the exercise by all or certain holders of ADSs of their preemptive rights and any other factors we consider appropriate at the time, and then to make a decision as to whether to file such registration statement. We cannot assure you that any registration statement would be filed. If we do not file a registration statement and no exemption from the registration requirements under the Securities Act is available, the Depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of such sale. In the event that the Depositary is not able, or determines that it is not feasible, to sell such rights at a premium over the cost of any such sale, all or certain holders of ADSs may receive no value for such rights. Non-U.S. holders of ADSs may be able to exercise their preemptive rights regardless of whether a registration statement is filed. The inability of all or certain holders of ADSs to exercise preemptive rights in respect of shares of common stock underlying such ADSs could result in such holders not maintaining their percentage ownership of the common stock following such preemptive rights offering unless such holder made additional market purchases of ADSs or shares of common stock.
 
 
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Under Chilean law, preemptive rights are exercisable or freely transferable by shareholders during a period that cannot be less than 30 days following the grant of such rights. During such period, and for an additional 30-day period thereafter, a Chilean corporation is not permitted to offer any unsubscribed shares for sale to third parties on terms which are more favorable than those offered to its shareholders. At the end of such additional 30-day period, a Chilean open stock corporation is authorized to sell unsubscribed shares to third parties on any terms, provided they are sold on a Chilean stock exchange. Unsubscribed shares that are not sold on a Chilean stock exchange can be sold to third parties only on terms no more favorable for the purchaser than those offered to shareholders.
 
C.  Material Contracts
 
During the past two years, we were not a party to any material contract outside the ordinary course of business.
 
D.  Exchange Controls
 
The Central Bank is responsible for, among other things, monetary policies and exchange controls in Chile. Appropriate registration of a foreign investment in Chile grants the investor access to the Formal Exchange Market. See “Item 3.  Key Information—A. Selected Financial Data—Exchange Rates.” Foreign investments can be registered with the Foreign Investment Committee under Decree Law No. 600 or can be registered with the Central Bank under the Central Bank Act. The Central Bank Act is an organic constitutional law requiring a “special majority” vote of the Chilean Congress to be amended. Since April 18, 2001, all exchange controls in Chile have been eliminated.
 
Previously, Chilean law mandated that holders of shares of Chilean companies that were not residents of Chile register as foreign investors under one of the foreign investment regimes contemplated by Chilean law in order to receive dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market. Under the Foreign Investment Contract (as defined herein), the Depositary, on behalf of ADS holders, is granted access to the Formal Exchange Market to convert cash dividends from Chilean pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile, net of taxes, and no separate registration by ADR holders is required. As of April 19, 2001, the Central Bank deregulated the Exchange Market, eliminating the need to obtain approval from the Central Bank in order to remit dividends, but at the same time eliminating the possibility of guaranteeing access to the Formal Exchange Market. However, this did not affect the current Foreign Investment Contract, which was signed prior to April 19, 2001, and which still permits access to the Formal Exchange Market based on the prior approval of the Central Bank. Therefore the holders of ADRs of Santander-Chile are still subject to the Foreign Investment Contract, including its clauses referring to the prior exchange rules including the now extinct Chapter XXVI of the Compendium.
 
E.  Taxation
 
The following discussion summarizes certain Chilean tax and United States federal income tax consequences to beneficial owners arising from the ownership and disposition of our common stock or ADSs. The summary does not purport to be a comprehensive description of all potential Chilean and United States federal income tax considerations that may be relevant to a decision to own or dispose of our common stock or ADSs and is not intended as tax advice to any particular investor. This summary does not describe any tax consequences arising under the laws of any state, locality or other taxing jurisdiction other than Chile and the United States. There is currently no income tax treaty between the United States and Chile. However, the U.S. government and the government of Chile signed on February 4, 2010 the Proposed Income Tax Treaty between the United States of America and the Republic of Chile (the “Proposed U.S.-Chile Treaty”), which is now subject to ratification by the U.S. Senate and Chilean Congress If the Proposed U.S.-Chile Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.
 
Material Tax Consequences of Owning Shares of Our Common Stock or ADSs
 
Chilean Taxation
 
The following is a summary of certain Chilean tax consequences of the ownership and disposition of shares of our common stock or of ADSs evidenced by ADRs by Foreign Holders (as defined herein). The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to own
 
 
or dispose shares of our common stock or ADSs and does not purport to address the tax consequences applicable to all categories of investors, some of whom may be subject to special rules. Holders of shares of our common stock or ADSs are advised to consult their tax advisers concerning the Chilean and other tax consequences of the ownership and disposition of shares of our common stock or of ADSs evidenced by ADRs.
 
The description of Chilean tax laws set forth below is based on Chilean laws in force as of the date of this Annual Report and is subject to any changes in such laws occurring after the date of this Annual Report. These changes can be made on a retroactive basis, but may not be used retroactively against taxpayers who acted in good faith relying on regulations or interpretations that were in force at that moment.
 
For purposes of this summary, the term “Foreign Holder” means either (1) in the case of an individual, a person who is not resident or domiciled in Chile; or (2) in the case of a legal entity, a legal entity that is not organized under the laws of Chile, unless the shares of our common stock or ADSs are assigned to a branch or a permanent establishment of such entity in Chile. For purposes of Chilean taxation, (a) an individual holder is resident in Chile if he or she has remained in Chile for more than six months in one calendar year, or a total of more than six months in two consecutive fiscal years, and (b) an individual is domiciled in Chile if he or she resides in Chile with the actual or presumptive intent of staying in Chile.(intention that can be evidenced by circumstances such as the acceptance of an employment in Chile or the relocation of one´s family to Chile).
 
The Income Tax Law provides that a Foreign Holder is subject to income taxes on his/her incomes of Chilean sources. For this purposes, Chilean source income means earnings from activities performed within Chilean territory or from sale, disposition or other transactions in connection with assets or goods located in Chile. Indirect sale regulations may also attribute sourced Chilean income.
 
Taxation of Dividends
 
Cash dividends paid by us with respect to shares of our common stock held by a Foreign Holder, including shares represented by ADSs, will be subject to a 35% Chilean Withholding Tax, which is withheld and paid over by us (the “Withholding Tax”). If we have paid Corporate Income Tax (the “First Category Tax”) on the income from which the dividend is paid, a credit for the First Category Tax effectively reduces the rate of Withholding Tax. When a credit is available, the Withholding Tax is computed by applying the 35% rate to the pre-tax amount needed to fund the dividend and then subtracting from the tentative withholding tax so determined the amount of First Category Tax actually paid on the pre-tax income. For purposes of determining the rate at which First Category Tax was paid, dividends are treated as paid from our oldest retained earnings.
 
The effective rate of Withholding Tax to be imposed on dividends paid by us will vary depending upon the amount of First Category Tax paid by us on the earnings underlying the dividends. The statutory rate for the First Category Tax attributed to earnings generated during the years 2008, 2009 and 2010 was 17.0%. For years, 2011, 2012 and 2013 was 20% and, for year 2014 is 21%. The example below illustrates the effective Chilean Withholding Tax burden on a cash dividend received by a Foreign Holder, assuming a Withholding Tax rate of 35%, a statutory First Category Tax rate of 21% and a distribution of all of the net proceeds available after payment of the First Category Tax.
 
Taxable income
    U.S.$ 100  
First Category Tax (21% of U.S.$100)
    (21 )
Net proceeds available
    79  
Dividend payment
    79  
Withholding Tax (35% of the sum of the dividend (U.S.$79) and the available First Category Tax credit (U.S.$21))
    35  
First Category Tax credit
    (21 )
Payable Withholding Tax
    14  
Net dividend received
    65 (79-14 )
      17.72 %
Effective dividend withholding tax rate
    (14/79 )

Dividend distributions made in kind would be subject to the same Chilean tax rules as cash dividends. Stock dividends received by the Foreign Holder are not subject to Chilean taxation. The distributions of preemptive rights
 
 
relating to shares of common stock will not be subject to Chilean taxation. If the Proposed U.S.-Chile Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.
 
Taxation of Capital Gains
 
Gain realized on the sale, exchange or other disposition by a Foreign Holder of ADSs will not be subject to Chilean taxation, provided that such sale or disposition occurs outside Chile or that it is performed under the rules of Title XXIV of the Chilean Securities Market Law, as amended by Law N°19,601, dated January 18, 1999. The deposit and withdrawal of shares of common stock in exchange for ADSs will not be subject to any Chilean taxes.
 
Gain recognized on a sale or exchange of shares of common stock (as distinguished from sales or exchanges of ADSs representing such shares of common stock) by a Foreign Holder will be subject both to First Category Tax (currently imposed at a rate of 21%) and Withholding Tax (the first can be used as credit against the second) if (1) the Foreign Holder has held such shares of common stock for less than one year since exchanging ADSs for the shares of common stock, (2) the Foreign Holder acquired and disposed of the shares of common stock in the ordinary course of its business or as a regular trader of stock or (3) the sale is made to a company in which the Foreign Holder holds an interest. In certain other cases where the Foreign Holder of shares of common stock has some connection with Chile, gain on the disposition of shares of common stock will be subject only to First Category Tax as a single tax (currently imposed at a rate of 21%).
 
The sale of shares of common stock by a Foreign Holder to an individual or entity non-resident or domiciled in Chile is subject to a provisional withholding. Such a provisional withholding will be equal to (i) 5% of the total amount to remit, without any deduction, paid to, credited to or putted at the disposal of the Foreign Holder if the transaction is subject to the First Category Tax as a single tax, unless the gain subject to taxation can be determined, in which case the withholding will be equal to the rate of First Category Tax (currently 21%) on the gain, or (ii) the difference between Withholding Tax (35%) and First Category Tax (21%) rates, which currently would be 14%, of the total amount to remit, without any deduction, paid to, credited to or putted at the disposal of the Foreign Holder, if the transaction is subject to both First Category and Withholding Tax, unless the gain subject to taxation can be determined, in which case the withholding will be equal to a 35% on the gain. For income tax purposes, the capital gain shall be the difference between the sales price and the acquisition cost of the stock. The tax basis of shares of common stock received in exchange for ADSs will be the acquisition value of such shares. The valuation procedure set forth in the deposit agreement, which values shares of common stock that are being exchanged at the highest price at which they trade on the Santiago Stock Exchange on the date of the exchange, generally will determine the acquisition value for this purpose. Consequently, the conversion of ADSs into shares of common stock and sale of such shares of common stock for the value established under the deposit agreement will not generate a capital gain subject to taxation in Chile.
 
 In the case where ADSs were exchanged for shares and the subsequent sale of the shares is made on a day that is different than the date on which the exchange is recorded, capital gains subject to taxation in Chile may be generated. On October 1, 1999, the Chilean Internal Revenue Service issued Ruling N°3,708 whereby it allowed Chilean issuers of ADSs to amend the Deposit Agreements in which they are parties in order to include a clause that states that, in the case that the exchanged shares are sold by the ADSs’ holder on a Chilean Stock Exchange, either on the same day on which the exchange is recorded in the shareholders’ registry of the issuer or within the two prior business days to such date, the acquisition price of such exchanged shares shall be the price registered in the invoice issued by the stock broker that participated in the sale transaction. Consequently, as we have included this clause in the form of ADRs attached to the deposit agreement, the capital gain that may be generated if the shares received in exchange for ADSs were sold within two days prior to the date on which the exchange is recorded will not be subject to taxation.
 
The distribution and exercise of preemptive rights relating to the shares of common stock will not be subject to Chilean taxation. Cash amounts received in exchange for the shares or assignment of preemptive rights relating to the shares will be subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter to the extent described above).
 
In certain cases and provided certain requirements are met, capital gains realized on the sale of actively traded stock of Chilean public companies may be exempt from Chilean income taxes. Our stock is currently considered an actively traded stock in the Santiago Stock Exchange, and Foreign Holders of the stock may qualify for an income tax exemption. Foreign Holders are urged to consult with their own tax advisers to determine whether an exemption applies to them.
 
 
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If the Proposed U.S.-Chile Treaty becomes effective, it may further restrict the amount of Chilean tax, if any, imposed on gains derived from the sale or exchange of shares of common stock by U.S. residents eligible for the benefits of the treaty. If the Proposed Tax Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.
 
Other Chilean Taxes
 
No Chilean inheritance, donation or succession taxes apply to the transfer or disposition of the ADSs by a Foreign Holder, but such taxes generally will apply to the transfer at death or by donation of shares of our common stock by a Foreign Holder. No Chilean stamp, issue, registration or similar taxes or duties apply to Foreign Holders of shares or ADSs.
 
Withholding Tax Certificates
 
Upon request, we will provide to Foreign Holders appropriate documentation evidencing the payment of Withholding Taxes. For further information, the investor should contact: Robert Moreno, rmorenoh@santander.cl. Dividends payable to holders of ADSs are net of foreign currency conversion expenses of the Depositary and will be subject to the Withholding Tax currently at the rate of 35% (subject to credits in certain cases as described above). 
 
Impact of Chilean Tax Reform
 
On September 29, 2014, the Law N°20.780 containing the Tax Reform was published in the Official Gazette.  The Tax Reform introduced significant changes to the Chilean taxation system and strengthened the powers of the Chilean Tax Authority to control and prevent tax avoidance. The Tax Reform contemplates, among other matters, changes to the corporate tax regime to create two tax regimes. According to the Tax Reform, Chile would have a dual tax system starting from 2017, the shareholders would be able to opt to be subject to one of the following systems: (i) the Semi-Integrated Regime (Sistema Parcialmente Integrado), and (ii) the Attributed Income Regime (Sistema de Renta Atribuida).
 
Under the Attributed Income Regime, the Shareholders would be taxed on an accrual basis, with a FCIT rate of 25% imposed at the level of the operating entity, plus global complementary tax at progressive rates for resident individuals or an additional withholding income tax (AWIT) of 35% for nonresident shareholders (the FCIT being 100% creditable), resulting in an overall income tax charge of 35% for nonresidents. Under this system, profits would be required to be attributed to the owners or shareholders, irrespective of whether a distribution actually is made.
 
Under the Semi-integrated Regime, the shareholders would be taxed on a cash basis (when profits are distributed), but at a FCIT rate of 25.5% for 2017 (and 27% as from 2018). The FCIT still would be creditable against the 35% AWIT under that system, but 35% of the credit would have to be paid to the Treasury, so, in practice, only 65% of the FCIT would be creditable. Thus, taxpayers would pay for the ability to defer shareholder taxation until profits actually are distributed with a higher overall income tax rate than under the attributed income system.
 
However, the Tax Reform considered that investors from countries with treaties containing the Chile clause would be entitled to 100% of the FCIT credit, even if they have opted into the semi-integrated system. Thus, investors from such treaty countries would enjoy the advantage of deferring shareholder taxation until profits are distributed, and yet retain the benefit of the overall 35% income tax charge. This could lead to a shift in the jurisdictions commonly used to make investments into Chile.
 
For banking enterprise, the default system is the Semi-integrated Regime, unless at a future shareholders’ meeting agrees to opt for the attributable taxation regime. Additionally, the Tax Reform considered an increase gradually of the FCIT rate of 20% up to 25% under the Attributed Income Regime, as described below. In the case of the Semi-Integrated Regime, the rate would increase up to 27%.
 
 
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Year
 
Rate
2014
 
21%
2015
 
22.5%
2016
 
24%
2017
 
25% (Attributed Income Regime) /
   
25.5% (Semi-Integrated Regime)
2018
 
25% (Attributed Income Regime) /
   
27% (Semi-Integrated Regime)

U.S. Federal Income Tax Considerations
 
The following is a discussion of material U.S. federal income tax consequences of owning and disposing of shares of our common stock or ADSs to U.S. holders described below, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold such common stock or ADSs. The discussion applies only if you hold shares of our common stock or ADSs as capital assets for U.S. federal income tax purposes. It does not address all aspects of U.S. federal income taxation that may be relevant to you in light of your particular circumstances, including the alternative minimum tax and the Medicare contribution tax, nor does it describe all tax consequences that may be relevant to U.S. holders subject to special rules, such as:
 
 
·
certain financial institutions;
 
 
·
insurance companies;
 
 
·
dealers and traders in securities who use a mark-to-market method of tax accounting;
 
 
·
persons holding shares or ADSs as part of a hedge, “straddle,” conversion transaction, integrated transaction or similar transaction;
 
 
·
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
 
 
·
partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
 
 
·
tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”;
 
 
·
persons holding shares of our common stock or ADSs that own or are deemed to own ten percent or more of our voting stock;
 
 
·
persons who acquired shares of our common stock or ADSs pursuant to the exercise of any employee stock option plan or otherwise as compensation; or
 
 
·
persons whose shares or ADSs are held in connection with a trade or business conducted outside the United States.
 
If an entity that is classified as a partnership for U.S. federal income tax purposes owns shares of our common stock or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships owning shares of our common stock or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the shares of our common stock or ADSs.
 
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. In addition, this discussion does not address U.S. state, local and non-U.S. tax consequences. Please consult your tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of shares or ADSs in your particular circumstances.
 
 
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As used herein, a “U.S. holder” is a person that for U.S. federal income tax purposes is a beneficial owner of shares of our common stock or ADSs and is:
 
 
·
a citizen or individual resident of the United States;
 
 
·
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, a state thereof or the District of Columbia; or
 
 
·
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
 
In general, if you own ADSs, you will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.
 
The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released prior to delivery of shares to the depositary (“pre-release”) or intermediaries in the chain of ownership between U.S. holders of American depositary shares and the issuer of the security underlying the American depositary shares may be taking actions that are inconsistent with the claiming of foreign tax credits for holders of American depositary shares. These actions would also be inconsistent with the claiming of the favorable tax rates, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Chilean taxes and the availability of the favorable tax rates for dividends received by certain non-corporate holders, each described below, could be affected by actions that may be taken by such parties or intermediaries.
 
This discussion assumes that we are not, and will not become, a passive foreign investment company, as described below.
 
Taxation of Distributions
 
Distributions paid on shares of our common stock or ADSs, other than certain pro rata distributions of common shares or rights, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. holders as dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, certain dividends paid by “qualified foreign corporations” to certain non-corporate U.S. holders may be taxable at rates applicable to long-term capital gains. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the NYSE where our ADSs are traded. You should consult your tax advisers to determine whether the favorable rates may apply to dividends you receive and whether you are subject to any special rules that limit your ability to be taxed at the favorable rates. The amount of the dividend will include any amounts withheld by us or our paying agent in respect of Chilean taxes at the effective rate (after credit for First Category Taxes) as described above under “ — Material Tax Consequences of Owning Shares of Our Common Stock or ADSs—Taxation of Dividends” above. You should consult with your tax adviser to determine the amount considered withheld with respect to a distribution if you opt to be subject to the Attributed Income Regime for Chilean tax purposes starting in 2017, as described above under “—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs—Impact of Chilean Tax Reform.”  The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the dividends received deduction generally allowed to U.S. corporations under the Code.
 
Dividends will be included in your income on the date of your (or in the case of ADSs, the depositary’s) receipt of the dividend.  The amount of any dividend income paid in Chilean pesos will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt regardless of whether the payment is in fact converted into U.S. dollars.  If the dividend is converted into U.S. dollars on the date of receipt, you should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
 
Subject to applicable limitations that may vary depending upon your circumstances and the discussion above regarding concerns expressed by the U.S. Treasury, Chilean taxes withheld from cash dividends on shares of our common stock or ADSs, reduced by the credit for any First Category Tax, as described above under “—Chilean
 
 
Taxation,” generally will be creditable against your U.S. federal income tax liability.  Starting in 2017, if you opt into the Attributed Income Regime, as described above under “—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs—Impact of Chilean Tax Reform,”  amounts withheld by us, reduced by the credit for any First Category Tax, may be creditable for U.S. tax purposes.  If creditable, it is uncertain whether such tax would be creditable in the year the Chilean tax is imposed, irrespective of whether a distribution is actually made.  You should consult your tax adviser concerning the creditability and timing issues pertaining to such tax.  If, however, the Proposed U.S.-Chile Treaty becomes effective, any Chilean income taxes withheld from dividends on shares or ADSs in excess of the rate provided by the treaty will not be creditable by a U.S. holder who is eligible for the benefits of the treaty.  The rules governing foreign tax credits are complex and you should consult your tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits.  Instead of claiming a credit, you may, at your election, deduct such Chilean taxes in computing your taxable income, subject to generally applicable limitations under U.S. law.  An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.
 
Sale or Other Disposition of Shares or ADSs
 
For U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of shares of our common stock or ADSs generally will be capital gain or loss, and will be long-term capital gain or loss if you held the shares of our common stock or ADSs for more than one year.  The amount of your gain or loss will be equal to the difference between your tax basis in the shares of our common stock or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars.  If a Chilean tax is withheld on the sale or disposition of the shares of our common stock or ADSs, your amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of the Chilean tax.  See “—Chilean Taxation—Taxation of Capital Gains” for a description of when a disposition may be subject to taxation by Chile.  Such gain or loss generally will be U.S.-source gain or loss for foreign tax credit purposes.  Consequently, you may not be able to credit any Chilean tax imposed on the disposition of shares of our common stock or ADSs against your taxable income unless you have other foreign-source income in the appropriate foreign tax credit category.  If the Proposed U.S.-Chile Treaty becomes effective, however, a U.S. holder who is eligible for the benefits of the treaty and whose gain from the sale of shares is not exempt from Chilean tax under such treaty may elect to treat disposition gain that is subject to Chilean tax as foreign-source gain and claim a credit in respect of the tax.  You should consult your tax advisers as to whether the Chilean tax on gains may be creditable against your U.S. federal income tax on foreign-source income from other sources.  Alternatively, instead of claiming a credit, you may elect to deduct otherwise creditable taxes in computing your income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.
 
Passive Foreign Investment Company Rules
 
Based on proposed Treasury regulations (the “Proposed Regulations”), which are proposed to be effective for taxable years beginning after December 31, 1994, we believe that we were not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for the year ended December 31, 2014. However, since the Proposed Regulations may not be finalized in their current form and since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25 percent owned equity investments) from time to time, there can be no assurance that we will not be a PFIC for any taxable year. If we were a PFIC for any taxable year during which you held an ADS or a share of our common stock, certain adverse tax consequences could apply to you.
 
If we were a PFIC for any taxable year during which you held shares of our common stock or ADSs, gain recognized by you on a sale or other disposition (including certain pledges) of a share of our common stock or an ADS would generally be allocated ratably over your holding period for the share of our common stock or ADS. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability for that taxable year. Similar rules would apply to any distribution in respect of shares of our common stock or ADSs that exceeds 125% of the average of the annual distributions on shares of our common stock or ADSs received by you during the preceding three years or your holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments of the shares of
 
 
our common stock or ADSs (including, with respect to our ADSs, a mark-to-market election). In addition, if we were a PFIC for a taxable year in which we pay a dividend or the prior taxable year, the favorable rates discussed above with respect to dividends paid to non-corporate holders would not apply.
 
If we were to be treated as a PFIC in any taxable year, a U.S. holder may be required to file reports with the Internal Revenue Service containing such information as the Treasury Department may require.
 
Information Reporting and Backup Withholding
 
Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding, unless you are a corporation or other exempt recipient or in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.
 
The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
 
Certain U.S. holders may be required to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution).  You should consult your tax advisers regarding any reporting obligations you may have with respect to shares of our common stock or ADSs.
 
F.  Dividends and Paying Agents
 
Not applicable.
 
G.  Statement by Experts
 
Not applicable.
 
H.  Documents on Display
 
The documents concerning us which are referred to in this Annual Report may be inspected at our offices at Bandera 140 Santiago, Chile. We are subject to the information reporting requirements of the Exchange Act, except that, as a foreign issuer, we are not subject to the proxy rules or the short-swing profit and disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the Public Reference Section by calling the SEC at 1-800-732-0330. The SEC maintains a website on the Internet at http://www.sec.gov that contains reports and information statements and other information regarding us. The reports and information statements and other information about us can be downloaded from the SEC’s website and can also be inspected and copied at the offices of the NYSE, Inc., 20 Broad Street, New York, New York 10005.
 
I.  Subsidiary Information
 
Not applicable.
 
 
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Introduction
 
The principal types of risk inherent in Santander-Chile’s business are market, liquidity, operational and credit risks. The effectiveness with which we are able to manage the balance between risk and reward is a significant factor in our ability to generate long term, stable earnings growth. Toward that end, our senior management places great emphasis on risk management.
 
A.  Risk Committee
 
The Risk Committee is responsible for revising and following all risks that may affect us, including reputation risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises risk in general. It also evaluates the reasonability of the systems for measurement and control of risks.
 
 
·
Credit risk
 
 
·
Market risk
 
 
·
Operational risk
 
 
·
Solvency risk (BIS)
 
 
·
Legal risks
 
 
·
Compliance risks
 
 
·
Reputational risks
 
This Committee includes the Vice Chairman of the Board and five Board members. This committee also includes the CEO, the Director of Risk and other senior level executives from the commercial side of our business: The Board members of this committee are:
 
Board member
 
Position in Committee
Oscar von Chrismar
 
Chairman
Marco Colodro
 
Member
Vittorio Corbo
 
Member
Roberto Méndez
 
Member
Raimundo Monge
 
Member
Juan Pedro Santa María
 
Member
 
 
 
Below is an organizational chart of the Risk Department:
 
 
B.  Credit risk
 
All issues regarding risk in the Bank are the responsibility of the Bank’s Risk Department. The Risk Department reports to the CEO but has full independence, and no risk decisions can be made without its approval. All risks (credit, market and operational) are approved and measured by the Risk Department and reported simultaneously to local management and to Santander Spain’s Risk Department, which follows global risk levels. The frequency of reporting depends on the nature of the risk. In general, market risks are measured daily and other risks are reviewed weekly. Within this structure, the Board and senior management interact extensively with the Risk Department.
 
1.  Executive Credit Committee
 
The Executive Credit Committee is comprised of the following Board members:
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Marco Colodro
 
Vice-Chairman
Oscar von Chrismar
 
Second Vice-Chairman
Roberto Méndez
 
Member
Juan Pedro Santa María
 
Member

In addition, this committee also includes: the Corporate Director of Risk, the CEO, the Corporate Legal Counsel, the Manager of Global Banking, the Corporate Director of Human Resources and Administration (this is a newly-created position) and two senior members of the Credit Risk department, who present the loans being reviewed. The Executive Credit Committee meets weekly and performs the following main functions:
 
 
·
Reviews the main client exposures by:  economic sector, geography, type of risk and segment.
 
 
·
Supervises and review the main credit risk indicators (NPLs, coverage, impaired loans, etc.).
 
 
·
Takes notes, analyzes and follows up on the observations and recommendations of the regulatory bodies and the external and internal auditors on credit-risk-related issues.
 
 
·
Reviews the loan positions reviewed by the Senior Credit Committee above U.S.$10 million and approves those loan positions greater than U.S.$60 million.
 
The Credit Risk Department must present to the Board on a monthly basis. In this presentation all loans above U.S.$5 million that were granted in the previous month must be reviewed. In addition, any other theme or subject of importance regarding credit risk is also presented (for example a proposal to change a provisioning model must be presented and approved by the Board). Finally, at least once a year, the Credit Risk Department presents a report to assure the Board that our loan loss allowances are adequate for all known and estimated incurred losses.
 
2.  Role of Santander Spain’s Global Risk Department: Credit Risk
 
In matters regarding Credit Risk, Santander Spain’s Global Risk Department has the following role:
 
 
170

 
 
·
All credit risks greater than U.S.$40 million (U.S.$60 million for financial institutions), after being approved locally, are reviewed by Santander Spain. This additional review ensures that no global exposure limit is being breached.
 
 
·
In standardized risks, the consumer and mortgage scoring models are developed locally but are reviewed and approved by Santander Spain’s Global Risk Department.
 
 
·
For each scoring model, a monthly Risk Report is prepared, which is reviewed locally and is also sent to Santander Spain’s Global Risk Department. This report includes the evolution of basic credit risk parameters such as: loan amounts, non-performance, charge offs and provisions.
 
 
·
Monthly, the Controller of the Risk Department sends a report to Santander Spain’s Global Risk Department covering all the main indicators regarding credit risk and the evolution of credit risk as compared to the budgeted levels.
 
C.  Non-financial risks
 
All issues regarding operational risks in the Bank fall under the Non-Financial Risk Department that reports to the Risk Department. Below is an organization chart of this department.
 

 
All operational risks are measured in this Department and reported simultaneously to local management and the Board through various channels.
 
 
 
171

 
1.  Audit Committee
 
Audit Committee
 
Board member
 
Position in Committee
Marco Colodro
 
Chairman
Víctor Arbulú Crousillat
 
First Vice Chairman and Financial Expert
Lisandro Serrano
 
Second Vice Chairman

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors. The Committee Secretary is the alternate director Juan Pedro Santa María. The General Counsel is the Committee Secretary. The Chief Executive Officer, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the external auditors and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. This committee also performs functions of a remuneration committee as established in Chilean Law, and reviews annually the salary and bonus programs for the executive officers of the Bank. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.
 
2.  Role of Santander Spain’s Global Risk Division: Operational Risk
 
In matters regarding operational risk, Santander Spain’s Global Risk Department’s role is to define certain global policies, guidelines and procedures regarding operational risk. The Corporate Operational Risk Committee is the main body in which the different units of Santander discuss and review the major operational risk events and policies.
 
D.  Market Risks
 
This section describes the market risks that we are exposed to, the tools and methodology used to control these risks, the portfolios over which these market risk methods were applied and quantitative disclosure that demonstrate the level of exposure to market risk that we are assuming. This section also discloses the derivative instruments that we use to hedge exposures and offer to our clients.
 
Market risk is the risk of losses due to unexpected changes in interest rates, foreign exchange rates, inflation rates and other rates or prices. We are exposed to market risk mainly as a result of the following activities:
 
 
·
trading in financial instruments, which exposes us to interest rate and foreign exchange rate risk;
 
 
·
engaging in banking activities, which subjects us to interest rate risk, since a change in interest rates affected gross interest income, gross interest expense and customer behavior;
 
 
·
engaging in banking activities, which exposes us to inflation rate risk, since a change in expected inflation affects gross interest income, gross interest expense and customer behavior;
 
 
·
trading in the local equity market, which subjects us to potential losses caused by fluctuations of the stock market; and
 
 
·
investing in assets whose returns or accounts are denominated in currencies other than the Chilean peso, which subjects us to foreign exchange risk between the Chilean peso and such other currencies.
 
The main decisions that relate to market risk for the Bank and the limits regarding market risk are made in the Asset and Liability Committee and the Market Committee. The measurement and oversight of market risks is performed by the Market Risk Department. Below is a list of the main reports produced by the Market Risk Department and who they are addressed to:
 
 
172

 
Report
 
Unit
 
Objective
 
Addressed to:
 
Periodicity
Daily Global Report
 
Market risks
 
Give a global vision of the market, positions, risks, sensitivity, vision and alerts of the trading and non-trading positions
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Daily
Stress Test
 
Market risks
 
Stress test report over the Bank's trading and ALCO books
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Monthly
Sensitivity Analysis
 
Market risks
 
Sensitivity analysis of the ALCO book
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Daily
Fixed income positions
 
Market risks
 
Fixed income positions and general information
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Daily
Interest rate gap
 
Market risks
 
Interest rate gap sensitivity and limit levels
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Monthly
Liquidity gap
 
Market risks
 
Liquidity levels and limits
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Monthly
Market report
 
Market risks
 
Main market indicators and evolution
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Daily
VaR
 
Market risks
 
VaR position and limits
 
- Market risk (local and global) and Senior Management
 
Daily
Trading Portfolio Limits
 
Market risks
 
Trading book evolution, instruments and limits
 
Market Risk (local and global), Senior Management, Internal Auditors
 
Daily
Largest depositors
 
Market risks
 
Largest 20 and largest 50 depositors
 
- Market risk (local and global) and Senior Management
 
Weekly
Follow-up report
 
Market risks
 
Summary of Market risk information for Senior Management
 
Market Risk (local and global), Senior Management (local and global), Internal Auditors
 
Monthly
Liquidity stress-test
 
Market risks
 
Liquidity stress test simulation
 
Market Risk (local and global), Senior Manager, Internal Auditors
 
Quarterly
Interest rate risk
 
Market risks
 
Interest rate risk report, limits and estimates of results from interest rate risk
 
- Market risk (local and global), Manager of Global banking and markets, Manager of Treasury, Manager of Market Making and Prop Trading
 
Daily
Backtesting
 
Market risks
 
Backtesting of VaR estimates to actual results
 
Market Risk (local and global), Senior Manager, Internal Auditors
 
Weekly
PNL Treasury
 
Market risks
 
Treasury income statement
 
- Market risk (local and global), Manager of Global banking and markets, Manager of Treasury, Manager of Market Making and Prop Trading
 
Daily

Santander-Chile’s governance rules have established the existence of two high-level committees that, among other things, function to monitor and control market risks: the Asset and Liability Committee and the Market Committee.
 
1.  Asset and Liability Committee
 
The ALCO includes the Chairman of the Board and five additional members of the Board, the Chief Executive Officer, the Corporate Financial Controller, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, and other senior members of management. The ALCO meets monthly. All limits reviewed by the ALCO are measured and prepared by the Market Risk Department. The non-Board members of the ALCO meet weekly to review liquidity, funding, capital and market risk related matters.
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Mauricio Larraín
 
Vice-Chairman
Oscar von Chrismar
 
Second Vice-Chairman
Marco Colodro
 
Member
Roberto Zahler
 
Member
Raimundo Monge
 
Member

 
173

 
The main functions of the ALCO are:
 
 
·
Making the most important decisions regarding interest rate risk, funding, capital and liquidity levels. The main limits set and monitored by the ALCO (and measured by the Market Risk Department) are:
 
Risk
 
Measure
   
Sensitivity Capital
Interest rates
 
Sensitivity NIM
   
Regulatory market risk limits
   
Regulatory limit 30 Days
Liquidity
 
Regulatory limit 90 Days
   
Internal liquidity limit
   
BIS ratio
Capital
 
BIS ratio with market risk
   
BIS ratio with market and operational risk
   
Intergroup exposure: Derivatives, deposits, loans
Foreign exposures
 
Foreign assets: Derivatives, Deposits, Loans

 
·
Review of the Bank’s main gaps (foreign currency and inflation gap).
 
 
·
Review of the evolution of the most relevant local and international markets and monetary policies.
 
2.  Market Committee
 
The Market Committee includes the Vice-Chairman of the Board, three additional members of the Board, the Chief Executive Officer, the Manager of Global Banking and Markets, the Manager of the Treasury Division, the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.
 
Board member
 
Position in Committee
Vittorio Corbo
 
Chairman
Oscar von Chrismar
 
Vice-Chairman
Roberto Zahler
 
Second Vice-Chairman
Mauricio Larraín
 
Member
Marco Colodro
 
Member

The Market Committee is responsible for:
 
 
·
Establishing a strategy for the Bank’s trading portfolio.
 
 
·
Establishing the Bank’s policies, procedures and limits with respect to its trading portfolio. The Bank’s Market Risk Department measures all risks and limits and reports these to the Market Committee.
 
 
·
Reviewing the evolution of the most relevant local and international markets and monetary policies.
 
3.  Role of Santander Spain’s Global Risk Division: Market Risk
 
In matters regarding Market Risk, the role of Santander Spain’s Global Risk Department is to define certain global policies, guidelines and procedures regarding market risk. The information produced by our local Market Risk Department is standardized for the whole group in order to facilitate a consolidation of risks being taken on a global basis. They review daily the consumption of limits and provide valuable input on the evolution of markets, especially regarding the Eurozone.
 
 
174

 
4.  Market Risk: Quantitative Disclosure
 
Impact of inflation
 
Our assets and liabilities are denominated in Chilean pesos, Unidades de Fomento (UF) and foreign currencies. The Bank no longer recognizes inflation accounting and has eliminated price-level restatement in line with IFRS, but inflation impacts our results of operations as some loan and deposit products are contracted in UF. The UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF equaled Ch$24,627.10 at December 31, 2014, Ch$23,309.56 at December 31, 2013 and Ch$22,840.75 at December 31, 2012. High levels of inflation in Chile could adversely affect the Chilean economy and could have an adverse effect on our business, financial condition and results of operations. Negative inflation rates also negatively impact our results. Inflation measured as the annual variation of the UF was 5.7% in 2014, 2.1% in 2013, and 2.5% in 2012. There can be no assurance that Chilean inflation will not change significantly from the current level. Although we currently benefit from moderate levels of inflation, due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no corresponding features in deposits or other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation. In summary:
 
 
·
UF-denominated assets and liabilities. The effect of any changes in the nominal peso value of our UF-denominated interest earning assets and interest bearing liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest income and expense, respectively.  Our net interest income will be positively affected by an inflationary environment to the extent that our average UF-denominated interest earning assets exceed our average UF-denominated interest bearing liabilities. Our net interest income will be negatively affected in a deflationary environment if our average UF-denominated interest earning assets exceed our average UF-denominated interest bearing liabilities. Our net interest income will be negatively affected by inflation in any period in which our average UF-denominated interest bearing liabilities exceed our average UF-denominated interest earning assets.
 
 
·
Inflation and interest rate hedge. A key component of our asset and liability policy is the management of interest rate risk. The Bank’s assets generally have a longer maturity than our liabilities. As the Bank’s mortgage portfolio grows, the maturity gap tends to rise as these loans, which are contracted in UF, have a longer maturity than the average maturity of our funding base. As most of our long term financial instruments and mortgage loans are contracted in UF and most of our deposits are in nominal pesos, the rise in mortgage lending increases the Bank’s exposure to inflation and to interest rate risk. The size of this gap is limited by internal and regulatory guidelines in order to avoid excessive potential losses due to strong shifts in interest rates. In order to keep this duration gap below regulatory limits, the Bank issues long term bonds denominated in UF or interest rate swaps. The average gap between our total assets and total liabilities linked to the inflation, including hedging was Ch$4,168,678 million in 2014, Ch$3,581,959 million in 2013 and Ch$3,034,112 million in 2012.
 
 
·
The financial impact of the gap between our assets and liabilities denominated in UFs including hedges was Ch$229,946 million in 2014, Ch$71,842 million in 2013 and Ch$71,238 million in 2012. The higher gain in 2014 can be explained by the greater UF inflation in 2014 compared to previous periods and the greater UF gap in 2014.
 
   
As of December 31,
   
% Change
   
% Change
 
   
2014
   
2013
   
2012
      2014/2013       2013/2012  
Impact of inflation on net interest income
 
(In millions of Ch$)
 
Results from UF GAP (1)
    229,946       71,842       71,238       220.1 %     0.8 %
Annual  UF inflation
    5.7 %     2.1 %     2.5 %                

(1)
UF GAP is net interest income from asset and liabilities denominated in UFs and include the results from hedging the size of this gap via interest rate swaps.
 
 
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·
Peso-denominated assets and liabilities. Interest rates prevailing in Chile during any period primarily reflect the inflation rate during the period and the expectations of future inflation. The sensitivity of our peso-denominated interest earning assets and interest bearing liabilities to changes to such prevailing rates varies. See “Item 5.  Operating and Financial Review and Prospects—C. Operating Results—Interest Rates.” We maintain a substantial amount of non-interest bearing peso-denominated demand deposits. Because such deposits are not sensitive to inflation, any decline in the rate of inflation would adversely affect our net interest margin on inflation indexed assets funded with such deposits, and any increase in the rate of inflation would increase the net interest margin on such assets The ratio of the average of such demand deposits and average shareholder’s equity to average interest-earning assets was 30.2%, 30.0% and 29.4% for the years ended December 31, 2014, 2013 and 2012, respectively.
 
Interest rate sensitivity
 
Interest rates earned and paid on our assets and liabilities reflect, to a certain degree, inflation, expectations regarding inflation, changes in short term interest rates set by the Central Bank and movements in long term real rates. The Central Bank manages short term interest rates based on its objectives of balancing low inflation and economic growth. Because our liabilities are generally re-priced sooner than our assets, changes in the rate of inflation or short term rates in the economy are reflected in the rates of interest paid by us on our liabilities before such changes are reflected in the rates of interest earned by us on our assets. Therefore, when short term interest rates fall, our net interest margin is positively impacted, but when short term rates increase, our interest margin is negatively affected. At the same time, our net interest margin tends to be adversely affected in the short term by a decrease in inflation rates since generally our UF-denominated assets exceed our UF-denominated liabilities. (See “Item 5.  Operating and Financial Review and Prospects—C. Operating Results—Impact of Inflation—Peso-denominated assets and liabilities”). An increase in long term rates has a positive effect on our net interest margin, because our interest earning assets generally have longer terms than our interest bearing liabilities. In addition, because our peso-denominated liabilities have relatively short re-pricing periods, they are generally more responsive to changes in inflation or short term rates than our UF-denominated liabilities. As a result, during periods when current inflation or expected inflation exceeds the previous period’s inflation, customers often switch funds from UF-denominated deposits to peso-denominated deposits, which generally bear higher interest rates, thereby adversely affecting our net interest margin.
 
 
As of December 31, 2014, the breakdown of maturities of assets and liabilities is as follows:
 
As of December 31, 2014
 
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
 
Assets
                                                     
Cash and deposits in banks
    1,538,888       70,000                   1,608,888                         1,608,888  
Cash items in process of collection
    531,373                         531,373                         531,373  
Trading investments
          263,034             164,823       427,857       171,620       175,338       346,958       774,815  
Investments under resale agreements
                                                     
Financial derivative contracts
          131,675       152,441       350,432       634,548       1,078,925       1,014,090       2,093,015       2,727,563  
Interbank loans (*)
    2,872             9,071             11,943                         11,943  
Loans and accounts receivables from customers (**)
    814,557       2,168,019       1,774,873       3,773,848       8,531,297       7,084,202       7,265,207       14,349,409       22,880,706  
Available for sale investments
          22,652       158,014       526,410       707,076       184,376       760,146       944,522       1,651,598  
Guarantee deposits (threshold)
    436,717                         436,717                         436,717  
Total assets
    3,324,407       2,655,380       2,094,399       4,815,513       12,889,699       8,519,123       9,214,781       17,733,904       30,623,603  
Liabilities
                                                                       
Deposits and other demand liabilities
    6,480,497                         6,480,497                         6,480,497  
Cash items in process of being cleared
    281,259                         281,259                         281,259  
Obligations under repurchase agreements
          390,331       1,453       342       392,126                         392,126  
Time deposits and other time liabilities
    112,025       5,343,226       2,480,158       2,289,405       10,224,814       130,427       58,699       189,126       10,413,940  
Financial derivative contracts
          125,884       176,048       319,488       621,420       1,028,017       911,947       1,939,964       2,561,384  
Interbank borrowings
    4,133       137,921       227,898       413,564       783,516       435,309       12,776       448,085       1,231,601  
Issued debt instruments
          176,649       319,516       691,227       1,187,392       2,693,946       1,903,774       4,597,720       5,785,112  
Other financial liabilities
    114,564       1,934       746       3,305       120,549       41,733       42,843       84,576       205,125  
Guarantees received (threshold)
    473,343                         473,343                         473,343  
Total liabilities
    7,465,821       6,175,945       3,205,819       3,717,331       20,564,916       4,329,432       2,930,039       7,259,471       27,824,387  

(*)
Interbank loans are presented on a gross basis. The amount of allowance is Ch$ 1 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$ 381,549 million, Mortgage loans Ch$ 48,744 million, and Consumer loans Ch$ 254,023 million.
 
