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 October, 2019

 

Commission File Number 001-15266

 

BANK OF CHILE
(Translation of registrant’s name into English)

 

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 þ        Form 40-F ☐

 

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

 

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): ____

 

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

 

Yes ☐        No þ

 

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 as of September 30, 2019.

 

 

 

 

 

 

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

 

(Free translation of consolidated financial statements originally issued in Spanish)

 

INDEX

 

I. Interim Consolidated Statements of Financial Position
II. Interim Consolidated Statements of Income
III. Interim Consolidated Statements of Other Comprehensive Income
IV. Interim Consolidated Statements of Changes in Equity
V. Interim Consolidated Statements of Cash Flows
VI. Notes to the Interim Consolidated Financial Statements

 

MCh$ = Millions of Chilean pesos
ThUS$ = Thousands of U.S. dollars
UF or CLF = Unidad de Fomento
    (The UF is an inflation-indexed, Chilean peso denominated monetary unit set daily in advance on the basis of the previous month’s inflation rate).
Ch$ or CLP = Chilean pesos
US$ or USD = U.S. dollar
JPY = Japanese yen
EUR = Euro
HKD = Hong Kong dollar
CHF = Swiss Franc
PEN = Peruvian sol
AUD = Australian dollar
     
IFRS = International Financial Reporting Standards
IAS = International Accounting Standards
RAN = Compilation of Standards of the CMF
IFRIC = International Financial Reporting Interpretations Committee
SIC = Standards Interpretation Committee

 

 

 

 

BANCO DE CHILE AND SUBSIDIARIES

 

INDEX

 

  Page
   
Interim Consolidated Statement of Financial Position 1
Interim Consolidated Statements of Income 2
Interim Consolidated Statements of Other Comprehensive Income 3
Interim Consolidated Statement of Changes in Equity 4
Interim Consolidated Statements of Cash Flows 5
1. Company information: 6
2. Legal regulations, basis of preparation and Other information: 7
3. New Accounting Pronouncements: 10
4. Changes in Accounting policies and Disclosures: 16
5. Relevant Events: 17
6. Business Segments: 19
7. Cash and Cash Equivalents: 22
8. Financial Assets Held-for-trading: 23
9. Cash collateral on securities borrowed and reverse repurchase agreements: 24
10. Derivative Instruments and Accounting Hedges: 26
11. Loans and advances to Banks: 32
12. Loans to Customers, net: 33
13. Investment Securities: 39
14. Investments in Other Companies: 41
15. Intangible Assets: 43
16. Fixed assets, leased assets and lease liabilities: 45
17. Current Taxes and Deferred Taxes: 49
18. Other Assets: 53
19. Current accounts and Other Demand Deposits: 54
20. Savings accounts and Time Deposits: 54
21. Borrowings from Financial Institutions: 55
22. Debt Issued: 56
23. Other Financial Obligations: 60
24. Provisions: 60
25. Other Liabilities: 64
26. Contingencies and Commitments: 65
27. Equity: 70
28. Interest Revenue and Expenses: 73
29. Income and Expenses from Fees and Commissions: 75
30. Net Financial Operating Income: 76
31. Foreign Exchange Transactions, Net: 76
32. Provisions for Loan Losses: 77
33. Personnel Expenses: 78
34. Administrative Expenses: 79
35. Depreciation, Amortization and Impairment: 80
36. Other Operating Income: 81
37. Other Operating Expenses: 82
38. Related Party Transactions: 83
39. Fair Value of Financial Assets and Liabilities: 87
40. Maturity of Assets and Liabilities: 100
41. Subsequent Events: 102

 

i

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

For the periods ended September 30, 2019 and December 31, 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

      September   December 
      2019   2018 
   Notes  MCh$   MCh$ 
ASSETS           
Cash and due from banks  7   1,650,317    880,081 
Transactions in the course of collection  7   631,110    580,333 
Financial assets held-for-trading  8   1,783,121    1,745,366 
Cash collateral on securities borrowed and reverse repurchase agreements  9   86,864    97,289 
Derivative instruments  10   2,544,156    1,513,947 
Loans and advances to banks  11   984,651    1,494,307 
Loans to customers, net  12   28,907,977    27,307,223 
Financial assets available-for-sale  13   1,332,299    1,043,440 
Financial assets held-to-maturity  13        
Investments in other companies  14   49,169    44,561 
Intangible assets  15   54,769    52,061 
Property and equipment  16   220,018    215,872 
Leased assets  16   153,758     
Current tax assets  17   802    677 
Deferred tax assets  17   316,035    277,922 
Other assets  18   732,302    673,380 
TOTAL ASSETS      39,447,348    35,926,459 
              
LIABILITIES             
Current accounts and other demand deposits  19   10,039,396    9,584,488 
Transactions in the course of payment  7   449,454    335,575 
Cash collateral on securities lent and repurchase agreements  9   194,372    303,820 
Savings accounts and time deposits  20   10,726,131    10,656,174 
Derivative instruments  10   2,655,431    1,528,357 
Borrowings from financial institutions  21   1,651,038    1,516,759 
Debt issued  22   8,803,492    7,475,552 
Other financial obligations  23   154,259    118,014 
Lease liabilities  16   149,409     
Current tax liabilities  17   52,228    20,924 
Deferred tax liabilities  17        
Provisions  24   599,755    670,119 
Other liabilities  25   548,426    412,524 
TOTAL LIABILITIES      36,023,391    32,622,306 
            
EQUITY  27          
Attributable to Bank’s Owners:             
Capital      2,418,833    2,418,833 
Reserves      703,190    617,597 
Other comprehensive income      (84,148)   (39,222)
Retained earnings:             
Retained earnings from previous years      170,171    17,481 
Income for the period      445,863    594,872 
Less:             
Provision for minimum dividends      (229,953)   (305,409)
Subtotal      3,423,956    3,304,152 
Non-controlling interests      1    1 
TOTAL EQUITY      3,423,957    3,304,153 
TOTAL LIABILITIES AND EQUITY      39,447,348    35,926,459 

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

 

1

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

For the nine-month ended September 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

      September   September 
      2019   2018 
   Notes  MCh$   MCh$ 
            
Interest revenue  28   1,541,402    1,474,192 
Interest expense  28   (537,309)   (493,750)
Net interest income      1,004,093    980,442 
              
Income from fees and commissions  29   434,915    376,598 
Expenses from fees and commissions  29   (96,669)   (105,578)
Net fees and commission income      338,246    271,020 
              
Net financial operating income  30   91,479    56,578 
Foreign exchange transactions, net  31   18,562    27,031 
Other operating income  36   32,445    31,996 
Total operating revenues      1,484,825    1,367,067 
              
Provisions for loan losses  32   (245,807)   (220,057)
              
OPERATING REVENUES, NET OF PROVISIONS FOR LOAN LOSSES      1,239,018    1,147,010 
              
Personnel expenses  33   (344,136)   (326,009)
Administrative expenses  34   (248,231)   (242,401)
Depreciation and amortization  35   (51,884)   (27,903)
Impairment  35   (1,023)   (18)
Other operating expenses  37   (29,029)   (31,136)
              
TOTAL OPERATING EXPENSES      (674,303)   (627,467)
              
NET OPERATING INCOME      564,715    519,543 
              
Income attributable to associates  14   5,494    6,956 
Income before income tax      570,209    526,499 
              
Income tax  17   (124,346)   (93,148)
              
NET INCOME FOR THE PERIOD      445,863    433,351 
              
Attributable to:             
Bank’s Owners  27   445,863    433,350 
Non-controlling interests          1 
              
