Consolidated Financial Statements Banco Del

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Consolidated Financial Statements BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Santiago, Chile December 31, 2015 and 2014 Consolidated Financial Statements BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES As of and for the years ended December 31, 2015 and 2014 (Translation of Financial Statements originally issued in Spanish- See Note 1b) Contents I. II. III. IV. V. VI. VII. Ch$ = MCh$ = US$ = MUS$ = UF = JPY € = = Independent Auditors’ Report Consolidated Statement of Financial Position Consolidated Statement of Income Consolidated Comprehensive Statement of Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Chilean pesos Millions of Chilean pesos United States dollars Millions of United States dollars Unidad de Fomento (UF). The UF is a peso-dominated inflation-indexed monetary unit. The UF rate is set daily in advance, based on the change in the Consumer Price Index (CPI) of the previous month Japanese Yen Euros BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES TABLE OF CONTENTS Page Independent Auditors’ Report Consolidated Statement of Financial Position Consolidated Statement of Income Consolidated Comprehensive Statement of Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows 1 3 4 5 6 7 Notes to the Consolidated Financial Statements Note 1 - Corporate information and summary of significant accounting policies ........................... 8 Note 2 - Accounting changes ......................................................................................................... 50 Note 3 - Relevant events ................................................................................................................ 50 Note 4 - Operating segments .......................................................................................................... 59 Note 5 - Cash and cash equivalents ................................................................................................ 63 Note 6 - Financial assets held for trading ....................................................................................... 65 Note 7 - Repurchase agreements and securities loans.................................................................... 66 Note 8 - Financial derivative contracts and accounting hedges ..................................................... 68 Note 9 - Loans and advance to banks ............................................................................................. 76 Note 10 -Loans and accounts receivable from customers .............................................................. 77 Note 11 - Investment securities ...................................................................................................... 82 Note 12 - Investments in companies .............................................................................................. 83 Note 13 - Intangible assets ............................................................................................................. 85 Note 14 - Property, plant and equipment ....................................................................................... 87 Note 15 - Current and deferred income taxes ................................................................................ 88 Note 16 - Other assets .................................................................................................................... 93 Note 17 - Deposits and other demand obligations and time deposits ............................................ 95 Note 18 - Obligations with banks ................................................................................................... 96 Note 19 - Debt instruments issued and other obligations............................................................... 97 Note 20 - Provisions ..................................................................................................................... 100 Note 21 - Other liabilities ............................................................................................................. 102 Note 22 - Contingencies and commitments ................................................................................. 103 Note 23 - Shareholders’ equity..................................................................................................... 108 Note 24 - Interest revenue and expenses ...................................................................................... 111 Note 25 - Income and expenses from fees and commissions ....................................................... 113 Note 26 - Net income from financial operations .......................................................................... 114 Note 27 - Foreign exchange transaction, net ................................................................................ 114 Note 28 - Provisions for loan losses ............................................................................................. 115 Note 29 - Personnel expenses....................................................................................................... 116 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES TABLE OF CONTENTS Page Note 30 - Administrative expenses .............................................................................................. 120 Note 31 - Depreciation, amortization and impairment ................................................................. 121 Note 32 - Other operating income and expenses.......................................................................... 122 Note 33 - Transactions with related parties .................................................................................. 124 Note 34 - Assets and liabilities at fair value................................................................................. 128 Note 35 - Risk management ......................................................................................................... 133 Note 36 - Maturity of assets and liabilities .................................................................................. 152 Note 37 - Events occurred after the reporting period ................................................................... 154 Deloitte Auditores y Consultores Limitada Rosario Norte 407 Las Condes, Santiago Chile Fono: (56-2) 2729 7000 Fax: (56-2) 2374 9177 [email protected] www.deloitte.cl INDEPENDENT AUDITORS’ REPORT To Banco del Estado de Chile We have audited the accompanying consolidated financial statements of Banco del Estado de Chile and Subsidiaries (hereinafter “the Bank”), which include the consolidated statement of financial position as of December 31, 2015 and the corresponding consolidated statements of income, of comprehensive income, of changes in net equity and of cash flows for the year then ended and the related notes to the consolidated financial statements. Responsibility of Management for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Accounting Standards and instructions issued by the Superintendency of Banks and Financial Institutions; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements, that are free from material misstatement, whether due to fraud or error. Responsibility of the Auditor Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Chile. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor´s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Bank´s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Bank´s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by the Bank´s management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence that we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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/acerca de 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banco del Estado de Chile and Subsidiaries as of December 31, 2015 and the results of its operations and its cash flows for the year then ended, in accordance with accounting standards and instructions issued by the Superintendency of Banks and Financial Institutions. Other issues - Predecessor Independent Auditors The consolidated financial statements as of December 31, 2014 of Banco del Estado de Chile were audited by other auditors whose report dated February 26, 2015 expressed an unqualified opinion on those statements. Other matters Our audit also comprehended the translations of Chilean Peso amounts into US Dollars amounts; in our opinion such translations has been made in conformity with the basis stated in Note 1b) to the consolidated financial statements. The accompanying consolidated financial statements have been translated into English for the convenience of readers outside of Chile. February 25, 2016 Santiago, Chile BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Statements of Financial Position As of December 31, 2015 and 2014 (In millions of Chilean Pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) Notes ASSETS Cash and due from banks Transactions in the course of collection Financial assets held for trading Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivable from customers Financial investments available for sale Financial investments held to maturity Investments in companies Intangible assets Property, plant and equipment Deferred taxes Other assets 5 5 6 7 8 9 10 11 11 12 13 14 15 16 TOTAL ASSETS LIABILITIES Current accounts and other demand deposits Transactions in the course of payment Repurchase agreements and securities loans Saving accounts and time deposits Financial derivative contracts Obligations with banks Debt instruments issued Other financial obligations Current taxes Deferred taxes Provisions Other liabilities 17 5 7 17 8 18 19 19 15 15 20 21 TOTAL LIABILITIES EQUITY Attributable to equity holders of the bank: Issued capital Reserves Valuation accounts Retained earnings: Net income for the period Less: Provision for distribution of income to the benefit of the state Non-controlling interest TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 23 23 23 12/31/2015 MUS$(*) 12/31/2015 MCh$ 12/31/2014 MCh$ 6,526 459 3,112 330 623 689 26,106 5,651 51 18 188 428 1,130 523 4,634,708 325,925 2,209,909 234,062 442,739 489,453 18,539,161 4,013,041 36,273 13,161 133,804 303,777 802,298 371,271 3,991,859 383,694 1,876,891 179,780 306,971 437,373 16,164,190 3,333,722 42,632 12,128 98,125 256,561 744,049 288,229 45,834 32,549,582 28,116,204 11,181 228 811 20,201 357 1,465 7,634 55 59 376 949 414 7,940,027 161,900 575,634 14,346,167 253,460 1,040,353 5,421,541 39,265 42,246 267,334 673,633 294,055 6,653,167 351,760 475,202 12,641,928 216,856 679,003 4,562,943 33,279 119,825 191,201 753,622 194,919 43,730 31,055,615 26,873,705 809 1,249 8 574,632 886,976 5,403 432,472 795,779 8,685 112,583 (92,149) 165,659 (165,659) 159 (130) 2,095 9 1,487,445 6,522 1,236,936 5,563 2,104 1,493,967 1,242,499 45,834 32,549,582 28,116,204 (*) See Note 1b The accompanying notes 1 to 37 form an integral part of these Consolidated Financial Statements. 3 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Statements of Income For the years ended December 31, 2015 and 2014 (In millions of Chilean Pesos – MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) Notes Interest income Interest expense 24 24 Net interest income Fees and commission income Fees and commission expense 25 25 Net fee and commission income Profit from financial operations, net Profit foreign exchange transaction, net Other operating income 26 27 32 Total operating income Provisions for loan losses 28 OPERATING INCOME, NET Personnel salaries and expenses Administrative expenses Depreciation and amortization Impairment Other operating expenses 29 30 31 31 32 Total operating expenses OPERATING INCOME Income from investments in companies 12 Income before income taxes Income taxes expenses 15 NET INCOME FOR THE PERIOD Attributable to: Equity holders of the bank Non-controlling interest 23 23 12/31/2015 MUS$(*) 12/31/2015 MCh$ 12/31/2014 MCh$ 2,215 (1,143) 1,573,104 (811,916) 1,682,613 (943,107) 1,072 761,188 739,506 438 (160) 311,233 (113,541) 266,642 (78,813) 278 197,692 187,829 41 161 18 29,106 114,507 12,936 123,520 30,101 8,407 1,570 1,115,429 1,089,363 (205) (145,958) (233,128) 1,365 969,471 856,235 (510) (351) (104) (34) (362,004) (249,603) (73,572) (24,002) (319,936) (218,980) (69,284) (27,849) (999) (709,181) (636,049) 366 260,290 220,186 2 1,460 1,134 368 261,750 221,320 (195) (138,835) (46,057) 173 122,915 175,263 159 14 112,583 10,332 165,659 9,604 173 122,915 175,263 (*) See Note 1b The accompanying notes 1 to 37 form an integral part of these Consolidated Financial Statements. 4 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Comprehensive Statements of Income For the years ended December 31, 2015 and 2014 (In millions of Chilean Pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) 12/31/2015 Notes MUS$(*) 12/31/2015 MCh$ 12/31/2014 MCh$ 173 122,915 175,263 NET INCOME FOR THE PERIOD OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASSIFIED TO THE INCOME FOR THE PERIOD Loss on valuation of investment securities available-for-sale Profit on accumulated conversion differencee translation adjustment Net (loss) profit on cash flow hedge derivatives (12) 1 (8) (8,370) 857 (5,497) (654) 2,324 19,164 Subtotal other comprehensive income components that will be reclassified to the income for the period (19) (13,010) 20,834 Income tax relating to components of other comprehensive income components that may be reclassified to the income for the period 14 9,728 (13,194) Total other comprehensive income that will be reclassified to the income for the period (5) (3,282) 7,640 4 2,847 (6,002) 4 2,847 (6,002) (3) (1,850) 4,021 23 OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED TO THE INCOME FOR THE PERIOD Adjustment for employee benefits plans 29 Subtotal other comprehensive income components that will not be reclassified to the income for the period Income tax relating to components of other comprehensive income components that may not be reclassified to the income for the period Total other comprehensive income that will not be reclassified to the income for the period 29 TOTAL OTHER COMPREHENSIVE INCOME (4) CONSOLIDATED COMPREHENSIVE INCOME FOR THE PERIOD Attributable to: Equity holders of the bank Non-controlling interest 1 23 997 (2,285) (1,981) 5,659 169 120,630 180,922 155 14 110,298 10,332 171,318 9,604 169 120,630 180,922 (*) See Note 1b The accompanying notes 1 to 37 form an integral part of these Consolidated Financial Statements. 5 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Statements of Changes in Equity For the years ended December 31, 2015 and 2014 (In millions of Chilean Pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) Reserves Issued capital MCh$ Valuation accounts Other reserves not Reserves derived from derived from profits profits MCh$ MCh$ Financial investments available for sale MCh$ Cash flow hedge MCh$ Conversion difference MCh$ Deferred taxes MCh$ Prior year's retained earnings MCh$ Income for the period MCh$ Provision for distribution of net income period MCh$ Total attributable to equity holders of the bank MCh$ Noncontrolling interest MCh$ Total equity MCh$ Equity as of 01/01/2014 Transfers Dividends paid Capital contribution Variation of financial investments available-for-sale Variation of hedge accounting derivatives Adjustment for conversion differences New York Branch Adjustment for employee plans Provision for distribution of minimum income Net income for the period 278,497 153,975 - (1,981) - 797,760 103,188 (103,188) - 5,750 (654) - 6,194 19,164 - (4,646) 2,324 - (6,253) 88 (13,282) - - 103,188 (103,188) 165,659 (103,188) 103,188 (165,659) - 1,077,302 153,975 (566) 5,882 2,324 (1,981) (165,659) 165,659 Equity as of 12/31/2014 MCh$ 432,472 (1,981) 797,760 5,096 25,358 (2,322) (19,447) - 165,659 (165,659) 1,236,936 Equity as of 01/01/2015 Transfers Dividends paid Capital contribution Variation of financial investments available-for-sale Variation of hedge accounting derivatives Adjustment for conversion differences New York Branch Adjustment for employee plans Provision for distribution of minimum income Net income for the period 432,472 142,160 - (1,981) 997 - 797,760 165,659 (75,459) - 5,096 (8,370) - 25,358 (5,497) - (2,322) 857 - (19,447) 5,469 4,259 - - 165,659 (165,659) 112,583 (165,659) 73,510 - 1,236,936 (75,459) 142,160 (2,901) (1,238) 857 997 73,510 112,583 Equity as of 12/31/2015 MCh$ 574,632 (984) 887,960 (3,274) 19,861 (1,465) (9,719) - 112,583 (92,149) 1,487,445 6,522 1,493,967 809 (1) 1,250 (4) 28 (2) (14) - 159 (130) 2,095 9 2,104 Equity as of 12/31/2015 MUS$ (*) 4,992 1,082,294 (2,638) (2,638) 153,975 (566) 5,882 2,324 (1,981) (6,395) (172,054) 9,604 175,263 5,563 1,242,499 5,563 1,242,499 (2,996) (78,455) 142,160 (2,901) (1,238) 857 997 (6,377) 67,133 10,332 122,915 (*) See note 1b The accompanying notes 1 to 37 form an integral part of these Consolidated Financial Statements. 6 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended December 31, 2015 and 2014 (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) 12/31/2015 Notes MUS$(*) 12/31/2015 MCh$ 12/31/2014 MCh$ 23 173 122,915 175,263 31 104 330 (161) (2) (7) 6 274 (129) 73,572 234,401 (114,126) (1,460) (4,679) (167) 4,493 194,602 (91,421) 69,284 317,066 (45,600) (1,134) (2,029) 19 2,925 10,437 (102,216) (690) (3,550) (948) (73) 1,499 2,752 (40) 141 (166) (346) 855 210 (490,317) (2,520,929) (672,960) (52,080) 1,064,797 1,954,627 (28,325) 100,432 (117,822) (246,020) 607,370 149,028 (170,556) (2,031,538) 327,140 (200,307) (54,906) 769,121 211,345 (8,522) (78,023) 174,210 (100,807) 426,200 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income for the period Charges (credits) to income that do not represent cash flows: Depreciation and amortization Impairment of assets Provisions for loan losses Adjustment to market of financial assets held-for-trading Gain from investment in companies Net gain on sales assets received in lieu of payment (Gain) loss net on sale of property, plant and equipment Write-off of assets received in lieu of payment Other charges to income that do not represent cash movements Net loss for interest and inflation readjustment 12 32 Changes in assets and liabilities affecting operating flows: Increase of trading instruments Increase in loans (Increase) decrease in held-to-maturity and financial investments available-for-sale Increase in other credit transactions Increase (decrease) in currents accounts Increase of deposits and loans (Decrease) increase in other demand and time liabilities Increase (decrease) of other obligations through brokerage of documents Decrease of obligations in letters of credit (Decrease) Increase of loans obtained from local banks Increase (decrease) of loans obtained from foreign banks Increase of other assets and liabilities Net cash flows provided by (used in) operating activities 232 165,931 (312,628) (229) 1 9 (162,735) 73 (194) 570 6,305 (69,152) 46 (2,200) 409 3,132 Net cash flow used in investing activities (219) (155,981) (67,765) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issue of bonds Redemption of bonds Capital increase Payment of prior period income in benefit of the state Payment of income in benefit of non-controlling interest 865 (35) 200 (106) (13) 614,573 (24,868) 142,160 (75,459) (9,395) 632,195 (22,627) 153,975 (103,188) (12,127) Net cash flows provided by financing activities 911 647,011 648,228 NET VARIATION FOR THE PERIOD OF CASH AND CASH EQUIVALENTS 924 656,961 267,835 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Purchase of property, plant and equipment and intangible assets Sale of property, plant and equipment and intangible assets Investments in companies Dividends received from investments in companies Sale of assets received in lieu of payment 13, 14 12 23 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 5 6,864 4,874,556 4,606,721 CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 5 7,788 5,531,517 4,874,556 (*) See Note 1b The accompanying notes 1 to 37 form an integral part of these Consolidated Financial Statements. 7 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Corporate Information - Background of the Bank and Subsidiaries The Caja de Crédito Hipotecario was established on August 29, 1855. It was the founding institution that promoted the country’s economic development, whose main objective was to provide access to credit to the productive sector and to the public in general and to safeguard their deposits. Subsequently, the Caja Nacional de Ahorro was established by law on August 22, 1910 in order to encourage savings, especially in the lower-income sector, and to ensure safe and profitable savings. Under this law, it was agreed to combine in a single institution all of the saving entities in the country under the sponsorship of the Government. The country’s needs, especially in the agricultural sector, led to the creation of the Caja de Crédito Agrario, in August 1926, in order to provide financial services to a wide range of farmers. For similar purposes, but this time pursuant to the manufacturing industry, the Instituto de Crédito Industrial was established in February 1928. The four institutions mentioned above, operated separately until 1953 when Banco del Estado de Chile (hereinafter referred to as “the Bank” or “BancoEstado”) was established by Decree in Force of Law (D.F.L.) No. 126, published in the Official Gazette on July 24, 1953, and began operating on September 1, 1953. The purpose of its creation was to promote development of domestic economic activities by providing financial products and services, and in doing so provide the best quality service to Chilean citizens. The Organic Law of Banco del Estado de Chile, Law Decree No. 2,079 of 1977, establishes that the Bank is an autonomous State company, with its own legal status and equity, of indefinite duration, exclusively subject to the supervision of the Superintendencia de Bancos e Instituciones Financieras (SBIF) and related with the Government through the Treasury Department. Therefore, Banco del Estado de Chile does not have issued shares as it is governed by the previously mentioned Organic Law. The Bank is governed by its Board of Directors consisting of seven members; where six of them have the exclusive trust of the President of the Republic, and one is a representative of the Bank’s employees. It is managed by an Executive Committee formed by the Chairman, Vice-chairman and Chief Executive Officer. The Bank’s headquarters are located at Avenida Libertador Bernardo O’Higgins No. 1,111, Santiago, Chile. The Consolidated Financial Statements of BancoEstado and Subsidiaries, for the year ended December 31, 2015 were approved by the Audit Committee and by the Board of Directors on February 25, 2016. 8 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Banco del Estado de Chile is the parent company of a group of Subsidiaries which are engaged in separate lines of business. Consequently the Bank is obligated to prepare consolidated Financial Statements including its Subsidiaries and its foreign Branch and its investments in entities supporting its line of business in addition to its own Financial Statements. The Subsidiaries and foreign Branch of the Bank are the following: - BancoEstado S.A. Corredores de Bolsa is a privately held Corporation, incorporated on August 17, 1989, as a stock agency, that became a stock broker on June 10, 1992. On January 19, 1990, it obtained its registration as a stock broker and a stock agency with the Superintendencia de Valores y Seguros (S.V.S), under registry No. 0137. Its main purpose is the trading of publiclyoffered securities on behalf of third parties and on its own account. BancoEstado S.A. Corredores de Bolsa is located at Avenida Libertador Bernando O’Higgins No. 1,111, 6th floor, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, given that the latter owns shares with representative voting rights for 99.9996% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of BancoEstado S.A. Corredores de Bolsa. BancoEstado S.A. Corredores de Bolsa holds non-controlling interest in the following companies: Entity name Bolsa de Comercio de Santiago; Bolsa de Valores Bolsa Electrónica de Chile BancoEstado Microempresa S.A. Asesorías Financieras (*) BancoEstado Servicios de Cobranza S.A. (*) No. of share 1 1 436 10 Participation 2.0833% 2.4390% 0.1000% 0.1000% Valuation of the investment Fair Value Fair Value Share Method Share Method Dividends Received 2015 2014 MUS$ MCh$ MCh$ 123 110 1 - (*) Entities that form part of the consolidated BancoEstado group. 9 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - BancoEstado S.A. Administradora General de Fondos is a privately held Corporation established on June 23, 1997 and authorized by Resolution No. 272 dated August 20, 1997 issued by the Superintendencia de Valores y Seguros, whose exclusive purpose was to manage home savings. On April 25, 2003 through Exempt Resolution No. 105, the Superintendencia de Valores y Seguros approved the by-laws of BancoEstado S.A. Administradora de Fondos, with its objective to engage in the management of third-party resources in accordance with the provisions of Law No. 20,712 or those regulations that replace or supplement it, and conduct all activities complementary to its business as authorized by the Superintendencia de Valores y Seguros. On December 3, 2008, Banco del Estado de Chile entered into a Sale Agreement for the sale of 4,999 shares out of the total of 10,000 shares of this Subsidiary with BNP Paribas Investment Partners, equivalent to 49.99% of its equity interest. The sale of its equity interests became effective on January 2, 2009. Currently, the Company has under its administration 18 mutual funds. BancoEstado S.A. Administradora General de Fondos is located at Nueva York No. 33, 7th floor, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 50.01% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of BancoEstado S.A. Administradora General de Fondos. - BancoEstado Corredores de Seguros S.A. was established as a limited liability company on August 4, 1999. Its by-laws were modified on September 13, 2004, becoming a privately held corporation. This company is regulated by the Superintendencia de Valores y Seguros. Its purpose is the remunerated intermediation of all types of insurance ruled by Law Decree No. 251 of 1931, with any national insurance company domiciled in the country and providing related insurance contracting advisory services. BancoEstado has a strategic alliance with Metlife Chile Inversiones Ltda. for the development of the insurance business and incorporated this company as a shareholder of BancoEstado Corredores de Seguros S.A. with a 49.9% interest. This alliance includes participation in the management and development of products and businesses. BancoEstado Corredores de Seguros S.A. is located at Moneda No. 1,140, 2nd floor, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 50.10% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of BancoEstado Corredores de Seguros S.A. 10 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - BancoEstado Servicios de Cobranza S.A., is a privately held company established on September 9, 1999, and registered with the Superintendencia de Bancos e Instituciones Financieras on August 10, 1999 under No. 752. Its exclusive objective is to collect on credit documents on its own account or on behalf of others, whether through pre-judicial, judicial or extrajudicial means. BancoEstado Servicios de Cobranza S.A. is located at San Diego No. 81, 6th floor, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 99.9% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of BancoEstado Servicios de Cobranza S.A., which is fully dependent upon BancoEstado. BancoEstado Servicios de Cobranzas S.A. holds non-controlling interest in the following companies: Entity name BancoEstado Contacto 24 Horas S.A. (*) BancoEstado Centro de Servicios S.A. (*) No. of share Participation 10 0.1000% 518,749 0.1000% Valuation of the investment Share Method Share Method Dividends Received 2015 2014 MUS$ MCh$ MCh$ - (*) Entities that form part of the consolidated BancoEstado group. - BancoEstado Microempresas S.A. Asesorías Financieras was incorporated on July 23, 1996, and is subject to the regulations of the Superintendencia de Bancos e Instituciones Financieras. Its exclusive purpose is to provide support services to the banking business in terms of financial advisories to microenterprises. BancoEstado Microempresa S.A. Asesorías Financieras is located at Nueva York No. 9, 5th floor, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 99.9% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of BancoEstado Microempresa S.A. Asesorías Financieras. 11 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - BancoEstado Centro de Servicios S.A. was incorporated on November 13, 2004, for the sole purpose of carrying out legal and operating activities related to those referred to in No. 1 of Article No. 69 of the General Banking Law, except for those related to entering into contracts for checking accounts and deposit transactions. Its main purpose is to provide support services to the banking business in terms of cash services. BancoEstado Centro de Servicios S.A. is located at Nueva York No. 9, 3rd floor, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 99.9% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of BancoEstado Centro de Servicios S.A. BancoEstado Centro de Servicios S.A. holds non-controlling interest shares in the following company: Entity name Sociedad de Servicios Transaccionales Caja Vecina S.A. (*) No. of share Participation 30 0.1506% Valuation of the investment Share Method Dividends Received 2015 2014 MUS$ MCh$ MCh$ 4 2 (*) Entities that form part of the consolidated BancoEstado group. - BancoEstado Contacto 24 Horas S.A. is a privately held company established on December 13, 2001. Its purpose is to provide, via remote and/or virtual communication, telemarketing and technical support services, and general product and service information aimed at developing and maintaining business relationships with customers from BancoEstado and its subsidiaries. BancoEstado Contacto 24 Horas S.A. is located at Nueva York No. 80, 11th floor, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 99.9% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of BancoEstado Contacto 24 Horas S.A. 12 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - Sociedad de Servicios Transaccionales Caja Vecina S.A. is a privately held company established on October 19, 2006. Its sole and exclusive purpose is to carry out activities related to legal and operational actions with the public referred to in No. 1 of Art. No. 69 of the General Banking Law, except for those related to entering into contracts for checking accounts and deposits operations. Sociedad de Servicios Transaccionales Caja Vecina S.A. is located at Avenida Bombero Ossa No. 1,010, Office 301-A, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 99.85% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of Sociedad de Servicios Transaccionales Caja Vecina S.A. Sociedad de Servicios Transaccionales Caja Vecina S.A. holds non-controlling interest in the following company: Entity name Sociedad de Promoción de Productos Bancarios S.A. (*) No. of share Participation 10 0.1700% Valuation of the investment Share Method Dividends Received 2015 2014 MUS$ MCh$ MCh$ - (*) Entities that form part of the consolidated BancoEstado group. - Sociedad de Promoción de Productos Bancarios S.A. is a privately held corporation, established on May 7, 2008. Its sole and exclusive purpose is to promote the products and services of the Bank and its Subsidiaries. This company is subject to the regulations of the Superintendencia de Bancos e Instituciones Financieras. Sociedad de Promoción de Productos Bancarios S.A. is located at Bandera No. 84, mezzanine, Santiago, Chile. This company is considered a Subsidiary of BancoEstado, as the Bank owns shares with representative voting rights for 99.83% of its equity as of December 31, 2015 and 2014, holding controlling interest in the operations of Sociedad de Promoción de Productos Bancarios S.A. 13 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - Banco del Estado de Chile New York Branch, whose banking license was issued on July 25, 2005, by the authorities of the State of New York, authorized Banco del Estado de Chile the opening and operations of a branch in the city of New York. Its operation started on October 5, 2005. Its commercial orientation is preferably towards Chilean customers, corporations, entities and institutions with products and services for foreign trade, such as letters of credit, discounts and payment orders, commercial loans in foreign currencies, exchange operations, risks hedging, etc. The Branch fully depends on its parent company. This Branch is regulated and supervised by the State of New York and the Federal Reserve in the United States. The following charts show a summary of the financial position of the companies in which BancoEstado participates (*): December 31, 2015 Entities BancoEstado S.A. Corredores de Bolsa BancoEstado S.A. Administradora General de Fondos BancoEstado Corredores de Seguros S.A. BancoEstado Servicios de Cobranzas S.A. BancoEstado Microempresas S.A. Asesorías Financieras BancoEstado Centro de Servicios S.A. BancoEstado Contacto 24 Horas S.A. Sociedad de Servicios Transaccionales Caja Vecina S.A. Sociedad de Promoción de Productos Bancarios S.A. Assets MUS$ MCh$ 960 682,054 14 10,201 46 32,921 8 5,769 12 8,258 32 22,464 2 1,230 11 7,882 1 611 Liabilities MUS$ MCh$ 864 613,282 6 4,348 36 25,714 6 4,044 7 4,813 29 20,252 1 595 5 3,444 6 Company income MUS$ MCh$ 9 6,251 9 6,245 20 14,449 1 580 196 1 203 3 2,332 7 Accumulated profits MUS$ MCh$ 76 54,149 1 842 5 3,386 27 4 2,529 (7) (4,773) (346) (25) Cash and cash equivalent MUS$ MCh$ 5 3,387 7 4,936 12 8,861 3 2,261 5 3,417 1 406 1 369 6 3,983 8 December 31, 2014 Entities BancoEstado S.A. Corredores de Bolsa BancoEstado S.A. Administradora General de Fondos BancoEstado Corredores de Seguros S.A. BancoEstado Servicios de Cobranzas S.A. BancoEstado Microempresas S.A. Asesorías Financieras BancoEstado Centro de Servicios S.A. BancoEstado Contacto 24 Horas S.A. Sociedad de Servicios Transaccionales Caja Vecina S.A. Sociedad de Promoción de Productos Bancarios S.A. Assets MCh$ 745,549 8,376 23,516 5,792 7,091 28,377 1,405 7,466 606 Liabilities MCh$ 682,888 6,687 17,313 4,093 3,759 26,166 973 3,341 9 Cash and Company Accumulated cash income profits equivalent MCh$ MCh$ MCh$ 9,870 44,278 3,349 5,013 4,373 4,342 13,772 3,369 1,106 1,313 (1,313) 1,313 83 2,529 1,768 204 (4,977) 923 132 (478) 66 2,419 3,719 10 (34) 1 (*) For more information, please see our website, www.bancoestado.cl. 14 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Summary of significant accounting policies and others a) Period covered: The Consolidated Financial Statements (hereinafter, “Financial Statements”) comprise the following statements and periods: Consolidated Statement of Financial Position, Consolidated Statement of Income, Consolidated Comprehensive Statement of Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows for the years ended December 31, 2015 and 2014. b) Basis of presentation: Article No.15 of the General Banking Law empowers the Superintendencia de Bancos e Instituciones Financieras to set forth general application accounting standards to entities subject to its oversight. On the other hand, the Companies Law requires that generally accepted accounting principles be followed. According to the mentioned legal regulations, banks must use the criteria established by the Superintendencia de Bancos e Instituciones Financieras in its Compendium of Accounting Standards, and in all matters not treated therein and when not in opposition to said Compendium, they must follow the generally accepted accounting principles, which correspond to the International Financial Reporting Standards (“IFRS”), established by the International Accounting Standards Board (IASB). In the event of discrepancies between those generally accepted accounting principles and the accounting criteria issued by the Superintendencia de Bancos e Instituciones Financieras, the latter shall take preference. The notes to the Consolidated Financial Statements contain additional information to that included in the Consolidated Statement of Financial Position, the Consolidated Statement of Income, the Consolidated Comprehensive Statement of Income, the Consolidated Statement of Changes in Equity and the Consolidated Statement of Cash Flows. These notes provide narrative descriptions and clear, relevant, reliable and comparable details of the Financial Statements. For the convenience of the reader, the Consolidated Financial Statements and their accompanying notes have been translated from Spanish to English. Certain accounting practices applied by the Bank that conform to rules issued by the Chilean Superintendency of Banks may not conform to generally accepted accounting principles in the United States (“US GAAP”) or to International Financial Reporting Standards (IFRS). 