 
The following table sets forth our average daily balance of liabilities for the years ended December 31, 2014, 2013 and 2012, in each case together with the related average nominal interest rates paid thereon.
 
   
2014
   
2013
   
2012
 
   
Average Balance
   
% of Total Average Liabilities
   
Average Nominal Rate
   
Average Balance
   
% of Total Average Liabilities
   
Average Nominal Rate
   
Average Balance
   
% of Total Average Liabilities
   
Average Nominal Rate
 
   
(millions of Ch$, except percentages)
 
Interest-bearing liabilities
                                                     
Savings accounts
    108,185       0.3 %     5.0 %     103,760       0.4 %     1.9 %     102,420       0.4 %     2.5 %
Time deposits
    11,952,994       36.6 %     3.4 %     9,949,401       36.8 %     4.5 %     9,659,815       38.5 %     5.2 %
Central Bank borrowings
    6,906       0.0 %     0.2 %     221       0.0 %     6.3 %     4,469       0.0 %     5.2 %
Repurchase agreements
    413,263       1.3 %     2.0 %     266,883       1.0 %     5.6 %     369,338       1.5 %     4.2 %
Mortgage finance bonds
    81,805       0.2 %     11.9 %     102,778       0.4 %     8.0 %     131,070       0.5 %     8.6 %
Other interest bearing liabilities
    6,865,084       21.0 %     6.9 %     6,850,953       25.3 %     4.7 %     5,927,893       23.6 %     5.3 %
Subtotal interest-bearing liabilities
    19,428,237       59.4 %     4.6 %     17,273,996       63.9 %     4.6 %     16,195,005       64.5 %     5.3 %
                                                                         
Non-interest bearing liabilities
                                                                       
Non-interest bearing deposits
    5,386,272       16.5 %             4,620,849       17.1 %             4,177,432       16.6 %        
Derivatives
    2,719,386       8.3 %             1,467,723       5.4 %             1,141,169       4.5 %        
Other non-interest bearing liabilities
    2,501,651       7.6 %             1,325,975       4.9 %             1,395,112       5.6 %        
Shareholders’ equity
    2,689,037       8.2 %             2,349,448       8.7 %             2,187,716       8.8 %        
Subtotal non-interest bearing liabilities
    13,296,346       40.6 %             9,763,995       36.1 %             8,901,429       35.5 %        
Total liabilities
    32,724,383       100.0 %             27,037,991       100.0 %             25,096,434       100.0 %        

Foreign exchange fluctuations
 
The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar could adversely affect our financial condition and results of operations. The Chilean peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. The Central Bank exchange rate depreciated 16.0% in 2014.  See “Item 3.  Key Information—A. Selected Financial Data—Exchange Rates.”
 
A significant portion of our assets and liabilities are denominated in foreign currencies, principally the U.S. dollar, and we historically have maintained, and may continue to maintain, material gaps between the balances of such assets and liabilities. Because such assets and liabilities, as well as interest earned or paid on such assets and liabilities, and gains and losses realized upon the sale of such assets, are translated to Chilean pesos in preparing our financial statements, our reported income is affected by changes in the value of the Chilean peso relative to foreign currencies (principally the U.S. dollar).
 
Our current strategy is not to maintain a significant difference between the balances of our assets and liabilities in foreign currencies. In 2014, 2013 and 2012, the Bank’s spot position in foreign currency held more liabilities than assets in foreign currencies, mainly U.S. dollars as a result of an ample supply of U.S.$ deposits from companies that receive export revenues, foreign correspondent bank loans and bonds issued abroad. This difference is usually hedged using forwards and cross-currency swaps. In general, the Bank is not permitted, due to guidelines set by the ALCO, to open a meaningful gap in foreign currency. Therefore, all foreign currency risk is included in the trading portfolio and is measured using VaR. The translation gain or loss over assets and liabilities (excluding derivatives held for trading) is included as foreign exchange transactions in the income statement. The translation and mark-to-market of foreign currency derivatives held for trading is recognized as a gain or loss in the net results from mark-to-market and trading. The composition on our assets and liabilities at December 31, 2014 by foreign currency was as follows:
 
 
178

 
Non-Trading U.S.$ portfolio (in millions of U.S.$)
             
Assets
     
Liabilities
     
Loans
    4,369  
Client deposits                                 
    3,284  
Fixed assets
    248  
Long-term market funding
    6,173  
Financial investments
    1,741  
Short-term market funding
    1,290  
Derivatives
    4,458  
Other liabilities                                 
    69  
Total
    10,816  
Total                                 
    10,816  

Including the trading portfolio, as of December 31, 2014, the net difference between assets and liabilities in foreign currency was a net asset position of U.S.$131.4 million. The average gap, be it a net asset or liability position in foreign currency, in 2014 was U.S.$34.2 million.  Both figures include derivatives used to hedge foreign currency risk. Below is a graph that illustrates the net daily foreign currency position in 2014.
 
 
We also set an absolute limit on the size of Santander-Chile’s consolidated net foreign currency trading position, which is equivalent to the maximum differential allowed between assets and liabilities in foreign currencies, including hedging of this gap. The limit on the size of the net foreign currency position is determined by the Market Committee and is calculated and monitored by the Market Risk Department. At December 31, 2014, this was equal to U.S.$200 million. This limit in various other currencies is as follows:
 
Currency
 
Limit (in millions of U.S.$)
 
U.S. dollars
    200  
Euros
    75  
Yen
    22.5  
Real
    15  
Mexican peso
    15  
Colombian peso
    15  
Other European currencies
    15  
Other Latin American currencies
    7.5  
Other currencies
    3.75  
Total Limit
    200  

Liquidity risk management
 
The Financial Management Division receives information from all the business units on the liquidity profile of their financial assets and liabilities, as well as breakdowns of other projected cash flows stemming from future businesses. On the basis of that information, the Financial Management Division maintains a portfolio of liquid short–term assets, comprised mainly of liquid investments, loans and advances to other banks, to make sure the Bank has sufficient liquidity. The business units’ liquidity needs are met through short–term transfers from the Financial Management Division to cover any short–term fluctuations and long–term financing to address all the structural liquidity requirements.
 
 
179

 
The Bank monitors its liquidity position every day, determining the future flows of its outlays and revenues. In addition, stress tests are performed at the close of each month, for which a variety of scenarios encompassing both normal market conditions and conditions of market fluctuation are used. The liquidity policy and procedures are subject to review and approval by the Bank’s Board. Periodic reports are generated by the Market Risk Department, providing a breakdown of the liquidity position of the Bank and its subsidiaries, including any exceptions and the corrective measures adopted, which are regularly submitted to the ALCO for review.
 
The Bank relies on demand deposits from individuals, SMEs, Middle-Market, Corporate and institutional deposits, obligations to banks, debt instruments, and time deposits as its main sources of funding. Although most obligations to banks, debt instruments and time deposits mature in over a year, customer (retail) and institutional deposits tend to have shorter maturities and a large proportion of them are payable within 90 days. The short–term nature of these deposits increases the Bank’s liquidity risk, and hence, the Bank actively manages this risk by continual supervision of the market trends and price management.
 
Liquidity risk management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated. The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO has determined that our liquidity portfolio must be comprised of cash plus assets that can be readily convertible into cash either through the Chilean Central Bank window, overnight deposits or instruments or the local secondary market. The management of the Bank’s liquidity portfolio is performed by the Financial Management Division under rules determined by the ALCO.
 
   
December 31, 2014
   
December 31, 2013
 
   
Ch$ million
 
Balance as of:
           
Financial investments for trading
    774,815       287,567  
Available for sale investments
    1,651,598       1,700,993  
Encumbered assets (net) (1)
    (112,015 )     (71,896 )
Net cash (2)
    14,774       248,073  
Net interbank deposits (3)
    890,274       984,666  
Total liquidity portfolio
    3,219,446       3,149,403  
 
   
December 31, 2014
   
December 31, 2013
 
   
Ch$ million
 
Average balance as of:
           
Financial investments for trading
    571,479       412,012  
Available for sale investments
    1,673,423       1,706,631  
Encumbered assets (net) (1)
    (97,712 )     (100,021 )
Net cash (2)
    (50,554 )     29,812  
Net interbank deposits (3)
    788,958       858,699  
Total liquidity portfolio
    2,885,594       2,907,134  

(1)
Assets encumbered through repurchase agreements are deducted from the liquidity portfolio
 
(2)
Cash minus reserve requirements
 
(3)
Includes overnight deposits in the Central Bank, domestic banks and foreign banks
 
 
180

 
The Bank must also comply with regulatory limits imposed by the SBIF and the Central Bank that are the following:
 
 
·
The sum of the liabilities with a maturity of less than 30 days may not exceed the sum of the assets with a maturity of less than 30 days by more than an amount greater than our capital. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 2014 the percentage of (i) our liabilities with a maturity of less than 30 days in excess of our assets with a maturity of less than 30 days to (ii) our capital and reserves was 32%.
 
 
·
The sum of the liabilities in foreign currency with a maturity of less than 30 days may not exceed the sum of the assets in foreign currency with a maturity of less than 30 days by more than an amount greater than our capital. At December 31, 2014 the percentage of (i) our liabilities with a maturity of less than 30 days in foreign currency in excess of our assets in foreign currency with a maturity of less than 30 days to (ii) our capital and reserves was 0%, as the Bank had more foreign currency assets than liabilities for the calculation of this limit.
 
 
·
The sum of the liabilities with a maturity of less than 90 days may not exceed the sum of the assets with a maturity of less than 90 days by more than 2 times our capital. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 2014 the percentage of (i) our liabilities with a maturity of less than 90 days in excess of our assets with a maturity of less than 90 days to (ii) our capital and reserves was 15%.
 
New liquidity requirements in line with BIS III
 
The SBIF and the Chilean Central Bank published new liquidity corporate governance standards and ratios that must be implemented and calculated by all banks. These will eventually replace the current regulatory limits imposed by the SBIF and the Central Bank described above. These new liquidity standards are in line with those established in BIS III. The most important liquidity ratios that will eventually be adopted by Chilean banks are:
 
 
·
Liability concentration per institutional and wholesale counterparties. Banks will have to calculate the percentage of their liabilities coming from institutional and wholesale sources, including the calculation of ratios regarding renovation, maturity and product concentration of these funds.
 
 
·
Liquidity coverage ratio (LCR), which measures the percentage of Liquid Assets over Net Cash Outflows. The new guidelines also define Liquid Assets and the formulas for calculating Net Cash Outflows.
 
 
·
Net Stable Funding Ratio (NSFR) which will measure a bank’s stable funding sources over required stables needs both concepts also defined in the new regulations.
 
In the second half of 2015, banks must report these ratios to the Central Bank and the SBIF. The evolution of these indicators will be monitored for a 12 month period and further adjustments could be made. The final limits and results should begin to be published in the second half of 2016. The initial limits banks must meet to meet in order to comply with these new ratios have not been published yet.  For this reason, and even though the Bank has advanced liquidity management models, we cannot assure that the implementation of these models will not have a material effect on our business.
 
Market risk management
 
The Bank’s internal management of market risk is based chiefly on the procedures and standards of Santander Spain, which are in turn based on analysis of management in three principal components:
 
 
·
trading portfolio;
 
 
·
local financial management portfolio; and
 
 
·
foreign financial management portfolio.
 
 
181

 
The trading portfolio is comprised chiefly of investments valued at fair market value and free of any restriction on their immediate sale, which are often bought and sold by the Bank with the intention of selling them in the short term to benefit from short–term price fluctuations. The trading portfolio also includes the Bank’s exposure to foreign currency. The financial management portfolios include all the financial investments not considered to be part of trading portfolio.
 
Market risk – management of trading portfolio
 
The Bank applies VaR methodologies to measure the market risk of its trading portfolio. The Bank has a consolidated commercial position comprised of fixed–income investments and foreign currency trading. This portfolio is comprised mostly of Central Bank of Chile bonds, mortgage bonds, locally issued, low–risk corporate bonds and foreign currencies, mainly U.S. dollars. At the end of each year, the trading portfolio included no stock portfolio investments.
 
For the Bank, the VaR estimate is made under the historical simulation methodology, which consists of observing the behavior of the profits and losses that would have occurred in the current portfolio if the market conditions for a given historical period had been in force, in order to infer the maximum loss on the basis of that information, with as given degree of confidence. The methodology has the advantage of precisely reflecting the historical distribution of the market variables and not requiring any assumptions regarding the distribution of specific probabilities. All the VaR measures are intended to determine the distribution function for a change in the value of a given portfolio, and once that distribution is known, to calculate the percentile related to the necessary degree of confidence, which will be equal to the value at risk by virtue of those parameters. As calculated by the Bank, the VaR is an estimate of the maximum expected loss of market value for a given portfolio over a 1–day horizon, with a 99.00% confidence level. It is the maximum 1–day loss that the Bank could expect to experience in a given portfolio, with a 99.00% confidence level. In other words, it is the loss that the Bank would expect to experience only 1.0% of the time. The VaR provides a single estimate of market risk which is not comparable from one market risk to another. Returns are calculated through the use of a 2–year time window or at least 520 data points obtained since the last reference date for calculation of the VaR going backward in time.
 
We do not calculate three separate VaRs. We calculate a single VaR for the entire trading portfolio, which in addition is segregated by risk type. The VaR software performs a historical simulation and calculates a Profit and Loss Statement (P&L) for 520 data points (days) for each risk factor (fixed income, foreign currency and variable income.) The P&L of each risk factor is added together and a consolidated VaR is calculated with 520 points or days of data. At the same time a VaR is calculated for each risk factor based on the individual P&L calculated for each individual risk factor . Furthermore, a weighted VaR is calculated in the manner described above, but which gives a greater weighting to the 30 most recent data points. The larger of the two VaRs is the one that is reported. In 2014, 2013 and 2012, we used the same VaR model and there has been no change in methodology or assumptions for subsequent periods.
 
The Bank uses the VaR estimates to provide a warning when the statistically estimated incurred losses in its trading portfolio would exceed prudent levels, and hence, there are certain predetermined limits.
 
Limitations of the VaR model
 
When applying a calculation methodology, no assumptions are made regarding the probability distribution of the changes in the risk factors; the historically observed changes are used for the risk factors on which each position in the portfolio will be valued.
 
It is necessary to define a valuation function fj(xi) for each instrument j, preferably the same one used to calculate the market value and income of the daily position. This valuation function will be applied in each scenario to generate simulated prices for all the instruments in each scenario.
 
In addition, the VaR methodology is subject to the following limitations:
 
 
·
Changes in market rates and prices may not be independent and identically distributed random variables, and may not have a normal distribution; In particular, the assumption of normal distribution may underestimate the probability of extreme market movements;
 
 
182

 
 
·
The historical data used by the Bank may not provide the best estimate of the joint distribution of changes in the risk factors in the future, and any modification of the data may be inadequate; In particular, the use of historical data may fail to capture the risk of potential extreme and adverse market fluctuations, regardless of the time period used;
 
 
·
A 1–day time horizon may not fully capture the market risk positions which cannot be liquidated or covered in a single day; It would not be possible to liquidate or cover all the positions in a single day;
 
 
·
The VaR is calculated at the close of business, but trading positions may change substantially in the course of the trading day;
 
 
·
The use of a 99% degree of confidence does not take account of, or make any statement about, the losses that could occur outside of that degree of confidence; and
 
 
·
A model such as the VaR does not capture all the complex effects of the risk factors over the value of the positions or portfolios, and accordingly, it could underestimate potential losses.
 
At no time in 2014, 2013 and 2012 did the Bank exceed the VaR limits in respect of the three components which comprise the trading portfolio: fixed–income investments, variable–income investments and foreign currency investments. We perform back-testing daily and generally find that trading losses exceed our VaR estimate approximately one out of every 100 trading days.  At the same time, we set a limit to the maximum VaR that we are willing to accept over our trading portfolio. In 2014, the Bank remained within the maximum limit it had set for VaR, including those instances in which the actual VaR exceeded the estimate.
 
The high, low, and average levels for each component and each year below were as follows:
 
Consolidated
 
2014
   
2013
   
2012
 
   
(in millions of U.S.$)
 
VaR:
                 
High
    3.77       3.48       4.62  
Low
    1.06       1.06       0.96  
Average
    1.91       1.72       2.33  
Fixed–income investments:
                       
High
    3.99       2.39       4.99  
Low
    1.06       0.97       0.95  
Average
    1.78       1.57       2.24  
Variable–income investments:
                       
High
    0.15       0.19       0.07  
Low
    0.00       0.00       0.00  
Average
    0.00       0.00       0.00  
Foreign currency investments:
                       
High
    2.39       3.20       3.23  
Low
    0.06       0.06       0.03  
Average
    0.58       0.69       0.66  

Market risk – local and foreign financial management
 
The Bank’s financial management portfolio includes most of the Bank’s non–trading assets and liabilities, including the credit/loan portfolio. For these portfolios, investment and financing decisions are strongly influenced by the Bank’s commercial strategies.
 
The Bank uses a sensitivity analysis to measure the market risk of local and foreign currency (not included in the trading portfolio). The Bank performs a simulation of scenarios, which will be calculated as the difference between the present value of the flows in the chosen scenario (a curve with a parallel movement of 100 bp in all its segments) and their value in the base scenario (current market). All the inflation–indexed local currency (UF) positions are adjusted by a sensitivity factor of 0.57, which represents a 57 basis point change in the rate curve for
 
 
the real rates and a 100 basis point change for the nominal rates. The same scenario is performed for the net foreign currency positions and the interest rates in U.S. dollars. The Bank has also established limits in regard to the maximum loss which these interest rate movements could impose on the capital and net financial income budgeted for the year.
 
To determine the consolidated limit, the foreign currency limit is added to the local currency limit for both the net financial income loss limit and the loss limit over capital and reserves using the following formula:
 
Consolidated limit = Square root of a2 + b2 + 2ab                                                                                     
a: limit in local currency.
b: limit in foreign currency.
Since correlation is assumed to be 0. 2ab = 0.
Limitations of the sensitivity models
 
The most important assumption is the use of a 100 basis point change in the yield curve (57 basis points for the real rates). The Bank uses a 100 basis point change because sudden changes of that magnitude are considered realistic. The Santander Spain Global Risk Department has established comparable limits by country, to be able to compare, monitor and consolidate the market risk by country in a realistic and orderly way. In addition, the sensitivity simulation methodology should be interpreted with consideration for the following limitations:
 
 
·
The simulation of scenarios assumes that the volumes remain in the Bank’s Consolidated General Balance Sheet and are always renewed at maturity, thereby omitting the fact that certain credit risk and prepayment considerations may affect the maturity of certain positions.
 
 
·
This model assumes an identical change along the entire length of the yield curve and takes no account of the different movements for different maturities.
 
 
·
The model takes no account of the sensitivity of volumes which results from interest rate changes.
 
 
·
The limits to losses of budgeted financial income are calculated on the basis of the financial income foreseen for the year, which may not be actually earned, meaning that the real percentage of financial income at risk may be higher than the expected one.
 
Market Risk – Financial management portfolio – December 31, 2014, 2013 and 2012
 
   
2014
   
2013
   
2012
 
   
Effect on net interest income
   
Effect on equity
   
Effect on net interest income
   
Effect on equity
   
Effect on net interest income
   
Effect on equity
 
Financial management portfolio – local currency (in millions of Ch$)
             
 
   
 
   
 
   
 
 
Loss limit
    38,150       192,660       35,500       167,530       37,300       167,530  
High
    27,707       112,133       28,923       86,196       26,233       100,175  
Low
    16,904       77,231       21,129       69,729       13,885       85,546  
Average
    21,077       92,809       25,124       77,849       20,054       92,312  
Financial management portfolio – foreign currency (in millions of U.S.$)
                                               
Loss limit
    40.0       70.0       30.0       30.0       40.0       44.0  
High
    16.0       39.0       17.2       26.0       24.3       14.7  
Low
          10.0       2.1       2.3       3.7       4.5  
Average
    10.0       28.0       10.2       18.6       12.8       4.7  
Financial management portfolio – consolidated (in millions of Ch$)
                                               
Loss limit
    40,650       172,390       35,500       167,530       39,200       167,530  
High
    27,949       112,364       28,958       86,212       26,437       100,201  
Low
    17,441       77,848       21,204       69,787       17,037       85,566  
Average
    21,404       93,245       25,146       77,891       21,165       92,457  

 
184

 
Market risk –Regulatory method
 
The following table illustrates our market risk exposure according to the Chilean regulatory method, as of December 31, 2014. This information is sent to the SBIF on a quarterly basis. Our maximum exposure to long-term interest rate fluctuations is set at 35% of regulatory capital and is approved by the board of directors.
 
Regulatory Market Risk
 
As of December 31, 2014
 
   
(Ch$ million)
 
Market risk of trading portfolio (EMR)
     
Interest rate risk of trading portfolio
    128,417  
Foreign currency risk of trading portfolio
    20,812  
Risk from interest rate options
    73,407  
Risk from foreign currency options
    53  
Total market risk of trading portfolio
    222,689  
10% x Risk-weighted assets
    2,420,889  
Subtotal
    2,643,578  
Limit = Regulatory Capital
    3,324,514  
Available margin
    680,936  
Non-trading portfolio market risk
       
Short-term interest rate risk
    75,774  
Inflation risk
    89,079  
Long-term interest rate risk
    668,487  
Total market risk of non-trading portfolio
    833,340  
Regulatory limit of exposure to short-term interest rate and inflation risk
       
Short-term exposure to interest rate risk
    75,774  
Exposure to inflation risk
    89,079  
Limit: 20% of (net interest income + net fee income sensitive to interest rates)
    261,862  
Available margin
    97,009  
Regulatory limit of exposure to long-term interest rate risk
       
Long-term exposure to interest rate risk
    668,487  
35% of regulatory capital
    1,163,580  
Available margin
    495,093  

Derivative activities
 
At December 31, 2014, 2013 and 2012, derivatives are valued at market price on the balance sheet and the net unrealized gain (loss) on derivatives is classified as a separate line item on the income statement.  Notional amounts are not recorded on the balance sheet. Banks must mark to market derivatives. A derivative financial instrument held for trading purposes must be marked to market and the unrealized gain or loss recognized in the income statement. The SBIF recognizes three kinds of hedge accounting: (i) cash flow hedges, (ii) fair value hedges and (iii) hedging of foreign investments.
 
 
·
When a cash flow hedge exists, the fair value movements on the part of the hedging instrument that is effective are recognized in equity. Any ineffective portion of the fair value movement on the hedging instrument is recognized in the income statement.
 
 
185

 
 
·
When a fair value hedge exists, the fair value movements on the hedging instrument and the corresponding fair value movements on the hedged item are recognized in the income statement. Hedged items in the balance sheet are presented at their market value.
 
 
·
When a hedge of foreign investment exposure exists (i.e. investment in a foreign branch), the fair value movements on the part of the hedging instrument that is effective are recognized in equity. Any ineffective portion of the fair value movement on the hedging instrument is recognized in the income statement.
 
We classify some of our derivative financial instruments as being held for trading, due to the guidelines from the SBIF. However, substantially all of our derivatives are not actually used for speculative purposes or trading. We use derivatives to hedge our exposure to foreign exchange, interest rate and inflation risks. We had the following derivative financial instruments portfolio as of December 31, 2014, 2013 and 2012:
 
   
As of December 31, 2014
 
   
Notional amount
   
Fair value
 
   
Up to 3 months
   
More than 3 months to 1 year
   
More than 1 year
   
Total
   
Assets
   
Liabilities
 
   
Ch$mn
 
Fair value hedge derivatives
                                   
Currency forwards
                                   
Interest rate swaps
    97,812       846,168       668,166       1,612,146       9,821       2,540  
Cross currency swaps
          193,704       694,852       888,556       110,448       7,997  
Call currency options
                                   
Call interest rate options
                                   
Put currency options
                                   
Put interest rate options
                                   
Interest rate futures
                                   
Other derivatives
                                   
Subtotal
    97,812       1,039,872       1,363,018       2,500,702       120,269       10,537  
Cash flow hedge derivatives
                                               
Currency forwards
                                   
Interest rate swaps
                                   
Cross currency swaps
    11,329       850,555       1,727,283       2,589,167       131,880       21,996  
Call currency options
                                   
Call interest rate options
                                   
Put currency options
                                   
Put interest rate options
                                   
Interest rate futures
                                   
Other derivatives
                                   
Subtotal
    11,329       850,555       1,727,283       2,589,167       131,880       21,996  
Trading derivatives
                                               
Currency forwards
    8,740,802       20,156,612       2,155,381       31,052,795       342,726       277,789  
Interest rate swaps
    1,675,560       16,147,587       37,838,280       55,661,427       518,392       485,798  
Cross currency swaps
    524,274       4,395,731       19,028,968       23,948,973       1,609,197       1,761,196  
Call currency options
    160,560       89,701             250,261       1,587       2,597  
Call interest rate options
                103,474       103,474       795       633  
Put currency options
    153,999       157,757       34,491       346,247       2,575       485  
Put interest rate options
                                   
Interest rate futures
                                   
Other derivatives
    258,425                   258,425       142       353  
Subtotal
    11,513,620       40,947,388       59,160,594       111,621,602       2,475,414       2,528,851  
Total
    11,622,761       42,837,815       62,250,895       116,711,471       2,727,563       2,561,384  


   
As of December 31, 2013
 
   
Notional amounts
   
Fair Value
 
   
Within 3 months
   
After 3 months but within one year
   
After one year
   
Assets
   
Liabilities
 
   
(Ch$ million)
 
Fair value hedge derivative instruments
                             
Currency forwards
                             
Interest rate swaps
          55,000       375,599       9,951       1,009  
Cross currency swaps
          233,824       899,293       63,528       1,736  
Call currency options
                             
Call interest rate options
                             
Put currency options
                             
Put interest rate options
                             
Interest rate future
                             
Other Derivatives
                             
Subtotal
          288,824       1,274,892       73,479       2,745  
Cash Flow hedge derivative instruments
                                       
Currency forwards
                             
Interest rate swaps
                             
Cross currency swaps
    522,451       937,529       661,676       60,453       13,908  
Call currency options
                             
Call interest rate options
                             
Put currency options
                             
Put interest rate options
                             
Interest rate future
                             
Other Derivatives
                             
Subtotal
    522,451       937,529       661,676       60,453       13,908  
Derivative instruments for trading
                                       
Currency forwards
    14,972,304       9,801,554       1,749,378       198,130       188,340  
Interest rate swaps
    4,526,349       11,332,697       25,005,852       241,528       242,563  
Cross currency swaps
    1,634,855       3,927,402       14,246,746       915,099       840,718  
Call currency options
    443,944       42,805       5,557       1,327       2,398  
Call interest rate options
          7,031                    
Put currency options
    428,638       38,450       2,936       3,831       1,108  
Put interest rate options
                             
Interest rate future
                             
Other Derivatives
    54,777                   171       5  
Subtotal
    22,060,867       25,149,939       41,010,469       1,360,086       1,275,132  
Total
    22,583,318       26,376,292       42,947,037       1,494,018       1,291,785  


   
As of December 31, 2012
 
   
Notional amounts
   
Fair Value
 
   
Within 3 months
   
After 3 months but within one year
   
After one year
   
Assets
   
Liabilities
 
   
(Ch$ million)
 
Fair value hedge derivative instruments
                             
Currency forwards
                             
Interest rate swaps
    95,200       397,092       395,471       12,647       4,054  
Cross currency swaps
    25,396       14,975       671,942       12,716       4,361  
Call currency options
                             
Call interest rate options
                             
Put currency options
                             
Put interest rate options
                             
Interest rate future
                             
Other Derivatives
                             
Subtotal
    120,596       412,067       1,067,413       25,363       8,415  
Cash Flow hedge derivative instruments
                                       
Currency forwards
    13,704                         298  
Interest rate swaps
                             
Cross currency swaps
    268,693       666,668       689,045       1,851       52,589  
Call currency options
                             
Call interest rate options
                             
Put currency options
                             
Put interest rate options
                             
Interest rate future
                             
Other Derivatives
                             
Subtotal
    282,397       666,668       689,045       1,851       52,887  
Derivative instruments for trading
                                       
Currency forwards
    17,560,012       7,109,216       563,301       159,624       187,304  
Interest rate swaps
    4,578,678       9,882,478       13,752,690       204,800       230,380  
Cross currency swaps
    1,126,961       3,215,654       11,639,636       899,174       665,100  
Call currency options
    413,452       8,032             567       1,485  
Call interest rate options
    3,917       14,458       12,481       24       20  
Put currency options
    402,234       1,928             1,777       516  
Put interest rate options
                             
Interest rate future
                             
Other Derivatives
    19,415                   32       54  
Subtotal
    24,104,669       20,231,766       25,968,108       1,265,998       1,084,859  
Total
    24,507,662       21,310,501       27,724,566       1,293,212       1,146,161  

Other subsidiaries
 
For VaR measurements and scenario simulations, our consolidated trading and consolidated non-trading portfolios do not consolidate the asset liability structure of the following subsidiaries:
 
 
·
Santander S.A. Corredores de Bolsa
 
 
·
Santander S.A. Sociedad Securitizadora
 
 
·
Santander Corredores de Seguros Ltda.
 
The balance sheets of these subsidiaries are mainly comprised of non-sensitive assets and liabilities, fixed assets and capital and in total only represent 0.5% of our total consolidated assets.
 
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
A.  Debt Securities
 
Not applicable.
 
 
188

 
B.  Warrants and Right
 
Not applicable.
 
C.  Other Securities
 
Not applicable.
 
D.  American Depositary Shares
 
Our Depositary is JPMorgan Chase Bank, N.A., with its principal executive office located at 270 Park Avenue, New York, NY 10017-2070.
 
Each ADS represents the right to receive 400 shares of Common Stock without par value.
 
 
·
Fees charged to investors as outlined in the deposit agreement are the following:
 
Category of Service
 
Depositary Actions
 
Associated Fee
         
(a) Depositing or substituting the underlying shares
 
Each person to whom ADSs are issued, including against deposits of shares, in respect of share distributions, rights and other distributions,1 pursuant to a stock dividend or stock split declared by the Bank, pursuant to a merger, exchange of securities or other transaction or event affecting the ADSs.
 
$5.00 for each 100 ADSs (or portion thereof) delivered or surrendered.
         
(b) Receiving or distributing dividends
 
Distribution of dividends.
 
$0.02 per ADS.
         
(c) Selling or Exercising Rights
 
Distribution or sale of securities
 
An amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities.
         
(d) Transferring an ADR
 
Transfer of ADRs.
 
$1.50 per ADR.
(e) Withdrawing an underlying security
 
Acceptance of ADRs surrendered for withdrawal of deposited securities.
 
$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered.
         
(f) Expenses of the Depositary
 
Expenses incurred on behalf of holders in connection with:
 
i) Stock transfer or other taxes and other governmental charges (including any penalties and/or interest).
ii) Cable, telex and facsimile transmission and delivery.
iii) Expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency).
iv) Such fees and expenses as are incurred by the Depositary (including without limitation expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the Depositary’s or its Custodian’s compliance with applicable law, rule or regulation.
 
Expenses payable at the sole discretion of the depositary.

(1)
The Depositary may sell (by public or private sale) sufficient securities and property received in respect of such share distributions, rights and other distributions prior to such deposit to cover such charge.
 
 
189

 
Direct and Indirect Payments
 
The Depositary, has agreed to reimburse certain of our reasonable expenses related to our ADR program and incurred by us in connection with the program. Under certain circumstances, including termination of the program, we are required to repay to the Depositary amounts reimbursed in prior periods.
 
The reimbursements include direct payments (legal and accounting fees incurred in connection with preparation of Form 20-F and ongoing SEC compliance and listing requirements, listing fees, investor relations expenses, advertising and public relations expenses and fees payable to service providers for the distribution of hard copy materials to beneficial ADR holders in the Depositary Trust Company, such as information related to shareholders’ meetings and related voting instruction cards); and indirect payments (third-party expenses paid directly and fees waived).
 
In 2014, the Depositary made direct payments and reimbursements to us in the gross amount of U.S. $1,246,345.for expenses related to investor relations of which 30% was withheld for tax purposes in the U.S.
 
PART II
 
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
Not applicable.
 
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
Not applicable.
 
ITEM 15. CONTROLS AND PROCEDURES
 
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
 
As of December 31, 2014, the Bank, under the supervision and with the participation of the Bank’s management, including its Disclosure Committee, the Chief Executive Officer, the Chief Financial Officer and the Financial Controller, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.
 
Based on such evaluation, the Bank’s Disclosure Committee, the Chief Executive Officer, the Chief Financial Officer and the Financial Controller concluded that the Bank’s disclosure controls and procedures were effective in ensuring that information relating to the Bank, including its consolidated subsidiaries, required to be disclosed in the reports it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to the Banks management, including its Disclosure Committee and principal financial officers as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Report on Internal Control Over Financial Reporting
 
The Bank’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Bank’s internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS-IASB and includes those policies and procedures that:
 
 
·
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank;
 
 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS-IASB, and that our receipts and expenditures are being made only in accordance with authorizations of the Bank’s management and directors; and
 
 
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting, no matter how well designed may not prevent or detect misstatements, due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Under the supervision and with the participation of the Bank’s management, including the Disclosure Committee, the Chief Executive Officer, the Chief Financial Officer and the Financial Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
 
We have adapted our internal control over financial reporting to the most rigorous international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control―Integrated Framework (2013).  The general framework assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.
 
Based on this assessment, our management concluded that, as of December 31, 2014, our internal control over financial reporting was effective based on those criteria.
 
 
Changes in Internal Control Over Financial Reporting
 
There has been no change in the Bank’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
 
Our internal control over financial reporting as of December 31, 2014 has been audited by an independent registered public accounting firm, as stated in its report, which follows below.
 
Report of Independent Registered Public Accounting Firm
 
Deloitte
Auditores y Consultores Limitada
Rosario Norte 407
Las Condes, Santiago
Chile
Fono: (56) 227 297 000
Fax: (56) 223 749 177
deloittechile@deloitte.com
www.deloitte.cl
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Banco Santander Chile

We have audited the internal control over financial reporting of Banco Santander Chile and subsidiaries (the “Bank”) as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Bank’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Bank’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s  assets that could have a material effect on the financial statements.
 
 
191

 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, 2014 of the Bank and our report dated May 14, 2015 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the translation of Chilean peso amounts into U.S. dollar amounts in conformity with the basis stated in Note 1e. and that such U.S. dollar amounts are presented solely for the convenience of readers outside of Chile.


/s/ Deloitte

May 14, 2015
Santiago, Chile
 

 
Deloitte® se refiere a Deloitte Touche Tohmatsu Limited una compañía privada limitada por garantía, de Reino Unido, y a su red de firmas miembro, cada una de las cuales es una entidad legal separada e independiente. Por favor, vea en www.deloitte.cl/ acercade la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.
 
 
 
Deloitte Touche Tohmatsu Limited es una compañía privada limitada por garantía constituida en Inglaterra & Gales bajo el número 07271800, y su domicilio registrado: Hill House, 1 Little New Street, London, EC4A 3TR, Reino Unido.
 
 
ITEM 16. [RESERVED]
 
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
 
Our Board of Directors has determined that one of the members of our Audit Committee, Víctor Arbulú Crousillat, meets the requirements of an “audit committee financial expert” in accordance with SEC rules and regulations, in that he has an understanding of IFRS-IASB and financial statements, the ability to assess the general application of IFRS-IASB in connection with the accounting for estimates, accruals and reserves, experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our consolidated financial statements, an understanding of internal controls over financial reporting, and an understanding of audit committee functions. All four members of our Audit Committee have experience overseeing and assessing the performance of Santander-Chile and its consolidated subsidiaries and our external auditors with respect to the preparation, auditing and evaluation of our consolidated financial statements.
 
All four members of our Audit Committee are considered to be independent according to applicable NYSE criteria. Víctor Arbulú Crousillat is relying on the exemption provided by Rule 10A-3(b)(1)(iv)(B), which allows an otherwise independent director to serve on both the audit committee of the issuer and the Board of Directors of an affiliate.
 
ITEM 16B. CODE OF ETHICS
 
The Bank has adopted a code of ethics that is applicable to all of the Bank’s employees and a copy is included as an exhibit hereto. We will provide to any person without charge, upon request, a copy of our code of ethics. Please email rmorenoh@santander.cl to request a copy. Our code of ethics is available on our website, which does not form part of this Annual Report on Form 20-F, at www.santander.cl under the heading “Información Corporativa”.
 
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Amounts paid to the auditors for statutory audit and other services were as follows:
 
   
2014
   
2013
 
   
(in millions of Ch$)
 
Audit Fees
           
- Statutory audit
    427       478  
- Audit-related regulatory reporting
    373       256  
- Other audit-related fees
    320       657  
Tax Fees
               
- Compliance
           
- Advisory Services
    53       34  
Total
    1,173       1,425  

Statutory audit: Consists of fees billed for professional services rendered in connection with the audit of our consolidated financial statements that are provided by Deloitte Auditores y Consultores Limitada in connection with statutory and regulatory filings or engagements, and attest services.
 
Audit-related regulatory reporting: Consists of fees billed for assurance and related services that were specifically related to the performance of the audit and review of our filings under the Securities Act.
 
Tax fees: Consist of fees billed for related services that were specifically related to tax related matters such as assuring the Bank was in compliance with tax laws and other tax advisory services.
 
The audit committee is required to pre-approve the audit and non-audit services performed by the Bank auditors in order to assure that the provision of such services do not impair the audit firm’s independence.
 
In the first months of each year the audit committee proposes to the board the appointment of the independent auditor. As a matter of policy, at that time, the audit committee pre-approves the audit and audit related services that the appointed auditors will be required to carry out during the year to comply with the applicable regulation. These services will be included in the corresponding audit contracts of the Bank with its principal auditing firm.
 
In addition, under such policy, non-recurring audit or audit-related services and all non-audit services provided by the Bank principal auditing firm or other auditing firms are subject to case-by-case approval by the audit committee.
 
The Chief Accounting Officer is in charge of managing the process and must report monthly to the audit committee detailing all services to be provided by auditors,  and others requiring individual approval.
 
All services provided by the Bank principal auditing firm in 2014 detailed in the table above were approved by the Audit and Compliance Committee.
 
 
193

 
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
Not applicable.
 
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
In 2014, neither Santander-Chile nor any of its affiliates purchased any of Santander-Chile’s equity securities.
 
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
Not applicable.
 
ITEM 16G. CORPORATE GOVERNANCE
 
Summary Comparison of Corporate Governance Standards and NYSE Listed Company Standards
 
Our corporate governance standards, dictated by Chilean corporate law, differ from the standards followed by U.S. companies under the New York Stock Exchange (NYSE) listing standards in a number of ways. Consequently, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements. The following is a non-exhaustive summary of a few key differences:
 
 
·
Whether a company’s executive officers may serve as its directors – the NYSE standards do not prohibit a U.S. company’s executive officer from also serving as a director, whereas our corporate governance standards prohibits this.
 
 
·
Whether the shareholders must be given an opportunity to vote on equity-compensation plans – the NYSE standards require that shareholders be allowed to vote on all equity compensation plans of a U.S. company, whereas our corporate governance standards only require that shareholders be allowed to vote on director compensation.
 
 
·
The adoption and disclosure of corporate governance guidelines – the NYSE standards require all U.S. companies listed on the NYSE to adopt the NYSE corporate governance guidelines, whereas we follow the corporate governance guidelines established under Chilean law.
 
As more than 50% of our voting power is held by another company, Santander Spain, we would be permitted to elect for certain exemptions under NYSE corporate governance standards if we were a U.S. company. Specifically, as a U.S. company, we could elect to be exempted from the requirements (i) that we have a majority of independent directors (as defined by the NYSE), (ii) that we have a nominating/corporate governance committee meeting certain conditions, and (iii) that we have a compensation committee meeting certain requirements. Because we would not be required to follow these standards if we were a U.S. company, we have not summarized the differences, if any, between these provisions and our own corporate governance procedures.
 
Summary of Corporate Governance Standards
 
Santander-Chile has adopted diverse measures to promote good corporate governance. Among the measures adopted are:
 
 
·
Board of Directors mainly composed of professionals not related to Santander Spain, our parent company.
 
 
·
Active participation of Directors in main committees of the Bank.
 
 
·
All personnel must subscribe to a code of ethics and good conduct. Those who interact directly with the capital markets must also subscribe to an additional code of conduct.
 
 
·
Segregation of functions in order to assure adequate management of risks. Commercial areas separated from back office areas. Risk management independent of commercial areas. Main credit decisions taken in committees.
 
 
·
Internal Auditing Area clearly independent from the Administration.
 
 
·
The Bank also has an Internal Compliance Division that oversees the fulfillment of the Bank’s codes of conduct.
 
Santander-Chile has a commitment to transparency. This includes:
 
 
·
Equal treatment for all shareholders: one share equals to one vote.
 
 
·
Monthly publication of the Bank’s results by the SBIF.
 
 
·
Quarterly report of a detailed analysis of Bank results published by us at least 30 days after the close of each interim quarter and 40 days after close of the full year.
 
 
·
Quarterly conference call open to the public.
 
 
·
All information relevant to the public available immediately on the web page www.santander.cl.
 
 
·
Ample and periodic coverage of the Bank by international and local stock analysts.
 
 
·
The Bank has five credit risk ratings by five independent rating agencies, domestic and international.
 
 
194

 
In addition, our corporate governance practices reflect the Santander Spain corporate governance framework described below.
 