Net income per share attributable to Bank’s Owners:      Ch$    Ch$ 
Basic net income per share  27   4.41    4.29 
Diluted net income per share  27   4.41    4.29 

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

 

2

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF

OTHER COMPREHENSIVE INCOME

For the nine-month ended September 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

      September   September 
      2019   2018 
   Notes  MCh$   MCh$ 
            
NET INCOME FOR THE PERIOD      445,863    433,351 
              
OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS             
              
Net gains (losses) on available-for-sale instruments valuation  13   20,867    (6,359)
Net gains (losses) on derivatives held as cash flow hedges  10   (82,385)   (40,905)
Subtotal Other comprehensive income before income taxes      (61,518)   (47,264)
              
Income tax relating to the components of other comprehensive income that are reclassified in income for the period      16,592    12,759 
              
Total other comprehensive income items that will be reclassified subsequently to profit or loss      (44,926)   (34,505)
              
OTHER COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS             
              
Adjustment for defined benefit plans  24   (360)    
              
Subtotal other comprehensive income before income taxes      (360)    
              
Income tax relating to the components of other comprehensive income that will not be reclassified to income for the period  17   97     
              
Total other comprehensive income items that will not be reclassified subsequently to profit or loss      (263)    
              
CONSOLIDATED COMPREHENSIVE INCOME FOR THE PERIOD      400,674    398,846 
              
Attributable to:             
Bank’s Owners      400,674    398,845 
Non-controlling interests          1 
              

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

 

3

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the nine-month ended September 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in millions of Chilean pesos)

 

           Reserves   Other comprehensive income   Retained earnings     
       Paid-in Capital   Other reserves   Reserves from earnings   Unrealized gains (losses) on available-for-sale   Derivatives cash flow hedge   Income   Retained earnings from previous periods    Income (losses) for the period   Provision for minimum dividends   Attributable to equity holders of the parent   Non-controlling interest   Total equity 
   Notes   MCh$   MCh$   MCh$   MCh$   MCh$   Tax   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                     
Balances as of December 31, 2017       2,271,401    32,053    531,135    1,851    (12,551)   2,660    16,060    576,012    (312,907)   3,105,714    1    3,105,715 
Capitalization of retained earnings       147,432                            (147,432)                
Retention (release) of profits according to bylaws  27            54,501                    (54,501)                
Dividends distributions and paid  27                                (374,079)   312,907    (61,172)   (1)   (61,173)
Other comprehensive income:                                                                
Derivatives cash flow hedge, net  27                    (40,905)   11,044                (29,861)       (29,861)
Valuation adjustment on available-for-sale instruments (net)  27                (6,359)       1,715                (4,644)       (4,644)
Equity effect change in accounting policy                               1,421            1,421        1,421 
Income for the period 2018  27                                433,350        433,350    1    433,351 
Provision for minimum dividends                                       (221,286)   (221,286)       (221,286)
Balances as of September 30, 2018       2,418,833    32,053    585,636    (4,508)   (53,456)   15,419    17,481    433,350    (221,286)   3,223,522    1    3,223,523 
Defined benefit plans adjustment, net           (92)                               (92)       (92)
Other comprehensive income:                                                                
Derivatives cash flow hedge, net                       9,962    (2,690)               7,272        7,272 
Valuation adjustment on available-for-sale instruments                   (5,428)       1,479                (3,949)       (3,949)
Income for the period 2018                                   161,522        161,522        161,522 
Provision for minimum dividends                                       (84,123)   (84,123)       (84,123)
Balances as of December 31, 2018       2,418,833    31,961    585,636    (9,936)   (43,494)   14,208    17,481    594,872    (305,409)   3,304,152    1    3,304,153 
Retention of profits                               152,705    (152,705)                
Retention (release) of profits according to bylaws  27            85,856                    (85,856)                
Dividends distributions and paid  27                                (356,311)   305,409    (50,902)       (50,902)
Defined benefit plans adjustment, net           (263)                               (263)       (263)
Other comprehensive income:                                                                
Derivatives cash flow hedge, net  27                    (82,385)   22,244                (60,141)       (60,141)
Valuation adjustment on available-for-sale instruments  27                20,867        (5,652)               15,215        15,215 
Equity effect change in accounting policy                               (15)           (15)       (15)
Income for the period 2019  27                                445,863        445,863        445,863 
Provision for minimum dividends  27                                    (229,953)   (229,953)       (229,953)
Balances as of September 30, 2019       2,418,833    31,698    671,492    10,931    (125,879)   30,800    170,171    445,863    (229,953)   3,423,956    1    3,423,957 

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

 

4

 

 

BANCO DE CHILE AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine-month ended September 30, 2019 and 2018

(Free translation of interim consolidated financial statements originally issued in Spanish)

(Expressed in million of Chilean pesos)

 

      September   September 
      2019   2018 
   Notes  MCh$   MCh$ 
CASH FLOWS FROM OPERATING ACTIVITIES:           
Net income for the period      445,863    433,351 
Charges (credits) to income that do not represent cash flows:             
Depreciation and amortization  35   51,884    27,903 
Impairment  35   1,023    18 
Provision for loans and accounts receivable from customers and owed by banks  32   281,028    264,007 
Provision of contingent loans  32   1,717    (3,288)
Fair value adjustment of financial assets held-for-trading      (2,021)   (804)
Changes in assets and liabilities by deferred taxes  17   (43,668)   1,005 
(Gain) loss attributable to investments in companies with significant influence, net  14   (5,128)   (6,564)
(Gain) loss from sales of assets received in lieu of payment,net  36   (8,054)   (4,774)
(Gain) loss on sales of property and equipment, net  36 – 37   (71)   (3,595)
Charge-offs of assets received in lieu of payment  37   6,734    3,649 
Other charges (credits) to income that do not represent cash flows      9,709    (1,308)
Change in the exchange rate of assets and liabilities      (45,525)   (88,733)
Net interest variation, readjustment and accrued fees on assets and liabilities      119,081    99,754 
              
Changes in assets and liabilities that affect operating cash flows:             
(Increase) decrease in loans and advances to banks, net      509,473    (588,779)
(Increase) decrease in loans to customers      (1,845,877)   (1,769,396)
(Increase) decrease in financial assets held-for-trading, net      335,528    (80,961)
(Increase) decrease in other assets and liabilities      142,012    (44,107)
Increase (decrease) in current account and other demand deposits      454,479    114,880 
Increase (decrease) in payables from repurchase agreements and security lending      (111,052)   252,264 
Increase (decrease) in savings accounts and time deposits      51,338    923,296 
Sale of assets received in lieu of payment or adjudicated      23,222    19,718 
Total cash flows from operating activities      371,695    (452,464)
              
CASH FLOWS FROM INVESTING ACTIVITIES:             
(Increase) decrease in financial assets available-for-sale, net      (270,284)   162,800 
Payments for lease agreements  16   (21,804)    
Purchases of property and equipment  16   (30,213)   (21,256)
Sales of property and equipment      73    3,600 
Acquisition of intangible assets  15   (12,346)   (17,077)
Acquisition of investments in companies  14       (30)
Dividends received from investments in companies      919    803 
Total cash flows from investing activities      (333,655)   128,840 
              
