A. BACKGROUND

City Union Bank Limited (the Bank), incorporated in Kumbakonam, India is a publicly held Banking Company governed by the Banking Regulation Act, 1949 and is engaged in providing a wide range of Banking and Financial Services including Commercial Banking and treasury operations.

B. BASIS OF PREPARATION

The Financial Statements are prepared under the historical cost convention following accrual basis of accounting, unless otherwise stated, using going concern assumption, and conform in all material aspects to the Generally Accepted Accounting Principles (GAAP) in India, which comprises applicable statutory provisions, regulatory norms / guidelines and extant disclosure norms prescribed by the Reserve Bank of India (RBI), Accounting Standards (AS) issued under Section 133 of the Companies Act, 2013 read together with the Companies (Accounting Standards) Rules, 2021, Banking Regulation Act, 1949 and practices prevalent in the banking industry in India.

USE OF ESTIMATES

The preparation of Financial Statements in conformity with GAAP require the management to make estimates and assumptions in the reported amounts of Assets and Liabilities (including Contingent Liabilities) as of the date of the Financial Statements and the reported income and expenses during the reporting period. Management believes that the estimates used in preparation of the Financial Statements are prudent and reasonable. Actual results could differ from these estimates. Any revision in the accounting estimates is recognised prospectively in the current and future periods.

C. SIGNIFICANT ACCOUNTING POLICIES

1. REVENUE RECOGNITION

Income and Expenditure are accounted on accrual basis, except the following;

a. Interest on Non-Performing Advances (NPA) and Non-Performing Investments (NPI) are recognised

upon realisation as per the prudential norms prescribed by RBI.

b. Interest on overdue bills, commission, exchange, brokerage and rent on lockers are accounted on realization.

c. Dividend on equity shares, preference shares and mutual fund units is accounted as income when the right to receive the dividend is established.

In case of suit filed accounts, related legal and other expenses incurred are charged to Profit and Loss Account and on recovery the same are accounted as income.

2. INVESTMENTS

2.1 As per RBI guidelines, the investments of the Bank are classified into the following categories at the time of acquisition

• Held To Maturity (HTM)

• Available For Sale (AFS)

• Held For Trading (HFT)

They are further sub-classified and shown in the Balance Sheet under the following six categories :

i) Government Securities

ii) Other Approved Securities

iii) Shares

iv) Debentures and Bonds

v) Subsidiaries / Joint Ventures and

vi) Others

a) Securities classified under HTM category are valued at acquisition cost. Where the acquisition cost is higher than the face value, such excess of acquisition cost over the face value is amortised over the remaining period to maturity.

b) Securities held in AFS Category are valued scrip wise as under :

i) Government of India Securities are valued at market price as per quotation put out by Fixed I n c o m e M o n e y M a r ke t a n d D e r iv a t i ve s Association of India (FIMMDA) & Bloomberg / Financial Benchmark India Limited.

ii) State Government Loans, Trustee Securities, Securities guaranteed by Central / State Governments and PSU Bonds are valued on appropriate Yield to Maturity (YTM) basis as per FIMMDA & Bloomberg / Financial Benchmark India Limited.

iii) Treasury Bills / Certificate of Deposits / Commercial Papers, being discounted instruments, are valued at carrying cost.

iv) Equity Shares are valued at market rate if quoted, otherwise at Break up Value as per the latest Balance Sheet if available, or '1/- for each Company.

v) Preference shares are valued at market price if quoted or at appropriate YTM basis as per FIMMDA & Bloomberg / Financial Benchmark India Limited.

vi) Debentures / Bonds are valued at market price if quoted, otherwise on an appropriate YTM basis.

vii) Units of mutual funds are valued at the Latest Repurchase Price / Net Asset Value (NAV) declared by the mutual fund.

viii) Security Receipts are valued at NAV as declared by the Securitization Companies.

c) Individual scrips under HFT category are valued at Market Price.

2.2 Investments in AFS / HFT are valued scrip-wise, aggregated category-wise and net depreciation, if any, within each category is charged to Profit & Loss Account, while net appreciation, if any, under each category is ignored.

