Edgar Filing: BANK OF CHILE

FORM 6-K
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

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

For the month of February, 2014

Commission File Number 001-15266

BANK OF CHILE

(Translation of registrant’s name into English)

Paseo Ahumada 251
Santiago, Chile
(Address of principal executive offices)

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

Form 20-F x Form 40-F o

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

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

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

Yes o No x

If “Yes” is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-

BANCO DE CHILE
REPORT ON FORM 6-K

Attached Banco de Chile’s Consolidated Financial Statements with notes for the period 2013.

Table of Contents

Consolidated Financial Statements

BANCO DE CHILE AND SUBSIDIARIES

Santiago, Chile

December 31, 2013 and 2012

Table of Contents

Consolidated Financial Statements

BANCO DE CHILE AND SUBSIDIARIES

December 31, 2013 and 2012

(Translation of consolidated financial statements originally issued in Spanish)

Index

I.	Report of Independent Registered Public Accounting Firm
II.	Consolidated Statements of Financial Position
III.	Consolidated Statements of Income
IV.	Consolidated Statements of Other Comprehensive Income
V.	Consolidated Statements of Changes in Equity
VI.	Consolidated Statements of Cash Flows
VII.	Notes to the Consolidated Financial Statements

Ch$ or CLP	=	Chilean pesos
MCh$	=	Millions of Chilean pesos
US$ or USD	=	U.S. dollars
ThUS$	=	Thousands of U.S. dollars
JPY	=	Japanese yen
EUR	=	Euro
MXN	=	Mexican pesos
HKD	=	Hong Kong dollars
PEN	=	Peruvian nuevo sol
CHF	=	Swiss franc
U.F. or CLF	=	Unidad de fomento
		(The unidad de fomento is an inflation-indexed, Chilean peso denominated monetary unit set daily in advance on the basis of the previous month’s inflation rate).

IFRS	=	International Financial Reporting Standards
IAS	=	International Accounting Standards
RAN	=	Compilation of Standards of the Chilean Superintendency of Banks
IFRIC	=	International Financial Reporting Interpretations Committee
SIC	=	Standards Interpretation Committee

Table of Contents

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the years ended December 31, 2013 and 2012

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

BANCO DE CHILE AND SUBSIDIARIES

INDEX

		Page
Consolidated Statement of Financial Position		4
Consolidad Statements of Comprehensive Income		5
Consolidated Statement of Changes in Equity		7
Consolidated Statements of Cash Flows		8
1.	Company Information:	9
2.	Summary of Significant Accounting Principles:	10
3.	New Accounting Pronouncements:	46
4.	Changes in Accounting Policies and Disclosures:	52
5.	Relevant Events:	54
6.	Segment Reporting:	59
7.	Cash and Cash Equivalents:	63
8.	Financial Assets Held-for-trading:	64
9.	Repurchase Agreements and Security Lending and Borrowing:	65
10.	Derivative Instruments and Accounting Hedges:	68
11.	Loans and advances to Banks:	75
12.	Loans to Customers, net:	76
13.	Investment Securities:	84
14.	Investments in Other Companies:	86
15.	Intangible Assets:	89
16.	Property and equipment:	92
17.	Current and Deferred Taxes:	94
18.	Other Assets:	98
19.	Current accounts and Other Demand Deposits:	99
20.	Savings accounts and Time Deposits:	99
21.	Borrowings from Financial Institutions:	100
22.	Debt Issued:	102
23.	Other Financial Obligations:	106
24.	Provisions:	106
25.	Other Liabilities:	110
26.	Contingencies and Commitments:	111
27.	Equity:	116
28.	Interest Revenue and Expenses:	122
29.	Income and Expenses from Fees and Commissions:	125
30.	Net Financial Operating Income:	126
31.	Foreign Exchange Transactions, net:	126
32.	Provisions for Loan Losses:	127
33.	Personnel Expenses:	128
34.	Administrative Expenses:	129
35.	Depreciation, Amortization and Impairment:	130
36.	Other Operating Income:	131
37.	Other Operating Expenses:	132
38.	Related Party Transactions:	133
39.	Fair Value of Financial Assets and Liabilities:	138
40.	Maturity of Assets and Liabilities:	149
41.	Risk Management:	151
42.	Subsequent Events:	181

The accompanying notes 1 to 43 form an

integral part of these consolidated financial statements

Table of Contents

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the years ended December 31, 2013 and 2012

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

	Notes	2013		2012
		MCh$		MCh$
ASSETS
Cash and due from banks	7	873,308		684,925
Transactions in the course of collection	7	374,471		396,611
Financial assets held-for-trading	8	393,134		192,724
Cash collateral on securities borrowers and reverse repurchase	9	82,422		35,100
Derivative instruments	10	374,688		329,497
Loans and advances to banks	11	1,062,056		1,343,322
Loans to customers, net	12	20,389,033		18,334,330
Financial assets available-for-sale	13	1,673,704		1,264,440
Financial assets held-to-maturity	13	—		—
Investments in other companies	14	16,670		13,933
Intangible assets	15	29,671		34,290
Property and equipment	16	197,578		205,189
Current tax assets	17	3,202		2,684
Deferred tax assets	17	145,904		127,143
Other assets	18	318,029		296,878

TOTAL ASSETS		25,933,870		23,261,066
LIABILITIES
Current accounts and other demand deposits	19	5,984,332		5,470,971
Transactions in the course of payment	7	126,343		159,218
Cash collateral on securities lent and repurchase agreements	9	256,766		226,396
Savings accounts and time deposits	20	10,402,725		9,612,950
Derivative instruments	10	445,132		380,322
Borrowings from financial institutions	21	989,465		1,108,681
Debt issued	22	4,366,960		3,273,933
Other financial obligations	23	210,926		162,123
Current tax liabilities	17	10,333		25,880
Deferred tax liabilities	17	36,569		27,630
Provisions	24	551,898		504,837
Other liabilities	25	268,105		301,066

TOTAL LIABILITIES		23,649,554		21,254,007

EQUITY	27
Attributable to equity holders of the parent:
Capital		1,849,351		1,629,078
Reserves		213,636		175,814
Other comprehensive income		15,928		18,935
Retained earnings:
Retained earnings from previous periods		16,379		16,379
Income for the year		513,602		467,610
Less:
Provision for minimum dividends		(324,582	)	(300,759	)
Subtotal		2,284,314		2,007,057
Non-controlling interests		2		2