CASH FLOWS FROM FINANCING ACTIVITIES:             
Redemption of letters of credit      (2,480)   (3,349)
Issuance of bonds  22   2,082,571    1,543,241 
Redemption of bonds      (908,198)   (977,193)
Dividends paid  27   (356,311)   (374,079)
Increase (decrease) in borrowings from foreign financial institutions      132,838    20,270 
Increase (decrease) in other financial obligations      37,917    (15,085)
Increase (decrease) in other obligations with Central Bank of Chile          (1)
Other long-term borrowings          15 
Payment of other long-term borrowings      (1,376)   (1,912)
Total cash flows from financing activities      984,961    191,907 
              
TOTAL NET POSITIVE (NEGATIVE) CASH FLOWS FOR THE PERIOD      1,023,001    (131,717)
              
Effect of exchange rate changes      45,525    88,733 
              
Cash and cash equivalents at beginning of period      2,256,375    2,079,398 
              
Cash and cash equivalents at end of period  7   3,324,901    2,036,414 

 

   September   September 
   2019   2018 
   MCh$   MCh$ 
Operational Cash flow interest:        
Interest received   1,484,238    1,389,278 
Interest paid   (361,064)   (309,082)

 

The accompanying notes 1 to 41 are an integral part of these interim consolidated financial statements

5

 

 

BANCO DE CHILE AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

1.Company information:

 

Banco de Chile is authorized to operate as a commercial bank since September 17, 1996, being, in conformity with the stipulations of article 25 of Law No. 19,396, the legal continuation of Banco de Chile resulting from the merger of the Banco Nacional de Chile, Banco Agrícola and Banco de Valparaiso, which was constituted by public deed dated October 28, 1893, granted before the Notary Public of Santiago, Mr. Eduardo Reyes Lavalle, authorized by Supreme Decree of November 28, 1893.

 

Banco de Chile (or the “Bank”) is a Corporation organized under the laws of the Republic of Chile, regulated by the Chilean Commission for the Financial Market (“CMF”), in accordance with the established in the Law 21,130 dated January 12, 2019, which ordered the integration of the Superintendency of Banks and Financial Institutions (“SBIF”) with the Commission for the Financial Market as of June 1, 2019. Since 2001, it is subject to the supervision of the Securities and Exchange Commission of the United States of America (“SEC”), in consideration of the fact that the Bank is registered on the New York Stock Exchange (“NYSE”), through a program of American Depositary Receipt (“ADR”).

 

Banco de Chile offers a broad range of banking services to its customers, ranging from individuals to large corporations. Additionally, the Bank offers international as well as treasury banking services, in addition to those offered by subsidiaries that include securities brokerage, mutual fund and investment management, insurance brokerage, financial advisory services and securitization.

 

Banco de Chile’s legal address is Ahumada 251, Santiago, Chile and its website is www.bancochile.cl.

 

The Interim Consolidated Financial Statements of Banco de Chile, for the period ended September 30, 2019 were approved by the Directors on October 24, 2019.

 

6

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

2.Legal regulations, basis of preparation and Other information:

 

(a)Legal regulations:

 

The Law 21,000 that creates the CMF, in its article 5, empowers it to issue accounting standards of general application for entities it supervises. The Corporations Law, in turn, requires following the generally accepted accounting principles.

 

Based on the aforementioned laws, banks should use the criteria provided by the Compendium of Accounting Standards (“Compendium”), 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 CMF, the latter shall prevail.

 

(b)Basis of preparation:

 

(b.1)These Interim Consolidated Financial Statements are presented according to Chapter C-2 of the Compendium of Accounting Standards, issued by the CMF.

 

(b.2)The following table details the entities in which the Bank has control and are part of this consolidated financial statements:

 

            Interest Owned 
            Direct   Indirect   Total 
            September   December   September   December   September   December 
         Functional  2019   2018   2019   2018   2019   2018 
RUT  Subsidiaries  Country  Currency  %   %   %   %   %   % 
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 
96,571,220-8  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$   99.01    99.01    0.99    0.99    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 

 

7

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

2.Legal regulations, basis of preparation and Other information, continued:

 

(c)Use of estimates and judgments:

 

Preparing the Interim Consolidated Financial Statements requires the Bank’s Management to make judgments, estimations and assumptions that affect the application of accounting policies and the valuation of assets, liabilities, income and expenses presented. Actual results could differ from these estimated amounts. These estimates refer to:

 

1.Provision for loan losses (Notes No. 11. No. 12 and No. 32);
2.Useful life of intangible and property and equipment (Notes No.15 and No.16);
3.Income taxes and deferred taxes (Note No. 17);
4.Provisions (Note No. 24);
5.Contingencies and Commitments (Note No. 26);
6.Fair value of financial assets and liabilities (Note No. 39).

 

Estimates and relevant assumptions are regularly reviewed by the management of the Bank, according to quantify certain assets, liabilities, gains, loss and commitments. Estimates reviewed are registered in income in the period that the estimate is reviewed.

 

As of September 30, there have been no significant changes in the estimates made.

 

(d)Seasonality or Cyclical Character of the Transactions of the Intermediate Period:

 

Given the activities to which the Bank and its subsidiaries are engaged, the transactions of the Bank do not have a cyclical or seasonal nature. For this reason, specific breakdowns in these notes to the Interim Consolidated Financial Statements for the nine-month period ended September 30, 2019 are not included.

 

(e)Relative Importance:

 

In determining the information to be disclosed on the different items of the financial statements or other matters, the relative importance in relation to the Financial Statements of the period has been taken into account.

 

(f)Leases:

 

The Bank acts as a lessor

 

Assets that are leased to clients under contracts that substantially transfer all risks and property recognition, with or without legal title, are classified as a financial lease. When the assets are subject to a financial leasing, the leased assets are no longer recognized as a fixed asset and are recorded in an account receivable, which is equal to the minimum value of the lease payment, discounted at the interest rate of the lease. The initial negotiation expenses in a financial lease are incorporated into the account receivable through the discount rate applied to the lease. Lease income is recognized on lease terms based on a model that consistently reflects a periodic rate of return on the net investment of the lease.

 

8

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

2.Legal regulations, basis of preparation and Other information, continued:

 

(f)Leases, continued:

 

Assets that are leased to customers under contracts that do not transfer substantially all the risks and benefits of the property are classified as an operating lease and are recognized monthly on an accrual basis.

 

The leased investment properties, under the operating lease modality, are included in “Other assets” in the Statement of Financial position and depreciation is determined on the book value of these assets, applying a proportion of the value in a systematic way on the economic use of the estimated useful life. Lease income is recognized on a straight-line basis over the lease period, on an accrual basis.

 

The Bank acts as a lessee

 

A contract is or contains a lease if it has the right to control the use of an identified asset for a period of time in exchange for a consideration.

 

At the start date of a lease, an asset is determined by right of use of the leased asset at cost, which comprises the amount of the initial measurement of the lease liability plus other disbursements made, except lease payments in the short term and those in which the underlying asset is of low value, which are recognized directly in results.

 

The amount of the lease liability is measured at the present value of future lease payments that have not been paid on that date, which are discounted using the Bank’s incremental financing interest.

 

The right-of-use asset is measured using the cost model less accumulated depreciation and accumulated impairment losses. The depreciation of the right-of-use asset is recognized in the Income Statement based on the straight-line method of depreciation from the start date and until the end of the term of the lease.

 

After the start date, the lease liability is measured by reducing the carrying amount to reflect the lease payments made and the lease contract modifications.

 

(g)Reclassifications:

 

There have not been significant reclassifications at the end of this period 2019.