15 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 such Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars amounts at the rate indicated in preparing our Financial Statements or could be converted into U.S. dollars amounts at the rate indicated or any particular rate at all. Unless otherwise indicated, such U.S. dollar amounts have been translated from Chilean pesos based on our own exchange rate of Ch$ 710.16, per US$1.00 as of December 31, 2015 c) Basis of preparation of the Consolidated Financial Statements: The Consolidated Financial Statements as of Decembrer 31, 2015 and 2014, comprise the preparation of the Financial Statements of the Bank, New York Branch and Subsidiaries, and include the adjustments and reclassifications necessary to conform the accounting policies and valuation criteria applied by the Bank, in accordance with the standards established in the Compendium of Accounting Standards issued by the Superintendencia de Bancos e Instituciones Financieras. Intercompany balances and any unrealized gains or losses from intercompany transactions are eliminated in full during the preparation of the Consolidated Financial Statements. As of December 31, 2015, the assets and liabilities and operating income of the Subsidiaries represent altogether 10.76%, 11.26% and 18.45% respectively (8.88%, 9.27% and 28.61% respectively, as of December 31, 2014) of total consolidated assets, liabilities and operating income. Unearned income and/or losses from transactions with companies, whose investment is recognized using the equity method, is eliminated from the investment, using the share percentage in the entity’s equity. The companies in which BancoEstado participates are divided into the following:  Controlled entities and/or Subsidiaries Banco Estado controls an investee when it has exposure, or rights, to variable returns from the investor‘s involvement with the investee and has the ability to use its power over the investee to affect the amount of the investor‘s returns. The entities (hereinafter jointly referred to as “Subsidiaries”) and foreign Branch over which the Bank has the capacity to exercise control, and form part of the Consolidated Financial Statements as of December 31, 2015 and 2014: 16 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Rut Company and/or foreing Branch 96.564.330-3 77.330.030-5 96.900.150-0 96.836.390-5 96.979.620-1 96.781.620-5 76.727.730-K 99.578.880-2 76.015.414-8 - BancoEstado S.A. Corredores de Bolsa BancoEstado Corredores de Seguros S.A. BancoEstado Servicios de Cobranza S.A. (*) BancoEstado S.A. Administradora General de Fondos BancoEstado Contacto 24 Horas S.A. (*) BancoEstado Microempresas S.A. Asesorías Financieras (*) Sociedad de Servicios Transaccionales Caja Vecina S.A. (*) BancoEstado Centro de Servicios S.A. (*) Sociedad de Promoción de Productos Bancarios S.A. (*) BancoEstado - Sucursal New York (*) Participation December 31, 2015 December 31, 2014 Direct Indirect Total Direct Indirect Total 99.9996% 50.1000% 99.9000% 50.0100% 99.9000% 99.9000% 99.8494% 99.9000% 99.8300% 100.0000% 0.1000% 0.1000% 0.1000% 0.1506% 0.1000% 0.1700% - 99.9996% 50.1000% 100.0000% 50.0100% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 99.9996% 50.1000% 99.9000% 50.0100% 99.9000% 99.9000% 99.8494% 99.9000% 99.8300% 100.0000% 0.1000% 0.1000% 0.1000% 0.1506% 0.1000% 0.1700% - 99.9996% 50.1000% 100.0000% 50.0100% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% (*) These entities are regulated by the Superintendencia de Bancos e Instituciones Financieras. The remaining companies are regulated by the Superintencias de Valores y Seguros. The New York Branch is also regulated by the State of New York and the US Federal Reserve.  Entities supporting the line of business and/or associated entities: Entities supporting the line of business are those over which the Bank has the ability to exercise significant influence, but not control or joint control. The companies that support the line of business are detailed as follows: Company Administrador Financiero Transantiago S.A. Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. Operadora de Tarjetas de Crédito Nexus S.A. Transbank S.A. IMERC-OTC S.A. Participation % 12/31/2015 12/31/2014 21.0000% 14.9606% 12.9030% 8.7188% 11.1100% 21.0000% 13.0336% 12.9030% 8.7188% 11.1100% The Bank analyzed the valuation method and decided to continue to apply the equity method (EM) to account for all entities supporting the line of business, using as main criterion the level of significant influence exercised over these companies through its participation in the Board rather than its share in the equity of those companies. The business support entities are non public entities that do not trade their shares on a stock exchange, and aim to facilitate the execution of operational activities with associated banks, and are considered permanent investments. 17 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Investments in companies: Investments in companies correspond to those companies over which the Bank has no control, or for those over which it has no significant influence. The aforementioned investments are presented at their fair value. Between December 31, 2015 and December 31, 2014 there have been no changes in the Bank’s composition or changes in ownership. The Bank has no participation in special purpose entities. d) Non-controlling interest: The non-controlling interest represents the portion of the gains or losses and net assets over which the Bank, directly or indirectly, has no ownership. The non-controller interest is presented separately within the Consolidated Statement of Income, and in the equity in the Consolidated Statement of Financial Position, it is presented separately from the equity attributable to the Bank. e) Operating segments: The Bank discloses segment information in accordance with IFRS 8 “Operating Segments”, which establishes the standards to report operating segments and related disclosures for products and services and geographical areas. An operating segment is defined as a component of an entity about which, separate financial information is available, that is used regularly by the chief decision maker to decide how to allocate resources and evaluate performance. The Bank’s operating segments are determined based on the different business units. These business units generate services subject to risks and performance that are different from another operating segment. The breakdown of operating segments is presented in Note 4 to the consolidated financial statements 18 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) f) Functional and presentation currency: The Bank and its Subsidiaries have defined the Chilean peso as their functional currency because:  It is the currency of the main economic environment whose competitive forces and regulations determine the prices of financial services provided by the Bank and its Subsidiaries.  It is the currency that mainly influences payroll and other costs necessary to provide the services that the Bank and its Subsidiaries provide to its clients The New York Branch has defined its functional currency as the US dollar. Balances of the Branch’s Financial Statements are converted to Chilean pesos as follows:    Assets and liabilities are converted at the exchange rate, as of the Financial Statement closing date. Income, expenses and cash flows, are converted applying the accounting average exchange rate of the month of the transaction. Net equity at historical exchange rates. The presentation currency for the Consolidated Financial Statements is the Chilean peso, expressed in millions of pesos (MCh$). g) Foreign currency transactions: All balances and transactions in currencies other than the functional currency are considered “foreign currency”. For the preparation of the Consolidated Financial Statements of the Bank and its Subsidiaries, monetary assets and liabilities in foreign currencies are converted into Chilean pesos using exchange rates current as of the closing date of the respective Consolidated Financial Statements. The resulting gains or losses are recognized as profit or loss. Differences produced from the converted of balances in the functional currency of the New York Branch to Chilean pesos are recorded in “Valuation accounts – conversion difference” in the Consolidated Statement of Changes in Equity. 19 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) h) Valuation criteria of assets and liabilities: The measurement criteria of assets and liabilities recorded in the Consolidated Statements of Financial Position are the following:  Assets and liabilities measured at amortized cost: The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition plus or minus the cumulative amortization of any difference between that initial amount and the maturity amount. In the case of financial assets, amortized cost also includes adjustments for any impairment that may have occurred. For financial instruments the part systematically recorded in the accounts of profits and loss is recorded under the effective interest rate method. The effective rate method is determined on the basis of all cash flows estimated for all the concepts in the remaining useful life of a financial instrument.  Assets and liabilities measured at fair value: The fair value of an asset or liability at a given date is understood to be the amount at which the asset could be exchanged and the liability could be settled on that date between two prudent, knowledgeable willing parties in an arm’s length transaction. The most objective and habitual reference of the fair value of an asset or liability is the price that would be paid for it in an organized and transparent market (“quoted price” or “market price”). When there is no market price to determine the fair value for a particular asset or liability, the price of recent transactions involving similar instruments is used. In those cases, when it is not possible to determine the fair value of a financial asset or liability, it is measured at amortized cost. In addition, according to Chapter A-2 of the Compendium of Accounting Standards, banks are not permitted to designate a financial asset or liability on initial recognition as one to be measured at fair value in replacement of the general criterion of amortized cost (“Fair value option”). 20 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Consolidated Financial Statements have been prepared based on the amortized cost, except for:  Derivative financial instruments, which have been measured at fair value. Assets classified as held for sale are valued at fair value when it is lower than the carrying amount minus the cost of executing the sale. Financial assets held for trading are measured at fair value. Financial investments available for sale are measured at fair value. Loans defined as hedged. Assets valued at acquisition cost: Acquisition cost is the cost of the transaction to acquire the asset, less any impairment losses should there be any. i) Investment securities: Investment securities are classified into two categories: investments held-to-maturity and financial investments available for sale. The category of investments held-to-maturity includes only those instruments for which the Bank has the positive intent and ability to hold to maturity. All other investment securities are categorized as available for sale. Investment securities are initially recognized at cost, including transaction costs. Subsequent to initial recognition, available-for-sale investments are measured at fair value based on market prices or valuations obtained from using models, less impairment losses. Unrealized gains or losses from changes in fair value are recognized with a charge or credit to equity. When these investments are sold or impaired, the amount of the accumulated fair value adjustments in equity is transferred to income and reported under “Net income from financial operations” the consolidated income statement for the year. Held to maturity investments are recorded at cost plus accrued interest and readjustments less impairment provisions recorded when their carrying amount exceeds their estimated recovery amount. Interests and adjustments to held to maturity investments and instruments available for sale are included under, "Interest income" the Consolidated Statements of Income. Investment securities designated as hedged instruments are adjusted following the rules on hedge accounting. 21 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investment securities purchases and sales that must be delivered within the time period established by market regulations and conventions are recognized on the trading date, which is the date when the commitment is made to purchase or sell the asset. The Bank has evaluated its held-to-maturity and available-for-sale investment portfolio as of December 31, 2015 and 2014, in order to assess whether there are any impairment indicators. This assessment includes economic evaluations, credit rating of the debt issues and the intent and ability of management to hold these investments to maturity. Based on such evaluation, no impairment losses have been recognized. j) Instruments held for trading: Instruments held for trading are securities acquired for the purpose of generating earnings from current price fluctuation or from brokerage margins, or which form part of a portfolio in which there is a pattern of current profit-taking. Instruments held for trading are valued at fair value based on market prices as of the closing date of the Consolidated Statement of Financial Position. Profits or losses generated by adjustments for the valuation of their fair value, as well as income from negotiation activities (sale of instruments), are included in “Net income from financial operations” in the Consolidated Statement of Income. Accrued interest and readjustments are also reported as “Net income from financial operations” in the Consolidated Statement of Income. Management has designated all investments held by Subsidiaries as instruments held for trading. All purchases and sales of instruments held for trading to be delivered in the period established by market regulations or conventions are recognized on the trading date, which is the date on which the commitment is made to purchase or sell the asset. k) Derivative financial instruments: Financial derivative contracts including foreign currency (FC) and UF, interest rate futures, currency and interest rate swaps, interest rate and currency options, and other financial derivatives are initially recognized in the Consolidated Statement of Financial Position at their cost (including transaction costs) and subsequently measured at fair value. The fair value is obtained from market rates, discounted cash flow models and option valuation models, as appropriate. Derivative contracts are presented as an asset when their change in fair value is positive and as a liability when it is negative under "Financial derivative contracts", as applicable. 22 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Certain embedded derivatives in other financial instruments are treated as separate derivatives when their risk and characteristics are not closely related to those of the main contract and if the contract in its entirety is not recorded at its fair value with its unrealized gains and losses included in profit or loss. At inception of a derivative contract, it should be designated by the Bank as a trading derivative or as a hedging instrument for hedge accounting purposes. Any changes in the fair value of financial derivative contracts for negotiation are included under “Net profits from financial operations”, in the Consolidated Statement of Income. If the derivative instrument is classified as for accounting hedge purposes, it can be: (1) a fair value hedge of existing assets or liabilities or firm commitments, or (2) a hedge for cash flows related to existing assets or liabilities or expected transactions. A hedge relationship for hedge accounting purposes must meet all the following conditions: (a) at inception of the hedge there is formal documentation of the hedge relationship; (b) the hedge is expected to be highly effective; (c) the effectiveness of the hedge can be reliably measured and (d) the hedge is highly effective in relation to the hedged risk, continuously throughout the hedge relationship. Certain transactions with derivatives that do not qualify for hedge accounting are treated and reported as trading derivatives, even though they provide effective coverage for managing risk positions. When a derivative hedges exposure to changes in the fair value of a recognized asset or liability, such asset or liability is recorded at fair value with respect to the specific risk hedged. Profits or losses from valuing both the hedged item and the hedge derivative at fair value are recognized in profit or loss. If the hedged item in a fair value hedge is a firm commitment, changes in the fair value of the commitment in regard to the risk hedged are recorded as an asset or liability with an effect on income for the year. Profits or losses from fair value measurement of the hedge derivative are recognized with an effect on income for the year. When an asset or liability is acquired as a result of the commitment, the initial recognition of the acquired asset or liability is adjusted to incorporate the accumulated effect of fair value valuation of the firm commitment that was recorded in the Consolidated Statement of Financial Position. When a derivative hedges exposure to changes in the cash flows of recognized assets or liabilities or of expected transactions, the effective part of the changes in fair value with respect to the hedged risk is recorded in shareholders’ equity. Any ineffective part is recognized directly in income for the year. 23 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The amounts recorded directly in equity for the effective portion of cash hedges, are carried to income during the same periods in which the hedged assets or liabilities affect the profits or losses for the year. l) Loans to customers: Loans to customers are non-derivative financial assets with fixed or determined payments that are not quoted in an active market and that the Bank has no intention to sell immediately or in the short-term. When the Bank is the landlord in a lease agreement and substantially transfers all incidental risks and benefits over the leased asset, the transactions is presented under loans to customers, as leasing operations. Loans are initially valued at cost plus incremental transaction costs and subsequently measured at amortized cost using the effective interest rate method, except when the Bank defines certain loans as hedges, which are valued at fair value with changes in net income, as described in letter k) of this note. m) Interest revenue and expenses: Interest revenue and expenses are recognized on an accrual basis using the effective interest rate method. However, when a loan is determined to be impaired, the Bank, on a prudent basis, will suspend accrual of interest and readjustment, and recognize them in the accounting when they are received. In accordance with the criteria established by the Superintendecia de Bancos e Instituciones Financieras, suspension occurs in the following cases: Loans with individual assessment:  Loans classified in categories C5 and C6: accrual is suspended by the sole fact of being in the impaired portfolio.  Loans classified in categories C3 and C4: accrual is suspended due to having been three months in the impaired portfolio. 24 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans with collective assessment:  Loans with less than 80% real guarantees: accrual is suspended when payment of the loan or one of its installments has been overdue for six months. Notwithstanding the above, in the case of loans subject to individual assessment, recognition of income from accrual of interest and readjustments can be maintained for loans that are being paid normally and which correspond to obligations whose cash flows are independent, as can occur in the case of project financing. n) Income and expenses from fees and commissions: Income and expenses from fees and commissions are recognized in the Consolidated Statements of Income with different criteria, depending on their nature. The most significant criteria as the follows: - Those originating from specific actions which are recognized when the action that generates them is produced. Those originating from transactions or services that are rendered over a period of time, which are recognized over the life, maturity or term covering such transactions or services. Those related to financial assets or liabilities, which are recognized at the time of their collection. o) Impairment: The Bank, New York Branch and Subsidiaries use the following criteria to evaluate the impairment of its assets, as applicable:  Financial assets: Financial assets are evaluated at each reporting date to determine whether there is objective evidence of impairment. A financial asset or group or assets will be impaired if there is objective evidence that one or more events have had a negative effect on future cash flows of the asset. An impairment loss related to financial assets recorded at amortized cost is calculated as the difference between the carrying amount of the asset and the present value of estimated cash flows discounted at the effective interest rate. An impairment loss in relation to an available-for-sale financial asset is calculated by reference to its fair value. 25 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Individually significant financial assets are individually reviewed to determine their impairment (individual assessment). The remaining financial assets are evaluated collectively in groups that share similar credit risk characteristics (collective assessment). All impairment losses are recognized in profit or loss. Any accumulated loss related to an availablefor-sale financial asset, previously recognized in equity is transferred to income. An impairment loss can only be reversed if it can be related objectively to an event occurring after the impairment loss was recognized. Reversal of financial assets recorded at amortized cost and those debt instruments classified as available-for-sale is recorded in profit or loss.  Non-financial assets: The carrying amount of non-financial assets, excluding investment properties and deferred taxes, is regularly reviewed to determine whether there is any indication that the asset may be impaired. If any such indication exists, the Bank estimates the recoverable amount of the asset, which is its fair value less cost of sales or its value in use, whichever is greater. Losses for impairment recognized in previous years are evaluated on each date of presentation in order to check for any signs that losses have reduced or disappeared. A loss for impairment is reversed if, and only if, a change has occurred in the estimates used to determine the recoverable amount of the asset, since the last loss for impairment was recognized. The asset’s carrying amount, increased after the reversal of a loss for impairment, shall not exceed the carrying amount that would have been obtained (net of depreciation or amortization), if a loss for impairment of value had not been recognized for that asset in previous years. p) Investments in companies: Associated entities, which correspond to entities that provide business-related support, are valued using the equity method (Note 1 c)), which consists of determining the value of the investment according to the percentages of participation in the associate’s equity. Income on these investments is recognized on an accrued basis. q) Intangible assets: Intangible assets held by the Bank are mainly investments in software. Acquired software is measured at cost less accumulated amortization and accumulated impairment losses. 26 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Expenses for internally developed software are recognized as assets when the Bank is able to demonstrate its intention and ability to complete its development and use it internally to generate future economic benefits, and the cost of completing its development can be reliably measured. Capitalization of the cost of internally developed software includes all direct costs attributable to the development of the software and is amortized over its useful life. Amortization is recognized on a straight-line basis over the estimated useful life of the software since it is ready for use. The average estimated useful life of software is 3 years. Expenses incurred, in research and evaluation of technological alternatives, are recognized as an expense in period in which they are incurred. r) Property, plant and equipment: “Property, plant and equipment” are stated at cost less accumulated depreciation and impairment losses. The cost includes expenses directly attributable to the acquisition of such assets. The cost of assets at the construction stage includes the cost of materials and direct labor and any other costs directly attributable to the process of conditioning an asset so that it is ready for use. When part of a property, plant and equipment item has a different useful life; such part is recorded as a separate item (significant components of “Property, plant and equipment”). Depreciation is recognized in the Consolidated Statement of Income based on the linear depreciation method applied to the useful lives of each part of a property, plant and equipment item. Assets associated with leased goods are amortized in the shortest period between the leasing contract and their useful lives, unless it is certain that the Bank will obtain ownership at the end of the leasing period. As of December 31, 2015 and 2014, the Bank applied the following useful lives for depreciation of assets - Buildings - Equipment and facilities - Equipment and accessories 80 years 5 to 10 years 3 years Depreciation, useful lives and residual values are calculated at each reporting date. 27 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The estimated useful lives of property, plant and equipment items are reviewed at the end of the reporting period in order to detect any significant changes. If changes are observed in the useful lives of the assets, they are adjusted and depreciation is corrected in the current period and any future affected period. Repair and maintenance expenses are recognized when they occur. s) Lease agreements:  Operating leases: When the Bank, New York Branch and its Subsidiaries act as lessees and the contract qualifies as an operating lease, the total payment is recorded on the date of the rendering of the service. At the end of the term of the operating lease, any payment related to contract fines required by the lessor is recorded in expenses for the exercise in which such contract ended.  Financial leases: Financial leases consist of lease agreements with a clause that gives the lessee the option to purchase the leased asset at the end of the lease. The sum of the present value of lease payments that will be received from the lessee, plus the purchase option is recognized as third party financing and therefore presented in the “Loans and accounts receivable from customers” at present value and the asset is derecognized. Goods acquired for financial lease operations are presented under “Other assets” at acquisition cost. t) Cash and cash equivalents: The Bank has used the indirect method for preparing the Consolidated Statement of Cash Flows, whereby the Bank’s net income is adjusted for the effects of non-cash transactions, as well as for income and expenses associated to cash flows classified as from operational, investing or financing. 28 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In accordance with the specific provisions applicable to financial institutions, the Bank and its Subsidiaries consider cash and cash equivalents as the balance of the “Cash and deposits in banks”, plus (minus) the net balance of “Transactions in the course of collection” as shown in the Consolidated Statements of Financial Position, plus “Financial assets held for trading” and “Financial investments available for sale” of high liquidity and insignificant risk of a change in value, whose maturity does not exceed three months from the date of acquisition, and “Repurchase agreements and securities loans” in that position. It also includes investments in fixed income mutual funds, which are found under “Financial assets held for trading” in the Consolidated Financial Statements. The preparation of the Consolidated Statements of Cash Flows considers the following concepts: a) Operating activities: correspond to normal activities performed by banks, as well as other activities that cannot be qualified as from investing or financing. b) Investing activities: correspond to acquisition or disposal by other means of non-current assets and other investments not included in cash and cash equivalents. c) Financing activities: correspond to activities that produce changes in the size and composition of net equity and liabilities that do not form part of operating or investing activities. u) Provisions for loan losses: The provisions required to cover loan losses have been recognized according to the standards of the Superintendencia de Bancos e Instituciones Financieras. Assets are presented net of the provision or showing the reduction in the case of “Loans and accounts receivable from customers”. In the case of contingent credits, provisions are recorded in liabilities, under “Provisions”. The models established by the Superintendencia de Bancos e Instituciones Financieras for determining provisions are summarized as follows: u.1) Provisions for individual assessment: In accordance with Chapter B-1 of the Compendium of Accounting Standards of the Superintendencia de Bancos e Instituciones Financieras the individual assessment of debtors is necessary when dealing with clients who due to their size, complexity or exposure level, need to be known and analyzed in detail. 29 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Criteria of commercial portfolio rating with individual analysis: The following risk rating criteria are applied to commercial debtors subject to individual analysis, and are based on the principles established in Chapter B-1 of the Compendium of Accounting Standards of the Superintendencia de Bancos e Instituciones Financieras. The analysis for the rating should be mainly based on the debtor’s payment capacity and inherent financial characteristics, taking the credit quality of the group it belongs to as referential information. Debtor portfolio with normal risk The portfolio with normal risk includes debtors whose payment capacity allows them to fulfill their obligations and commitments and it is not perceived that this condition will change based on the assessment of their economic financial position. Therefore, these are debtors without substantial risks, whose payment capacity allows them to cover obligations under the agreed terms and which would continue being satisfactory in spite of unfavorable business, economic and financial situations. The probability of default and expected loss in each category of the normal risk portfolio is as follows: Type of portfolio Normal risk Portfolio Category Probability of default % A1 A2 A3 A4 A5 A6 0.04 0.10 0.25 2.00 4.75 10.00 Loss due to default % 90.00 82.50 87.50 87.50 90.00 90.00 Expected loss (provision %) 0.03600 0.08250 0.21875 1.75000 4.27500 9.00000 30 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Substandard portfolio The substandard portfolio includes debtors with financial difficulties or significant worsening of their payment capacity and for which there are reasonable doubts about the total reimbursement of agreed principal and interest, showing little room to fulfill their current financial obligations. This portfolio also includes debtors, which lately (in the last twelve months) have shown delinquencies in excess of thirty days, show poor payment behavior with the Bank and with third parties (delinquency during the year for significant amounts outstanding for less than 90 days). The probability of default and expected loss in each category of the substandard portfolio are detailed as follows: Type of portfolio Category Substandard Portfolio B1 B2 B3 B4 Probability of default % 15.00 22.00 33.00 45.00 Loss due to default % 92.50 92.50 97.50 97.50 Expected loss (provision %) 13.87500 20.35000 32.17500 43.87500 Provisions on portfolio under normal or substandard compliance To determine the amount of the provisions that should be established for portfolios with normal and substandard compliance, banks must first estimate the exposure subject to provisions, to which the respective loss percentages will be applied (expressed in decimals), which comprise the likelihood of default (PI) and loss due to default (PDI) established for the category within which the debtor and/or its qualified guarantor fall, as applicable. The exposure subject to provisions corresponds to loans plus contingent loans less amounts that would be recovered by means of executing guarantees, as stated in No. 4.1 of Chapter B-1 of the Compendium of Accounting Standards of the Superintendencia de Bancos e Instituciones Financieras. Likewise, loans are understood to be the carrying amount of loans and accounts receivable of the respective debtor, whereas contingent loans are understood as the value resulting of applying the regulations contained in No. 3 of Chapter B-3 of the Compendium of Accounting Standards of the Superintendencia de Bancos e Instituciones Financieras. 31 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The following should be considered for calculation purposes: Provision debtor = (EAP-EA)*(PI debtor /100)*(PDI debtor /100)+EA*(PI GUARANTOR /100)*(PDI GUARANTOR /100) Where: EAP = EA PI PDI = = = Exposure subject to provision (Loans + contingent loans) - (financial or guarantees. Guaranteed exposure. Likelihood of default. Loss due to default. real) Notwithstanding the above, the Bank must maintain a minimum provision percentage required of 0.50% on loans and contingent loans in the Normal Portfolio. Non-performing portfolio This portfolio includes debtors with loans overdue for more than 90 days or which are in judicial collection and whose source of payment is supported in the guarantees established. Should there be concrete information that justifies it; the present value of recoveries that might be obtained by exerting the collection actions, net of the expenses associated to them can also be considered. “Concrete information” is considered to be any recovery by judicial means that is supported with a report from the Bank’s Legal Department determining the effectiveness of the collection. This must be free of any encumbrance or preferential creditors, leading to an actual payment flow. In addition, those debtors who have shown a negative past performance in the Bank or Financial System are considered as non-performing, such as: social security and tax infringement, protested and not cleared notes, debt past due in the Financial System (FS), write-offs in the financial system, etc. as well as debtors in default or showing a preventive judicial arrangement. There are six categories for debtors with non-performing loans and each of them is associated to a range of expected loss relating to commercial loans and commercial lease operations of the customer as a whole; therefore it is necessary to determine the guarantee coverage. It should be noted that all contingent loans must be fully considered, since they are rated as non-performing loans. 