In December 2012, primarily in response to the requirements of the European Banking Authority, our controlling shareholder, Santander Spain, adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander). The purpose of the framework is to organize and standardize the corporate governance practices of Santander Spain and its most significant subsidiaries, including us, in order to enhance the ability of Santander Spain to manage the risks arising from its operations around the world.
 
The three pillars of the framework are (i) an organizational model based on functions subject to internal governance, (ii) terms of reference according to which Santander Spain exercises control and oversight over its subsidiaries and participates in specific decisions at the subsidiary level and (iii) corporate models establishing common guidelines for the management and control of Santander Spain’s subsidiaries, subject to local autonomy considerations. In general, the framework purports to implement organizational and procedural changes rather than mandating particular substantive outcomes. However, in some cases, and subject to the limitations set forth in the framework, the framework states that Santander Spain may require that its subsidiaries make substantive changes or take specific actions. The framework enables Santander Spain to participate in the decision-making processes of its subsidiaries by requiring its approval of certain decisions that may have a significant impact on the Santander Group as a whole due to their significance or potential risk, such as decisions relating to mergers and acquisitions, capital structure, dividends and risk appetite, among other things. The framework also requires that a single person at each subsidiary be in charge of each function subject to internal governance and gives Santander Spain the authority to participate in the appointment, evaluation and compensation of each such person.
 
By its own terms, the framework as a whole is premised on the legal and financial autonomy of the subsidiaries and does not empower Santander Spain to supplant its subsidiaries’ decision-making processes. Moreover, each of the three pillars of the framework is explicitly made subject to local legal requirements. Our Board of Directors approved the adoption of this corporate governance framework in April 2013, subject to certain overarching principles:
 
 
·
the precedence of applicable laws and regulations and orders of competent authorities over the framework to the extent they are in conflict; and
 
 
·
the disclosure of the adoption of the corporate governance framework to the public and to our employees and subsidiaries.
 
As a result of the precedence given to local legal requirements in the framework itself and in our Board of Directors’ adopting resolutions, we do not expect that the adoption of the corporate governance framework will affect our ability to comply with applicable corporate governance regulations, including SEC and NYSE rules applicable to foreign private issuers. For example, although one provision of the framework states that we must obtain Santander Spain’s approval for our audit plan and that Santander Spain may request additional audits at its discretion, to the extent that this provision of the framework would prevent our audit committee from fulfilling any of the requirements of applicable SEC or NYSE rules (including, for example, the audit committee’s obligation to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing an audit report), we understand that this provision would be limited so as not to conflict with such requirements due to the precedence given to local legal requirements in the framework and our adopting resolutions. Similarly, we understand that the authorities given to Santander Spain under the framework to approve certain decisions by us and to approve the compensation of certain persons in charge of functions subject to internal governance are limited by the framework and the adopting resolutions so as not to limit the ability of members of our audit committee to make independent decisions or take independent actions as required by the audit committee independence requirements of applicable SEC and NYSE rules.
 
ITEM 16H. MINE SAFETY DISCLOSURE
 
Not applicable.
 
 
195

 
PART III
 
ITEM 17. FINANCIAL STATEMENTS
 
We have responded to Item 18 in lieu of this Item.
 
ITEM 18. FINANCIAL STATEMENTS
 
Reference is made to Item 19 for a list of all financial statements filed as part of this Annual Report.
 
ITEM 19. EXHIBITS
 
a) Index to Financial Statements
 
Report of independent registered public accounting firm
F-2
Audited consolidated financial statements:
 
Consolidated Statements of Financial Position as of December 31, 2013, 2012 and 2011
F-3
Consolidated Statements of Income for each of the three years in the period ended December 31, 2013, 2012 and 2011
F-4
Consolidated Statements of Other Comprehensive Income for each of the three years in the period ended December 31, 2013, 2012 and 2011
F-5
Consolidated Statements of Changes in Equity for each of the three years in the period ended December 31, 2013, 2012 and 2011
F-6
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2013, 2012 and 2011
F-8
Notes to consolidated financial statements
F-10

b) Index to Exhibits
 
Exhibit
Number
Description
1A.1
Restated Articles of Incorporation of Santander-Chile (Spanish Version) (incorporated by reference to our Registration Statement on Form F-4 (Registration No. 333-100975) filed with the Commission on December 12, 2002).
   
1A.2
Restated Articles of Incorporation of Santander-Chile (English Version) (incorporated by reference to our Registration Statement on Form F-4 (Registration No. 333-100975) filed with the Commission on December 12, 2002).
   
1B.1
Amended and Restated By-Laws (estatutos) of Santander-Chile (Spanish Version) (incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2012 (File No. 1-4554) filed with the Commission on April 30, 2014).
   
1B.2
Amended and Restated By-Laws (estatutos) of Santander-Chile (English Version) (incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2013 (File No. 1-4554) filed with the Commission on April 30, 2012).
 
 
 
196

 
2A.1
Form of Amended and Restated Deposit Agreement, dated August 4, 2008, among Banco Santander-Chile, JPMorgan Chase Bank, N.A. (as depositary) and Holders of American Depositary Receipts (incorporated by reference to our Registration Statement on Form F-6 (Registration No. 333-152664) filed with the Commission on July 31, 2008).
   
2A.2
Form of Foreign Investment Contract among Banco Santiago, JPMorgan Chase Bank, N.A. and the Central Bank of Chile relating to the foreign exchange treatment of an investment in ADSs (accompanied by an English translation) (incorporated by reference to our Registration Statement on Form F-1 (Registration No. 333-7676) filed with the Commission on October 23, 1997).
   
2A.3
Copy of the Central Bank Chapter XXVI Regulations Related to the Acquisition of Shares in Chilean Corporations and the Issuance of Instrument on Foreign Stock Exchanges or under Other Terms and Conditions of Issue (accompanied by an English translation) (incorporated by reference to Old Santander-Chile’s Annual Report for the fiscal year ended December 31, 1996 (File No. 1-13448) filed with the Commission on June 30, 1997).
   
2A.4
Form of Amended and Restated Deposit Agreement, dated October 22, 2012 among Banco Santander-Chile, JPMorgan Chase Bank, N.A. (as depositary) and Holders of American Depositary Receipts (incorporated by reference to our Registration Statement on Form F-6 (Registration No. 333-184234) filed with the Commission on October 2, 2012).
   
2B.1
Agreement for the Issuance of Bonds dated November 26, 1996 between Old Santander-Chile and Banco Security (accompanied by an English translation) (incorporated by reference to Old Santander-Chile’s Annual Report for the fiscal year ended December 31, 1996 (File No. 1-13448) filed with the Commission on June 30, 1997).
   
2B.2
Indenture dated December 9, 2004 between Santander-Chile and Deutsche Bank Trust Company Americas, as trustee, providing for issuance of securities in series (incorporated by reference to Banco Santiago’s Annual Report on Form 20-F for the fiscal year ended December 31, 2005 (File No. 1-4554) filed with the Commission on April 12, 2006).
   
2B.3
Indenture dated March 16, 2001, as amended on May 30, 2003, October 22, 2004, May 3, 2005, and September 20, 2005 between Santander-Chile and Banco de Chile, as trustee, relating to issuance of UF14 million senior notes (copy to be furnished upon request).
   
8.1
List of Subsidiaries (incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (File No. 1-4554) filed with the Commission on June 30, 2005).
   
11.1
Code of Conduct for Executive Personnel of Banco Santander-Chile and Subsidiaries (incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (File No. 1-4554) filed with the Commission on June 30, 2005).
   
11.2
Code of Conduct for all Grupo Santander Personnel (incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (File No. 1-4554) filed with the Commission on June 30, 2005).
   
12.1
Section 302 Certification by the Chief Executive Officer.
   
12.2
Section 302 Certification by the Chief Financial Officer.
   
12.3
Section 302 Certification by the Financial Controller.
   
13.1
Section 906 Certification.

We will furnish to the Securities and Exchange Commission, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Banco Santander-Chile.
 
 
SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
 
BANCO SANTANDER-CHILE
 
   
By:
 /s/ Cristian Florence
 
Name:
Cristian Florence
 
Title:
General Counsel
 

Date: May 14, 2015
 
 
 
       
       
       
       
       
       
       
       
       
       
       
       
       
       
 
FINANCIAL
   
       
 
STATEMENTS 2014
Banco Santander Chile
 
       
       
       
       
       
       
       
       
       
       
       
   
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
 
 
CONTENT
 
Consolidated Financial Statements

F-3
F-4
F-5
F-6
F-8
   
   
Notes to the Consolidated Financial Statements
 
   
F-10
F-40
F-43
F-48
F-49
F-50
F-53
F-61
F-62
F-70
F-74
F-76
F-78
F-81
F-84
F-85
F-86
F-88
F-95
F-97
F-98
F-99
F-100
F-103
F-107
F-109
F-110
F-110
F-111
F-112
F-113
F-114
F-115
F-117
F-123
F-126
F-132
F-146

 
Deloitte
Auditores y Consultores Limitada
Rosario Norte 407
Las Condes, Santiago
Chile
Fono: (56) 227 297 000
Fax: (56) 223 749 177
deloittechile@deloitte.com
www.deloitte.cl

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
 Banco Santander Chile

We have audited the accompanying consolidated statements of financial position of Banco Santander Chile and subsidiaries (the “Bank”) as of December 31, 2014, and 2013, and the corresponding consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2014.  These financial statements are the responsibility of the Bank´s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Banco Santander Chile and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

Our audits also comprehended the translation of Chilean peso amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1e to the consolidated financial statements.  Such U.S. dollar amounts are presented solely for the convenience of readers outside Chile.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Bank's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 14, 2015 expressed an unqualified opinion on the Bank’s internal control over financial reporting.


/s/ Deloitte

May 14, 2015
Santiago, Chile

 
Deloitte® se refiere a Deloitte Touche Tohmatsu Limited una compañía privada limitada por garantía, de Reino Unido, y a su red de firmas miembro, cada una de las cuales es una entidad legal separada e independiente. Por favor, vea en www.deloitte.cl/ acercade la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.
 
Deloitte Touche Tohmatsu Limited es una compañía privada limitada por garantía constituida en Inglaterra & Gales bajo el número 07271800, y su domicilio registrado: Hill House, 1 Little New Street, London, EC4A 3TR, Reino Unido.
 
 

Banco Santander Chile and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
         
As of December 31,
 
         
2014
   
2014
   
2013
 
   
NOTE
   
ThUS$
   
MCh$
   
MCh$
 
ASSETS
                       
Cash and deposits in banks
    4       2,644,762       1,608,888       1,571,810  
Cash items in process of collection
    4       873,495       531,373       604,077  
Trading investments
    5       1,273,675       774,815       287,567  
Investments under resale agreements
    6       -       -       17,469  
Financial derivative contracts
    7       4,483,690       2,727,563       1,494,018  
Interbank loans, net
    8       19,631       11,942       124,954  
Loans and accounts receivable from customers, net
    9       36,487,416       22,196,390       20,320,874  
Available for sale investments
    10       2,714,970       1,651,598       1,700,993  
Investments in associates and other companies
    11       29,448       17,914       9,681  
Intangible assets
    12       67,370       40,983       66,703  
Property, plant, and equipment
    13       347,773       211,561       180,215  
Current taxes
    14       3,684       2,241       1,643  
Deferred taxes
    14       447,319       272,118       227,285  
Other assets
    15       1,525,424       927,961       514,938  
TOTAL ASSETS
            50,918,657       30,975,347       27,122,227  
LIABILITIES
                               
Deposits and other demand  liabilities
    16       10,652,930       6,480,497       5,620,763  
Cash items in process of being cleared
    4       462,346       281,259       276,379  
Obligations under repurchase agreements
    6       644,594       392,126       208,972  
Time deposits and other time liabilities
    16       17,118,899       10,413,940       9,675,272  
Financial derivative contracts
    7       4,210,517       2,561,384       1,291,785  
Interbank borrowings
    17       2,024,561       1,231,601       1,682,377  
Issued debt instruments
    18       9,509,825       5,785,112       5,198,658  
Other financial liabilities
    18       337,194       205,125       189,781  
Current taxes
    14       1,771       1,077       50,242  
Deferred taxes
    14       12,544       7,631       26,753  
Provisions
    20       470,090       285,970       217,310  
Other liabilities
    21       1,075,990       654,557       311,479  
TOTAL LIABILITIES
            46,521,261       28,300,279       24,749,771  
EQUITY
                               
                                 
Attributable to the Bank's shareholders:
            4,343,013       2,641,985       2,343,952  
Capital
    23       1,465,164       891,303       891,303  
Reserves
    23       2,149,756       1,307,761       1,130,991  
Valuation adjustments
    23       42,082       25,600       (5,964 )
Retained earnings
            686,011       417,321       327,622  
Retained earnings from prior years
            30,220       18,384       18,016  
Income for the year
            936,844       569,910       442,294  
Minus:  Provision for mandatory dividends
    23       (281,053 )     (170,973 )     (132,688 )
Non-controlling interest
    24       54,383       33,083       28,504  
TOTAL EQUITY
            4,397,396       2,675,068       2,372,456  
                                 
TOTAL LIABILITIES AND EQUITY
            50,918,657       30,975,347       27,122,227  

Banco Santander Chile and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the years ended
 
         
December 31,
 
         
2014
   
2014
   
2013
   
2012
 
   
NOTE
   
ThUS$
   
MCh$
   
MCh$
   
MCh$
 
OPERATING INCOME
                             
                               
Interest income
    25       3,660,872       2,227,018       1,871,204       1,890,953  
Interest expense
    25       (1,495,757 )     (909,914 )     (794,442 )     (848,219 )
                                         
Net interest income
            2,165,115       1,317,104       1,076,762       1,042,734  
                                         
Fee and commission income
    26       602,845       366,729       346,120       360,427  
Fee and commission expense
    26       (229,228 )     (139,446 )     (116,284 )     (89,855 )
                                         
Net fee and commission income
            373,617       227,283       229,836       270,572  
                                         
Net income (expense) from financial operations
    27       (262,435 )     (159,647 )     (20,289 )     (64,079 )
Net foreign exchange gain (loss)
    28       447,474       272,212       144,726       146,378  
Other operating income
    33       10,759       6,545       88,155       13,105  
                                         
Net operating profit before provision for loan losses
            2,734,530       1,663,497       1,519,190       1,408,710  
                                         
Provision for loan losses
    29       (583,405 )     (354,903 )     (371,462 )     (403,692 )
                                         
NET OPERATING PROFIT
            2,151,125       1,308,594       1,147,728       1,005,018  
                                         
Personnel salaries and expenses
    30       (557,079 )     (338,888 )     (308,344 )     (299,904 )
Administrative expenses
    31       (337,233 )     (205,149 )     (188,191 )     (183,379 )
Depreciation and amortization
    32       (72,612 )     (44,172 )     (61,074 )     (56,369 )
Impairment of property, plant, and equipment
    32       (60,270 )     (36,664 )     (244 )     (90 )
Other operating expenses
    33       (96,898 )     (58,946 )     (52,338 )     (59,637 )
                                         
Total operating expenses
            (1,124,092 )     (683,819 )     (610,191 )     (599,379 )
                                         
OPERATING INCOME
            1,027,033       624,775       537,537       405,639  
                                         
Income from investments in associates and other companies
    11       3,559       2,165       1,422       267  
                                         
Income before tax
            1,030,592       626,940       538,959       405,906  
                                         
Income tax expense
    14       (83,918 )     (51,050 )     (94,530 )     (44,473 )
                                         
NET INCOME FOR THE YEAR
            946,674       575,890       444,429       361,433  
                                         
Attributable to:
                                       
Equity holders of the Bank
            936,844       569,910       442,294       356,808  
Non-controlling interest
    24       9,830       5,980       2,135       4,625  
Earnings per share attributable to Equity holders of the Bank :
                                       
(expressed in Chilean pesos)
                                       
Basic earnings
    23       4.971       3.024       2.347       1.893  
Diluted earnings
    23       4.971       3.024       2.347       1.893  

Banco Santander Chile and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended

         
December 31,
 
         
2014
   
2014
   
2013
   
2012
 
   
NOTE
   
ThUS$
   
MCh$
   
MCh$
   
MCh$
 
NET INCOME FOR THE YEAR
          946,674       575,890       444,429       361,433  
OTHER COMPREHENSIVE INCOME ITEMS WHICH MAY  BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS
                                     
                                       
Available for sale investments
    10       34,264       20,844       10,857       (13,060 )
Cash flow hedge
    23       31,204       18,982       (13,572 )     4,921  
                                         
Other comprehensive income items which may be reclassified subsequently to profit or loss, before tax
            65,468       39,826       (2,715 )     (8,139 )
                                         
Income tax related to items which may be reclassified subsequently to profit or loss
    14       (13,626 )     (8,289 )     543       1,572  
                                         
Other comprehensive income items which may be reclassified subsequently to profit or loss, net of tax
            51,842       31,537       (2,172 )     (6,567 )
                                         
OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS
            -       -       -       -  
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
            998,516       607,427       442,257       354,866  
                                         
Attributable to:
                                       
Equity holders of the Bank
            988,730       601,474       440,111       350,195  
Non-controlling interests
    24       9,786       5,953       2,146       4,671  


Banco Santander Chile and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2014, 2013 and 2012

         
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 year
   
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, 2011
    891,303       803,651       (2,224 )     3,077       394       (639 )     82,383       402,191       (120,657 )     2,059,479       33,801       2,093,280  
Distribution of income from previous period
    -       -       -       -       -       -       402,191       (402,191 )     -       -       -       -  
Equity as of January 1, 2012
    891,303       803,651       (2,224 )     3,077       394       (639 )     484,574       -       (120,657 )     2,059,479       33,801       2,093,280  
Dividends distributions/ withdrawals made
    -       -       -       -       -       -       (261,051 )     -       120,657       (140,394 )     (4,207 )     (144,601 )
Transfer of retained earnings to reserves
    -       174,033       -       -       -       -       (174,033 )     -       -       -       -       -  
Provision for mandatory dividends
    -       -       -       -       -       -       -       -       (107,044 )     (107,044 )     -       (107,044 )
Subtotal
    -       174,033       -       -       -       -       (435,084 )     -       13,613       (247,438 )     (4,207 )     (251,645 )
Other comprehensive income
    -       -       -       (13,118 )     4,921       1,584       -       -       -       (6,613 )     46       (6,567 )
Income for the year
    -       -       -       -       -       -       -       356,808       -       356,808       4,625       361,433  
Subtotal
    -       -       -       (13,118 )     4,921       1,584       -       356,808       -       350,195       4,671       354,866  
Equity as of December 31, 2012
    891,303       977,684       (2,224 )     (10,041 )     5,315       945       49,490       356,808       (107,044 )     2,162,236       34,265       2,196,501  
Distribution of income from previous period
    -       -       -       -       -       -       356,808       (356,808 )     -       -       -       -  
Equity as of January 1, 2013
    891,303       977,684       (2,224 )     (10,041 )     5,315       945       406,298       -       (107,044 )     2,162,236       34,265       2,196,501  
Own shares transactions (1)
    -       29       -       -       -       -       -       -       -       29       -       29  
Dividends distributions/ withdrawals made
    -       -       -       -       -       -       (232,780 )     -       107,044       (125,736 )     (7,907 )     (133,643 )
Transfer of retained earnings to reserves
    -       155,502       -       -       -       -       (155,502 )     -       -       -       -       -  
Provision for mandatory dividends
    -       -       -       -       -       -       -       -       (132,688 )     (132,688 )     -       (132,688 )
Subtotal
    -       155,531       -       -       -       -       (388,282 )     -       (25,644 )     (258,395 )     (7,907 )     (266,302 )
Other comprehensive income
    -       -       -       10,843       (13,572 )     546       -       -       -       (2,183 )     11       (2,172 )
Income for the year
    -       -       -       -       -       -       -       442,294       -       442,294       2,135       444,429  
Subtotal
    -       -       -       10,843       (13,572 )     546       -       442,294       -       440,111       2,146       442,257  
Equity as of December 31, 2013
    891,303       1,133,215       (2,224 )     802       (8,257 )     1,491       18,016       442,294       (132,688 )     2,343,952       28,504       2,372,456  
Distribution of income from previous period
    -       -       -       -       -       -       442,294       (442,294 )     -       -       -       -  
Equity as of January 1, 2014
    891,303       1,133,215       (2,224 )     802       (8,257 )     1,491       460,310       -       (132,688 )     2,343,952       28,504       2,372,456  
Increase or decrease of capital and reserves
    -       -       -       -       -       -       -       -       -       -       (1,374 )     (1,374 )
Own shares transactions
    -       -       -       -       -       -       -       -       -       -       -       -  
Dividends distributions/ withdrawals made
    -       -       -       -       -       -       (265,156 )     -       132,688       (132,468 )     -       (132,468 )
Transfer of retained earnings to reserves
    -       176,770       -       -       -       -       (176,770 )     -       -       -       -       -  
Provision for mandatory dividends
    -       -       -       -       -       -       -       -       (170,973 )     (170,973 )     -       (170,973 )
Subtotal
    -       176,770       -               -       -       (441,926 )     -       (38,285 )     (303,441 )     (1,374 )     (304,815 )
Other comprehensive income
    -       -       -       20,878       18,982       (8,296 )     -       -       -       31,564       (27 )     31,537  
Income for the year
    -       -       -       -       -       -       -       569,910       -       569,910       5,980       575,890  
Subtotal
    -       -       -       20,878       18,982       (8,296 )     -       569,910       -       601,474       5,953       607,427  
Equity as of December 31, 2014
    891,303       1,309,985       (2,224 )     21,680       10,725       (6,805 )     18,384       569,910       (170,973 )     2,641,985       33,083       2.675,068  
(1)
Corresponds to the profit on sale of own shares received in lieu of payment, see Note 23- Equity

Banco Santander Chile and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2014, 2013 and 2012
 
Period
 
Total attributable to Equity holders of the Bank
   
Allocated to
 reserves
   
Allocated to dividends
   
Percentage
distributed
   
Number of
shares
   
Dividend per share
(in pesos)
 
   
MCh$
   
MCh$
   
MCh$
   
%
             
                                     
Year 2013 (Shareholders Meeting April 2014)
    441,926       176,770       265,156       60       188,446,126,794       1.407  
                                                 
Year 2012 (Shareholders Meeting April 2013)
    387,967       155,187       232,780       60       188,446,126,794       1.235  
 
 
Banco Santander Chile and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
 
               
December 31,
       
         
2014
   
2014
   
2013
   
2012
 
   
NOTE
   
ThUS$
   
MCh$
   
MCh$
   
MCh$
 
                               
A - CASH FLOWS FROM OPERATING ACTIVITIES
                             
CONSOLIDATED INCOME BEFORE TAX
          1,030,592       626,940       538,959       405,906  
Debits (credits) to income that do not represent cash flows
          (1,680,159 )     (1,022,091 )     (905,251 )     (856,316 )
Depreciation and amortization
    32       72,538       44,127       61,074       56,369  
Impairment of property, plant, and equipment
    32       60,270       36,664       244       90  
Provision for loan losses
    29       680,353       413,880       426,746       436,707  
Mark to market of trading investments
            (18,551 )     (11,285 )     (13,711 )     (9,978 )
Income from investments in associates and other companies
    11       (3,559 )     (2,165 )     (1,422 )     (267 )
Net gain on sale of assets received in lieu of payment
    33       (4,621 )     (2,811 )     (6,571 )     (2,654 )
Provision on assets received in lieu of payment
    33       2,592       1,577       2,363       7,546  
Net gain on sale of investments in associates and other companies
    33       -       -       (78,122 )     (599 )
Net gain on sale of property, plant and equipment
    33       (1,129 )     (687 )     (176 )     (9,194 )
Net interest income
    25       (2,165,114 )     (1,317,104 )     (1,076,762 )     (1,042,734 )
Net fee and commission income
    26       (373,618 )     (227,283 )     (229,836 )     (270,572 )
Debits (credits) to income that do not represent cash flows
            189,438       115,240       38,580       18,324  
Changes  in deferred taxes
    14       (118,758 )     (72,244 )     (27,658 )     (39,354 )
Increase/decrease in operating assets and liabilities
            1,113,827       677,574       1,011,458       (703,522 )
(Increase) of loans and accounts receivables from customers, net
            (2,752,052 )     (1,674,156 )     (1,978,593 )     (1,240,427 )
(Increase) decrease of financial investments
            (719,762 )     (437,853 )     175,886       (93,372 )
Decrease (increase) due to resale agreements (assets)
            28,716       17,469       (10,476 )     5,935  
Decrease (increase) of interbank loans
            186,539       113,477       (34,868 )     (2,985 )
Decrease of assets received or awarded in lieu of payment
            7,284       4,431       4,515       46,463  
Increase of debits in customers checking accounts
            1,196,068       727,604       397,383       462,367  
Increase of time deposits and other time liabilities
            1,214,255       738,668       563,059       195,535  
Increase of obligations with domestic banks
            107,682       65,506       500       -  
Increase of other demand liabilities or time obligations
            217,201       132,130       253,361       93,838  
(Decrease) increase of obligations with foreign banks
            (848,480 )     (516,156 )     244,051       (481,677 )
(Decrease) of obligations with Central Bank of Chile
            (207 )     (126 )     (177 )     (412 )
Increase (decrease) obligations under  repurchase agreements
            301,077       183,154       (95,145 )     (240,264 )
Increase (decrease) in other financial liabilities
            25,223       15,344       (2,830 )     16,012  
Net increase of other assets and liabilities
            (1,324,717 )     (805,865 )     (430,434 )     (665,506 )
Redemption of letters of credit
            (48,770 )     (29,668 )     (40,231 )     (45,830 )
Mortgage bond issuance
            60,725       36,941       70,339       -  
Senior bond issuances
            1,966,487       1,196,273       664,422       623,457  
Redemption of mortgage bonds and payments of interest
            (6,896 )     (4,195 )     -       -  
Redemption of senior bonds and payments of interest
            (944,400 )     (574,507 )     (190,719 )     (507,369 )
Issuance of subordinate bonds
            -       -       141,043       -  
Redemption of subordinated bonds and payments of interest
            (14,607 )     (8,886 )     (31,299 )     (135,881 )
Interest received
            3,674,711       2,235,437       1,905,532       1,910,729  
Interest paid
            (1,502,145 )     (913,800 )     (729,942 )     (871,130 )
Dividends received from investments in other companies
    11       196       119       775       896  
Fees and commissions received
    26       602,845       366,729       346,120       360,427  
Fees and commissions paid
    26       (229,228 )     (139,446 )     (116,284 )     (89,855 )
Income tax
    14       (83,918 )     (51,050 )     (94,530 )     (44,473 )
Total cash flow provided by (used in) operating activities
            464,260       282,423       645,166       (1,153,932 )

 
F-8

 
Banco Santander Chile and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
 
         
December 31,
 
         
2014
   
2014
   
2013
   
2012
 
   
NOTE
   
ThUS$
   
MCh$
   
MCh$
   
MCh$
 
                               
B - CASH FLOWS FROM INVESTMENT ACTIVITIES:
                             
Purchases of property, plant, and equipment
    13       (97,131 )     (59,088 )     (40,789 )     (36,738 )
Sales of property, plant, and equipment
    13       283       172       348       6,573  
Purchases of investments in associates and other companies
    11       (10,378 )     (6,313 )     (1,440 )     (61 )
Sales of investments in associates and other companies
    11       -       -       90,281       401  
Purchases of intangible assets
    12       (45,102 )     (27,437 )     (18,400 )     (42,262 )
Total cash flow (used in) provided by investment activities
            (152,328 )     (92,666 )     30,000       (72,087 )
                                         
C - CASH FLOW FROM FINANCING ACTIVITIES:
                                       
From shareholders’ financing activities
            (435,875 )     (265,156 )     (232,780 )     (261,051 )
Dividends paid
            (435,875 )     (265,156 )     (232,780 )     (261,051 )
From non-controlling interest financing activities
            -       -       (7,907 )     (4,207 )
Dividends and/or withdrawals paid
            -       -       (7,907 )     (4,207 )
Total cash flow used in financing activities
            (435,875 )     (265,156 )     (240,687 )     (265,258 )
                                         
D – NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS DURING THE YEAR
            (123,943 )     (75,399 )     434,479       (1,491,277 )
                                         
E – EFFECTS OF FOREIGN EXCHANGE RATE FLUCTUATIONS
            57,358       34,893       (20,699 )     (3,664 )
                                         
F - INITIAL BALANCE OF CASH AND CASH EQUIVALENTS
            3,122,496       1,899,508       1,485,728       2,980,669  
                                         
FINAL BALANCE OF CASH AND CASH EQUIVALENTS
    4       3,055,911       1,859,002       1,899,508       1,485,728  

 
         
December 31,
 
Reconciliation of provisions for the Consolidated Statement of Cash Flow for the year ended
       
2014
   
2014
   
2013
   
2012
 
         
ThUS$
   
MCh$
   
MCh$
   
MCh$
 
                               
Provision for loan losses for cash flow purposes
    29       680,354       413,880       426,746       436,707  
Recovery of loans previously charged off
    29       (96,949 )     (58,977 )     (55,284 )     (33,015 )
Provision for loan losses – net
            583,405       354,903       371,462       403,692  

 
F-9

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED  DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CORPORATE INFORMATION
 
Banco Santander Chile (formerly Banco Santiago) is a banking corporation (limited company) operating under the laws of the Republic of Chile, headquartered at Bandera N°140, Santiago. The corporation provides a broad range of general banking services to its customers, ranging 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, including (but not limited to) factoring, collection, leasing, securities and insurance brokering, 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, 2014 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 Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

For purposes of these financial statements we use certain terms and conventions. References to “US$”, “U.S. dollars” and “dollars” are to United States dollars, references to “EUR” are to European Economic Community Euro, references to “CNY” are to Chinese Yuan, references to “CHF” are to Swiss franc, references to “Chilean pesos,” “pesos” or “Ch$” 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 UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF is equaled Ch$23,309.56 as of December 31, 2013 and Ch$24,627.10 as of December 31, 2014. In 2014, UF inflation was 4.6% compared to 2.1% in 2013. The effect of any changes in the nominal peso value of our UF-denominated interest earning assets and interest bearing liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest income and expense, respectively.

The Notes to the Consolidated Financial Statements contain additional information to support the figures submitted in the Consolidated Statement of Financial Position, Consolidated Statement of Income, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows.

b) 
Basis of preparation for the Consolidated Financial Statements

The Consolidated Financial Statements as of December 31, 2014 and 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.

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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.

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 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 in certain circumstances.

When necessary, adjustments are made to the financial statements of the subsidiaries to ensure their accounting policies are consistent with the Bank’s accounting policies.

All intragroup assets, 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 a loss of control over the subsidiaries are accounted for as equity transactions. The carrying values of the Group’s equity and the non-controlling interests equity are adjusted to reflect the changes to 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 December 31,
 
   
Place of
 
2014
   
2013
   
2012
 
   
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  
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  
 
(*) 
Santander Asset Management S.A. Administradora General de Fondos was sold in December 2013.
 
(**) 
From May 1, 2014, this entity was absorbed by the Bank, with authorization for this transaction obtained from the SBIF on March 26, 2014.
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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 24– 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:

 
-
Santander Gestión de Recaudación y Cobranza Limitada (collection services)
 
-
Multinegocios S.A. (management of sales force).
 
-
Servicios Administrativos y Financieros Limitada (management of sales force)
 
-
Multiservicios de Negocios Limitada (call center)
 
-
Bansa Santander S.A. (management of repossessed assets and leasing of properties)
 
-
Servicios de Cobranza Fiscalex Limitada (collection services) (*)

(*) As of August 1, 2014, Servicios de Cobranza Fiscalex Limitada was absorbed by Santander Gestión de Recaudación y Cobranza Limitada. See Note 02 d).

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:

     
Percentage of ownership share
     
As of December 31,
     
2014
 
2013
 
2012
Subsidiaries
Main activity
Place of incorporation and operation
%
 
%
 
%
Redbanc S.A.
ATM services
Santiago, Chile
33.43
 
33.43
 
33.43
Transbank S.A.
Debit and credit card services
Santiago, Chile
25.00
 
25.00
 
25.00
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
29.29
 
29.28
 
29.28
Cámara de Compensación de Alto Valor S.A.
Payments clearing
Santiago, Chile
14.14
 
14.14
 
14.14
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 Sociedad Nexus S.A. and Cámara Compensación de Alto Valor S.A., Banco Santander Chile has a representative on the Board of Directors. As per the definition of associates, the Bank has concluded that it exerts significant influence over those entities.

Servicios de Infraestructura de Mercado OTC S.A. is considered an associate due to the Bank’s executives being actively involved in the management of the company, including the organization and structuring of this company from the point of incorporation, therefore exercising significant influence over this company. This influence is in addition to an 11.11% holding in this associate.

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 acquisition value less impairment, if any.

 
F-12

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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 Statement of Income, and separately from shareholders’ equity in the Consolidated 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

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 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.

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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”.

The Bank maintains its accounting records and prepares its financial statements in Chilean pesos. The US dollar amounts disclosed in the accompanying financial statements are presented solely for the convenience of the reader as of December 31, 2014 using the observed exchange rate of Ch$608.33 per US$1.00. This translation is just a reference and in no case should be construed as accurately representing the actual amounts.

f) 
Foreign currency transactions

The Bank makes transactions 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. representative of the month end; the rate used was Ch$608.33 per US$1 as of December, 2014 (Ch$524.20 per US$1 as of December, 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.

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

Financial assets are classified into the following specified categories: financial assets trading investments “at fair value through profit or loss (FVTPL), ‘held to maturity' investments, ‘available for sale investments' (AFS) financial assets and ‘loans and accounts receivable from customers'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Financial assets are initially recognized at fair value plus, in the case of a financial assets not a fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue.

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Effective interest method
 
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Income is recognised on an effective interest basis for loans and accounts receivables other than those financial assets classified as at fair value through profit or loss.
 
Financial assets at FVTPL - Trading investments
 
Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at fair value through profit or loss.

A financial asset is classified as held for trading if:

-
it has been acquired principally for the purpose of selling it in the near term; or
-
on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or
-
it is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

-
such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
-
the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
-
it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘net profit (loss) from financial operations' line item.
 
Held to maturity investments
 
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method less any impairment.
 
Available for sale investments (AFS investments)
 
AFS investments are non-derivatives that are either designated as AFS or are not classified as (a) loans and accounts receivable from customers, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss (trading investments).
 
Financial instruments held by the Bank that are traded in an active market are classified as AFS and are stated at fair value at the end of each reporting period. The Bank also has investments in financial instruments that are not traded in an active market but that are also classified as AFS investments and stated at fair value at the end of each reporting period (because the directors consider that fair value can be reliably measured). Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognised in profit or loss. Other changes in the carrying amount of available for sale investments are recognised in other comprehensive income and accumulated under the heading of “Valuation Adjustment”. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.
 
Dividends on AFS equity instruments are recognised in profit or loss when the Bank's right to receive the dividends is established.
 
 
F-15

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated as the described in f) above. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset.

AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period.

Loans and accounts receivable from customers
 
Loans and accounts receivable from customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and accounts receivables from customers (including loans and accounts receivable from customers and interbank loans) are measured at amortised cost using the effective interest method, less any impairment.
 
Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.

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 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 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 timing differences, etc.

-
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.

-
Investments under resale agreements: includes balances of financial instruments purchased under resale agreement.

-
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 derivatives held for hedging, as shown in Note 7 to the Consolidated Financial Statements.

 
·
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 derivatives designated as being in a hedging relationship, including the embedded derivatives separated from the hybrid financial instruments.

-
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 certain other financial asset classifications listed above.

-
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 rewards incidental to the leased asset, the transaction is presented in loans and accounts receivable from customers while the leased asset is derecognized in the Bank´s statement of financial position.
 
-
Investment instruments: Are classified into two categories: held-to-maturity investments, and available-for-sale investments. The held-to-maturity investment classification includes only those instruments for which the Bank has the ability and intent to hold to maturity. The remaining investments are treated as available for sale.
 
 
F-16

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

iv.
Classification of financial liabilities for measurement purposes

Financial liabilities are classified as either financial liabilities ‘at FVTPL' or ‘other financial liabilities'.
 
Financial liabilities at FVTPL
 
Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL.
 
A financial liability is classified as held for trading if:

-
it has been incurred principally for the purpose of repurchasing it in the near term; or
-
on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or
-
it is a derivative that is not designated and effective as a hedging instrument.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if:

-
such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
-
the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
-
it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as at FVTPL.

Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the ‘net profit (loss) from financial operations' line item.
 
Other financial liabilities
 
Other financial liabilities (including borrowings and trade and other payables) are subsequently measured at amortised cost using the effective interest method.
 
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

v.
Classification of financial liabilities for presentation purposes

The financial liabilities are classified by their nature into the following line items in the consolidated statements of financial position:

-
Deposits and other on- demand liabilities: this 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 represents domestic transactions in the process of transfer through a central domestic clearinghouse or international transactions which may be delayed in settlement due to timing differences, etc.
 

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
-
Obligations under repurchase agreements: this includes the balances of sales of financial instruments under securities repurchase and loan agreements. In accordance with the applicable regulation, the Bank does not record instruments acquired under repurchase agreements.

-
Time deposits and other time liabilities: this shows the balances of deposit transactions in which a term at the end of which they become callable has been stipulated.
 
-
Financial derivative contracts: this includes financial derivative contracts with negative fair values (i.e. a liability of the Bank), whether they are for trading or for hedge accounting, as set forth in Note 7.

 
·
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 derivatives designated as being in a hedging relationship, including the embedded derivatives separated from the hybrid financial instruments.

-
Interbank borrowings: this includes obligations due to other domestic banks, foreign banks, or the Central Bank of Chile,
other than those reflected in certain other financial liability classifications listed above.

-
Issued debt instruments: there are three types of instruments issued by the Bank: 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 instruments

Financial assets are measured according to their fair value, gross of any transaction costs that may be incurred in the course of a sale, except for credit investments and held to maturity investments.

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.

The 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, the most advantageous market for the asset or liability. Even when there is no observable market to provide pricing information in connection with the sale of an asset or the transfer of a liability at the measurement date, the fair value measurement shall assume that the transaction takes place, considered from the perspective of a potential market participant who intends to maximize value associated with the asset or liability.

When using valuation techniques, the Bank shall maximize the use of relevant observable inputs and minimize 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 categorized within the fair value hierarchy (i.e. Level 1, 2 or 3). IFRS 13 establishes a fair value hierarchy that categorizes 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).

 
F-18

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
All derivatives are recorded in the Consolidated Statements of Financial Position at the fair value previously described. This value is compared to the valuation as at the trade date. If the change in value is positive, this is recorded as an asset. If the change in value is negative, this is 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 Statement of Income.
 
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) and Debit Valuation Adjustment (DVA), all with the objective that the fair value of each instrument includes the credit risk of its counterparty and Bank´s own risk.

“Loans and accounts receivable from customers” and “Held-to-maturity instrument portfolio” 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 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 are recorded in “Net profit (loss) 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 incorporates the contractual interest rate established on the acquisition date. Where applicable, the fees and transaction costs that are a part of the financial return are included. For floating-rate financial instruments, the effective interest rate matches the current rate of return until the date of the next review of interest rates.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives, whose underlying is an equity instrument that are settled by delivery of those instruments, are measured at acquisition cost adjusted for any related impairment loss.

The amounts at which the financial assets are recorded represent the Bank’s maximum exposure to credit risk as at the 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 under leasing agreements, assets acquired under repurchase agreements, securities loans and derivatives.

ii.
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 in available markets, the Management determines a 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 however for some valuations of financial instruments, significant inputs are unobservable in the market. To determine a value for those instruments, various techniques are employed to make these estimates, including the extrapolation of observable market data.

The most reliable evidence of the fair value of a financial instrument on initial recognition usually is the transaction price, however due to lack of availability of market information, the value of the instrument may be derived from other market transactions performed with the same or similar instruments or may be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

 
F-19

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
The main techniques used as of December 31, 2014 and 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.

 
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 calculated by 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 Bank’s management considers that its 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.

iii.
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 are not held for hedging purposes 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, 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”).
 
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.

 
F-20

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
The changes in the value of financial instruments qualifying for hedgeaccounting are recorded as follows:

a.
For 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 included as “Net income (expense) from financial operations” in the Consolidated Statement of Income.

b.
For fair value hedges of interest rate risk on a portfolio of financial instruments, gains or losses that arise in measuring hedging instruments and other gains or losses due to changes in fair value of the underlying hedged item (attributable to the hedged risk) are recorded in the Consolidated Statement of Income under “Net income (expense ) from financial operations”.

c.
For cash flow hedges, the change in fair value of the hedging instrument is included as “Cash flow hedge” in “Other comprehensive income”, until the hedged transaction occurs, thereafter being reclassified to the Consolidated 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 Statement of Income under “Net income (expense) 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, hedge accounting treatment is discontinued. 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, where applicable.

When cash flow hedges are discontinued, any cumulative gain or loss of the hedging instrument recognized 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 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 Statement of Income.

iv.
Derivatives embedded in hybrid financial instruments

Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if 1) their risks and characteristics are not closely related to the host contracts, 2) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and 3) 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”.

v.
Offsetting of financial instruments

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

vi.
Derecognition of financial assets and liabilities

The accounting treatment of transfers of financial assets is determined by 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 Statements of Financial Position and any rights or obligations retained or created in the transfer are simultaneously recorded.

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 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:

 
F-21

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
 
-
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 due to 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 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 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 derecognised from the Consolidated 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 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 the Bank believes that the debtor poses a high risk of default, the interest and inflation adjustments pertaining to these transactions are not recorded directly in the Consolidated Statement of Income unless they have been actually received.
 
This interest and inflation adjustments are generally referred to as “suspended” and are recorded in memo accounts which are not part of the Consolidated Statements of Financial Position. Instead, they are reported as part of the complementary information thereto and as memo accounts. 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, D1 or D2 categories (for loans individually evaluated for impairment).

ii. 
Commissions, fees, and similar items

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

-
Fee and commission income and expenses on financial assets and liabilities are recognized when they are earned.
-
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 transaction are recognized when the single transaction is performed.

iii.
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 the Consolidated Statement of Income over the term of the loan.

 
F-22

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
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.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
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.