 

9

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements:

 

3.1 Standards approved and/or modified by the International Accounting Standards Board (IASB) and by the Chilean Commission for the Financial Market (CMF):

 

3.1.1 Standards and interpretations that have been adopted in these Consolidated Financial Statements.

 

As of the date of issuance of these Interim Consolidated Financial Statements, the new accounting pronouncements issued by both the International Accounting Standards Board and the CMF, which have been adopted by the Bank and its subsidiaries, are detailed below:

 

Accounting standards issued by IASB.

 

IFRS 16 Leases.

 

On January 2016 was issued IFRS 16, which has as purpose to establish principles to the recognition, measurement, presentation and disclosure of lease contracts from the point of view of the lessee and lessor.

 

This new rule does not differ significantly from IAS 17 Leases that precedes it, related to the accounting treatment for the lessor. However, related to the lessee, the new rule requires the recognition of assets and liabilities for most lease contracts.

 

The Bank and its subsidiaries, for purposes of the initial application, took the option to recognize the cumulative effect on the initial adoption date (January 1, 2019), no restating the comparative information, recording an asset for right of use for an amount equal to the lease liability for an amount of Ch$144,529 million. This amount was determined according to the present value of the remaining lease payments, discounted using the Bank’s incremental financing interest rate.

 

IFRIC 23 Uncertainty over Income Tax Treatments.

 

In June 2017, the IASB published IFRIC 23, which clarifies the application of the recognition and measurement criteria required by IAS 12 Income Taxes when there is uncertainty about tax treatments.

 

This modification had no impact on the Banco de Chile and its subsidiaries.

 

IFRS 9 Financial instruments and IAS 28 Investments in associates and joint ventures.

 

On October 2017, the IASB published the amendments to IFRS 9 Financial Instruments and IAS 28 Investments in Associated Entities and Joint Ventures.

 

The amendments to IFRS 9 allow entities to measure financial assets, prepaid with negative compensation at amortized cost or fair value, through other comprehensive income if a specific condition is met, instead of at fair value with effect on results.

 

10

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

Regarding IAS 28, the amendments clarify that entities must account for long-term results in an associate or joint venture, to which the equity method is not applied, using IFRS 9.

 

The IASB also released an example that illustrates how companies should apply the requirements of IFRS 9 and IAS 28 to long-term interests in an associated entity or joint venture.

 

This modification had no impact for Banco de Chile and its subsidiaries.

 

Annual improvements to IFRS.

 

On December 2017, the IASB issued the Annual Improvements to IFRS Cycle 2015-2017, which includes amendments to the following regulations:

 

- IFRS 3 Business Combinations. Interests previously held in a joint operation.

 

The amendment provides additional guidance for applying the procurement method to particular types of business combinations.

 

The amendment states that when a party to a joint arrangement obtains control of a business, which is a joint arrangement and had rights over the assets and liabilities for the liabilities related to this joint arrangement, immediately before the acquisition date, the transaction it is a business combination achieved in stages.

 

Therefore, the acquirer will apply the requirements for a business combination achieved in stages, including re-measuring its previously held interest in the joint operation. By doing so, the acquirer will re-measure its total value that it previously had in the joint operation.

 

This modification had no impact for Banco de Chile and its subsidiaries.

 

- IFRS 11 Joint Arrangements.

 

The amendment to IFRS 11 relate to the accounting for acquisitions of interests in Joint Agreements.

 

The amendment establishes that a party that participates, but does not have control, in a joint agreement, can obtain control of the joint agreement. Given the above, the activity of the joint agreement would constitute a Business Combination as defined in IFRS 3, in such cases; the interests previously held in the joint agreement are not remeasured.

 

This modification had no impact for Banco de Chile and its subsidiaries.

 

11

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

- IAS 23 Costs for loans. Costs for loans that can be capitalized.

 

The amendment to the standard is intended to clarify that, when an asset is available for use or sale, an entity will treat any outstanding loan taken specifically to obtain said asset, as part of the funds it has taken as current loans, from that moment on the interest will not be included as part of the cost of the asset.

 

This modification had no impact for Banco de Chile and its subsidiaries.

 

- IAS 19 Employee Benefits.

 

On February 2018 the IASB issued amendments to IAS 19 “Employee Benefits”. The amendments specify that when a modification, reduction or liquidation of a plan occurs during the annual reporting period, the entity must:

 

- Determine the current cost of services for the remainder of the period following the modification, reduction or liquidation of the plan, using the actuarial assumptions used to measure the liability (asset) for the defined benefits net, reflecting the benefits offered under the plan and the plan assets after that event.

 

- Determine the net interest for the rest of the period after the modification, reduction or liquidation of the plan using: the liability (asset), net for defined benefits that reflects the benefits offered under the plan and the plan assets after that event; and the discount rate used to remeasure the net (asset) liability for defined benefits.

 

This modification had no impact for Banco de Chile and its subsidiaries.

 

Accounting standards issued by the CMF.

 

Circular No. 3,645.

 

On January 31, 2019, the CMF published this circular, which introduces changes to the Compendium of Accounting Standards in order to apply the criteria defined in IFRS 16.

 

The main changes are for the valuation for the right to use of assets under lease being applied as a measurement after initial recognition, the cost methodology less accumulated depreciation / amortization and accumulated impairment.

 

In the statement of financial position are introduced the items “Leased assets” and “lease liabilities”, which also modify the Notes “Fixed assets” and “Leased assets and lease liabilities”.

 

Additionally, for the purposes of the first application of this standard, banks and their subsidiaries must record any effect due to the first application of this standard in the equity item “Retained earnings from previous periods”.

 

12

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

On May 6, 2019, the CMF issued Circular No. 3,649, which defines the treatment of the lease agreements expressed in UF, establishing that the variation in the UF should be treated as a new measurement, and therefore the readjustments resulting in changes in lease payments must be recognized as a modification of the amount of the obligation and in parallel, the amount of the asset must be adjusted for the right to use leased assets for this purpose.

 

The application of these amendments was made jointly with the adoption of IFRS 16.

 

Circular No. 3,638.

 

On July 6, 2018, the CMF published amendments to the standards contained in Chapter B-1 “Provisions for Credit Risk” of the Compendium of Accounting Standards, which incorporates a standard model for the estimation of provisions for credit risk of the commercial portfolio of group analysis.

 

The methods and risk factors considered are the following:

 

-Commercial Leasing Portfolio: considers default, the type of asset in leasing (real estate or non-real estate) and the present value of benefits (PVB) of the asset of the operation.
-Student Portfolio: considers the type of loan granted, the enforceability of the payment and the default that it presents, in case the loan is enforceable.
-Generic Commercial Portfolio: considers default and the existence of real guarantees that guarantee the placement. In the case of guarantees, the relationship between the placement and the value of the collateral is considered.

 

According to the CMF, the three standardized methods included in the model will constitute a prudential floor for internal methods currently used by the industry.

 

On January 31, 2019, the CMF complemented these instructions with the publication of Circular No. 3,647, with the purpose of recognizing the mitigating effect of the credit risk represented by the transferor’s responsibility in factoring operations, a particular factor is introduced for the component “Loss Given Default” (hereinafter “LGD”) of the standard method for the commercial portfolio of group analysis, for factoring provisions.

 

The adoption of this standard in July 2019 did not have a material impact on the Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

13

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

3.1.2 New standards and interpretations that have been issued but its date of application have not yet come into force:

 

The following is a summary of new standards, interpretations and improvements to the International Financial Reporting Standards issued by IASB that are not yet effective as of September 30, 2019, are detailed below:

 

Accounting standards issued by IASB.