32 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Provisions on non-performing portfolio For the purpose of establishing the provisions, there are percentages that must be applied to the amount of the exposure which correspond to the sum of loans and contingent loans held by the same debtor. To apply this percentage, an expected loss rate should first be estimated by deducting from the amount of the exposure the amounts recoverable through execution of guarantees and, in case there is concrete information to justify it, also deducting the present value of recoveries that can be obtained exerting collection actions, net of the related expenses associated to them. This loss rate should be included in one of the six categories defined according to the range of losses actually expected by the Bank for all the operations of the same debtor. These categories and their loss range as estimated by the Bank and the provisions percentages that should ultimately be applied on the amounts of exposures for the non-performing portfolio are those indicated in the following table: Type of portfolio Non-performing portfolio Hazard Scale C1 C2 C3 C4 C5 C6 Range of expected loss More than 0 up to 3% More than 3 % up to 20% More than 20% up to 30% More than 30% up to 50% More than 50% up to 80% More than 80% Provisions (%) 2 10 25 40 65 90 The following should be considered for calculation purposes: Expected loss rate = (E-R)/E Provision = E * (PP/100) Where: E R PP = = = Amount of the exposure. Recoverable amount. Provisions percentage (as per category where the expected loss rate must fall). 33 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) u.2) Collective assessment provisions: Collective assessment is used to analyze a large number of operations whose individual amounts are low, generally involving individuals or small businesses. For this purpose the Bank uses models based on probability of default of debtors and their loans. In collective assessments, provisions are always established according to the expected loss using the models and formulas indicated by the Superintendencia de Bancos e Instituciones Financieras. Provisions for the collectively assessed portfolio are determined as follows: Provision=EG*(1-EA/100)*(PI/100)*(PDI/100)+EG*EA/100(PI GUARANTOR /100)*(PDI GUARANTOR /100) Where: EG EA PI PDI = = = = PI GUARANTOR = Amount of exposure. Percentage of guaranteed exposure, for the group of loans. Likelihood of default. Percentage of loss due to expected default, which must be calculated excluding recoveries from guarantors. Percentage of likelihood that the guarantor will default. PDI GUARANTOR = Percentage of loss due to guarantor default. u.3) Impaired portfolio: The impaired loan portfolio includes those loans for which there is concrete evidence that debtors will default by failing to make any of the contractual payments, regardless of the possibility of recovering the amounts owed through guarantees, through exercising legal collection actions or by agreeing to different conditions. In any case, when dealing with debtors subject to individual assessment, the Bank considers in impaired portfolio all credits of debtors classified in any of the categories of the non-performing portfolio, as well as in categories B3 and B4 of the substandard portfolio. Likewise for debtors being collectively assessed, the impaired portfolio includes all loans in the non-performing portfolio. Based on the above, the Bank shall maintain loans in the impaired portfolio until it observes regularization of the debtor’s payment capacity or behavior; otherwise it will write these loans off. 34 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) u.4) Loans write-off: Loans and accounts receivable are written-off based on due, past due and outstanding installments. The timeframe for the write-off is from the beginning of the default, i.e. when the default time of an installment or portion of a loan of an operation reaches the deadline to be written-off, detailed as follows: Type of loan Consumer loans with or without real guarantees Other transactions without real guarantees Commercial loans with real guarantees Residential mortgage loans Leasing of consumer goods Other non-real estate lease transactions Real estate lease (commercial and residential) Deadline 6 months 24 months 36 months 48 months 6 months 12 months 36 months u.5) Recovery of written-off loans: Recovery of previously written-off loans is recognized directly in income under “provisions for loan losses” netting the provision expense for the year. u.6) Additional provisions: In addition to the provision for loan losses, the Bank may make additional provisions to those derived from the application of portfolio assessment models, for the purpose of safeguarding against unpredictable economic fluctuations that might affect the macroeconomic environment or the situation of a specific economic sector, in accordance with the Bank’s policies (Note No. 20). Within the additional provisions the Bank contemplates a countercyclical mechanism of accumulation of provisions in the commercial, consumer and mortgage portfolio, to safeguard against any recessionary periods and also considers additional provisions for portfolio concentration of the mortgage loan portfolio. In January 2014, the Executive Board of the Bank decided to replace the limits to constitute additional provisions, establishing such limits between 0% and 2.5% of risk-weighted assets. As of 31 December 2015, the Bank maintains additional provisions equivalent to 2.02% of the weighted assets for credit risk (2.31% as of December 31, 2014). During 2015 there has been no effect on income due to additional provisions, as these were recorded in prior years. 35 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) v) Provisions and contingent liabilities: Provisions are liabilities of uncertain timing and amount. These provisions are recognized in the Consolidated Statement of Financial Position when the following requirements are fulfilled collectively:  It is a real obligation as a result of past events and,  As of the date of the Consolidated Financial Statements it is probable that the Bank or group will use an outflow of resources to settle the obligation and the amount of the obligation can be reliably estimated. A contingent liability is a possible obligation that arises from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events that are not wholly within the control of the Bank, New York Branch and its Subsidiaries. w) Employee benefits:  Employee vacations: The annual cost of vacations and employee benefits are recognized on an accrual basis.  Current benefits: The Bank provides to its employees an annual bonus incentive plan based on achievement of certain objectives and goals, which consists in a specific number or portion of monthly salaries. that bonus is accrued based on the expected amount to be paid. The Bank has agreed with its employees during the collective negotiation process of 2015, a negotiation bonus which is amortized over the term of the collective agreement and the portion that is not amortized is recorded in the item “Other assets”.  Non-current benefits: The Bank has made provisions for long-term benefits to its employees due to the existence of implied obligations in the collective contract. These obligations result in provisions that are calculated using actuarial assumptions including variables such as the rate of staff turnover, increased salaries, mortality tables and the likelihood of using this benefit. BancoEstado does not have defined contribution plans. 36 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) x) Current and deferred income taxes: The Bank and its Subsidiaries have recognized a corporate income tax expense as of the end of each reporting period in accordance with applicable tax regulations (Note No. 15). Additionally, as the Bank is treated as a public sector institution, it is subject to a tax credit in accordance with Art. No. 2 of Decree Law No. 2,398 dated 1978 that corresponds to a rate of 40%. The effects of deferred taxes on temporary differences, between the tax balance sheet and the Consolidated Statement of Financial Position, are recorded in accordance with IAS 12. The Bank and its Subsidiaries recognize, when applicable, deferred tax assets and/or liabilities for the future estimate of tax effects attributable to differences between the carrying amounts of assets and/or liabilities and their tax values. Deferred tax assets and/or liabilities are measured on the basis of the tax rate, which according to current tax legislation must be applied in the year in which the deferred tax assets and/or liabilities are realized or settled. Future effects of changes in tax legislation or in tax rates are recognized in deferred taxes, as of the date in which the law approving those changes is enacted. On September 29, 2014, Law No. 20,780 was published in the Diario Oficial that permanently changed the income tax rate established in Article No. 20 of the Income Tax Law, setting the First Category tax rate at 21% and 22.5% for the 2014 and 2015 business year, respectively. In relation to the above-mentioned Law No. 20,780, a "Tax reform that amends the income tax system and introduces various adjustments in the tax system" establishing a temporary increase in the First Category income tax rate, BancoEstado and Subsidiaries have chosen the option B) tax regime in Article No. 14 of the Income Tax Law for the sole purpose of reversing the effects of deferred taxes on assets and liabilities for the years 2017 onwards. However, the definitive regime will be resolved in the timeframes and manners as specified by Law. On July 23, 2015, the Servicio de Impuestos Internos Circular Letter No. 66, which sets the taxation system to companies in which the State has a 100% ownership interest. Due to the above, for the purposes of reversal of the effects of assets and deferred tax liabilities shall be applied, for the years 2017 onwards, a first category tax rate of 25% on the affected revenues generated in the year. 37 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) y) Transactions with agreements: The Bank, New York Branch and Subsidiaries enter into sales with repurchase agreements as a method of financing. In this regard, investments sold under repurchase agreements which serve as loan guarantees are classified under “Instruments held for trading” and “Investment securities available for sale”. The repurchase obligation is classified under “Repurchase agreements and securities loans”, recognizing interest and adjustments accrued as of the closing date. The Bank, the New York Branch and Subsidiaries also enter into sales transactions with repurchase agreements as a form of investment. Financial instruments purchased under resale agreements are included as assets under “Repurchase agreements and securities loans” recognizing interest and readjustments accrued as of the closing date. z) Factoring transactions: The Bank performs factoring transactions with its customers, whereby it receives invoices and other commercial papers representing receivables, with or without the responsibility of the transferor, paying the transferor a percentage of the total amounts receivable from the debtor for the transferred documents. Factoring receivables are valued at cash consideration paid for the receivables. The difference between the cash consideration paid and the face value of the receivables is recognized as interest income by using the effective interest method over the financing period. The transferor maintains the responsibility of payment on the invoices not collected. aa) Assets received in lieu of payment: Assets received in lieu of payment are recognized at the lower of initial carrying amount and net realizable value, less any regulatory write-offs. Write-offs are required by the Superintendencia de Bancos e Instituciones Financieras if the asset has not been sold within one year from its reception. bb) Derecognition of financial assets and liabilities: The Bank, New York Branch and its Subsidiaries derecognize a financial asset from their Statement of Financial Position when all the contractual rights over the cash flows of the financial asset expire, or when they transfer the rights to receive contractual cash flows for the financial asset during a transaction in which the risks and benefits of ownership of the financial asset are substantially transferred. Any share in financial assets transferred that is created or retained by the Bank is recognized as a separate asset or liability. 38 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) When the Bank transfers a financial asset, it evaluates to what extent it retains the risks and benefits inherent to ownership. In this case: (a) If the risks and advantages inherent to ownership of the financial assets are substantially transferred, it is derecognized in accounts and any rights and obligations created or retained due to the transfer will be separately recognized as assets or liabilities. (b) If the risks and advantages inherent to ownership of a financial asset are substantially retained, it will continue to be recognized. (c) If all the risks and advantages inherent to ownership of the financial assets are not substantially transferred or retained, it shall determine whether it has retained control over the financial asset. In this case: (i) If the transferring entity has not retained control, it will derecognize the financial asset and shall separately recognize, as an asset or liability, any right or obligation created or retained due to the transfer. (ii) If the transferring entity has retained control, it shall continue recognizing the financial asset in the Consolidated Statement of Financial Position in an amount equal to its exposure to changes in value that it might experience and recognizes a financial liability associated to the financial asset transferred. The Bank eliminates from its Consolidated Statement of Financial Position a financial liability (or a portion of it) when, and only when, it is extinguished, i.e. when the obligation specified in the corresponding contract has been paid or canceled, or when it has expired. cc) Use of estimates and judgments: The preparation of the Consolidated Financial Statements requires management to make judgments, estimates and assumptions that affect the application of the accounting policies and the carrying amounts of the assets, liabilities, income and expenses. Actual results may differ from these estimates. Significant estimates and assumptions are reviewed by the Bank’s management on an ongoing basis in order to quantify certain assets, liabilities, income, expenses and uncertainties. Changes to accounting estimates are recognized in the period, in which the estimate is changed and in any other affected future period. 39 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In particular, the information regarding the most significant areas of estimates and uncertainties and critical judgments in the application of accounting policies that have the most significant effect on the amounts recognized in the Consolidated Financial Statements, correspond to the following items: - Valuation of financial instruments and derivatives (Notes No. 6, No. 8 and No. 11) The useful life of property, plant and equipment and intangible assets (Notes No. 13 and No. 14) Current and deferred income taxes (Note No. 15) Provisions (Note No. 20) Contingencies and commitments (Note No.22) Provisions for loan losses (Note No. 28) Assumptions used in the actuarial valuation of employee benefits liabilities and commitments and other obligations (Note No. 29) Impairment losses of certain assets (Note No. 31) Assets and liabilities at fair value (Note No. 34) During the year ended December 31, 2015, there have been no significant changes in the estimates made. dd) Non-current assets held for sale: Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered mainly through a sales transaction rather than through continuing use. Immediately before this classification, the assets (or elements of a disposal group) are re-measured in accordance with the Bank’s accounting policies. From that time on, the assets (or disposal group) are measured at the carrying amount or fair value less cost of sales, whichever is lower. Deferred tax assets, assets of employee benefit and investment properties continue to be evaluated according to the Bank's accounting policies. In the initial classification of assets held for sale and profits and/or losses subsequent to the revaluation, impairment losses are recognized in income. Profits are not recognized if they exceed any cumulative impairment. ee) Distribution of net income to the Government: As of December 31, 2015 and 2014, the Bank has recognized a liability for the portion of net income to be distributed to the Government in accordance with its dividend distribution policy. For this purpose, it establishes a provision against a supplementary equity reserve account. 40 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) This policy establishes that in order to determine the provision for the distribution of net income to the Government, it shall consider the average distribution of net income for the last three years (established from the decrees issued by the Treasury Department) or that of the last year should it be greater. In accordance with the above, the provision percentage used for distribution of net income for the year amounted to 81.85% in 2015 (100.00% in 2014). ff) Consolidated Comprehensive Statement of Income: This statement presents income and expenses generated by the Bank for the period as a result of its activities, and all other income and expenses are recognized directly in equity. This Financial Statement is detailed as follows: a) b) c) d) e) f) Consolidated income for the year. Net amount of income and expenses temporarily and permanently recognized in equity as “Valuation accounts”. Deferred taxes originated from items a) and b), except for the foreign currency translation adjustment and hedge derivative for investment abroad. The net amount of revenue and expenses temporarily recognized in equity as other reserves not included in the year’s net income. Adjustments for IAS 19 actuarial calculation that are not reversed to income net of deferred tax. Total consolidated income and expenses recognized, calculated as the sum of the previous letters, separately showing the amount attributable to the Bank and to non-controlling interest. gg) New accounting pronouncements (IFRS, Interpretations of the IFRS Interpretations Committee, SBIF Regulations and SVS Regulations) The new standards, improvements and amendments to the IFRS, as well as interpretations that have been published in the period are detailed below. As of the date of these Financial Statements, these regulations are not yet effective, and the Bank has not applied them in advance. a) New Standards Date of obligatory Application IFRS 15 IFRS 9 IFRS 16 Revenue from Contracts with Customers Financial Instruments Leases January 1, 2018 January 1, 2018 January 1, 2019 41 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IFRS 15 “Revenue from Contracts with Customers” In May 2014 was issued IFRS 15; this is a new standard that is applicable to all contracts with customers except leases, financial instruments and insurance contracts. This is a joint project of the Council of International Financial Reporting Standards (IASB) with the domestic issuer of standards of the United States, the Council of Financial Accounting Standards Board (FASB), in order to eliminate differences in revenue recognition between IFRS and US GAAP. This new standard aims to improve the inconsistencies and weaknesses of IAS 18 and provide a model that will facilitate the comparability of companies from different industries and regions. It also provides a new model for the recognition of revenues and more detailed requirements for contracts with multiple elements. It also requires more detailed disclosures. The application date of the new standard is as of January 1, 2018, but its earlier application is allowed. BancoEstado is currently evaluating the impact that this policy could have on its Consolidated Financial Statements. IFRS 9 “Financial Instruments” In July 2014 was issued the final version of IFRS 9 Financial Instruments, gathering all phases of the IASB project to replace IAS 39 Financial Instruments: Recognition and Measurement. This standard includes new requirements based on principles for the classification and measurement, introduces a “more prospective” model for expected credit losses for the accounting impairment and a substantially reformed approach for hedge accounting. The entities also have the option to apply in advance accounting for income and losses due to changes in fair value related to the “own credit risk” to financial liabilities designated at fair value through profit or loss, without applying the other requirement of IFRS 9. The standard is mandatory for annual periods beginning on or after January 1, 2018. Its early application is allowed. To date, this legislation has not been approved by the Superintendencia de Bancos e Instituciones Financieras, situation that is required for its application 42 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IFRS 16 “Leases” On January 13, 2016, the IASB published a new standard, IFRS 16 “Leases”. The new standard implies that most leases are presented on the balance sheets of the leaseholders under a single model, eliminating the distinction between operating and financing leases. However, the accounting for lessees remains largely unchanged and the distinction between operating and finance leases is maintained. IFRS 16 replaces IAS 17 “Leases” and the related interpretations and is effective for periods beginning on or after January 1, 2019; its early application is allowed provided that IFRS 15 “Revenues from Contracts with Customers” is also applied. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank. b) Improvements and Modifications to Standards Date of obligatory Application IFRS 11 IAS 16 and IAS 38 IAS 27 IAS 28 and IFRS 10 IFRS 5 IFRS 7 IAS 19 IAS 34 IFRS 10, IFRS 12 And IAS 28 IAS 1 IAS 12 IAS 7 Joint Arrangements Property, Plant and Equipment and Intangible Assets Separate Financial Statements Investments in Associates and Joint Ventures and Consolidated Non-Current Assets Held for Sale and Discontinued Operations Financial Instruments: Disclosures Employee Benefits Interim Financial Reporting Consolidated Financial Statements, Disclosure of Interests in other Entities and Investments in Associates and Joint Ventures Presentation of Financial Statements Recognition of Deferred Tax Assets for Unrealized Losses Disclosure Initiative January 1, 2016 January 1, 2016 January 1, 2016 Postpone indefinitely January 1, 2016 January 1, 2016 January 1, 2016 January 1, 2016 January 1, 2016 January 1, 2016 January 1, 2017 January 1, 2017 43 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IFRS 11 “Joint Arrangements” The amendments to IFRS 11, issued on May 6, 2014, apply to the acquisition of a participation in a joint arrangement that constitutes a business. The amendments clarify that acquirers of these portions shall apply all the accounting principles for business combinations of IFRS 3 Business Combinations and other standards that are not in conflict with the guidelines of IFRS 11 Joint Arrangements. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank. IAS 16 “Property, Plant and Equipment” and IAS 38 “Intangible Assets” IAS 16 and IAS 38 establish the principle of depreciation and amortization base being the expected pattern of consumption of future economic benefits of an asset. In its amendments to IAS 16 and IAS 38 published on May 12, 2014, the IASB clarified that the use of methods based on income to calculate the depreciation of an asset is not suitable because the income generated by an activity that involves the use of an asset generally reflect factors other than the consumption of the economic benefits embodied in the asset. The IASB also clarified that income generally has an inadequate basis for measuring consumption of the future economic benefits embodied in an intangible asset. However, this presumption may be rebutted in certain limited circumstances. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank. IAS 27 “Separate Financial Statements” On August 18, 2014 the IASB published amendments to IAS 27, which reset the option of using the equity method of accounting for investments in subsidiaries, joint ventures and associates in the separate financial statements. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. 44 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank IAS 28 “Investments in Associates and Joint Ventures” and IFRS 10 “Consolidated Financial Statements” The amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) address a recognized inconsistency between the requirements of IFRS 10 and IAS 28 (2011) in the treatment of the sale or contribution of assets between an investor and his associate or joint venture. The amendments, issued on September 11, 2014, states that when the transaction involves a business (both when in a subsidiary or not) a complete gain or loss is recognized. A partial gain or loss is recognized when the transaction involves assets that do not constitute a business, even when the assets are in a subsidiary. On December 17, 2015 the IASB published final amendments to "the sale or contribution of assets between an investor and his associate or joint venture." The amendments postpone the effective date until the research project on the equity method is completed. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank. IFRS 5 “Non-Current Assets Held for Sale and Discontinued Operations” “Annual Improvements cycle 2012–2014”, issued in September 2014, clarifies that if an entity reclassifies an asset (or group of assets for disposal) from held for sale directly to held for distribution to the owners or from retained for distribution to owners directly held for sale, then the change in classification is considered a continuation of the original sales plan. The IASB clarifies that in such cases shall not apply the accounting requirements for the changes in a sales plan. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank. 45 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IFRS 7 “Financial Instruments: Disclosures” “Annual Improvements cycle 2012–2014”, issued in September 2014, clarifies that service agreements may constitute continuing involvement in a transferred asset for the purposes of the disclosures of transfers of financial assets. Generally this will be the case when the Manager has an interest in the future performance of the transferred financial assets as a result of such contract. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank. IAS 19 “Employee Benefits” “Annual Improvements cycle 2012–2014”, issued in September 2014, clarifies that the depth of the market of corporate bonds of high credit quality is evaluated based on the currency in which the obligation is denominated, rather than the country where the obligation is generated. Where there is no depth market for such bonds in that currency, bonds issued by the government in the same currency and deadlines will be used. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank. IAS 34 “Interim Financial Reporting” “Annual Improvements cycle 2012–2014”, issued in September 2014, clarifies the fact that the required disclosures have to be included or, in the interim financial statements or these shall be indicated by cross-referencing the interim financial statements and any other report that contains it. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. According to Management, this regulatory amendment has no impact on the Consolidated Financial Statements of the Bank 46 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IFRS 10 “Consolidated Financial Statements”, IFRS 12 “Disclosure of Interests in Other Entities” and IAS 28 “Investments in Associates and Joint Ventures” On December 18, 2014, the IASB has published, amendments to IFRS 10, IFRS 12 and IAS 28 introducing minor clarifications about the requirements for accounting, for investment entities. In addition, these amendments provide relief in certain circumstances, which will reduce the cost of implementing these standards. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. BancoEstado is evaluating the impact that such amendment could generate in its Consolidated Financial Statements. IAS 1 “Presentation of Financial Statements” In December 2014 the IASB published amendments to IAS 1 “Disclosure Initiative”. These amendments to IAS 1 address some expressed concerns about the presentation and disclosure requirements, and ensure that entities have the ability to exercise judgment when applying IAS 1. The amendments will become mandatory for annual periods beginning on or after January 1, 2016. Its early application is allowed. BancoEstado is evaluating the impact that could generate such amendment in its Consolidated Financial Statements. IAS 12 “Recognition of deferred tax assets for unrealized losses” On January 19, 2016, the IASB published final amendments to IAS 12 Income Taxes. The amendments clarify the following aspects  The unrealized losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to deductible temporary differences regardless of whether the holder of the debt instrument expect to recover the book value of the debt instrument through its sale or use.  The carrying amount of an asset does not limit the estimate of probable future tax profits.  The estimates of future taxable profits excludes tax deductions resulting from the reversal of deductible temporary differences 47 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  An entity evaluates a deferred tax asset in combination with other deferred tax assets. When the tax laws restrict the use of tax losses, an entity should evaluate a deferred tax asset in combination with other deferred tax assets of the same type. The amendments are effective for annual periods beginning on or after January 1, 2017. Its early application is allowed. BancoEstado is evaluating the impact that could generate such amendment in its Consolidated Financial Statements. IAS 7 “Disclosure Initiative” The amendments are part of the proposed disclosure initiative of the IASB and introduce additional disclosure requirements intended to address the concerns of investors that the financial statements do not currently allow us to understand the cash flows of the entity; in particular regarding the administration of financial activities. The amendments require disclosure of information that enables users of financial statements to evaluate changes in liabilities arising from financial activities. Although there is no specific format required to meet the new requirements, the modifications include illustrative examples to show how an entity can meet the objective of these amendments. The amendments are effective for annual periods beginning on or after January 1, 2017. Its early application is allowed. BancoEstado is evaluating the impact that could generate such amendment in its Consolidated Financial Statements. c) Regulations Issued by Superintendencia de Bancos e Instituciones Financieras - On December 30, 2014, the Superintendencia de Bancos e Instituciones Financieras issued Circular No. 3,573, which establishes changes to the rules governing the determination of the “Provisions for loan losses” included in chapter B-1 Compendium of Accounting Standards. 48 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The most important changes are: a) Addition of instructions regarding the application of standard methods for purposes of establishing provisions for portfolios evaluated in groups and governing from the year 2016, including the standard method to be applied to the mortgage loans for housing. The standard methods for commercial and consumer group portfolios, as well as the requirements to be met to use internal methodologies once these rules are applicable, will be established during this year. b) Given the peculiarities of factoring operations, instructions on this matter are added, setting certain conditions that allow treating operations as responsibility of the assignor, considering the credit risk to the ones that have to pay the invoices. c) The instructions on the portfolio in default on loans subject to individual assessment are supplemented, including certain conditions to be met to remove the portfolio of credits of a debtor, while it incorporates the same matter for group loans. d) In connection with the approval that the Board should give on the adequacy of provisions, it is stated that it shall refer both to the Consolidated Financial Statements, as the Bank considered individually, the latter with its subsidiaries in the country and overseas, as appropriate. e) The rules on rating of banks according to their portfolio evaluation systems are eliminated. f) The other changes in Chapter B-1 corresponds to adjustments or clarifications in the current standards and obey, among other things, to the need to consider aspects that have to do with the treatment of guarantees, internal methods and standard methods. The Superintendencia de Bancos e Instituciones Financieras gave instructions on December 2, 2015, that the impact of the application of this circular letter should be considered a change in estimate and, therefore, recorded in the Consolidated Statement of Income for the Year. BancoEstado as from January 2016 shall begin implementing this regulation, including the effect that can be determined on the outcome of such period. Regarding this effect, which includes the methodological adjustments to the model, if it had been registered in 2015, there would have been greater recording of provisions for net loans of MCh$ 51,615 and a release of Additional provisions for the same amount. 49 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 1 - CORPORATE INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) - On September 3, 2015, the Superintendencia de Bancos e Instituciones Financieras issued Circular Letter No. 3,586 amending paragraph 12.2 of Title II of Chapter 11-6 of the Updated Compilation of Standards, which modifies the regular delivery of the background information to be provided by parent banks about the financial position of its subsidiaries not regulated by such Superintendence; in its replacement, it requests the submittal of Interim financial Statements that need to be prepared by such entities in accordance with its rules, as provided for the financial statements of the Bank. d) Regulations issued by the Superintendencia de Valores y Seguros - On January 13, 2014, the SVS issued Circular No. 2,137, which regulates the form and content of Financial Statements to be sent to the Superintendecia de Valores y Seguros by insurance brokers that are not individuals. This regulation establishes the presentation of financial statements under IFRS effective January 1, 2015, along with establishing accounting standards related to the revenue recognition of commissions. NOTE 2 - ACCOUNTING CHANGES During the year ended December 31, 2015 there have been no significant accounting changes that affect the interpretation of these Consolidated Financial Statements. NOTE 3 - RELEVANT EVENTS a) Bank bond issuance: - On January 16, 2015, the Bank issued a bond abroad of JPY 31,000 million, at a term of 5 years, with maturity of principal on January 23, 2020, at a rate of 0.52% per annum, with half-yearly interest payments starting on July 23, 2015. - On January 27, 2015, the Bank placed a bank bond for an amount of UF 2.0 million, with a remaining term of 29 years and 11 months, at an issuance rate of 3.70% per annum, with halfyearly interest payments and payment of principal in one installment upon maturity. - On February 24, 2015, the Bank placed a bank bond for an amount of UF 3.0 million, with a remaining term of 4 years and 10 months, at an issuance rate of 3.30% per annum, with halfyearly interest payments and payment of principal in one installment upon maturity. 