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 occurs only if it can be objectively related to an event occurring after the initial impairment loss was recorded. The reversal of an impairment loss shall not exceed the carrying amount that would have been determined if no impairment loss has been recognized for the asset in prior years. The reversal is recorded in income with the exception of available for sale equity financial assets, in which case it is recorded in other comprehensive income.

ii. 
Non-financial assets:

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

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.

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. Goodwill impairment is not reversed.

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 includes but is not limited to 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. These assets 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.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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
IT systems and software
 
36
ATMs
 
60
Other machines and equipment
 
60
Office furniture
 
60
Telephone and communication systems
 
60
Security systems
 
60
Rights over telephone lines
 
60
Air conditioning systems
 
84
Other installations
 
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 accordance with the revised carrying amount and to the new remaining useful life, if the useful life needs to be revised.

The estimated useful lives of the items of property, plant and equipment held for own use are reviewed at the end of each reporting period to detect significant changes. 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.

Maintenance expenses relating to tangible assets 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 Statements of Financial Position.

When the consolidated entities act as lessees, they show the cost of the leased assets in the Consolidated 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.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
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 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 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 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 except in the case of excess of proceeds over fair value, which difference is amortized over the period of use of the asset. In the case of finance leasebacks, the profit or loss generated is amortized over the lease term.

m) 
Intangible assets

Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of legal or contractual rights or it is separable. The Bank recognizes an intangible asset, whether purchased or self-created (at cost), when the cost of the asset can be measured reliably and it is probable that the future economic benefits that are attributable to the asset will flow to the Bank.

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 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.

n) 
Cash and cash equivalents

For the preparation of the cash flow statement, the indirect method was used, starting 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 operating, 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 with the 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.

 
F-26

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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.

o)
Allowances for loan losses

The Bank has established allowances to cover incurred losses on loans and account receivables from customers in accordance with its internal models and risk assessment as approved by the Board of Directors.

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.
Commercial loans,
ii.
Mortgage loans, and
iii.
Consumer 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 cases 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.

 
-
Group assessment - A group assessment is relevant for analyzing a large number of operations with small individual balances from individuals or small 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 the case of companies which, due to their size, complexity or level of exposure regarding the entity, must be known and analyzed in detail.

For the purposes of establishing its provisions, the Bank assigns a risk category to each debtor, their loans and contingent loans. The risk factors considered are: industry or sector of the borrower, owners or managers of the borrower, their financial situation and payment capacity, and payment behavior.

The Bank’s risk categories are as follows:

1. Debtors may be classified in risk categories A1, A2, A3 or B (if they are current on their payment obligations and show no sign of deterioration in their credit quality). B is different from the A categories by a certain history of late payments. The A and B categories are distinguished by different PNPs (as defined below).

2. Debtors classified as C1, C2, C3, C4, D1 or D2 include debtors whose loans with us have been charged off or administered by our Recovery Unit, or classified as Precontenciosos (PRECO or deteriorated).

For loans classified as A1, A2, A3 and B, we assign a specific provision level on an individual basis to each borrower and, therefore, the amount of loan loss allowance is determined on a case by case basis.

Estimated Incurred Loan Loss = Loan Loss Allowance.

 
F-27

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The estimated incurred loss is obtained by multiplying all risk factors defined in the following equation:

EIL= EXP x PNP x SEV

EIL = Estimated Incurred Loan Loss. The estimated incurred loan loss is how much could be lost in the event a debtor does not perform the obligations under the loan.

EXP = Exposure. This corresponds to the value of commercial loans.

PNP = Probability of Non-Performance. This variable, expressed as a percentage, indicates the probability that a debtor will default. This percentage is associated with the internal rating that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity (including, usually, projected cash flows), the company’s financial history, the solvency and capacity of shareholders and management, and projections for the economic sector in which it operates.

SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for us for each segment.

PNP and SEV are reviewed and updated every 3 years. Every year, models together with PNP and SEV assumptions, are tested by the Bank’s Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and actual losses is reduced.

These tests focus on the validation of the sufficiency of the Bank’s allowances, and consist of comparisons between actual write-offs to allowances established by the model, and the coverage of the total allowance to actual write-offs in the most current periods. Individual loan classification and improvements to any customer classification are also presented for approval to our Risk Committee.

For loans classified in the C and D categories, loan loss allowances are based mainly on the fair value of the collateral, adjusted for an estimated cost to sell, that each of these loans have. Allowance percentage for each category is then based on the fair value of the collateral, or the expected future cash flow from the loan for each individually evaluated non-performing loans.

II. 
Allowances for group assessment

The Bank uses the concept of estimation of incurred loss to quantify the allowances levels over the group-evaluated portfolios, considering the counterpart risk and the guarantees associated with each transaction.

Following the Bank’s definition, the Bank uses group evaluation to approach transactions that have similar credit risk features, which indicate the debtor’s payment capacity over the entire debt, principal and interests, pursuant to the contract’s terms. In addition, this allows us to assess a high number of transactions with low individual amounts, whether they belong to individuals or small sized companies. Therefore, debtors and loans with similar features are grouped together and each group has a risk level assigned to it.

These models are meant to be used mainly to analyze loans granted to individuals (including consumer loans, credit lines, mortgage loans and commercial loans) and commercial loans to SMEs.

Allowances are established using these models, taking into account the historical Impairment and other known circumstances at the time of evaluation. After this, a historical loss rate is assigned to each portfolio profile constituting each segment.

Allowances for group-evaluated loans are established based on the credit risk of the profile to which the loan belongs, within the established segments for the type of loan. The method for assigning a profile is established based on statistical building method, establishing a relation through logistic regression of various variables, such as payment behavior in the Bank, payment behavior outside the Bank, various sociodemographic data, among others, and a response variable that determines a client’s risk level, which in this case is 90 days of non-performance (the chosen features are relevant when calculating future cash flows per group of assets). Afterwards, common profiles are established and with differentiated default rates, applying the real historical loss the Bank has had with that portfolio.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

The different risk categories are constructed and updated periodically based on the payment behavior of the client’s profile to which they belong, as well as his or her sociodemographic characteristics. Therefore, when a customer has past due balance or has missed some payments, the outcome is that the customer will move to a different segment with a higher loss rate, therefore capturing current trends for each risk profile.

Allowance quantification, once the customers have been classified, is the product of three factors: exposure (EXP), Probability of Non-Performance (PNP) and Severity (SEV). The same equation used for individual assessment mentioned above.

The estimated incurred loss rates for group-evaluated loans correspond to charge-offs net of recoveries. The methodology establishes the period in which the estimated incurred loss for each risk profile emerges. Once the loss has been considered to have been incurred, the estimated incurred loss rates are applied to the corresponding risk profile to obtain the net charge-off level associated with this period. The loss rates applied to each risk profile are based only on the historical net charge-off data for that specific profile within one of the four groups of loans. No other statistical or other information other than net charge-offs is used to determine the loss rates.

To determine the estimated incurred loss for commercial and mortgage loans collectively evaluated for impairment, we mainly analyze the payment behavior of clients, particularly the payment behavior of clients with payments that are more than 90 days overdue, clients with other weaknesses, such as early non-performance (i.e., payments that are past-due, though by less than 90 days), clients with modified loans and clients with renegotiated loans, as well as success in recovery against these clients. We also take into account whether the loan is supported by collateral.

In connection with mortgage loans, historical net charge-offs are considered in the model to calculate loss rates for loans collectively evaluated for impairment. The risk categories are such that when a customer has a past-due balance or has missed some payments, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing current trends of the customer and, when aggregate, current trends in the market.

Our models for loans analyzed on a group basis (consumer loans, residential mortgage loans and small-and-mid- sized commercial loans) are monitored on a monthly basis with respect to predictability and stability, using indicators that seek to capture the underlying need to update the models for current loss trends. Therefore, the periods of historical net charge-offs used in the allowance model may be more than a year old as we only update the historical net charge-offs when our assessment of predictability and stability indicators determine it is necessary.

During the second semester of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for consumer loans and commercial loans. The models were calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and decisional approvals at different points of the approval process, better techniques of statistical processes and of the extent of historical information, allowing stronger parameters of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation.

This involved the release of consumer provisions of Ch$26,563 million and an increase in commercial provisions of Ch$45,141 million. As this is a change in estimation, the net increase of these improvements (Ch$18,578 million) was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8.

III. 
Charge-offs

As a general rule, charge-offs should be done when all collection efforts have been exhausted. These charge-offs consist of derecognition from the Consolidated Statements of Financial Position of the corresponding loans operations in its entirety, and, therefore, include portions not past-due of a loan in the case of installments loans or leasing operations (no partial charge-offs exists).
 
Subsequent payments obtained from charged-off loans will be recognized in the Consolidated Statement of Income as a recovery of loans previously charged-off.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Loan and accounts receivable charge-offs are recorded for overdue, past due, and current installments based on the time periods expired since reaching overdue status, as described below:

Type of loan
 
Term
     
Consumer loans with or without collateral
 
6 months
Other transactions without collateral
 
24 months
Commercial loans 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

IV. 
Recovery of loans previously charged off and accounts receivable from customers

Any payment agreement 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 are accounted for as a recovery from loans previously charged-off.

Recovery of previously charged-off loans and accounts receivable from customers, are recorded in the Consolidated Statement of Income as a deduction from provisions for loan losses.
 
In accordance with our charge-off policy described in iii) above, we may subsequently recover a portion of the amount charged-off (at 100%). The allowance for loan losses on our collectively evaluated loans incorporates an expected recovery rate based on historical information. At the time we charge-off the carrying amount of any loans which have been collectively evaluated for impairment, the allowance for loan losses on collectively evaluated loans is replenished to reflect incurred losses based on statistical models developed in compliance with IAS 39 on the remaining pool of loans. The amounts required for replenishment are recorded in the financial statements as “Provision established”. When a charged-off line item within the financial statements also includes charge-offs on collectively impaired loans, the line item is titled “Charged-offs of individually significant loans and/or collectively evaluated loans”.

p) 
Provisions, contingent assets, and contingent liabilities

Provisions are liabilities of uncertain timing or amount.  Provisions are recognized in the Consolidated 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.

The Consolidated Statements of Financial Position and annual accounts reflect all significant provisions for which it is estimated that it is probable an outflow of resources will be required to meet the obligation 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 year. Provisions must specify the liabilities for which they were originally recognized. Partial or total reversals are recognized when such liabilities 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
 
-
Provisions for contingent credit risks
 
-
Provisions for contingencies


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

q) 
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, in accordance with 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 is enacted or substantially enacted.

r) 
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 balances of assets, liabilities, revenues and expenses. Actual results may differ from these estimates.

In certain cases, International Financial Reporting Standards (IFRS) 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.

The Bank has established allowances to cover incurred losses to estimate allowances. These allowances must be regularly reviewed 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’ ability to pay. Increases in the allowances for loan losses are reflected as “Provision for loan losses” in the Consolidated Statement of Income. Loans are charged-off when Management determines that a loan or a portion thereof is impaired. Charge-offs are recorded as a reduction of the allowance for loan losses.

The relevant estimates and assumptions made to calculate provisions 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.

These estimates, made on the basis of the best available information, mainly refer to:

 
-
Allowances for loan losses (Note 9)
 
-
Impairment losses of certain assets (Notes 7, 8, 9, 10, and 33)
 
-
The useful lives of tangible and intangible assets (Notes 12, 13 and 33)
 
-
The fair value of assets and liabilities (Notes 5, 6, 7, 10 and 36)
 
-
Commitments and contingencies (Note 22)
 
-
Current and deferred taxes (Note 14)

s) 
Non-current assets held for sale

Non-current assets (or a group holding assets and liabilities for disposal) expected to be recovered mainly through the sale of these items rather than through the 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 and fair value less cost to sell.

As of December 31, 2014 and 2013 the Bank has not classified any non-current assets as held for sale.

t) 
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”. Any excess of the fair value over the outstanding loan balance, less costs to sell of the collateral, is returned to the client. 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”. The result obtained in the sale of the asset is subsequently recorded under “Other operating income”.
 
 
F-31

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Independent appraisals are obtained at least every 18 months and fair values are adjusted accordingly. No adjustments have been made between appraisals with respect to the period covered by these financial statements considering the stability of the real estate market in Chile during past years and expected stability of the real estate market in the coming years.
 
At least once a year, the Bank performs the necessary analysis to update these assets’ costs to sell. According to the Bank’s survey, as of December 31, 2014 the average cost to sell was estimated at 4.8% of the appraised value (5.7% as of December 31, 2013).

u) 
Earnings per share

Basic earnings per share are determined by dividing the net income attributable to the equity holders of the Bank 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 December 31, 2014 and 2013 the Bank did not have any instruments that generated dilution.
 
v) 
Temporary acquisition (assignment) of assets and liabilities

Purchases or sales of financial assets under non-optional repurchase agreements at a fixed price 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) 
Provision for mandatory dividends

As of December 31, 2014 and 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 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 Bank’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 Bank will create a pension fund, with life insurance, for each beneficiary in the plan. Periodic contributions into this fund are made by the manager and matched by the Bank.
 
d.
The Bank 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.
 
 
F-32

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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) the difference between the actual return on plan assets and the interest on plan assets included in the net interest component and;
(c) changes in the effect of the asset ceiling.

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 less the fair value of plan assets.

Plan assets comprise the pension fund taken out by the Group 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.

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

The post-employment benefits liability, recognized in the Consolidated 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. 
Cash-settled share based compensation

The Bank allocates cash-settled share based compensation to executives of the Bank and its Subsidiaries in accordance with IFRS 2. The Bank measures the services received and the obligation incurred at fair value. Until the obligation is settled, the Bank determines the fair value at the end of each reporting period, as well as at the date of settlement, recognizing any change in fair value in the income statement of the period.
 
x) 
Application of new and revised International Financial Reporting Standards

i.
New and revised IFRS standards effective in current year

 
a)
New and revised IFRS effective in the current year

The following new and revised IFRS have been adopted in these financial statements:

Amendment to IAS 32, Financial Instruments- Presentation – On December 16, 2011, the IASB amended the accounting requirements and disclosures related to offsetting of financial assets and financial liabilities by issuing amendments to IAS 32 Financial Instruments: Presentation and IFRS 7 Financial Instruments: Disclosures. These amendments are the result of the IASB and US Financial Accounting Standards Board (‘FASB’) undertaking a joint project to address the differences in their respective accounting standards regarding offsetting of financial instruments.

The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014.  Both require retrospective application for comparative periods. The implementation 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 Involvement in Other Entities and IAS 27 – Separate Financial Statements – On October 31, 2012, the IASB published “Investment Entities (amendments to IFRS 10, IFRS 12 and IAS 27)”, providing  an exemption from consolidation of subsidiaries under IFRS 10 'Consolidated Financial Statements' for entities which meet the definition of an 'investment entity', such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 'Financial Instruments' or IAS 39 'Financial Instruments: Recognition and Measurement'.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The amendments also require additional disclosure about why the entity is considered an investment entity, details of the entity's unconsolidated subsidiaries, and the nature of relationship and certain transactions between the investment entity and its subsidiaries. In addition, the amendments require an investment entity to account for its investment in a relevant subsidiary in the same way in its consolidated and separate financial statements (or to only provide separate financial statements if all subsidiaries are unconsolidated).

The amendments are effective for annual periods beginning on or after January 1, 2014, with early application permitted. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

Amendments to IAS 36, Recoverable Amount Disclosures for Non-Financial Assets – On May 29, 2013 the IASB published “Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets.” The publication of IFRS 13 Fair Value Measurements amended certain disclosure requirements in IAS 36 Impairment of Assets with respect to measuring the recoverable amount of impaired assets. However, one of the modifications to the disclosure requirements was more extensive than originally intended. The IASB has rectified this with the publication of these amendments to IAS 36.
 
The amendments to IAS 36 removed the requirement to disclose the recoverable amount of each cash-generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) was significant compared with the total carrying amount of goodwill or intangible assets with indefinite useful life of the entity.

The amendments require an entity to disclose the recoverable amount of an individual asset (including goodwill) or a cash-generating unit to which the entity recognized or reversed deterioration during the reporting period. An entity shall disclose information about the fair value less costs to sell of an individual asset, including goodwill, or a cash-generating unit to which the entity recognized or reversed an impairment loss during the reporting period, including: (i) the level of the fair value hierarchy (IFRS 13), (ii) the valuation techniques used to measure fair value less costs to sell, and (iii) the key assumptions used in fair value measurement categorized within "Level 2" and "Level 3" of the fair value hierarchy. In addition, an entity should disclose the discount rate used when an entity recognized or reversed an impairment loss during the reporting period and the recoverable amount should be based on the fair value less costs to sell determined using a present value valuation technique.

The amendments should be applied retrospectively for annual periods beginning on or after January 1, 2014. Earlier application is permitted. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.
 
Amendments to IAS 39, Novation of Derivatives and Continuation of Hedge Accounting – On June 2013, the IASB published Amendments to IAS 39 –Novation of Derivatives and Continuation of Hedge Accounting. This modification permits the continuation of hedge accounting (under IAS 39 and the next chapter on hedge accounting under IFRS 9) when a derivative is novated to a central counterparty and certain conditions are met. A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. In order to apply the amendments and continue hedge accounting, novation to a central counterparty must happen as a consequence of laws or regulations or the introduction of laws or regulations.
 
The amendments are effective for annual periods beginning on or after January 1, 2014. Earlier application is permitted but corresponding disclosures are required.  In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the amendments are to be applied retrospectively. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

Amendment to IAS 19 (2011), Employee Benefits – On November 21, 2013, the IASB amended IAS 19 (2011) Employee Benefits to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. The amendments permit contributions that are independent of the number of years of service to be recognized as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to periods of service. Other contributions by employees or third parties are required to be attributed to periods of service either using the plan’s contribution formula or on a straight-line basis.

The amendments are effective for periods beginning on or after July 1, 2014, with earlier application permitted. The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.

 
F-34

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Annual Improvements 2010 – 2012 Cycle
 
IFRS 2 Share based payments, Definition of vesting condition - Appendix A ‘Defined terms’ to IFRS 2 was amended to (i) change the definitions of ‘vesting condition’ and ‘market condition’, and (ii) add definitions for ‘performance condition’ and ‘service condition’ which were previously included within the definition of ‘vesting condition’. The amendments clarify that: (a) a performance

target can be based on the operations of the entity or another entity in the same group (i.e. a non-market condition) or on the market price of the equity instruments of the entity or another entity in the same group (i.e. a market condition); (b) a performance target can relate either to the performance of the entity as a whole or to some part of it (e.g. a division or an individual employee); (c) a share market index target is a non-vesting condition because it not only reflects the performance of the entity, but also of other entities outside the group; (d) the period for achieving a performance condition must not extend beyond the end of the related service period; (e) a condition need to have an explicit or implicit service requirement in order to constitute a performance condition  (rather than being a non-vesting condition); (f) a market condition is a type of performance condition, rather than a non-vesting condition; and (g) if the counterparty ceases to provide services during the vesting period, this means it has failed to satisfy the service condition, regardless of the reason for ceasing to provide services. The amendments apply prospectively to share-based payment transactions with a grant date on or after July 1, 2014, with earlier application permitted.

IFRS 3 Business Combinations, Accounting for contingent consideration in a business combination - The amendments clarify that a contingent consideration that is classified as an asset or a liability should be measured at fair value at each reporting date, irrespective of whether the contingent consideration is a financial instrument within the scope of IFRS 9 or IAS 39 or a non-financial asset or liability. Changes in fair value (other than measurement period adjustments) should be recognized in profit or loss. Consequential amendments were also made to IFRS 9, IAS 39 and IAS 37. The amendments apply prospectively to business combination for which the acquisition date is on or after July 1, 2014. Earlier application is permitted.

IFRS 8 Operating Segments, Aggregation of Operating Segments – The amendments require an entity to disclose the judgments made by management in applying the aggregation criteria to operating segments, including a description of the operating segments aggregated and the economic indicators assessed in determining whether the operating segments have ‘similar economic characteristics’. It clarifies that a reconciliation of the total of the reportable segments’ assets to the entity’s assets should only be provided if the segment assets are regularly provided to the chief operating decision-maker. The amendments apply for annual periods beginning on or after July 1, 2014, with earlier application permitted.
 
IFRS 13 Fair Value Measurement, Short-term receivables and payables – The Basis for Conclusions was amended to clarify that the issuance of IFRS 13 and consequential amendments to IAS 39 and IFRS 9 did not remove the ability to measure short-term receivables and payables with no stated interest rate at their invoice amounts without discounting, if the effect of not discounting is immaterial.
 
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, Revaluation method: proportionate restatement of accumulated depreciation/amortization – The amended requirements clarify that the gross carrying amount is adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that accumulated depreciation/amortization is the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses. The amendments apply for annual periods beginning on or after July 1, 2014, with earlier application permitted. An entity is required to apply to amendments to all revaluations recognized in the annual period in which the amendments are first applied and in the immediately preceding annual period. An entity is permitted, but not required, to restate any earlier periods presented.

IAS 24 Related Party Disclosures, Key management personnel – The amendments clarify that a management entity providing key management personnel services to a reporting entity is a related party of the reporting entity. The amendments apply for annual periods beginning on or after July 1, 2014, with earlier application permitted.

The implementation of those modifications had no material impact on the consolidated financial statements of the Bank.
 
Annual Improvements 2011 – 2013 Cycle
 
IFRS 1 First-time Adoption of International Financial Reporting Standards, Meaning of “effective IFRS” -The amendment clarifies that a first-time adopter is allowed, but not required, to apply a new IFRS that is not yet mandatory if that IFRS permits early application. If an entity chooses to early apply a new IFRS, it must apply that new IFRS retrospectively throughout all periods presented unless IFRS 1 provides an exemption or an exception that permits or requires otherwise. Consequently, any transitional requirements of that new IFRS do not apply to a first-time adopter that chooses to apply that new IFRS early.
 
 
F-35

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

IFRS 3 Business Combinations, Scope exception for joint ventures - The scope section was amended to clarify that IFRS 3 does not apply to the accounting for the formation of all types of joint arrangement in the financial statements of the joint arrangement itself.

IFRS 13 Fair Value Measurement, Scope of portfolio exception (paragraph 52) - The scope of the portfolio exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis was amended to clarify that it includes all contracts that are within the scope of, an accounted for in accordance with, IAS 39 or IFRS 9, even if those contracts do not meet the definitions of financial assets or financial liabilities within IAS 32. Consistent with the prospective initial application of IFRS 13, the amendment must be applied prospectively from the beginning of the annual period in which IFRS was initially applied.

IAS 40 Investment Property, Interrelationship between IFRS 3 and IAS 40 - IAS 40 was amended to clarify that this standard and IFRS 3 Business Combinations are not mutually exclusive and application of both standards may be required. Consequently, an entity acquiring investment property must determine whether (a) the property meets the definition of investment property in IAS 40, and (b) the transaction meets the definition of a business combination under IFRS 3. The amendment applies prospectively for acquisitions of investment property in periods commencing on or after July 1, 2014. An entity is only permitted to adopt the amendments early and/or restate prior periods if the information to do so is available.
 
The implementation of those modifications had no material impact on the consolidated financial statements of the Bank.
 
FRIC 21, Levies – On May 20, 2013, the IASB published the IFRIC 21, Levies. The new interpretation  provides guidance on when to recognize a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain.
 
This interpretation defines a levy as "a resource outflow involving future economic benefits that are imposed by governments on entities in accordance with the law". Taxes within the scope of IAS 12 Income Taxes are excluded from the scope as well as fines and penalties. The payments to governments for services or the acquisition of an asset under a contractual arrangement are also excluded. That is, the tax should be a non-reciprocal transfer to a government when the tax paying entity does not receive goods or services in return. For the purpose of interpretation, a "government" is defined in accordance with IAS 20 Accounting for Government Grants and Disclosures of Government Assistance. When an entity acts as an agent of a government to collect a tax, the cash flows received from the agency are outside the scope of this interpretation. This interpretation identifies the event which gives rise to the obligation to recognize a liability, which is the payment of tax in accordance with the relevant legislation.
 
IFRIC 21 provides the following guidance on recognition of a liability to pay levies: (i) the liability is recognized progressively if the obligating event occurs over a period of time; (ii) if an obligation is triggered on reaching a minimum threshold, the liability is recognized when that minimum threshold is reached. The interpretation is applicable retrospectively for annual periods beginning on or after January 1, 2014.
 
The implementation of this amendment had no material impact on the consolidated financial statements of the Bank.
 
 
b)
New and revised IFRS in issue but not yet effective:

On November 12, 2009, the IASB issued IFRS 9 Financial Instruments (IFRS 9)- This Standard introduces new requirements for the classification and measurement of financial assets and is effective from 1 January 2013 with early adoption permitted.  IFRS 9 specifies how an entity shall classify and measure its financial assets. This Standard requires that all financial assets be classified on the basis of an entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Financial assets are either measured at amortized cost or at fair value.  Only those financial assets measured at amortized cost are tested for impairment.  Additionally, on 28 October 2010, the IASB published a revised version of IFRS 9.  The revised standard retains the requirements for classification and measurement of financial assets that were published in November 2009 but adds guidance on the classification and measurement of financial liabilities. As part of its restructuring of IFRS 9, the IASB also copied the guidance on derecognition of financial instruments and related implementation guidance from IAS 39 to IFRS 9. This new guidance concludes the first part of Phase 1 of the Board's project to replace IAS 39. The other phases, impairment and hedge accounting, are not yet completed.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

On December 16, 2011, the IASB issued Mandatory Effective Date of IFRS 9 and Transition Disclosures, deferring the mandatory effective date of both the 2009 and 2010 versions to annual periods beginning on or after January 1, 2015. Prior to the amendments, application of IFRS 9 was mandatory for annual periods beginning on or after January 1, 2013. The amendments modify the requirements for 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 containing the date of initial application of IFRS 9.

On November 19, 2013, has published an amendment to IFRS 9 “Financial Instruments” incorporating its new general hedge accounting model. This represents a significant milestone as it completes another phase of the IASB’s project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. The new general hedge accounting model will allow reporters to reflect risk management activities in the financial statements more closely as it provides more opportunities to apply hedge accounting.

The IFRS 9 amendment to introduce the new hedge accounting model removed the mandatory effective date for IFRS 9 which will be set once the standard is complete with a new impairment model and finalization of any limited amendments to classification and measurement, both of which are due to be finalized in 2014. The standard is available for early adoption (subject to local endorsement requirements), but if an entity elects to apply it must apply all of the requirements in the standard at the same time. On transition the hedge accounting requirements are generally applied prospectively with some limited retrospective application

IFRS 9 (2014) was issued on 24 July 2014 and supersedes IFRS 9 (2013), but this version of the standard remains available for application if the relevant date of initial application is before 1 February 2015

On July 24, 2014 the IASB has published the final version of IFRS 9 'Financial Instruments' bringing together the classification and measurement, impairment and hedge accounting phases of the IASB's project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. This version adds a new expected loss impairment model and limited amendments to classification and measurement for financial assets. The Standard supersedes all previous versions of IFRS 9 and is effective for periods beginning on or after 1 January 2018.The Bank’s management is assessing the potential impact of the adoption of these modifications.

IFRS 14, Regulatory Deferral Accounts – issued on January 30, 2014 the IASB issued IFRS 14 Regulatory Deferral Accounts.  This standard is applicable to first-time adopter of IFRS and for entities which are involved in rate-regulated activities and recognized regulatory deferral account balances under its previous general accepted accounting principles.  This standard requires separate presentation of regulatory deferral account balances in the statement of financial position and statement of comprehensive income.

 IFRS 14 is effective for an entity’s firs annual IFRS financial statements for a period beginning on or after January 1, 2016, with earlier application permitted. The Bank’s management has considered that regulatory deferral accounts will not impact in the consolidated financial statement.

IFRS 15, Revenue from Contracts with Customers - issued on May 28, 2014, the IASB has published its new standard, IFRS 15 Revenue from contracts with customers.  At the same time, the Financial Accounting Standards Board (FASB) has published its equivalent revenue standard, ASU 2014-09.The new standard provides a single, principles based five-step model to be applied to all contracts with customers, i) identify the contract with the customer, ii) identify the performance obligations in the contract, iii) determine the transaction price, iv) allocate the transaction price to the performance obligations in the contracts, v) recognize revenue when (or as) the entity satisfies a performance obligation.

IFRS 15 must be applied in an entity’s first annual IFRS financial statements for periods beginning on or after 1 January 2017.  Application of the Standard is mandatory and early adoption is permitted.  An entity that chooses to apply IFRS 15 earlier than 1 January 2016 must disclose this fact. The Bank’s management is assessing the potential impact of the adoption of these modifications.
 
Accounting for Acquisitions of interests in Joint Operations (Amendments to IFRS 11) - issued on May 6, 2014 the IASB has issued “Accounting for Acquisitions of Interests in Joint Operations (amendments to IFRS 11)”, the amendments clarify the accounting for acquisitions of an interest in a joint operation when the operation constitutes a business.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Amends IFRS 11 Joint Arrangements to require an acquirer of an interest in a joint operation in which the activity constitutes a business (as defined in IFRS 3 Business Combinations) to:
 
·
apply all of the business combinations accounting principles in IFRS 3 and other IFRSs, except for those principles that conflict with the guidance in IFRS 11;
 
·
disclose the information required by IFRS 3 and other IFRSs for business combinations.
 
The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted but corresponding disclosures are required. The amendments apply prospectively. The Bank’s management has considered that accounting for acquisitions of interests in joint operations will not impact in the consolidated financial statements.
 
Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16 and IAS 38) - issued on May 12, 2014 the IASB has published “Clarification of Acceptable Methods of depreciation and amortization (amendments to IAS 16 and IAS 38)”.The amendments provide additional guidance on how the depreciation or amortization of property, plant and equipment and intangible assets should be calculated. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Bank’s management has considered that amendment will not impact in the consolidated financial statements.
 
Equity Method in Separate Financial Statements (Amendments to IAS 27) - issued on August 12, 2014, the IASB has published “Equity Method in Separate Financial Statements (Amendments to IAS 27)”. The amendments reinstate the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. The amendments allow an entity to account for investments in subsidiaries, joint ventures and associates in its separate financial statements:
 
·
at cost,
·
in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9), or
·
using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.
 
The accounting option must be applied by category of investments. In addition to the amendments to IAS 27, there are consequential amendments to IAS 28 to avoid a potential conflict with IFRS 10 Consolidated Financial Statements and to IFRS 1 First-time Adoption of International Financial Reporting Standards. The accounting option must be applied by category of investments. In addition to the amendments to IAS 27, there are consequential amendments to IAS 28 to avoid a potential conflict with IFRS 10 Consolidated Financial Statements and to IFRS 1 First-time Adoption of International Financial Reporting Standards.
 
The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The amendments are to be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The Bank’s management has considered that amendment will not impact in the consolidated financial statements.
 
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) - issued on September 11, 2014, the IASB has published 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)'. The amendments address a conflict between the requirements of IAS 28 'Investments in Associates and Joint Ventures' and IFRS 10 'Consolidated Financial Statements' and clarify the treatment of the sale or contribution of assets from an investor to its associate or joint venture, as follows:
 
· require full recognition in the investor's financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations);
· require the partial recognition of gains and losses where the assets do not constitute a business, i.e. a gain or loss is recognized only to the extent of the unrelated investors’ interests in that associate or joint venture.
 
The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted. The Bank’s management has considered that amendments will not impact in the consolidated financial statements.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 
Disclosure initiative (Amendments to IAS 1) - issued on December 18, 2014 the IASB added an initiative on disclosure to its work program in 2013 to complement the work being done in the Conceptual Framework project. The initiative is made up of a number of smaller projects that aim at exploring opportunities to see how presentation and disclosure principles and requirements in existing Standards can be improved.
 
They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Bank’s management has considered that amendment will not impact in the consolidated financial statements.
 
Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) - issued on December 18, 2014 the IASB has published 'Investment Entities: Applying the Consolidation Exception, Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures (2011) to address issues that have arisen in the context of applying the consolidation exception for investment entities.
 
They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Bank’s management has considered that amendments will not impact in the consolidated financial statements.
 
Annual Improvements 2012-2014 Cycle
 
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, Changes in methods of disposal - Adds specific guidance in IFRS 5 for cases in which an entity reclassify an asset from held for sale to held for distribution or vice versa and cases in which held-for-distribution accounting is discontinued.
 
IFRS 7 Financial Instruments: Disclosures (with consequential amendments to IFRS 1), Servicing contracts - Adds additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of determining the disclosures required.
 
IAS 19 Employee Benefits, Discount rate – Clarifies that the high quality corporate bonds used in estimating the discount rate for post-employment benefits should be denominated in the same currency as the benefits to be paid (thus, the depth of the market for high quality corporate bonds should be assessed at currency level).
 
IAS 34 Interim Financial Reporting, Disclosure of information “elsewhere in the interim financial report” - Clarifies the meaning of 'elsewhere in the interim report' and requires a cross-reference
 
The Bank’s management has considered that improvements will not impact in the consolidated financial statements.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 02
SIGNIFICANT EVENTS

As of December 31, 2014, the following significant events have occurred and affected the Bank`s operations and Consolidated Financial Statements.

a)
The Board

In the Ordinary Board Meeting of Banco Santander Chile held on April 22, 2014, the Chairman of the Board, Mr. Mauricio Larraín Garcés, presented his resignation. In this session, Mr. Vittorio Corbo Lioi was designated as Chairman with Mr. Mauricio Larraín Garcés continuing to form part of the Board of Directors as a Director.

On September 2, 2014 the Superintendency of Banks and Financial Institutions was informed of the resignation of Carlos Olivos Marchant, who served as director. The President proposed that the Director Marco Colodro Hadjes replace Carlos Olivos as a member and chairman of the Audit Committee of Directors. This was approved unanimously by those present.

In the Ordinary Board Meeting dated September 23, 2014 the Board appointed Orlando Poblete Iturrate as the new director who until then had served as Alternate Director, therefore his previous position became vacant.

Use of Profits and Distribution of Dividends

The Shareholders’ Meeting of Banco Santander Chile held on April 22, 2014, was chaired by Mr. Vittorio Corbo Lioi (Chairman), and attended by Oscar von Chrismar Carvajal (First Vice President), Roberto Méndez Torres (Second Vice President), Víctor Arbulú Crousillat, the Directors: Marco Colodro Hadjes, Mauricio Larraín Garcés, Carlos Olivos Marchant, Lucía Santa Cruz Sutil, Juan Pedro Santa María Pérez, Lisandro Serrano Spoerer, Roberto Zahler Mayanz, Raimundo Monge Zegers (Alternate Director) and Orlando Poblete Iturrate (Alternate Director).  Also, the CEO Claudio Melandri Hinojosa and CAO Felipe Contreras Fajardo attended the meeting.

According to the information presented in aforementioned meeting, 2013 net income (designated in the financial statements as “Income attributable to equity holders of the Bank”) amounted to Ch$441,926 million. The Board approved the distribution of 60% of such net income, yielding a Ch$1.407 dividend per share, payable starting on April 23, 2014. Also, it was approved that the remaining 40% of the profits will be retained in the Bank’s reserves.

b)
Taxation Reforms

On September 29, 2014 Law No. 20,780 was published in the Official Journal. This law amended the Chilean tax system, including Income Tax, Stamp Duty and Taxation Codes. Regarding the Income Tax Law, the key changes are:

 
·
Each company must formally elect to join a tax scheme. There are two alternative tax schemes under this law. The deadline for such election is  the second half of 2016.

 
·
The schemes are:

o Attributed system, reaching a tax rate of 25% in 2017. This system involves payment of taxes independent of withdrawals or distributions of profits.
o Semi-Integrated System, reaching a tax rate of 27% in 2018. This system involves payment of taxes on the withdrawal or distribution of profits to shareholders. The corporate income tax paid on the profits distributed is creditable against the final taxes. Profits distributed are subject to withholding income tax of 35%, except for non-residents of Chile where a double taxation agreement exists between Chile and the foreign entity’s country of residence.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 02
SIGNIFICANT EVENTS, continued

 
·
The current rate of 20% is changed to 21% for the year 2014, to 22.5% in 2015, 24% in 2016 and 25% in 2017 for the attributed system. If the semi-integrated system is chosen the rate for 2017 will be 25.5%, reaching 27% in 2018.

The Bank has estimated the effect of the tax reform using the Semi-Integrated System. A decision has not yet been subject to discussion by the Bank's shareholders. The estimated net effect of this reform is Ch$35,411 million, this has been recorded at December 31, 2014 in "Income taxes" in the Consolidated Statement of Income. This Ch$35,411 million consists of a higher tax of Ch$3,175 million for the current tax year and a lesser deferred tax expense of Ch$38,586 million (temporary asset differences).

c)
Issuance of bonds - at December 31, 2014

In the year ended December 31, 2014 the Bank has issued senior bonds in the amount of CHF300,000,000, UF11,400,000, USD750,000,000, CLP75,000,000,000, AUD125,000,000 and JPY 27,300,000,000.  Debt issuance information is included in Note 18.

c.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
5 years
3.5% per annum simple
02-21-2014
10-01-2018
Bond
UF 2,000,000
7 years
3.5% per annum simple
08-28-2014
01-01-2021
Bond
 UF 2,400,000
10 years
3.40% biannually
10-29-2014
01-01-2024
Bond
UF 3,000,000
5 years
2.65% biannually
12-11-2014
07-01-2019
Bond
UF 2,000,000
10 years
3.00% biannually
12-16-2014
01-01-2024
Total
UF 11,400,000
       
Bond
CLP 25,000,000,000
5 years
6.2% per annum simple
02-22-2014
09-01-2018
Bond
CLP 50,000,000,000
5 years
5,50% per annum simple
11-21-2014
07-01-2019
Total
CLP 75,000,000,000
       
USD floating bond
USD 250,000,000
5 years
Libor (3 months)+75 bp
02-19-2014
02-19-2019
USD floating bond
USD 500,000,000
5 years
Libor (3 months)+90 bp
04-15-2014
04-11-2017
Total
USD 750,000,000
       
Bond
AUD 125,000,000
3 years
4.5% per annum simple
03-13-2014
03-13-2017
Total
AUD 125,000,000
       
JPY floating bond
JPY 6,600,000,000
3 years
Libor (3 months) +65 bp
04-24-2014
04-24-2017
JPY current bond 2017
JPY 2,000,000,000
3 years
0.72% per annum simple
04-24-2014
04-24-2017
JPY current bond 2019
JPY 18,700,000,000
5 years
0.97% per annum simple
04-24-2014
04-24-2019
Total
JPY 27,300,000,000
       

c.2) 
Subordinated bonds

As at December 31, 2014, the Bank had not issued subordinated bonds in this financial year.

c.3) 
Repurchase of bonds

The Bank has conducted the following repurchase of bonds as of December 31, 2014:
 
Date
Series
Amount
     
02-21-2014
Senior bond
CLP118,409,000,000
03-03-2014
Senior bond
  UF            6,000,000
 
 
F-41

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 02
SIGNIFICANT EVENTS, continued

c.4) 
Mortgage bonds

As of December 31, 2014 the Bank has issued the following bonds:

Series
Currency
Amount
Term
Issuance rate
Issuance date
Maturity date
Bond
UF
1,500,000
18 years
3.20% biannually
01-09-2014
01-04-2032
Total
UF
1,500,000
       

d)
Investments in Subsidiaries

d.1) 
Mergers and Acquisitions

Merger of Santander Servicios de Recaudación y Pagos Limitada

The Bank has effected its merger of the subsidiary Santander Servicios de Recaudación y Pagos Limitada through the transfer of all the rights from Santander Corredora de Seguros Limitada to the Bank on May 01, 2014. Authorization was granted by the SBIF on March 26, 2014.  This merger included the conversion of "Supercaja" branches to branches of the Bank and the transfer of rights held by Santander Corredora de Seguros Limitada to the Bank who now hold 100% of the rights, becoming the legal successor of that company.

Merger of Servicios de Cobranza Fiscalex Limitada

On August 01, 2014, the company Servicios de Cobranza Fiscalex Limited was acquired by Santander Gestión de Recaudación y Cobranza Limitada. Both companies were previously consolidated by the Bank, therefore no material effect should be observed in the Bank’s Consolidated Financial Statements.

d.2)
Capital increase of Transbank S.A.

In the Transbank’s Shareholders’ Meeting held in June of the current year, it was agreed to capitalize retained earnings and increase the capital by approximately Ch$25,200 million. The Bank has participated in proportion to its ownership share (25%), resulting a contribution of approximately Ch$6,313 million to Transbank.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

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 December 31, 2014.

The Bank has the following operating segments falling under each reportable segment header noted below:

Individuals and Small and mid-sized (SMEs)

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 operating 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 operating 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.

c.
Small and mid-sized (SMEs)
Small companies are considered to be companies with annual sales less than Ch$1,200 million. This operating 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  Institutions

a.
Middle market
Companies with annual sales in excess of Ch$1,200 million but not more than Ch$10,000 million are included in this segment. The companies within this operating segment have access to many 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 operating segment includes all the companies engaged in the real estate industry who carry out projects to sell properties to third parties and annual sales exceeding Ch$800 million with no upper limit.  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
This operating segment is made up of companies with annual sales exceeding Ch$10,000 million. The companies within this segment have access to many 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.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 03
OPERATING SEGMENTS, continued

d.
Institutions
Serves institutions such as universities, government entities, local and regional governments. The institutions within this segment have access to many 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 is comprised of:

 
a.
Corporate
This segment consists of foreign and domestic multinational companies with sales over Ch$10,000 million. The companies within this segment have access to many 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 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 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.