 

IAS 28 Investments in Associates and Join Venture and IFRS 10 - Consolidated Financial Statements.

 

In September 2014, the IASB issued this amendment, which clarifies the scope of recognized gains and losses in a transaction involving an associate or joint venture, and this depends on whether the asset sold or contribution is a business. Therefore, IASB concluded that all of the profit or loss should be recognized against loss of control of a business. Likewise, gains or losses resulting from the sale or contribution of a subsidiary that is not a business (definition of IFRS 3) to an associate or joint venture should be recognized only to the extent of unrelated interests in the associate or joint venture.

 

During December 2015 the IASB agreed that the amendments should apply in the future, allowing its immediate application.

 

This amendment will not impact on the Interim Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

Conceptual Framework.

 

On March 29, 2018, the IASB issued a “Reviewed” Conceptual Framework. Changes to the Conceptual Framework may affect the application of IFRS when no rule applies to a particular transaction or event.

 

The Conceptual Framework introduces mainly the following improvements:

 

-It incorporates some new concepts of measurement, presentation and disclosure and derecognition of assets and liabilities in the Financial Statements.

 

-Provides updated definitions of assets, liabilities and includes criteria for the recognition of assets and liabilities in the financial statements.

 

-Clarifies some important concepts such as background on form, prudential criteria and measurement of uncertainty.

 

The Conceptual Framework enters into force for periods beginning on January 1, 2020. Early adoption is permitted.

 

14

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

- IFRS 3 Business Combinations. Definition of a business.

 

The amendments clarify the definition of business, with the objective of helping entities determine whether a transaction should be accounted for as a business combination or as the acquisition of an asset.

 

(a)clarify that, to be considered a business, an acquired set of activities and assets must include, as a minimum, an input and a substantive process that together contribute significantly to the ability to produce outputs;

 

(b)eliminate the assessment of whether market participants can substitute missing processes or inputs and continue to produce outputs;

 

(c)add guides and illustrative examples to help entities assess whether a substantial process has been acquired;

 

(d)restrict definitions of a business or products by focusing on goods and services provided to clients and eliminate reference to the ability of reducing costs; and

 

(e)add an optional concentration test that allows a simplified assessment of whether an acquired set of activities and businesses acquired are not business.

 

Companies are required to apply the modified definition of a business to acquisitions made from January 1, 2020. Early application is allowed.

 

This amendment has no impact on the Interim Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

- IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Definition of materiality or relative importance.

 

The IASB issued changes to IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of materiality and align these standards with the Revised Conceptual Framework issued in March 2018, to facilitate companies to make materiality judgments.

 

Under the old definition omissions or misrepresentations of elements are important if they could, individually or collectively, influence the economic decisions that users make on the basis of financial statements (IAS 1 Presentation of Financial Statements).

 

The new definition states that information is material if the omission, distortion or concealment of the information can reasonably be expected to influence decisions that primary users of financial statements of general purpose make on the basis of those financial statements, which provide financial information about a specific reporting entity.

 

The date of application of these amendments is January 1, 2020. Early application is allowed.

 

This amendment has no impact on the Interim Consolidated Financial Statements of Banco de Chile and its subsidiaries.

 

15

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

3.New Accounting Pronouncements, continued:

 

IFRS 9 Financial Instruments, IFRS 7 Financial Instruments: Disclosures and IAS 39 Financial Instruments: Recognition and Measurement. Interest rate benchmark reform.

 

In September 2019, the IASB issued amendments to IFRS 9, 7 and IAS 39, as a result of the IBOR (Interbank Offered Rate) reform, which results in the replacement of existing reference interest rates, by alternative interest rates.

 

The amendments pretend that entities designate new hedging relationships or discontinue existing hedge accounting.

 

The date of application of these amendments is from January 1, 2020. Early application is allowed.

 

The Administration is evaluating the impact of these modifications.

 

4.Changes in Accounting policies and Disclosures:

 

The accounting policies adopted in the preparation of this Consolidated Interim Financial Statements are consistent with those used in the preparation of the annual Consolidated Financial Statements for the year ended December 31, 2018, except for the adoption of new regulations in force at 1 January 2019. See Note No. 3 “Recent Accounting Pronouncements”.

16

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

5.Relevant Events:

 

(a)On January 18, 2019, the subsidiary Banchile Corredores de Bolsa S.A. informed that in the Ordinary Session held that day, the Board became aware and accepted the resignation presented by Mr. Roberto Serwaczak Slowinski to his position as Director of the company.

 

(b)On January 24, 2019 in the Ordinary Session No. BCH 2,895, the Board of Directors of Banco de Chile agreed to convene an Ordinary Meeting of Shareholders for March 28, 2019, with the purpose of proposing, among other matters, the distribution of the dividend No. 207 of $ 3.52723589646 for each share, corresponding to 70% of the distributable liquid profit, retaining the remaining 30%.

 

(c)On January 28, 2019, Banco de Chile and its subsidiary Banchile Corredores de Seguros Ltda. informed that they have entered into a strategic alliance with the insurance companies Chubb Seguros Chile S.A. and Chubb Seguros de Vida Chile S.A. The framework of the strategic alliance establishes the general terms and conditions pursuant to which the Bank will grant, for a period of 15 years, exclusive access to the Companies to provide insurances to clients via face-to-face and digital channels of the Bank, through Banchile, subject to the exceptions agreed upon by the parties.

 

The aforementioned Agreement includes a payment to the Bank of UF 5,367,057 on the date of the signing of the contracts, in accordance with the terms and conditions thereof, and annual payments subject to compliance with insurance sales objectives during the agreement lifetime.

 

The subscription of the contracts referred in the Agreement was subject to the condition that the National Economic Prosecutor’s Office approve the execution of all of them, for which purpose the parties have proceeded to notify the operation in accordance with Chapter IV of the Decree Law No. 211.

 

(d)On March 14, 2019 in the Ordinary session No. 2,897, the Board of Directors of Banco de Chile agreed to establish a provision for minimum dividends of 60% of the net distributable profit that will be generated during the course of the year. For these purposes, the net distributable profit is defined as net income for the corresponding period minus the value effect of the monetary unit of paid capital and reserves, as a result of any change in the Consumer Price Index (CPI) between to the month prior to the current month and the month of November of the previous year.

 

(e)On March 28, 2019 at the Ordinary Shareholder’s Meeting, our shareholders approved the distribution of the dividend No. 207 of $3.52723589646 per share, to be charged to the net distributable income obtained during the fiscal year 2018. Also, the shareholders agreed to withhold of 30% of the distributable net profit for the year 2018.

 

Additionally, the shareholders approved the definite appointment of Mr. Julio Santiago Figueroa as Director of Banco de Chile, a position which he will hold until the next renewal of the Board of Directors.

 

17

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

5.Relevant Events, continued:

 

(f)On May 20, 2019, the subsidiary Banchile Corredores de Bolsa S.A. reported that in Ordinary Session held on May 17, 2019, the Board of Banchile Corredores de Bolsa S.A. appointed Mr. Fuad Jorge Muvdi Arenas as titular director.

 

(g)On June 4, 2019, Banco de Chile reported that the condition established in of the Strategic Alliance Framework Agreement subscribed by Banco de Chile, its subsidiary Banchile Corredores de Seguros Limitada and the insurance companies Chubb Seguros Chile SA and Chubb Seguros de Vida Chile SA, had been met on January 28, 2019, and in order to comply with said agreement, the following contracts had been signed:

 

-Contract of Exclusive Access to Distribution Channels between the Bank and the Companies;
-Supply, Intermediation and Distribution of Insurance Contracts between Banchile and each of the Companies;
-Trademark Use Agreement between the Bank and each of the Companies; and
-Collection Contracts between the Bank and each of the Companies.