50 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) - On March 3, 2015, the Bank placed a bank bond for an amount of UF 2.0 million, with a remaining term of 19 years and 11 months, at an issuance rate of 3.20% per annum, with half-yearly interest payments and payment of principal in one installment upon maturity. - On May 7, 2015, the Bank placed a bank bond for an amount of UF 2.0 million, with a remaining term of 29 years and 4 months, at an issuance rate of 3.30% per annum, with half-yearly interest payments and payment of principal in one installment upon maturity. - On May 27, 2015, the Bank placed a bank bond for an amount of UF 3.0 million, with a remaining term of 9 years and 9 months, at an issuance rate of 3.00% per annum, with half-yearly interest payments and payment of principal in one installment upon maturity. - On July 8, 2015, the Bank issued a bond abroad of € 53,000,000, at a term of 10 years, with maturity of capital on July 22, 2025, at a rate of 1.58% per annum, with half-yearly interest payments starting on July 22, 2016. - On August 26, 2015, the Bank placed a bank bond for an amount of UF 2.0 million, with a remaining term of 31 years and 2 months, at an issuance rate of 3.30% per annum, with halfyearly interest payments and payment of principal in one installment upon maturity. - On November 4, 2015, the Bank placed a bank bond for an amount of UF 2.0 million, with a remaining term of 31 years and 1 month, at an issuance rate of 3.30% per annum, with half-yearly interest payments and payment of principal in one installment upon maturity. - On December 2, 2015, the Bank placed a bank bond for an amount of UF 2.0 million, with a remaining term of 4 years and 3 months, at an issuance rate of 2.80% per annum, with half-yearly interest payments and payment of principal in one installment upon maturity. b) Distribution of dividends and renewal of the Board at the Subsidiary BancoEstado S.A. Administradora General de Fondos: On March 30, 2015, the Eighteenth Ordinary General Shareholders' Meeting of BancoEstado S.A. Administradora General de Fondos was held , in which it was unanimously agreed to distribute and pay a final dividend equivalent to 100% of the net revenues of 2014, in the total amount of MCh$ 5,045. The dividend was paid on April 01, 2015. 51 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) The Meeting also agreed to renew partially the Board of the Company as per the following: Regular Director Alternate Director Emiliano Figueroa Sandoval Cecilia Vergara Fisher Antonio Bertrand Hermosilla Carlos Alberto Curi Luiz Sorge Cécile Emmanuelle Besse Advani Victoria Martínez Ocamica María Verónica Hevia Lobo Cristián Wolleter Valderrama Dominique Lienart Henri Jean Auguste Coste Ligia Torres c) Ordinary Shareholders' Meeting of the Subsidiary BancoEstado Centro de Servicios S.A.: On April 16, 2015 the Ordinary Shareholders' Meeting was held, during which the Financial Statements for the year ended December 31, 2014 were approved; according to the retained earnings for the year 2014, it was agreed to approve these in order to absorb the accumulated losses; the chosen newspaper was "La Nación" for purposes of publication of notices and other appropriate matters; the Board was completely renewed. d) Ordinary Shareholders' Meeting of the Subsidiary BancoEstado Contacto 24 Horas S.A.: On April 21, 2015 the Ordinary Shareholders' Meeting was held, during which the Financial Statements for the year ended December 31, 2014 were approved ; according to the retained earnings for the year 2014, it was agreed to approve these in order to absorb the accumulated losses, consequently, there are no net profits to be distributed; the chosen newspaper was "La Nación" for purposes of publication of notices and other appropriate matters; the Board was completely renewed. e) Ordinary Shareholders' Meeting of the Subsidiary Sociedad de Servicios Transaccionales Caja Vecina S.A.: On April 22, 2015 the Ordinary Shareholders' Meeting was held, during which the Financial Statements for the year ended December 31, 2014 were approved; according to the earnings, it was agreed to distribute and pay the dividends to the shareholders on May 29, 2015; the chosen newspaper was "La Nación" for purposes of publication of notices and other appropriate matters; the Board was completely renewed. 52 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) f) Ordinary Shareholders' Meeting of the Subsidiary Sociedad de Promoción de Productos Bancarios S.A.: On April 28, 2015 the Ordinary Shareholders' Meeting was held, during which the Financial Statements for the year ended December 31, 2014 were approved; the convocation agreed to absorb the accumulated losses of prior years with the existing earnings; the chosen newspaper was "La Nación" for purposes of publication of notices and other appropriate matters; the Board was maintained and its next renewal will be 2016. g) Assigning of the External Auditors for BancoEstado, Subsidiaries and the Branch New York: As agreed in the Board of Directors No. 26 of BancoEstado held on April 30, 2015, it was decided that for the years ended December 31, 2015 and 2016, the services of external audit would be assigned to the Firm Deloitte Auditores y Consultores Limitada, for BancoEstado, its Subsidiaries and the New York Branch. h) Distribution of dividends and renewal of the Board at the Subsidiary BancoEstado Corredores de Seguro S.A.: On April 30, 2015, the Eleventh Ordinary General Shareholders' Meeting of BancoEstado Corredores de Seguro S.A was held , during which it was unanimously agreed to distribute and pay a final dividend equivalent to 100% of the net revenues of 2014, in the total amount of MCh$ 13,772, of which were paid as interim dividend MCh$ 11,300 on April 15, 2015, and the balance of MCh$ 2,472 on May 29, 2015. The Meeting also agreed to renew completely the Board of the Company as per the following: Regular Director Carlos Martabit Scaff María Cecilia Vergara Fisher Pablo Iacobelli Del Río José Miguel Saavedra Florez Alternate Director Mauricio Zárate González Juan Paulo Mestre Carmona Cristián Eyzaguirre Court Patricia Silberman Veszpremi 53 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) i) Distribution of dividends and renewal of the Board at the Subsidiary BancoEstado S.A. Corredores de Bolsa: On April 30, 2015, the Ordinary Shareholders' Meeting of BancoEstado S.A. Corredores de Bolsa was held , during which, according to what is established in paragraph No. 2 of Article No. 56 of Law No. 18,046 and in the corporate by-laws regarding the pronouncement on the distribution of the revenues for the year and, especially, the distribution of dividends; the Meeting ratified the proposal of the Company's Board in their ordinary meeting held on March 30, 2015, in which it was decided to withhold the total revenues of 2014, in order to strengthen the equity of the Company. Also, during such Meeting the new Board of the Company was chosen and the following persons were assigned: Mrs. Karen Ergas Segal and Messrs. Óscar González Narbona, Pedro Cristi Díaz, Galo Miranda Gálvez, Víctor Coddou Braga and Rodrigo Devia Ilabaca. j) Ordinary Shareholders' Meeting of the Subsidiary BancoEstado Microempresas S.A. Asesorías Financieras: On April 30, 2015 the Ordinary Shareholders' Meeting was held, during which the Financial Statements for the year ended December 31, 2014 were approved ; according to the net income it was decided to distribute dividends as per the revenues of 2014 and the payment to the shareholders in proportion to the number of current shares. Consequently, the shareholder Banco Estado de Chile received Ch$ 82,865,060 and the shareholder BancoEstado S.A. Corredores de Bolsa received Ch$ 82,948. k) Ordinary Shareholders' Meeting of the Subsidiary BancoEstado Servicios de Cobranza S.A.: On April 30, 2015 the Ordinary Shareholders' Meeting of BancoEstado Servicios de Cobranza S.A. was held , during which the balance sheet and the Financial Statements for the year ended December 31, 2014 were approved ; it was agreed to distribute 50.5% of the revenues of 2014, maintaining the balance in the Company's equity. l) Vacancy of the position of Chairman of BancoEstado: From May 11 to July 5, 2015, the position of Chairman of the Bank was vacant due to the assignation of Mr. Rodrigo Valdés Pulido as Minister of Treasury. The position of Alternate Chairman was assumed during this period by Mr. Guillermo Larraín Ríos. 54 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) m) Distribution of revenues of BancoEstado of the year 2014: On May 26, 2015, through Order No. 1,389, the Ministerio de Hacienda as stipulated in the Law Decree No. 2,079 of 1978, authorized the capitalization of BancoEstado by MCh$ 90,200 and allocated to the benefit of the public treasury the amount of MCh$ 75,459. The latter amount corresponds to 45.55% of net profits generated in the year 2014. n) Change to By-Laws of the Subsidiary BancoEstado Servicios de Cobranza S.A.: On May 29, 2015, the Seventh Extraordinary General Shareholders' Meeting of BancoEstado Servicios de Cobranza S.A. was held, in which it was agreed to change the by-laws of the Company in order to increase from four to five the number of the Board members. During the Meeting, as a fifth member was appointed, Mr. Arturo Barrios Almarza, until the next Ordinary Shareholders' Meeting of the Company, at which time the total Board will be renewed. o) Change of By-Laws and the total renewal of the Board of the Subsidiary BancoEstado Centro de Servicios S.A.: On June 5, 2015, the third Extraordinary Shareholders' Meeting of BancoEstado Centro de Servicios S.A. was held, during which it was agreed to change the by-laws of the Company in order to increase from three to four the number of the regular Board members. The Meeting also agreed that the Board of the Company for the next statutory period of three years would be composed of Mrs. Virginia Maria Vergara Soto and Messrs. Humberto Gómez Cisternas, Carlos René Marcuello Aguirre and Mauricio Zárate González. p) Designation of the General Manager of Banco del Estado de Chile Branch New York: On June 9, 2015, as General Manager of Banco del Estado de Chile Branch New York, Mr. Eugenio Echeverria Olivares was designated, who served as Market Manager of the Subsidiary BancoEstado S.A. Corredores de Bolsa. He began his new duties on July 1, 2015. q) Change of By-Laws and the total renewal of the Board of the Subsidiary BancoEstado Contacto 24 horas S.A.: On June 9, 2015, the Second Extraordinary Shareholders' Meeting of BancoEstado Contacto 24 horas S.A. was held during which it was agreed to reform the by-laws of the Company increasing from three to four the number of regular members of the Board. The Meeting also agreed that the Board of the Company for the next statutory period of two years would be composed of Mrs Maria Dolores Peralta Rubio and Messrs. Patricio Pérez Miranda, Franklin Eduardo Vildósola Saavedra and Cristian Rodrigo Vega Meza. 55 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) r) Change of By-Laws and the total renewal of the Board of the Subsidiary BancoEstado Microempresas S.A. Asesorías Financieras: On June 17, 2015, the Second Extraordinary Shareholders' Meeting of BancoEstado Microempresas S.A. Asesorías Financieras was held during which it was agreed to reform the by-laws of the Company increasing from three to four the number of regular members of the Board. The Meeting also agreed that the Board of the Company for the next statutory period of three years would be composed by Mrs. Soledad Ovando Green and Messrs. Guillermo Larraín Ríos, Antonio Bertrand Hermosilla and Ramón Rey González. s) Change of By-Laws and the total renewal of the Board of the Subsidiary Sociedad de Servicios Transaccionales CajaVecina S.A.: On June 18, 2015, the third Extraordinary Shareholders' Meeting of Sociedad de Servicios Transaccionales CajaVecina S.A. was held, during which it was agreed to change the by-laws of the Company in order to increase from three to four the number of the regular Board members. The Meeting also agreed that the Board of the Company for the next statutory period of three years would be composed by Mrs. María Cecilia Vergara Fisher and Messrs. Emilio Vélez Hormazábal, Carlos Francisco Olivares González and Alexis Nicolás Genskowsky Goic. t) Registration and payment of shares of Transbank S.A.: On June 23, 2015, BancoEstado registered and paid for 512,018 shares of the company that supports its line of business, Transbank S.A., in the amount of MCh$ 104, agreed at the Extraordinary Shareholders' Meeting of such Company held on April 16, 2015. u) Renewal of the Board at the Subsidiary BancoEstado S.A. Administradora General de Fondos: On June 24, 2015, the Eighth Extraordinary Shareholders' Meeting of BancoEstado S.A. Administradora General de Fondos was held, during which it was unanimously agreed to renew the Board of the Company which is now composed as follows: 56 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) Regular Director Emiliano Figueroa Sandoval Marcelo Hiriart Vergara Antonio Bertrand Hermosilla Carlos Alberto Curi Luiz Sorge Cécile Emmanuelle Besse Advani Alternate Director Victoria Martínez Ocamica María Verónica Hevia Lobo Alexis Genskowsky Goic Dominique Lienart Henri Jean Auguste Coste Ligia Torres v) Designation of the position of Chairman of BancoEstado: Through Decree No. 896 dated July 6, 2015 from the Ministry of Finance as Chairman of BancoEstado Mr. Guillermo Larrain Rios was appointed , as of July 6, 2015. w) Issuance of Circular Letter No. 66 of the Servicio de Impuestos Internos: On July 23, 2015, the Internal Revenue Service issued Circular Letter No. 66, which sets the taxation system to companies in which the State has a 100% ownership interest. x) Purchase of shares of Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A.: On August 13, 2015, BancoEstado bought from Banco de Crédito e Inversiones, the amount of 58 shares of Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. in the amount of MCh$ 28 y) Designation of the position of Vice Chairman of BancoEstado: On August 21, 2015, the President of the Republic Mrs. Michelle Bachelet Jeria, appointed Mr. Enrique Marshall Rivera as Vice Chairman of BancoEstado, who took office on October 15, 2015. z) Signing of the new Collective Bargaining Agreement: On September 1, 2015, the new collective agreement between the Management and the National Union of Employees of BancoEstado was signed, with a term of 27 months, as of September 1, 2015 until November 30, 2017. 57 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) aa) Purchase of shares Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A.: On September 02, 2015, BancoEstado purchased from Banco BICE 81 shares of the company Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. in the amount of MCh$ 39. bb) Resignation of the position of Chairman of BancoEstado: On September 22, 2015, the President of the Republic Mrs. Michelle Bachelet Jeria, accepted the resignation of Mr. Guillermo Larrain Rios as Chairman of BancoEstado, resignation that became effective on September 30, 2015. cc) Designation of the position of Chairman of BancoEstado: On September 22, 2015, the President of the Republic Mrs. Michelle Bachelet Jeria appointed Mr. Jorge Rodriguez Grossi as Chairman of BancoEstado, replacing Mr. Guillermo Larrain Rios, a position he assumed on October 1, 2015. dd) Resignation as Director and Chairman of the Company BancoEstado Microempresas S.A. Asesorías Financieras: On September 30, 2015, during the Two-hundredth Twenty-Eighth Meeting of the Board of BancoEstado Microempresas S.A. Asesorías Financieras, the Chairman Mr. Guillermo Larrain Rios Lord presented his resignation to the Board of the Subsidiary. ee) Purchase of shares of Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A.: On October 6, 2015, BancoEstado bought from HSBC Bank (Chile), the amount of 47 shares of Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. in the amount of MCh$ 23. ff) Payment of distribution of net income of BancoEstado of the year 2014: On October 15, 2015, the Treasury of the Republic was paid MCh$ 75,459, corresponding to 45.55% of the Bank's net income generated in the year 2014. 58 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 3 - RELEVANT EVENTS (Continued) gg) Appointment of Director and Chairman of the Board of the Company BancoEstado Microempresas S.A. Asesorías Financieras: On October 20, 2015, the Two-hundredth Twenty-Ninth Meeting of the Board of Directors BancoEstadoMicroempresas S.A. Asesorías Financieras was held, during which as Director and Chairman Mrs. Jessica López Saffie was designated replacing Mr. Guillermo Larrain Rios. NOTE 4 - OPERATING SEGMENTS Segmentation criteria: Segment information is structured according to the different lines of business of the Bank, which are based on its organizational structure, products and services offered and the customer segments for which they are intended. Segment information provided is based on monthly reports prepared from information prepared through a management control information application. The structure of this management information is designed as if each line of business were treated as an autonomous business. The Bank obtains most of its income from interest, readjustments and fees, discounting provisions and expenses. As such, the financial performance of each segment is calculated by applying the following criteria: a) the net interest margin of loans and deposits is measured at an individual transaction level and it corresponds to the difference between the effective rate of the customer and the internal transfer pricing established based on the term and currency of each operation; b) Net revenue from commissions, the net income from financial operations, income (loss) from foreign exchange and other operating income are distributed to each functional area and allocated to business segments using different allocation criteria, regarding which specific indicators are defined for different concepts; c) Operating expenses and taxes are managed at the corporate level and are not allocated to business segments. Transfer pricing between operating segments are carried out at arm´s length prices. Segments: The Bank focused its activities on the following major lines of business: Wholesale Banking, which comprises large companies, medium sized companies and institutions. 59 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 4 - OPERATING SEGMENTS (Continued) Retail Banking, which includes individuals, small companies and micro companies. Treasury and International, which represents financial and international business. Other Segments, this group comprises corporate concepts, where the assets, liabilities, income and expenses, as applicable, cannot be clearly attributed to any of the lines of business or segment or which are the result of decisions affecting the Bank as a whole. 60 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 4 - OPERATING SEGMENTS (Continued) As of December 31, 2015 and 2014, income by segments is detailed as follows: INCOME Net interest income Wholesaler Banking MCh$ Retail Banking MCh$ December 31, 2015 Treasury and International Other MCh$ MCh$ Wholesaler Banking MCh$ Total MCh$ MUS$ Retail Banking MCh$ December 31, 2014 Treasury and International MCh$ Other MCh$ Total MCh$ 185,175 461,557 51,741 62,715 761,188 1,072 204,622 456,581 22,788 55,515 739,506 33,446 12,629 3,921 180 187,945 5,975 3,953 464 2,350 10,502 106,606 7 (26,049) 27 12,285 197,692 29,106 114,507 12,936 278 41 161 18 31,796 10,475 3,931 142 167,485 4,079 3,639 342 2,727 108,966 22,520 (64) (14,179) 11 7,987 187,829 123,520 30,101 8,407 Total operating Income 235,351 659,894 171,206 48,978 1,115,429 1,570 250,966 632,126 156,937 49,334 Provisions for loan losses (27,774) (122,580) 378 4,018 (145,958) (24,587) (78,459) Operating income, net 207,577 537,314 171,584 52,996 969,471 226,379 553,667 Net fee and commission income Net income from financial operations Profit foreign exchange transactions, net Other operating income (205) 1,365 (590) 156,347 1,089,363 (129,492) (233,128) (80,158) 856,235 Operating expense Other operating expenses (685,179) (24,002) (965) (34) (608,200) (27,849) Total operating expenses (709,181) (999) (636,049) 260,290 366 220,186 1,460 2 1,134 261,750 368 221,320 Net operating income Income from investments in companies Income before income taxes 61 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 4 - OPERATING SEGMENTS (Continued) As of December 31, 2015 and 2014, the Consolidated Statements of Financial Position by segment are detailed as follows: December 31, 2015 Treasury and International Others MCh$ MCh$ Wholesaler Banking MCh$ Retail Banking MCh$ ASSETS Cash and cash equivalents Transactions in the course of collection Financial assets held for trading Loans to customers, net Financial investments available for sale Other assets 7,581,043 25,051 240,779 10,957,549 31 4,634,708 325,925 2,209,909 556 3,987,990 961,719 TOTAL ASSETS 7,846,873 10,957,580 LIABILITIES Current accounts and other demand deposits Transactions in the course of payment Saving accounts and time deposits Obligations with banks Debt issued instruments Other liabilities 5,226,835 3,047,954 652,494 TOTAL LIABILITIES 8,927,283 EQUITY TOTAL LIABILITIES AND EQUITY 8,927,283 MCh$ MUS$ Wholesaler Banking MCh$ 13 1,624,309 4,634,708 325,925 2,209,909 18,539,161 4,013,041 2,826,838 6,526 459 3,112 26,106 5,651 3,980 6,459,083 19,054 187,644 9,705,296 20 12,120,807 1,624,322 32,549,582 45,834 6,665,781 9,705,316 2,354,851 5,314,969 17,723 131,760 161,900 5,979,101 1,040,353 5,421,541 243,552 226,581 4,143 1,231,858 7,940,027 161,900 14,346,167 1,040,353 5,421,541 2,145,627 11,181 228 20,201 1,465 7,634 3,021 4,358,231 3,454,222 536,173 7,687,543 12,978,207 1,462,582 31,055,615 43,730 8,348,626 1,493,967 1,493,967 2,104 2,956,549 32,549,582 45,834 7,687,543 12,978,207 - Total 8,348,626 Retail Banking MCh$ December 31, 2014 Treasury and International MCh$ 36 1,399,091 10,345,980 1,399,127 28,116,204 1,992,671 4,743,682 16,831 57,569 351,760 4,440,168 679,003 4,562,943 210,380 244,696 3,856 1,221,520 6,653,167 351,760 12,641,928 679,003 4,562,943 1,984,904 6,753,184 10,301,823 1,470,072 26,873,705 1,242,499 1,242,499 2,712,571 28,116,204 6,753,184 10,301,823 - Total MCh$ 3,991,859 383,694 1,876,891 16,164,190 3,333,722 2,365,848 - 3,991,859 383,694 1,876,891 (225) 3,314,668 779,093 Others MCh$ The Others column mainly includes the following concepts: a) Assets: Investments in companies; Intangible assets; Property, plant and equipment; Deferred taxes and Other assets; b) Liabilities: Current taxes; Deferred taxes; Provisions and Other liabilities. 62 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 5 - CASH AND CASH EQUIVALENTS a) As of December 31, 2015 and 2014, balances included in cash and cash equivalents, and their reconciliation with the Consolidated Statement of Cash Flows are detailed as follows: 12-31-2015 MUS$ MCh$ 12-31-2014 MCh$ Cash and due from banks Cash Deposits in the Chilean Central Bank Deposits in domestic Banks Foreign Deposit 715 3,485 1 2,325 507,782 2,474,878 1,008 1,651,040 410,831 1,964,438 431 1,616,159 Subtotal Cash and due from banks 6,526 4,634,708 3,991,859 231 702 330 164,025 498,722 234,062 31,934 670,983 179,780 7,789 5,531,517 4,874,556 Transactions in the course of collection net High liquidity financial instruments (1) Repurchase agreements (2) Total Cash and cash equivalents (1) Corresponds to instruments held for trading and investment securities available for sale with little risk of change in value, maturing in 90 days or less from the date of acquisition. These are detailed as follows: Highly liquid financial instruments Financial assets held for trading Fixed time deposits Readjustable time deposits Promissory note Central Bank Mutual fund 20 38,804 157,385 58 41,730 196,189 2 642 - 1,196 455,796 - 398,068 76,726 Subtotal financial investments available for sale 644 456,992 474,794 Total 702 498,722 670,983 Financial investments available for sale Fixed time deposits Readjustable time deposits Promissory note Central Bank Promissory note Treasury 38 12-31-2014 MCh$ 27,219 14,511 Subtotal financial assets held for trading (2) Corresponds 12-31-2015 MUS$ MCh$ - to repurchase agreements held under the same conditions. 63 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 5 - CASH AND CASH EQUIVALENTS (Continued) As of December 31, 2015 and 2014, the Bank presents balances corresponding to mandatory reserves which are not available to be used in the amount of MCh$ 606,503 and MCh$ 472,026, respectively as part of its cash and deposits in the Chilean Central Bank. The level of cash funds and amounts held in deposits at the Chilean Central Bank is due to regulations on mandatory cash reserve that the Bank must maintain on average, which are measured monthly. b) Transactions in the course of collection Transactions in the course of being settled correspond to transactions only pending settlement, which will increase or decrease the funds in the Chilean Central Bank or in foreign banks, normally within the following 12 or 24 business hours. As of December 31, 2015 and 2014, these transactions are detailed as follows: 12-31-2015 MUS$ MCh$ 12-31-2014 MCh$ Assets: Outstanding notes from other Banks (clearing) Accounts receivables 231 228 163,724 162,201 64,348 319,346 Subtotal assets 459 325,925 383,694 Liabilities: Accounts payables 228 161,900 351,760 Subtotal liabilities 228 161,900 351,760 Net transactions in the course of collection 231 164,025 31,934 64 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 6 - FINANCIAL ASSETS HELD FOR TRADING As of December 31, 2015 and 2014, instruments designated as financial instruments held-for-trading are detailed as follows: 12-31-2015 MUS$ MCh$ Instruments of the State and the Chilean Central Bank: Instruments of the Chilean Central Bank Bonds and promissory notes of the Chilean Treasury Other government instruments Instruments from other local institutions: Instruments from other local banks Bonds and commercial papers from companies Other instruments issued locally Instruments from foreign institutions: Instruments from foreign governments or central banks Other instruments issued abroad Investments in Mutual Funds: Funds managed by related entities Funds managed by third parties Total 12-31-2014 MCh$ 259 121 138 - 184,058 85,740 98,318 - 230,774 35,336 195,438 - 2,833 2,806 27 2,011,340 1,992,450 18,890 1,488,732 1,458,255 30,477 - - - 20 20 14,511 14,511 - 157,385 49,385 108,000 3,112 2,209,909 1,876,891 - As of December 31, 2015, Government and Chilean Central Bank Securities include instruments sold to clients and financial institutions with a repurchase agreement. However, the Bank has no instruments sold with a repurchase agreement in 2015 and 2014. As of December 31, 2015, instruments from other national and foreign institutions include instruments sold with repurchase agreements to customers and financial institutions in the amount of MCh$ 403,731 (MCh$ 345,649 in 2014). As of December 31, 2015 and 2014, repurchase agreements have an average expiration of 9 days. 65 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 7 - REPURCHASE AGREEMENTS AND SECURITIES LOANS a) The Bank purchases financial instruments and agrees to sell them at future dates at an established price. As of December 31, 2015 and 2014, instruments purchased with resale agreements are detailed as follows: Rights under purchase agreements 2015 From 1 day to 3 months MCh$ Instruments of the State and the Chilean Central Bank: Instruments of the Chilean Central Bank Bonds and promissory notes of the Chilean Treasury Other government instruments More than 3 months to 1 year MCh$ 2014 More than 1 year MCh$ Total MCh$ MUS$ 14,154 - - - 14,154 - Other instruments issued locally: Instruments from other local banks Bonds and commercial papers from companies Other instruments issued locally 184,110 35,798 - - - 184,110 35,798 - Other instruments issued abroad: Instruments from governments or central banks Other instruments issued abroad - - - - Investments in Mutual Funds: Funds managed by related entities Funds managed by third parties - - - - 234,062 - - 234,062 Total - From 1 day to 3 months MCh$ More than 3 months to 1 year MCh$ More than 1 year MCh$ Total MCh$ 20 114 2,955 - - - 114 2,955 - 259 51 - 98,821 77,890 - - - 98,821 77,890 - - - - - - - - - - - 179,780 - - 179,780 - 330 66 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 7 - REPURCHASE AGREEMENTS AND SECURITIES LOANS (Continued) b) The Bank obtains funds selling financial instruments, committing to buying them on future dates plus interest at a pre-established rate. As of December 31, 2015 and 2014, the obligation for instruments sold with a buyback agreement is as follows: Obligations under sale agreements 2015 From 1 day to 3 months MCh$ Instruments of the State and the Chilean Central Bank: Instruments of the Chilean Central Bank Bonds and promissory notes of the Chilean Treasury Other government instruments More than 3 months to More than 1 year 1 year MCh$ MCh$ Total MCh$ MUS$ 51,981 - - - 51,981 - 523,653 - - - 523,653 - Other instruments issued abroad: Instruments from foreign governments or central banks Other instruments issued abroad - - - - Investments in Mutual Funds: Funds managed by related entities Funds managed by third parties - - - - 575,634 - - 575,634 Other instruments issued locally: Instruments from other local banks Bonds and commercial papers from companies Other instruments issued locally Total 73 From 1 day to 3 months MCh$ 2014 More than 3 months to More than 1 year 1 year MCh$ MCh$ 1,330 - - 473,870 - - 738 - 811 Total MCh$ - 1,330 - - - 473,872 - - - - - - - - - - 475,202 475,200 2 2 67 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES As of December 31, 2015 and 2014, the Bank’s portfolio of derivative instruments is detailed as follows: 2015 Up to 1month MCh$ More than 1 up to 3 months MCh$ Notional amount of contracts with final maturity More than More than More than 3 1 up to 3 6 up to 12 up to 6 years months months MCh$ MCh$ MCh$ More than 3 up to 5 years MCh$ More than 5 years Fair Value MCh$ Assets MCh$ MUS$ Liabilities MCh$ MUS$ Fair value hedge derivatives: Forwards Swaps Call options Put options Futures Others - - - - 376,385 - 179,315 - 356,192 - Subtotal - - - - 376,385 179,315 356,192 2 1,526 7 2 - 1,526 - 7 - 4,728 4,728 Trading Derivatives: Forwards Swaps Call options Put options Futures Others 4,467,863 153,577 - 3,518,298 102,801 - 1,841,487 177,681 - 1,085,320 460,517 - 309,447 1,669,448 - 1,970 917,395 - 985 1,381,731 - 135 223 - 95,929 158,649 - 101 169 - 72,182 119,822 47 - Subtotal 4,621,440 3,621,099 2,019,168 1,545,837 1,978,895 919,365 1,382,716 358 254,578 270 192,051 225,795 17,754 - - - - - 47 33 23,162 - - - - 293,431 528,346 289,610 263 186,588 47 2,648,711 1,627,026 2,028,518 623 442,739 357 Hedging derivatives for investment abroad: Forwards Cash flow hedging derivatives: Swaps Total 4,847,235 3,638,853 2,019,168 1,545,837 - 33,519 253,460 68 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES (Continued) 2014 Up to 1month MCh$ More than 1 up to 3 months MCh$ Notional amount of contracts with final maturity More than 3 More than More than up to 6 6 up to 12 1 up to 3 months months years MCh$ MCh$ MCh$ Fair Value More than 3 up to 5 years MCh$ More than 5 years MCh$ Assets MCh$ Liabilities MCh$ Fair value hedge derivatives: Forwards Swaps Call options Put options Futures Others - - - - 321,578 - 91,013 - 173,615 - 815 - 3,808 - Subtotal - - - - 321,578 91,013 173,615 815 3,808 Trading Derivatives: Forwards Swaps Call options Put options Futures Others 3,887,178 120,741 - 3,215,113 465,859 - 2,091,967 1,196,000 - 1,807,218 339,331 - 50,157 182,292 - 1,893 139,309 - 1,893 634,589 - 111,377 95,983 - 113,942 57,730 42 - Subtotal 4,007,919 3,680,972 3,287,967 2,146,549 232,449 141,202 636,482 207,360 171,714 Hedging derivatives for investment abroad: Forwards Cash flow hedging derivatives: Swaps Total 172,924 - - - - - - - 13,091 - - - - 103,148 147,556 515,738 98,796 28,243 657,175 379,771 1,325,835 306,971 216,856 4,180,843 3,680,972 3,287,967 2,146,549 69 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES (Continued) Types of derivatives: Transactions with derivatives have the following purposes: to provide solutions for the Bank’s customers in respect to risk management and trading and to manage the Bank’s own internal risks, as well as managing matching of the Bank’s positions. The Bank can enter into the following derivatives: 1) Hedge derivatives, whose main purpose is to manage the volatility in the Consolidated Statement of Financial Position, generated by the portfolio classified as available for sale, which allows the Bank to manage the structural position of the Financial Statements. It can also hedge business investments abroad or cash flows. As of December 31, 2015, the Bank has the following hedge derivatives: i) Hedge on net investment in foreign businesses BancoEstado Parent Company, with the Chilean peso as functional currency, has foreign business investments corresponding to the New York Branch, United States of America. Due to its accounting treatment, this position generates changes in the Parent’s equity since these financial statements must recognize changes in the exchange rate, therefore it carried out a net investment hedge with a notional contract amount of MCh$ 243,549, with expiration up to three months, with negative net investment hedge of MCh$ 23,115 (notional amount of MCh$ 172,924 and negative net fair value of MCh$ 13,091 in 2014), for the purpose of hedging the currency risk of that investment. The equity of New York Branch amount to MCh$ 104,449 as of December 31, 2015. Up to 1 More than 3 up to 6 months MCh$ 17,754 - - (225,795) (17,754) - - - - month MCh$ Hedged item (assets) Investment New York Branch 225,795 Hedging instrument Forward hedging Total 2015 More than More than 6 up to 12 1 up to 3 months years MCh$ MCh$ More than 1 up to 3 months MCh$ More than 3 up to 5 years MCh$ More than 5 years Total MCh$ MCh$ MUS$ - - - 243,549 343 - - - - (243,549) (343) - - - - - - 70 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES (Continued) Up to 1 2014 More than More than 6 up to 12 1 up to 3 months years MCh$ MCh$ More than 1 up to 3 months MCh$ More than 3 up to 6 months MCh$ Hedged item (assets) Investment New York Branch 172,924 - - - Hedging instrument Forward hedging (172,924) - - - - - month MCh$ Total More than 3 up to 5 years MCh$ More than 5 years Total MCh$ MCh$ - - - 172,924 - - - - (172,924) - - - - - ii) Cash flow hedge: The Bank uses derivative instruments, in particular Cross Currency Swaps (CCS), to hedge the following risks related to placement of bonds abroad: Hedged Risk 1: Bond in US$, JPY and €. The volatility of cash flows consisting of principal plus interest (payable by the Bank), which are denominated in US$, JPY and €, and settled in Chilean pesos arising from the issuance of debt in US$, JPY and €. Hedged Risk 2: Assets in UF, US$ and Inflation risk The volatility of expected cash flows (receivable by the Bank), which are denominated in UF and settled in Chilean pesos arising from various sources. These projected cash flows have different sources or risk, although all of them share the risk of cash flows due to the effects of change in the UF. The volatility of expected flows (to be received by the Bank) which are denominated in US$, is indexed at the Libor US$ 6M rate, which exposes the Bank to the risk of resetting or re-pricing, given the volatility of this index. Considering the above, hedged risk 2 has been defined as a portion of total exposure of these UF and US$ denominated projected cash flows, where the hedged portion is only the part that is affected by the variation in the UF and the exchange rate (references in paragraph AG99F of IAS 39). This strategy then will hedge two different risks with a single hedge instrument, which is allowed by paragraph 76 of IAS 39. 