TOTAL EQUITY		2,284,316		2,007,059
TOTAL LIABILITIES AND EQUITY		25,933,870		23,261,066

The accompanying notes 1 to 43 form an

integral part of these consolidated financial statements

Table of Contents

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

for the years ended December 31, 2013 and 2012

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

	Notes	2013		2012
		MCh$		MCh$
Interest revenue	28	1,763,540		1,661,467
Interest expense	28	(704,371	)	(708,629	)
Net interest income		1,059,169		952,838

Income from fees and commissions	29	386,733		372,767
Expenses from fees and commissions	29	(99,639	)	(85,495	)
Net fees and commission income		287,094		287,272

Net financial operating income	30	11,084		24,747
Foreign exchange transactions, net	31	71,457		35,136
Other operating income	36	27,221		22,061
Total operating revenues		1,456,025		1,322,054

Provisions for loan losses	32	(241,613	)	(188,190	)
OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES		1,214,412		1,133,864

Personnel expenses	33	(323,236	)	(309,865	)
Administrative expenses	34	(252,501	)	(247,459	)
Depreciation and amortization	35	(28,909	)	(30,957	)
Impairment	35	(2,247	)	(899	)
Other operating expenses	37	(16,051	)	(22,454	)
TOTAL OPERATING EXPENSES		(622,944	)	(613,834	)

NET OPERATING INCOME		591,468		522,230

Income attributable to associates	14	2,071		(229	)
Income before income tax		593,539		522,001
Income tax	17	(79,936	)	(54,390	)

NET INCOME FOR THE YEAR		513,603		467,611

Attributable to:
Equity holders of the parent		513,602		467,610
Non-controlling interests		1		1

		$		Ch$
Net income per share attributable to equity holders of the parent:
Basic net income per share	27	5.52		5.30
Diluted net income per share	27	5.52		5.30

The accompanying notes 1 to 43 form an

integral part of these consolidated financial statements

Table of Contents

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

for the years ended December 31, 2013 and 2012

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

	Notes	2013		2012
		MCh$		MCh$
NET INCOME FOR THE YEAR		513,603		467,611

OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASIFFIED SUBSEQUENTLY TO PROFIT OR LOSS

Net unrealized gains (losses):
Net change in unrealized gains (losses) on available for sale instruments	13	14,221		24,510
Gains and losses on derivatives held as cash flow hedges	10	(18,069	)	1,777
Cumulative translation adjustment		71		(58	)
Subtotal Other comprehensive income before income taxes that will be reclassified subsequently to profit or loss		(3,777	)	26,229

Income tax related to other comprehensive income that will be reclassified subsequently to profit or loss		770		(5,220	)

Total other comprehensive income items that will be reclassified subsequently to profit or loss		(3,007	)	21,009

OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASIFFIED SUBSEQUENTLY TO PROFIT OR LOSS

Loss in defined benefit plans		(166	)	(2,200	)

Subtotal Other comprehensive income that will not be reclassified subsequently to profit or loss		(166	)	(2,200	)

Income tax related to other comprehensive income that will not be reclassified subsequently to profit or loss		33		440

Total other comprehensive income items that will not be reclassified subsequently to profit or loss		(133	)	(1,760	)

TOTAL CONSOLIDATED COMPREHENSIVE INCOME		510,463		486,860

Attributable to:
Equity holders of the parent		510,462		486,859
Non-controlling interest		1		1

		Ch$		Ch$
Comprehensive net income per share attributable to equity holders of the parent:
Basic net income per share		5.49		5.52
Diluted net income per share		5.49		5.52

The accompanying notes 1 to 43 form an

integral part of these consolidated financial statements

Table of Contents

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

for the years ended December 31, 2013 and 2012

(Translation of financial statements originally issued in Spanish)

(Expressed in millions of Chilean pesos)

			Reserves			Other comprehensive income						Retained earnings
												Retained
						Unrealized						earnings					Attributable
					Reserves	gains (losses)		Derivatives		Cumulative		from			Provision for		to equity		Non-
	Notes	Paid-in Capital	Other reserves		from earnings	on available- for- sale		cash flow hedge		translation adjustment		previous periods	Income for the year		minimum dividends		holders of the parent		controlling interest		Total equity
		MCh$	MCh$		MCh$	MCh$		MCh$		MCh$		MCh$	MCh$		MCh$		MCh$		MCh$		MCh$

Balances as of December 31, 2011		1,436,083	32,256		87,226	(1,644	)	(395	)	(36	)	16,379	428,805		(259,501	)	1,739,173		2		1,739,175
Capitalization of retained earnings	27	73,911	—		—	—		—		—		—	(73,911	)	—		—		—		—
Income retention (released) according to law		—	—		58,092	—		—		—		—	(58,092	)	—		—		—		—
Defined benefit plans adjustment	4	—	(1,760	)	—	—		—		—		—	—		—		(1,760	)	—		(1,760	)
Paid and distributed dividends	27	—	—		—	—		—		—		—	(296,802	)	259,501		(37,301	)	(1	)	(37,302	)
Other comprehensive income:	27	—	—		—	—		—		—		—	—		—		—		—		—
Cumulative translation adjustment		—	—		—	—		—		(58	)	—	—		—		(58	)	—		(58	)
Derivatives cash flow hedge, net		—	—		—	—		1,429		—		—	—		—		1,429		—		1,429
Valuation adjustment on available-for-sale instruments (net)		—	—		—	19,639		—		—		—	—		—		19,639		—		19,639
Subscription and payment of shares	27	119,084	—		—	—		—		—		—	—		—		119,084		—		119,084
Income for the period 2012		—	—		—	—		—		—		—	467,610		—		467,610		1		467,611
Provision for minimum dividends	27	—	—		—	—		—		—		—	—		(300,759	)	(300,759	)	—		(300,759	)
Balances as of December 31, 2012		1,629,078	30,496		145,318	17,995		1,034		(94	)	16,379	467,610		(300,759	)	2,007,057		2		2,007,059

Capitalization of retained earnings	27	86,202	—		—	—		—		—		—	(86,202	)	—		—		—		—
Income distribution		—	1,760		—	—		—		—		—	(1,760	)	—		—		—		—
Income retention (released) according to law		—	—		36,193	—		—		—		—	(36,193	)	—		—		—		—
Defined benefit plans adjustment		—	(133	)	—	—		—		—		—	—		—		(133	)	—		(133	)
Equity adjustment investment in other companies		—	2		—	—		—		—		—	—		—		2		—		2
Paid and distributed dividends	27	—	—		—	—		—		—		—	(343,455	)	300,759		(42,696	)	(1	)	(42,697	)
Other comprehensive income:	27	—	—		—	—		—		—		—	—		—		—		—		—
Cumulative translation adjustment		—	—		—	—		—		71		—	—		—		71		—		71
Derivatives cash flow hedge, net		—	—		—	—		(14,455	)	—		—	—		—		(14,455	)	—		(14,455	)
Valuation adjustment on available-for-sale instruments (net)		—	—		—	11,377		—		—		—	—		—		11,377		—		11,377
Subscription and payment of shares	27	134,071	—		—	—		—		—		—	—		—		134,071		—		134,071
Income for the period 2013		—	—		—	—		—		—		—	513,602		—		513,602		1		513,603
Provision for minimum dividends	27	—	—		—	—		—		—		—	—		(324,582	)	(324,582	)	—		(324,582	)
Balances as of December 31, 2013		1,849,351	32,125		181,511	29,372		(13,421	)	(23	)	16,379	513,602		(324,582	)	2,284,314		2		2,284,316