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 03
OPERATING SEGMENTS, continued

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

         
As of December 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$
 
Individuals and SMEs
                                         
Santander Banefe
    752,267       91,979       21,257       1,352       (46,410 )     (44,657 )     23,521  
Commercial Banking
    11,083,815       519,541       128,891       10,577       (119,886 )     (350,964 )     188,159  
Small and mid-sized (SMEs)
    3,354,840       269,483       47,011       6,529       (160,581 )     (83,985 )     78,457  
Subtotal
    15,190,922       881,003       197,159       18,458       (326,877 )     (479,606 )     290,137  
                                                         
Companies and Institutions
                                                       
Middle market
    1,888,557       80,497       13,460       8,420       (21,690 )     (31,225 )     49,462  
Large Corporations
    2,138,226       72,303       8,798       6,734       (9,374 )     (18,416 )     60,045  
Real estate
    1,027,191       32,899       4,700       533       3,048       (5,995 )     35,185  
Institutions
    390,895       33,608       2,447       655       697       (13,587 )     23,820  
Subtotal
    5,444,869       219,307       29,405       16,342       (27,319 )     (69,223 )     168,512  
                                                         
Subtotal Commercial Banking
    20,635,791       1,100,310       226,564       34,800       (354,196 )     (548,829 )     458,649  
                                                         
Global Banking and Markets
                                                       
     Corporate
    2,201,913       72,747       21,188       (7,155 )     (701 )     (21,045 )     65,034  
Treasury
    -       14,990       764       54,011       -       (20,899 )     48,866  
Subtotal
    2,201,913       87,737       21,952       46,856       (701 )     (41,944 )     113,900  
                                                         
Other
    54,945       129,057       (21,233 )     30,909       (6 )     2,564       141,291  
                                                         
Total
    22,892,649       1,317,104       227,283       112,565       (354,903 )     (588,209 )     713,840  
                                                         
Other operating income
                                                    6,545  
Other operating expenses and impairment
                                                    (95,610 )
Income from investments in associates and other companies
                                                    2,165  
Income tax expense
                                                    (51,050 )
Net income for the year
                                                    575,890  

 
(1)
Corresponds to loans and accounts receivable from customers, without deducting their allowances for loan losses.
 
(2)
Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.
 
(3)
Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 03
OPERATING SEGMENTS, continued

         
As of December 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$
 
Individuals and SMEs
                                         
Santander Banefe
    727,452       99,182       25,648       1,614       (56,309 )     (52,370 )     17,765  
Commercial Banking
    9,710,249       506,192       123,496       7,118       (157,697 )     (298,173 )     180,936  
Small and mid-sized (SMEs)
    3,223,215       260,856       37,641       4,798       (101,611 )     (79,633 )     122,051  
Subtotal
    13,660,916       866,230       186,785       13,530       (315,617 )     (430,176 )     320,752  
                                                         
Companies and Institutions
                                                       
Middle market
    1,757,586       73,906       14,020       7,457       (21,364 )     (27,947 )     46,072  
Large Corporations
    1,923,810       62,953       9,026       5,930       (15,296 )     (19,937 )     42,676  
Real estate
    996,847       26,607       3,588       287       (5,098 )     (6,055 )     19,329  
Institutions
    353,509       30,283       2,615       562       261       (15,889 )     17,832  
Subtotal
    5,031,752       193,749       29,249       14,236       (41,497 )     (69,828 )     125,909  
                                                         
Subtotal Commercial Banking
    18,692,668       1,059,979       216,034       27,766       (357,114 )     (500,004 )     446,661  
                                                         
Global Banking and Markets
                                                       
     Corporate
    2,219,045       63,036       16,295       9,011       (14,739 )     (19,802 )     53,801  
Treasury
    -       9,896       1,727       41,706       -       (17,926 )     35,403  
Subtotal
    2,219,045       72,932       18,022       50,717       (14,739 )     (37,728 )     89,204  
                                                         
Other
    149,048       (56,149 )     (4,220 )     45,954       391       (19,877 )     (33,901 )
                                                         
Total
    21,060,761       1,076,762       229,836       124,437       (371,462 )     (557,609 )     501,964  
Other operating income
                                                    88,155  
Other operating expenses and impairment
                                                    (52,582 )
Income from investments in associates and other companies
                                                    1,422  
Income tax expense
                                                    (94,530 )
Net income for the year
                                                    444,429  

 
(1)
Corresponds to loans and accounts receivable from customers, without deducting their allowances for loan losses.
 
(2)
Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.
 
(3)
Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.

 
F-46

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 03
OPERATING SEGMENTS, continued
 
         
As of December 31, 2012
 
   
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$
 
Individuals and SMEs
                                         
Santander Banefe
    730,362       123,043       33,853       1,288       (73,882 )     (51,797 )     32,505  
Commercial Banking
    8,941,860       499,422       141,946       8,613       (229,958 )     (291,562 )     128,461  
Small and mid-sized companies (SMEs)
    2,890,251       233,622       38,115       5,009       (80,144 )     (76,560 )     120,042  
Subtotal
    12,562,473       856,087       213,914       14,910       (383,984 )     (419,919 )     281,008  
                                                         
Companies and Institutions
                                                       
Middle market
    1,626,606       70,747       13,885       5,118       (21,531 )     (26,672 )     41,547  
Large Corporations
    1,661,837       56,086       8,722       5,623       (3,361 )     (17,958 )     49,112  
Real estate
    770,250       21,344       3,296       321       706       (5,745 )     19,922  
Institutions
    355,518       28,472       2,470       615       (346 )     (15,297 )     15,914  
Subtotal
    4,414,211       176,649       28,373       11,677       (24,532 )     (65,672 )     126,495  
                                                         
Subtotal Commercial Banking
    16,976,684       1,032,736       242,287       26,587       (408,516 )     (485,591 )     407,503  
                                                         
Global Banking and Markets
                                                       
Corporate
    1,863,595       57,822       16,832       763       5,546       (17,564 )     63,399  
Treasury
    -       (7,345 )     2,327       51,514       -       (17,912 )     28,584  
Subtotal
    1,863,595       50,477       19,159       52,277       5,546       (35,476 )     91,983  
                                                         
Other
    126,373       (40,479 )     9,126       3,435       (722 )     (18,585 )     (47,225 )
                                                         
Total
    18,966,652       1,042,734       270,572       82,299       (403,692 )     (539,652 )     452,261  
                                                         
Other operating income
                                                    13,105  
Other operating expenses and impairment
                                                    (59,727 )
Income from investments in associates and other companies
                                                    267  
Income tax expense
                                                    (44,473 )
Net income for the year
                                                    361,433  

 
(1)
Corresponds to loans and accounts receivable from customers, 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.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 04
CASH AND CASH EQUIVALENTS

a) 
The detail of the balances included under cash and cash equivalents is as follows:
 
 
As of December 31,
 
2014
2013
 
MCh$
MCh$
Cash and deposits in banks
   
Cash
594,979
551,136
Deposits in the Central Bank of Chile
167,444
797,363
Deposits in domestic banks
50
81
Deposits in foreign banks
846,415
223,230
Subtotals – Cash and deposits in banks
1,608,888
1,571,810
     
Cash in process of collection, net
250,114
327,698
     
Cash and cash equivalents
1,859,002
1,899,508
 
The balance of funds held in cash and at the Central Bank of Chile reflects the reserves that the Bank must maintain on average each month in accordance with the regulations governing minimum reserves.

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

Cash items in process of collection and in process of being cleared represent domestic transactions which have not been processed through the central domestic clearinghouse or international transactions which may be delayed in settlement due to timing differences.  These transactions were as follows:

 
As of December 31,
 
2014
2013
 
MCh$
MCh$
Assets
   
Documents held by other banks (documents to be cleared)
261,758
289,723
Funds receivable
269,615
314,354
Subtotal
531,373
604,077
Liabilities
   
Funds payable
281,259
276,379
Subtotal
281,259
276,379
Cash in process of collection, net
250,114
327,698

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 05
TRADING INVESTMENTS

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

 
As of December 31,
 
2014
2013
 
MCh$
MCh$
Chilean Central Bank and Government securities
   
Chilean Central Bank Bonds
270,004
75,577
Chilean Central Bank Notes
-
100
Other Chilean Central Bank and Government securities
461,340
189,962
Subtotal
731,344
265,639
     
Other Chilean securities
   
Time deposits in Chilean financial institutions
-
-
Mortgage finance bonds of Chilean financial institutions
-
-
Chilean financial institution bonds
-
10,042
Chilean corporate bonds
36,339
2,229
Other Chilean securities
-
-
Subtotal
36,339
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
7,132
9,657
Funds managed by others
-
-
Subtotal
7,132
9,657
     
Total
774,815
287,567
 
As of December 31, 2014 and 2013, there were no trading investments sold under contracts to resell to clients and financial institutions.

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 06
INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS

a)
Rights arising from resale agreements

The Bank purchases financial instruments agreeing to resell them at a future date. As of December 31, 2014 and 2013, rights associated with instruments acquired under contracts to resell are as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
From 1 day and less than 3 months
   
More than 3
months and
less than
1 year
   
More than 1 year
   
Total
   
From 1 day and less than 3 months
   
More than 3 months and
less than
1 year
   
More than 1 year
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                 
Securities from the Chilean Government and the Chilean Central Bank
                                               
Chilean Central Bank Bonds
    -       -       -       -       -       -       -       -  
Chilean Central Bank Notes
    -       -       -       -       -       -       -       -  
Other securities from the Government and the Chilean Central Bank
    -       -       -       -       17,469       -       -       17,469  
Subtotal
    -       -       -       -       17,469       -       -       17,469  
Instruments from other domestic institutions domestic institutions:
                                                               
Time deposits in Chilean financial institutions
    -       -       -       -       -       -       -       -  
Mortgage finance bonds of Chilean financial institutions
    -       -       -       -       -       -       -       -  
Chilean financial institution bonds
    -       -       -       -       -       -       -       -  
Chilean corporate bonds
    -       -       -       -       -       -       -       -  
Other Chilean securities
    -       -       -       -       -       -       -       -  
Subtotal
    -       -       -       -       -       -       -       -  
Foreign financial securities:
                                                               
Foreign government or central banks securities
    -       -       -       -       -       -       -       -  
Other foreign financial instruments
    -       -       -       -       -       -       -       -  
Subtotal
    -       -       -       - -       -       -       -       -  
Investments in mutual funds:
                                                               
Funds managed by  related entities
    -       -       -       -       -       -       -       -  
Funds managed by others
    -       -       -       -       -       -       -       -  
Subtotal
    -       -       -       -       -       -       -       -  
                                                                 
Total
    -       -       -       -       17,469       -       -       17,469  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 06
INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS, continued

b) 
Obligations arising from repurchase agreements

The Bank raises funds by selling financial instruments and committing itself to buy them back at future dates, plus interest at a predetermined rate.   As of December 31, 2014 and 2013, obligations related to instruments sold under repurchase agreements are as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
From 1 day
to less than
3 months
   
More than 3
months and
less than
1 year
   
More than
1 year
   
Total
   
From 1 day
to less than
3 months
   
More than 3
months and
less than
1 year
   
More than
1 year
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                 
Securities from Chilean Government and the Chilean Central Bank
                                               
Chilean Central Bank Bonds
    105,702       -       -       105,702       66,937       -       -       66,937  
Chilean Central Bank Notes
    153       -       -       153       22       -       -       22  
Other securities from the Government and the Chilean Central Bank
    10,644       -       -       10,644       23,879       -       -       23,879  
Subtotal
    116,499       -       -       116,499       90,838       -       -       90,838  
Instruments from other
    domestic institutions:
                                                               
Time deposits in Chilean financial institutions
    275,285       342       -       275,627       112,743       5,391       -       118,134  
Mortgage finance bonds of Chilean financial institutions
    -       -       -       -       -       -       -       -  
Chilean financial institution bonds
    -       -       -       -       -       -       -       -  
Chilean corporate bonds
    -       -       -       -       -       -       -       -  
Other Chilean securities
    -       -       -       -       -       -       -       -  
Subtotal
    275,285       342       -       275,627       112,743       5,391       -       118,134  
Foreign financial securities:
                                                               
Foreign government or central banks securities
    -       -       -       -       -       -       -       -  
Other foreign financial instruments
    -       -       -       -       -       -       -       -  
Subtotal
    -       -       -       -       -       -       -       -  
Investments in mutual funds:
                                                               
Funds managed by  related entities
    -       -       -       -       -       -       -       -  
Funds managed by others
    -       -       -       -       -       -       -       -  
Subtotal
    -       -       -       -       -       -       -       -  
                                                                 
Total
    391,784       342       -       392,126       203,581       5,391       -       208,972  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 06
INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS, continued

c)
Below is the detail by portfolio of collateral associated with repurchase agreements as of December 31, 2014 and 2013, valued at fair value:

   
As of December 31,
 
   
2014
   
2013
 
   
Available
 for sale
portfolio
   
Trading
portfolio
   
Total
   
Available
for sale
portfolio
   
Trading portfolio
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                     
Chilean Central Bank and Government securities:
                                   
Chilean Central Bank Bonds
    105,680       -       105,680       66,933       -       66,933  
Chilean Central Bank Notes
    153       -       153       22       -       22  
Other securities from the Government and the
Chilean Central Bank
    10,642       -       10,642       23,863       -       23,863  
Subtotal
    116,475       -       116,475       90,818       -       90,818  
Other Chilean securities:
                                               
Time deposits in Chilean financial institutions
    275,675       -       275,675       118,195       -       118,195  
Mortgage finance bonds of Chilean financial institutions
    -       -       -       -       -       -  
Chilean financial institution bonds
    -       -       -       -       -       -  
Chilean corporate bonds
    -       -       -       -       -       -  
Other Chilean securities
    -       -       -       -       -       -  
Subtotal
    275,675       -       275,675       118,195       -       118,195  
Foreign financial securities:
                                               
Foreign Central Banks and Government securities
    -       -       -       -       -       -  
Other foreign financial instruments
    -       -       -       -       -       -  
Subtotal
    -       -       -       -       -       -  
Investments in mutual funds:
                                               
Funds managed by related entities
    -       -       -       -       -       -  
Funds managed by others
    -       -       -       -       -       -  
Subtotal
    -       -       -       -       -       -  
                                                 
Total
    392,150       -       392,150       209,013       -       209,013  

 
F-52

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 07
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

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

   
As of December 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
    97,812       846,168       668,166       1,612,146       9,821       2,540  
Cross currency swaps
    -       193,704       694,852       888,556       110,448       7,997  
Call currency options
    -       -       -       -       -       -  
Call interest rate options
    -       -       -       -       -       -  
Put currency options
    -       -       -       -       -       -  
Put interest rate options
    -       -       -       -       -       -  
Interest rate futures
    -       -       -       -       -       -  
Other derivatives
    -       -       -       -       -       -  
Subtotal
    97,812       1,039,872       1,363,018       2,500,702       120,269       10,537  
                                                 
Cash flow hedge derivatives
                                               
Currency forwards
    -       -       -       -       -       -  
Interest rate swaps
    -       -       -       -       -       -  
Cross currency swaps
    11,329       850,555       1,727,283       2,589,167       131,880       21,996  
Call currency options
    -       -       -       -       -       -  
Call interest rate options
    -       -       -       -       -       -  
Put currency options
    -       -       -       -       -       -  
Put interest rate options
    -       -       -       -       -       -  
Interest rate futures
    -       -       -       -       -       -  
Other derivatives
    -       -       -       -       -       -  
Subtotal
    11,329       850,555       1,727,283       2,589,167       131,880       21,996  
                                                 
Trading derivatives
                                               
Currency forwards
    8,740,802       20,156,612       2,155,381       31,052,795       342,726       277,789  
Interest rate swaps
    1,675,560       16,147,587       37,838,280       55,661,427       518,392       485,798  
Cross currency swaps
    524,274       4,395,731       19,028,968       23,948,973       1,609,197       1,761,196  
Call currency options
    160,560       89,701       -       250,261       1,587       2,597  
Call interest rate options
    -       -       103,474       103,474       795       633  
Put currency options
    153,999       157,757       34,491       346,247       2,575       485  
Put interest rate options
    -       -       -       -       -       -  
Interest rate futures
    -       -       -       -       -       -  
Other derivatives
    258,425       -       -       258,425       142       353  
Subtotal
    11,513,620       40,947,388       59,160,594       111,621,602       2,475,414       2,528,851  
                                                 
Total
    11,622,761       42,837,815       62,250,895       116,711,471       2,727,563       2,561,384  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 07
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       1,009  
Cross currency swaps
    -       233,824       899,293       1,133,117       63,528       1,736  
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       2,745  
                                                 
Cash flow hedge derivatives
                                               
Currency forwards
    -       -       -       -       -       -  
Interest rate swaps
    -       -       -       -       -       -  
Cross currency swaps
    522,451       937,529       661,676       2,121,656       60,453       13,908  
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       13,908  
                                                 
Trading derivatives
                                               
Currency forwards
    14,972,304       9,801,554       1,749,378       26,523,236       198,130       188,340  
Interest rate swaps
    4,526,349       11,332,697       25,005,852       40,864,898       241,528       242,563  
Cross currency swaps
    1,634,855       3,927,402       14,246,746       19,809,003       915,099       840,718  
Call currency options
    443,944       42,805       5,557       492,306       1,327       2,398  
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       1,275,132  
                                                 
Total
    22,583,318       26,376,292       42,947,037       91,906,647       1,494,018       1,291,785  

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 07
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

b)
Hedge accounting

Fair value hedge:

The Bank uses cross-currency swaps and interest rate 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 December 31, 2014 and 2013, classified by term to maturity:

   
As of December 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 loans
    -       -       -       -       -  
Available for sale investments
                                       
   Yankee bonds
    -       -       -       -       -  
   Mortgage financing bonds
    -       -       -       3,291       3,291  
   Treasury bonds (BTP)
    -       20,000       135,000       20,000       175,000  
   Central bank bonds (BCP)
    -       28,000       13,000       147,500       188,500  
Time deposits and other demand liabilities
                                       
Time deposits
    761,481       33,000       -       -       794,481  
Issued debt instruments
                                       
   Senior bonds
    376,203       261,437       286,792       414,998       1,339,430  
   Subordinated bonds
    -       -       -       -       -  
Interbank borrowings
                                       
   Interbank loans
    -       -       -       -       -  
Total
    1,137,684       342,437       434,792       585,789       2,500,702  
Hedging instrument
                                       
   Cross currency swaps
    943,980       81,000       248,000       339,166       1,612,146  
   Interest rate swaps
    193,704       261,437       186,792       246,623       888,556  
Total
    1,137,684       342,437       434,792       585,789       2,500,702  


   
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 loans
    12,213       -       -       -       12,213  
Available for sale investments
                                       
   Yankee bonds
    -       -       -       28,308       28,308  
   Mortgage financing 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  

 
F-55

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 07
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

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 December 31, 2014 and 2013, and the period when the cash flows will be generated:
 
   
As of December 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
    10,078       78,927       -       -       89,005  
Available for sale investments
                                       
   Yankee bond
    -       -       -       287,078       287,078  
   Chilean Central Bank bonds
    11,448       11,509       -       -       22,957  
   Time deposits
    289,819       -       -       -       289,819  
Issued debt instruments
                                       
   Senior bonds (variable rate)
    -       882,875       152,083       -       1,034,958  
   Senior bonds (fixed rate)
    -       -       -       -       -  
Interbank borrowings
                                       
   Interbank loans
    550,539       314,811       -       -       865,350  
Total
    861,884       1,288,122       152,083       287,078       2,589,167  
Hedging instrument
                                       
Cross currency swaps
    861,884       1,288,122       152,083       287,078       2,589,167  
Total
    861,884       1,288,122       152,083       287,078       2,589,167  


   
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
    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  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 07
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

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 December 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
    22,834       26,763       10,039       5,449       65,085  
Outflows
    (27,361 )     (19,007 )     (2,186 )     -       (48,554 )
Net flows
    (4,527 )     7,756       7,853       5,449       16,531  
                                         
Hedging instrument
                                       
Inflows
    27,361       19,007       2,186       -       48,554  
Outflows (*)
    (22,834 )     (26,763 )     (10,039 )     (5,449 )     (65,085 )
Net flows
    4,527       (7,756 )     (7,853 )     (5,449 )     (16,531 )

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


   
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.
 
 
F-57

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 07
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

b.2)
Forecasted cash flows for inflation risk:

   
As of December 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
    62,551       39,579       -       -       102,130  
Outflows
    -       -       -       -       -  
Net flows
    62,551       39,579       -       -       102,130  
                                         
Hedging instrument
                                       
Inflows
    -       -       -       -       -  
Outflows
    (62,551 )     (39,579 )     -       -       (102,130 )
Net flows
    (62,551 )     (39,579 )     -       -       (102,130 )


   
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 )

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 07
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

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

As of December 31, 2014 the Bank has no forecasted cash flows for exchange rate risk.
 
   
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 Statement of Changes in Equity, specifically within Other comprehensive income, as of December 31, 2014 and 2013, and is as follows:

   
As of December 31,
 
Hedged item
 
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Interbank loans
    4,208       (3,809 )
Issued debt instruments
    5,981       (723 )
Available for sale investments
    (726 )     (3,744 )
Loans and accounts receivable from customers
    1,262       19  
Net flows
    10,725       (8,257 )
 
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.

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

 
F-59

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 07
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

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 years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Bond hedging derivatives
    (16 )     (33 )     (863 )
Interbank loans hedging derivatives
    446       1,550       1,458  
                         
Cash flow hedge net income
    430       1,517       595  
 
See Note 23 - Equity, letter d)

e)
Net investment hedges in foreign operations:

As of December 31, 2014 and 2013, the Bank does not have any foreign net investment hedges in its hedge accounting portfolio.
 
 
F-60

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 08
INTERBANK LOANS

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

   
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
    44       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
    11,899       125,383  
Overdrafts in checking accounts
    -       -  
Non-transferable foreign bank deposits
    -       -  
Other foreign bank loans
    -       -  
Provisions and impairment for foreign bank loans
    (1 )     (495 )
                 
Total
    11,942       124,954  

b)
The amount in each period for provisions and impairment of interbank loans is shown below:

   
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
    -       495       495       -       159       159  
Charge-offs
    -       -       -       -       -       -  
Provisions established
    -       60       60       -       455       455  
Provisions released
    -       (554 )     (554 )     -       (119 )     (119 )
                                                 
Total
    -       1       1       -       495       495  

 
F-61

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 09
LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS

a)
Loans and accounts receivable from customers

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

   
Assets before allowances
   
Allowances established
       
As of December 31, 2014
 
Normal portfolio
   
Impaired portfolio
   
Total
   
Individual allowances
   
Group allowances
   
Total
   
Assets net balance
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                           
Commercial loans
                                         
Commercial loans
    7,674,710       650,239       8,324,949       129,739       139,446       269,185       8,055,764  
Foreign trade loans
    1,689,242       96,990       1,786,232       55,522       1,278       56,800       1,729,432  
Checking accounts debtors
    253,704       12,527       266,231       3,552       6,457       10,009       256,222  
Factoring transactions
    324,388       3,453       327,841       4,143       725       4,868       322,973  
Leasing transactions
    1,391,370       98,014       1,489,384       16,971       6,763       23,734       1,465,650  
Other loans and account receivable
    113,722       21,941       135,663       5,925       11,028       16,953       118,710  
Subtotal
    11,447,136       883,164       12,330,300       215,852       165,697       381,549       11,948,751  
                                                         
Mortgage loans
                                                       
Loans with mortgage finance bonds
    55,040       2,316       57,356       -       353       353       57,003  
Mortgage mutual loans
    113,741       2,409       116,150       -       552       552       115,598  
Other mortgage mutual loans
    6,092,647       365,878       6,458,525       -       47,839       47,839       6,410,686  
Subtotal
    6,261,428       370,603       6,632,031       -       48,744       48,744       6,583,287  
                                                         
Consumer loans
                                                       
Installment consumer loans
    1,989,755       331,020       2,320,775       -       201,931       201,931       2,118,844  
Credit card balances
    1,335,268       27,319       1,362,587       -       44,050       44,050       1,318,537  
Leasing transactions
    5,187       83       5,270       -       80       80       5,190  
Other consumer loans
    224,681       5,062       229,743       -       7,962       7,962       221,781  
Subtotal
    3,554,891       363,484       3,918,375       -       254,023       254,023       3,664,352  
                                                         
Total
    21,263,455       1,617,251       22,880,706       215,852       468,464       684,316       22,196,390  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 09
LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued
 
   
Assets before allowances
   
Allowances established
       
As of December 31, 2013  
Normal
portfolio
   
Impaired
portfolio
   
Total
   
Individual allowances
   
Group allowances
   
Total
   
Assets
net balance
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                           
Commercial loans
                                         
Commercial loans
    7,177,278       620,404       7,797,682       127,141       81,478       208,619       7,589,063  
Foreign trade loans
    1,748,762       91,572       1,840,334       52,127       878       53,005       1,787,329  
Checking accounts debtors
    267,441       12,216       279,657       3,621       4,755       8,376       271,281  
Factoring transactions
    312,818       3,296       316,114       4,437       617       5,054       311,060  
Leasing transactions
    1,291,131       58,683       1,349,814       14,161       5,016       19,177       1,330,637  
Other loans and account receivable
    99,934       18,717       118,651       4,890       7,426       12,316       106,335  
Subtotal
    10,897,364       804,888       11,702,252       206,377       100,170       306,547       11,395,705  
                                                         
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
    19,457,611       1,477,701       20,935,312       206,377       408,061       614,438       20,320,874  
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 09
LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

b)
Portfolio characteristics:

As of December 31, 2014 and 2013 the portfolio before allowances is as follows, by customer’s economic activity:
 
   
Domestic loans (*)
   
Foreign interbank loans (**)
   
Total loans
   
Distribution percentage
 
   
As of December 31
   
As of December 31,
   
As of December 31,
   
As of December 31,
 
   
2014
   
2013
   
2014
   
2013
   
2014
   
2013
   
2014
   
2013
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
%
   
%
 
Commercial loans
                                               
Manufacturing
    1,126,268       1,216,914       -       -       1,126,268       1,216,914       4.92       5.78  
Mining
    428,847       464,865       -       -       428,847       464,865       1.87       2.21  
Electricity, gas, and water
    567,548       222,110       -       -       567,548       222,110       2.48       1.05  
Agriculture and livestock
    871,247       806,092       -       -       871,247       806,092       3.81       3.83  
Forest
    98,039       183,716       -       -       98,039       183,716       0.43       0.87  
Fishing
    256,818       265,917       -       -       256,818       265,917       1.12       1.26  
Transport
    758,339       721,931       -       -       758,339       721,931       3.31       3.43  
Communications
    167,004       249,499       -       -       167,004       249,499       0.73       1.18  
Construction
    1,365,841       1,337,791       -       -       1,365,841       1,337,791       5.97       6.35  
Commerce
    2,773,410       2,578,979       11,899       125,383       2,785,309       2,704,362       12.17       12.84  
Services
    469,141       447,861       -       -       469,141       447,861       2.05       2.13  
Other
    3,447,842       3,206,643       -       -       3,447,842       3,206,643       15.06       15.23  
                                                                 
Subtotal
    12,330,344       11,702,318       11,899       125,383       12,342,243       11,827,701       53.92       56.16  
                                                                 
Mortgage loans
    6,632,031       5,625,812       -       -       6,632,031       5,625,812       28.97       26.71  
                                                                 
Consumer loans
    3,918,375       3,607,248       -       -       3,918,375       3,607,248       17.11       17.13  
                                                                 
Total
    22,880,750       20,935,378       11,899       125,383       22,892,649       21,060,761       100.00       100.00  

(*)
Includes domestic interbank loans for Ch$ 44 million as of December 31, 2014 (Ch$66 million as of December 31, 2013), see Note 8.

(**)
Includes foreign interbank loans for Ch$ 11,899 million as of December 31, 2014 (Ch$125,383 million as of December 31, 2013), see Note 8.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 09
LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

c)
Impaired Portfolio

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

   
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
    420,038       -       -       420,038       317,534       -       -       317,534  
Non-performing loans (collectively evaluated)
    367,791       179,417       97,119       644,327       364,890       155,688       92,723       613,301  
Other impaired portfolio
    95,335       191,186       266,365       552,886       122,464       167,713       256,689       546,866  
Total
    883,164       370,603       363,484       1,617,251       804,888       323,401       349,412       1,477,701  
 
ii)
The impaired portfolio with or without guarantee as of December 31, 2014 and 2013 is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
Commercial
   
Mortgage
   
Consumer
   
Total
   
Commercial
   
Mortgage
   
Consumer
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Secured debt
    408,759       341,860       48,133       798,752       385,712       302,219       49,051       736,982  
Unsecured debt
    474,405       28,743       315,351       818,499       419,176       21,182       300,361       740,719  
Total
    883,164       370,603       363,484       1,617,251       804,888       323,401       349,412       1,477,701  
 
iii)
The portfolio of non-performing loans as of December 31, 2014 and 2013 is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
Commercial
   
Mortgage
   
Consumer
   
Total
   
Commercial
   
Mortgage
   
Consumer
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Secured debt
    130,999       157,608       8,292       296,899       151,494       136,768       7,241       295,503  
Unsecured debt
    236,792       21,809       88,827       347,428       213,396       18,920       85,482       317,798  
Total
    367,791       179,417       97,119       644,327       364,890       155,688       92,723       613,301  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 09
LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

d)
Allowances

The changes in allowance balances during 2014, 2013 and 2012 are as follows:

Activity during 2014
 
Commercial
loans
   
Mortgage
loans
   
Consumer
loans
       
   
Individual
   
Group
   
Group
   
Group
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                               
Balance as of January 1, 2014
    206,377       100,170       43,306       264,585       614,438  
Allowances established (1)
    52,240       99,648       14,959       129,410       296,257  
Allowances released (2)
    (15,903 )     (7,127 )     (6,561 )     (38,275 )     (67,866 )
Allowances released due to charge-off (3)
    (26,862 )     (26,994 )     (2,960 )     (101,697 )     (158,513 )
Balances as of December 31, 2014
    215,852       165,697       48,744       254,023       684,316  


Activity during 2013
 
Commercial
loans
   
Mortgage
loans
   
Consumer
loans
       
   
Individual
   
Group
   
Group
   
Group
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                               
Balance as of January 1, 2013
    154,702       95,938       35,990       263,259       549,889  
Allowances established(1)
    92,008       36,724       21,314       155,921       305,967  
Allowances released(2)
    (22,014 )     (11,151 )     (9,216 )     (35,482 )     (77,863 )
Allowances released due to charge-off(3)
    (18,319 )     (21,341 )     (4,782 )     (119,113 )     (163,555 )
Balances as of December 31, 2013
    206,377       100,170       43,306       264,585       614,438  


Activity during 2012
 
Commercial
loans
   
Mortgage
loans
   
Consumer
loans
       
   
Individual
   
Group
   
Group
   
Group
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                               
Balances as of January 1, 2012
    112,687       97,115       35,633       243,022       488,457  
Allowances established (1)
    83,742       31,772       10,741       239,607       365,862  
Allowances release (2)
    (20,716 )     (16,624 )     (7,449 )     (38,471 )     (83,260 )
Allowances released due to charge-off (3)
    (21,011 )     (16,325 )     (2,935 )     (180,899 )     (221,170 )
Balances as of December 31, 2012
    154,702       95,938       35,990       263,259       549,889  

(1)
Represents gross allowances made in respect of increased risk of loss during the period and loan growth.
(2)
Represents the gross amount of loan loss allowances released during the year as a consequence of reduction in the level of risk existing in the loan portfolio, including as a result of improvement in the credit risk classification of borrowers and loans paid.
(3)
Represents the gross amount of loan loss allowances removed due to charge-off.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 09
LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

e)
Recoveries by type of loan

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Commercial loans
    16,947       14,545       8,695  
Consumer loans
    36,908       36,004       22,015  
Residential mortgage loans
    5,122       4,735       2,305  
Total
    58,977       55,284       33,015  

Recoveries of loans previously charged off are recognized as income in the line item “Provision for loans losses”. We only recognize as a recovery interest and/or principal paid in cash in connection with a loan that has already been charged-off in its entirety. Such recoveries do not have an impact on our allowance for loan losses as these recoveries are for loans that have been already charged-off and recognized as a loss in our income statement and are no longer on-balance sheet.
 
f)
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 December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Customers loans
    296,257       305,967       365,862  
Interbank loans
    60       455       548  
Total
    296,317       306,422       366,410  
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 09
LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

g)
Portfolio by its Impaired and non-impaired status.

   
As of December 31, 2014
 
   
Non-impaired
   
Impaired
   
Portfolio total
 
   
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
    11,225,562       5,959,902       3,361,922       20,547,386       374,316       129,18       160,292       663,793       11,599,878       6,089,087       3,522,214       21,211,179  
Overdue for 1-29 days
    136,012       94,212       116,315       346,539       38,909       18,164       53,921       110,994       174,921       112,376       170,236       457,533  
Overdue for 30-89 days
    85,562       207,314       76,654       369,530       107,093       51,435       60,676       219,204       192,655       258,749       137,330       588,734  
Overdue for 90 days or more
    -       -       -       -       362,846       171,819       88,595       623,260       362,846       171,819       88,595       623,260  
                                                                                                 
Total portfolio before allowances
    11,447,136       6,261,428       3,554,891       21,263,455       883,164       370,603       363,484       1,617,251       12,330,300       6,632,031       3,918,375       22,880,706  
                                                                                                 
Overdue loans (less than 90 days) presented as portfolio percentage
    1.94 %     4.82 %     5.43 %     3.37 %     16.53 %     18.78 %     31.53 %     20.42 %     2.98 %     5.60 %     7.85 %     4.57 %
                                                                                                 
Overdue loans (90 days or more) presented as portfolio percentage.
    -       -       -       -       41.08 %     46.36 %     24.37 %     38.54 %     2.94 %     2.59 %     2.26 %     2.72 %


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 09
LOANS AND ACCOUNTS RECEIVABLES FROM CUSTOMERS, continued

   
As of December 31, 2013
 
   
Non-impaired
   
Impaired
   
Portfolio total
 
   
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 %

Reconciliation of overdue loans with non-performing loans

   
As of December 31, 2014
 
   
Commercial
   
Mortgage
   
Consumer
   
Total
 
   
MCh$
   
MCh$
   
MCh$
       
                         
Overdue loans
    362,846       171,819       88,595       623,260  
Loans with not overdue but classified as non-performing loans
    4,945       7,598       8,524       21,067  
Total
    367,791       179,417       97,119       644,327  

   
As of December 31, 2013
 
   
Commercial
   
Mortgage
   
Consumer
   
Total
 
   
MCh$
   
MCh$
   
MCh$
       
                         
Overdue loans
    359,928       146,933       85,713       592,574  
Loans with not overdue but classified as non-performing loans
    4,962       8,755       7,010       20,727  
Total
    364,890       155,688       92,723       613,301  
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 10
AVAILABLE FOR SALE INVESTMENTS

As of December 31, 2014 and 2013,detail of instruments deemed as available for sale investments is as follows:
 
   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Chilean Central Bank and Government securities
           
Chilean Central Bank Bonds
    381,117       364,821  
Chilean Central Bank Notes
    384       1,078  
Other Chilean Central Bank and Government securities
    353,419       146,295  
Subtotal
    734,920       512,194  
Other Chilean securities
               
Time deposits in Chilean financial institutions
    590,382       1,011,354  
Mortgage finance bonds of Chilean financial institutions
    31,693       33,856  
Chilean financial institution bonds
    -       -  
Chilean corporate bonds
    -       -  
Other Chilean securities
    -       -  
Subtotal
    622,075       1,045,210  
Foreign financial securities
               
Foreign Central Banks and Government securities
    -       -  
Other foreign financial securities
    294,603       143,589  
Subtotal
    294,603       143,589  
                 
Total
    1,651,598       1,700,993  
 
As of December 31, 2014 and 2013, the line item Chilean Central Bank and Government securities item includes securities sold under repurchase agreements to clients and financial institutions for Ch$ 116,475 million and Ch$ 90,818 million, respectively.

As of December 31, 2014 and 2013, the line item Other Chilean Securities includes securities sold to customers and financial institutions under repurchase agreements totaling Ch$ 275,675 million and Ch$ 118,195 million, respectively.

As of December 31, 2014 available for sale investments included a net unrealized profit of Ch$ 21,684 million, recorded as a “Valuation adjustment” in Equity, distributed between a profit of Ch$ 21,680 million attributable to Equity holders of the Bank and a profit of Ch$ 4 million attributable to non-controlling interest.

As of December 31, 2013 available for sale investments included a net unrealized profit of Ch$ 840 million, recorded as a “Valuation adjustment” in Equity, distributed between a profit of Ch$ 802 million attributable to Equity holders of the Bank and a profit of Ch$ 38 million attributable to non-controlling interest.
 
 
F-70

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 10
AVAILABLE FOR SALE INVESTMENTS, continued

Gross profits and losses realized on the sale of available for sale investments as of December 31, 2014, 2013 and 2012, are as follows:
 
   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Sale of available for sale investments generating realized profits
    2,064,836       3,826,358       4,886,706  
Realized profits
    6,079       9,326       2,574  
Sale of available for sale investments generating realized losses
    92,620       388,401       665,779  
Realized losses
    64       1,098       503  
 
The Bank evaluated those instruments with unrealized losses as of December 31, 2014 and 2013 and concluded they were not impaired. This review consisted of evaluating the economic reasons for any declines, the credit ratings of the securities’ issuers, and the Bank’s intention and ability to hold the securities until the unrealized loss is recovered.  Based on this analysis, the Bank believes that there were no significant or prolonged decline in its investment portfolio, since most of the decline in fair value of these instruments was caused by market conditions which the Bank considers to be temporary. All of the instruments that have unrealized losses as of December 31, 2014 and 2013, were not in a continuous unrealized loss position for more than one year.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 10
AVAILABLE FOR SALE INVESTMENTS, continued

The following charts show the available for sale investments unrealized profit and loss:

As of December 31, 2014:
 
   
Less than 12 months
   
More than 12 months
   
Total
 
   
Amortized cost
   
Fair value
   
Unrealized
profit
   
Unrealized loss
   
Amortized cost
   
Fair value
   
Unrealized
profit
   
Unrealized loss
   
Amortized cost
   
Fair value
   
Unrealized
profit
   
Unrealized loss
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Chilean Central Bank and Government securities
                                                                       
Chilean Central Bank Bonds
    370,858       381,117       10,297       (38 )     -       -       -       -       370,858       381,117       10,297       (38 )
Chilean Central Bank Notes
    385       384       -       (1 )     -       -       -       -       385       384       -       (1 )
Other Chilean Central Bank and Government securities
    343,847       353,419       9,572       -       -       -       -       -       343,847       353,419       9,572       -  
Subtotal
    715,090       734,920       19,869       (39 )     -       -       -       -       715,090       734,920       19,869       (39 )
                                                                                                 
Other Chilean securities
                                                                                               
Time deposits in Chilean financial institutions
    592,398       590,382       600       (2,616 )     -       -       -       -       592,398       590,382       600       (2,616 )
Mortgage finance bonds of Chilean financial institutions
    31,693       31,693       218       (218 )     -       -       -       -       31,693       31,693       218       (218 )
Chilean financial institution bonds
    -       -       -       -       -       -       -       -       -       -       -       -  
Chilean corporate bonds
    -       -       -       -       -       -       -       -       -       -       -       -  
Other Chilean securities
    -       -       -       -       -       -       -       -       -       -       -       -  
Subtotal
    624,091       622,075       818       (2,834 )     -       -       -       -       624,091       622,075       818       (2,834 )
                                                                                                 
Foreign financial securities
                                                                                               
Foreign Central Banks and Government securities
    -       -       -       -       -       -       -       -       -       -       -       -  
Other foreign financial securities
    290,733       294,603       3,870       -       -       -       -       -       290,733       294,603       3,870       -  
Subtotal
    290,733       294,603       3,870       -       -       -       -       -       290,733       294,603       3,870       -  
                                                                                                 
Total
    1,629,914       1,651,598       24,557       (2,873 )     -       -       -       -       1,629,914       1,651,598       24,557       (2,873 )

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 10
AVAILABLE FOR SALE INVESTMENTS, continued

As of December 31, 2013:
 
   
Less than 12 months
   
More than 12 months
   
Total
 
   
Amortized cost
   
Fair value
   
Unrealized
profit
   
Unrealized loss
   
Amortized cost
   
Fair value
   
Unrealized
profit
   
Unrealized loss
   
Amortized cost
   
Fair value
   
Unrealized
profit
   
Unrealized loss
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Chilean Central Bank and Government securities
                                                                       
Chilean Central Bank Bonds
    363,708       364,821       1,708       (595 )     -       -       -       -       363,708       364,821       1,708       (595 )
Chilean Central Bank Notes
    1,088       1,078       -       (10 )     -       -       -       -       1,088       1,078       -       (10 )
Other Chilean Central Bank and Government securities
    145,870       146,295       596       (171 )     -       -       -       -       145,870       146,295       596       (171 )
Subtotal
    510,666       512,194       2,304       (776 )                                     510,666       512,194       2,304       (776 )
                                                                                                 
Other Chilean securities
                                    -       -       -       -                                  
Time deposits in Chilean financial institutions
    1,009,661       1,011,354       1,811       (118 )     -       -       -       -       1,009,661       1,011,354       1,811       (118 )
Mortgage finance bonds of Chilean financial institutions
    34,154       33,856       108       (406 )     -       -       -       -       34,154       33,856       108       (406 )
Chilean financial institution bonds
    -       -       -       -       -       -       -       -       -       -       -       -  
Chilean corporate bonds
    -       -       -       -       -       -       -       -       -       -       -       -  
Other Chilean securities
    -       -       -       -       -       -       -       -       -       -       -       -  
Subtotals
    1,043,815       1,045,210       1,919       (524 )                                     1,043,815       1,045,210       1,919       (524 )
                                                                                                 
Foreign financial securities
                                                                                               
Foreign Central Banks and Government securities
    -       -       -       -       -       -       -       -       -       -       -       -  
Other foreign financial securities
    145,672       143,589       -       (2,083 )     -       -       -       -       145,672       143,589       -       (2,083 )
Subtotal
    145,672       143,589       -       (2,083 )                                     145,672       143,589       -       (2,083 )
                                      -       -       -       -                                  
Total
    1,700,153       1,700,993       4,223       (3,383 )     -       -       -       -       1,700,153       1,700,993       4,223       (3,383 )
 
 
F-73

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 11
INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES

a)
The Consolidated Statements of Financial Position reflect investments in associates and other companies amounting to Ch$ 17,914 million as of December 31, 2014, and Ch$ 9,681 million, as of December 31, 2013, as shown in the following table:

   
Investment
 
   
Ownership interest
As of December 31
   
Investment value
As of December 31,
   
Profit and loss
As of December 31,
 
   
2014
   
2013
   
2012
   
2014
   
2013
   
2012
   
2014
   
2013
   
2012
 
   
%
   
%
   
%
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Company
                                                     
Redbanc S.A.
    33.43       33.43       33.43       1,725       1,513       1,374       211       139       (199 )
Transbank S.A. (1)
    25.00       25.00       25.00       8,646       1,309       1,607       1,022       9       306  
Centro de Compensación Automatizado
    33.33       33.33       33.33       894       673       548       220       125       116  
Sociedad Interbancaria de Depósito de Valores S.A.
    29.29       29.28       29.28       745       585       501       170       112       86  
Cámara de Compensación de Alto Valor S.A. (3)
    14.14       14.14       14.14       709       673       678       107       63       114  
Administrador Financiero del Transantiago S.A.
    20.00       20.00       20.00       2,229       1,947       1,215       282       732       (527 )
Sociedad Nexus S.A.
    12.90       12.90       12.90       1,123       972       1,106       195       145       278  
Servicios de Infraestructura de Mercado
OTC S.A. (2)
    11.11       11.11       -       1,258       1,424       -       (172 )     (16 )     -  
Subtotal
                            17,329       9,096       7,029       2,035       1,309       174  
Shares or rights in other companies (*)
                                                                       
Bladex
                            136       136       136       20       16       13  
Stock Exchanges
                            425       417       417       110       97       80  
Others
                            24       32       32       -       -       -  
Total
                            17,914       9,681       7,614       2,165       1,422       267  
(*) Investments in associates and other companies do not have market prices

(1)
In the Transbank’s Shareholders’ Meeting held in June 03, 2014, it was agreed to capitalize retained earnings and increase the capital by approximately Ch$25,200 million. The Bank has participated in proportion to its ownership share (25%), resulting in a contribution of approximately Ch$6,313 million to Transbank.