71 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES (Continued) Cash flow hedges are recorded as follows: the part of the profit or loss of the hedge instrument which is determined to be an effective hedge is recognized in equity. Other comprehensive income effects generated by derivatives that compose the hedge instrument in this cash flow hedge strategy has been recorded with a credit to equity in the amount of MCh$ 1,238 (debit to equity of MCh$ 5,882 in 2014), net of deferred taxes. As of December 31, 2015 and 2014 there was no ineffectiveness in cash flow hedges, since both the hedging instrument and the hedged item are mirrors of each other, which means that all changes in value attributable to rate and readjustment components are completely balanced out. Cash flows for the portfolio of underlying assets in UF and cash flows for the hedge derivative instrument are detailed as follows: Up to 1 MCh$ More than 3 up to 6 months MCh$ More than 6 up to 12 months MCh$ 574,151 - 212,450 - (574,151) - (212,450) - - - Up to 1 More than 1 up to 3 months More than 3 up to 6 months More than 6 up to 12 months month Hedged item (assets) Loans UF Hedging instrument Cross Currency Swap UF Total 2015 More than 1 up to 3 years MCh$ More than 1 up to 3 months MCh$ month More than 3 up to 5 years More than 5 years MCh$ MCh$ MCh$ MUS$ 1,521,082 829,983 539,847 3,677,513 5,178 - (1,521,082) (829,983) (539,847) (3,677,513) (5,178) - - - - - - 2014 More than 1 up to 3 years Total More than 3 up to 5 years More than 5 years Total MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ Hedged item (assets) Loans UF - - - - 961,302 483,509 626,929 2,071,740 Hedging instrument Cross Currency Swap UF - - - - (961,302) (483,509) (626,929) (2,071,740) - - - - - - - - Total 72 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES (Continued) Cash flows of the bonds issued abroad, object of this hedge and cash flows of the hedge derivative instrument are detailed as follows: Up to 1 2015 More than More than 6 up to 12 1 up to 3 months years MCh$ MCh$ MCh$ More than 1 up to 3 months MCh$ More than 3 up to 6 months MCh$ Hedged item (liabilities) Corporate bonds in FC (475) (6,880) (12,886) (20,889) Hedging instrument Cross Currency Swap FC 475 6,880 12,886 - - - month Total Up to 1 month More than 3 up to 5 years MCh$ More than 5 years MCh$ MCh$ MUS$ (710,198) (597,204) (420,017) (1,768,549) (2,490) 20,889 710,198 597,204 420,017 1,768,549 2,490 - - - - - - More than 1 up to 3 months More than 3 up to 6 months 2014 More than More than 6 up to 12 1 up to 3 months years Total More than 3 up to 5 years More than 5 years Total MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ Hedged item (liabilities) Corporate bonds in FC - (12,135) (4,757) (16,892) (434,287) (169,320) (566,514) (1,203,905) Hedging instrument Cross Currency Swap FC - 12,135 4,757 16,892 434,287 169,320 566,514 1,203,905 - - - - - - - - Total iii) Fair value hedge: The Bank uses Interest Rate Swaps (IRS), to cover its exposure to changes in the fair value of the hedged element attributable to interest rate. The instruments modify the effective cost of noncurrent issuances from a fixed interest rate to a variable interest rate, decreasing the duration of and modifying the sensitivity to short stretches of the curve, as applicable. 73 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES (Continued) Nominal values of the elements and instruments under fair value hedges, are detailed as follows: 2015 MUS$ 2014 MCh$ MCh$ Hedged item Corporate bonds in FC Mortgage loans Commercial loans Total 932 75 277 1,284 662,223 53,508 196,161 911,892 503,603 82,603 586,206 Hedging instrument (notional value) Interest rate swap Total 1,284 1,284 911,892 911,892 586,206 586,206 As a way to mitigate the exposure to the interest rate risk of a portfolio of mortgage loans, the Bank has adopted a hedging strategy (Macro-hedges), resulting in a diversification of the portfolio of mortgage loans denominated in UF, by signing Interest Rate Swap (SPC) contracts where the Bank receives a variable amount of UF and pays a fixed amount of UF. The following table presents the flows of portfolio mortgage loans in UF and of the derivative hedging instruments: Up to 1 MCh$ More than 1 up to 3 months MCh$ More than 3 up to 6 months MCh$ More than 6 up to 12 months MCh$ 271 541 812 1,623 (271) (541) (812) - - - month Hedged item (assets) Mortgage loans UF Hedging instrument Interest rate swap Total 2015 More than 1 up to 3 years MCh$ More than 3 up to 5 years More than 5 years Total MCh$ MCh$ MCh$ MUS$ 6,493 6,222 37,546 53,508 75 (1,623) (6,493) (6,222) (37,546) (53,508) (75) - - - - - - 74 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 8 - FINANCIAL DERIVATIVE CONTRACTS AND ACCOUNTING HEDGES (Continued) Additionally, the below presents the valuation adjustment for macro-hedging of the portfolio of covered mortgage loans: 2015 MUS$ Assets Adjustments to financial assets by macro-hedges Liabilities Adjustments to financial liabilities for macro-hedges MM$ 2 - 2014 MM$ 1,218 - - - 2) Trading Derivatives, whose main purpose is to generate profits in the short-term, taking advantage of margins and fluctuations in rates and currencies in the market. Profits and/or losses generated from operating with these instruments are recorded in net income for the period. The different types of economic hedges the Bank currently has include the following: Forwards, where a future transactions is agreed upon, generating an enforceable right and obligation on the agreed upon date. The two main categories are Currency Forwards and Rate Forwards (FRA). Swaps, where more than one right and more than one obligation, are assumed for each transaction. As the name says, it is an exchange of a series of rights and obligations. There are two main categories, Currency Swaps (CCS) and Interest Rate Swaps (IRS). BancoEstado has instruments classified as available for sale, which causes that the structure of the Consolidated Statement of Financial Position is affected by the volatility generated in the Bank’s equity by these investments. To counteract this, BancoEstado enters into fair value hedge derivatives, whose recording through p & l, when highly effective, offsets the effect produced by the fluctuation in the hedged item. 75 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 9 - LOANS AND ADVANCE TO BANKS a) As of December 31, 2015 and 2014, balances “Loans and advance to Banks” are detailed as follows: 2015 MUS$ MCh$ 2014 MCh$ Local banks Loans and advances to banks Deposits in the Chilean Central Bank, not available Non-transferable notes of the Chilean Central Bank Other credit balances with the Chilean Central Bank Interbank loans Overdrafts in checking accounts Non-transferable deposits in local banks Other credit balances with local banks Provisions and impairment for credits with local banks 194 - 137,809 (138) 19,329 (45) Foreign banks Loans to foreign banks Overdrafts in checking accounts Non-transferable deposits in foreign banks Other credit balances with foreign banks Provisions and impairment for credits with foreign banks 427 69 (1) 303,792 48,986 (996) 366,480 52,935 (1,326) 689 489,453 437,373 Total b) For each year, provisions and impairment of loans owed by banks are detailed as follows: Local banks MCh$ Details Balance as of January 1 Transfer Write-off Provisions established Provisions released Impairment Reversal of impairment Exchange difference Balances as of December 31 2015 Foreign banks MCh$ Total MCh$ MUS$ 45 219 (136) 10 1,326 427 (854) 97 1,371 646 (990) 107 138 996 1,134 1 Local banks MCh$ 1 (1) 20 117 (95) 3 1 45 - 2014 Foreign banks MCh$ Total MCh$ 708 932 (364) 50 728 1,049 (459) 53 1,326 1,371 76 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 10 -LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS a) Loans and accounts receivable from customers: As of December 31, 2015, the loans portfolio is detailed as follows: 2015 Assets before provisions Portfolio without Impaired impairment portfolio MCh$ MCh$ Total MCh$ Provisions established Individual Group provisions provisions Total MCh$ MCh$ MCh$ Net assets MCh$ MUS$ Commercial loans Commercial loans Foreign trade loans Amounts receivable, checking accounts Factoring operations Leasing operations Other credits and accounts receivable 7,038,238 1,018,353 208,369 249,855 647,801 541,301 301,943 33,937 7,906 1,427 24,520 28,623 7,340,181 1,052,290 216,275 251,282 672,321 569,924 97,714 33,603 2,230 4,208 17,966 1,259 92,528 1,300 1,681 470 1,583 28,800 190,242 34,903 3,911 4,678 19,549 30,059 7,149,939 1,017,387 212,364 246,604 652,772 539,865 10,068 1,433 299 347 919 760 Subtotal 9,703,917 398,356 10,102,273 156,980 126,362 283,342 9,818,931 13,826 Mortgage loans Loans with bills of exchange Loans with transferable mortgages Other credits with mortgages Leasing operations Other credits and accounts receivable 675,647 614,428 4,863,197 160,640 151,685 155,969 506,342 177,414 827,332 770,397 5,369,539 338,054 - 753 2,991 43,396 36,022 753 2,991 43,396 36,022 826,579 767,406 5,326,143 302,032 1,164 1,081 7,500 425 Subtotal 6,313,912 991,410 7,305,322 - 83,162 83,162 7,222,160 10,170 Consumer loans Consumer loans in installments Amounts receivable, checking accounts Credit card balances Other credits and accounts receivable 1,269,764 85,065 178,553 - 116,659 5,993 7,930 - 1,386,423 91,058 186,483 - - 132,209 9,095 24,590 - 132,209 9,095 24,590 - 1,254,214 81,963 161,893 - 1,766 115 229 - Subtotal 1,533,382 130,582 1,663,964 - 165,894 165,894 1,498,070 2,110 17,551,211 1,520,348 19,071,559 156,980 375,418 532,398 18,539,161 26,106 Total 77 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 10 - LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS (Continued) As of December 31, 2014, the loans portfolio is detailed as follows: 2014 Assets before provisions Portfolio without Impaired impairment portfolio MCh$ MCh$ Total MCh$ Provisions established Individual Group provisions provisions Total MCh$ MCh$ MCh$ Net assets MCh$ Commercial loans Commercial loans Foreign trade loans Amounts receivable, checking accounts Factoring operations Leasing operations Other credits and accounts receivable 6,275,049 675,160 112,606 334,288 523,233 464,326 246,065 34,740 2,860 2,181 13,347 14,363 6,521,114 709,900 115,466 336,469 536,580 478,689 79,093 35,164 942 5,330 13,005 2,192 83,763 1,732 1,909 706 1,321 23,969 162,856 36,896 2,851 6,036 14,326 26,161 6,358,258 673,004 112,615 330,433 522,254 452,528 Subtotal 8,384,662 313,556 8,698,218 135,726 113,400 249,126 8,449,092 Mortgage loans Loans with bills of exchange Loans with transferable mortgages Other credits with mortgages Leasing operations Other credits and accounts receivable 749,031 627,966 3,901,949 152,505 185,709 161,740 445,463 167,504 934,740 789,706 4,347,412 320,009 - 794 3,091 34,718 27,281 794 3,091 34,718 27,281 933,946 786,615 4,312,694 292,728 Subtotal 5,431,451 960,416 6,391,867 - 65,884 65,884 6,325,983 Consumer loans Consumer loans in installments Amounts receivable, checking accounts Credit card balances Other credits and accounts receivable 1,184,383 72,038 142,413 - 113,205 5,439 7,023 - 1,297,588 77,477 149,436 - - 108,374 10,757 16,255 - 108,374 10,757 16,255 - 1,189,214 66,720 133,181 - Subtotal 1,398,834 125,667 1,524,501 - 135,386 135,386 1,389,115 15,214,947 1,399,639 16,614,586 135,726 314,670 450,396 16,164,190 Total 78 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 10 - LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS (Continued) Guarantees received by the Bank, to guarantee collection of the rights reflected in its loan portfolio correspond to real property guarantees such as mortgages and pledges. As of December 31, 2015 and 2014, the fair values of guarantees received correspond to 113% and 116% of hedged assets, respectively. As of December 31, 2015 and 2014, the fair value of the mortgage guarantees received corresponds to 271% and 274% of the loans balance receivable, respectively. The Bank finances the acquisition by its customers of personal property and real estate, through financial lease contracts presented under this heading. As of December 31, 2015, MCh$ 299,629 (MCh$ 264,384 in 2014), correspond to financial leases on personal property and MCh$ 372,692 (MCh$ 272,196 in 2014), to financial leases on real estate. As of December 31, 2015, the Bank has obtained assets, such as real estate for a total amount of MCh$ 5,175 (MCh$ 2,710 in 2014), through the execution of guarantees. b) Characteristics of the portfolio: As of December 31, 2015 and 2014, the portfolio before provisions is separated by the customer’s economic activity, detailed as follows: Local credits 2015 2014 MCh$ MCh$ Foreign credits 2015 2014 MCh$ MCh$ Total 2015 MUS$ MCh$ 2014 MCh$ 2015 % 2014 % Commercial loans Manufacturing Mining Electricity, gas and water supply Agriculture and cattle-raising Forestry Fishing Transport Telecommunications Construction Retail Services Others 942,811 436,206 723,160 553,517 82,974 91,878 650,951 76,699 1,323,373 1,837,892 2,471,614 714,320 663,617 204,669 501,583 462,386 116,401 178,008 594,405 68,448 1,189,632 1,539,837 2,494,027 614,437 135,910 39,668 7,132 9,412 4,756 - 38,250 9,718 6,442 16,358 - 1,519 670 1,018 779 127 129 930 108 1,863 2,588 3,487 1,007 1,078,721 475,874 723,160 553,517 90,106 91,878 660,363 76,699 1,323,373 1,837,892 2,476,370 714,320 701,867 214,387 501,583 462,386 116,401 178,008 594,405 68,448 1,189,632 1,546,279 2,510,385 614,437 5.7% 2.5% 3.8% 2.9% 0.5% 0.5% 3.5% 0.4% 6.9% 9.6% 13.0% 3.7% 4.1% 1.3% 2.9% 2.7% 0.7% 1.0% 3.5% 0.4% 7.0% 11.7% 14.7% 3.6% Subtotal 9,905,395 8,627,450 196,878 70,768 14,225 10,102,273 8,698,218 53.0% 53.6% Mortgage loans Consumer loans 7,305,322 1,663,964 6,391,867 1,524,501 - - 10,287 2,343 7,305,322 1,663,964 6,391,867 1,524,501 38.3% 8.7% 37.5% 8.9% 18,874,681 16,543,818 196,878 70,768 26,855 19,071,559 16,614,586 100.0% 100.0% Total 79 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 10 - LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS (Continued) c) Provisions As of December 31, 2015 and 2014, movements of provisions are detailed as follows: Individual provisions MCh$ December 31, 2015 Group provisions Total MCh$ MCh$ MUS$ Balances at January 1 Write-offs of impaired portfolio Commercial loans Mortgage loans Consumer loans 135,726 314,670 450,396 634 (11,015) - (52,700) (12,735) (72,537) (63,715) (12,735) (72,537) (90) (18) (103) Total write-offs (11,015) (137,972) (148,987) Provisions established Provisions released Exchange difference 61,547 (29,992) 714 221,533 (22,813) - Balances at December 31 156,980 375,418 December 31, 2014 Individual Group provisions provisions MCh$ MCh$ 122,005 Total MCh$ 298,469 420,474 (6,417) - (44,673) (21,339) (75,337) (51,090) (21,339) (75,337) (211) (6,417) (141,349) (147,766) 283,080 (52,805) 714 399 (74) 1 49,153 (29,693) 678 184,704 (27,154) - 233,857 (56,847) 678 532,398 749 135,726 314,670 450,396 In addition to these Credit Risk provisions, there are country risk provisions to cover transactions abroad and additional provisions agreed upon by the Executive Committee, which are presented in liabilities under “Provisions” (Note No. 20). d) Portfolio sales: During 2015 and 2014, BancoEstado sold part of the portfolio of State Guaranteed University Loans (“CUGE”) in the framework of the public bid on the Financing and Administration Service for Higher Education Studies Law No. 20,027. The bid model open to financial institutions is included in the respective tender documents, and allows the selling of a percentage of the portfolio to third parties. Regarding the sold portfolio, BancoEstado substantially transferred all the risks and benefits associated to that portfolio, maintaining only its administration service, which considers the generation of new loans and collection of loan installments. Loans sold are detailed as follows: Sales at December 31, 2015 Bid lists New credits based on prior years list Others (**) 8,577 31,813 - 14,672 49,840 - 19,878 65,892 - (394) (1,514) - 5,962 Income received in advance MCh$ (*) 5,600 17,566 44,542 Total 40,390 64,512 85,770 (1,908) 5,962 67,708 91 121 (3) 8 95 Total MUS$ Number of transactions Par value MCh$ Sale value MCh$ Release of provisions MCh$ Gain on sale MCh$ 80 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 10 - LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS (Continued) Sales at December 31, 2014 Number of transactions Par value MCh$ Sale value MCh$ Release of provisions MCh$ Gain on sale MCh$ Bid lists New credits based on prior years list Others (**) 1,171 37,244 - 1,573 55,755 - 2,063 72,835 - (58) (1,985) - 4,061 Total 38,415 57,328 74,898 (2,043) 4,061 Income received in advance MCh$ (*) 548 19,065 30,891 50,504 (*) Income received in advance is reflected in “Other liabilities” under the concept of income received in advance, and is carried to income once the term of deferment is determined, recognizing the equivalent of the effective rate of these operations, according to IAS 39. (**) As of December 31, 2015, MCh$ 5,962 (MCh$ 4,061 in 2014) was recognized as a gain, reflected in the category “Net income from financial operations” in the Consolidated Income Statement for the year, as detailed below: Portfolio sales Year 2012 Year 2013 Year 2014 Year 2015 Totals Balance 12/31/2013 MCh$ 13,700 21,252 - Income received in advance 2014 MCh$ 19,613 - Annual amortization 2014 MCh$ (1,536) (2,125) (400) - Balance 12/31/2014 MCh$ 12,164 19,127 19,213 - Income received in advance 2015 MCh$ 23,166 Annual amortization 2015 MCh$ (1,536) (2,125) (1,961) (340) 34,952 19,613 (4,061) 50,504 23,166 (5,962) Balance 12.31.2015 MM$ MUS$ 10,628 15 17,002 24 17,252 24 22,826 32 67,708 95 81 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 11 - INVESTMENT SECURITIES As of December 31, 2015 and 2014, instruments designated as financial instruments available-forsale and financial instruments held-to-maturity are detailed as follows: Available for sale MCh$ Investments quoted in active markets: From the Chilean Government and the Chilean Central Bank: Instruments of the Chilean Central Bank Bonds and promissory notes of the Chilean Treasury Other government instruments Other instruments issued locally: Instruments from other local banks Bonds and commercial papers from companies Other instruments issued locally Other instruments issued abroad: Instruments from foreign governments or central banks Other instruments issued abroad Provision for impairment Subtotal 2015 Held to maturity MCh$ 2014 Held to maturity MCh$ Total MCh$ 838,776 41,119 - - 838,776 41,119 - 1,181 58 - 638,462 378,277 - - 638,462 378,277 - 2,258,632 25,396 - - 2,258,632 25,396 - 3,180 36 - 1,887,461 20,183 - - 1,887,461 20,183 - 849,118 - 849,118 1,196 409,339 - 409,339 - - - - - - 4,013,041 - Investments not quoted in active markets: Bonds and promissory notes of the Chilean Treasury Bonds and commercial papers from companies Other instruments - Provision for impairment - Subtotal - 36,273 Total Total MCh$ MUS$ Available for sale MCh$ 4,013,041 35,999 274 4,013,041 5,651 35,999 274 - 51 - - - 36,273 36,273 51 4,049,314 5,702 3,333,722 - 42,211 421 3,333,722 42,211 421 - - - - 42,632 42,632 42,632 3,376,354 3,333,722 As of December 31, 2015, MCh$ 51,961 of Chile’s Central Bank Instruments are sold with repurchase agreements to customers and financial institutions (MCh$ 1,330 in 2014). As of December 31, 2015, Instruments issued in the country and abroad include instruments sold with repurchase agreements to customers and financial institutions in the amount of MCh$ 2,849 (MCh$ 41,558 in 2014). As of December 31, 2015, repurchase agreements have an average expiration of 6 days (9 days in 2014). As of December 31, 2015 and 2014, no impairment has been identified for investment securities. 82 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 12 - INVESTMENTS IN COMPANIES a) As of December 31, 2015 and 2014, the main investments in companies are detailed as follows: At December 31, 2015 Participation % Investments under the equity method of accounting: Administrador Financiero Transantiago S.A. Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. (*) Operadora de Tarjetas de Créditos Nexus S.A. Transbank S.A. (**) IMERC-OTC (***) Company's equity MUS$ MCh$ Total investment MUS$ MCh$ 21.0000 18 12,758 4 2,679 14.9606 12.9030 8.7188 11.4263 7 13 57 14 4,955 9,472 40,302 9,823 1 2 5 1 741 1,222 3,514 1,123 13 9,279 3 2 2,200 125 1,557 - 5 3,882 - 18 13,161 Subtotal Bolsa de Comercio de Santiago Bolsa Electrónica de Chile Shares or interests in other companies (Bladex) Subtotal Total Net income MUS$ MCh$ - 1 1 2 Net income MCh$ 339 21.0000 11,145 2,341 296 133 225 438 (119) 13.0336 12.9030 8.7188 11.4263 4,643 8,253 34,177 10,899 605 1,065 2,980 1,245 97 195 359 (178) 8,236 769 321 2,437 125 1,330 109 256 444 3,892 365 12,128 1,134 1,016 123 - 2 Participation % 2014 Company's Total equity investment MCh$ MCh$ 1,460 (*) As of 31 December 2015, the Bank has purchased 186 shares of Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A., from different local banks in the amount of MCh$ 90. (**) On June 25, 2015, BancoEstado subscribed and paid for 512,018 shares of the business support company Transbank S.A. amounting to MCh$ 104. (***) This Company was established with principal divided into 10,000 shares of no par value, of which BancoEstado paid 1,111 subscribed shares of such company. As of December 31, 2015 and 2014, of the 10,000 shares issued by the company, 9,674 shares have been subscribed and paid. The percentage of 11.4263% corresponds to the Bank’s share of the subscribed paid-in principal. In contrast, the percentage indicated in Note 1c) corresponds to a percentage of the subscribed principal. 83 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 12 - INVESTMENTS IN COMPANIES (Continued) b) Movements of investments in companies recorded in 2015 and 2014 are detailed as follows: Detail Initial carrying amount Acquisition of investment Share in income Dividends received Dividends received - investments at market value Provision for dividends Provision for losses on investments Exchange difference of shares of Banco Latinoamericano de Exportaciones S.A. Adjustment of investments Total MUS$ 16 2 18 2015 MCh$ 2014 MCh$ 12,128 194 1,016 (444) (197) 227 237 9,152 2,200 769 (365) (142) 180 334 13,161 12,128 c) As of December 31, 2015 and 2014 no impairment has been identified for this type of investment. 84 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 13 - INTANGIBLE ASSETS a) As of December 31, 2015 and 2014, intangibles are detailed as follows: Years of Years of remaining useful life amortization Item Intangible assets acquired independently Intangible assets acquired in business combinations Internally-generated intangible assets 3 - 1.1 - 3 1.1 Total 2015 Accumulated amortization and impairment MCh$ Gross balance MCh$ 2014 Net balance MCh$ MUS$ 92,500 199,167 (29,416) (128,447) 63,084 70,720 291,667 (157,863) 133,804 Net balance MCh$ 89 99 59,208 38,917 188 98,125 - b) During 2015 and 2014 movements of intangibles are detailed as follows: Intangible Intangible Assets assets Acquired acquired in business independently combinations MCh$ MCh$ Internallygenerated intangible assets MCh$ Total MCh$ MUS$ Gross Balance Balance at January 1, 2014 Purchases Disposals Impairment Increases and decreases from restatements Assets classified as held for sale Transfers (*) Others 78,780 7,082 (157) 83 (33) - 98,342 33,345 (1) 559 (379) 177,122 40,427 (158) 642 (412) Balances at December 31, 2014 85,755 - 131,866 217,621 Balance at January 1, 2015 Purchases Disposals Impairment Increases and decreases from restatements Assets classified as held for sale Transfers (**) Others 85,755 9,216 (823) (1,652) 4 - 131,866 104,345 (10,720) (25,888) (436) 217,621 113,561 (11,543) (27,540) (432) 306 160 (16) (39) (1) Balances at December 31, 2015 92,500 - 199,167 291,667 410 - (*) Corresponds to transfers performed during the year from Property, plant and equipment to Intangible assets. (**) Corresponds to transfers carried out during the year from Intangible assets to Property, plant and equipment 85 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 13 - INTANGIBLE ASSETS (Continued) Intangible Intangible Assets assets Acquired acquired in business independently combinations MCh$ MCh$ Internallygenerated intangible assets MCh$ Total MCh$ MUS$ Accumulated amortization and impairment Balance as of January 1, 2014 Amortization for the year Impairment loss Retirement/Sale Transfers Other changes in the carrying amount of the year (19,574) (6,956) (17) - (49,564) (43,386) 1 - (69,138) (50,342) 1 (17) Balances as of December 31, 2014 (26,547) - (92,949) (119,496) Balance as of January 1, 2015 Amortization for the year Impairment loss Retirement/Sale Other changes in the carrying amount of the year (26,547) (3,430) 589 (28) - (92,949) (42,549) 7,051 - (119,496) (45,979) 7,640 (28) (168) (65) 11 - Balances as of December 31, 2015 (29,416) - (128,447) (157,863) (222) c) As of December 31, 2015 and 2014, the Bank has commitments for the acquisition of intangible assets detailed as follows: Details Service Management Projects Development Projects Total Agreement Date December Purchase Order December Purchase Order Investment amount 2015 2014 MUS$ MCh$ MCh$ 5 1 3,348 519 118 18 6 3,867 136 86 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 14 - PROPERTY, PLANT AND EQUIPMENT a) As of December 31, 2015 and 2014 property, plant and equipment movements by class are detailed as follows: December 31, 2015 Land and buildings MCh$ Equipment MCh$ Others MCh$ MCh$ Total MUS$ Cost Balance as of January 1, 2015 Additions Withdrawals / disposals Assets in transit (*) Others 223,585 997 (1,344) 1,430 78 108,314 39,812 (486) 6,440 71 59,521 8,365 (2,919) 19,670 (55) 391,420 49,174 (4,749) 27,540 94 551 69 (7) 40 - Subtotal 224,746 154,151 84,582 463,479 653 Accumulated depreciation (28,204) (104,825) (26,673) (159,702) (225) Property, plant and equipment, net Balances as of December 31, 2015 196,542 49,326 57,909 303,777 428 Land and buildings MCh$ Equipment MCh$ December 31, 2014 Others MCh$ Total MCh$ 46,135 15,000 (1,833) 752 (533) 368,161 28,725 (4,857) (642) 33 Cost Balance as of January 1, 2014 Additions Withdrawals / disposals Assets in transit (**) Others 222,458 6,896 (2,399) (3,868) 498 Subtotal 223,585 108,314 59,521 391,420 Accumulated depreciation (24,707) (87,347) (22,805) (134,859) Property, plant and equipment, net Balances as of December 31, 2014 198,878 20,967 36,716 256,561 99,568 6,829 (625) 2,474 68 (*) Corresponds to transfers performed during the year from Intangible assets to Property, plant and equipment. (**) Corresponds to transfers performed during the year from Property, plant and equipment to Intangible assets. 87 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 14 - PROPERTY, PLANT AND EQUIPMENT (Continued) b) As of December 31, 2015 and 2014, the Bank and its Subsidiaries have operating leases that cannot be unilaterally rescinded. Future payment information is detailed as follows: Up to 1 year MCh$ Real estate Future payments of operating lease From 2 to 3 Years More than 3 years Total MCh$ MCh$ MCh$ MUS$ Balances as of December 31, 2015 7,444 7,226 9,718 24,388 34 Balances as of December 31, 2014 9,248 7,916 3,740 20,904 29 c) As of December 31, 2015 and 2014, the Bank does not have financial lease contracts. However, assets for leasing that correspond to assets acquired to be handed over under financing leasing as of December 31, 2015, total MCh$ 113,608 (MCh$ 105,568 in 2014), and are classified under “Other assets”. NOTE 15 - CURRENT AND DEFERRED INCOME TAXES a) Current taxes: As of December 31, 2015 and 2014, the Bank has established a corporate tax provision in the amount of MCh$ 114,329 and MCh$ 168,522 with debit to income, respectively, which considers 40% additional tax in accordance with D.L. No. 2,398. That provision is presented net of provisional payments tax installments and other credits, detailed as follows: MUS$ Income tax, tax rate (22.5% / 21%) Article No. 2 D.L. No. 2,398 Tax (40%) First category tax Non-deductible expenses article No. 21 Income tax on equity (*) Less: Monthly provisional payments Monthly provisional payments for accumulated losses Article No. 31 section 3 Credit for training expenses Credit Others for purchase of property, plant and equipment Total (64) (97) 2015 MCh$ 2014 MCh$ (45,197) (69,132) (115) 1,071 (62,180) (106,342) (15) (7,211) 1 67,960 2,066 1,101 53,425 1,962 536 (59) (42,246) (119,825) 2 96 3 - (*) Corresponds to 1st category income tax from the Income Tax Law and article No. 2 of D.L. No. 2,398, credited and debited to equity for the concept of the fair value of derivatives, which are part of the income tax liability. 88 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 15 - CURRENT AND DEFERRED INCOME TAXES (Continued) b) Tax effect on income: The effect of the tax expense for the years ended December 31, 2015 and 2014 is detailed as follows: 2015 MUS$ MCh$ Income tax expenses Income tax, tax rate (22.5% / 21%) Article No. 2 D.L. No. 2,398 Tax (40%) First category sole tax 2014 MCh$ (64) (97) (45,197) (69,132) - (62,180) (106,342) - (34) (24,598) - 126,857 (4,484) Subtotal (195) (138,927) (46,149) Taxes from disallowed expenses article No. 21 Other - (115) 207 (15) 107 Net charge to income for income tax (195) (138,835) (46,057) Credit (charge) for deferred taxes: Generation and reversal of temporary differences Tax benefit from prior years - c) Reconciliation of effective tax rate: The reconciliation of the income tax rate to the effective rate applied in the determination of the tax expense, as of December 31, 2015 and 2014, is detailed as follows: 2015 Tax rate % Income before taxes Effect of rate change Law No. 20,780 Permanent differences Additions or deductions: Sole tax (disallowed expenses) Non-deductible expenses (financial and non-taxable expenses) Incentives of taxes not recognized in the statement of income Sole tax Investment Company's Other 62.5% (9.5%) Effective tax rate and income tax expense 53.0% - 2014 Amount MCh$ MUS$ 163,594 (24,644) (115) 138,835 231 (36) 195 Tax rate % 61.0% (16.4%) (23.8%) Amount MCh$ 135,005 (36,578) (52,385) - - 15 20.8% 46,057 89 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 15 - CURRENT AND DEFERRED INCOME TAXES (Continued) d) Deferred taxes effect on equity: Deferred taxes recognized with a charge (credit) to equity for the year ended December 31, 2015 and 2014, are detailed as follows: 2015 Assets MUS$ MCh$ Available-for-sale financial investments Cash flow hedge Employee benefit plans Others 5 3 3 3,582 2,171 2,128 11 7,881 - Total charge (credit) in equity Assets MCh$ 2014 Liabilities MCh$ (8,521) - 4,021 2,128 (1,794) (11,709) - (8,521) 6,149 (13,503) Liabilities MUS$ MCh$ (12) (12) e) Deferred taxes effect: As of December 31, 2015 and 2014, accumulated deferred tax effects are detailed as follows: Assets MUS$ MCh$ Item Provisions for loan losses Vacation provision Provisions associated with employees Severance indemnity Tax loss (*) Suspended interest and indexation Other provisions Intangibles Property, plant and equipment, net Fair value Leasing operations, net Other Total net tax 2015 Liabilities MUS$ MCh$ Net MUS$ MCh$ Assets MCh$ 2014 Liabilities MCh$ Net MCh$ 425 24 12 61 2 74 430 16 86 301,913 16,993 8,512 43,271 1,320 52,402 305,191 11,324 33 14 334 60,991 (109) (38) (64) (99) (66) (77,685) (27,018) (45,305) (70,371) (46,955) 425 24 12 61 2 74 430 16 (109) (38) (64) (99) 20 301,913 16,993 8,512 43,271 1,320 52,402 305,191 11,324 (77,652) (27,004) (44,971) (70,371) 14,036 265,692 15,654 8,113 45,978 1,122 55,307 308,132 21 501 43,529 (55,517) (31,685) (22,155) (60,811) (21,033) 265,692 15,654 8,113 45,978 1,122 55,307 308,132 (55,517) (31,664) (21,654) (60,811) 22,496 1,130 802,298 (376) (267,334) 754 534,964 744,049 (191,201) 552,848 (*) The Bank and Subsidiaries has recognized deferred taxes on taxes losses, since they have no expiration date and Management believes that there will be sufficient future taxable income to allow the use of the respective tax credit. The New York Branch has not recognized deferred taxes since Management is uncertain about the generation of future taxable income that would enable it to use this benefit in the near future. 90 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 15 - CURRENT AND DEFERRED INCOME TAXES (Continued) f) Provisions and write-offs for tax purposes In accordance with joint Circular No. 47, issued by the Servicio de Impuestos Internos, and No. 3,478 issued by the Superintendencia de Bancos e Instituciones Financieras, both on August 18, 2009, the movements and effects generated by the application of article No. 31 No. 4, of the Income Tax Law. As of December 31, 2015, are detailed as follows: A. Credits and accounts receivable and due from banks Loans as of December 31, 2015 Trade and due from banks Consumer Mortgage B. Provisions for past-due loans Commercial Consumer Mortgage C. Direct write-offs and recoveries Direct write-offs Art. 31 No.4 section 2 Forgiving (renegotiation)/ release of provisions Recoveries or renegotiations write-off credits D. Application of Art. 31 No. 4 sections 1 and 3 (Other write-offs/forgiving) Write-off section 1 Forgiving (impaired credits) (*) Financial value of assets MCh$ 8,679,117 1,663,964 7,305,322 Total MUS$ 12,307 2,343 10,315 Tax value of assets Total Past-due loans Past-due loans with guarantee without guarantee MCh$ MCh$ MCh$ 8,739,792 16,069 50,453 1,663,968 1,023 11,207 7,325,536 40,877 - Balance at Write-off against Provisions 01.01.2015 provisions established MCh$ MCh$ MCh$ 35,202 (12,180) 42,977 6,635 (4,046) 11,203 - Provisions Released MCh$ (15,546) (2,585) - Balance at 12.31.2015 MUS$ MCh$ 71 50,453 16 11,207 - MCh$ 124,722 - MCh$ - 91 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 15 - CURRENT AND DEFERRED INCOME TAXES (Continued) As of December 31, 2014, are detailed as folows: A. Credits and accounts receivable and due from banks Loans as of December 31, 2014 Trade and due from banks Consumer Mortgage B. Provisions for past-due loans Commercial Consumer Mortgage C. Direct write-offs and recoveries Direct write-offs Art. 31 No.4 section 2 Forgiving (renegotiation)/ release of provisions Recoveries or renegotiations write-off credits D. Application of Art. 31 No. 4 sections 1 and 3 (Other write-offs/forgiving) Write-off section 1 Forgiving (impaired credits) (*) (*) Financial value of assets MCh$ 7,359,648 1,524,501 6,391,867 Tax value of assets Past-due loans Past-due loans with guarantee without guarantee MCh$ MCh$ MCh$ 7,386,689 24,506 35,202 1,524,507 744 6,635 6,450,065 49,421 Total Balance at Write-off against 01.01.2014 provisions MCh$ MCh$ 30,655 (10,053) 6,576 (5,133) - Provisions established MCh$ 28,199 6,631 - Provisions Balance at Released 12.31.2014 MCh$ MCh$ (13,598) 35,202 (1,438) 6,635 - MCh$ 126,132 - MCh$ - Corresponds to balances only for individual BancoEstado (without considering factoring and leasing), i.e. does not include Subsidiaries or the New York Branch. 