 

(h)On June 10, 2019, Banco de Chile informed that on that date Mr. Rodrigo Manubens Moltedo submitted his resignation to the position of Deputy Director of Banco de Chile.

 

(i)On June 27, 2019, Banco de Chile informed that in ordinary session, the Board of Directors appointed Mrs. Sandra Guazzotti as first substitute director, until the next Ordinary Shareholders’ Meeting, replacing Mr. Rodrigo Manubens Moltedo.

 

(j)On July 1, 2019, Banco de Chile reported the deceased of the Director of Banco de Chile, Mr. Gonzalo Menéndez Duque.

 

(k)On July 8, 2019, the subsidiary Banchile Administradora General de Fondos S.A. informed that on July 5, 2019 Mr. Nicolás Luksic Puga submitted his resignation to the position of director of the Company.

 

(l)On August 8, 2019, Banco de Chile informed that in ordinary session the Board of Directors appointed to Mr. Hernán Büchi Buc as Regular Director of the Board in replacement of Mr. Gonzalo Menéndez Duque until the next Ordinary Shareholders Meeting.

 

18

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

6.Business Segments:

 

For management purposes, the Bank is organized into four segments, which are defined based on the types of products and services offered, and the type of client in which focuses as described below:

 

Retail:This segment focuses on individuals and small and medium-sized companies (SMEs) with annual sales up to UF 70,000, where the product offering focuses primarily on consumer loans, commercial loans, checking accounts, credit cards, credit lines and mortgage loans.

 

Wholesale:This segment focused on corporate clients and large companies, whose annual revenue exceed UF 70,000, where the product offering focuses primarily on commercial loans, checking accounts and liquidity management services, debt instruments, foreign trade, derivative contracts and leases.

 

Treasury:This segment includes the associated revenues to the management of the investment portfolio and the business of financial transactions and currency trading.

 

Transactions with customers carried out by the Treasury are reflected in the respective aforementioned segments. These products are highly transaction-focused and include foreign exchange transactions, derivatives and financial instruments in general, among others.

 

Subsidiaries:Corresponds to the businesses generated by the companies controlled by the Bank, which carry out activities complementary to the bank business. The companies that comprise this segment are:

 

Entity

 

-Banchile Administradora General de Fondos S.A.
-Banchile Asesoría Financiera S.A.
-Banchile Corredores de Seguros Ltda.
-Banchile Corredores de Bolsa S.A.
-Banchile Securitizadora S.A.
-Socofin S.A.

 

19

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

6.Business Segments, continued:

 

The financial information used to measure the performance of the Bank’s business segments is not comparable with similar information from other financial institutions because each institution relies on its own definitions. The accounting policies applied to the segments is the same as those described in the summary of accounting principles. The Bank obtains the majority of the results for: interest, indexation and commissions and financial operations and changes, discounting provisions for credit risk and operating expenses. Management is mainly based on these concepts to evaluate the performance of the segments and make decisions about the goals and allocations of resources of each unit. Although the results of the segments reconcile with those of the Bank at the total level, this is not necessarily the case in terms of the different concepts, given that management is measured and controlled individually and not on a consolidated basis, applying the following criteria:

 

The net interest margin of loans and deposits is obtained aggregating the net financial margins of each individual operation of credit and uptake made by the bank. For these purposes, the volume of each operation and its contribution margin are considered, which in turn corresponds to the difference between the effective rate of the customer and the internal transfer price established according to the term and currency of each operation. Additionally, the net margin includes the result of interest and indexation from the accounting hedges.

 

The capital and its financial impacts on outcome have been assigned to each segment based on the risk-weighted assets.

 

Operational expenses are reflected at the level of the different functional areas of the Bank. The allocation of expenses from functional areas to business segments is done using different allocation criteria, at the level of the different concepts and expense items.

 

Taxes are managed at a corporate level and are not allocated to business segments.

 

For the periods ended September 30, 2019 and 2018, there was no income from transactions with a customer or counterparty that accounted for 10% or more of the Bank’s total revenues.

 

20

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

6.Business Segments, continued:

 

The following table presents the income by segment for the periods ended September, 2019 and 2018 for each of the segments defined above:

  

   Retail   Wholesale   Treasury   Subsidiaries   Subtotal   Consolidation
adjustment
   Total 
   September   September   September   September   September   September   September   September   September   September   September   September   September   September 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Net interest income   768,785    718,366    256,314    266,114    (18,389)   (251)   (5,380)   (6,190)   1,001,330    978,039    2,763    2,403    1,004,093    980,442 
Net commissions income (loss)   196,014    139,181    37,773    33,597    (2,463)   (2,999)   113,851    110,330    345,175    280,109    (6,929)   (9,089)   338,246    271,020 
Other operating income   26,234    31,526    45,723    37,892    32,797    25,526    42,665    25,180    147,419    120,124    (4,933)   (4,519)   142,486    115,605 
Total operating revenue   991,033    889,073    339,810    337,603    11,945    22,276    151,136    129,320    1,493,924    1,378,272    (9,099)   (11,205)   1,484,825    1,367,067 
Provision for loan losses   (238,280)   (229,042)   (7,411)   8,890            (116)   95    (245,807)   (220,057)           (245,807)   (220,057)
Depreciation and amortization   (42,479)   (21,911)   (4,878)   (3,712)   (117)   (69)   (4,410)   (2,211)   (51,884)   (27,903)           (51,884)   (27,903)
Other operating expenses   (433,979)   (412,870)   (114,233)   (116,493)   (3,705)   (3,565)   (79,601)   (77,841)   (631,518)   (610,769)   9,099    11,205    (622,419)   (599,564)
Income attributable to associates   4,037    5,429    747    989    282    127    428    411    5,494    6,956            5,494    6,956 
Income before income taxes   280,332    230,679    214,035    227,277    8,405    18,769    67,437    49,774    570,209    526,499            570,209    526,499 
Income taxes                                                               (124,346)   (93,148)
Income after income taxes                                                               445,863    433,351 

 

The following table presents assets and liabilities of the periods ended September 30, 2019 and December 31, 2018 by each segment defined above:

 

   Retail   Wholesale   Treasury   Subsidiaries   Subtotal  

Consolidation

adjustment

   Total 
   September   December   September   December   September   December   September   December   September   December   September   December   September   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Assets   17,779,053    16,425,068    10,865,353    10,592,117    10,150,838    8,093,850    804,589    925,440    39,599,833    36,036,475    (469,322)   (388,615)   39,130,511    35,647,860 
Current and deferred taxes                                                               316,837    278,599 
Total assets                                                               39,447,348    35,926,459 
                                                                       
Liabilities   10,829,093    10,369,534    10,104,185    9,873,018    14,883,594    11,982,709    623,613    764,736    36,440,485    32,989,997    (469,322)   (388,615)   35,971,163    32,601,382 
Current and deferred taxes                                                               52,228    20,924 
Total liabilities                                                               36,023,391    32,622,306 

 

21

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

7.Cash and Cash Equivalents:

 

(a)The detail of the balances included under cash and cash equivalents and their reconciliation with the Statement of Cash Flows at the end of each period are detailed as follows:

 

   September   December 
   2019   2018 
   MCh$   MCh$ 
         
Cash and due from banks:        
Cash (*)   822,211    624,862 
Deposit in Chilean Central Bank (*)   278,537    121,807 
Deposits in other domestic banks   4,704    26,698 
Deposits abroad   544,865    106,714 
Subtotal - Cash and due from banks   1,650,317    880,081 
           
Net transactions in the course of collection   181,656    244,758 
Highly liquid financial instruments (**)   1,432,329    1,058,904 
Repurchase agreements (**)   60,599    72,632 
Total cash and cash equivalents   3,324,901    2,256,375 

 

(*)Amounts in cash funds and in Central Bank are regulatory reserve deposits that the Bank must maintain as a monthly average.