(2)
In July 2013, Banco Santander acquired 1,111 shares in the company "Servicios de Infraestructura de Mercado OTC S.A." for Ch$1,440 million.
 
(3)
In August 2012, Banco Santander Chile bought 144 shares from Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor S.A through Banco Scotiabank Chile, increasing its ownership from 12.65% to 14.14%.  The purchase of such shares was for Ch$61 million.
 

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 11
INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES, continued

b)
Summary of financial information of associates as of and for the years ended December 31, 2014, 2013 and 2012:

As of December 31,
 
   
2014
   
2013
   
2012
 
                     
Net Income
                     
Net Income
                     
Net Income
 
 
Assets
   
Liabilities
   
Equity
   
Assets
   
Liabilities
   
Equity
   
Assets
   
Liabilities
   
Equity
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Centro de Compensación Automatizado
    3,731       1,117       1,953       661       2,994       1,012       1,606       376       2,014       405       1,263       346  
Redbanc S.A.
    19,215       14,246       4,336       633       18,023       13,622       3,984       417       15,973       11,863       4,706       (596 )
Transbank S.A.
    535,507       501,330       30,088       4,089       483,004       477,772       5,196       36       316,881       310,576       5,076       1,229  
Sociedad Interbancaria de Depósito de Valores S.A.
    2,715       314       1,863       538       2,113       20       1,711       382       1,714       4       1,415       295  
Sociedad Nexus S.A.
    14,438       6,185       6,745       1,508       13,309       6,112       6,075       1,122       14,439       8,027       4,256       2,156  
Servicios de Infraestructura de Mercado OTC S.A.
    12,001       1,094       12,603       (1,696 )     14,608       3,188       11,560       (140 )     -       -       -       -  
Administrador Financiero del Transantiago S.A.
    70,302       59,157       9,737       1,408       63,981       54,244       6,076       3,661       81,017       74,940       8,714       (2,637 )
Cámara de Compensación de Alto Valor S.A.
    5,278       636       3,901       741       5,435       906       4,085       444       5,109       772       3,631       706  
Total
    663,187       584,079       71,226       7,882       603,467       556,876       40,293       6,298       437,147       406,587       29,061       1,499  


c)
Restrictions over the ability of associated companies to transfer funds to investors.

There are no significant restrictions regarding the capacity of associates to transfer funds, whether in cash dividends, refund of loans, or advance payments to the Bank.

d)
Activity with respect to investments in other companies during 2014, 2013 and 2012, is as follows:

   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Opening balance as of January 1,
    9,681       7,614       8,728  
Acquisition of investments (1)
    6,313       1,440       61  
Sale of investments
    -       -       (401 )
Participation in income
    2,165       1,422       267  
Dividends received
    (119 )     (663 )     (690 )
Other equity adjustments
    (126 )     (132 )     (351 )
                         
Total
    17,914       9,681       7,614  

 
(1)
See reference (1) of part a) of this note.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 12
INTANGIBLE ASSETS

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

                     
As of December 31, 2014
 
   
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       2,197       10,441       (8,435 )     2,006  
Software development
    3       2       64,506       232,418       (193,441 )     38,977  
                                                 
Total
                    66,703       242,859       (201,876 )     40,983  


                     
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 changes in the value of intangible assets during the periods ended December 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
    486       26,951       27,437  
Disposals and impairment
    -       (36,556 )     (36,556 )
Other
    -       -          
Balances as of December 31, 2014
    10,441       232,418       242,859  
                         
Balances as of January 1, 2013
    9,329       224,671       234,000  
Acquisitions
    626       17,774       18,400  
Disposals and impairment
    -       -       -  
Other
    -       (422 )     (422 )
Balances as of December 31, 2013
    9,955       242,023       251,978  

 
F-76

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 12
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
    (677 )     (15,924 )     (16,601 )
Other changes
    -       -       -  
Balances as of December 31, 2014
    (8,435 )     (193,441 )     (201,876 )
                         
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 December 31, 2014 and 2013.  Additionally, the intangibles assets have not been pledged as guarantee for fulfillment of financial liabilities. Also, the Bank has no debt related to Intangible Assets  as of those dates.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 13
PROPERTY, PLANT, AND EQUIPMENT

a)
As of December 31, 2014 and 2013, the composition of property, plant, and equipment balances are composed as follows:

         
As of December 31, 2014
 
   
Net opening balance as of
January 1, 2014
   
Gross
balance
   
Accumulated depreciation
   
Net
 balance
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                         
Land and buildings
    128,119       209,668       (67,072 )     142,596  
Equipment
    38,841       108,416       (59,316 )     49,100  
Ceded under operating leases
    4,329       4,888       (638 )     4,250  
Other
    8,926       43,499       (27,884 )     15,615  
Total
    180,215       366,471       (154,910 )     211,561  


         
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 buildings
    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 changes in the value of property, plant, and equipment as of December 31, 2014 and December 31, 2013 is as follows:

b.1)
Gross balance

2014
 
Land and buildings
   
Equipment
   
Ceded under operating leases
   
Other
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                               
Balances as of January 1, 2014
    184,711       85,857       4,888       32,207       307,663  
Additions
    24,957       22,785       -       11,346       59,088  
Disposals
    -       (118 )     -       (54 )     (172 )
Impairment due to damage (*)
    -       (108 )     -       -       (108 )
Other
    -       -       -       -       -  
Balances as of December 31, 2014
    209,668       108,416       4,888       43,499       366,471  

(*) Banco Santander Chile recognized on its financial statements as of December 31, 2014 a Ch$108 million impairment due to damages to ATMs Compensation received from insurance totaled Ch$661 million, which is presented within Other operating income and expenses (see Note 33).

 
F-78

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 13
PROPERTY, PLANT, AND EQUIPMENT, continued
 
2013
 
Land and buildings
   
Equipment
   
Ceded under operating leases
   
Other
   
Total
 
   
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 (*)
    -       (244 )     -       -       (244 )
Other
    -       -       -       102       102  
Balances as of December 31, 2013
    184,711       85,857       4,888       32,207       307,663  
 
 
(*)
Banco Santander Chile recognized on its financial statements as of December 31, 2013 Ch$ 244 million impairment from damages to ATMs.  Compensation received from insurance totaled Ch$ 725 million, which is presented within Other operating income and expenses (see Note 33).

b.2)
Accumulated depreciation

2014
 
Land and buildings
   
Equipment
   
Ceded under operating leases
   
Other
   
Total
 
   
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
    (10,483 )     (12,331 )     (79 )     (4,678 )     (27,571 )
Sales and disposals in the period
    2       31       -       76       109  
Transfers
    -       -       -       -       -  
Other
    -       -       -       -       -  
Balances as of December 31, 2014
    (67,073 )     (59,316 )     (638 )     (27,883 )     (154,910 )


2013
 
Land and buildings
   
Equipment
   
Ceded under operating leases
   
Other
   
Total
 
   
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
    -       -       -       -       -  
Other
    -       -       -       -       -  
Balances as of December 31, 2013
    (56,592 )     (47,016 )     (559 )     (23,281 )     (127,448 )



 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 13
PROPERTY, PLANT, AND EQUIPMENT, continued

c) 
Operational leases – Lessor

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

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    453       637  
Due after 1 year but within 2 years
    1,140       508  
Due after 2 years but within 3 years
    278       300  
Due after 3 years but within 4 years
    278       263  
Due after 4 years but within 5 years
    276       263  
Due after 5 years
    1,755       2,148  
                 
Total
    4,180       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 December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    19,225       18,941  
Due after 1 year but within 2 years
    17,509       16,948  
Due after 2 year but within 3 years
    16,416       15,161  
Due after 3 years but within 4 years
    15,206       14,083  
Due after 4 years but within 5 years
    13,012       12,902  
Due after 5 years
    58,213       61,730  
                 
Total
    139,581       139,765  


e)
As of December 31, 2014 and 2013, the Bank has no financial leases which cannot be unilaterally rescinded.

f)
The Bank has no restriction on property plant and equipment as of December 31, 2014 and 2013. Additionally, the property, plant, and equipment have not been provided as guarantees of financial liabilities. The Bank has no debt in connection with property, plant and equipment.

 
F-80

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 14
CURRENT AND DEFERRED TAXES

a) 
Current taxes

As of December 31, 2014 and 2013, 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 December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Summary of current tax liabilities (assets)
           
Current tax (assets)
    (2,241 )     (1,643 )
Current tax liabilities
    1,077       50,242  
                 
Total tax payable (recoverable)
    (1,164 )     48,599  
                 
(Assets) liabilities current taxes detail (net)
               
Income tax, tax rate 21% (20% as of December 31, 2013)
    122,150       117,095  
Minus:
               
Provisional monthly payments (PPM)
    (115,743 )     (61,730 )
Credit for training expenses
    (1,764 )     (1,656 )
Land taxes leasing
    (3,357 )     (2,987 )
Grant credits
    (1,587 )     (1,892 )
Other
    (863 )     (231 )
                 
Total tax payable (recoverable)
    (1,164 )     48,599  


b) 
Effect on income

The effect of tax expense on income for the years ended December 31, 2014 and 2013 is comprised of the following items:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Income tax expense
           
Current tax
    122,150       117,095  
                 
Credits (debits) for deferred taxes
               
Origination and reversal of temporary differences
    (72,244 )     (27,658 )
Subtotals
    49,906       89,437  
Tax for rejected expenses (Article No.21)
    746       392  
Other
    398       4,701  
Net charges for income tax expense
    51,050       94,530  

 
F-81

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 14
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 December 31, 2014 and 2013, is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
Tax
rate
   
Amount
   
Tax
rate
   
Amount
 
 
   
%
   
MCh$
   
%
   
MCh$
 
                         
Tax calculated over profit before tax
    21.00       131,657       20.00       107,792  
Permanent differences
    (6.18 )     (38,724 )     (2.04 )     (11,012 )
Single penalty tax (rejected expenses)
    0.12       746       0.07       392  
Effect of tax reform changes on deferred tax (*)
    (6.26 )     (39,262 )     -       -  
Real estate taxes
    (0.54 )     (3,357 )     (0.55 )     (2,987 )
Other
    -       (10 )     0.06       345  
Effective rates and expenses for income tax
    8.14       51,050       17.54       94,530  

(*) The effect of the tax reform was Ch$ 35,411 million. In the fourth quarter an additional effect of Ch$ 3,851 million was generated by the fluctuation of deferred taxes (recognized as of December 31, 2014).

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 years ended December 31, 2014 and 2013:


   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Deferred tax assets
           
Available for sale investments
    24       31  
Cash flow hedges
    (2,252 )     1,651  
Total deferred tax assets recognized through other comprehensive income
    (2,228 )     1,682  
                 
Deferred tax liabilities
               
Available for sale investments
    (4,578 )     (199 )
Cash flow hedges
    -       -  
Total deferred tax liabilities recognized through other comprehensive income
    (4,578 )     (199 )
                 
Net deferred tax balances in equity
    (6,806 )     1,483  
                 
Deferred taxes in equity attributable to Equity holders of the Bank
    (6,805 )     1,491  
Deferred tax in equity attributable to non-controlling interests
    (1 )     (8 )

 
F-82

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 14
CURRENT AND DEFERRED TAXES, continued

e) 
Effect of deferred taxes on income

As of December 31, 2014 and 2013, the Bank has recorded effects for deferred taxes in the financial statements.

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

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
 Deferred tax assets
           
 Interests and adjustments
    10,999       7,203  
 Non-recurring charge-offs
    7,988       9,787  
 Assets received in lieu of payment
    981       707  
 Property, plant and equipment
    5,154       3,579  
 Allowance for loan losses
    118,480       89,600  
 Provision for expenses
    25,752       19,130  
 Derivatives
    9,939       19  
 Leased assets
    73,886       52,447  
 Subsidiaries tax losses
    7,887       5,716  
Valuation of investments
    4,895       -  
 Other
    8,385       37,415  
Total deferred tax assets
    274,346       225,603  
                 
 Deferred tax liabilities
               
 Valuation of investments
    -       (13,258 )
 Depreciation
    (395 )     (315 )
 Other
    (2,658 )     (12,981 )
Total deferred tax liabilities
    (3,053 )     (26,554 )

f) 
Summary of deferred tax assets and liabilities

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

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Deferred tax assets
           
Recognized through other comprehensive income
    (2,228 )     1,682  
Recognized through profit or loss
    274,346       225,603  
Total deferred tax assets
    272,118       227,285  
                 
Deferred tax liabilities
               
Recognized through other comprehensive income
    (4,578 )     (199 )
Recognized through profit or loss
    (3,053 )     (26,554 )
Total deferred tax liabilities
    (7,631 )     (26,753 )

 
F-83

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 15
OTHER ASSETS

Other assets item includes the following:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Assets for leasing (*)
    66,656       41,402  
                 
Assets received or awarded in lieu of payment
               
Assets received in lieu of payment
    13,354       16,659  
Assets awarded at judicial sale
    12,055       6,530  
Provision on assets received in lieu of payment or awarded
    (3,561 )     (2,914 )
Subtotal
    21,848       20,275  
                 
Other assets
               
Guarantee deposits (margin accounts)
    436,717       181,032  
Gold investments
    422       373  
VAT credit
    11,579       8,705  
Income tax recoverable
    38,674       42,354  
Prepaid expenses
    204,626       34,970  
Assets recovered from leasing for sale
    1,042       5,747  
Pension plan assets
    1,857       1,822  
Accounts and notes receivable
    47,153       60,256  
Notes receivable through brokerage and
simultaneous transactions
    53,142       75,145  
Other receivable assets
    10,251       9,746  
Other assets
    33,994       33,111  
Subtotal
    839,457       453,261  
                 
Total
    927,961       514,938  

(*) Assets available to be granted under the financial leasing agreements.

 
F-84

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 16
TIME DEPOSITS AND OTHER TIME LIABILITIES

As of December 31, 2014 and 2013, the composition of the line item Time deposits and other liabilities is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Deposits and other demand liabilities
           
Checking accounts
    5,131,130       4,403,526  
Other deposits and demand accounts
    554,785       569,395  
Other demand liabilities
    794,582       647,842  
                 
Total
    6,480,497       5,620,763  
                 
Time deposits and other time liabilities
               
Time deposits
    10,303,167       9,567,855  
Time savings account
    107,599       104,143  
Other time liabilities
    3,174       3,274  
                 
Total
    10,413,940       9,675,272  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 17
INTERBANK BORROWINGS

As of December 31, 2014 and 2013 the line item Interbank borrowings is as follows:
 
   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
Loans from financial institutions and the Central Bank of Chile
           
Other obligations with Central Bank of Chile
    94       220  
Subtotal
    94       220  
Loans from domestic financial institutions
    66,006       500  
Loans from foreign financial institutions
               
Standard Chartered Bank - New York
    206,471       349,433  
Mizuho Corporate Bank
    192,522       131,273  
Citibank N.A. - New York
    177,246       181,107  
Wells Fargo Bank N.A. – New York
    140,060       144,284  
Banco Interamericano del Desarrollo
    121,575       104,929  
Bank of Montreal – Toronto
    103,439       80,820  
The Toronto Dominion Bank – Toronto
    73,110       70,803  
HSBC Bank of New York
    30,430       26,222  
Canadian Imperial Bank of Comm
    24,341       -  
National Bank of Abu Dhabi
    18,235       15,741  
Bank of America
    15,331       94,388  
European Investment Bank
    12,702       -  
The Bank of New York Mellon
    12,184       26,224  
KFW IPEX Bank GMBH
    12,184       -  
Commerzbank N.A. – Miami
    6,097       5,254  
Standard Chartered Bank - Hong Kong
    4,851       1,059  
Banco Santander – Brasil S.A.
    2,459       -  
Banco Santander – Hong Kong
    1,959       5,781  
U.S. Bank
    1,193       174  
Banco Itaú – Paraguay S.A.
    1,156       -  
Bank of China
    737       105  
Commerzbank A.G. - Frankfurt
    425       107,843  
HSBC Bank USA
    391       179  
J.P. Morgan Chase Bank N.A. - New York
    385       164  
Banco Santander – Madrid
    369       500  
YAPI VE KREDI BANKASI A.S.
    363       -  
Banco Sudameris Paraguay s.A.
    308       -  
Wachovia Bank N.A.- Miami
    299       7,394  
First Union National Bank
    276       -  
Deutsche Bank A.G.- New York
    269       13,109  
ING Bank N.V. - Vienna
    267       -  
Banco do Brasil S.A. – London
    249       146  
Banque Generale Du luxembourg
    237       -  
Standard Chartered Bank
    228       -  
Unicrédito Italiano - New York
    225       -  
BBVA Banco Francés S.A.
    210       26  
Banca Popolare di Vicenza SCPA
    174       76  
National Westminster Bank PLC
    145       136  
Banco de Occidente
    123       248  
Banco Bradesco S.A.
    93       60  
Banca Commerciale Italiana S. P.
    47       23  
Banca Nazionale  del Lavoro S. P.
    26       38  
Turkiye Halk Bankasi
    22       23  
Banco de Sabadell S.A.
    17       250  
Landesbank Baden Wuerttemberg
    -       108,566  
Sumitomo Mitsui Banking Corporation
    -       102,379  
Banco Santander – Montevideo
    -       52,442  
Royal Bank of Scotland – London
    -       44,608  
Unicrédito Italiana SPA
    -       993  
Woori Bank
    -       627  
Lanschot Bankiers N.V.
    -       446  
Banco Popolare di Novara
    -       351  
National Agricultural Cooperative
    -       259  
Banco Popular Español S.A.
    -       224  
Banco Bilbao Vizcaya Argentaria
    -       221  
Bank of Tokio Mitsubishi
    -       174  
Intesa Sanpaolo SPA - USA
    -       173  
United Bank of India
    -       160  
State Bank of India
    -       89  
Discount Bank – Montevideo
    -       73  
Unicredit Banca d Impresa
    -       47  
Bancolombia S.A. - Panamá
    -       9  
Other
    2,071       2,004  
Subtotal
    1,165,501       1,681,657  
Total
    1,231,601       1,682,377  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 17
INTERBANK BORROWINGS, continued

a) 
Obligations with Central Bank of Chile

Debts to the Central Bank of Chile include credit lines for renegotiation of loans and other borrowings. These credit lines were provided by the Central Bank of Chile for renegotiation of loans due to the need to refinance debt as a result of the economic recession and crisis of the banking system in the early 1980s.

The outstanding amounts owed to the Central Bank of Chile under these credit lines are as follows:
 
   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Totals Line of credit for renegotiation with Central Bank of Chile
    94       220  
                 

b) 
Loans from domestic financial institutions

These obligations’ maturities are as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    66,006       500  
Due within 1 and 2 year
    -       -  
Due within 2 and 3 year
    -       -  
Due within 3 and 4 year
    -       -  
Due after 5 years
    -       -  
                 
Total loans from domestic financial institutions
    66,006       500  

c) 
Foreign obligations

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    717,416       1,529,511  
Due within 1 and 2 year
    242,863       152,146  
Due within 2 and 3 year
    192,522       -  
Due within 3 and 4 year
    -       -  
Due after 5 years
    12,700       -  
                 
Total loans from foreign financial institutions
    1,165,501       1,681,657  
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 18
ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES

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

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Other financial liabilities
           
Obligations to public sector
    65,843       68,075  
Other domestic obligations
    136,021       118,683  
Foreign obligations
    3,261       3,023  
Subtotals
    205,125       189,781  
Issued debt instruments
               
Mortgage finance bonds
    81,509       101,667  
Senior bonds
    4,868,487       4,190,918  
Mortgage bond
    109,200       70,339  
Subordinated bonds
    725,916       835,734  
Subtotals
    5,785,112       5,198,658  
                 
Total
    5,990,237       5,388,439  


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

   
As of December 31, 2014
 
   
Current
   
Non-current
   
Total
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Mortgage finance bonds
    6,561       74,948       81,509  
Senior bonds
    1,166,602       3,701,885       4,868,487  
Mortgage bond
    3,778       105,422       109,200  
Subordinated bonds
    10,451       715,465       725,916  
Issued debt instruments
    1,187,392       4,597,720       5,785,112  
                         
Other financial liabilities
    120,549       84,576       205,125  
                         
Total
    1,307,941       4,682,296       5,990,237  

   
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 bond
    -       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  
 
 
F-88

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 
NOTE 18
ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

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 December 31, 2014 (5.21% as of December 31, 2013).

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    6,561       6,493  
Due after 1 year but within 2 years
    6,971       9,760  
Due after 2 year but within 3 years
    8,282       8,768  
Due after 3 year but within 4 years
    10,366       9,921  
Due after 4 year but within 5 years
    6,198       12,511  
Due after 5 years
    43,131       54,214  
Total mortgage bonds
    81,509       101,667  

b) 
Senior bonds

The following table shows senior bonds by currency:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Santander bonds in UF
    1,797,438       1,964,905  
Santander bonds in USD
    2,191,347       1,658,789  
Santander bonds in CHF
    443,186       246,284  
Santander bonds in Ch$
    236,025       277,530  
Santander bonds in CNY
    -       43,410  
Current bonds in  AUD
    62,472       -  
Santander bonds in JPY
    138,019       -  
Total senior bonds
    4,868,487       4,190,918  

 
F-89

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 18
ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

i. 
Placement of senior bonds:

In 2014, the Bank issued bonds for UF11,400,000; CLP 75,000,000,000; CHF 300,000,000; USD 750,000,000, AUD 125,000,000, and JPY 27,300,000,000 detailed as follows:

Series
Amount
Term
Issuance rate
Issuance date
Series issued amount
Maturity date
EB Series
UF2,000,000
5 years
3.5% per annum simple
02-21-2014
UF 2,000,000
10-01-2018
ED Series
UF2,000,000
7 years
3.5% per annum simple
08-28-2014
UF 2,000,000
01-01-2021
EF Series
UF2,400,000
10 years
3.40% biannually
10-29-2014
UF 2,400,000
01-01-2024
SB Series
UF3,000,000
5 years
2.65% biannually
12-11-2014
UF 3,000,000
07-01-2019
SA Series
UF2,000,000
10 years
3.00% biannually
12-16-2014
UF 2,000,000
01-01-2024
UF Total
UF11,400,000
         
EA Series
CLP25,000,000,000
5 years
6.2% per annum simple
02-22-2014
CLP 25,000,000,000
09-01-2018
SE Series
CLP50,000,000,000
5 years
5.50% per annum simple
11-21-2014
CLP 50,000,000,000
07-01-2019
CLP Total
CLP75,000,000,000
         
CHF Bond
CHF300,000,000
3 years
1% per annum simple
01-31-2014
CHF 300,000,000
07-31-2017
CHF Total
CHF300,000,000
         
DN Current Bond
USD250,000,000
5 years
Libor (3 months) + 75 bp
02-19-2014
USD 250,000,000
02-19-2019
Floating Bond
USD500,000,000
5 years
Libor (3 months) + 90 bp
04-15-2014
USD 500,000,000
04-11-2017
USD Total
USD750,000,000
         
AUD Bond
AUD125,000,000
3 years
4.5% per annum simple
03-13-2014
AUD 125,000,000
03-13-2017
AUD Total
AUD125,000,000
         
JPY Floating Bond
JPY6,600,000,000
3 years
Libor (3 months) + 65 bp
04-24-2014
JPY 6,600,000,000
04-24-2017
JPY Current Bond
JPY2,000,000,000
3 years
0.72% per annum simple
04-24-2014
JPY 2,000,000,000
04-24-2017
JPY Current Bond
JPY18,700,000,000
5 years
0.97% per annum simple
04-24-2014
JPY 18,700,000,000
04-24-2019
JPY Total
JPY27,300,000,000
         

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


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 18
ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

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

Series
Amount
Term
Issuance rate
Issuance date
Series issued amount
Maturity
date
E1 Series
UF2,742,000
5 years
3.5% per annum simple
02-01-2011
UF 4,000,000
02-01-2016
E2 Series
UF952,000
7 years
3.0% per annum simple
01-01-2012
UF 4,000,000
07-01-2018
E3 Series
UF2,244,000
8.5 years
3.5% per annum simple
01-01-2011
UF 4,000,000
07-01-2019
E6 Series
UF3,720,000
10 years
3.5% per annum simple
04-01-2012
UF 4,000,000
04-01-2022
E9 Series
UF2,000,000
10 years
3.5% per annum simple
01-01-2013
UF2,000,000
01-01-2023
FD Series
UF110,000
5 years
3.0% per annum simple
08-01-2010
UF 110,000
08-01-2015
EC Series
UF2,000,000
10 years
3.5 % per annum simple
11-28-2013
UF2,000,000
09-01-2023
Total UF
UF13,768,000
         
E4 Series
CLP7,500,000,000
5 years
6.75 % per annum simple
06-01-2011
CLP 50,000,000,000
06-01-2016
E8 Series
CLP25,000,000,000
10 years
6.6% per annum simple
11-01-2012
CLP 25,000,000,000
11-01-2022
CLP Total
CLP32,500,000,000
         
CHF floating bond
CHF150,000,000
4 years
Libor (3 months) + 100 bp
03-28-2013
CHF 150,000,000
03-28-2017
CHF Bond
CHF150,000,000
6 years
1.75% per annum simple
09-26-2013
CHF 150,000,000
09-26-2019
CHF Total
CHF300,000,000
         
USD floating bond
USD250,000,000
5 years
Libor (3 months) + 100 bp
06-07-2013
USD 250,000,000
06-07-2018
USD Total
USD250,000,000
         

During 2013, the Bank performed a partial repurchase of bonds for Ch$ 46,245,000,000


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 18
ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued
 
ii. 
Nominal bonds to be placed:

As of December 31, 2014, there are no outstanding amounts of bonds, not previously authorized, to be placed.
 
iii.
The maturities of senior bonds are as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    1,166,602       1,603,929  
Due after 1 year but within 2 years
    646,380       674,784  
Due after 2 year but within 3 years
    1,037,521       338,853  
Due after 3 year but within 4 years
    381,263       321,589  
Due after 4 year but within 5 years
    566,430       154,368  
Due after 5 years
    1,070,291       1,097,395  
Total senior bonds
    4,868,487       4,190,918  


c)
Mortgage bonds

Detail of mortgage bonds per currency is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Mortgage bonds in UF
    109,200       70,339  
Total mortgage bonds
    109,200       70,339  


i. 
Allocation of mortgage bonds

In 2014, the Bank issued bonds for UF 1,500,000, detailed as follows:
 
Series
Amount
Term
Issuance rate
Issuance date
Series issued amount
Maturity
date
AB Series
UF  1,500,000
18 years
3.2% biannually
09-01-2014
UF  1,500,000
04-01-2032
Total UF
UF   1,500,000
         

In 2013, the Bank issued bonds for UF 3,000,000, detailed as follows:
 
Series
Amount
Term
Issuance rate
Issuance date
Series issued amount
Maturity
date
BH Series
UF  3,000,000
15 years
3.2% per annum simple
07-31-2013
UF  3,000,000
07-31-2028
Total UF
UF  3,000,000
         


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 18
ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

The maturities of Mortgage bond are as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    3,778       -  
Due after 1 year but within 2 years
    6,065       -  
Due after 2 year but within 3 years
    6,261       -  
Due after 3 year but within 4 years
    6,463       -  
Due after 4 year but within 5 years
    6,671       -  
Due after 5 years
    79,962       70,339  
Total Mortgage bonds
    109,200       70,339  


d) 
Subordinated bonds

Detail of the subordinated bonds per currency is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Subordinated bonds denominated in USD
    3       139,802  
Subordinated bonds denominated in UF
    725,913       695,932  
Total subordinated bonds
    725,916       835,734  

i.
Allocation of subordinated bonds

During 2014, the Bank has not placed any subordinated bonds.

During 2013, the Bank placed subordinated bonds for UF 5,900,000. The following chart shows details related to subordinated bonds allocations:

Series
Amount
Term
Issuance rate
Issuance date
Series issued amount
Maturity
date
G5
UF  1,900,000
20 years
3.9 % per annum simple
04-05-2011
UF  4,000,000
04-01-2031
H1
UF  4,000,000
30 years
3.9 % per 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.

 
F-93

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 18
ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

The maturities of subordinated bonds, are as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Due within 1 year
    10,451       138,466  
Due after 1 year but within 2 years
    6,311       14,039  
Due after 2 year but within 3 years
    -       4,140  
Due after 3 year but within 4 years
    -       -  
Due after 4 year but within 5 years
    -       -  
Due after 5 years
    709,154       679,089  
Total subordinated bonds
    725,916       835,734  

e) 
Other financial liabilities

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

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Non-current portion:
           
Due after 1 year but within 2 years
    3,380       3,389  
Due after 2 year but within 3 years
    2,248       2,389  
Due after 3 year but within 4 years
    20,988       3,045  
Due after 4 year but within 5 years
    15,116       20,862  
Due after 5 years
    42,844       58,398  
Non-current portion subtotals
    84,576       88,083  
                 
Current portion:
               
Amounts due to credit card operators
    112,530       97,027  
Acceptance of letters of credit
    2,496       741  
Other long-term financial obligations, short-term portion
    5,523       3,930  
Current portion subtotals
    120,549       101,698  
                 
Total other financial liabilities
    205,125       189,781  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 19
MATURITY OF FINANCIAL ASSETS AND LIABILITIES

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

As of December 31, 2014
 
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
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Financial assets
                                                     
Cash and deposits in banks
    1,538,888       70,000       -       -       1,608,888       -       -       -       1,608,888  
Cash items in process of collection
    531,373       -       -       -       531,373       -       -       -       531,373  
Trading investments
    -       263,034       -       164,823       427,857       171,620       175,338       346,958       774,815  
Investments under resale agreements
    -       -       -       -       -       -       -       -       -  
Financial derivative contracts
    -       131,675       152,441       350,432       634,548       1,078,925       1,014,090       2,093,015       2,727,563  
Interbank loans (*)
    2,872       -       9,071       -       11,943       -       -       -       11,943  
Loans and accounts receivables from customers (**)
    814,557       2,168,019       1,774,873       3,773,848       8,531,297       7,084,202       7,265,207       14,349,409       22,880,706  
Available for sale investments
    -       22,652       158,014       526,410       707,076       184,376       760,146       944,522       1,651,598  
Guarantee deposits (margin accounts)
    436,717       -       -       -       436,717       -       -       -       436,717  
                                                                         
Total financial assets
    3,324,407       2,655,380       2,094,399       4,815,513       12,889,699       8,519,123       9,214,781       17,733,904       30,623,603  
Financial liabilities
                                                                       
Deposits and other demand liabilities
    6,480,497       -       -       -       6,480,497       -       -       -       6,480,497  
Cash items in process of being cleared
    281,259       -       -       -       281,259       -       -       -       281,259  
Obligations under repurchase agreements
    -       390,331       1,453       342       392,126       -       -       -       392,126  
Time deposits and other time liabilities
    112,025       5,343,226       2,480,158       2,289,405       10,224,814       130,427       58,699       189,126       10,413,940  
Financial derivative contracts
    -       125,884       176,048       319,488       621,420       1,028,017       911,947       1,939,964       2,561,384  
Interbank borrowings
    4,133       137,921       227,898       413,564       783,516       435,309       12,776       448,085       1,231,601  
Issued debt instruments
    -       176,649       319,516       691,227       1,187,392       2,693,946       1,903,774       4,597,720       5,785,112  
Other financial liabilities
    114,564       1,934       746       3,305       120,549       41,733       42,843       84,576       205,125  
Guarantees received (margin accounts)
    473,343       -       -       -       473,343       -       -       -       473,343  
                                                                         
Total financial liabilities
    7,465,821       6,175,945       3,205,819       3,717,331       20,564,916       4,329,432       2,930,039       7,259,471       27,824,387  

(*) 
Interbank loans are presented on a gross basis. The amount of allowance is Ch$ 1 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$ 381,549 million, Mortgage loans Ch$ 48,744 million, and Consumer loans Ch$ 254,023 million.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 19
MATURITY OF FINANCIAL ASSETS AND LIABILITIES, continued:
 
As of December 31, 2013
 
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
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                       
Financial 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 derivative 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  
Guarantee deposits (margin accounts)
    181,032       -       -       -       181,032       -       -       -       181,032  
                                                                         
Total financial assets
    3,131,530       2,647,295       2,190,406       4,387,042       12,356,273       7,412,088       7,149,366       14,561,454       26,917,727  
                                                                         
Financial liabilities
                                                                       
Deposits and other demand liabilities
    5,620,763       -       -       -       5,620,763       -       -       -       5,620,763  
Cash items in process of being cleared
    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 derivative contracts
    -       126,238       89,018       223,031       438,287       508,206       345,292       853,498       1,291,785  
Interbank borrowings
    8,199       104,490       216,472       1,201,070       1,530,231       152,146       -       152,146       1,682,377  
Issued debt 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  
Guarantees received (margin accounts)
    115,333       -       -       -       115,333       -       -       -       115,333  
                                                                         
Total financial liabilities
    6,221,934       6,238,525       3,346,329       3,766,011       19,572,799       2,326,150       2,360,371       4,686,521       24,259,320  

(*)
Interbank loans are presented on a gross basis. The amount of allowance is Ch$ 495 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$306,547 million, Mortgage loans Ch$ 43,306 million, and Consumer loans Ch$ 264,585 million.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 20
PROVISIONS

a)
As of December 31, 2014 and 2013, the composition is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Provisions for personnel salaries and expenses
    46,759       39,501  
Provisions for mandatory dividends
    170,973       132,688  
Provisions for contingent loan risk
    12,679       11,582  
Provisions for contingencies
    55,559       33,539  
Total
    285,970       217,310  


b)
Below is the activity regarding provisions during the years ended December 31, 2014 and 2013:

   
Provisions for
 
   
Personnel salaries and expenses
   
Mandatory dividends
   
Contingent loans
   
Contingencies
   
Total
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                               
Balances as of January 1, 2014
    39,501       132,688       11,582       33,539       217,310  
Provisions established
    57,071       170,973       11,946       42,470       282,460  
Application of provisions
    (46,777 )     (132,688 )     -       (9,664 )     (189,129 )
Provisions released
    -       -       (10,849 )     (10,786 )     (21,635 )
Reclassifications
    (3,036 )     -       -       -       (3,036 )
Other
    -       -       -       -       -  
                                         
Balances as of December 31, 2014
    46,759       170,973       12,679       55,559       285,970  
                                         
Balances as of January 1, 2013
    47,574       107,044       7,036       30,238       191,892  
Provisions established
    35,515       132,688       10,511       99,599       278,313  
Application of provisions
    (43,588 )     (107,044 )     -       (3,675 )     (154,307 )
Provisions released
    -       -       (5,965 )     (89,185 )     (95,150 )
Reclassifications
    -       -       -       (3,438 )     (3,438 )
Other
    -       -       -       -       -  
                                         
Balances as of December 31, 2013
    39,501       132,688       11,582       33,539       217,310  


c)
Provisions for personnel salaries and expenses.

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Provision for seniority compensation
    1,917       691  
Provision for stock-based personnel benefits
    -       809  
Provision for performance bonds
    24,540       18,218  
Provision for vacations
    19,746       18,741  
Provision for other personnel benefits
    556       1,042  
Total
    46,759       39,501  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 21
OTHER LIABILITIES

The other liabilities line item is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Accounts and notes payable
    90,261       84,729  
Unearned income
    478       384  
Guarantees received (margin accounts)
    473,343       115,333  
Notes payable through brokerage and simultaneous transactions
    27,751       -  
Other payable obligations
    43,550       95,266  
Withheld VAT
    1,698       1,165  
Other liabilities
    17,476       14,602  
                 
Total
    654,557       311,479  

 
F-98

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 22
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 December 31, 2014, the Banks and its subsidiaries have provisions for this item of Ch$1,437 million and Ch$738 million, respectively (Ch$1,004 million and Ch$ 220 million as of December 31, 2013) which is included in “Provisions” in the Consolidated Statements of Financial Position as provisions for contingencies.
 
b) 
Contingent loans

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

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Letters of credit issued
    205,920       218,032  
Foreign letters of credit confirmed
    75,813       127,600  
Guarantees
    1,481,154       1,212,799  
Personal guarantees
    262,169       181,416  
Subtotals
    2,025,056       1,739,847  
Available on demand credit lines
    5,699,573       5,141,831  
Other irrevocable credit commitments
    109,520       47,376  
Total
    7,834,149       6,929,054  
 
c) 
Held securities

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

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
             
Third party operations
           
Collections
    172,070       217,948  
Assets from third parties managed by the Bank and its affiliates  (*)
    1,247,923       1,015,817  
Subtotals
    1,419,993       1,233,765  
Custody of securities
               
Securities held in custody
    238,264       304,535  
Securities held in custody deposited in other entity
    552,741       532,072  
Issued securities held in custody
    16,383,501       15,351,545  
Subtotals
    17,174,506       16,188,152  
Total
    18,594,499       17,421,917  

(*) During 2014, the Bank classified the portfolios managed by private banking in “Assets from third parties managed by the Bank and its affiliates”.  At the end of December 2014, the balance for this was Ch$1,247,923 million (Ch$1,015,817 million at December 31, 2013).
 
d)
Guarantees

Banco Santander Chile has a comprehensive officer fidelity insurance policy, No. 2951729, 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, 2014 to June 30, 2015.
 
e)
Contingent loans and liabilities
 
To satisfy its clients’ needs, the Bank took on several contingent loans and liabilities that cannot be recognized in the Consolidated Financial Statement of Financial Position; these contain loan risks and they are, therefore, part of the Bank`s global risk.
 
 
F-99

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 23
EQUITY

a)
Capital

As of December 31, 2014 and 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, 2013 and 2012 was as follows:

   
SHARES
As of December 31,
 
   
2014
   
2013
   
2012
 
                   
Issued as of January 1
    188,446,126,794       188,446,126,794       188,446,126,794  
Issuance of paid shares
    -       -       -  
Issuance of outstanding shares
    -       -       -  
Stock options exercised
    -       -       -  
Issued as of December 31,
    188,446,126,794       188,446,126,794       188,446,126,794  

As of December 31, 2014 and 2013 the Bank does not have any of its own shares in treasury, nor do any of the consolidated companies.
 
In December 2013, the Bank received 26,241,318 of its own shares in lieu of payment. The value of the shares was 757,586,851 pesos (28.87 pesos per share). Those shares were sold in the stock market during the same month, generating a price difference of Ch$29 million, which was recorded within Equity, as a reserve increase.
 
As of December 31, 2014 the shareholder composition was as follows:

Corporate Name or Shareholder's Name
 
Shares
   
ADRs (*)
   
Total
   
% of
equity holding
 
                         
Santander Chile Holding S.A.
    66,822,519,695       -       66,822,519,695       35.46  
Teatinos Siglo XXI Inversiones Limitada
    59,770,481,573       -       59,770,481,573       31.72  
J.P. Morgan Chase Bank
    -       31,370,004,471       31,370,004,471       16.65  
Banks  on behalf of third parties
    10,949,884,423       -       10,949,884,423       5.81  
Pension funds (AFP) on behalf of third parties
    10,082,508,540       -       10,082,508,540       5.35  
Other minority holders
    9,450,728,092       -       9,450,728,092       5.01  
Total
    157,076,122,323       31,370,004,471       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.

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

Corporate Name or Shareholder's Name
 
Shares
   
ADRs (*)
   
Total
   
% of
equity holding
 
                         
Santander Chile Holding S.A.
    66,822,519,695       -       66,822,519,695       35.46  
Teatinos Siglo XXI Inversiones Limitada
    59,770,481,573       -       59,770,481,573       31.72  
J.P. Morgan Chase Bank
    -       30,087,328,471       30,087,328,471       15.97  
Banks  on behalf of third parties
    11,590,917,506       -       11,590,917,506       6.15  
Pension funds (AFP) on behalf of third parties
    10,533,224,876       -       10,533,224,876       5.58  
Other minority holders
    9,641,654,673       -       9,641,654,673       5.12  
Total
    158,358,798,323       30,087,328,471       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.