The accompanying notes 1 to 43 form an

integral part of these consolidated financial statements

Table of Contents

BANCO DE CHILE AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the years ended December 31, 2013 and 2012

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

	Notes	2013		2012
		MCh$		MCh$
OPERATING ACTIVITIES:
Net income for the year		513,603		467,611
Items that do not represent cash flows:
Depreciation and amortization	35	28,909		30,957
Impairment of intangibles assets and property and equipment	35	2,247		899
Provision for loan losses, net of recoveries	32	262,467		225,631
Provision of contingent loans	32	12,692		1,251
Fair value adjustment of financial assets held-for-trading		(1,612	)	931
(Income) loss attributable to investments in other companies	14	(1,780	)	468
(Income) loss sales of assets received in lieu of payment	36	(6,126	)	(5,674	)
(Income) loss on sales of property and equipment	36 - 37	(219	)	(318	)
(Increase) decrease in other assets and liabilities		(42,730	)	34,555
Charge-offs of assets received in lieu of payment	37	1,891		2,600
Other credits (debits) that do not represent cash flows		9,890		5,174
(Gain) loss from foreign exchange transactions of other assets and other liabilities		(148,118	)	37,133
Net changes in interest and fee accruals		29,324		4,049
Changes in assets and liabilities that affect operating cash flows:
(Increase) decrease in loans and advances to banks, net		281,524		(695,376	)
(Increase) decrease in loans to customers, net		(2,259,317	)	(1,529,338	)
(Increase) decrease in financial assets held-for-trading, net		(165,629	)	52,892
(Increase) decrease in deferred taxes, net	17	(12,381	)	(11,657	)
Increase (decrease)in current account and other demand deposits		512,875		576,301
Increase (decrease) in payables from repurchase agreements and security lending		33,016		(15,277	)
Increase (decrease) in savings accounts and time deposits		797,009		327,980
Proceeds from sale of assets received in lieu of payment		8,454		9,510
Total cash flows provided by (used in) operating activities		(144,011	)	(479,698	)

INVESTING ACTIVITIES:
(Increase) decrease in financial assets available-for-sale		(367,258	)	295,572
Purchases of property and equipment	16	(12,249	)	(17,981	)
Proceeds from sales of property and equipment		505		400
Purchases of intangible assets	15	(5,511	)	(9,116	)
Investments in other companies	14	(1,440	)	(71	)
Dividends received from investments in other companies	14	956		943
Total cash flows provided by (used in) investing activities		(384,997	)	269,747

FINANCING ACTIVITIES:
Increase in mortgage finance bonds		—		—
Repayment of mortgage finance bonds		(20,734	)	(27,529	)
Proceeds from bond issuances	22	1,607,265		1,233,985
Redemption of bond issuances		(536,823	)	(389,382	)
Proceeds from subscription and payment of shares	27	134,071		119,084
Dividends paid	27	(343,455	)	(296,802	)
Increase (decrease) in borrowings from financial institutions		(323,055	)	142,573
Increase (decrease) in other financial obligations		54,074		(16,512	)
Increase (decrease) in Borrowings from Central Bank		—		(22,793	)
Proceeds from borrowings with Central Bank of Chile (long-term)		—		20
Payment of borrowings from Central Bank (long-term)		(7	)	(56	)
Proceeds from foreign borrowings		844,776		325,247
Payment of foreign borrowings		(639,571	)	(1,013,911	)
Proceeds from other long-term borrowings		609		1,526
Payment of other long-term borrowings		(6,285	)	(7,363	)
Total cash flows provided by (used in) financing activities		770,865		48,087

TOTAL NET POSITIVE (NEGATIVE) CASH FLOWS FOR THE YEAR		241,857		(161,864	)
Net effect of exchange rate changes on cash and cash equivalents		60,437		(31,720	)
Cash and cash equivalents at beginning of year		1,236,324		1,429,908
Cash and cash equivalents at end of year	7	1,538,618		1,236,324

	2013		2012
	MCh$		MCh$
Operating cash flow of Interest:
Interest received	1,669,559		1,614,122
Interest paid	(581,066	)	(657,235	)

The accompanying notes 1 to 43 form an

integral part of these consolidated financial statements

Table of Contents

BANCO DE CHILE AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2013 and 2012

(Translation of financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

1. Company Information:

Banco de Chile is authorized to operate as a commercial bank from September 17, 1996, and according to the Article 25 of the Law 19.396 is the legal continuer of the Banco de Chile, which in turn resulted from the merger between Banco Nacional of Chile, Banco Agricola y Banco de Valparaiso. Banco de Chile was formed on October 28, 1893, granted in front of the Public Notary of Santiago Mr. Eduardo Reyes Lavalle, authorized by Supreme Decree of November 28, 1893.

Banco de Chile (“Banco de Chile” or the “Bank”) is a Corporation organized under the laws of the Republic of Chile, regulated by the Superintendency of Banks and Financial Institutions (“SBIF” or “Superintendencia”). Since 2001, - when the bank was first listed on the New York Stock Exchange (“NYSE”), in the course of its American Depository Receipt (ADR) program, which is also registered at the London Stock Exchange — Banco de Chile additionally follows the regulations published by the United States Securities and Exchange Commission (“SEC”).

Banco de Chile offers a broad range of banking services to its customers, ranging from individuals to large corporations. The services are managed in large corporate banking, middle and small corporate banking, personal banking services and retail. Additionally, the Bank offers international as well as treasury banking services. The Bank’s subsidiaries provide other services including securities brokerage, mutual fund and investment management, insurance brokerage, financial advisory and securitization.

Banco de Chile’s legal domicile is Paseo Ahumada 251, Santiago, Chile and its Web site is www.bancochile.cl.

The consolidated financial statements of the Bank for the year ended December 31, 2013 were authorized for issuance in accordance with the directors’ resolution on January 30, 2014.

For convenience of reader, these 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 (SBIF) may not conform to generally accepted accounting principles in the United States (“US GAAP”) or to International Financial Reporting Standards (IFRS).

Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles:

(a) Basis of preparation:

Legal provisions

The General Banking Law in its Article No. 15 authorizes the Chilean Superintendency of Banks (SBIF) to issue generally applicable accounting standards for entities it supervises. The Corporations Law, in turn, requires generally accepted accounting principles to be followed.

Based on the aforementioned laws, banks should use the criteria provided by the Superintendency in accordance with the Compendium of Accounting Standards, and any matter not addressed therein, as long as it does not contradict its instructions, should adhere to generally accepted accounting principles in technical standards issued by the Chilean Association of Accountants, that coincide with International Accounting Standards and International Financial Reporting Standards agreed upon by the International Accounting Standards Board (IASB). Should there be discrepancies between these generally accepted accounting principles and the accounting criteria issued by the SBIF, these shall prevail.

(b) Basis of consolidation:

The financial statements of Banco de Chile as of December 31, 2013 and 2012 have been consolidated with its Chilean subsidiaries and foreign subsidiary using the global integration method (line-by-line). They include preparation of individual financial statements of the Bank and companies that participate in the consolidation, and it include adjustments and reclassifications necessary to homologue accounting policies and valuation criteria applied by the Bank. The Consolidated Financial Statements have been prepared using the same accounting policies for similar transactions and other events in equivalent circumstances.

Significant intercompany transactions and balances (assets, liabilities, equity, income, expenses and cash flows) originated in operations performed between the Bank and its subsidiaries and between subsidiaries have been eliminated in the consolidation process. The non-controlling interest corresponding to the participation percentage of third parties in subsidiaries, which the Bank does not own directly or indirectly, has been recognized and is shown separately in the consolidated shareholders’ equity of Banco de Chile.

Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(b) Basis of consolidation, continued:

(i) Subsidiaries

Consolidated financial statements as of December 31, 2013 and 2012 incorporate financial statements of the Bank and its subsidiaries. According IFRS 10 — “Consolidated Financial Statements”, control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. Specifically the Bank controls an investee if and only if the investor has all of the following elements:

I. power over the investee, i.e. the investor has existing rights that give it the ability to direct the relevant activities;

II. exposure, or rights, to variable returns from its involvement with the investee; and

III. the ability to use its power over the investee to affect the amount of the investor’s returns.

When the Bank has less than a majority of the voting rights of an investee, but these voting rights are enough to have the ability to direct the relevant activities unilaterally, then conclude the Bank has control. The Bank considers all factors and relevant circumstances to evaluate if their voting rights are enough to obtain the control, which it includes:

· The amount of voting rights that the Bank has, related to the amount of voting rights of the others stakeholders.

· Potential voting rights maintained by the Bank, other holders of voting rights or other parties.

· Rights emanated from other contractual arrangements.

· Any additional circumstance that indicate that the Bank have or have not the ability to manage the relevant activities when that decisions need to be taken, including behavior patterns of vote in previous shareholders meetings.

The Bank reevaluates if it has or has not the control over an investee when the circumstances indicates that exists changes in one or more elements of control listed above.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

The entities controlled by the Bank and which form parts of the consolidation are detailed as follows:

				Interest Owned
			Functional	Direct		Indirect		Total
RUT	Subsidiaries	Country	Currency	2013	2012	2013	2012	2013	2012
				%	%	%	%	%	%
44,000,213-7	Banchile Trade Services Limited	Hong Kong	US$	100.00	100.00	—	—	100.00	100.00
96,767,630-6	Banchile Administradora General de Fondos S.A.	Chile	Ch$	99.98	99.98	0.02	0.02	100.00	100.00
96,543,250-7	Banchile Asesoría Financiera S.A.	Chile	Ch$	99.96	99.96	—	—	99.96	99.96
77,191,070-K	Banchile Corredores de Seguros Ltda.	Chile	Ch$	99.83	99.83	0.17	0.17	100.00	100.00
96,894,740-0	Banchile Factoring S.A.(*)	Chile	Ch$	—	99.75	—	0.25	—	100.00
96,571,220-8	Banchile Corredores de Bolsa S.A.	Chile	Ch$	99.70	99.70	0.30	0.30	100.00	100.00
96,932,010-K	Banchile Securitizadora S.A.	Chile	Ch$	99.00	99.00	1.00	1.00	100.00	100.00
96,645,790-2	Socofin S.A.	Chile	Ch$	99.00	99.00	1.00	1.00	100.00	100.00
96,510,950-1	Promarket S.A.	Chile	Ch$	99.00	99.00	1.00	1.00	100.00	100.00

(*) See note No. 5 (j) about Relevant Events

(ii) Associates and Joint Ventures:

Associates

An associate is an entity over whose operating and financial management policy decisions the Bank has significant influence, without to have the control over the associate. Significant influence is generally presumed when the Bank holds between 20% and 50% of the voting rights. Other considered factors when determining whether the Bank has significant influence over another entity are the representation on the board of directors and the existence of material intercompany transactions. The existence of these factors could determine the existence of significant influence over an entity even though the Bank had participation less than 20% of the voting rights.

Investments in associates where exists significant influence, are accounted for using the equity method.

In accordance with the equity method, the Bank’s investments are initially recorded at cost, and subsequently increased or decreased to reflect the proportional participation of the Bank in the net income or loss of the associate and other movements recognized in its shareholders’ equity. Goodwill arising from the acquisition of an associate is included in the net book value, net of any accumulated impairment loss.

Joint Ventures

Joint Ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

According IFRS 11, an entity shall be determining type of joint arrangement: “Joint Operation” or “Joint Venture”.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(b) Basis of consolidation, continued:

(ii) Associates and Joint Ventures, continued:

Joint Ventures, continued

For investments defined like “Joint Operation”, their assets, liabilities, income and expenses are recognised by their participation in joint operation.

For investments defined like “Joint Venture”, they will be registered according equity method.

Investments that, for their characteristics, are defined like “Joint Ventures” are the following:

· Artikos S.A.

· Servipag Ltda.

(iii) Shares or rights in other companies

These are entities in which the Bank does not have significant influence. They are presented at acquisition value (historical cost).

(iv) Special purpose entities

According to current regulation, the Bank must be analyzing continuously its consolidation area, considering that the principal criteria are the control that the Bank has in an entity and not its percentage of equity participation.

The Bank has securitized certain credits and have been transferred to its associate Banchile Securitizadora, which created the Segregated Equity No. 17, according established by Law 18,045 and Superintendencia de Valores y Seguros. The Bank has not maintained control thereon (see details in Note No. 12(h)). As of December 31, 2013 and 2012 the Bank does not control and has not created any SPEs.