 

(**)It corresponds to negotiation instruments and repurchase contracts that meet the definition of cash and cash equivalents.

 

(b)Transactions in course of settlement:

 

Transactions in course of settlement are transactions for which the only remaining step is settlement, which will increase or decrease the funds in the Central Bank or in foreign banks, normally occurring within 24 to 48 business hours, and are detailed as follows:

 

   September   December 
   2019   2018 
   MCh$   MCh$ 
Assets        
Documents drawn on other banks (clearing)   177,525    210,743 
Funds receivable   453,585    369,590 
Subtotal transactions in the course of collection   631,110    580,333 
           
Liabilities          
Funds payable   (449,454)   (335,575)
Subtotal transactions in the course of payment   (449,454)   (335,575)
Net transactions in the course of settlement   181,656    244,758 

 

22

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

8.Financial Assets Held-for-trading:

 

The detail of financial instruments classified as held-for-trading is as follows:

 

   September   December 
   2019   2018 
   MCh$   MCh$ 
Instruments issued by the Chilean Government and Central Bank of Chile        
Central Bank of Chile bonds   40,496    24,906 
Central Bank of Chile promissory notes   1,452,306    1,410,080 
Other instruments issued by the Chilean Government and Central Bank   47,589    88,486 
           
Other instruments issued in Chile          
Bonds from other domestic companies   8,480    7,532 
Bonds from domestic banks   14,312    20,186 
Deposits in domestic banks   135,986    100,225 
Other instruments issued in Chile   2,805    1,664 
           
Instruments issued Abroad          
Instruments from foreign governments or central banks        
Other instruments issued abroad       4,446 
           
Mutual fund investments          
Funds managed by related companies   81,147    87,841 
Funds managed by third-party        
Total   1,783,121    1,745,366 

 

Under “Instruments issued by the Chilean Government and Central Bank of Chile” are classified instruments sold under repurchase agreements to customers and financial instruments, by an amount of Ch$6,072 million as of September 30, 2019 (Ch$115,749 million as of December 31, 2018). Repurchase agreements had a 2 day average expiration as of period-end 2019 (2 days in December 2018).

 

Moreover, under this same item, other financial instruments are maintained as collateral guaranteeing the derivative transactions executed through Comder Contraparte Central S.A. for an amount of Ch$76,914 as of September 30, 2019 (Ch$34,456 million as of December 31, 2018).

 

“Other instruments issued in Chile” include instruments sold under repurchase agreements with customers and financial instruments amounting to Ch$112,436 million as of September 30, 2019 (Ch$99,268 million as of December 31, 2018). The repurchase agreements have an average expiration of 7 days as of period-end 2019 (10 days in December 2018).

 

Additionally, the Bank holds financial investments in mortgage finance bonds issued by itself in the amount of Ch$9,168 million as of September 30, 2019 (Ch$11,397 million as of December 31, 2018), which are presented as a reduction of the liability line item “Debt issued”.

 

23

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

9.Cash collateral on securities borrowed and reverse repurchase agreements:

 

(a)Receivables for repurchase agreements: The Bank provides financing to its customers through repurchase agreements and security borrowings, in which the financial instrument serves as collateral. As of September 30, 2019 and December 31, 2018, the detail is as follows:

 

   Up to 1 month   Over 1 month and up to 3 months   Over 3 months and up to 12 months   Over 1 year and up to 3 years   Over 3 years and up to 5 years   Over 5 years   Total 
   September   December   September   December   September   December   September   December   September   December   September   December   September   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Instruments issued by the Chilean Governments and Central Bank of Chile                                                        
Central Bank bonds   226                                                226     
Central Bank promissory notes       742                                                742 
Other instruments issued by the Chilean Government and Central Bank   4,974                                                4,974     
Subtotal   5,200    742                                            5,200    742 
Other Instruments issued in Chile                                                                      
Deposit promissory notes from domestic banks                                                        
Mortgage bonds from domestic banks                                                        
Bonds from domestic banks   25,012    367                                            25,012    367 
Deposits in domestic banks       2,053                                                2,053 
Bonds from other Chilean companies                                                        
Other instruments issued in Chile   28,250    70,334    6,984    16,918    21,418    6,875                            56,652    94,127 
Subtotal   53,262    72,754    6,984    16,918    21,418    6,875                            81,664    96,547 
Instruments issued by foreign institutions                                                                      
Instruments from foreign governments or Central Bank                                                        
Other instruments                                                        
Subtotal                                                        
Mutual fund investments                                                                      
Funds managed by related companies                                                        
Funds managed by third-party                                                        
Subtotal                                                        
Total   58,462    73,496    6,984    16,918    21,418    6,875                            86,864    97,289 

 

Securities received:

 

The Bank and its subsidiaries have received financial instruments that they can sell or give as collateral in case the owner of these instruments enters into default or in bankruptcy. As of September 30, 2019, the fair value of the instruments received amounts to Ch$88,111 million (Ch$95,316 million as of December, 2018).

 

24

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

9.Cash collateral on securities lent and repurchase agreements, continued:

 

(b)Liabilities for repurchase contracts: The Bank obtains financing by selling financial instruments and committing to purchase them at future dates, plus interest at a prefixed rate. As of September 30, 2019 and December 31, 2018, the repurchase agreements are the following:

 

   Up to 1 month   Over 1 month and up to 3 months   Over 3 months and up to 12 months   Over 1 year and up to 3 years   Over 3 years and up to 5 years   Over 5 years   Total 
   September   December   September   December   September   December   September   December   September   December   September   December   September   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Instruments issued by the Chilean Governments and Central Bank of Chile                                                        
Central Bank bonds       130,197                                                130,197 
Central Bank promissory notes   6,078                                                6,078     
Other instruments issued by the Chilean Government and Central Bank                                                        
Subtotal   6,078    130,197                                            6,078    130,197 
Other Instruments issued in Chile                                                                      
Deposit promissory notes from domestic banks                                                        
Mortgage bonds from domestic banks                                                        
Bonds from domestic banks                                                        
Deposits in domestic banks   173,894    162,167    9,417    1,448    45    5,210                            183,356    168,825 
Bonds from other Chilean companies                                                        
Other instruments issued in Chile   3,202    4,798            1,736                                4,938    4,798 
Subtotal   177,096    166,965    9,417    1,448    1,781    5,210                            188,294    173,623 
Instruments issued by foreign institutions                                                                      
Instruments from foreign governments or central bank                                                        
Other instruments issued by foreing                                                        
Subtotal                                                        
Mutual fund investments                                                                      
Funds managed by related companies                                                        
Funds managed by third-party                                                        
Subtotal                                                        
Total   183,174    297,162    9,417    1,448    1,781    5,210                            194,372    303,820 

 

Securities sold:

 

The fair value of the financial instruments delivered as collateral by the Bank and its subsidiaries, in sales transactions with repurchase agreement and securities loans as of September 30, 2019 amounts to Ch$192,323 million (Ch$298,708 million in December 2018). In the event that the Bank and its subsidiaries enter into default or bankruptcy, the counterparty is authorized to sell or deliver these investments as collateral.