 
F-100

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 23
EQUITY, continued

As of December 31, 2012 the shareholder composition was 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
    -       35,111,060,871       35,111,060,871       18.63  
BNP Paribas Arbitrage
    173,328,889       -       173,328,889       0.09  
MBI Arbitrage Fondo de Inversion
    495,766,248       -       495,766,248       0.26  
Banks and stock brokers on behalf of third parties
    12,473,837,817       -       12,473,837,817       6.62  
Pension funds (AFP) on behalf of third parties
    6,346,809,483       -       6,346,809,483       3.37  
Other minority holders
    3,839,358,209       3,412,964,009       7,252,322,218       3.85  
Total
    149,922,101,914       38,524,024,880       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)
Reserves

In April 2014, due to the Shareholders’ Meeting, the Bank agreed to capitalized 40% of retained earnings from 2013 as reserves; which equals Ch$ 176,770 million (Ch$ 155,502 million in 2013).
 
c)
Dividends

The distribution of dividends is detailed in the chart of the Consolidated Statements of Changes in Equity.
 
d)
As of December 31, diluted earnings and basic earnings were as follows:

   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
a) Basic earnings per share
                 
Total attributable to Equity holders of the Bank
    569,910       442,294       356,808  
Weighted average number of outstanding shares
    188,446,126,794       188,446,126,794       188,446,126,794  
Basic earnings per share (in Ch$)
    3.024       2.347       1.893  
                         
b) Diluted earnings per share
    569,910       442,294       356,808  
Total attributable to Equity holders of the Bank
    188,446,126,794       188,446,126,794       188,446,126,794  
Weighted average number of outstanding shares
    -       -       -  
Adjusted number of shares
    188,446,126,794       188,446,126,794       188,446,126,794  
Diluted earnings per share (in Ch$)
    3.024       2.347       1.893  

As of December 31, 2014 and 2013 the Bank does not own instruments with dilutive effects.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 23
EQUITY, continued

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

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Available for sale investments
                 
As of January 1,
    840       (10,017 )     3,043  
Gain (losses) on the re-measurement of available for sale investments, before tax
    14,829       2,629       (15,131 )
Reclassification from other comprehensive income to income for the year
    6,015       8,228       2,071  
Subtotals
    20,844       10,857       (13,060 )
Total
    21,684       840       (10,017 )
                         
Cash flow hedges
                       
As of January 1,
    (8,257 )     5,315       394  
Gains (losses) on the re-measurement of cash flow hedges, before tax
    18,552       (15,089 )     4,326  
Reclassification adjustments on cash flow hedges, before tax
    430       1,517       595  
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
    18,982       (13,572 )     4,921  
Total
    10,725       (8,257 )     5,315  
                         
Other comprehensive income, before taxes
    32,409       (7,417 )     (4,702 )
                         
Income tax related to other comprehensive income components
                       
Income tax relating to available for sale investments
    (4,554 )     (168 )     2,003  
Income tax relating to cash flow hedges
    (2,252 )     1,651       (1,063 )
Total
    (6,806 )     1,483       940  
                         
Other comprehensive income, net of tax
    25,603       (5,934 )     (3,762 )
Attributable to:
                       
Equity holders of the Bank
    25,600       (5,964 )     (3,781 )
Non-controlling interest
    3       30       19  

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.

 
F-102

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 24
NON-CONTROLLING INTEREST

a)
The non-controlling interest included in the equity and the income from the subsidiaries is summarized as follows:

                     
Other comprehensive income
 
As of December 31, 2014
 
Non-controlling
   
Equity
   
Income
   
Available for sale investments
   
Deferred tax
   
Total other comprehensive income
   
Comprehensive income
 
   
%
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                           
Subsidiaries:
                                         
Santander Agente de Valores Limitada
    0.97       558       87       -       -       -       87  
Santander S.A. Sociedad Securitizadora
    0.36       2       -       -       -       -       -  
Santander S.A. Corredores de Bolsa
    49.00       20,928       1,239       (34 )     7       (27 )     1,212  
Santander Corredora de Seguros Limitada
    0.25       154       (4 )     -       -       -       (4 )
Subtotal
            21,642       1,322       (34 )     7       (27 )     1,295  
                                                         
Entities controlled through other considerations:
                                                       
Bansa Santander S.A.
    100.00       5,671       2,236       -       -       -       2,236  
Santander Gestión de Recaudación y
Cobranzas Limitada (1)
    100.00       1,037       1,531       -       -       -       1,531  
Multinegocios S.A.
    100.00       730       253       -       -       -       253  
Servicios Administrativos y Financieros Limitada.
    100.00       2,001       315       -       -       -       315  
Servicios de Cobranzas Fiscalex Limitada (1)
    -       -       -       -       -       -       -  
Multiservicios de Negocios Limitada.
    100.00       2,002       323       -       -       -       323  
Subtotal
            11,441       4,658       -       -       -       4,658  
                                                         
Total
            33,083       5,980       (34 )     7       (27 )     5,953  

(1)
On August 01, 2014 the company Servicios de Cobranza Fiscalex Limitada was acquired by Santander Gestión de Recaudación y Cobranza Limitada.

 
F-103

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 24
NON-CONTROLLING INTEREST, continued

                     
Other comprehensive income
 
As of December 31, 2013
 
Non-controlling
   
Equity
   
Income
   
Available for sale investments
   
Deferred tax
   
Total other comprehensive income
   
Comprehensive income
 
   
%
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                           
Subsidiaries:
                                         
Santander Agente de Valores Limitada
    0.97       471       87       3       (1 )     2       89  
Santander S.A. Sociedad Securitizadora
    0.36       2       -       -       -       -       -  
Santander S.A. Corredores de Bolsa (1)
    49.00       19,698       1,656       11       (2 )     9       1,665  
Santander Asset Management S.A. Administradora General de Fondos (2)
    0.02       -       9       -       -       -       9  
Santander Corredora de Seguros Limitada
    0.25       149       1       -       -       -       1  
Subtotals
            20,320       1,753       14       (3 )     11       1,764  
                                                         
Entities controlled through other considerations:
                                                       
Bansa Santander S.A.
    100.00       3,435       1,307       -       -       -       1,307  
Santander Gestión de Recaudación y
Cobranzas Limitada
    100.00       275       (2,230 )     -       -       -       (2,230 )
Multinegocios S.A.
    100.00       477       234       -       -       -       234  
Servicios Administrativos y Financieros Limitada.
    100.00       1,686       276       -       -       -       276  
Servicios de Cobranzas Fiscalex Limitada
    100.00       632       416       -       -       -       416  
Multiservicios de Negocios Limitada.
    100.00       1,679       379       -       -       -       379  
Subtotals
            8,184       382       -       -       -       382  
                                                         
Total
            28,504       2,135       14       (3 )     11       2,146  
 
(1)
In June 2013, Santander S.A. Corredores de Bolsa, distributed total accumulated income from previous years, decreasing equity. The amount of dividends distributed to non-controlling interest was Ch$7,590 million.

(2)
This subsidiary was sold in December 2013. This note presents the effect of the consolidation of the subsidiary until November 2013.

 
F-104

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 24
NON-CONTROLLING INTEREST, continued

                     
Other comprehensive income
 
As of December 31, 2012
 
Non-controlling
   
Equity
   
Income
   
Available for sale investments
   
Deferred tax
   
Total other comprehensive income
   
Comprehensive income
 
   
%
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                           
Subsidiaries:
                                         
Santander Agente de Valores Limitada
    0.97       656       84       1       -       1       85  
Santander S.A. Sociedad Securitizadora
    0.36       3       -       -       -       -       -  
Santander S.A. Corredores de Bolsa
    49.00       25,646       2,423       57       (12 )     45       2,468  
Santander Asset Management S.A. Administradora General de Fondos
    0.02       10       4       -       -       -       4  
Santander Corredora de Seguros Limitada
    0.25       148       4       -       -       -       4  
Subtotals
            26,463       2,515       58       (12 )     46       2,561  
                                                         
Entities controlled through other considerations:
                                                       
Bansa Santander S.A.
    100.00       2,127       1,098       -       -       -       1,098  
Santander Gestión de Recaudación y
Cobranzas Limitada
    100.00       2,505       171       -       -       -       171  
Multinegocios S.A.
    100.00       244       93       -       -       -       93  
Servicios Administrativos y Financieros Limitada.
    100.00       1,411       328       -       -       -       328  
Servicios de Cobranzas Fiscalex Limitada
    100.00       216       64       -       -       -       64  
Multiservicios de Negocios Limitada.
    100.00       1,299       356       -       -       -       356  
Subtotals
            7,802       2,110       -       -       -       2,110  
                                                         
Total
            34,265       4,625       58       (12 )     46       4,671  

 
F-105

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 24
NON-CONTROLLING INTERESTS, 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 conforming accounting policy  adjustments:

   
As of December 31,
 
   
2014
   
2013
   
2012
 
                     
Net
income
                     
Net income
                     
Net
 
 
Assets
   
Liabilities
   
Capital
   
Assets
   
Liabilities
   
Capital
   
Assets
   
Liabilities
   
Capital
   
income
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Santander Corredora de Seguros Limitada
    70,602       9,068       63,078       (1,544 )     67,956       8,484       59,012       460       69,863       10,520       57,795       1,548  
Santander S.A. Corredores de Bolsa
    74,408       31,790       40,171       2,447       110,917       70,799       36,735       3,383       138,147       85,921       47,193       5,033  
Santander Asset Management S.A.
Administradora General de Fondos (1)
    -       -       -       -       -       -       -       -       58,186       8,981       27,262       21,943  
Santander Agente de Valores Limitada
    339,787       282,233       48,556       8,998       194,812       146,255       39,581       8,976       215,126       147,545       58,900       8,681  
Santander S.A. Sociedad Securitizadora
    622       61       640       (79 )     725       74       764       (113 )     849       87       836       (74 )
Santander Gestión de Recaudación y
Cobranzas Ltda. (2)
    4,917       3,880       458       579       4,978       4,703       2,505       (2,230 )     6,313       3,808       2,334       171  
Multinegocios S.A. (management of sales force)
    1,959       1,229       477       253       1,441       963       244       234       2,020       1,777       150       93  
Servicios Administrativos y Financieros Limitada (management of sales force).
    2,956       955       1,686       315       2,412       725       1,411       276       2,748       1,337       1,083       328  
Servicio de Cobranza Fixcalex Ltda. (2)
    -       -       -       -       4,008       3,376       216       416       3,500       3,284       152       64  
Multiservicios de Negocios Limitada (call center).
    3,401       1,399       1,679       323       3,049       1,371       1,299       379       3,483       2,183       944       356  
Bansa Santander S.A.
    31,062       25,391       3,435       2,236       28,490       25,055       2,128       1,307       28,938       26,810       1,029       1,099  
Total
    529,714       356,006       160,180       13,528       418,788       261,805       143,895       13,088       529,173       292,253       197,678       39,242  

(1)
Santander Assets Management S.A. Administradora General de Fondos was sold in December 2013.

(2)
On August 01, 2014 the company Servicios de Cobranza Fiscalex Limitada was acquired by Santander Gestión de Recaudación y Cobranza Limitada.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 25
INTEREST INCOME AND INFLATION- INDEXATION 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 years ended December 31, 2014, 2013 and 2012 the composition of income from interest and inflation-indexing adjustments, not including income from hedge accounting, is as follows:

   
For the years ended December 31,
 
   
2014
         
2013
   
2012
 
   
Interest
   
Inflation adjustments
   
Prepaid fees
   
Total
   
Interest
   
Inflation adjustments
   
Prepaid fees
   
Total
   
Interest
   
Inflation adjustments
   
Prepaid fees
   
Total
 
Items
 
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Resale agreements
    1,223       -       -       1,223       2,254       -       -       2,254       4,796       (10 )     -       4,786  
Interbank loans
    139       -       -       139       195       -       -       195       790       -       -       790  
Commercial loans
    706,190       208,427       7,883       922,500       728,597       72,570       4,980       806,147       698,925       78,762       4,924       782,611  
Mortgage loans
    245,980       328,212       18,230       592,422       232,860       108,702       13,234       354,796       227,994       123,297       11,401       362,692  
Consumer loans
    603,804       5,108       3,205       612,117       611,936       2,184       3,030       617,150       613,543       2,804       2,797       619,144  
Investment instruments
    61,774       25,461       -       87,235       77,240       7,815       -       85,055       95,732       2,011       -       97,743  
Other interest income
    10,584       3,218       -       13,802       5,282       (1,063 )     -       4,219       19,880       3,037       -       22,917  
                                                                                                 
Interest income less income from hedge accounting
    1,629,694       570,426       29,318       2,229,438       1,658,364       190,208       21,244       1,869,816       1,661,660       209,901       19,122       1,890,683  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 25
INTEREST INCOME AND INFLATION- INDEXATION ADJUSTMENTS, continued

b)
For the years ended December 31, 2014, 2013 and 2012, the composition of expense from interest and inflation-indexing adjustments, excluding expense from hedge accounting is as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
Interest
   
Inflation adjustments
   
Total
   
Interest
   
Inflation adjustments
   
Total
   
Interest
   
Inflation adjustments
   
Total
 
Items
 
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                       
Demand deposits
    (6,189 )     (1,909 )     (8,098 )     (5,225 )     (588 )     (5,813 )     (3,601 )     (535 )     (4,136 )
Repurchase agreements
    (7,052 )     -       (7,052 )     (12,092 )     -       (12,092 )     (10,707 )     9       (10,698 )
Time deposits and liabilities
    (334,841 )     (74,384 )     (409,225 )     (426,812 )     (22,787 )     (449,599 )     (456,348 )     (45,743 )     (502,091 )
Interbank loans
    (19,015 )     (9 )     (19,024 )     (21,233 )     (5 )     (21,238 )     (26,182 )     (14 )     (26,196 )
Issued debt instruments
    (175,886 )     (137,460 )     (313,346 )     (171,659 )     (53,952 )     (225,611 )     (172,138 )     (64,006 )     (236,144 )
Other financial liabilities
    (3,131 )     (1,729 )     (4,860 )     (4,712 )     (661 )     (5,373 )     (4,884 )     (881 )     (5,765 )
Other interest expense
    (2,636 )     (17,839 )     (20,475 )     (2,340 )     (3,749 )     (6,089 )     (2,366 )     (3,435 )     (5,801 )
                                                                         
Interest expense less expenses from hedge accounting
    (548,750 )     (233,330 )     (782,080 )     (644,073 )     (81,742 )     (725,815 )     (676,226 )     (114,605 )     (790,831 )

c)
For the years ended December 31, 2014, 2013 and 2012, the overview of interests and inflation-indexing adjustments is as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
Items
 
MCh$
   
MCh$
   
MCh$
 
                   
Interest income less income from hedge accounting
    2,229,438       1,869,816       1,890,683  
Interest expense less expense from hedge accounting
    (782,080 )     (725,815 )     (790,831 )
                         
Net Interest income less income from hedge accounting
    1,447,358       1,144,001       1,099,852  
                         
Income from hedge accounting (net)
    (130,254 )     (67,239 )     (57,118 )
                         
Total net interest income
    1,317,104       1,076,762       1,042,734  
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 26
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:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Fee and commission income
                 
Fees and commissions for lines of credits and overdrafts
    7,015       7,025       9,296  
Fees and commissions for guarantees and letters of credit
    32,403       30,131       28,523  
Fees and commissions for card services
    147,256       127,101       127,437  
Fees and commissions for management of accounts
    29,031       28,044       28,755  
Fees and commissions for collections and payments
    35,355       45,190       56,472  
Fees and commissions for intermediation and management of securities
    9,286       10,482       11,272  
Fees and commissions for investments in mutual funds or others (*)
    -       31,154       33,414  
Insurance brokerage fees
    34,695       32,253       32,499  
Office banking
    17,602       15,165       13,507  
Other fees earned
    54,086       19,575       19,252  
Total
    366,729       346,120       360,427  
 
(*)
Due to the sale of Santander Asset Management S.A. Administradora General de Fondos, the Bank does not have any fees and commissions on investments in mutual funds recorded.
 
   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Fee and commission expense
                 
Compensation for card operation
    (104,095 )     (87,776 )     (73,503 )
Fees and commissions for securities transactions
    (979 )     (4,287 )     (1,687 )
Office banking and other fees
    (34,372 )     (24,221 )     (14,665 )
Total
    (139,446 )     (116,284 )     (89,855 )
                         
Net fees and commissions income
    227,283       229,836       270,572  

The fees earned in transactions with letters of credit are presented in the Consolidated Statements of Income in the line item “Interest income”.
 
 
F-109

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 27
PROFIT AND LOSS FROM FINANCIAL OPERATIONS

For the years ended December 31, 2014, 2013 and 2012, the detail of income from financial operations is as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Profit and loss from financial operations
                 
Trading derivatives
    (224,015 )     (68,201 )     (104,344 )
Trading investments
    45,952       29,985       36,338  
Sale of loans and accounts receivables from customers
                       
     Current portfolio
    1,261       1,677       2,745  
     Charged-off portfolio
    4,809       1,500       2,090  
Available for sale investments
    6,934       10,258       (1,764 )
Repurchase of issued bonds
    5,198       4,502       760  
Other profit and loss from financial operations
    214       (10 )     96  
Total
    (159,647 )     (20,289 )     (64,079 )
 
 
NOTE 28
NET FOREIGN EXCHANGE GAIN (LOSS)

Net foreign exchange income 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 years ended December 31, 2014, 2013 and 2012, net foreign exchange income is as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Net foreign exchange gain (loss)
                 
Net profit (loss) from currency exchange differences
    (370,282 )     (242,841 )     270,990  
Hedging derivatives
    621,767       379,910       (120,610 )
Income from inflation-indexed assets in foreign currency
    22,404       8,600       (5,574 )
Income from inflation-indexed liabilities in foreign currency
    (1,677 )     (943 )     1,572  
Total
    272,212       144,726       146,378  

 
F-110

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 29
PROVISIONS FOR LOAN LOSSES

a)
For the years ended December 31, 2014, 2013 and 2012 activity within income for provisions for loan losses is a follows:

     
Loans and accounts receivable from customers
               
Total
 
For the year ended December 31, 2014
 
Interbank
loans
   
Commercial
loans
   
Mortgage
loans
   
Consumer
loans
   
Contingent
loans
       
   
Individual
   
Individual
   
Group
   
Group
   
Group
   
Individual
   
Group
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Charged-off individually significant loans
    -       (10,811 )     -       -       -       -             (10,811 )
Provisions established
    (60 )     (52,240 )     (174,244 )     (24,907 )     (218,941 )     (8,305 )     (3,641 )     (482,338 )
Total provisions and charge-offs
    (60 )     (63,051 )     (174,244 )     (24,907 )     (218,941 )     (8,305 )     (3,641 )     (493,149 )
Provisions released
    554       15,903       7,127       6,561       38,275       4,431       6,418       79,269  
Recovery of loans previously charged off
    -       5,302       11,645       5,122       36,908       -       -       58,977  
Net charge to income
    494       (41,846 )     (155,472 )     (13,224 )     (143,758 )     (3,874 )     2,777       (354,903 )


     
Loans and accounts receivable from customers
               
Total
 
For the year ended December 31, 2013
 
Interbank
loans
Individual
   
Commercial
loans
   
Mortgage
loans
   
Consumer
loans
   
Contingent
loans
       
   
Individual
   
Group
   
Group
   
Group
   
Individual
   
Group
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Charged-off individually significant loans
    -       (8,071 )     -       -       -       -       -       (8,071 )
Provisions established
    (455 )     (92,008 )     (98,715 )     (42,487 )     (258,446 )     (7,402 )     (3,109 )     (502,622 )
Total provisions and charge-offs
    (455 )     (100,079 )     (98,715 )     (42,487 )     (258,446 )     (7,402 )     (3,109 )     (510,693 )
Provisions released
    119       22,014       11,151       9,216       35,482       2,128       3,837       83,947  
Recovery of loans previously charged off
    -       4,572       9,973       4,735       36,004       -       -       55,284  
Net charge to income
    (336 )     (73,493 )     (77,591 )     (28,536 )     (186,960 )     (5,274 )     728       (371,462 )


     
Loans and accounts receivable from customers
               
Total
 
For the year ended December 31, 2012
 
Interbank
loans
Individual
   
Commercial
loans
   
Mortgage
loans
   
Consumer
loans
   
Contingent
loans
       
   
Individual
   
Group
   
Group
   
Group
   
Individual
   
Group
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Charged-off individually significant loans
    -       (5,470 )     -       -       -       -       -       (5,470 )
Provisions established
    (548 )     (83,742 )     (83,181 )     (25,314 )     (318,565 )     (5,036 )     (4,634 )     (521,020 )
Total provisions and charge-offs
    (548 )     (89,212 )     (83,181 )     (25,314 )     (318,565 )     (5,036 )     (4,634 )     (526,490 )
Provisions released
    400       20,716       16,624       7,449       38,471       2,017       4,106       89,783  
Recovery of loans previously charged off
    -       1,991       6,704       2,305       22,015       -       -       33,015  
Net charge to income
    148       (66,505 )     (59,853 )     (15,560 )     (258,079 )     (3,019 )     (528 )     (403,692 )

b)
The detail of Charge-off of individually significant loans, is as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Charge-off of loans
    37,673       26,390       26,481  
Provision applied
    (26,862 )     (18,319 )     (21,011 )
Net charge offs of individually significant loans
    10,811       8,071       5,470  
 
 
F-111

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 30
PERSONNEL SALARIES AND EXPENSES

For the years ended December 31, 2014 and 2013, the composition of personnel salaries and expenses is as follows:
 
   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
Personnel compensation
    213,364       197,695       188,563  
Bonuses or gratifications
    77,145       67,805       66,666  
Stock-based benefits
    329       684       1,747  
Seniority compensation:
    10,551       8,828       8,966  
Pension plans
    1,395       (311 )     58  
Training expenses
    2,477       2,366       2,423  
Day care and kindergarten
    2,485       2,542       2,487  
Health funds
    4,082       3,493       3,571  
Welfare funds
    533       76       397  
Other personnel expenses
    26,527       25,166       25,026  
Total
    338,888       308,344       299,904  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 31
ADMINISTRATIVE EXPENSES

For the years ended December 31, 2014, 2013 and 2012, the composition of the item is as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
General administrative expenses
    125,271       116,685       113,804  
Maintenance and repair of property, plant and equipment
    17,498       15,368       14,290  
Office lease
    28,348       26,105       24,369  
Equipment lease
    94       106       367  
Insurance payments
    3,302       2,989       2,420  
Office supplies
    4,567       4,579       5,796  
IT and communication expenses
    29,379       29,144       24,873  
Heating, and other utilities
    4,131       3,871       4,086  
Security and valuables transport services
    17,089       15,879       11,929  
Representation and personnel travel expenses
    4,173       5,255       5,101  
Judicial and notarial expenses
    2,192       1,619       8,609  
Fees for technical reports and auditing
    6,891       6,400       7,396  
Other general administrative expenses
    7,607       5,370       4,568  
Outsourced services
    51,504       44,411       41,127  
Data processing
    32,253       26,489       26,581  
Products sale
    1,502       1,820       1,686  
Archive services
    3,305       1,728       795  
Valuation services
    2,119       2,265       1,957  
Outsourcing
    5,608       9,489       8,253  
Other
    6,717       2,620       1,855  
Board expenses
    1,314       1,154       1,073  
Marketing expenses
    16,419       15,800       16,899  
Taxes, payroll taxes, and contributions
    10,641       10,141       10,476  
Real estate taxes
    1,415       1,201       1,615  
Patents
    1,525       1,843       1,961  
Other taxes
    15       4       15  
Contributions to SBIF
    7,686       7,093       6,885  
Total
    205,149       188,191       183,379  

 
F-113

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 32
DEPRECIATION, AMORTIZATION, AND IMPAIRMENT

Depreciation, amortization and impairment charges for the years ended December 31, 2014, 2013 and 2012, are detailed below:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Depreciation and amortization
                 
Depreciation of property, plant, and equipment
    (27,571 )     (22,452 )     (21,195 )
Amortizations of Intangible assets(*)
    (16,601 )     (38,622 )     (35,174 )
Total depreciation and amortization
    (44,172 )     (61,074 )     (56,369 )
Impairment of property, plant, and equipment
    (108 )     (244 )     (90 )
Impairment of intangibles (*)
    (36,556 )     -       -  
Total
    (80,836 )     (61,318 )     (56,459 )

As of December 31, 2014, the costs for Property, plant, and equipment impairment totaled Ch$108 million, mainly due to damages to ATMs (Ch$ 244 million and Ch$ 90 million as of December 31, 2013 and 2012, respectively).

(*) The Bank, in its strategic objectives, initiated a plan to transform its business and operating model with a focus on the client. Therefore, there have arisen a number of new requirements for the Bank to adapt to changing customer demands and establish new ways to interact with them. This change in strategy resulted in a number of applications that are in use or in development that needed to be tested for impairment. Following the testing, in accordance with IAS 36 the Bank has recognized an impairment of Ch$ 36,556 million.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 33
OTHER OPERATING INCOME AND EXPENSES

a)
Other operating income is comprised of the following components:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Income from assets received in lieu of payment
                 
Income from sale of assets received in lieu of payment
    2,811       6,571       2,654  
Recovery of charge-offs and income from assets received
in lieu of payment
    -       -       -  
Subtotal
    2,811       6,571       2,654  
Income from sale of investments in other companies
                       
Gain on sale of investments in other companies
    -       78,122       599  
Subtotal
    -       78,122       599  
Other income
                       
         Leases
    805       328       142  
         Income from sale of property, plant and equipment
    687       176       9,194  
         Recovery of provisions for contingencies
    315       77       -  
         Compensation from insurance companies due to damages
    661       725       262  
         Other
    1,266       2,156       254  
Subtotal
    3,734       3,462       9,852  
                         
Total
    6,545       88,155       13,105  
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 33
OTHER OPERATING INCOME AND EXPENSES continued

b)
Other operating expenses are detailed as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
Allowances and expenses for assets received in lieu of payment
                 
  Provision on assets received in lieu of payment
    1,577       2,363       7,546  
  Expenses for maintenance of assets received in lieu of  payment
    2,489       2,461       2,630  
Subtotal
    4,066       4,824       10,176  
                         
Credit card expenses
    2,638       2,157       6,362  
                         
Customer services
    9,940       10,954       8,674  
                         
Other expenses
                       
  Operating charge-offs
    6,153       8,222       8,366  
  Life insurance and general product insurance policies
    8,919       7,348       7,211  
  Additional tax on expenses paid overseas
    3,055       2,862       3,283  
  Provisions for contingencies
    13,080       5,805       7,964  
  Expense for adopting chip technology on cards
    2,400       2,283       -  
  Other
    8,695       7,883       7,601  
Subtotal
    42,302       34,403       34,425  
                         
Total
    58,946       52,338       59,637  

 
F-116

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 34
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 of Directors and 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).

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 of Directors and 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.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 34
TRANSACTIONS WITH RELATED PARTIES, continued

a) 
Loans to related parties:

Below are loans and receivables as well as contingent loans that correspond to related entities:
 
   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
Companies
of the Group
   
Associated
companies
   
Key
personnel
   
Other
   
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
    51,647       9,614       4,348       8,743       47,305       618       4,022       51,141       46,790       668       2,910       57,723  
Mortgage loans
    -       -       19,941       -       -       -       15,561       -       -       -       15,089       -  
Consumer loans
    -       -       2,798       -       -       -       2,061       -       -       -       1,513       -  
Loans and accounts receivables:
    51,647       9,614       27,087       8,743       47,305       618       21,644       51,141       46,790       668       19,512       57,723  
                                                                                                 
Allowance for loan losses
    (139 )     (10 )     (46 )     (18 )     (238 )     (3 )     (44 )     (6 )     (329 )     (3 )     (39 )     (9 )
Net loans
    51,508       9,604       27,041       8,725       47,067       615       21,600       51,135       46,461       665       19,473       57,714  
                                                                                                 
Guarantees
    409,339       -       23,896       1,289       124,420       -       19,237       2,326       9       -       17,909       1,349  
                                                                                                 
Contingent loans:
                                                                                               
Personal guarantees
    -       -       -               -       -       -       -       -       -       -       -  
Letters of credit
    16,000       -       -       11       30,714       -       -       -       25,697       -       -       -  
Guarantees
    432,802       -       -       762       172,274       -       -       9,989       34,897       -       -       1,443  
Contingent loans:
    448,802       -       -       773       202,988       -       -       9,989       60,594       -       -       1,443  
                                                                                                 
Allowance for contingent loans
    (12 )     -       -       -       (22 )     -       -       (4 )     (15 )     -       -       (2 )
                                                                                                 
Net contingent loans
    448,790       -       -       773       202,966       -       -       9,985       60,579       -       -       1,441  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 34
TRANSACTIONS WITH RELATED PARTIES, continued

Loan activity to related parties during 2014, 2013 and 2012 is shown below:

   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
Companies of the Group
   
Associated companies
   
Key Personnel
   
Other
   
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$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Opening balances as of January 1,
    250,293       618       21,644       61,130       107,384       668       19,512       59,166       52,673       663       19,698       63,081  
Loans granted
    338,784       9,108       11,651       17,585       161,763       377       7,313       14,858       78,586       21       6,132       10,927  
Loans payments
    (88,628 )     (112 )     (6,208 )     (69,199 )     (18,854 )     (427 )     (5,181 )     (12,894 )     (23,875 )     (16 )     (6,318 )     (14,842 )
                                                                                                 
Total
    500,449       9,614       27,087       9,516       250,293       618       21,644       61,130       107,384       668       19,512       59,166  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 34
TRANSACTIONS WITH RELATED PARTIES, continued

b) 
Assets and liabilities with related parties

   
As of December 31,
 
   
2014
   
2013
   
2012
 
   
Companies of the Group
   
Associated companies
   
Key personnel
   
Other
   
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$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Assets
                                                                       
Cash and deposits in banks
    193,377       -       -       -       5,306       -       -       -       5,357       -       -       -  
Trading investments
    -       -       -       -       -       -       -       -       -       -       -       -  
Obligations under repurchase agreements Loans
    -       -       -       -       -       -       -       -       -       -       -       -  
Financial derivative contracts
    995,468       -       -       -       557,026       -       -       -       526,734       -       -       -  
Available for sale investments
    -       -       -       -       -       -       -       -       -       -       -       -  
Other assets
    2,776       -       -       -       2,460       -       -       -       4,339       -       -       -  
                                                                                                 
Liabilities
                                                                                               
Deposits and other demand liabilities
    5,061       1,168       2,403       4,602       58,030       10,406       2,783       23,300       65,386       2,563       2,286       17,211  
Obligations under repurchase agreements Loans
    47,010       -       -       -       59,703       -       -       -       92,862       -       -       -  
Time deposits and other time liabilities
    269,381       2,320       81,079       81,079       54,212       299       3,774       156,977       97,449       373       2,842       39,193  
Financial derivative contracts
    1,395,507       -       -       -       537,162       -       -       -       387,903       -       -       -  
Issued debt instruments
    336,323       -       -       -       96,872       -       -       -       67,368       -       -       -  
Other financial liabilities
    846       -       -       -       3,912       -       -       -       103,207       -       -       -  
Other liabilities
    771       -       -       -       462       -       -       -       1,241       -       -       -  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 34
TRANSACTIONS WITH RELATED PARTIES, continued

c)
Income (expenses) recorded due to transactions with related parties

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
Companies
of the
Group
   
Associated Companies
   
Key personnel
   
Other
   
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$
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                                                         
Income (expense) recorded
                                                                       
Interest income and inflation-indexation adjustments
    (11,130 )     25       1,963       (2,509 )     (8,812 )     50       1,065       (1,082 )     (11,660 )     54       948       (2,819 )
Fee and commission income and expenses
    30,591       84       230       167       -       75       120       3,615       (1,191 )     59       114       214  
Net profit (loss) from financial operations and net foreign exchange gain (loss) (*)
    (315,918 )     -       20       (10,051 )     (8,690 )     -       (4 )     (1,534 )     241,424       -       (1 )     107  
Other operating income and expenses
    1,158       -       -       -       955       -       -       -       643       -       -       -  
Income from sale of investments in other companies (**)
    -       -       -       -       78,122       -       -       -       -       -       -       -  
Key personnel compensation and expenses
    -       -       (31,361 )     -       -       -       (31,652 )     -       -       -       (30,999 )     -  
Administrative and other expenses
    (30,342 )     (33,961 )     -       -       (28,371 )     (30,758 )     -       -       (23,121 )     (20,461 )     -       -  
                                                                                                 
Total
    (325,641 )     (33,852 )     (29,148 )     (12,393 )     33,204       (30,633 )     (30,471 )     999       206,095       (20,348 )     (29,938 )     (2,498 )

(*)
Primarily relates to derivative contracts used to financially cover exchange risk of assets and liabilities that cover positions of the Bank and its subsidiaries.
(**)
Corresponds to the profit from the sale of the subsidiary Santander Asset Management S.A. Administradora General de Fondos.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 34
TRANSACTIONS WITH RELATED PARTIES, continued

d)
Payments to Board members and key management personnel

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

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Personnel compensation
    17,410       16,954       16,880  
Board members’ salaries and expenses
    1,235       1,083       1,034  
Bonuses or gratifications
    12,358       11,267       10,255  
Compensation in stock
    310       684       1,508  
Training expenses
    78       55       138  
Seniority compensation
    234       1,064       12  
Health funds
    288       290       289  
Other personnel expenses
    504       566       431  
Pension plans (*)
    1,395       (311 )     452  
Total
    33,812       31,652       30,999  
(*) Some of the executives that qualified for this benefit left the Group for different reasons, without complying with the requirements to use the benefit, therefore the obligation amount decreased, which generated  the reversal of provisions.

e)
Composition of key personnel

As of December 31, 2014, 2013 and 2012, the composition of the Bank’s key personnel is as follows:

   
No. of executives
 
Position
 
As of December 31,
 
   
2014
   
2013
   
2012
 
                   
Director
    13       12       13  
Division manager
    18       16       19  
Department manager
    90       80       85  
Manager
    54       60       63  
                         
Total key personnel
    175       168       180  


 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 35
PENSION PLANS

The Bank has an additional benefit available to its principal executives, consisting of a pension plan. The purpose of the pension plan is to endow the executives with funds for a better supplementary pension upon their retirement.

For this purpose, the Bank will match the voluntary contributions made by the beneficiaries for their future pensions with an equivalent contribution. The executives will be entitled to receive this benefit only when they fulfill the following conditions:

 
a.
Aimed at the Bank’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 Bank will create a pension fund, with life insurance, for each beneficiary in the plan. Periodic contributions into this fund are made by the manager and matched by the Bank.
 
d.
The Bank will be responsible for granting the benefits directly.

If the working relationship between the manager and the respective company ends, before s/he fulfills the abovementioned requirements, s/he will have no rights under this benefit plan.

In the event of the executive’s death or total or partial disability, s/he will be entitled to receive this benefit.

The Bank will make contributions to this benefit plan on the basis of mixed collective insurance policies whose beneficiary is the Bank. The life insurance company with whom such policies are executed is not an entity linked or related to the Bank or any other Santander Group company.

Plan Assets owned by the Bank at the end of 2014 totaled Ch$6,495 million (Ch$5,171 million in 2013).

The amount of the defined benefit plans has been quantified by the Bank, based on the following criteria:

Calculation method:

Use of the projected unit credit  method which considers each working year as generating an additional amount of rights over benefits  and values each unit separately. It is calculated based primarily on fund contributions, as well as other factors such as the legal annual pension limit, seniority, age and yearly income for each unit valued individually.

Actuarial hypothesis assumptions:

Actuarial assumptions with respect to demographic and financial variables are non-biased and mutually compatible with each other.  The most significant actuarial hypotheses considered in the calculations were:
 
 
Plans
post-employment
Plans
post-employment
 
2014
2013
     
Mortality chart
RV-2009
RV-2009
Termination of contract rates
5.0%
5.0%
Impairment chart
PDT 1985
PDT 1985
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 35
PENSION PLANS, continued

Assets related to the pension fund contributed by the Bank into the Seguros Euroamérica insurance company with respect to defined benefit plans are presented as net of associated commitments.

Activity for post-employment benefits is as follows:

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
Plan assets
    6,495       5,171  
Commitments for defined-benefit plans
               
For active personnel
    (4,639 )     (3,888 )
Incurred by inactive personnel
    -       -  
Minus:
               
Unrealized actuarial (gain) losses
    -       -  
Balances at year end
    1,856       1,283  
 
Year’s cash flow for post-employment benefits is as follows:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
a) Fair value of plan assets
                 
Opening balance
    5,171       5,584       5,508  
Expected yield of insurance contracts
    446       247       326  
Employer contributions
    878       (660 )     (250 )
Actuarial (gain) losses
    -       -       -  
Premiums paid
    -       -       -  
Benefits paid
    -       -       -  
Fair value of plan assets at year end
    6,495       5,171       5,584  
b) Present value of obligations
                       
Present value of obligations opening balance
    (3,244 )     (3,594 )     (3,143 )
Net incorporation of Group companies
    -       -       -  
Service cost
    (1,395 )     (311 )     (452 )
Interest cost
    -       -       -  
Curtailment/settlement effect
    -       -       -  
Benefits paid
    -       -       -  
Past service cost
    -       -       -  
Actuarial (gain) losses
    -       17       -  
Other
    -       -       -  
Present value of obligations at year end
    (4,639 )     (3,888 )     (3,595 )
Net balance at year end
    1,856       1,283       1,989  
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 35
PENSION PLANS, continued

Plan expected profit:

 
As of December 31,
 
2014
 
2013
 
2012
           
Type of expected yield from the plan’s assets
UF + 2.50% annual
 
UF + 2.50% annual
 
UF + 2.50% annual
Type of yield expected from the reimbursement rights
UF + 2.50% annual
 
UF + 2.50% annual
 
UF + 2.50% annual

Plan associated expenses:

   
For the years ended December 31,
 
   
2014
   
2013
   
2012
 
   
MCh$
   
MCh$
   
MCh$
 
                   
Current period service expenses
    1,395       311       452  
Interest cost
    -       -       -  
Expected yield from plan’s assets
    (446 )     (247 )     (326 )
Expected yield of insurance contracts linked to the Plan:
                       
Extraordinary allocations
    -       -       -  
Actuarial (gain)/ losses recorded in the period
    -       (17 )     -  
Past service cost
    -       -       -  
Other
    -       -       -  
Total
    949       47       126  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 36
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 sale transaction of 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.

These techniques  are significantly influenced by the assumptions used, including the discount rate, the estimates of future cash flows and prepayment expectations. Hence, the fair value estimated for an asset or liability may not coincide exactly with the price at which that asset or liability could be delivered or settled on the date of its valuation, and may not be justified in comparison with independent markets.

Except as detailed in the following table, the management consider that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values.

Determination of fair value of financial instruments

Below is a comparison between the value at which the Bank’s financial assets and liabilities are recorded and their fair value as of December 31, 2014 and 2013:

   
As of December 31,
 
   
2014
   
2013
 
   
Book value
   
Fair value
   
Book value
   
Fair value
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                         
Assets
                       
Trading investments
    774,815       774,815       287,567       287,567  
Financial derivative contracts
    2,727,563       2,727,563       1,494,018       1,494,018  
Loans and accounts receivable from customers and interbank loans, net
    22,208,332       24,176,606       20,445,828       23,556,158  
Available for sale investments
    1,651,598       1,651,598       1,700,993       1,700,993  
Guarantee deposits (margin accounts)
    436,717       436,717       181,032       181,032  
                                 
Liabilities
                               
Deposits and interbank borrowings
    18,126,038       18,470,479       16,978,412       16,921,614  
                                 
Financial derivative contracts
    2,561,384       2,561,384       1,291,785       1,291,785  
Issued debt instruments and other financial liabilities
    5,990,237       6,456,142       5,388,439       5,729,213  
Guarantees received (margin accounts)
    473,343       473,343       115,333       115,333  

The fair value approximates the carrying amount of the following line items due to their short-turn nature: cash and deposits banks, cash items in process of collection and investments under resale or repurchase agreements.

In addition, the fair value estimates presented above do not attempt to estimate the value of the Bank’s profits generated by its business activity, nor its future activities, and accordingly, they do not represent the Bank’s value as a going concern.  Below is a detail of the methods used to estimate the financial instruments’ fair value.
 
a)
Trading investments and available for sale investment instruments

The estimated fair value of these financial instruments was established using market values or estimates from an available dealer, or quoted market prices of similar financial instruments. Investments with maturity of less than one year are evaluated at recorded value since, due to their short maturity term, they are considered as having a fair value not significantly different from their recorded value. To estimate the fair value of debt investments or representative values in these lines of businesses, we take into consideration additional variables and elements, as long as they apply, including the estimate of prepayment rates and credit risk of issuers.
 
 
F-126

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 36
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

b)
Loans and accounts receivable from customers and interbank loans

Fair value of commercial, mortgage and consumer loans and credit cards is measured through a discounted cash flow (DCF) analysis. To do so, we use current market interest rates considering product, term, amount and similar loan quality. Fair value of loans with 90 days or more of delinquency are measured by means of the market value of the associated guarantee, minus the rate and term of expected payment. For variable rate loans whose interest rates change frequently (monthly or quarterly) and that are not subjected to any significant credit risk change, the estimated fair value is based on their book value.

c)
Deposits

Disclosed fair value of deposits that do not bear interest and saving accounts is the amount payable at the reporting date and, therefore, equals the recorded amount. Fair value of time deposits is calculated through a discounted cash flow calculation that applies current interest rates from a monthly calendar of scheduled maturities in the market.
 
d)
Short and long term issued debt instruments

The fair value of these financial instruments is calculated by using a discounted cash flow analysis based on the current incremental lending rates for similar types of loans having similar maturities.

e)
Financial derivative contracts

The estimated fair value of financial derivative contracts is calculated using the prices quoted on the market for financial instruments having similar characteristics.

The fair value of interest rate swaps represents the estimated amount that the Bank determines as exit price in accordance with IFRS 13.

If there are no quoted prices from the market (either direct or indirect) for any derivative instrument, the respective fair value estimates have been calculated by using models and valuation techniques such as Black-Scholes, Hull, and Monte Carlo simulations, taking into consideration the relevant inputs/outputs such as volatility of options, observable correlations between underlying assets, counterparty credit risk, implicit price volatility, the velocity with which the volatility reverts to its average value, and the straight-line relationship (correlation) between the value of a market variable and its volatility, among others.

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.

 
F-127

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 36
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

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).

The following financial instruments are classified under Level 2:

Type of
 financial instrument
Model
used in valuation
Description
ž   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.
     
ž   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.
     
ž   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.
     
žFX 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.

 
F-128

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 36
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

The following financial instruments are classified under Level 3:

Type of
 financial instrument
Model
used in valuation
Description
ž   caps/ Floors/ Swaptions
Black Normal Model for Cap/Floors and Swaptions
There is no observable input of implicit volatility.
     
ž   UF options
Black – Scholes
There is no observable input of implicit volatility.
     
ž   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.
     
ž   CCS (special contracts)
Implicit Forward Rate Agreement (FRA)
Start Fwd unsupported by MUREX (platform) due to the UF forward estimate.
     
ž   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.
     
ž   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.

The Bank does not believe that any change in unobservable inputs with respect to level 3 instruments would result in a significantly different fair value measurement.