(v) Fund management

The Bank manages assets maintained in common investment funds and other investment products on behalf of investors. Different entities which conform consolidation group of Banco de Chile (Banchile Administradora General de Fondos S.A. and Banchile Securitizador S.A) and owned by third parties are not included in Consolidated Statements of Financial Position, unless the Bank has the control. As of December 31, 2013 and 2012, the Bank does not control and hence, does not consolidate any of these funds.

Fees generates by this activity are included in the item “Income from fees and commissions” of Consolidates Statements of Comprehensive Income.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

Non-controlling interest represents the share of losses, income and net assets that the Bank does not control, neither directly or indirectly. It is presented as a separate item in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position.

(d) Use of estimates and judgment

The Consolidated Financial Statements include estimates made by the Senior Management of the Bank and of the consolidated entities to quantify certain of the assets, liabilities, income, expenses and commitments that are recorded in them. Basically, these estimates are made in function of the best information available, and refer to:

1. Goodwill valuation (Note No. 15);

2. Useful lives of property and equipment and intangible assets (Note No. 15 and No. 16);

3. Current taxes and deferred taxes (Note No.17);

4. Provisions (Note No. 24);

5. Contingencies and commitments (Note No. 26);

6. Provision for loan losses (Note No.11, Note No. 12 and Note No. 32);

7. Impairment of other financial assets (Note No. 35);

8. Fair value of financial assets and liabilities (Note No. 39)

During period 2013, the Bank has made a modification to the derivatives valuation model. This consists in the incorporation of “Counterparty Value Adjustment” (CVA) in the valuation of derivatives, to reflect the counterparty risk in determining the fair value. This valuation does not consider the credit risk of the issuer “Debit Valuation Adjustment” (DVA) in accordance with it was established by the SBIF. In accordance with IAS 8 “Accounting Policies: Changes in Accounting Estimates and Errors”, this modification has been treated as a change in accounting estimate and its effect recorded in earnings. The effect of this change involved a charge of income of Ch$16,413 million.

During the year ended December 31, 2013, there have been no other significant changes, different to it indicated above.

Estimates and relevant assumptions are regularly reviewed by the Bank’s Management to quantify certain assets, liabilities, income, expenses and commitments. The accounting estimations reviewed are recognised in the period in which the estimate is evaluated.

(e) Financial asset and liability valuation criteria:

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the Statement of Financial Position and the Comprehensive Income. This involves selecting the particular basis or method of measurement.

In the Consolidated Financial Statements several measuring bases are used with different levels mixed among them. These bases or methods include the following:

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(e) Financial asset and liability valuation criteria, continued:

(i) Initial recognition

The Bank and its subsidiaries recognize loans to customers, trading and investment securities, deposits, debt issued and subordinated liabilities and other assets o liabilities on the date of negotiation. Purchases and sales of financial assets performed on a regular basis are recognized as of the trade date on which the Bank committed to purchase or sell the asset.

(ii) Classification

Assets, liabilities and income accounts have been classified in conformity with standards issued by the Superintendency of Banks.

(iii) Derecognition

The Bank and its subsidiaries derecognize a financial asset (or where applicable part of a financial asset) from its Consolidated Statement of Financial Position when the contractual rights to the cash flows of the financial asset have expired or when the contractual rights to receive the cash flows of the financial asset are transferred during a transaction in which all ownership risks and rewards of the financial asset are transferred. Any portion of transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability.

When the Bank transfers a financial asset, it assesses to what extent it has retained the risks and rewards of ownership. In this case:

(a) If substantially all risks and rewards of ownership of the financial asset have been transferred, it is derecognized, and any rights or obligations created or retained upon transfer are recognized separately as assets or liabilities.

(b) If substantially all risks and rewards of ownership of the financial asset have been retained, the Bank continues to recognize it.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(e) Financial asset and liability valuation criteria, continued:

(iii) Derecognition, continued:

(c) If substantially all risks and rewards of ownership of the financial asset are neither transferred nor retained, the Bank will determine if it has retained control of the financial asset. In this case:

(i) If it has not retained control, the financial asset will be derecognized, and any rights or obligations created or retained upon transfer will be recognized separately as assets or liabilities.

(ii) If the entity has retained control, it will continue to recognize the financial asset in the Consolidated Financial Statement by an amount equal to its exposure to changes in value that can experience and recognize a financial liability associated to the transferred financial asset.

The Bank derecognizes a financial liability (or a portion thereof) from its Consolidated Statement of Financial Position if, and only if, it has extinguished or, in other words, when the obligation specified in the corresponding contract has been paid or settled or has expired.

(iv) Offsetting

Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position if, and only if, the Bank has the legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis or to realize an asset and settle the liability simultaneously.

Income and expenses are shown net only if accounting standards allow such treatment, or in the case of gains and losses arising from a group of similar transactions such as the Bank’s trading activities.

(v) Valuation at amortized cost

Amortized cost is the amount at which a financial asset or liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization (calculated using the effective interest rate method) of any difference between that initial amount and the maturity amount and minus any reduction for impairment.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(e) Financial asset and liability valuation criteria, continued:

(vi) Fair value measurements

Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The most objective and common fair value is the price that you would pay on an active, transparent and deep market (“quoted price” or “market price”).

When available, the Bank estimates the fair value of an instrument using quoted prices in an active market for that instrument. A market is considered active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. These valuation techniques include the use of recent market transactions between knowledgeable, willing parties in an arm’s length transaction, if available, as well as references to the fair value of other instruments that are substantially the same, discounted cash flows and options pricing models.

The chosen valuation technique use the maximum observable market data, relies as little as possible on estimates performed by the Bank, incorporates factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Inputs into the valuation technique reasonably represent market expectations and include risk and return factors that are inherent in the financial instrument. Periodically, the Bank calibrates the valuation techniques and tests it for validity using prices from observable current market transaction in the same instrument or based on any available observable market data.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in income depending on the individual facts and circumstances of the transaction.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(e) Financial asset and liability valuation criteria, continued:

(vi) Fair value measurements, continued:

Generally, the Bank has assets and liabilities that offset each other’s market risks. In these cases, average market prices are used as a basis for establishing these values.

Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Bank believes that a third-party market participant would take them into account in pricing a transaction.

The available-for-sale instruments market valuation process consists in changing the rate from an average rate of sale (mid-rate) at the rate of sale of these instruments (offer-rate).

When the transaction price is different from the fair value derived from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a “Day 1” profit or loss) in “Net financial operating income”. In cases where fair value is determined using data that is not observable, the difference between the transaction price and model value is only recognized in the Consolidated Statement of Comprehensive Income when the inputs become observable, or when the document is derecognized.

The Bank’s fair value disclosures are included in Note 39.