 

25

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

10.Derivative Instruments and Accounting Hedges:

 

(a)As of September 30, 2019 and December 31, 2018, the Bank’s portfolio of derivative instruments is detailed as follows:

  

   Notional amount of contract with final expiration date in   Fair Value 
As of September 30,  Up to 1 month   Over 1 month and up to 3 months   Over 3 months and up to 12 months   Over 1 year and up to 3 years   Over 3 year and up to 5 years   Over 5 years   Total   Assets   Liabilities 
2019  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Derivatives held for hedging purposes                                    
Interest rate swap and cross currency swap               9,709            9,709        2,989 
Interest rate swap       11,089        11,584    3,643    77,056    103,372    41    8,664 
Total derivatives held for hedging purposes       11,089        21,293    3,643    77,056    113,081    41    11,653 
                                              
Derivatives held as cash flow hedges                                             
Interest rate swap and cross currency swap       217,258    32,876    138,688    133,567    678,717    1,201,106    32,480    73,278 
Total derivatives held as cash flow hedges       217,258    32,876    138,688    133,567    678,717    1,201,106    32,480    73,278 
                                              
Trading derivatives                                             
Currency forward   9,073,326    7,028,992    15,749,276    3,234,108    65,252    37,162    35,188,116    760,724    565,585 
Interest rate swap   2,169,256    5,846,716    17,879,724    17,317,067    6,976,120    10,294,717    60,483,600    1,012,615    1,017,927 
Interest rate swap and cross currency swap   234,699    728,660    3,840,288    5,695,579    3,516,545    4,471,970    18,487,741    733,761    984,729 
Call currency options   30,194    55,797    72,520    9,424            167,935    4,486    1,604 
Put currency options   29,663    53,910    57,510    7,238            148,321    49    655 
Total trading derivatives   11,537,138    13,714,075    37,599,318    26,263,416    10,557,917    14,803,849    114,475,713    2,511,635    2,570,500 
                                              
Total   11,537,138    13,942,422    37,632,194    26,423,397    10,695,127    15,559,622    115,789,900    2,544,156    2,655,431 

 

26

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

10.Derivative Instruments and Accounting Hedges, continued:

 

(a)Portfolio of derivative instruments, continued:

 

   Notional amount of contract with final expiration date in   Fair Value 
As of December 31,  Up to 1 month   Over 1 month and up to 3 months   Over 3 months and up to 12 months   Over 1 year and up to 3 years   Over 3 year and up to 5 years   Over 5 years   Total   Assets   Liabilities 
2018  MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
Derivatives held for hedging purposes                                    
Interest rate swap and cross currency swap                   11,132        11,132        3,012 
Interest rate swap           10,555        16,078    200,321    226,954    1,116    3,152 
Total derivatives held for hedging purposes           10,555        27,210    200,321    238,086    1,116    6,164 
                                              
Derivatives held as cash flow hedges                                             
Interest rate swap and cross currency swap       142,045    213,518    136,852    163,027    482,015    1,137,457    34,298    31,818 
Total derivatives held as cash flow hedges       142,045    213,518    136,852    163,027    482,015    1,137,457    34,298    31,818 
                                              
Trading derivatives                                             
Currency forward   8,414,296    9,941,108    13,350,051    3,843,703    92,395    35,374    35,676,927    735,444    631,047 
Interest rate swap   3,977,068    9,065,335    25,723,239    17,216,272    7,219,269    9,129,644    72,330,827    287,611    284,840 
Interest rate swap and cross currency swap   227,185    369,509    1,983,836    4,366,801    3,339,946    3,695,613    13,982,890    450,519    570,033 
Call currency options   16,988    71,243    131,175    9,769            229,175    4,839    2,921 
Put currency options   16,141    62,809    103,834    9,769            192,553    120    1,534 
Total trading derivatives   12,651,678    19,510,004    41,292,135    25,446,314    10,651,610    12,860,631    122,412,372    1,478,533    1,490,375 
                                              
Total   12,651,678    19,652,049    41,516,208    25,583,166    10,841,847    13,542,967    123,787,915    1,513,947    1,528,357 

 

27

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

10.Derivative Instruments and Accounting Hedges, continued:

 

(b)Fair value Hedges:

 

The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in the fair value of the hedged elements attributable to interest rates in financial instruments. The aforementioned hedge instruments change the effective cost of long-term assets from a fixed interest rate to a floating rate, decreasing the duration and modifying the sensitivity to the shortest segments of the curve.

 

Below is a detail of the hedged elements and instruments under fair value hedges as of September 30, 2019 and December 31, 2018:

 

   September   December 
   2019   2018 
   MCh$   MCh$ 
Hedge element        
Commercial loans   9,709    11,132 
Corporate bonds   103,372    226,954 
           
Hedge instrument          
Cross currency swap   9,709    11,132 
Interest rate swap   103,372    226,954 

 

(c)Cash flow Hedges:

 

(c.1)The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates and foreign exchange of foreign banks obligations and bonds issued abroad in US Dollars, Hong Kong dollars, Swiss Franc, Japanese Yens, Peruvian Sol, Australian Dollars and Euros. The cash flows of the cross currency swaps equal the cash flows of the hedged items, which modify uncertain cash flows to known cash flows derived from a fixed interest rate.

 

Additionally, these cross currency swap contracts used to hedge the risk from variability of the Unidad de Fomento (“CLF”) in assets flows denominated in CLF until a nominal amount equal to the portion notional of the hedging instrument CLF, whose readjustment daily impact the item “Interest Revenue” of the Income Financial Statements.

 

28

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued

(Free translation of interim consolidated financial statements originally issued in Spanish)

 

 

 

10.Derivative Instruments and Accounting Hedges, continued:

 

(c)Cash flow Hedges, continued:

 

(c.2)Below are the cash flows from bonds issued abroad objects of this hedge and the cash flows of the asset part of the derivative instrument:

 

   Up to 1 month   Over 1 month and up to 3 months   Over 3 months and up to 12 months   Over 1 year and up to 3 years   Over 3 years and up to 5 years   Over 5 years   Total 
   September   December   September   December   September   December   September   December   September   December   September   December   September   December 
   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018   2019   2018 
   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$   MCh$ 
                                                         
Hedge element                                                        
Outflows:                                                        
Corporate Bond EUR           (620)       (718)   (1,338)   (2,677)   (2,675)   (2,677)   (2,675)   (86,441)   (87,097)   (93,133)   (93,785)
Corporate Bond HKD   (4,482)       (56,628)       (6,861)   (66,378)   (22,661)   (21,601)   (80,883)   (83,608)   (322,824)   (263,206)   (494,339)   (434,793)
Corporate Bond PEN                   (1,699)       (3,398)       (2,548)       (48,042)       (55,687)    
Corporate Bond CHF           (130,412)   (89,256)       (125,993)   (1,501)   (1,450)   (85,448)   (82,552)   (109,770)   (106,050)   (327,131)   (405,301)
Corporate Bond USD   (775)               (775)   (1,476)   (3,101)   (2,952)   (3,101)   (2,952)   (43,411)   (42,060)   (51,163)   (49,440)
Obligation USD   (209)   (870)   (51,096)   (86)   (624)   (49,401)   (110,337)   (105,622)                   (162,266)   (155,979)
Corporate Bond JPY        &