92 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 16 - OTHER ASSETS a) As of December 31, 2015 and 2014, “Other assets” are detailed as follows: MUS$ 2015 MCh$ 2014 MCh$ 160 113,608 105,568 Assets for leasing (*) Assets received in lieu of payment Assets received in lieu of payment Assets received in settlement of loans in sheriff's auction Provisions for assets received in lieu of payment (**) Other assets Money deposits in guarantee Value added tax Prepaid expenses Property, plant and equipment for sale (***) Valuation adjustments for macrohedges Debts receivable from the government Outstanding operations Guarantee paid by CSA contracts Supplies Commissions receivable Assets in transit Sundry accounts Leasing assets in transit Other receivables Advance payment to providers Agreement cash Titles in guarantee Other assets Total 4 4 - 2,600 2,669 (69) 2,957 3,000 (43) 359 3 14 65 2 117 10 45 2 7 9 21 16 1 9 38 255,063 1,779 10,018 46,154 1,218 83,099 7,207 31,915 1,647 5,254 6,674 15,050 11,351 839 54 6,208 26,596 179,704 90 5,535 742 3 14,080 6,595 7,900 897 5,077 11,835 3,976 12,730 11,024 65,764 54 8,934 24,468 523 371,271 288,229 (*) Corresponds to property, plant and equipment available to be delivered under financial leases. (**) The recording of provisions over assets received or awarded in lieu of payments are recorded as indicated in the Compendium of Accounting Standards Chapter B-5 No. 3, which implies recognizing a provision for the difference between the initial value plus additions and appraisal value, when the former is greater. 93 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 16 - OTHER ASSETS (Continued) (***) Non current assets held for sale that appear under “Other assets” correspond to real estate properties that are presented in the account “Property, plant and equipment held for Sale”. These properties are assets available for sale, and it is highly probable that they will be sold. For most assets, their sale is expected to be completed within a year from the date on which they are classified as “Property, plant and equipment held for sale and/or Assets recovered from leasing for sale”. b) The movement of the provision for assets received in lieu of payment or awarded during 2015 and 2014, is detailed as follows: Amortization and accumulated impairment Provisions for assets 2015 2014 MUS$ MCh$ MCh$ Balance as of January 1 Provisioning for the year Provisions applied Release of provisions Impairment loss - 43 140 (100) (14) - Balance as of December 31, - 69 63 81 (83) (18) 43 94 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 17 - DEPOSITS AND OTHER DEMAND OBLIGATIONS AND TIME DEPOSITS As of December 31, 2015 and 2014, deposits and other obligations are detailed as follows: a) Current accounts and other demand deposits Current accounts Other deposits and call accounts Deposits for legal consignments On demand performance bonds Collections made to be paid Payments to be made for the sale of financial instruments Export proceeds to be paid Pending payment authorizations Payments on account of credits to be paid Immobilized balances article No. 156 of the General Banking Law Past-due time deposits Past-due bond coupons and bills of exchange Other demand liabilities Total MUS$ 2015 MCh$ 2014 MCh$ 8,139 1,929 526 15 174 10 14 5,779,686 1,370,003 373,803 10,195 123,556 4 173 7,260 9,815 4,714,889 1,119,615 345,101 6,713 124,263 5 1,289 6,410 12,079 13 6 355 9,102 4,401 16 252,013 7,166 2,965 20 312,652 11,181 7,940,027 6,653,167 b) Saving accounts and time deposits 2015 MUS$ MCh$ 2014 MCh$ Time deposits Saving accounts Other time credit balances 15,169 5,010 22 10,772,501 3,558,072 15,594 9,455,504 3,162,567 23,857 Total 20,201 14,346,167 12,641,928 95 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 18 - OBLIGATIONS WITH BANKS As of December 31, 2015 and 2014, “Obligations with banks” are detailed as follows: MUS$ Borrowings from Local Financial Institutions: Banco de Chile The Bank of Tokyo Banco Itau Chile Banco Falabella Subtotal Subtotal Borrowings abroad: Banco Central de Costa Rica Banco Centroamericano Integración Económica Banco General S.A. Bank of New York Mellon NY Branch Banking and Trust Company (BB&T) Citibank N.A. NY HSBC Bank PLC ING Bank N.V. Kfw Bankengruppe Mizuho Corporate Bank NY Royal Bank of Scotland PLC UK Sumitomo Mitsui Banking Corp NY The Bank of Montreal The Bank of Nova Scotia - Toronto Toronto-Dominion Bank Wells Fargo Bank N.A. Miami Zurcher Kantonalbank Others Subtotal Total 2014 MCh$ - - 120,010 16,001 100,008 10,001 - - 246,020 - - - - - - 281 73 32,201 1,307 2,597 71,016 571 93,314 19 292 2,450 1,227 418 242 1,604 139 460 261 53,262 321 71,016 39,059 45,450 81,668 580 28,406 2,720 67 327 1,012 2,279 165 207 3,950 168 326 87 865 1,351 730 60 907 238 47 82 123 449 544 325 1,331 25 69 100 65 138 115 50 70 85 - 17,762 49,015 71,045 46,206 97,931 81,713 35,518 49,742 60,467 - 62,380 18,205 12,135 12,149 12,149 12,148 30,339 39,468 110,126 15,175 12,163 30,344 18,208 30,361 1,993 1,465 1,040,353 432,983 1,465 1,040,353 679,003 Borrowings from Financial Institutions and the Chilean Central Bank: Other obligations with the Chilean Central Bank Borrowings from Foreign Financial Institutions: Agricultura Bank of China, The Banco Santander (Brasil) S.A. Bank of America, N.A Bank of Tokyo Mitsubishi UFJ, Ltd Bank of China Bank of Nova Scotia BNP Paribas SA (F/Banque Nationale) China Merchansts Bank Citibank, N.A. Citibank Taiwan Limited Commercial Bank of Ceylon PLC Deustche bank AG Deustche bank S.A.-Banco Alemao Hong Kong Shanghai Banking Corp. Ltd Industrial Bank of korea Intesa Sanpaolo Spa Kbc Bank Nv Korea Exchange Bank Kookmin Bank Standard Chartered Bank Standard Chartered Bank (Pakistan) Standard Chartered Bank Korea Ltd State Bank of India Sumitomo Mitsui Banking Corpo Shinhan Bank The Bank of Montreal The Bank of New York The Toronto Dominion Bank Wells Fargo Bank, N.A. Woori Bank, Seoul Zuercher Kantonalbank Others 2015 MCh$ 46 2 4 100 1 132 3 2 1 2 1 75 100 55 64 115 1 40 4 - 96 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 19 - DEBT INSTRUMENTS ISSUED AND OTHER OBLIGATIONS As of December 31, 2015 and 2014, debt instruments issued and other obligations are detailed as follows: MUS$ 2015 MCh$ 2014 MCh$ Debt issued instruments: Bills of exchange Ordinary bonds Subordinated bonds 1,318 5,096 1,220 935,661 3,619,155 866,725 1,053,483 2,654,701 854,759 Subtotal 7,634 5,421,541 4,562,943 55 39,265 - 33,279 - 55 39,265 33,279 7,689 5,460,806 4,596,222 Other Financial Obligations: Obligations public sector Other local obligations Borrowings abroad Subtotal Total - 97 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 19 - DEBT INSTRUMENTS ISSUED AND OTHER OBLIGATIONS (Continued) As of December 31, 2015 and 2014, bonds issued are detailed as follows: 12/31/2015 ORDINARY BONDS Balance due Series BEST-D0807 BEST-F1007 BEST-H1207 BESTA30400 BESTJ20708 BESTJ31008 BESTJ41008 BESTJ50109 BESTJ60109 BESTJ70112 BESTJ80112 BESTK10713 BESTK20713 BESTK30114 BESTK40114 BESTK50714 BESTK60714 BESTK70115 BESTK80115 BESTN10814 BESTN20814 BESTN30914 BESTN41114 BESTN51214 BESTO10215 BESTO20315 BESTO30315 Subtotal UF Bonds UF issued UF placement 6,000,000 6,000,000 2,000,000 2,000,000 4,000,000 4,000,000 3,000,000 3,000,000 3,000,000 3,000,000 5,000,000 5,000,000 2,000,000 2,000,000 5,000,000 5,000,000 2,000,000 2,000,000 5,000,000 5,000,000 3,000,000 3,000,000 3,000,000 3,000,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 3,000,000 3,000,000 78,000,000 78,000,000 Issuance date 08/01/2007 10/01/2007 12/01/2007 04/01/2000 07/01/2008 10/01/2008 10/01/2008 01/01/2009 01/01/2009 01/01/2012 01/01/2012 07/01/2013 07/01/2013 01/01/2014 01/01/2014 07/01/2014 07/01/2014 01/01/2015 01/01/2015 08/01/2014 08/01/2014 09/01/2014 11/01/2014 12/01/2014 02/01/2015 03/01/2015 03/01/2015 Maturity date 08/01/2017 10/01/2027 12/01/2017 04/01/2025 07/01/2018 10/01/2018 10/01/2028 01/01/2019 01/01/2029 01/01/2017 01/01/2032 07/01/2018 07/01/2043 01/01/2019 01/01/2044 07/01/2019 07/01/2044 01/01/2020 01/01/2045 08/01/2024 08/01/2044 09/01/2044 11/01/2046 12/01/2046 02/01/2035 03/01/2020 03/01/2025 Issuance rate 4.00% 4.25% 4.00% 6.50% 3.50% 3.50% 4.00% 3.50% 4.00% 3.50% 3.75% 3.30% 3.70% 3.30% 3.70% 3.30% 3.70% 3.30% 3.70% 3.00% 3.30% 3.30% 3.30% 3.30% 3.20% 2.80% 3.00% UF Original currency 6,111,519.67 2,094,002.05 4,050,224.84 1,850,791.69 3,004,851.32 4,979,068.87 1,912,929.25 5,087,574.68 1,999,739.28 5,098,803.55 3,097,129.17 3,142,664.40 2,297,041.76 3,125,579.75 2,336,967.40 3,204,546.04 2,378,512.09 3,202,111.97 2,365,070.19 3,083,646.98 2,159,182.60 2,118,470.86 2,091,931.12 2,031,411.47 2,153,859.22 1,852,883.70 3,065,005.74 79,895,519.66 MCh$ 156,633 53,667 103,804 47,434 77,012 127,609 49,027 130,390 51,251 130,678 79,377 80,544 58,871 80,106 59,894 82,130 60,959 82,067 60,615 79,031 55,338 54,294 53,614 52,063 55,201 50,039 78,553 2,050,201 Issuance date 10/07/2010 02/08/2012 11/05/2012 05/07/2013 Maturity date 10/07/2020 02/08/2022 11/09/2017 11/09/2017 Issuance rate 4.13% 3.88% 2.00% 2.00% US$ Original currency 501,199,742 499,405,012 494,331,882 200,502,899 1,695,439,535 MCh$ 355,932 354,657 351,055 142,389 1,204,033 Issuance Maturity date date 06/11/2013 06/18/2018 01/16/2015 01/23/2020 Issuance rate 0.84% 0.52% ¥ Original currency 23,991,524,276 30,967,818,331 54,959,342,607 MCh$ 141,287 182,371 323,658 Issuance Maturity date date 07/08/2015 07/22/2025 Issuance rate 1.58% € Original currency 53,270,136 53,270,136 MCh$ 41,263 41,263 MUS$ 221 76 146 67 108 180 69 184 72 184 112 113 83 113 84 116 86 116 85 111 78 76 75 73 78 70 111 2,887 Balance due Series FOREIGN CURRENCY BONDS FOREIGN CURRENCY BONDS FOREIGN CURRENCY BONDS FOREIGN CURRENCY BONDS Subtotal US$ Bonds US$ issued US$ placement 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 200,000,000 200,000,000 1,700,000,000 1,700,000,000 MUS$ 501 499 494 201 1,695 Balance due Serie FOREIGN CURRENCY BONDS FOREIGN CURRENCY BONDS Subtotal ¥ Bonds ¥ issued 24,000,000,000 31,000,000,000 55,000,000,000 ¥ placement 24,000,000,000 31,000,000,000 55,000,000,000 Serie FOREIGN CURRENCY BONDS Subtotal € Bonds € issued € placement 53,000,000 53,000,000 53,000,000 53,000,000 MUS$ 199 257 456 Balance due Total Ordinary Bonds MUS$ 58 58 3,619,155 5,096 SUBORDINATED BONDS Balance due Series UEST-A0799 UEST-B0603 UEST-C0405 UEST-D0106 UEST-E0806 UEST-F0207 UEST-I0308 UESTI20110 UESTL10111 UESTL20711 UESTL30112 UESTM11213 UESTM20114 UESTM30114 UESTM40114 Total Subordinated Bonds Total Bonds issued UF issued UF placement 4,000,000 4,000,000 2,500,000 2,500,000 4,000,000 4,000,000 2,000,000 2,000,000 2,500,000 2,500,000 2,500,000 2,500,000 2,000,000 2,000,000 3,000,000 3,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 36,500,000 36,500,000 Issuance date 07/01/1999 06/01/2003 04/01/2005 01/01/2006 08/01/2006 02/01/2007 03/01/2008 01/01/2010 01/01/2011 07/01/2011 01/01/2012 12/01/2013 01/01/2014 01/01/2014 01/01/2014 Maturity date 07/01/2024 06/01/2025 04/01/2027 01/01/2031 08/01/2031 08/01/2031 03/01/2033 01/01/2038 01/01/2041 07/01/2041 01/01/2042 12/01/2043 01/01/2045 01/01/2046 01/01/2047 Issuance rate 6.50% 4.80% 4.50% 4.50% 4.50% 4.00% 4.00% 4.50% 4.00% 4.00% 4.00% 3.50% 3.50% 3.50% 3.50% UF Original currency 2,410,968.68 1,570,638.75 3,090,640.65 1,730,106.34 2,242,512.06 2,246,624.37 1,831,663.33 3,387,191.68 2,087,571.80 2,194,720.14 2,200,235.18 2,043,773.91 2,191,890.57 2,366,049.24 2,223,412.21 33,817,998.91 MCh$ 61,791 40,254 79,210 44,341 57,473 57,579 46,944 86,811 53,503 56,249 56,390 52,380 56,176 60,640 56,984 866,725 4,485,880 MUS$ 87 57 112 63 81 81 66 122 75 79 79 74 79 85 80 1,220 6,316 98 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 19 - DEBT INSTRUMENTS ISSUED AND OTHER OBLIGATIONS (Continued) As of December 31, 2014, bonds issued are detailed as follows: 12/31/2014 Series BEST-D0807 BEST-F1007 BEST-H1207 BESTA30400 BESTJ20708 BESTJ31008 BESTJ41008 BESTJ50109 BESTJ60109 BESTJ70112 BESTJ80112 BESTK10713 BESTK20713 BESTK30114 BESTK40114 BESTK50714 BESTK60714 BESTN10814 BESTN20814 Subtotal UF Bonds UF issued 6,000,000 2,000,000 4,000,000 3,000,000 3,000,000 5,000,000 2,000,000 5,000,000 2,000,000 5,000,000 3,000,000 3,000,000 2,000,000 3,000,000 2,000,000 3,000,000 2,000,000 3,000,000 2,000,000 60,000,000 ORDINARY BONDS Issuance UF placement date 6,000,000 08/01/2007 2,000,000 10/01/2007 4,000,000 12/01/2007 3,000,000 04/01/2000 3,000,000 07/01/2008 5,000,000 10/01/2008 2,000,000 10/01/2008 5,000,000 01/01/2009 2,000,000 01/01/2009 5,000,000 01/01/2012 3,000,000 01/01/2012 3,000,000 07/01/2013 2,000,000 07/01/2013 3,000,000 01/01/2014 2,000,000 01/01/2014 3,000,000 07/01/2014 2,000,000 07/01/2014 3,000,000 08/01/2014 2,000,000 08/01/2014 60,000,000 Maturity date 08/01/2017 10/01/2027 12/01/2017 04/01/2025 07/01/2018 10/01/2018 10/01/2028 01/01/2019 01/01/2029 01/01/2017 01/01/2032 07/01/2018 07/01/2043 01/01/2019 01/01/2044 07/01/2019 07/01/2044 08/01/2024 08/01/2044 Issuance rate 4.00% 4.25% 4.00% 6.50% 3.50% 3.50% 4.00% 3.50% 4.00% 3.50% 3.75% 3.30% 3.70% 3.30% 3.70% 3.30% 3.70% 3.00% 3.30% UF Original currency 6,119,448.00 2,099,054.17 4,068,684.20 1,982,753.86 2,987,148.79 4,957,888.85 1,913,900.24 5,087,575.35 1,997,495.63 5,110,504.53 3,099,268.34 3,178,646.13 2,303,152.00 3,149,974.44 2,343,912.26 3,247,252.60 2,386,265.20 3,088,511.94 2,162,040.12 61,283,476.65 Balance due MCh$ 150,704 51,694 100,200 48,829 73,565 122,098 47,134 125,292 49,193 125,857 76,326 78,281 56,720 77,575 57,724 79,970 58,767 76,061 53,244 1,509,234 Series FOREIGN CURRENCY BONDS FOREIGN CURRENCY BONDS FOREIGN CURRENCY BONDS FOREIGN CURRENCY BONDS Subtotal US$ Bonds US$ issued US$ placement 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 200,000,000 200,000,000 1,700,000,000 1,700,000,000 Issuance 10/07/2010 02/08/2012 11/05/2012 05/07/2013 Maturity 10/07/2020 02/08/2022 11/09/2017 11/09/2017 Issuance 4.13% 3.88% 2.00% 2.00% US$ Original 500,183,357 496,525,359 491,114,007 200,295,864 1,688,118,587 Balance due MCh$ 303,486 301,267 297,983 121,530 1,024,266 Serie FOREIGN CURRENCY BONDS Subtotal ¥ Bonds ¥ issued ¥ placement 24,000,000,000 24,000,000,000 24,000,000,000 24,000,000,000 Issuance 06/11/2013 Maturity 06/18/2018 Issuance ¥ Original currency 0.84% 23,840,714,962 23,840,714,962 Balance due MCh$ 121,201 121,201 Total Ordinary Bonds 2,654,701 SUBORDINATED BONDS Series UEST-A0799 UEST-B0603 UEST-C0405 UEST-D0106 UEST-E0806 UEST-F0207 UEST-I0308 UESTI20110 UESTL10111 UESTL20711 UESTL30112 UESTM11213 UESTM20114 UESTM30114 UESTM40114 Total Subordinated Bonds Total Bonds issued UF issued 4,000,000 2,500,000 4,000,000 2,000,000 2,500,000 2,500,000 2,000,000 3,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 36,500,000 UF placement 4,000,000 2,500,000 4,000,000 2,000,000 2,500,000 2,500,000 2,000,000 3,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 36,500,000 Issuance 07/01/1999 06/01/2003 04/01/2005 01/01/2006 08/01/2006 02/01/2007 03/01/2008 01/01/2010 01/01/2011 07/01/2011 01/01/2012 12/01/2013 01/01/2014 01/01/2014 01/01/2014 Maturity 07/01/2024 06/01/2025 04/01/2027 01/01/2031 08/01/2031 08/01/2031 03/01/2033 01/01/2038 01/01/2041 07/01/2041 01/01/2042 12/01/2043 01/01/2045 01/01/2046 01/01/2047 Issuance 6.50% 4.80% 4.50% 4.50% 4.50% 4.00% 4.00% 4.50% 4.00% 4.00% 4.00% 3.50% 3.50% 3.50% 3.50% UF Original 2,595,044.96 1,691,918.61 3,296,182.70 1,806,438.33 2,339,717.20 2,347,456.09 1,902,115.98 3,397,312.02 2,088,111.34 2,199,003.49 2,204,518.54 2,044,576.25 2,195,146.39 2,373,197.58 2,227,311.74 34,708,051.22 Balance due MCh$ 63,908 41,667 81,175 44,487 57,621 57,811 46,844 83,666 51,424 54,155 54,291 50,352 54,060 58,445 54,853 854,759 3,509,460 99 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 20 - PROVISIONS As of December 31, 2015 and 2014, “Provisions” are detailed as follows: a) Provisions 12/31/2015 MUS$ MCh$ 12/31/2014 MCh$ Employee benefits and remunerations provision Distribution of net income provision (tax benefit) Credit risk on contingent loans provision Contingent provision (*) Country risk provisions 153 130 64 600 2 108,391 92,149 45,528 426,291 1,274 111,288 165,659 40,096 435,907 672 Totales 949 673,633 753,622 (*) Includes additional provision in the amount of MCh$ 413,820 in 2015 and 2014. b) The movement of provisions, recorded in 2015 and 2014, is detailed as follows: Employee benefits and remunerations MCh$ Contingent credit risks MCh$ Provisions for contingencies MCh$ Other provisions MCh$ MCh$ Total MUS$ Balances at January 1, 2015 Provisions established Applied provisions Release of provisions Other movements 111,288 66,177 (45,268) (23,807) 1 40,096 20,211 (15,741) 962 435,907 16,212 (9,643) (16,185) - 166,331 92,805 (165,659) (55) 1 753,622 195,405 (220,570) (55,788) 964 1,061 275 (310) (78) 1 Balances at December 31, 2015 108,391 45,528 426,291 93,423 673,633 949 Balances at January 1, 2014 Provisions established Applied provisions Release of provisions Other movements 106,777 48,538 (32,407) (11,620) - 32,816 20,207 (13,363) 436 293,903 172,924 (1,644) (29,275) (1) 103,842 165,871 (103,188) (194) - 537,338 407,540 (137,239) (54,452) 435 Balances at December 31, 2014 111,288 40,096 435,907 166,331 753,622 100 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 20 - PROVISIONS (Continued) c) As of December 31, 2015 and 2014, provisions for employee benefits and payroll are detailed as follows: 12/31/2015 12/31/2014 MUS$ MCh$ MCh$ Severance indemnity provision Severance benefit provision Provision for other employee benefits Vacation provision 90 22 41 63,584 15,667 29,140 69,031 15,136 27,121 153 108,391 111,288 - Total d) As of December 31, 2015 and 2014, termination benefits (Note 29) are detailed as follows: 12/31/2015 MUS$ MCh$ Present value of liabilities at beginning of year Increase in provision Advanced payments Applied provisions Release of provisions Effects for discount rate Others Total 97 16 (19) (4) 90 12/31/2014 MCh$ 69,031 11,356 (13,285) (3,518) - 67,580 19,858 (14,027) (4,375) (5) 63,584 69,031 101 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 20 - PROVISIONS (Continued) e) Additional provisions Additional provisions (included under the concept of contingencies provisions) are destined to cover countercyclical adverse effects on the Bank’s businesses and concentration risks, in accordance with the criteria approved by the Bank’s Executive Committee, as described in Note 1 u.6). As of December 31, 2015 and 2014, movements of additional provisions are detailed as follows: 12/31/2015 MUS$ MCh$ Balance as of January 1 Provision established Release of provisions Other Balance as of December 31 12/31/2014 MCh$ 583 - 413,820 - 281,201 132,622 (3) 583 413,820 413,820 The effects for the period are recorded in “Provisions for loan losses” in the Consolidated Statement of Income. NOTE 21 - OTHER LIABILITIES As of December 31, 2015 and 2014, “Other liabilities” are detailed as follows: MUS$ 2015 MCh$ 2014 MCh$ Accounts and notes payable Agreed-upon dividends payable Unearned income Outstanding operations Provisions for payment of leasing insurance premiums Guarantees received from Credit Support Annex (CSA) Contracts Other liabilities 106 9 105 6 6 164 18 75,274 6,376 74,617 4,419 4,229 116,154 12,986 63,015 6,396 53,995 12,339 9,076 43,783 6,315 Total 414 294,055 194,919 102 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 22 - CONTINGENCIES AND COMMITMENTS a) Commitments and responsibilities recorded in memorandum accounts: The Bank, its New York Branch and Subsidiaries, hold the following balances related to commitments and responsibilities arising from its normal line of business in memorandum accounts: 12-31-2015 MUS$ MCh$ Contingent Loans Guarantee and deposits: Guarantees and deposits in local currency Guarantees and deposits in foreign currency Confirmed foreign letters of credit Issued documented letters of credit Performance bonds Interbank letters of credit Immediately available lines of credit Amount of committed credits and not placed Other credit commitments Credits for higher education Law No. 20,027 Others Other contingent credits Operations on account of third parties Collections: Foreign collections Local collections Placement or sale of financial instruments: Placement of securities for public bid Sale of letters of credit of bank operations Sales of other instruments Financial assets transferred to and managed by the Bank: Assets assigned to Insurance companies Securitized assets Other assets assigned to third parties Third party resources managed by the Bank: Financial assets administered on behalf of third parties Other assets administared on behalf of third parties Financial assets acquired Other assets acquired Security held in custody Securities held in custody of the bank Securities held in custody deposited in another entity Securities issued by the bank: Promissory notes of time deposits Letters of credit for sale Other documents Commitment Guarantees for underwriting operations Commitments for assets purchase Total 12-31-2014 MCh$ 16 248 117 82 1,511 1,652 - 11,258 176,432 83,283 58,163 1,072,734 1,173,279 - 155,750 126,721 61,620 885,139 1,182,277 - 514 559 - 364,711 396,983 - 374,758 460,843 - 35 91 24,587 64,844 32,450 82,696 - - - - - - 1,143 - 811,806 - 1,555,737 - 631 6,373 448,308 4,525,898 1,079,788 4,490,902 3,739 4 - 2,655,150 2,562 - 2,374,356 3,150 - 16,715 11,869,998 12,866,187 103 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 22 - CONTINGENCIES AND COMMITMENTS (Continued) b) Lawsuits and legal proceedings: b.1.) Normal legal contingencies of the industry: As of the date of issuance of these Consolidated Financial Statements, there are several legal proceedings that have been filed against the Bank, its New York Branch and its Subsidiaries in relation to normal operations in its line of business. According to Management and based on the advice of its legal counsel, the Bank has recorded the provisions it deems appropriate to cover probable losses not contemplated by the Bank, New York Branch and Subsidiaries. As of December 31, 2015 and 2014, the Bank and its Subsidiaries have provisions for this concept that amount to MCh$ 4,800 and MCh$ 6,118 respectively, which form part of “Provisions” in the Consolidated Statement of Financial Position. Lawsuits and provisions by type are detailed as follows: TYPE b.2.) 12-31-2015 No. of Provision case Amount MUS$ MCh$ 12-31-2014 No. of Provision case Amount MCh$ Labor Civil 18 386 1 6 569 4,231 12 352 211 5,907 Total 404 7 4,800 364 6,118 Contingencies due to significant lawsuit at Courts of Justice: As of December 31, 2015 and 2014, the Bank, its New York Branch and Subsidiaries do not have contingencies due to significant lawsuits in courts, which affect or could affect these Consolidated Financial Statements. c) Operating guarantees granted: MUS$ 2015 MCh$ 2014 MCh$ Financial assets in guarantee CCLV, Bolsa de Comercio Shares in guarantee for the Bolsa de Comercio de Santiago by simultaneous 9 26 6,208 18,799 8,934 30,372 Totales 35 25,007 39,306 104 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 22 - CONTINGENCIES AND COMMITMENTS (Continued) BancoEstado Corredores de Seguros S.A.  Guarantees on transactions and third party liability: In accordance with Article No. 58 of Decree Law No. 251, as of December 31, 2015, Subsidiary BancoEstado Corredores de Seguros S.A. has a guarantee deposit which covers possible damages that might affect it as a consequence of infractions of the law, regulations and complementary standards that regulate insurance brokers, and especially when the noncompliance arises from acts, errors and omissions of the broker its representatives, managers or dependents participating in the brokerage. Guarantee information is as follows: Number Amount Issuer Purpose : : : : Effective : 8339912 UF 60,000 BancoEstado To guarantee any present or future creditors that it may have pursuant to its insurance brokerage operations and for the exclusive purpose of being used under the terms of Article No. 58 D.F.L. No. 251 dated 1931. Until April 14, 2016. BancoEstado S.A. Corredores de Bolsa  Operating guarantees: In order to comply with the obligation of transaction guarantees established in Article No. 30 of Law No. 18,045, Subsidiary BancoEstado S.A. Corredores de Bolsa has purchased insurance policy No. 214105230 from Compañía de Seguros de Crédito Continental S.A. for a value of UF 20,000, valid from April 22, 2014, to April 22, 2016, with Bolsa de Comercio de Santiago, Bolsa de Valores as the representative of the beneficiaries of the guarantee. BancoEstado S.A. Corredores de Bolsa has established a first priority pledge on its share of Bolsa de Comercio de Santiago, Bolsa de Valores, in order to guarantee faithful and timely performance of its obligations owed to that institution. In addition, it has established a second priority pledge in favor of all stock brokers to secure its obligations with them. 105 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 22 - CONTINGENCIES AND COMMITMENTS (Continued) Regarding the Comprehensive Insurance for brokers, BancoEstado S.A. Corredores de Bolsa has contracted two policies: - AIG Chile Compañía de Seguros Generales S.A., policy No. 0020069664 covers the first tranche of US$ 9,000,000, effective until January 31, 2017, and - Orion Seguros Generales S.A., Policy No. 21435 covers the second tranche of US$ 1,000,000, effective until January 31, 2017. BancoEstado S.A. Administradora General de Fondos:  Operating guarantees In compliance with Articles No. 226 and No. 227 of Law No. 18,045, Subsidiary BancoEstado S.A. Administradora General de Fondos, designated Banco del Estado de Chile as representative of the beneficiaries of the guarantees it has established. The guarantee deposits established are detailed as follows: Maturity Currency Fondo Mutuo BancoEstado Corporativo Fondo Mutuo BancoEstado Solvente Fondo Mutuo BancoEstado Compromiso Fondo Mutuo BancoEstado Conveniencia Fondo Mutuo BancoEstado Renta Futura Fondo Mutuo BancoEstado Protección Fondo Mutuo BancoEstado Acciones Nacionales Fondo Mutuo BNP Paribas Renta Emergente Fondo Mutuo BNP Paribas Acciones Emergentes Fondo Mutuo BNP Paribas Acciones Desarrolladas Fondo Mutuo BNP Paribas Más Renta Bicentenario Fondo Mutuo BancoEstado Perfil Dinámico A Fondo Mutuo BancoEstado Perfil Tradicional C Fondo Mutuo BancoEstado Perfil Moderado E Fondo Mutuo BancoEstado Dólar Disponible Fondo Mutuo BancoEstado Ahorro Mediano y Largo Plazo (*) Fondo Mutuo BancoEstado Ahorro Balanceado (*) Fondo Mutuo BancoEstado Empresas Europeas UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF UF Amount Start Date date 29,067.10 312,013.60 92,896.97 24,868.77 10,000.00 104,067.72 10,000.00 10,000.00 10,000.00 10,000.00 34,158.94 10,000.00 10,000.00 10,000.00 10,000.00 65,063.97 10,000.00 10,000.00 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-07-2016 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 01-10-2017 (*) On February 1, 2016, the cancellation of such funds in the Register of Regulations of the Superintendencia de Valores y Seguros was requested of the Superintendencia de Valores y Seguros. On January 25, 2016 a request was made for a performance bond for UF 10,000 for the new Fondo Mutuo BancoEstado Ahorro Corto Plazo, which comes into effect on January 29, 2016. 106 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 22 - CONTINGENCIES AND COMMITMENTS (Continued) d) Contingent loans and liabilities: To satisfy the needs of customers, the Bank acquired several irrevocable commitments and contingent liabilities, although these obligations could not be recognized in the Consolidated Financial Statements, these contain credit risks and are therefore part of the Bank’s global risk, and are indicated in letter a) of this note. The contractual amounts of the transactions that obligate the Bank to grant loans and the amount of the provisions established for the credit risk assumed are detailed as follows: 12-31-2015 MUS$ MCh$ 12-31-2014 MCh$ Guarantees and deposits Document letter of credit Performance bonds Amounts available for users of credit card Amount of committed credits and not placed Credits for higher education Law No. 20,027 Provisions established 264 187,690 199 141,446 1,511 1,072,734 1,652 1,173,279 559 396,983 514 364,711 (64) (45,528) 155,750 188,341 885,139 1,182,277 460,843 374,758 (40,096) Total 4,635 3,291,315 3,207,012 107 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 23 - SHAREHOLDERS’ EQUITY a) Corporate capital BancoEstado is governed by the Organic Law of Banco del Estado de Chile D.L. No. 2,079 dated 1977, which in its Title I, articles No. 1 and No. 4 establish the following: Article 1: Banco del Estado de Chile is an autonomously State-owned company with its own legal status and equity, with an indefinite term, submitted exclusively to the supervision of the Superintendencia de Bancos e Instituciones Financieras and related with the Government through the Treasury Department. Article 4: The Bank’s authorized capital is Ch$ 4,000,000,000 (four billion Chilean pesos) and will be paid with the funds that it currently has accounted for as capital and reserves in local currency. If those funds were not sufficient to complete the authorized capital, it will be completed with a charge to revaluations or net income produced in future years. This capital can be increased by supreme decree, with a prior favorable report from the Superintendencia de Bancos e Instituciones Financieras. Law No. 20,318 was published on January 2, 2009 and permits the Bank to make an extraordinary capital contribution of US$ 500 million under the conditions indicated in the mentioned Law. In 2009 this additional capital was completed for the equivalent of MCh$ 274,497 leaving current capital at MCh$ 278,497. On November 8, 2014, Law No. 20,792 was published which allows an extraordinary capital contribution to the Bank of up to US$ 450 million under the conditions indicated in the aforementioned law. In 2014, part of this additional capital contribution (US$ 250 million) was received equivalent to MCh$ 153,975. In November 2015 was received the balance of the capital contribution (US$ 200 million), equivalent to MCh$ 142,160, leaving the current capital at MCh$ 574,632. b) Distribution of net income: Net income for 2014: The net income of Banco del Estado de Chile for the year 2014 totaled MCh$ 165,659. The President of the Republic may, upon instructions from the Bank’s Directors’ Council, assign all or part of the income for the year to tax benefit, according to the Organic Law of Banco del Estado de Chile. BancoEstado made a provision for the minimum distribution of net income to tax benefit equivalent to 100.00% of the net income for the year, according to its accounting policies. 108 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 23 - SHAREHOLDERS’ EQUITY (Continued) On May 26, 2015, through Order No. 1,389, the Ministry of Finance as stipulated in the Law Decree No. 2,079 of 1978, authorized BancoEstado the capitalization of MCh$ 90,200 and allocated to the benefit of the public treasury the amount of MCh$ 75,459, from the revenues of MCh$ 165,659 generated during 2014. The submitted amount corresponds to 45.55% of the net income generated during 2014, which were send to the Public Treasury on October 15, 2015. Net income for 2015: The 2015 income of Banco del Estado de Chile attributable to the ownership of the Bank amounted to MCh$ 112,583. Her Excellence the President of the Republic could, upon proposal of the Board of Directors of the Bank, destine all or a portion of the income for the year to government benefit, as established in the Organic Law of Banco del Estado de Chile. BancoEstado constituted a provision for distribution of the minimum income to government benefit equivalent to 81.85% of the income for the year, in conformity to what is established in its accounting policies. c) Foreign exchange differences, net As of December 31, 2015 and 2014, the reconciliation of this item, as a separate component of equity is as follows: 2015 MUS$ MCh$ 2014 MCh$ Balance as of January 1 Change of net exchange differences (3) 1 (2,322) 857 (4,646) 2,324 Balance as of December 31 (2) (1,465) (2,322) d) Nature and destination of the reserves: - Conversion reserve: Conversion reserves correspond to the effect of converting the Financial Statements of the New York Branch, whose functional currency is the US Dollars, to the presentation currency of BancoEstado and parent company, which is in Chilean Pesos. 