2.3 Shifting of Securities from one category to another is carried out at the lower of acquisition cost / book value / market value as on the date of transfer. The depreciation, if any on such transfer is fully provided for.

2.4 Purchase and Sale transactions in Securities are accounted on settlement date. Profit / Loss on Sale of Investments in any category is taken to the

Profit & Loss Account. However, in case of Sale of Investments in HTM category, the profit is first credited to Profit and Loss Account and thereafter an amount equivalent to profit, net of Statutory Reserve and Taxes, is appropriated to the Capital Reserve Account.

2.5 The Bank undertakes short sale transactions in Central Government dated securities. The short position is marked to market and loss, if any, is charged to the Profit and Loss Account while gain, if any, is ignored. Profit / Loss on short sale is recognised on settlement date.

2.6 Cost of Investments is based on the Weighted Average Cost Method.

2.7 Commission, Brokerage, Broken Period Interest etc., incurred on acquisition of Securities is debited to Profit and Loss account. Commission, Incentives, Brokerage received on subscription is deducted from the cost of the Securities.

2.8 Investments are shown net of Depreciation, if any in the Balance Sheet.

2.9 Non Performing Investments are identified and provided for as per RBI guidelines. The provision on such Non-Performing Investments are not set off against the appreciation in respect of Other Performing Investments. Interest on NonPerforming Investments is not recognised until received.

3. LOANS / ADVANCES AND PROVISIONS THEREON

3.1 Advances have been classified as per the Asset Classification norms laid down by the Reserve Bank of India. The required provisioning for Standard Assets and for Non Performing Assets have been made as per the Regulatory Norms.

3.2 Advances shown in the Balance Sheet are net of specific provisions, technical write offs and ECGC / DICGC claims received.

Partial recoveries in Non Performing Assets are apportioned first towards charges and interest, thereafter towards principal.

3.3 NPAs are classified into Sub-Standard, Doubtful and Loss Assets based on the following criteria stipulated by RBI :

I. Sub-Standard : A loan asset that has remained non-performing for a period less than or equal to 12 months.

ii. Doubtful : A loan asset that has remained in the sub-standard category for a period of 12 months.

iii. Loss : A loan asset where loss has been identified but the amount has not been fully written off.

3.4 Provisions are made for NPAs as per the extant guidelines prescribed by the regulatory authorities, subject to minimum provisions as prescribed below :

Substandard Assets:

i. A general provision of 15% on the total outstanding ;

ii. Additional provision of 10% for exposures which are unsecured ;

iii. Unsecured Exposure in respect of infrastructure advances where certain safeguards such as escrow accounts are available 20%.

Doubtful Assets:

- Secured portion i. Upto one year - 25%

ii. One to three years - 40%

iii. More than three years - 100%

- Unsecured portion - 100%

Loss Assets:

100% to be provided on the total outstanding;

3.5 Floating Provisions :

The Bank has a policy for creation and utilisation of floating provisions separately for advances, investments and general purposes. The quantum of floating provisions to be created is assessed at the end of the financial year. The floating provisions are utilised only for contingencies under extraordinary circumstances specified in the policy with prior permission of Reserve Bank of India.

3.6 Provision for Country Exposure :

In addition to the specific provisions held according to the asset classification status, provisions are also made for individual country exposures (other than the home country). Countries are categorised into seven risk categories, namely, insignificant, low, moderately low, moderate, moderately high, high and very high and provisioning made as per extant RBI guidelines. If the country exposure (net) of the Bank in respect of each country does not exceed 1% of the total funded assets, no provision is maintained on such country exposures. The provision is reflected in Schedules of the Balance Sheet.

3.7 Provision for Unhedged Foreign Currency Exposure :

Provision for Unhedged Foreign Currency Exposure of borrower entities is made considering their Unhedged Exposure to the Bank.