(f) Presentation and functional currency

The items included in the financial statements of each of the entities of Banco de Chile and its subsidiaries are valued using the currency of the primary economic environment in which it operates (functional currency). The functional currency of Banco de Chile is the Chilean peso, which is also the currency used to present the entity’s consolidated financial statements, that is the currency of the primary economic environment in which the Bank operates, as well as obeying to the currency that influences in the costs and income structure.

(g) Transactions in foreign currency

Transactions in currencies other than the functional currency are considered to be in foreign currency and are initially recorded at the exchange rate of the functional currency on the transaction date. Monetary assets and liabilities denominated in foreign currencies are converted using the exchange rate of the functional currency as of the date of the Statement of Financial Position. All differences are recorded as a debit or credit to income.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(g) Transactions in foreign currency, continued:

Transactions in a currency other than the functional currency are considered in foreign currency and are initially recorded at the exchange rate of the currency at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are converted at the exchange rate of the functional currency at the date of the Statement of Financial Position. All differences are recorded as a charge or credit to income.

As of December 31, 2013, the Bank applied the exchange rate of accounting representation according to the standards issued by the Superintendency of Banks, where assets expressed in dollars are shown to their equivalent value in Chilean pesos calculated using the following exchange rate of Ch$525.72 to US$1. As of December 31, 2012, the Bank used the observed exchange rate equivalent to Ch$479.47 to US$1.

The gain of MCh$71,457 for net foreign exchange income (MCh$35,136 in 2012) shown in the Consolidated Statement of Comprehensive Income, includes recognition of the effects of exchange rate variations on assets and liabilities in foreign currency or indexed to exchange rates, and the result of foreign exchange transactions conducted by the Bank and its subsidiaries.

(h) Segment reporting:

The Bank’s operating segments are determined based on its different business units, considering the following factors:

(i) That it conducts business activities from which income is obtained and expenses are incurred (including income and expenses relating to transactions with other components of the same entity).

(ii) That its operating results are reviewed regularly by the entity’s highest decision-making authority for operating decisions, to decide about resource allocation for the segment and evaluate its performance; and

(iii) That separate financial information is available.

(i) Cash and cash equivalents:

The Consolidated Statement of Cash Flows shows the changes in cash and cash equivalents derived from operating activities, investment activities and financing activities during the year. The indirect method has been used in the preparation of this statement.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(i) Cash and cash equivalents, continued:

For the preparation of Consolidated Financial Statements of Cash Flow it is considered the following concepts:

(i) Cash and cash equivalents correspond to “Cash and Bank Deposits”, plus (minus) the net balance of transactions in the course of collection that are shown in the Consolidated Statement of Financial Position, plus instruments held-for-trading and available-for-sale that are highly liquid and have an insignificant risk of change in value, maturing in less than three months from the date of acquisition, plus repurchase agreements that are in that situation. Also includes investments in fixed income mutual funds that are presented under “Trading Instruments” in the Consolidated Statement of Financial Position.

(ii) Operating activities: corresponds to normal activities of the Bank, as well as other activities that cannot classify like investing or financing activities.

(iii) Investing activities: correspond to the acquisition, sale or disposition other forms, of long-term assets and other investments that not include in cash and cash equivalent.

(iv) Financing activities: corresponds to the activities that produce changes in the amount and composition of the equity and the liabilities that are not included in the operating or investing activities.

(j) Financial assets held-for-trading:

Financial assets held-for-trading consist of securities acquired with the intention of generating profits as a result of short-term prices fluctuation or as a result of brokerage activities, or are part of a portfolio on which a short-term profit-generating pattern exists.

Financial assets held-for-trading are stated at their fair market value as of the Consolidated Statement of Financial Position date. Gains or losses from their fair market value adjustments, as well as gains or losses from trading activities, are included in “Gains (losses) from trading and brokerage activities” in the Consolidated Statement of Comprehensive Income. Accrued interest and revaluations are reported as “Gains (losses) from trading and brokerage activities”.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(k) Repurchase agreements and security lending and borrowing transactions:

The Bank engages in transactions with repurchase agreements as a form of investment. The securities purchased under these agreements are recognized on the Bank’s Consolidated Statement of Financial Position under “Receivables from Repurchase Agreements and Security Lending”, which is valued in accordance with the agreed-upon interest rate, through of method of amortised cost.

The Bank also enters into security repurchase agreements as a form of financing. Investments that are sold subject to a repurchase obligation and serve as collateral for borrowings are reclassified as “Financial Assets held-for-trading” or “Available-for-sale Instruments”. The liability to repurchase the investment is classified as “Payables from Repurchase Agreements and Security Lending”, which is valued in accordance with the agreed-upon interest rate.

As of December 31, 2013 and 2012 it not exist operations corresponding to securities lending.

(l) Derivative instruments:

The Bank maintains contracts of Derivative financial instruments, for cover the exposition of risk of foreign currency and interest rate. These contracts are recorded in the Consolidated Statement of Financial Position at their cost (included transactions costs) and subsequently measured at fair value. Derivative instruments are reported as an asset when their fair value is positive and as a liability when negative under the item “Derivative Instruments”.

Changes in fair value of derivative contracts held for trading purpose are included under “Profit (loss) net of financial operations”, in the Consolidated Statement of Comprehensive Income.

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 income.

At the moment of subscription of a derivative contract must be designated by the Bank as a derivative instrument for trading or hedging purposes.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(l) Derivative instruments, continued:

If a derivative instrument is classified as a hedging instrument, it can be:

(1) A hedge of the fair value of existing assets or liabilities or firm commitments, or

(2) A hedge of cash flows related to existing assets or liabilities or forecasted transactions.

A hedge relationship for hedge accounting purposes must comply with all of the following conditions:

(a) at its inception, the hedge relationship has been formally documented;

(b) it is expected that the hedge will be highly effective;

(d) the hedge is highly effective with respect to the hedged risk on an ongoing basis and throughout the entire hedge relationship.

The Bank presents and measures individual hedges (where there is a specific identification of hedged item and hedged instruments) by classification, according to the following criteria:

Fair value hedges: changes in the fair value of a hedged instruments derivative, designed like “fair value hedges”, are recognised in income. Hedged item also is presented to fair value, related to the risk to be hedge. Gains or losses from fair value adjustments, both the hedged item and the derivative instrument, are recognized in income.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(l) Derivative instruments, continued:

Cash flow hedge: changes in the fair value of financial instruments derivative designated like “cash flow hedge” are recognised in “Other Comprehensive Income”, to the extent that hedge is effective and hedge is reclassified to income when hedged item affects such income. If the hedge is not effective, changes in fair value are recognised directly in income.