109 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 23 - SHAREHOLDERS’ EQUITY (Continued) - Reserves: Corresponds to balances that mainly come from capitalization of annual profits from previous years and the first implementation of new accounting standards set by the SBIF in its Compendium of Standards. - Fair value reserve: The fair value reserve includes accumulated net changes in the fair value of investments availablefor-sale until the investment is recognized or there is a need to establish an impairment provision. e) Non-controlling interest: Non-controlling interest balances for 2015 and 2014, for consolidated companies included in shareholders equity are detailed as follows: 2015 MUS$ MCh$ 2014 MCh$ Minority interest in BancoEstado Corredora de Seguros S.A. MetLife Chile Inversiones Limitada (49.90%) 5 3,596 3,056 Minority interest in BancoEstado S.A. Administradora General de Fondos BNP Paribas Investment Partners (49.99%) 4 2,926 2,507 Total minority interests 9 6,522 5,563 The share in income of non-controlling interests for 2015 and 2014 not participating in consolidation are detailed as follows: 110 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 23 - SHAREHOLDERS’ EQUITY (Continued) Minority interest in BancoEstado Corredora de Seguros S.A. MetLife Chile Inversiones Limitada (49.90%) MUS$ 2015 MCh$ 2014 MCh$ 10 7,210 7,072 4 3,122 2,532 14 10,332 9,604 Minority interest in BancoEstado S.A. Administradora General de Fondos BNP Paribas Investment Partners (49.99%) Total minority interests NOTE 24 - INTEREST REVENUE AND EXPENSES a) As of December 31, 2015 and 2014, “Interest and readjustment income” is detailed as follows: At December 31, Interest MCh$ 2015 Readjustment MCh$ Total MCh$ MUS$ Interest MCh$ 2014 Readjustment MCh$ Total MCh$ Normal Portfolio Repurchase agreements Loans to banks Commercial loans Mortgage loans Consumer loans Investment instruments Hedging income Other interest and indexation income Subtotal 21,549 4,365 478,375 319,323 234,011 95,727 12,616 104,224 270,932 5,540 16,154 2,354 1,208 21,549 4,365 582,599 590,255 239,551 111,881 2,354 13,824 30 6 821 831 337 158 3 19 21,640 4,971 470,473 296,463 229,210 113,747 17,081 139,173 315,306 9,458 49,705 5,021 3,847 21,640 4,971 609,646 611,769 238,668 163,452 5,021 20,928 1,165,966 400,412 1,566,378 2,205 1,153,585 522,510 1,676,095 1,252 3,057 1,020 - 226 1,146 25 - 1,478 4,203 1,045 - 2 6 2 1,119 3,081 1,135 - 92 1,062 29 - 1,211 4,143 1,164 - 5,329 1,397 6,726 10 5,335 1,183 6,518 1,171,295 401,809 1,573,104 2,215 1,158,920 523,693 1,682,613 Impaired Portfolio Recovery of interest and indexation Commercial loans Mortgage loans Consumer loans Investment instruments Hedging income Other interest and indexation income Subtotal Total interest and indexation income - 111 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 24 - INTEREST REVENUE AND EXPENSES (Continued) At December 31, Impaired portfolio suspended interest Commercial loans Mortgage loans Consumer loans Investment instruments Total Interest MCh$ 2015 Adjustment MCh$ Interest MCh$ Total MCh$ MUS$ 2014 Adjustment MCh$ Total MCh$ 32,577 12,186 1 - 28,366 7,976 2 - 60,943 20,162 3 - 86 28 - 25,476 11,598 1 - 42,073 6,279 3 - 67,549 17,877 4 - 44,764 36,344 81,108 114 37,075 48,355 85,430 b) As of December 31, 2015 and 2014, “Interest and readjustment expenses” are detailed as follows: At December 31, 2015 Item Expenses Interest Adjustment MCh$ MCh$ Demand deposits Repurchase agreements Time and demand deposits Liabilities with banks Issued debt instruments Other financial liabilities Hedging income Other interest and indexation expenses Total Total MCh$ MUS$ 2014 Expenses Interest Adjustment MCh$ MCh$ Total MCh$ 9,748 24,341 252,800 7,648 186,123 28,459 1,612 111 151,452 149,622 - 9,859 24,341 404,252 7,648 335,745 28,459 1,612 14 34 569 11 473 40 2 8,796 23,670 269,544 5,040 164,451 26,051 1,049 154 30 275,657 168,664 1 8,950 23,700 545,201 5,040 333,115 26,051 1,050 510,731 301,185 811,916 1,143 498,601 444,506 943,107 112 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 25 - INCOME AND EXPENSES FROM FEES AND COMMISSIONS As of December 31, 2015 and 2014, “Income and expenses from fees and commissions” are detailed as follows: Concept MUS$ 2015 MCh$ 2014 MCh$ 4 12 102 70 144 10 18 41 32 5 2,681 8,567 72,776 49,430 102,226 7,275 13,051 29,036 22,991 3,200 3,075 8,447 57,855 43,345 88,928 6,289 11,031 27,670 17,136 2,866 438 311,233 266,642 b) Fees and commission expenses Compensations for card operations Commissions for operation of securities Commissions for interbank transactions Commisisions for using ATMs Other commissions paid 41 27 72 5 15 29,137 19,271 50,704 3,763 10,666 21,637 15,495 32,348 1,573 7,760 Total commission expenses 160 113,541 78,813 a) Fees and commission income Commissions for lines of credit and overdraft Commissions for guarantees and letters of credit Commission for card services Commissions for account management Commissions for collections and payments Commissions for trading and management of securities Commissions for investments in mutual funds and others Compensations for trading of insurance policies Other compensations for services rendered Other commissions earned Total commission income 113 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 26 - NET INCOME FROM FINANCIAL OPERATIONS As of December 31, 2015 and 2014, “Income from financial transactions” is detailed as follows: MUS$ Trading portfolio Derivative contracts Portfolio available for sale Sale of loan portfolio Gains on factoring operations Others 2015 MCh$ 2014 MCh$ 95 (77) 5 8 9 1 67,327 (54,906) 3,660 5,962 6,099 964 85,410 16,868 8,564 4,061 8,022 595 41 29,106 123,520 Financial operations Net income NOTE 27 - FOREIGN EXCHANGE TRANSACTION, NET As of December 31, 2015 and 2014, “Net foreign exchange transaction” is detailed as follows: MUS$ Exchange difference Loss on exchange difference Gain on exchange difference 2015 MCh$ 2014 MCh$ (60) 15 (42,703) 10,959 (71,002) 8,794 (45) (31,744) (62,208) 27 19,030 - 20,388 - 27 19,030 20,388 179 127,221 71,921 Subtotal 179 127,221 71,921 Total 161 114,507 30,101 Subtotal Indexed in foreign currency Income for assets indexed in foreign currency Income for liabilities indexed in foreign currency Subtotal Hedging income Asset hedging income Liability hedging income - 114 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 28 - PROVISIONS FOR LOAN LOSSES During 2015 and 2014, movements recorded in income for the concept of provisions and impairment are detailed as follows: 2015 Due from Banks MCh$ Provisioning - Individual provisions - Group provisions - Additional provisions Expense from provisions established Release of provisions - Individual provisions - Group provisions Expense from release of provisions Recovery of written-off assets Net expense from credit risk provision Release of provisions - Individual provisions - Group provisions Expense from release of provisions Total MCh$ MUS$ (61,547) (79,074) - (39,076) - (103,383) - (14,549) (5,662) - (76,742) (227,195) - (108) (320) - (646) (140,621) (39,076) (103,383) (20,211) (303,937) (428) 990 - 29,992 13,413 9,063 337 11,867 3,874 42,849 26,687 60 38 990 43,405 9,063 337 15,741 69,536 98 30,515 33,633 24,295 - 88,443 125 (66,701) 3,620 (78,751) (145,958) (205) 344 Due from Banks MCh$ Expense from provisions established Contingent credits MCh$ (646) - 2014 Provisioning - Individual provisions - Group provisions - Additional provisions Credits and accounts receivable trade Commercial Mortgages Consumer loans loans loans MCh$ MCh$ MCh$ Credits and accounts receivable trade Commercial Mortgages Consumer loans loans loans MCh$ MCh$ MCh$ (4,470) Contingent credits MCh$ Total MCh$ (1,049) - (49,153) (71,316) - (25,815) (106,722) (87,573) (25,900) (14,173) (6,034) - (64,375) (190,738) (132,622) (1,049) (120,469) (132,537) (113,473) (20,207) (387,735) 459 - 29,693 1,788 22,653 2,713 10,446 2,917 40,598 30,071 459 31,481 22,653 2,713 13,363 70,669 19,189 42,224 22,525 - 83,938 (69,799) (67,660) (88,235) Recovery of written-off assets - Net expense from credit risk provision (590) (6,844) (233,128) In Management’s opinion, provisions established on credit risk and impairment cover all eventual losses that might be derived from non recovery of assets, according to the information examined by the Bank, New York Branch and Subsidiaries. 115 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 29 - PERSONNEL EXPENSES a) During 2015 and 2014, “Personnel expenses” are detailed as follows: MUS$ 2015 MCh$ 2014 MCh$ Personnel remunerations Bonuses or other benefits Severance indemnity Training expenses Welfare expenses Other personnel expenses 381 50 17 5 28 29 270,527 35,760 12,011 3,211 20,213 20,282 235,676 32,972 5,959 2,728 19,695 22,906 Total 510 362,004 319,936 b) Employee benefits plans: As of December 31, 2015 and 2014 the Bank and Subsidiaries maintain the following employee benefits: Employee vacations: The annual cost of vacactions and employee benefits are recognized on an accrual basis. Short-term benefits: The existence of short-term benefits (current expense) is primarily based on incentives for meeting commercial objectives and achieving operational efficiency. These benefits are:  Individual performance bond: Each employee is given an amount of money based on the fulfillment of the Bank’s objectives, the individual’s goals and the employee’s salary.  Corporate bond: Defines a percentage of the Bank’s monthly payroll to be distributed equally to all of the Bank’s employees. It is based on the fulfillment of commercial objectives and operational efficiency. 116 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 29 - PERSONNEL EXPENSES (Continued) Long-term benefits: Long-term benefits are those benefits granted by the Bank according to Law and/or the existence of implicit obligations derived from the current Union Contract. The methodology used to determine the provision for all employees is to use actuarial assumptions that consider variables such as turnover rates, mortality rates, salary increases, probability of the use of the benefit according to the valuation method entitled the Valuation Method of Accumulated Benefits or Accrued Cost of the Benefit. This methodology is established in IAS 19. The benefits are the following  Years of service: Applies to all of the Company’s employees. The Bank estimates that the employees will continue to work until their retirement age (67 years for men and women) and therefore it constitutes provisions according to the probability of the occurence of resignation, death, dismissal and retirement during the employees’ professional life at the Bank. The benefits are determined according to current legal regulations and the Union Contract.  Award for years of service: Applies to all of the Company’s employees. This award for years with the Company grants a percentage of salary to each milestone, including 10, 15, 20, 25, 30, 35, 40 and 45 years of service.  Retirement savings: Applies to all of the Company’s employees for an indefinite term who joined the company after August 14, 1981 and are not affiliated with the unemployment insurance established by Law 19,728. This benefit establishes a retirement savings program in the form of self-insurance, in order to provide a salary plus bonuses of a maximum of U.F. 90 for each 36 months of contribution to the program.  Additional benefits for retirement plan: Applies to all of the Company’s employees included in the plan established by the Union Contract. Early and voluntary retirement plan for all workers between 55 and 60 years; and between 58 and 64 years whose compensation increases by a percentage according to age range and the hiring date. The benefits that can be provisioned refer to health plans and life insurance for a period of 24 months, as well as education scholarships during the current school year (preschool, elementary school, high school and university) for school-aged children. 117 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 29 - PERSONNEL EXPENSES (Continued) Actuarial Assumptions The actuarial assumptions used to calculate the abovementioned long-term commitments according to IFRS are the following:  Mortality and invalidity: Uses the RV-2009 Mortality Chart of the Superintendencia de Valores y Seguros.  Turnover rates (resignations and company’s needs): Calculated based on the historical values registered in BancoEstado and subsidiaries, which records events occurred between 2010-2012.  Discount rate: Determined based on BCU (bond rate of the Central Bank of Chile in Unidades de Fomento) at 5, 10 and 20 years plus a spread equivalent to the cost over the indicated rate, of bond issuances or high-quality corporate bonds. As of December 31, 2015, the annual real discount rates used are 2.39%, 2.84% and 2.97% respectively (2.09%, 2.29% and 2.42% as of December 31, 2014).  Salary increase: Historical estimates of an annual rate of 2%.  Retirement age: According to Management, retirement age is set at 67 for men and women. The prepayment of employee benefits does not exist in the practice of the organization. 118 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 29 - PERSONNEL EXPENSES (Continued) Activity in actuarial provisions as of December 31, 2015 and 2014 is as follows: 12-31-2015 MUS$ Changes in obligations Initial value of obligation Provision for retirement plan Benefits paid during the year Cost of services during current year Cost for interest Actuarial profits and losses For experience or real behavior Turnover rate for resignation Turnover rate for dismissal Salary growth rate Discount rate Mortality Obligations at the end of the year 98 69,031 (13,285) 9,035 1,650 (2,847) (19) 13 2 (4) (7) (4,681) (105) (313) 468 1,784 3 90 12-31-2014 MCh$ MCh$ 67,580 (14,027) 7,756 1,720 6,002 1,842 690 676 48 2,746 63,584 69,031 (*) In relation to personnel benefits, the Bank recorded in the Comprehensive Consolidated Statement of Financial Position and in the Consolidated Statement of Changes in Equity, a credit of MCh$ 997 net of deferred taxes as of December 31, 2015 (debit of MCh$ 1,981 as of December 31, 2014, net of deferred taxes), due to the application of IAS 19. 119 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 30 - ADMINISTRATIVE EXPENSES As of December 31, 2015 and 2014, “Administrative expenses” are detailed as follows: Administrative expenses Maintenance and repair of property, plant, equipment Office rentals Equipment rentals Insurance Premiums Office supplies IT and communication expenses Lighting, heating and other services Guard services and transportation of securities Employees' representation expenses and travel provisions Court and notary costs Rendering of external services Fees for audit of financial statements Fines applied by SBIF Fines applied by other agencies Other property rentals Other administrative expenses Subcontracted services Rendering of services paid to companies External personnel expenses Administration and maintenance of automatic teller machines Others Board of Directors' expenses Directors' remunerations Other expenses of the Board of Directors Advertising Taxes, land tax and contributions Property taxes Licenses Other taxes Contributions to SBIF Total MUS$ 2015 MCh$ 2014 MCh$ 136 16 18 1 7 9 24 9 9 10 1 4 1 12 15 168 119 12 28 9 25 22 4 1 7 10 96,552 11,068 12,519 535 4,684 6,480 16,829 6,393 6,468 7,419 740 2,673 709 28 8,864 11,143 119,415 84,447 8,263 19,802 6,903 261 242 19 17,928 15,447 2,647 944 4,634 7,222 87,561 8,395 10,712 418 3,392 6,449 11,780 5,230 4,350 6,444 483 5,056 533 12 11 7,207 17,089 101,745 73,084 7,017 16,902 4,742 227 213 14 15,072 14,375 2,807 825 4,141 6,602 351 249,603 218,980 120 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 31 - DEPRECIATION, AMORTIZATION AND IMPAIRMENT a) During 2015 and 2014, amounts corresponding to charges to income for the concept of depreciation, amortization and impairment are detailed as follows: 2015 MUS$ MCh$ Depreciation and amortization Depreciation of property, plant and equipment Impairment of property, plant and equipment Amortization of intangible assets Impairment 39 65 - Balances as of December 31, 104 2014 MCh$ 27,593 45,979 - 18,942 50,342 - 73,572 69,284 b) The reconciliation of carrying amounts, as of January 1, to balances as of December 31, 2015 and 2014, is detailed as follows: Item Property, plant and equipment MCh$ Balances as of January 1 Charges for depreciation, amortization and impairment for the year Write-offs and sale Other 134,859 Balances as of December 31 159,702 27,593 (2,847) 97 Depreciation, amortization and impairment 2015 Intangible Investment Property, plant assets instruments and equipment Total MCh$ MCh$ MCh$ MUS$ MCh$ 119,496 45,979 (7,640) 28 157,863 - 254,355 358 - 73,572 (10,487) 125 104 (15) - - 317,565 447 119,528 18,942 (3,683) 72 134,859 2014 Intangible assets MCh$ Investment instruments MCh$ 69,138 - 50,342 (1) 17 - 119,496 - Total MCh$ 188,666 69,284 (3,684) 89 254,355 121 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 32 - OTHER OPERATING INCOME AND EXPENSES a) Other operating income: As of December 31, 2015 and 2014, the Bank presents “Other operating income” detailed as follows: Item MUS$ Income from assets received in lieu of payment Gain on sale of assets received in lieu of payment Other income Release of provisions for contingencies Country risk provision Special provisions for credits abroad Additional provisions for loans Other provisions for contingency Subtotal Other income Gain on sale of property, plant and equipment Receipt of communications Swift system Credit for compliance with regulatory period Sale of real estate awarded Transfer of customers to external appraisers Surplus of unemployment insurance and temporary disability insurance Property rental Recovery of BAF/INDAP and other Subsidy for new basic housing Recovery of sundry write-offs Income from payment adjustment Other income 2014 MCh$ 1 355 - 266 - 1 355 266 - Subtotal 2015 MCh$ - - - - 175 173 428 4,419 330 7 88 1,204 1,806 346 4 5 336 193 268 130 173 2,739 3,217 247 177 534 127 89 994 2,522 Subtotal 17 12,581 8,141 Total 18 12,936 8,407 1 6 1 - 122 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 32 - OTHER OPERATING INCOME AND EXPENSES (Continued) b) Other operating expenses: During 2015 and 2014, the Bank presents “Other operating expenses” detailed as follows: MUS$ Provisions and expenses from assets received in lieu of payment Provisions for assets received in lieu of payment Write-off of assets received in lieu of payment Expenses for maintenance of assets received in lieu of payment - 2014 MCh$ 6 126 4,493 75 22 2,925 72 6 4,694 3,019 - Subtotal 2015 MCh$ Provisions for contingency Provisions for country risk Other provisions for contingency Expenses for renegotiation of mortgage loan portfolio Losses and failures in systems and processes Losses for theft and robbery Fraud losses Other expenses Subtotal Total 601 (26) 18 10,162 1 575 10,180 1 1 3 3 3 8 1,186 1,593 8,666 37 533 850 1,770 2,244 1,846 26 1,054 5,320 2,406 48 567 1,057 2,009 732 1,431 27 18,733 14,650 34 24,002 27,849 - Subtotal Other expenses Loss on sale of plant, property, and equipment Regularization credit cards Adjustment of payment or collection from prior year Sundry write-off Insurance premiums payments 1 2 2 12 - 123 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 33 - TRANSACTIONS WITH RELATED PARTIES In accordance with the provisions of the General Banking Law and the instructions set forth by the Superintendencia de Bancos e Intituciones Financieras, individuals or legal entities are considered to be associated when they are involved in the ownership or management of the institution directly or indirectly through third parties. a) Group entities (consolidated in the Financial Statements) Company and/or foreign Branch Direct BancoEstado S.A. Corredores de Bolsa BancoEstado Corredores de Seguros S.A. BancoEstado Servicios de Cobranza S.A. BancoEstado S.A. Administradora General de Fondos BancoEstado Contacto 24 Horas S.A. BancoEstado Microempresas S.A. Asesorías Financieras Sociedad de Servicios Transaccionales Caja Vecina S.A. BancoEstado Centro de Servicios S.A. Sociedad de Promoción de Productos Bancarios S.A. BancoEstado - Sucursal New York 99.9996% 50.1000% 99.9000% 50.0100% 99.9000% 99.9000% 99.8494% 99.9000% 99.8300% 100.0000% 12/31/2015 Indirect 0.1000% 0.1000% 0.1000% 0.1506% 0.1000% 0.1700% - 12/31/2014 Indirect Total Direct 99.9996% 50.1000% 100.0000% 50.0100% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 99.9996% 50.1000% 99.9000% 50.0100% 99.9000% 99.9000% 99.8494% 99.9000% 99.8300% 100.0000% Total 0.1000% 0.1000% 0.1000% 0.1506% 0.1000% 0.1700% - 99.9996% 50.1000% 100.0000% 50.0100% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% 100.0000% b) Loans with related parties Loans and accounts receivable, contingent loans and assets corresponding to trading and investing instruments associated with related parties are detailed as follows: Productive Companies MUS$ MCh$ Loans and receivables Commercial loans Mortgage loans Consumer loans 1 - Gross loans Provision for loan losses 1 Contingent credits: Total contingent credits Provision for contingent loans - 478 - (8) 470 - 1 1,025 - - 1 - 1,025 - 2 - Natural Persons MUS$ MCh$ - 2 - 1 - Contingent loans, net Acquired instruments: For negotiation For investment 478 - - Loans, net 12/31/2015 Investment Companies MUS$ MCh$ - 7 1 353 4,999 380 227 - 8 5,732 227 2 Productive Companies MCh$ (23) 8 5,709 (2) 12/31/2014 Investment Companies MCh$ Natural Persons MCh$ 3 571 6,342 938 3 7,851 - - 225 (30) 3 7,821 12 8,767 (27) - 124 (1) 1,065 - 28,781 (180) 482 (4) 12 8,740 - 123 1,065 28,601 478 - - - - - - 124 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 33 - TRANSACTIONS WITH RELATED PARTIES (Continued) c) Other assets and liabilities with related parties 2015 MUS$ MCh$ Assets Other Assets - Liabilities Financial derivative contracts Demand deposits Deposits and other loans Other liabilities 65 47 - 2014 MCh$ 13 75 46,382 33,151 5 64,944 2,877 4 d) Transactions between related parties Type of income or expense Interest and readjustment income (expense) Income (expense) from commissions and services Income (loss) from trading Income (loss) from other financial transactions Exchange differences Expenses from operational support Other expenses Total 2015 Income Expenses MUS$ MCh$ MUS$ MCh$ 3 3 1,810 173 8 1,991 (2) (2) Income MCh$ 2014 Expenses MCh$ (87) (1,181) (28) 3,261 397 15 - (122) (1,129) (28) (1,296) 3,673 (1,279) 125 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 33 - TRANSACTIONS WITH RELATED PARTIES (Continued) e) Contracts with related parties Related parties 12/31/2015 Type of Contract 12/31/2014 Tipo Contrato 1) Contracts over UF 1,000 Isapre Fundación Operadora de Tarjetas de Crédito Nexus S. A. Transbank S. A. Sociedad Operadora Camara Compensación Pago Alto Valor S.A. Lease of office Back office services Commission charge Compensation chamber service Lease of office Back office services Computational support Compensation chamber service Lease of office Lease of office 2) Contracts less than UF 1,000 Fundación Asistencial y de Salud f) Payments to the Board of Directors and key management employees As of December 31, 2015 and 2014, remunerations received by key management employees are detailed as follows: 12-31-2015 MUS$ MCh$ Short term benefits to employees Staff severance indemnities Total 6 6 4,150 18 4,168 12-31-2014 MCh$ 3,945 208 4,153 126 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 33 - TRANSACTIONS WITH RELATED PARTIES (Continued) g) Key employees As of December 31, 2015 and 2014, the Bank’s key employees are detailed as follows: Position Chairman Vice President Director Labor Director General Manager Chief Attorney Controller Area Managers General Managers of Subsidiaries 12-31-2015 12-31-2014 Number of executives 1 1 4 2 1 1 1 11 8 Number of executives 1 1 4 2 1 1 1 9 8 30 28 Total h) Transactions with key employees and their related parties As of December 31, 2015 and 2014, the Bank has performed transactions with key employees and their related parties, whose results are detailed as follows: 12/31/2015 Income of key executives and related parties MUS$ MCh$ Credit cards and other services Loans Guarantees Mortgage credits Others - Total - 1 12/31/2014 Income of key executives and related parties MCh$ 32 23 70 985 3 89 56 1,147 - 127 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 34 - ASSETS AND LIABILITIES AT FAIR VALUE In general, “fair value” is understood to be the price of a financial instrument, at a specific moment in time, in a free and voluntary transaction between interested parties, who are duly informed and independent from each other. For financial instruments without available market prices, fair values have been estimated using current values or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate. In this sense, the fair value estimates of certain financial assets and liabilities, cannot be justified by comparison to independent markets and, in many cases cannot be made at placement. In addition, the fair value estimates presented below are not made for the purposes of estimating the fair value of the Bank’s profits generated by its current or future business activities, and therefore do not represent the Bank’s value as a going concern. The methods used to estimate fair value of financial instruments are detailed below: a) Cash and due from banks: The carrying amount of cash and bank deposits approximates their estimated fair value due to their current nature. b) Transactions in the course of collection (assets and liabilities): The carrying value of transactions with foreign exchange approximates their estimated value due to their current nature. c) Financial investments and bonds issued: The estimated fair value of these financial instruments was determined using market values at prices quoted in the market for financial instruments with similar characteristics. d) Loans and accounts receivable from customers, loans and advance to banks, deposits and other obligations, letters of credit issued, agreements and other debts: The fair values of these financial instruments are estimated using the analysis of cash flow discounts, derived from the settlement of contractual cash flows for each of them, at a market discount rate, which considers credit risk, when applicable. 128 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 34 - ASSETS AND LIABILITIES AT FAIR VALUE (Continued) e) Derivative instruments: The fair value of derivatives represents the estimated amount that the Bank, New York Branch and Subsidiaries expect to receive or pay to rescind the contracts and agreements, keeping in mind current interest rates and prices. Regarding the fair value of derivatives the Bank performs contrast price adjustment and adjustments for counterparty credit risk. In the case of contrast price adjustments (Bid/Ask) the Bank takes market information and incorporates it in the rate curves in the course of its evaluation. For counterparty credit risk adjustments the Bank applies the criteria defined for the “normal compliance” portfolio - it takes the counterparty credit exposure and applies the expected loss factor to the fair value. As of December 31, 2015 and 2014, estimated fair values of financial instruments are detailed as follows: Assets Cash and due from banks Transactions in the course of collection Financial assets held for trading Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivables from customers Financial investments available for sale Financial investments held to maturity Total Liabilities Current accounts and other demand deposits Transactions in the course of payment Repurchase agreements and securities loans Saving accounts and time deposits Financial derivative contracts Obligations with banks Debt instruments issued Other financial obligations Total Carrying amount MUS$ MCh$ 12/31/2015 Estimated fair value MUS$ MCh$ Carrying amount MCh$ 12/31/2014 Estimated fair value MCh$ 6,526 459 3,112 330 623 689 26,106 5,651 51 4,634,708 325,925 2,209,909 234,062 442,739 489,453 18,539,161 4,013,041 36,273 6,526 459 3,112 329 623 955 28,624 5,651 48 4,634,708 325,925 2,209,909 233,952 442,739 678,351 20,327,300 4,013,041 34,189 266 2,518 (3) (110) 188,898 1,788,139 (2,084) 3,991,859 383,694 1,876,891 179,780 306,971 437,373 16,164,190 3,333,722 42,632 3,991,859 383,694 1,876,891 179,696 306,971 466,576 19,058,777 3,333,722 40,015 (84) 29,203 2,894,587 (2,617) 43,547 30,925,271 46,327 32,900,114 2,781 1,974,843 26,717,112 29,638,201 2,921,089 11,181 228 811 20,201 357 1,465 7,634 55 7,940,027 161,900 575,634 14,346,167 253,460 1,040,353 5,421,541 39,265 11,181 228 809 20,366 357 1,780 6,889 55 7,940,027 161,900 574,168 14,463,072 253,460 1,264,156 4,892,213 39,248 2 (165) (315) 745 - 1,466 (116,905) (223,803) 529,328 17 6,653,167 351,760 475,202 12,641,928 216,856 679,003 4,562,943 33,279 6,653,167 351,760 473,697 14,135,957 216,856 759,319 4,167,940 33,269 1,505 (1,494,029) (80,316) 395,003 10 41,932 29,778,347 41,665 29,588,244 267 190,103 25,614,138 26,791,965 (1,177,827) Gain (loss) not recognized MUS$ MCh$ - Gain (loss) not recognized MCh$ - “Loans and advance to banks” and “Loans and accounts receivable from customers” are valued using market rates, discounting credit risk provisions, if applicable. 129 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 34 - ASSETS AND LIABILITIES AT FAIR VALUE (Continued) Fair value measurement and hierarchy IFRS 7 establishes a fair value hierarchy, which prioritizes the entry of valuation techniques used to measure fair value. The hierarchy gives top priority to unadjusted prices quoted in active markets for identical assets and liabilities (level 1 measurements) and the lowest priority to measurements that Significant important non-observable entries (level 3 measurements). The three levels of fair value hierarchy are detailed as follows:  Level 1: entries with quoted prices (unadjusted) in active markets for identical assets and liabilities, which the Bank has the capacity to access as of the measurement date.  Level 2: entries other than quoted prices included in level 1, which are directly or indirectly observable for assets or liabilities.  Level 3: non-observable entries for assets or liabilities. In this case, Banco Estado applies models recognized and validated in the financial industry to value financial instruments. With regard to Fixed Income Instruments and Financial Brokerage Instruments, these are valued, applying the model developed by DICTUC S.A., subsidiary of Pontificia Universidad Católica de Chile, which consists of valuing instruments in portfolio with real transaction prices. Should there be no prices for a specific instrument; the Price Reference Model is applied, based on all information available on transactions for the day and all historical information recorded in the Bolsa de Comercio de Santiago. In the case of derivative instruments, the methodology applied corresponds to currency rate factors obtained from valid market sources and modeled using a 6-factor Svenson model, obtaining the rate curve with daily frecuency for each currency, term and market where the Bank operates. As of December 31, 2015 and 2014, the assets and liabilities measured at fair value, are detailed as follows: 130 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 34 - ASSETS AND LIABILITIES AT FAIR VALUE (Continued) MUS$ Total MCh$ 12/31/2015 Fair value measurements Prices in active markets Other significant for identical assets input observable (level 1) (level 2) MUS$ MCh$ MUS$ MCh$ Significant input non-observable (level 3) MUS$ MCh$ ASSETS Financial assets held for trading Financial derivative contracts Financial investments available for sale 3,112 623 5,651 2,209,909 442,739 4,013,041 498 867 353,460 615,733 2,614 623 4,784 1,856,449 442,739 3,397,308 - - TOTAL 9,386 6,665,689 1,365 969,193 8,021 5,696,496 - - LIABILITIES Financial derivative contracts 357 253,460 - - 357 253,460 - - TOTAL 357 253,460 - - 357 253,460 - - Total MCh$ 12/31/2014 Fair value measurements Prices in active markets Other significant for identical input observable (level 1) (level 2) MCh$ MCh$ Significant non-observable (level 3) MCh$ ASSETS Financial assets held for trading Financial derivative contracts Financial investments available for sale 1,876,891 306,971 3,333,722 521,061 673,176 1,355,830 306,971 2,660,546 - TOTAL 5,517,584 1,194,237 4,323,347 - LIABILITIES Financial derivative contracts 216,856 - 216,856 - TOTAL 216,856 - 216,856 - Assets and liabilities classified in level 2 correspond to instruments whose rates or valuation prices are obtained from market prices with the application of modeling. 131 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 34 - ASSETS AND LIABILITIES AT FAIR VALUE (Continued) f) Compensation of Financial Assets and Liabilities: BancoEstado performs financial derivatives operations with counterparties residing abroad, using the documentation of the Master Agreement of ISDA (International Swaps and Derivatives Association, Inc.) under the current legal jurisdiction of the city of New York, USA, or the city of London, England. The legal framework in these jurisdictions, along with the abovementioned documentation, grants the Bank the right to move the maturity of the transactions forward and to then compensate the net value of these in the event of the transfer of payments from the respective counterparty. Additionally, BancoEstado has negotiated a supplementary appendix (CSA, Credit Support Annex) with some counterparties, including another form of loan mitigation, consisting of the payment of margins upon a certain threshold amount or maximum range of net value of the transactions; as well as other clauses. Fair Value in balance sheet MCh$ ISDA CONTRACTS Negative Fair Positive Fair Value Contracts Value Contracts with right to with right to compensation compensation MCh$ MCh$ CONTRACTS WITH ISDA AND CSA Negative Fair Positive Fair Value Contracts Value Contracts with credit with credit mitigator mitigator MCh$ MCh$ Financial guarantees MCh$ Net fair value MCh$ MUS$ Assets for financial derivative contracts as of December 31, 2015 442,739 (67,708) 169,535 (109,312) 344,615 (84,239) 291,675 411 Assets for financial derivative contracts as of December 31, 2014 306,971 (58,860) 5,289 (80,369) 92,214 (35,883) 331,009 466 132 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT Introduction: The main purpose of risk management is to ensure the long-term stability and sustainability of the businesses undertaken by BancoEstado. This is achieved through the application of credit policies consistent with the Bank’s commercial development, ensuring the existence of solid evaluation, approval and own risk management processes for bank operations in accordance with corporate governance management practices established by BancoEstado. The credit process is carried out with effective counterparts in all the Bank’s commercial segments, under a collective decisions scheme. In this sense, Corporate Risk Management is carried out with independence from the commercial areas and encompasses management of the credit, market and liquidity risks faced by BancoEstado in its businesses and also makes proposals on policies, methodologies and procedures to be applied in risk management. Therefore, the achievements in fulfilling the mission assigned to BancoEstado have made optimizing risk-return relationship, generating an increase in value of the institution. Risk management structure: Regarding the policies, methodologies, procedures manuals, contingency plans and limit structures, there is an allocation of specific responsibilities in respect to risk management, referring to the following: Executive Committee: approves policies and methodologies and establishes exposure limits for these risks, which are reviewed at least once a year. Financial Business Committee: responsible for assigning the limits defined by the Executive Committee and Management and managing the financial business. Assets and Liabilities Committee: responsible for managing and controlling the Bank’s assets and liabilities. Internal Audit: responsible for ensuring compliance with the policies, limits and standards regulating the banking business. Credit Committee: responsible for the approval of loans in accordance with the attributions matrix established for each segment. 133 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Main risks affecting the Bank: 1) Credit risk: Credit risk is the risk that the Bank incurs in a loss because its customers or counterparts do not comply with their contractual obligations. Exposure to credit risks are managed in a centralized manner incorporating the Bank, Subsidiaries and New York Branch, through regular analysis of the capacity of debtors and potential debtors to comply with payments in accordance with the contractual terms of loans. This exposure is mitigated by obtaining real and personal guarantees. However, a proportion of these loans are unguaranteed; for example, consumer loans granted to individuals. The Bank has segmented specialized areas based on company size and type of exposure, which actively participate at all stages of the loan process from risk assessment and approval of loans (through the respective committees), to monitoring and follow up of customers, up to managing normalization and recovery of critical portfolio for debtors with financial impairment, with clear definition of the policies, attributions and processes for the Wholesale and Retail Segments. The risk assessment in the Wholesale Banking Segment is carried out on a case-by-case basis for debtors with individual assessment who represent 97% of this portfolio, through rating the debtor in the risk categories defined in Chapter B-1 of the Compendium of Accounting Standards of the SBIF. The remaining customers are provisioned with group assessment, which is based on models of probability of non-compliance. Admission in the Retail Banking Segments is through different degrees of automation, with scoring tools for the Individual Segment and assessment guidelines in the case of Small Companies. Models based on probability of non-compliance are used to determine provisions in the Retail Banking Segments which consider behavior information, recovery and mitigation measures. These models can be viewed by product and by customer and are applied to all operations in the collective portfolio, which allows for a global and integrated view of credit risk management. 