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

   
Fair value measurement
 
As of December 31,
 
2014
   
Level 1
   
Level 2
   
Level 3
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                         
Assets
                       
Trading investments
    774,815       731,344       43,471       -  
Available for sale investments
    1,651,598       1,028,639       622,075       884  
Derivatives
    2,727,563       -       2,684,782       42,781  
Guarantee deposits (margin accounts)
    436,717       -       436,717       -  
Total
    5,590,693       1,759,983       3,787,045       43,665  
                                 
                                 
Liabilities
                               
Derivatives
    2,561,384       -       2,561,384       -  
Guarantees received (margin accounts)
    473,343       -       473,343       -  
Total
    3,034,727       -       3,034,727       -  
                                 
   
Fair value measurement
 
As of December 31,
    2013    
Level 1
   
Level 2
   
Level 3
 
   
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  
Derivatives
    1,494,018       -       1,442,752       51,266  
Guarantee deposits (margin accounts)
    181,032       -       181,032       -  
Total
    3,663,610       930,241       2,681,265       52,104  
                                 
                                 
Liabilities
                               
Derivatives
    1,291,785       -       1,290,366       1,419  
Guarantees received (margin accounts)
    115,333       -       115,333       -  
Total
    1,407,118       -       1,405,699       1,419  

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 36
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

The following table presents assets or liabilities which are not measured at fair value in the statement of financial position but for which the fair value is disclosed, as of December 31, 2014 and 2013:

   
Fair value measurement
 
As of December 31,
 
2014
   
Level 1
   
Level 2
   
Level 3
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
Assets
                       
Loans and accounts receivable from customers and interbank loans, net
    24,176,606       -       24,176,606       -  
Total
    24,176,606       -       24,176,606       -  
Liabilities
                               
Deposits and interbank borrowings
    18,470,479       -       18,470,479       -  
Issued debt instruments and other financial liabilities
    6,456,142       -       6,456,142       -  
Total
    24,926,621       -       24,926,621       -  
                                 
   
Fair value measurement
 
As of December 31,
    2013    
Level 1
   
Level 2
   
Level 3
 
   
MCh$
   
MCh$
   
MCh$
   
MCh$
 
                                 
Assets
                               
Loans and accounts receivable from customers and interbank loans, net
    23,556,158       -       23,556,158       -  
Total
    23,556,158       -       23,556,158       -  
Liabilities
                               
Deposits and interbank borrowings
    16,921,614       -       16,921,614       -  
Issued debt instruments and other financial liabilities
    5,729,213       -       5,729,213       -  
Total
    22,650,827       -       22,650,827       -  

There were no transfer between levels 1 and 2 for the year ended December 31, 2014 and 2013.

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 36
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued


The following table presents the Bank’s activity for assets and liabilities measured at fair value on a recurrent basis using unobserved significant entries (Level 3) as of December 31, 2014 and 2013:

   
Assets
   
Liabilities
 
   
MCh$
   
MCh$
 
             
As of January 1, 2014
    52,104       (1,419 )
                 
Total realized and unrealized profits (losses)
               
Included in statement of income
    (8,485 )     1,419  
Included in other comprehensive income
    46       -  
Purchases, issuances, and loans (net)
    -       -  
                 
As of December 31, 2014
    43,665       -  
                 
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 of December 31, 2013
    (8,439 )     1,419  

 
   
Assets
   
Liabilities
 
   
MCh$
   
MCh$
 
             
As of January 1, 2013
    63,149       (1,106 )
                 
Total realized and unrealized profits (losses)
               
Included in statement of income
    (10,524 )     (313 )
Included in other comprehensive income
    (521 )     -  
Purchases, issuances, and loans (net)
    -       -  
                 
As of December 31, 2013
    52,104       (1,419 )
                 
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 of December 31, 2012
    (11,045 )     (313 )
 
The realized and unrealized profits (losses) included in comprehensive income for 2014 and 2013, in the assets and liabilities measured at fair value on a recurrent basis through unobservable market data (Level 3) are recorded in the Statement of Comprehensive Income in the associate line item.

The potential effect as of December 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.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 37
RISK MANAGEMENT

Introduction and general description

The Bank, due to its activities with financial instruments is exposed to several types of risks. The main risks related to financial instruments that apply to the Bank are as follows:

 
-
Market risk: rises from holding financial instruments whose value may be affected by fluctuations in market conditions, generally including the following types of risk:

 
a.
Foreign exchange risk: this arises as a consequence of exchange rate fluctuations among currencies.
 
b.
Interest rate risk: this arises as a consequence of fluctuations in market interest rates.
 
c.
Price risk: this arises as a consequence of changes in market prices, either due to factors specific to the instrument itself or due to factors that affect all the instruments negotiated in the market.
 
d.
Inflation risk: this arises as a consequence of changes in Chile’s inflation rate, whose effect would be mainly applicable to financial instruments denominated in UFs.

 
-
Credit risk: this is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party.

 
-
Liquidity risk: is the possibility that an entity may be unable to meet its payment commitments, or that in order to meet them, it may have to raise funds with onerous terms or risk damage to its image and reputation.

 
-
Operating risk: this is a risk arising from human errors, system errors, fraud or external events which may damage the Bank’s reputation, may have legal or regulatory implications, or cause financial losses.

This note includes information on the Bank’s exposure to these risks and on its objectives, policies, and processes involved in their measurement and management.

Risk management structure

The Board is responsible for the establishment and monitoring of the Bank’s risk management structure, for which purpose it has an on-line corporate governance system which incorporates international recommendations and trends, adapted to Chilean regulatory conditions and given it the ability to apply the most advanced practices in the markets in which the Bank operates.  To optimize the performance of this function, the Board of Directors has established the Asset and Liability Committee (“ALCO”), whose principal task is to assist in carrying out its functions relating to oversight and management of the Bank’s risks.  To complement the ALCO in the risk management function, the Board also has three key committees:  the Markets Committee (“CDM,” the acronym in Spanish) the Executive Credit Committee (“CEC,” the acronym in Spanish) and the Audit Committee (“CDA,” the acronym in Spanish).  Each of these committees is composed of directors and executive members of the Bank’s management.

The ALCO is responsible for developing risk handling policies of the Bank following the Board and Santander Spain Global Risk Department guidelines, as well as the requirements of the Chilean SBIF. Said policies have been created mainly to identify and analyze the risks the Bank faces, establishing risk limits and adequate control monitoring risks, and the abiding by of limits. Risk handling policies and systems are revised regularly to reflect changes in market conditions and products or services offered. The Bank, through the creation and management of regulations and procedures, aims at developing a disciplined and constructive control environment in which all employees understand their role and duties.

To carry out its duties, the ALCO works directly with the Bank’s control and risk departments, whose joint objectives include the following:

 
-
evaluate risks whose magnitude might threaten the Bank’s solvency or which might potentially pose significant risks to its operations or reputation;
 
-
ensure that the Bank is equipped with the means, systems, structures, and resources, consistent with best practices, which enable the implementation of the risk management strategy;
 
-
ensure the integration, control, and management of all the Bank’s risks;
 
-
apply homogeneous risk principles, policies, and metrics throughout the Bank and its businesses;
 
-
develop and implement a risk management model at the bank, in order for risk exposure to be adequately integrated into the different decision making processes;
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

 
-
identify risk concentrations and mitigation alternatives, monitor the macroeconomic and competitive environment, quantifying sensitivities and the foreseeable impact of different scenarios on risk positioning; and
 
-
carry out the management of structural liquidity, interest rate, and exchange rate risks, as well as those arising from the Bank’s own resource base.

To achieve the aforementioned objectives, the Bank (its management and the ALCO) performs a variety of activities relating to risk management, including the following: calculate exposures to risk from different portfolios and/or investments, taking into consideration mitigating factors (guarantees, netting, collateral, etc.); calculate the probabilities of expected loss for each portfolio and/or investment; assign loss factors to new transactions (rating and scoring); measure the risk values of the portfolios and/or investments based on different scenarios by means of historical simulations; specify limits for potential losses based on the different risks incurred; determine the potential impact of the structural risks on the Bank’s Consolidated Statements of Income; set limits and alerts which guarantee the Bank’s liquidity; and identify and quantify the operating risks by line of business, so as to facilitate their mitigation through corrective actions.

The CDA is mainly responsible for supervising compliance with the Bank’s risk management policies and procedures, and for reviewing the adaptation of the risk management framework to the risks faced by the Bank.

Credit risk

Credit risk is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party.  To manage credit risk, the Bank consolidates all elements and components of credit risk exposure (e.g. individual delinquency risk, innate risk of a business line or segment, and/or geographical risk).

Mitigation of credit risk for loans and accounts receivable

The Board has delegated the duty of credit risk management to the ALCO and CEC, as well as to the Bank’s risk departments, whose roles are summarized below:

 
-
Formulation of credit policies, by consulting with the business units, meeting requirements of guarantees, credit evaluation, risk rating and submission of reports, documentation and legal procedures in compliance with the regulatory, legal and internal requirements of the Bank.

 
-
Establish the structure to approve and renew credit requests. The Bank structures credit risks by assigning limits to the concentration of that risk in terms of individual debtors, debtor groups, industry segment and country. Approval levels are assigned to the correspondent officials of the business unit (commercial, consumer, SMEs) to be exercised by that level of management. In addition, those limits are revised constantly. Teams in charge of risk evaluation at the branch level interact on a regular basis with customers; however, for larger credit requests, the risk team from the head office and even the CEC work directly with customers to assess credit risks and prepare risk requests. Moreover, Banco Santander España participates in the process to approve larger credits; for example, to customers or economic groups with debts over USD 40 million.

 
-
Limit concentrations of exposure to customers or counterparties in geographic areas or industries (for accounts receivable or loans), and by issuer, credit rating, and liquidity (for investments).

 
-
Develop and maintain the Bank’s credit risk classifications for the purpose of classifying risks according to the degree of exposure to financial loss that is exhibited by the respective financial instruments, with the aim of focusing risk management specifically on the associated risks.

 
-
Revise and evaluate credit risk. Review and evaluate credit risk. Management’s risk divisions are largely independent of the Bank’s commercial division and evaluate all credit risks in excess of the specified limits prior to loan approvals for customers or prior to the acquisition of specific investments.  Credit renewal and revisions are subject to similar processes.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

When preparing a credit request for a corporate customer, the Bank verifies several parameters such as debt service capacity (generally including future cash flows), the customer's financial records and/or projections for their economic sector. The risk division is closely involved in this process. All applications include an analysis of the customer’s strengths and weaknesses, as well as a risk classification and a recommendation.  Credit limits are not established over customers’ outstanding balances but on the direct and indirect credit risk of the financial group. For example, a corporation would be evaluated together with subsidiaries and affiliates.

Consumer loans are evaluated and approved by their respective risk divisions (individual, SME), and the evaluation process is based on an evaluation system known as Garra (Banco Santander) and Syseva (Santander Banefe). Both of these processes are decentralized, automated, and based on a scoring system that includes the credit risk policies adopted by the Bank’s Board.  The loan application process is based on a collection of information to determine the customer’s financial condition and payment capacity.  The parameters used to assess the credit risk of the applicant include different variables such as income levels, duration of current job, indebtedness, reports from credit reporting agencies, etc.

 
-
Provide advice, training, and specialized knowledge to the business units in order to promote the Bank’s best practices in credit risk management.

Mitigation of credit risk of other financial assets (investments, derivatives, commitments)

As a part of the acquisition process of financial investments and financial instruments, the Bank examines the probability of uncollectability from issuers or counterparties, using internal and external evaluations, such as risk evaluators that are independent from the Bank.  The Bank is also governed by a strict and conservative policy which ensures that the issuers of its investments and the counterparties in derivative transactions are highly reputable.

In addition, the Bank holds a variety of instruments which imply credit risk, but are not reflected in the Consolidated Statement of Financial Position, such as: personal guarantees, documentary letters of credit, performance bonds, and commitments to grant loans.

Personal guarantees represent an irrevocable payment obligation. If a guaranteed customer fails to meet their obligations to third parties secured by the Bank, the Bank will make the relevant payments; hence, these transactions imply the same credit risk exposure as an ordinary loan.

Documentary letters of credit are commitments documented by the Bank on behalf of customers, which are secured by the shipped merchandise to which they relate, and hence, have a lower risk than direct indebtedness. Performance bonds are contingent commitments which become enforceable only if the customer fails to carry out the work agreed upon with a third party who is secured by such performance bonds.

In the case of loan commitments, the Bank is potentially exposed to losses for an amount equivalent to the unused amount of the commitment. However, the expected loss amount is lower than the commitment’s unused amount. The Bank controls the maturity term of credit lines since generally, long-term obligations have a larger credit risk than short-term ones.

Maximum credit risk exposure

For financial assets recognised in the Consolidated Statements of Financial Position, maximum credit risk exposure equals their carrying value.  For financial guarantees granted, the maximum exposure to credit risk equals the maximum amount the Banks would have to pay if the financial guaranty was executed.

 
F-134

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

Below is the distribution by financial asset of the Bank’s maximum exposure to credit risk as of December 31, 2014 and 2013, without deduction of collateral, security interests or credit improvements received:

         
As of December 31,
 
         
2014
   
2013
 
         
Amount of exposure
   
Amount of exposure
 
   
Note
   
MCh$
   
MCh$
 
                   
Deposits in banks
    4       1,013,909       1,020,674  
Cash items in process of collection
    4       531,373       604,077  
Trading investments
    5       774,815       287,567  
Investments under resale agreements
    6       -       17,469  
Financial derivative contracts
    7       2,727,563       1,494,018  
Loans and accounts receivable from customers and
interbank loans, net
 
8 and 9
      22,208,332       20,445,828  
Available for sale investments
    10       1,651,598       1,700,993  
                         
Off-balance commitments:
                       
Letters of credit issued
            204,932       218,032  
Foreign letters of credit confirmed
            75,798       127,600  
Guarantees
            1,470,604       1,212,799  
Available credit lines
            5,699,034       5,141,831  
Personal guarantees
            261,582       181,416  
Other irrevocable credit commitments
            109,520       47,376  
Total
            36,729,060       32,499,680  

 
F-135

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

The following table shows loan portfolio information as set forth in our internal scoring policy, described in Note 01 p)“Allowance for loans losses” as of December 31, 2014 and 2013:
 
     
As of December 31,
 
Category
   
2014
   
2013
 
Commercial
Portfolio
   
Individual
   
Percentage
   
Allowance
   
Percentage
   
Individual
   
Percentage
   
Allowance
   
Percentage
 
 
MCh$
   
%
   
MCh$
   
%
   
MCh$
   
%
   
MCh$
   
%
 
                                                   
  A1       1,911,035       8.35 %     998       0.15 %     2,395,371       11.37 %     1,589       0.26 %
  A2       5,564,372       24.30 %     16,334       2.39 %     4,846,240       23.01 %     20,416       3.32 %
  A3       1,334,042       5.83 %     19,630       2.87 %     1,281,756       6.09 %     27,982       4.55 %
  B       398,611       1.74 %     29,189       4.27 %     374,051       1.78 %     30,536       4.97 %
  C1       79,148       0.35 %     1,583       0.23 %     56,040       0.27 %     1,121       0.18 %
  C2       66,267       0.29 %     6,627       0.97 %     46,996       0.22 %     4,700       0.76 %
  C3       16,742       0.07 %     4,185       0.61 %     20,780       0.10 %     5,195       0.84 %
  C4       33,074       0.14 %     13,229       1.93 %     43,109       0.20 %     17,243       2.80 %
  D1       59,585       0.26 %     38,730       5.66 %     61,246       0.29 %     39,811       6.47 %
  D2       94,832       0.41 %     85,348       12.47 %     64,755       0.30 %     58,279       9.48 %
Subtotal
      9,557,708       41.74 %     215,853       31.55 %     9,190,344       43.63 %     206,872       33.63 %
                                                                     
       
Group
   
Percentage
   
Allowance
   
Percentage
   
Group
   
Percentage
   
Allowance
   
Percentage
 
       
MCh$
   
%
   
MCh$
   
%
   
MCh$
   
%
   
MCh$
   
%
 
Commercial
                                                                 
Normal portfolio
      2,401,003       10.49 %     51,027       7.46 %     2,237,256       10.62 %     30,864       5.02 %
Impaired portfolio
      383,532       1.68 %     114,670       16.76 %     400,101       1.90 %     69,306       11.27 %
Subtotal
      2,784,535       12.17 %     165,697       24.22 %     2,637,357       12.52 %     100,170       16.29 %
Mortgage
                                                                 
Normal portfolio
      6,261,428       27.35 %     17,574       2.57 %     5,302,411       25.18 %     15,701       2.56 %
Impaired portfolio
      370,603       1.62 %     31,170       4.55 %     323,401       1.54 %     27,605       4.49 %
Subtotal
      6,632,031       28.97 %     48,744       7.12 %     5,625,812       26.72 %     43,306       7.05 %
Consumer
                                                                 
Normal portfolio
      3,554,891       15.53 %     116,865       17.07 %     3,257,836       15.47 %     112,468       18.29 %
Impaired portfolio
      363,484       1.59 %     137,158       20.04 %     349,412       1.66 %     152,117       24.74 %
Subtotal
      3,918,375       17.12 %     254,023       37.11 %     3,607,248       17.13 %     264,585       43.03 %
Total
      22,892,649       100.00 %     684,317       100.00 %     21,060,761       100.00 %     614,933       100.00 %
 
As December 31, 2014 and 2013, the Bank does not believe that the credit quality of its other financial assets or liabilities is of sufficient significance to warrant future disclosure.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

Regarding the individually evaluated portfolio, the different categories and levels within each category correspond to:

 
-
Category A or Normal Portfolio. Consists of debtors with a payment capacity that allows them to fulfill their financial obligations and commitments and who, according to their financial situation, are not likely to experience a change in this condition in the short term.

 
-
Category B or Substandard Portfolio. Includes debtors with financial difficulties or whose payment capacity has been diminished and about whom the Bank has considerable doubts about the total reimbursement of the capital and interest according to the agreed terms, showing they have a lesser likelihood of meeting their financial obligations in the short term.

 
-
Categories C and D or Default Portfolio.  Consists of those debtors where the Bank considers the ability of reimbursement remote since they have an impaired or null payment capacity.

Regarding the portfolios evaluated on a group basis, all of the associated operations are evaluated together.

See Note 29 for the detail of the Bank’s impaired loans and the associated allowances. Also, see Note 19 for a detail of the maturity of the Bank’s financial assets.

Exposure to credit risk in foreign derivative contracts

As of December 31, 2014, the Bank’s foreign exposure -including counterparty risk in the derivative instruments’ portfolio- was USD 1,711 million or 3.45% of assets. In the table below, exposure to derivative instruments is calculated by using the equivalent credit risk; which equals the replacement carrying amount plus the maximum potential value, considering the cash collateral that minimizes exposure.

Below, there are additional details regarding our exposure to Colombia and Italy, since they are classified above 1 and where the below represents our majority of exposure to categories other than 1 is. We do not have sovereign exposure to Colombia or Italy. Below we detail exposure to Italy and Colombia as of December 31, 2014, considering fair value of derivative instruments.

Country
 
Classification (1)
   
Derivative Instruments
(adjusted to market)
USD MM
   
Deposits
USD MM
   
Loans
USD MM
   
Financial investments
USD MM
   
Total
Exposure
USD MM
 
Colombia
    2       4.13       -       0.09       -       4.22  
Italy
    2       49.65       3.28       0.18       -       53.11  
Other
    3       1.37       0.21       0.53       -       2.11  
Total
            55.15       3.49       0.8       -       59.44  
 
(1) 
Corresponds to country’s classification established in Chapter B-6 of the Compendium of Accounting Standards issued by the SBIF.

*
The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, there is no net credit exposure.
 
Our exposure to Spain within the group is as follows:
 
Counterpart
Country
Classification
Derivative instruments (market adjusted)
USD MM
Deposits
USD MM
Loans
USD MM
Financial
Investments
USD MM
Exposure
Exposure
USD MM
Banco Santander España
Spain
2
4.79
311.26
-
-
316.05
 

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

Impairment of other financial instruments

As of December 31, 2014 and 2013, the Bank had no significant impairments of its financial assets other than loans and accounts receivable.

Security interests and credit improvements

The maximum exposure to credit risk is reduced in some cases by security interests, credit improvements, and other actions which mitigate the Bank’s exposure. Based on the foregoing, the creation of security interests are a necessary but not a sufficient condition for granting a loan; accordingly, the Bank’s acceptance of risks requires the verification of other variables and parameters, such as the ability to pay or generate funds in order to mitigate the risk being taken on.

Procedures for management and valuation of securities are described in the internal policies of risk management. Said policies set the basic principles for credit risk management, including the management of securities received in customers’ operations.  In this sense, the risk management model includes assessing the existence of adequate and sufficient guarantees that allow recovering the credit when the debtor’s circumstances prevent them from fulfilling their obligations.

The procedures used for the valuation of security interests utilize the prevailing market practices, which provide for the use of appraisals for mortgage securities, market prices for stock securities, fair value of the participating interest for investment funds, etc. All security interests received must be instrumented properly and registered on the relevant register, as well as have the approval of legal divisions of the Bank.

In addition, the Bank has classification tools that allow it to group the credit quality of transactions or customers. To study how this probability varies, the Bank has historical databases that keep this internally generated information. Classification tools vary according to the analyzed customer (commercial, consumer, SMEs, etc.).

Below is the detail of security interests, collateral, or credit improvements provided to the Bank as of December 31, 2014 and 2013.

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
Non-impaired financial assets:
           
Properties/mortgages
    14,643,933       12,701,836  
Investments and others
    2,005,276       1,347,770  
Impaired financial assets:
               
Properties/ mortgages
    420,033       663,889  
Investments and others
    12,314       27,810  
Total
    17,081,556       14,741,305  
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

Liquidity risk

Liquidity risk is the risk that the Bank may have difficulty meeting the obligations associated with its financial obligations.

Liquidity risk management

The Bank is exposed on a daily basis to requirements for cash funds from various banking activities, such as wires from checking accounts, fixed-term deposit payments, guarantee payments, disbursements on derivatives transactions, etc. As typical in the banking industry, the Bank does not hold cash funds to cover the balance of all the positions, as experience shows that only a minimum level of these funds will be withdrawn, which can be accurately predicted with a high degree of certainty.

The Bank’s approach to liquidity management is to ensure-- whenever possible--to have enough liquidity on hand to fulfill its obligations at maturity, in both normal and stressed conditions, without entering into unacceptable debts or risking the Bank’s reputation. The Board establishes limits on the minimal part of available funds close to maturity to fulfill said payments as well as over a minimum level of interbank operations and other loan facilities that should be available to cover transfers at unexpected demand levels. This is constantly reviewed. Additionally, the Bank must comply with the regulation limits established by the SBIF for maturity mismatches.

These limits affect the mismatches of future flows of income and expenditures of the Bank on an individual basis. They are:

i. 
mismatches of up to 30 days for all currencies, up to the amount of basic capital;
ii. 
mismatches of up to 30 days for foreign currencies, up to the amount of basic capital; and
iii. 
mismatches of up to 90 days for all currencies, twice the basic capital.

The Bank’s treasury department (“Treasury”) receives information from all business units about the liquidity profile of its financial assets and liabilities in addition to details from other future cash flows that arise from future business transactions.  Based on this information, Treasury keeps a short-term liquid assets portfolio, mainly composed of liquid investments, interbank loans, and advanced payments, to guarantee that the Bank has enough liquidity. Liquidity needs of business units are fulfilled through short-term transfers from Treasury to cover any short-term variation and long-term financing to address all structural liquidity requirements.

The Bank monitors its liquidity position daily to establish future flows of inflow and outflow. At each month's closing, stress tests are carried out in which a variety of scenarios are used, from normal market conditions to those that contain significant fluctuations. Liquidity policy and procedures are subjected to review and approval of the Bank’s Board. There are periodic reports which detail the Bank’s, and its subsidiaries’, liquidity position, including any exceptions and adopted correcting measures, which are also reviewed periodically by the ALCO.

The Bank relies on customer (retail) and institutional deposits, obligations to banks, debt instruments, and time deposits as its main sources of funding. Although most obligations to banks, debt instruments and time deposits have maturities of more than one year, customer (retail) and institutional deposits tend to have shorter maturities and a large proportion of them are payable within 90 days. The short-term nature of these deposits increases the Bank’s liquidity risk, and hence, the Bank actively manages this risk through continual supervision of the market trends and price management.

Liquidity management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated.

The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO has determined that our liquidity portfolio must be comprised of cash plus assets that can be readily convertible into cash either through the Chilean Central Bank window, overnight deposits or instruments or the local secondary market. The management of the Bank’s liquidity portfolio is performed by the Financial Management Division under rules determined by the ALCO.
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

   
As of December 31,
 
   
2014
   
2013
 
   
MCh$
   
MCh$
 
Financial investments for trading
    774,815       287,567  
Available for sale investments
    1,651,598       1,700,993  
Encumbered assets (net) (1)
    (112,015 )     (71,896 )
Net cash (2)
    14,774       248,073  
Net Interbank deposits (3)
    890,274       984,666  
Total liquidity portfolio
    3,219,446       3,149,403  

(1) Assets encumbered through repurchase agreements are deduced from the liquidity portfolio.
(2) Cash minus reserve requirements.
(3) Includes overnight deposits in Central Bank, domestic banks and foreign banks.

Exposure to liquidity risk

A similar, yet not identical, measure is the calculation used to measure the Bank´s liquidity limit as established by the SBIF. The Bank determines a mismatch percentage for purposes of calculating such liquidity limit which is calculated by dividing its benefits (assets) by its obligations (liabilities) according to maturity based on estimated repricing. The mismatch amount permitted for the 30 day and under period is 1 times capital and for the 90 day and under period is 2 times capital.

The following table displays the actual derived percentages as calculated per above:

   
As of December 31,
 
   
2014
   
2013
 
   
%
   
%
 
30 days
    32.00       30.00  
30 days foreign currency
    -       (22.00 )
90 days
    15.00       31.00  

Below, is the breakdown by maturity, of the liability balances of the Bank as of December 31, 2014 and 2013:
 
   
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 after 1 year
   
Total
 
As of December 31, 2014
 
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
 
Obligations under repurchase agreements
    -       390,331       1,453       342       392,126       -       -       -       392,126  
Checking accounts, time deposits and other time liabilities
    6,873,781       5,343,226       2,480,158       2,289,405       16,986,570       130,427       58,699       189,126       17,175,696  
Financial derivatives contracts
    -       125,884       176,048       319,488       621,420       1,028,017       911,947       1,939,964       2,561,384  
Interbank borrowings
    4,133       137,921       227,898       413,564       783,516       435,309       12,776       448,085       1,231,601  
Issue debt instruments
    -       176,649       319,516       691,227       1,187,392       2,693,946       1,903,774       4,597,720       5,785,112  
Other financial liabilities
    114,564       1,934       746       3,305       120,549       41,733       42,843       84,576       205,125  
Subtotal
    6,992,478       6,175,945       3,205,819       3,717,331       20,091,573       4,329,432       2,930,039       7,259,471       27,351,044  
Contractual interest payments
    2,301       43,155       126,047       445,275       616,778       1,362,292       786,150       2,148,442       2,765,220  
Total
    6,994,779       6,219,100       3,331,866       4,162,606       20,708,351       5,691,724       3,716,189       9,407,913       30,116,264  


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, 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 after 1 year
   
Total
 
As of December 31, 2013
 
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
   
MM$
 
Obligations under repurchase agreements
    -       185,140       18,466       5,366       208,972       -       -       -       208,972  
Checking accounts, time deposits and other time liabilities
    6,001,375       5,351,489       2,333,001       1,743,525       15,429,390       87,380       55,644       143,024       15,572,414  
Financial derivatives contracts
    -       126,238       89,018       223,031       438,287       508,206       345,292       853,498       1,291,785  
Interbank borrowings
    8,199       104,490       216,472       1,201,070       1,530,231       152,146       -       152,146       1,682,377  
Issue debt 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  
Subtotal
    6,106,601       6,238,525       3,346,329       3,766,011       19,457,466       2,326,150       2,360,371       4,686,521       24,143,987  
Contractual interest payments
    2,748       32,671       88,135       331,006       454,560       943,260       609,308       1,552,568       2,007,128  
Total
    6,109,349       6,271,196       3,434,464       4,097,017       19,912,026       3,269,410       2,969,679       6,239,089       26,151,115  
 
Market risk

Market risk arises as a consequence of the market activity, by means of financial instruments whose value can be affected by market variations, reflected in different assets and financial risk factors. The risk can be diminished by means of hedging through other products (assets/liabilities or derivative instruments) or terminating the open transaction/position. The objective of market risk management is to manage and control market risk exposure within acceptable parameters.

There are four major risk factors that affect the market prices: type of interest, type of exchange, price, and inflation. In addition and for certain positions, it is necessary to consider other risks as well, such as spread risk, base risk, commodity risk, volatility or correlation risk.

Market risk management

The Bank’s internal management measure market risk based mainly on the procedures and standards of Santander Spain, which are in turn based on analysis of management in three principal components:

 
-
trading portfolio;
 
-
domestic financial management portfolio;
 
-
foreign financial management portfolio.

The trading portfolio is comprised mainly of investments, valued at fair value, and free of any restriction on their immediate sale, which are often bought and sold by the Bank with the intent of selling them in the short term in order to benefit from short-term price fluctuations. The financial management portfolios include all the financial investments not considered a part of trading portfolio.

The ALCO has the general responsibility for the market risk. The Bank’s risk/finance department is responsible for formulating detailed management policies and applying them to the Bank’s operations, in conformity with the guidelines adopted by the ALCO and the Global Risk Department of Banco Santander – Spain.

The department’s functions in connection with trading portfolio include the following:

i.
apply the “Value at Risk” (VaR) techniques to measure interest rate risk;
ii.
adjust the trading portfolios to market and measure the daily income and loss from commercial activities;
iii.
compare the real VaR with the established limits;
iv.
establish procedures to prevent losses in excess of predetermined limits; and
v.
furnish information on the trading activities to the ALCO, other members of the Bank’s management, and the Global Risk Department of Santander – Spain.

 
F-141

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

The department’s functions in connection with financial management portfolios include the following:

 
i.
perform sensitivity simulations (as explained below) to measure interest rate risk for activities denominated in local currency and the potential losses forecasted by these simulations; and
 
 
ii.
provide daily reports thereon to the ALCO, other members of the Bank’s management, and the Global Risk Department of Santander - Spain.
 
Market risk - trading portfolio

The Bank applies VaR methods to measure the market risk of its trading portfolio. The Bank has a consolidated commercial position that is made up of fixed income investments, foreign exchange trading, and a minimum position of investments in equity shares. This portfolio is mostly made of Chilean Central Bank bonds, mortgage bonds and corporate bonds issued locally at low risk. At the closing date, the trading portfolio did not show investments in another portfolio.

For the Bank, the VaR estimate is done through the historical simulation method which consists of observing the behavior of profit and loss that might have taken place with the current portfolio if the market conditions at a given time had been present and, based on that information, infer maximum losses with a determined confidence level. This method has the advantage of reflecting precisely the historical distribution of market values and not requiring any distribution assumption for a specific probability. All VaR measures are designed to establish the distribution function for the value change in a given portfolio and, once this distribution is known, to calculate the percentile related to the necessary confidence level, which will match the risk value in virtue of those parameters. As calculated by the Bank, the VaR is an estimate of the maximum expected loss of market value of a given portfolio in one day, with 99.00% confidence. It is the maximum loss in one day the Bank could expect in a given portfolio with a confidence level of 99.00%. In other words, it is the loss the Bank would have to deal only 1.0% of the time. VaR provides a single estimation of the market risk that cannot be compared with other market risks. Returns are calculated using a time window of 2 years or, at least, 520 data points gathered since the reference date in the past to calculate VaR.

The Bank does not calculate three separate VaRs. Only one VaR is calculated for the entire trading portfolio which, in addition, is separated into risk types. The VaR program carries out a historical simulation and calculates a profit (ganancia or “G”) and loss (pérdida or “P”) G&P Statement for 520 data points (days) for each risk factor (fixed income, currency, and variable income). Each risk factor’s G&P is added and a consolidated VaR is calculated with 520 data points or days. In addition, the VaR is calculated for each risk factor based on the individual G&P calculated for each. Additionally, a weighted VaR is calculated following the above mentioned method but giving a larger weight to the 30 most recent data points. The highest VaR is reported. In 2014 and 2013, we were still using the same VaR model and the methodology has not changed.

The Bank uses VaR estimates to issue a warning in case the statistically estimated losses for the trading portfolio exceed the cautionary levels.

Limitations of the VaR model

When applying a calculation methodology, no assumptions are made regarding the probability distribution of the changes in the risk factors; the historically observed changes are used for the risk factors on which each position in the portfolio will be valued.

It is necessary to define a valuation function fj(xi) for each instrument  j, preferably the same one used to calculate the market value and income of the daily position.  This valuation function will be applied in each scenario to generate simulated prices for all the instruments in each scenario.

In addition, the VaR methodology should be interpreted taking into consideration the following limitations:

 
-
Changes in market rates and prices may not be independent and identically distributed random variables, and may not have a normal distribution.  In particular, the assumption of normal distribution may underestimate the probability of extreme market movements;
 
 
-
The historical data used by the Bank may not provide the best estimate of the joint distribution of changes in the risk factors in the future, and any modification of the data may be inadequate.  In particular, the use of historical data may fail to capture the risk of potential extreme and adverse market fluctuations, regardless of the time period used;
 
 
-
A 1-day time horizon may not fully capture the market risk positions which cannot be liquidated or covered in a single day.  It would not be possible to liquidate or cover all the positions in a single day;
 
 
-
The VaR is calculated at the close of business, but trading positions may change substantially in the course of the trading day;
 

 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

 
-
The use of a 99% level of confidence does not take account of, or make any statement about, the losses that could occur outside of that degree of confidence; and

 
-
A model such as the VaR does not capture all the complex effects of the risk factors over the value of the positions or portfolios, and accordingly, it could underestimate potential losses.

At no time in 2014 and 2013 did the Bank exceed the VaR limits in connection with the three components which comprise the trading portfolio: fixed-income investments, variable-income investments and foreign currency investments.

The Bank carries out back-testings on a daily basis and, generally, discovers that trading losses exceed the estimated VaR approximately one out of hundred business days.  Also, a maximum VaR limit was established that can be applied over the trading portfolio. Both in 2014 and 2013, the Bank has kept within the maximum limit it established for the VaR; even when the real VaR exceeded estimations.

High, low and average levels for each component and year were as follows:

VaR
 
2014
USDMM
   
2013
USDMM
 
Consolidated:
           
High
    3.77       3.48  
Low
    1.06       1.061  
Average
    1.91       1.72  
                 
Fixed-income investments:
               
High
    3.99       2.39  
Low
    1.06       0.97  
Average
    1.78       1.57  
                 
Variable-income investments
               
High
    0.15       0.19  
Low
    0.00       0.00  
Average
    0.00       0.00  
                 
Foreign currency investments
               
High
    2.39       3.20  
Low
    0.06       0.06  
Average
    0.58       0.69  

Market risk - local and foreign financial management

The Bank’s financial management portfolio includes most of the Bank’s non-trading assets and liabilities, including the credit/loan portfolio. For these portfolios, investment and financing decisions are strongly influenced by the Bank’s commercial strategies.

The Bank uses a sensitivity analysis to measure market risk for domestic and foreign currencies (not included in the trading portfolio). The Bank carries out a simulation of scenarios that will be calculated as the difference between current flows in the chosen scenario (curve with a parallel movement of 100 basis points (“bp”) in all its sections) and its value in the base scenario (current market). All positions in domestic currency indexed to inflation (UF) are adjusted by a sensitivity factor of 0.57 which represents a change in the curve of 57bp in all real rates and 100 bp in nominal rates. The same scenario is carried out for net positions in foreign currency and interest rates in USD. In addition, the Bank has established limits regarding maximum loss this kind of movement in interest rates can have over capital and net financial income budgeted for the year.

To establish the consolidated limit, we add the foreign currency limit to the domestic currency limit and multiple by 2 the sum of the multiplication of them together both for net financial loss limit as well as for the capital and reserves loss limit, using the following formula:

Consolidated limit = square root of a2 + b2 + 2ab
a: domestic currency limit
b: foreign currency limit
Since we assume the correlation is 0; 2ab = 0. 2ab = 0.

 
F-143

 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

Limitations of the sensitivity models

The most important assumption is using an exchange rate of 100 bp based on yield curve (57 bp for real rates). The Bank uses a 100 bp exchange since sudden changes of this magnitude are considered realistic. Santander Spain Global Risk Department has also established comparable limits by country, so as to compare, control and consolidate market risk by country in a realistic and orderly fashion.

In addition, the sensitivity simulation methodology should be interpreted taking into consideration the following limitations:

 
-
The simulation of scenarios assumes that the volumes remain consistent in the Bank’s Consolidated Statements of Financial Position and are always renewed at maturity, thereby omitting the fact that certain credit risk and prepayment considerations may affect the maturity of certain positions.

 
-
This model assumes an identical change along the entire length of the yield curve and does not take into account the different movements for different maturities.

 
-
The model does not take into account the volume sensitivity which results from interest rate changes.

 
-
The limits to losses of budgeted financial income are calculated based on the financial income foreseen for the year, which may not be actually earned, meaning that the real percentage of financial income at risk may be higher than the expected one.

Market risk – Financial management portfolio – December 31, 2014 and 2013

   
2014
   
2013
 
   
Effect on financial income
   
Effect on capital
   
Effect on financial income
   
Effect on capital
 
                         
Financial management portfolio – local currency (MCh$)
                       
Loss limit
    38,150       192,660       35,500       167,530  
High
    27,707       112,133       28,923       86,196  
Low
    16,904       77,231       21,129       69,729  
Average
    21,077       92,809       25,124       77,849  
Financial management portfolio – foreign currency (in millions of $US)
                               
Loss limit
    40       70       30.0       30.0  
High
    16       39       17.2       26.0  
Low
    -       10       2.1       2.3  
Average
    10       28       10.2       18.6  
Financial management portfolio – consolidated (in MCh$)
                               
Loss limit
    40,650       172,390       35,500       167,530  
High
    27,949       112,364       28,958       86,212  
Low
    17,441       77,848       21,204       69,787  
Average
    21,404       93,245       25,146       77,891  
 
Operating risk

Operating risk is the risk of direct or indirect losses stemming from a wide variety of causes related to the Bank’s processes, personnel, technology, and infrastructure, as well as external factors other than credit, market, or liquidity, such as those related to legal or regulatory requirements.  Operating risks arise from all the Bank’s operations.

The Bank’s objective is to manage operating risk in order to mitigate economic losses and damage to the Bank’s reputation through a flexible internal control structure.

The Bank’s management has the main responsibility to develop and apply controls to mitigate operating risks. This responsibility is supported by the global development of the Bank’s standards for operating risk management in the following areas:

 
-
Requirements for adequate segregation of duties, including independent authorization of transactions
 
-
Requirements for reconciliation and supervision of transactions
 
 
 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

NOTE 37
RISK MANAGEMENT, continued

 
-
Compliance with the applicable legal and regulatory requirements
 
-
Documentation of controls and procedures
 
-
Requirements for periodic evaluation of applicable operating risks and improvement of the controls and procedures to address the risks that are identified
 
-
Requirements for disclosure of operating losses and the proposed corrective measures
 
-
Development of contingency plans
 
-
Training and professional development
 
-
Adoption of ethical business standards
 
-
Reduction or mitigation of risks, including acquisition of insurance policies if they are effective

Compliance with the Bank’s standards is supported by a program of periodic reviews conducted by the Bank’s internal audit unit, whose results are internally submitted to the management of the business unit that was examined and to the CDA.

Risk Concentration

The Bank operates mainly in Chile, thus most of its financial instruments are concentrated in that country. See Note 9 of the financial statements for a detail of the concentration of the Bank’s loans and accounts receivable by industry.


 
Banco Santander Chile and Subsidiaries
Notes to the Consolidated Financial Statements
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
 
NOTE 38
SUBSEQUENT EVENTS

On April 28, 2015, the  Bank issued a bond for CHF 150,000,000 at a fixed rate for 7 years.

At the ordinary shareholders’ meeting held on April 28, 2015  it was agreed  that 60% of the net income from 2014 was to be distributed as dividends  (totaling  Ch$265,156 million). The remaining 40% was assigned  to the Bank’s equity.

Between January 1, 2015 and the date on which these Consolidated Financial Statements were issued (May 14, 2015), no other events have occurred which could significantly affect their interpretation.


 

FELIPE CONTRERAS FAJARDO
Chief Accounting Officer
CLAUDIO MELANDRI HINOJOSA
Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
Exhibit 12.1
 
 
CHIEF EXECUTIVE OFFICER SECTION 302 CERTIFICATION
 
I, Claudio Melandri, certify that:
 
1.
I have reviewed this annual report on Form 20-F of Banco Santander-Chile;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
4.
The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under, our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
5.
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
 
Date: May 14, 2015
 

 
       /s/ Claudio Melandri
Name:           Claudio Melandri
Title:           Chief Executive Officer
 

 

Exhibit 12.2
 
 
 
CHIEF FINANCIAL OFFICER SECTION 302 CERTIFICATION
 
I, Miguel Mata, certify that:
 
1.
I have reviewed this annual report on Form 20-F of Banco Santander-Chile;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
4.
The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under, our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
5.
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
 
Date: May 14, 2015
 

 
       /s/ Miguel Mata
Name:         Miguel Mata
Title:           Chief Financial Officer

 
 

 

Exhibit 12.3
 
 
FINANCIAL CONTROLLER SECTION 302 CERTIFICATION
 
I, Gabriel Montoya, certify that:
 
1.
I have reviewed this annual report on Form 20-F of Banco Santander-Chile;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
 
4.
The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under, our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
 
5.
The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
 
Date: May 14, 2015
 

 
       /s/ Gabriel Montoya
Name:         Gabriel Montoya
Title:           Financial Controller

 
 

 
Exhibit 13.1
 
Section 906 Certification
 
The certification set forth below is being submitted in connection with the Annual Report on Form 20-F for the year ended December 31, 2014 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
Claudio Melandri, the Chief Executive Officer, Miguel Mata, the Chief Financial Officer, and Gabriel Montoya, the Financial Controller, of Banco Santander-Chile, each certifies that, to the best of his knowledge:
 
 
1.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
 
 
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Banco Santander-Chile.
 
Date: May 14, 2015
 

 
       /s/ Claudio Melandri
Name:         Claudio Melandri
Title:           Chief Executive Officer



       /s/ Miguel Mata
Name:         Miguel Mata
Title:           Chief Financial Officer



       /s/ Gabriel Montoya
Name:         Gabriel Montoya
Title:           Financial Controller