If the hedged instruments does not comply with criteria of hedge accounting of cash flow, it expires or is sold, it suspend or executed, this hedge must be discontinued prospectively. Accumulated gains or losses recognised previously in the equity are maintained there until projected transactions occur, in that moment will be registered in Consolidated Statement of Income, lesser than it foresees that the transaction will not execute, in this case it will be registered immediately in Consolidated Statement of Income.

(m) Loans to customers:

Loans to customers include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and which the Bank does not intend to sell immediately or in the short-term.

(i) Valuation method

Loans are initially measured at cost plus incremental transaction costs, and subsequently measured at amortized cost using the effective interest rate method, except when the Bank defined some loans as hedged items, which are measured at fair value, changes are recorded in the Consolidated Statement of Income, as described in letter (l) of this note.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(ii) Lease contracts:

Accounts receivable for leasing contracts, included under the caption “Loans to customers” are recorded MCh$1,209,747 as of December 31, 2013 (MCh$1,113,272 in 2012), correspond to periodic rent installments of contracts which meet the definition to be classified as financial leases and are presented at their nominal value net of unearned interest as of each year-end.

(iii) Factoring transactions:

The Bank carry out factoring transactions, where they receive invoices and other commercial instruments representative of credit, with or without recourse, and they advance to the assignor a percentage of the total amounts to be collected from the original debtor.

As of December 31, 2013, the item “Loans to customers” includes MCh$524,059 (MCh$606,137 in 2012), corresponding to the amount advanced to the assignor, plus accrued interest net of payments received.

In those cases where the transfer of these instruments it was made without responsibility of the grantor, the Bank assumes the default risk.

(iv) Impairment of loans

The impaired portfolio includes loans of debtors for which there is evidence that they will not fulfill some of their obligations on the agreed upon payment conditions without the possibility of recovering what is owed, having to recur to the guarantees, through exercising judicial payment actions or agreeing upon other conditions.

The following are certain situations that constitute evidence that the debtors will not fulfill their obligations with the Bank in accordance with what has been agreed upon, and that their loans are impaired:

· Financial difficulties evident of the debtor or significant worsening of their credit quality.

· Notorious indicators that the debtor will go into bankruptcy or into a forced restructuring of debts or that effectively bankruptcy or a similar measure has been filed in relation to their payment obligations, including delaying or non-payment of obligations.

· Forced restructuring of a loan due to economic or legal factors related to the debtor, whether by decreasing the payment obligation or delaying the principal, interest or commissions.

· The obligations of the debtor are negotiated with a significant loss due to the vulnerability of the debtor’s payment capacity.

· Adverse changes produced in the technological, market, economic or legal area in which the debtor operates, which potentially compromise the debtor’s payment capacity.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(iv) Impairment of loans, continued

In any case, when dealing with debtors subject to individual assessment, are considered in impaired portfolio all credits of debtors classified in some the “Non-complying Loans “ categories, as well as in categories B3 and B4 of “Substandard Portfolio.” Also, being subject to assessment debtors group, the impaired portfolio includes all credits of the Non-complying loans.

The Bank incorporates the loans to impaired portfolio and keeps them in that portfolio, until it is not observed a normalization of the capacity or conduct of payment.

(v) Allowance for loan losses

Allowances are required to cover the risk of loan losses have been established in accordance with the instructions issued by the Superitendency of Banks. The loans are presented net of those allowances and, in the case of loans and in the case of contingent loans, they are shown in liabilities under “Provisions”.

In accordance with what is stipulated by the Superintendency of Banks, models or methods are used based on an individual and group analysis of debtors, to establish allowance for loan losses.

(v.i) Allowance for individual evaluations

An individual analysis of debtors is applied to individuals and companies that are of such significance with respect to size, complexity or level of exposure to the bank, that they must be analyzed in detail.

Likewise, the analysis of borrowers should focus on its ability to payment, to have sufficient and reliable information, and to analyze in regard to guarantees, terms, interest rates, currency and revaluation, etc.

For purposes of establish the allowances and before the assignment to one of three categories of loans portfolio: Normal, Substandard and Non-complying Loans, it must classify the debtors and their operations related to loans and contingent loans in the categories that apply.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(v) Allowance for loan losses, continued:

(vi) Allowance for individual evaluations, continued:

vi.1 Normal Loans and Substandard Loans:

Normal loans correspond to borrowers who are up to date on their payment obligations and show no sign of deterioration in their credit quality. Loans classified in categories A1 through A6.

Substandard loans includes all borrowers with insufficient payment capacity or significant deterioration of payment capacity that may be reasonably expected not to comply with all principal and interest payments obligations set forth in the credit agreement.

This category also includes all loans that have been non-performing for more than 30 days. Loans classified in this category are B1 through B4.

As a result of individual analysis of the debtors, the banks must classify them in the following categories, assigning, subsequently, the percentage of probability of default and loss given default resulting in the corresponding percentage of expected loss:

Classification	Category	Probability of default (%)	Loss given default (%)	Expected loss (%)
	A1	0.04	90.0	0.03600
	A2	0.10	82.5	0.08250
Normal Loans	A3	0.25	87.5	0.21875
	A4	2.00	87.5	1.75000
	A5	4.75	90.0	4.27500
	A6	10.00	90.0	9.00000
	B1	15.00	92.5	13.87500
Substandard Loans	B2	22.00	92.5	20.35000
	B3	33.00	97.5	32.17500
	B4	45.00	97.5	43.87500

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(v) Allowance for loan losses, continued:

(vi) Allowance for individual evaluations, continued:

vi.1 Normal Loans and Substandard Loans, continued:

Allowances for Normal and Substandard Loans

To determine the amount of allowances to be constitute for normal and substandard portfolio, previously should be estimated the exposure to subject to the allowances, which will be applied to respective expected loss (expressed in decimals), which consist of probability of default (PD) and loss given default (LGD) established for the category in which the debtor and/or guarantor belong, as appropriate.

The exposure affects to allowances applicable to loans plus contingent loans minus the amounts to be recovered by way of the foreclosure of guarantees. Loans means the book value of credit of the respective debtor, while for contingent loans, the value resulting from to apply the indicated in No.3 of Chapter B-3 of Compilation of Standards of the Chilean Superintendency of Banks (RAN).