134 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) On the other hand, the Bank has strict controls over open positions in derivative contracts negotiated directly with its counterparts. In any case, the credit risk is limited to the fair value of contracts favorable to the Bank, which only represents a small fraction of the notional values of these instruments. This exposure to credit risk is managed as part of the limits of loans to customers, together with potential exposures due to market fluctuations. For contingent commitments, Banco Estado operates with various instruments whose credit risk exposure is not reflected in the Consolidated Statement of Financial Position, such as: guarantors and bonds, documentary letters of credit, guarantee deposits and commitments to grant loans. Guarantees and securities represent an irrevocable payment obligation. Should a guaranteed customer not fulfill its obligations with third parties guaranteed by the Bank, the latter will make the corresponding payments, therefore these operations represent the same credit risk exposure as a ordinary loan. Documentary letters of credit are documented commitments made by the Bank in representation of the customer, which are guaranteed by the shipped merchandise to which they are related and therefore have less risk than direct debt. Guarantee deposits correspond to contingent commitments that are made effective only if the customer does not comply with the performance of the work agreed upon with a third party, guaranteed by them. It should be noted that the Bank establishes provisions to safeguard against potential losses in respect to the exposure of these contingent loans, duly weighted in accordance with the requirements of the SBIF in Chapter B-3 of the Compendium of Accounting Standards. For financial instruments, the Bank measures the probability of not being able to collect from the issuers using internal and external ratings such as risk rating agencies that are independent from the Bank. 135 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Maximum exposure to financial credit risk: The maximum exposure to credit risk for the different components of the Consolidated Statement of Financial Position including derivatives, not considering guarantees or other credit improvements is detailed as follows: 2015 Note Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivables from customers Financial investments available for sale Financial investments held to maturity Other assets (*) Contingent credits Total 7 8 9 10 11 11 16 22 Exposure Maximum Gross MUS$ MCh$ Exposure maximum net MUS$ MCh$ 2014 Exposure Exposure Maximum maximum Gross net MCh$ MCh$ 330 623 690 26,855 5,651 51 140 4,699 234,062 442,739 490,587 19,071,559 4,013,041 36,273 99,704 3,336,843 623 689 26,106 5,651 51 140 4,635 442,739 489,453 18,539,161 4,013,041 36,273 99,704 3,291,315 179,780 306,971 306,971 438,744 437,373 16,614,586 16,164,190 3,333,722 3,333,722 42,632 42,632 30,181 30,181 3,247,108 3,207,012 39,039 27,724,808 37,895 26,911,686 24,193,724 23,522,081 For further details of the maximum credit risk exposure and concentration for each type of financial risk, refer to the indicated notes. (*) Corresponds to accounts receivable from the government, commissions receivable and other accounts receivable. 136 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) The concentration of financial assets credit risk by industry is detailed as follows: 2015 Commercial loans Manufacturing Mining Electricity, gas and water supply Agriculture and cattle raising Forestry Fishing Transport Telecommunications Construction Retail Services Others Subtotal Mortgage and consumer loans Mortgage Consumer Subtotal Total 2014 Maximum Maximum exposure exposure gross Net MCh$ MCh$ Maximum exposure gross MUS$ MCh$ Maximum exposure Net MUS$ MCh$ 1,527 671 1,063 781 127 130 1,010 108 1,901 2,611 10,636 5,844 1,084,413 476,179 755,199 554,400 90,106 92,008 716,907 76,704 1,349,723 1,854,812 7,554,172 4,150,899 1,494 668 1,050 742 120 104 968 107 1,871 2,515 10,237 5,739 1,060,965 474,702 745,871 527,150 85,334 73,905 687,094 76,021 1,328,743 1,786,198 7,269,861 4,075,612 705,501 215,112 509,657 462,885 130,678 178,288 644,200 68,513 1,195,145 4,909,285 3,366,305 3,891,787 687,170 212,386 507,187 439,889 129,011 154,969 614,675 68,003 1,173,466 4,843,455 3,151,221 3,825,551 26,409 18,755,522 25,615 18,191,456 16,277,356 15,806,983 10,287 2,343 7,305,322 1,663,964 10,170 2,110 7,222,160 1,498,070 6,391,867 1,524,501 6,325,983 1,389,115 12,630 8,969,286 12,280 8,720,230 7,916,368 7,715,098 39,039 27,724,808 37,895 26,911,686 24,193,724 23,522,081 137 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) The risk categories for the individual portfolio are described as follows: Normal compliance portfolio Normal risk portfolio includes debtors, whose payment capacity allows them to fulfill their obligations and commitments and based on the assessment of their economic-financial situation , it is not perceived that this situation will change. Therefore, these are debtors without appreciable risks, whose payment capacity allows them to cover their obligations under the agreed upon conditions and who would continue to have good behavior even when faced with unfavorable business, economic or financial situations. The probabilities of non-compliance and expected loss for each category are detailed below: Type of portfolio Category Probability of non-compliance % Normal portfolio A1 A2 A3 A4 A5 A6 0.04 0.10 0.25 2.00 4.75 10.00 Loss due to noncompliance % 90.00 82.50 87.50 87.50 90.00 90.00 Expected loss (provision %) 0.03600 0.08250 0.21875 1.75000 4.27500 9.00000 Substandard portfolio The substandard portfolio includes debtors with financial difficulties or significant worsening of their payment capacity and with respect to which there are reasonable doubts regarding full reimbursement of principal and interest under the contractually agreed upon terms, showing little probability to fulfill their current financial obligations. This portfolio also includes debtors, which in the last twelve months have been more than 30 days delinquent, show poor payment behavior with the Bank or with third parties (delinquency of significant amounts during the year, non-payment of less than 90 days). The probabilities of non-compliance and expected loss for each category are detailed as follows: 138 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Type of portfolio Category Probability of noncompliance % Substandard portfolio B1 B2 B3 B4 15.00 22.00 33.00 45.00 Loss due to noncompliance % 92.50 92.50 97.50 97.50 Expected loss (provision %) 13.87500 20.35000 32.17500 43.87500 The following formula established by the SBIF must be used for the purpose of calculating the provision for the normal and substandard portfolios: Provision debtor =(EAP-EA)*(PI debtor /100)*(PDI debtor /100)+EA*(PI GUARANTOR /100)*(PDI GUARANTOR /100) Where: EAP EA PI PDI = = = = Exposure subject to provisions (loans + contingent loans) – (financial or real) guarantees. Guaranteed exposure. Likelihood of non-compliance. Loss due to default. Notwithstanding the above, the Bank must maintain a minimum provision percentage of 0.50% on loans and contingent loans in the Normal Portfolio. Non-performing portfolio The non-performing portfolio includes debtors and their loans for which recovery is considered remote, since they show an impaired or no payment capacity. These debtors are those with evident indications of possible bankruptcy and those for which a forced debt restructuring is necessary to prevent their delinquency and in addition any debtor that has loans unpaid for more than 90 days or is in judicial collection and whose source of payment is supported in the guarantees established. Should there be concrete information to justify it, the present value of recoveries that might be obtained by exerting the collection actions, net of the expenses associated with them can also be considered. “Concrete information” is considered to be any recovery by judicial means that is duly supported with a report from the Bank’s Legal Department (“Fiscalía”) determining the effectiveness of the collection. This must be free of any encumbrance or preferential creditors, leading to an actual payment flow. 139 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) In addition, debtors who have shown negative past performance in the Bank or Financial System (FS) are considered to be non-performing. This includes: social security and tax infringement, returned and not cleared notes, debt past due in the FS, write-offs in the FS, etc. as well as debtors under default or showing a preventive judicial arrangement. There are six categories for debtors with non-performing loans and each of them is associated with a range of expected loss relating to commercial loans and commercial lease operations of the customer as a whole; therefore it is necessary to determine the guarantee coverage. It should be noted that all contingent loans must be fully considered, since they are rated as non-performing loans. These categories and their range of loss as estimated by the Bank and the provision percentages that finally must be applied on exposure amounts are detailed as follows: Type of portfolio Risk Scale Non-Compliance Portfolio C1 C2 C3 C4 C5 C6 Range of Expected Loss More than 0 up to 3% More than 3 % up to 20% More than 20% up to 30% More than 30% up to 50% More than 50% up to 80% More than 80% Provision (%) 2 10 25 40 65 90 The following must be considered for calculation purposes: Expected Loss Rate = (E-R)/E Provision =E x (PP/100) 140 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Where: E R PP = Amount of exposure. = Recoverable amount. = Provision percentage (according to the category of the expected loss rate). The Bank maintains a level of additional provisions, approved by the Executive Committee, aimed at the application of portfolio assessment models for the purpose of safeguarding against unpredictable economic fluctuations that might affect the macroeconomic environment or the situation of a specific economic sector, in accordance with the Bank’s policies. The additional provisions include a mechanism for determining anti-cyclical provisions (accumulation of provisions in commercial, consumer and mortgage portfolios) in order to protect against possible periods of recession and portfolio concentration due to mortgage loans. In January 2014, the Bank’s Board decided to replace the limits for the creation of additional provisions, establishing such limits between 0% and 2.5% of risk-weighted assets. As of December 31, 2015, the use of this limit amounts to 2.02% of risk-weighted assets. As of December 31, 2015 and 2104, the additional anti-cyclical provisions amount to MCh$ 104,228 and by concentration amounts to MCh$ 309,592. 141 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Quality of loans by class of financial asset Quality of loans described in conformity with the Compendium of Standards of the Superintendencia de Bancos e Instituciones Financieras, the quality of loans are detailed as follows: 2015 INDIVIDUAL GROUP A1 MCh$ A2 MCh$ A3 MCh$ A4 MCh$ A5 MCh$ A6 MCh$ B1 MCh$ B2 MCh$ Impaired portfolio MCh$ Loans and advance to banks Loans and accounts receivables from customers 120,015 270,519 70,553 1,584,679 279,435 1,540,402 20,584 2,131,312 1,063,977 646,378 193,617 19,514 245,522 10,100,813 Total 390,534 1,655,232 1,819,837 2,151,896 1,063,977 646,378 193,617 19,514 245,522 10,100,813 A1 MCh$ A2 MCh$ A3 MCh$ A4 MCh$ 2014 INDIVIDUAL Normal MCh$ Impaired MCh$ Total MCh$ Total MUS$ 1,274,826 490,587 19,071,559 690 26,855 1,274,826 19,562,146 27,545 GROUP A5 MCh$ A6 MCh$ B1 MCh$ B2 MCh$ Impaired portfolio MCh$ Normal MCh$ Impaired MCh$ Total MCh$ Loans and advance to banks Loans and accounts receivables from customers 381 59,208 133,980 1,186,239 272,156 1,645,004 32,222 1,822,657 5 913,751 648,842 111,034 26,595 181,126 8,801,617 1,218,513 438,744 16,614,586 Total 59,589 1,320,219 1,917,160 1,854,879 913,756 648,842 111,034 26,595 181,126 8,801,617 1,218,513 17,053,330 Note: Values are presented gross, without reducing provisions. 142 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Analysis of aging of debts that are overdue but not impaired by class of financial asset is detailed as follows: Aging: Overdue 1: 1 to 29 days Overdue 2: 30 to 59 days Overdue 3: 60 to 89 days 2015 Delinquency 1 MCh$ Delinquency 2 MCh$ Delinquency 3 MCh$ Due from banks Commercial loans Mortgage loans Consumer loans 64,152 1,068 4,886 4,987 1,225 2,069 1,825 205 2,617 70,964 2,498 9,572 100 4 13 Total 70,106 8,281 4,647 83,034 117 2014 Delinquency 1 MCh$ Delinquency 2 MCh$ Delinquency 3 MCh$ Due from banks Commercial loans Mortgage loans Consumer loans 98,617 1,156 4,253 5,350 1,139 1,452 1,218 190 1,776 105,185 2,485 7,481 104,026 7,941 3,184 115,151 Total Total MCh$ Total MUS$ Total MCh$ Note: values are presented gross, without reducing provisions. The fair value of guarantees on impaired delinquent assets amounts to MCh$ 28,497 and MCh$ 9,092 for the individual portfolio and MCh$ 463,066 and MCh$ 425,058 for the collective portfolio as of December 31, 2015 and 2014, respectively. In order to mitigate credit risk, the Bank actively uses different types of guarantees such as: mortgages, bonds, guarantors and bonds and leased assets. Regarding the guarantees required for financial transactions, particularly agreements, which are those with credit risk, the underlying asset is considered as a guarantee, which usually corresponds to Government commercial paper. 143 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) It should be noted, that the coverage of provisions and guarantees over the impaired delinquent portfolio is 87% as of December 31, 2015 and 2014. The difference in respect to the total corresponds to expected recoveries using collections actions. For this purpose, the Bank has considered the guarantees adjusted to the historical recovery values obtained by BancoEstado. 2) Liquidity risk: Liquidity risk is the risk that an entity finds it difficult to obtain the funds necessary to fulfill its financial commitments. On a daily basis BancoEstado requires cash funds for draws on bank savings and current accounts, payment of time deposits, payment of guarantees, disbursements on operations with derivatives and others. The limits established to control liquidity are detailed as follows: (i) Mismatches of up to 30 days for all currencies, up to one time the basic capital. (ii) Mismatches of up to 30 days for foreign currencies, up to one time the basic capital. (iii) Mismatches of up to 90 days for all currencies, two times the basic capital. Considering the nature of its operations, the Bank adopts the adjusted methodology for the purpose of measuring its mismatches and compliance with regulation limits. This methodology allows the Bank to consider that one part of demand deposits, time deposits and retail customer accounts tend to remain at the Bank for longer periods than contractual deposits, which the Bank models with sufficient reliability. Note No. 36 shows the detail by expiration of assets and liabilities. 144 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Positions of assets, liabilities and contingent loans by currency, as of each year-end, are detailed as follows: Year 2015 US$ MCh$ Euros MCh$ Yens MCh$ Pounds MCh$ Others MCh$ Pesos MCh$ UF MCh$ Total MCh$ MUS$ Cash and due from banks Transactions in the course of collection Financial assets held for trading Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivables from customers Investment securities Other assets 3,752,903 94,774 3,833 494 359,790 2,106,362 880,861 40,714 22,084 6,492 3,958 650 815 1,241 - 545 4,034 59 - 827 612 123,905 269 857,534 220,013 1,863,820 234,062 442,245 129,663 6,076,538 2,851,590 1,579,209 342,256 10,227,098 316,863 3,469 4,634,708 325,925 2,209,909 234,062 442,739 489,453 18,539,161 4,049,314 1,624,311 6,526 459 3,112 330 623 689 26,106 5,702 2,287 Total asset 7,239,731 33,184 2,056 4,638 125,613 14,254,674 10,889,686 32,549,582 45,834 Current accounts and other demand deposits Transactions in the course of payment Repurchase agreements and securities loans Saving accounts and time deposits Financial derivative contracts Obligations with banks Debt instruments issued Other financial liabilities Other liabilities 361,642 70,989 1,131 3,741,156 867 1,038,004 1,212,030 21,809 124,391 9,231 16,086 5,688 1,129 41,263 16 1,220 324,184 - 20 2,993 274 - 359 705 71 - 7,412,628 71,127 574,158 6,456,189 252,593 17,456 1,152,689 156,147 4,143,134 3,844,064 172 7,940,027 161,900 575,634 14,346,167 253,460 1,040,353 5,421,541 39,265 1,277,268 11,181 228 811 20,201 357 1,465 7,634 55 1,798 Total liabilities 6,572,019 15,936,840 8,143,517 31,055,615 43,730 (1,682,166) 1,831,218 2,746,169 828,444 1,493,967 3,336,843 2,104 4,699 3,574,613 4,830,810 6,803 Net assets (liabilities) Contingent credits Net position of assets (liabilities) Year 2014 73,413 325,404 3,287 1,135 667,712 668,766 (40,229) 4,349 (323,348) 3,803 1,351 263 124,478 - 1,336,478 (35,880) (319,545) 1,614 124,478 US$ MCh$ Euros MCh$ Yens MCh$ Pounds MCh$ 149,052 Others MCh$ Pesos MCh$ Total MCh$ 381,812 9,171,500 701,476 3,923 3,991,859 383,694 1,876,891 179,780 306,971 437,373 16,164,190 3,376,354 1,399,092 Cash and due from banks Transactions in the course of collection Financial assets held for trading Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivables from customers Investment securities Other assets 3,399,088 107,377 3,034 703 438,239 1,726,226 434,727 14,048 18,360 21,310 8,384 29 895 416 55 - 290 50 - 767 97 124,129 544 Total asset 6,123,442 48,083 1,366 340 125,537 11,558,725 10,258,711 28,116,204 Current accounts and other demand deposits Transactions in the course of payment Repurchase agreements and securities loans Saving accounts and time deposits Financial derivative contracts Obligations with banks Debt instruments issued Other financial liabilities Other liabilities 342,111 64,423 851 3,313,885 914 432,348 1,034,798 17,715 48,865 4,429 28,881 26,634 635 1 381 359 121,954 - 73 13 277 - 410 207 144 - 6,102,540 257,877 473,930 4,997,865 215,942 246,020 15,564 1,210,525 203,223 4,303,544 3,406,191 176 6,653,167 351,760 475,202 12,641,928 216,856 679,003 4,562,943 33,279 1,259,567 Total liabilities 5,255,910 60,580 122,694 363 761 13,520,263 7,913,134 26,873,705 867,532 696,003 (12,497) 2,821 (121,328) 418 (23) 222 124,776 29 (1,961,538) 1,926,356 2,345,577 621,259 1,242,499 3,247,108 1,563,535 (9,676) (120,910) 199 124,805 (35,182) 2,966,836 4,489,607 Net assets (liabilities) Contingent credits Net position of assets (liabilities) 572,459 254,494 1,492,045 179,780 306,268 (866) 5,133,846 2,240,151 1,380,548 UF MCh$ For maturity of assets and liabilities analysis, see Note No. 36. 145 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) 3) Market risk: It is the risk that the future fair value or cash flows of a financial instrument might fluctuate as a consequence of changes in market prices. Banco Estado has defined losses due to changes in interest rates, exchange rates and market prices that affect the fair value of its positions as Market Risk. This definition encompasses all of Banco Estado and incorporates methodologies that are internationally accepted and validated by different instances of regulating and accounting supervision. Regarding the main market risk components, the Bank’s greatest source of risk is from active positions in indexed local currency and when looking at risk components by product the greatest source of risk are mortgage loans whose average term is approximately 13 years. Conscious of the importance of appropriate administration and market risk management to achieve its strategic objectives, BancoEstado, Subsidiaries and New York Branch have a Corporate Policy for its administration and control, which establishes general guidelines necessary to maintain a level of risk limited to the limits defined for the financial business sector. The Chilean Central Bank establishes a regulatory limit for the sum of interest rate risks in the trading positions and currency risk. At an individual level, the Bank must observe these limits on an ongoing basis and report weekly to the Superintendencia de Bancos e Instituciones Financieras on its risk positions and compliance with those limits. It must also report monthly to the SBIF regarding risk positions consolidated with Subsidiaries and New York Branch. The regulatory limit establishes that effective equity must be sufficient to cover the sum of 8% of credit risk and market risk weighted assets. In addition Banco Estado uses regulatory models to manage its risks through recognized models and methodologies such as the Value at Risk (VaR) model with one-day horizons and a 99% level of reliance, used to measure market risks and credit risk of derivative instruments. To the application of VaR as management and risk measurement tool the Bank also incorporates market price sensitivity analysis, for currencies, interest rates and price indexes. 146 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Results of measuring these risk management instruments are reported daily to the Bank’s senior management. The Bank has systems to manage financial risks developed by external suppliers and others developed with its own resources. The report structure includes daily reports that show exhaustive monitoring and control of exposures to market risks. As of December 31, 2015 and 2014, exposure consolidated to interest rate risk in the trading positions of BancoEstado and Subsidiaries, with the methodology described in Chapter III B-2 of the Compendium of Financial Standards of the Chilean Central Bank, was US$ 93 million and US$ 112 million and for currency risk it was US$ 17 million and US$ 2.8 million, respectively. The VaR applied with a 99% level of reliance is estimated and reported daily to the corresponding instances and provides the potential loss that would result if the current positions remained unaltered during one business day. The measurement is subjected to retrospective testing to verify that daily losses effectively occurred do not exceed the VaR, more than thrice every 100 days. The result is regularly monitored to verify the validity of assumptions, hypothesis and adjustment of the parameters and risk factors used to calculate the VaR. Since the VaR is an integral part of the Bank’s market risk control, the VaR maximum exposure limits to market risks are established by the Executive Committee both for trading and investment operations. 4) Operating risk: Banco Estado has defined operating risk as the risk of loss due to the inadequacy or failure in processes, employees and/or internal systems or due to external events. This definition includes legal risk, but excludes strategic risk, and the risk of image and reputation, as framed in the proposal of the Basel Committee. Aware of the importance of an adequate administration of this risk to achieve its strategic objectives, BancoEstado and its Subsidiaries count on a Corporate Policy for the comprehensive administration of all its operational risks, which establish the necessary general guidelines to maintain a model that allows keeping a controlled risk level in the different operating environments. 147 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) The policy includes specific allocation of responsibilities for managing operating risks, which refer to: - Those responsible for processes, and primary risk managers, in charge of self-managing the risks of the activities they carry out. - Corporate Risk Management under the Operational Risk Departament, as the area responsible for global management and monitoring of operational risk. - Controllership area, responsible for assessing the effectiveness of the implementation of operational risk policies, and - The Risk Committee is responsible for the review and proposal to the Executive Committee of the Operational Risk Policies, knowing the existing risks and approving exposure levels (limits), performing overall risk follow up and its evolution, knowing the regulatory changes and proposing action plans (if required), validating the internal models of risk assessment (construction guidelines, application, performance) and following up on the compliance with the observations made by the SBIF in matters of risk. This Committee is made up by members of Senior Management, and is chaired by the Corporate Risk Manager and reports annually regarding its performance to the Executive Committee of the Bank. Banco Estado manages its risks through a model that considers the impact that they could cause the Bank and the likelihood of occurrence of the risk events it identifies. For the most critical risks identified, which are not at tolerated levels, action plans are established to enable their mitigation. In addition, Banco Estado has integrated monitoring of operational risk to its normal activities and has increased the construction of appropriate indicators that provide warning of the risk and of future losses. In addition, the Bank has a Loss and Operating Incidents Information database. All this allows it to learn about and quantify the risks, which significantly favors continuous improvement processes. On the other hand, Banco Estado has established controls to guarantee information security, mainly focused on safeguarding its confidentiality, integrity and availability. In this sense, the Bank has made efforts to classify information into the different levels of required protection. In the area of business continuity, the Bank has defined four scenarios that could impede complying all or part of its obligations and, in this sense, it has developed a formal methodology that considers among its stages, the impact and critical nature of its services and products, the definition of strategies related to prevention, containment and recovery, as well as periodic tests of such strategies. 148 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) In the area of operational risk management for outsourcing services, the Bank has policies, standards and procedures, as well as an environment that enables it to identify, assess, control, mitigate, monitor and report the most significant risks associated with this subject, in accordance with the provisions of the SBIF’s Updated Compilation of Norms (RAN) Chapter 20-7. In an effort to raise awareness in the organization with respect to operational risk, BancoEstado conducts dissemination activities for each participant in the organization to assume and understand the responsibilities of his/her area. For the generation of new products and/or services, the new products are subjected to risk analysis prior to their implementation, in order to prevent the introduction of risks that are outside acceptable levels. Accounting hedges Banco Estado uses accounting hedges to manage risks of changes in fair value and cash flows, which it is exposed to in the undertaking of its businesses. Hedges use derivative instruments to hedge against changes in the value of the assets and liabilities in the balance sheet. The treatment of this type of instrument is regulated in accordance with IAS 39. Market risk management is in charge of designing and validating the effectiveness of the hedges. The results of the hedges are informed to the Assets and Liabilities Committee. As of December 31, 2015, the Company maintains notionals in cash flow hedges for MUF 43.4 (MUF 31.1 in 2014), of net investments in business abroad for MUF 9.5 (MUF 7.0 in 2014) and of fair value for MUF 35.6 (MUF 23.8 in 2014). For more details, please see Note No. 8. Capital requirement a) In accordance with the General Banking Law, the Bank must maintain a minimum ratio of Effective Equity over Consolidated Risk Weighted Assets of 8%, net of provisions required and a minimum ratio of Basic Risk Capital over Total Consolidated Assets of 3%, net of required provisions. For this purpose, Effective Equity is determined from Capital and Reserves or Basic Capital with the following adjustments: a. Subordinate bonds are added with a limit of 50% of basic capital and, b. Deducting the balance of assets corresponding to goodwill or surcharges paid and premiums paid and investments in companies that do not participate in consolidation. c. Adding additional provisions up to 1.25% of its risk weighted assets. 149 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) Assets are weighted according to risk categories, to which a risk percentage is assigned based on the capital amount necessary to support each of those assets. Five risk categories are applied (0%, 10%, 20%, 60% and 100%). For example, cash, deposits in other banks and financial instruments issued by the Chilean Central Bank, have 0% of risk, which means that in accordance with current regulations, no capital is required to support these assets. Property, plant and equipment have 100% risk, which means that the Bank must have minimum capital equivalent to 8% of the amount of these assets. All derivative instruments traded outside the stock exchange are considered in the determination of risk assets, as a conversion factor over notional values, thus obtaining the amount of exposure to credit risk (or “credit equivalent”). Contingent loans outside the Consolidated Statement of Financial Position are also considered as “credit equivalent”, for weighting. As of 2015 and 2014 year-end, the ratio of consolidated totals and consolidated risk weighted assets is as follows: 2015 Consolidated assets MUS$ MCh$ Risk weighted Assets MUS$ MCh$ 2014 Consolidated assets MCh$ Risk Assets MCh$ Assets of balance sheet (net of provisions) Cash and due from banks Transactions in the course of collection Financial assets held for trading Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivables from customers Financial investments available for sale Financial investmensts held to maturity Investments in companies Intangible assets Property, plant and equipment Deferred taxes Other assets 6,526 459 3,112 330 623 689 26,106 5,651 51 18 188 428 1,130 523 4,634,708 325,925 2,209,909 234,062 442,739 489,453 18,539,161 4,013,041 36,273 13,161 133,804 303,777 802,298 371,271 97 622 330 785 534 21,952 1,810 5 19 188 428 113 523 68,872 441,723 234,062 557,700 379,252 15,589,223 1,285,320 3,627 13,177 133,804 303,777 80,230 371,271 3,991,859 383,694 1,876,891 179,780 306,971 437,373 16,164,190 3,333,722 42,632 12,128 98,125 256,561 744,049 288,229 236,771 499,057 179,780 504,914 421,923 13,614,868 709,259 4,263 12,136 98,125 256,561 74,405 288,229 Assets off the statement of financial position Contingent credits 2,470 1,753,959 1,455 1,033,222 1,708,792 1,006,213 28,861 20,495,260 Total risk weighted assets - 17,906,504 150 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 35 - RISK MANAGEMENT (Continued) For the purposes of calculating the indicators of capital sufficiency, according to Chapter 12-1 of the Collection of Updated Standards of the Superintendencia de Bancos e Instituciones Financieras, total consolidated assets are MCh$ 34,564,642 and MCh$ 30,180,080 for 2015 and 2014, respectively. 2015 MUS$ Equity base Effective Equity 2,095 3,378 2014 MCh$ 1,487,444 2,398,956 Razón % 4.30% 11.70% MCh$ 1,236,936 2,057,966 Razón % 4.10% 11.49% b) As of 2015 and 2014 year-end, the Bank contemplates the following information regarding its capital management: 1) Standards pursuant to basic capital, effective equity and risk weighted assets, referred to in No. 66 and No. 67 of the General Banking Law, regulate the minimum own resources that national credit institutions must maintain at a consolidated level and particularly establish that the effective equity of a bank cannot be less than 8% of its risk weighted assets, net of provisions required, whereas its basic capital must be equal to or higher than 3% of its total assets, net of provisions required. 2) The Bank’s policy in this area has been to always strictly comply with the mentioned regulated capital requirements, in accordance with the inherent credit risks assumed in its activity and the environment in which it operates, pursuing maximum efficiency in that area. In addition, it has maintained sufficient capital and comfortable leeway of its own resources that allow it to adequately face possible economic and/or financial shocks in order to continuously ensure institutional solvency and public confidence. 3) Due to its nature of state-owned company, the Bank cannot access external sources of capital. Therefore, the sources of its equity growth are exclusively capitalization of annual net income and the eventual extraordinary capital contributions that the enactment of a law require. 4) During 2015 MCh$ 75,459 was paid as a dividend. 5) The Bank considers the Equity capital attributable to the Bank’s owners as that indicated in its Consolidated Statement of Financial Position. 151 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 36 - MATURITY OF ASSETS AND LIABILITIES As of December 31, 2015, maturity of assets and liabilities is detailed as follows: Up to 30 Days MCh$ From 31 to 90 days MCh$ From 91 to 180 days MCh$ From 181 and 365 days MCh$ From 1 and 3 years MCh$ More than 3 years MCh$ Total MCh$ MUS$ Assets Cash and due form banks Transactions in the course of collection Finacial assets held for trading Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivables from customers Financial investments available for sale Financial investments held to maturity 4,634,708 325,925 21,012 234,062 43,433 271,420 981,966 1,079,378 19 117,156 27,434 93,997 944,225 659,631 32 743,764 21,677 58,899 1,291,043 928,111 84 1,127,516 15,017 47,185 2,032,613 931,516 74 95,325 55,718 17,952 3,945,898 167,456 13,838 105,136 279,460 9,343,416 246,949 22,226 4,634,708 325,925 2,209,909 234,062 442,739 489,453 18,539,161 4,013,041 36,273 6,526 459 3,112 330 623 689 26,106 5,651 51 Total 7,591,923 1,842,475 3,043,578 4,153,921 4,296,187 9,997,187 30,925,271 43,547 Liabilities Current accounts and other demand deposit Transactions in the course of payment Repurchase agreements and securities loans Saving accounts and time deposits Financial derivative contracts Obligations with banks Debt instruments issued Other financial liabilities Other liabilities 6,058,503 87,038 575,476 5,214,874 41,846 173,362 98,353 35,193 294,055 44,537 158 2,240,500 22,178 13,445 4,720 2,423 - 30,325 2,282,547 49,539 73,188 34,321 1,649 - 738,162 10,270 591,702 70,786 - 666,330 29,528 108,221 1,592,838 - 1,881,524 3,203,754 100,099 80,435 3,620,523 - 7,940,027 161,900 575,634 14,346,167 253,460 1,040,353 5,421,541 39,265 294,055 11,181 228 811 20,201 357 1,465 7,634 55 414 12,578,700 2,327,961 2,471,569 1,410,920 2,396,917 8,886,335 30,072,402 42,346 Total 152 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 36 - MATURITY OF ASSETS AND LIABILITIES (Continued) As of December 31, 2014, maturity of assets and liabilities is detailed as follows: Up to 30 Days MCh$ From 31 to 90 days MCh$ From 91 to 180 days MCh$ From 181 and 365 MCh$ From 1 and 3 years MCh$ More than 3 years MCh$ Total MCh$ Assets Cash and due form banks Transactions in the course of collection Finacial assets held for trading Repurchase agreements and securities loans Financial derivative contracts Loans and advance to banks Loans and accounts receivables from customers Financial investments available for sale Financial investments held to maturity 3,991,859 383,694 152,251 179,780 47,530 73,234 1,288,060 725,096 23 185,130 57,612 121,589 1,072,807 243,253 77 600,913 34,495 134,613 1,218,149 1,012,442 74 624,493 15,555 69,569 1,631,000 1,094,110 111 202,855 19,029 38,368 3,214,135 236,259 16,613 111,249 132,750 7,740,039 22,562 25,734 3,991,859 383,694 1,876,891 179,780 306,971 437,373 16,164,190 3,333,722 42,632 Total 6,841,527 1,680,468 3,000,686 3,434,838 3,727,259 8,032,334 26,717,112 Liabilities Current accounts and other demand deposit Transactions in the course of payment Repurchase agreements and securities loans Saving accounts and time deposits Financial derivative contracts Obligations with banks Debt instruments issued Other financial liabilities Other liabilities 5,021,665 152,911 468,773 3,977,871 49,599 247,807 101,598 29,975 53,864 153,168 142 1,984,212 36,721 70,612 4,466 2,027 248 45,681 6,287 2,836,747 35,703 155,538 35,126 373 654,635 16,846 87,572 72,352 1,277 999 611,330 15,555 35,515 1,078,700 10,143 1,631,502 2,577,133 62,432 81,959 3,270,701 129,292 6,653,167 351,760 475,202 12,641,928 216,856 679,003 4,562,943 33,279 194,919 10,104,063 2,251,596 3,115,455 833,681 1,751,243 7,753,019 25,809,057 Total 153 BANCO DEL ESTADO DE CHILE AND SUBSIDIARIES Notes to the Consolidated Financial Statements As of December 31, 2015 and 2014 and for the years then ended (In millions of Chilean pesos - MCh$) (Translation of Financial Statements originally issued in Spanish – See Note 1b) NOTE 37 - EVENTS OCCURRED AFTER THE REPORTING PERIOD - Between January 1 and February 25, 2016, issuance date of the accompanying Financial Statements, no subsequent events occurred that could affect significantly the presentation of these Consolidated Financial Statements of the Bank. CARLOS MARTABIT SCAFF Chief Finance Officer MARCOS GAÍNZA ARAGONÉS Accounting and Management Manager JESSICA LÓPEZ SAFFIE Chief Executive Officer ÓSCAR GONZÁLEZ NARBONA Planning and Management Control Manager 154