The banks must use the following equation:

Provision = (ESA-GE) x (PD debtor /100)x(LGD debtor/100)+GE x(PD guarantor/100)x(LGD guarantor /100)

Where:

ESA	=	Exposure subject to allowances
GE	=	Guaranteed exposure
EAP	=	(Loans + Contingent Loans) — Financial Guarantees

However, independent of the results obtained from the equation above, the bank must be assigned a minimum provision level of 0.5% of the Normal Loans (including contingent loans).

vi.2 Non-complying Loans

The non-complying loans corresponds to borrowers and its credits whose payment capacity is seriously at risk and who have a high likelihood of filing for bankruptcy or are renegotiating credit terms to avoid bankruptcy. This category comprises all loans and contingent loans outstanding from debtors that have at least one installment payment of interest or principal overdue for 90 days or more. This group is composed of debtors belonging to categories C1 through C6 of the classification level and all loans, inclusive contingent loans, which maintain the same debtors.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(v) Allowance for loan losses, continued:

(vi) Allowance for individual evaluations, continued:

vi.2 Non-complying Loans, continued:

For purposes to establish the allowances on the non-complying loans, the Bank dispose the use of percentage of allowances to be applied on the amount of exposure, which corresponds to the amount of loans and contingent loans that maintain the same debtor. To apply that percentage, must be estimated a expected loss rate, less the amount of the exposure the recoveries by way of foreclosure of guarantees and, if there are available specific background, also must be deducting present value of recoveries obtainable exerting collection actions, net of expenses associated with them. This loss percentage must be categorized in one of the six levels defined by the range of expected actual losses by the Bank for all transactions of the same debtor.

These categories, their range of loss as estimated by the Bank and the percentages of allowance that definitive must be applied on the amount of exposures, are listed in the following table:

Type of Loan	Classification	Expected loss	Allowance (%)
	C1	Up to 3%	2
	C2	More than 3% up to 20%	10
Non-complying loans	C3	More than 20% up to 30%	25
	C4	More than 30% up to 50%	40
	C5	More than 50% up to 80%	65
	C6	More than 80%	90

For these loans, the expected loss must be calculated in the following manner:

Expected loss	=	(TE – R) / TE
Allowance	=	TE x (AP/100)

Where:

TE	=	total exposure
R	=	recoverable amount based on estimates of collateral value and collection efforts
AP	=	allowance percentage (based on the category in which the expected loss should be classified).

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(v) Allowance for loan losses, continued:

(vii) Allowances for group evaluations

Group evaluations are relevant to address a large number of operations whose individual amounts are low or small companies. Such assessments, and the criteria for application, must be consistent with the transaction of give the credit.

Group evaluations requires the formation of groups of loans with similar characteristics in terms of type of debtors and conditions agreed, to establish technically based estimates by prudential criteria and following both the payment behavior of the group that concerned as recoveries of defaulted loans and consequently provide the necessary provisions to cover the risk of the portfolio.

Banks may use two alternative methods for determining provisions for retail loans that are evaluated as a group.

Under first method, it will be used the experience to explain the payment behavior of each homogeneous group of debtors and recoveries through collateral and of collection process, when it correspond, with objective of to estimate directly a percentage of expected losses that will be apply to the amount of the loans of respective group.

Under second method, the banks will segment to debtors in homogeneous groups, according described above, associating to each group a determined probability of default and a percentage of recovery based in a historic analysis. The amount of provisions to register it will be obtained multiplied the total loans of respective group by the percentages of estimated default and of loss given the default.

In both methods, estimated loss must be related with type of portfolio and terms of operations.

The Bank to determine its provisions has opted for using second method.

In the case of consumer loans are not considered collateral for purposes of estimating the expected loss.

Allowances are establish according with the results of the application of the methods used by the Bank, distinguishing between allowances over normal portfolio and over the non-complying loans, and those that protect the contingent credit risks associated with these portfolios.

The non-complying loans includes loans and contingent credits linked to debtors that have delay more than 90 days in the payment of interest or principal, including all their credits, even 100% of the amount of contingent credit, related to the same debtor has it .

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(viii) Charge-offs

Generally, the charge-offs are produced when the contractual rights on cash flows end. In case of loans, even if the above does not happen, it will proceed to charge-offs the respective asset balances.

The charge-off refers to derecognition of the assets in the Statement of Financial Position, related to the respective transaction and, therefore, the part that could not be past-due if a loan is payable in installments, or a lease.

The charge-off must be to make using credit risk provisions constituted, whatever the cause for which the charge-off was produced.

(viii.i) Charge-offs of loans to customers

Charge-off loans to customers, other than leasing operations, shall be made in accordance to the following circumstances occurs:

a) The Bank, based on all available information, concludes that will not obtain any cash flow of the credit recorded as an asset.

b) When the debt (without “executive title”, a collectability category pursuant to local law) meets 90 days since it was recorded as an asset.

a) At the time the term set by the statute of limitations runs out and as result legal actions are precluded in order to request payment through executive trial or upon rejection or abandonment of title execution issued by judicial and non-recourse resolution.

b) When past-due term of a transaction complies with the following:

Type of Loan		Term
Consumer loans - secured and unsecured		6 months
Other transactions - unsecured		24 months
Commercial loans - secured		36 months
Residential mortgage loans		48 months

The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued

2. Summary of Significant Accounting Principles, continued:

(m) Loans to customers, continued:

(viii) Charge-offs, continued

(viii.ii) Charge-offs of lease operations

Assets for leasing operations must be charge-offs against the following circumstances, whichever occurs first:

a) The bank concludes that there is no possibility of the rent recoveries and the value of the property cannot be considered for purposes of recovery of the contract, either because the lessee have not the asset, for the property’s conditions, for expenses that involve its recovery, transfer and maintenance, due to technological obsolescence or absence of a history of your location and current situation.

b) When it complies the prescription term of actions to demand the payment through executory or upon rejection or abandonment of executory by court.

c) When past-due term of a transaction complies with the following:

Type of Loan		Term
Consumer leases		6 months
Other non-real estate lease transactions		12 months
Real estate leases (commercial or residential)		36 months

The term represents the time elapsed since the date on which payment of all or part of the obligation in default became due.

(vii) Loan loss recoveries

Cash recoveries on charge-off loans including loans that were reacquired from the Central Bank of Chile are recorded directly in income in the Consolidated Statement of Comprehensive Income, as a reduction of the “Provisions for Loan Losses” item.

In the event that there are recovery in assets, is recognized in income the revenues for the amount they are incorporated in the asset. The same criteria will be followed if the leased assets are recovered after the charge-off of a lease operation, to incorporate those to the asset.

(viii) Renegotiations of charge-off transactions

Any renegotiation of a charge-off loan it not recognize in income, while the operation continues to have deteriorated quality. Payments must be recognized as loan recoveries.

Therefore, renegotiated credit can be recorded as an asset only if it has not deteriorated quality; also recognizing revenue from activation must be recorded like recovery of loans.

The same criteria should apply in the case that was give credit to pay a charge-off loan.

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