4. FIXED ASSETS, DEPRECIATION & AMORTIZATION

4.1 Premises, Software and Other Fixed Assets are accounted at acquisition cost less depreciation. Cost includes cost of purchase and all expenditure like site preparation, installation costs and professional fees incurred on the asset before it is ready to use.

4.2 Capital work-in-progress includes cost of fixed assets that are not ready for their intended use.

4.3 Depreciation has been provided on the composite value for premises acquired with land and building, where cost of the land is not separately identifiable.

4.4 The Bank has provided depreciation based on useful life of the assets in line with Schedule II of the Companies Act, 2013. Depreciation is charged over the estimated useful life of the fixed asset on a straight-line basis. Depreciation on assets purchased and sold during the year is provided on a pro-rata basis.

5. EFFECTS OF CHANGES IN THE FOREIGN EXCHANGE RATE

5.1 Assets and Liabilities denominated in Foreign Currencies are translated at the rates notified by FEDAI at the close of the year. Profit or Loss accruing from such transactions is recognised in the Profit and Loss Account.

5.2 Income and Expenditure items have been translated at the exchange rates prevailing on the date of the transactions.

5.3 The Bank does not have a Branch in any Foreign Country.

5.4 Outstanding Forward Exchange Contracts are revalued at the exchange rates notified by FEDAI and the resultant net gain or loss is recognised in the Profit and Loss Account.

5.5 Foreign Currency Guarantees, Acceptances, Endorsements and other obligations are reported at the FEDAI notified closing exchange rates prevailing on the date of the Balance Sheet.

6. EMPLOYEE BENEFITS

6.1 Payments to defined contribution schemes such as Provident Fund and Employees Pension Fund, are charged as expenses, as and when they fall due.

6.2 Provision towards Leave Encashment is accounted on actuarial basis in accordance with Accounting Standard 15 (Revised 2005) issued by ICAI.

6.3 Payments to the Group Gratuity Life Assurance Scheme of the Life Insurance Corporation of India towards gratuity liability are charged as expenses, as and when they fall due.

7. EMPLOYEES STOCK OPTION SCHEME

The Employee Stock Option Scheme provides for grant of equity stock options to employees that vest in a graded manner. The Bank follows the Intrinsic Value Method to account for its employee compensation costs arising from grant of such options. The excess of fair market price over the exercise price shall be accounted as employee compensation cost in the year of vesting. The fair market price is the latest closing price of the shares on the Stock Exchanges in which shares of the Bank are largely traded immediately prior to the date of meeting of the Compensation Committee in which the options are granted.

8. SEGMENT REPORTING

The Bank recognises the Business Segment as the Primary Reporting Segment and Geographical Segment as the Secondary Reporting Segment, in accordance with the RBI guidelines and in compliance with the Accounting Standard 17.

Business Segment is classified into (a) Treasury (b) Corporate and Wholesale Banking, (c)Retail Banking (includes Digital Banking Units) (d) Other Banking Operations.

9. EARNING PER SHARE

Basic earning per share is calculated by dividing the net profit of the year by the weighted average number of equity shares.

Diluted earning per share is computed using the weighted average number of equity shares and dilutive potential equity shares.

10. IMPAIRMENT OF ASSETS

An assessment is made at each Balance Sheet date whether there is any indication that an asset is impaired. If any such indication exists, an estimate of the recoverable amount is made and impairment loss, if any, is provided for.

11. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

11.1 In conformity with AS 29 "Provisions, Contingent Liabilities and Contingent Assets" issued by the Institute of Chartered Accountants of India, the Bank recognizes provision only when :

a) It has a present obligation as a result of a past event.

b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and

c) A reliable estimate of the amount of the obligation can be made.

11.2 No provision is recognized for :

I. Any possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the Bank; or

ii. Any present obligation that arises from past events but is not recognized because

a) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or

b) A reliable estimate of the amount of obligation cannot be made.

Such obligations are recorded as Contingent Liabilities. These are assessed at regular intervals and only that part of the obligation for which an outflow of resources embodying economic benefits is probable, is provided for, except in the extremely rare circumstances where no reliable estimate can be made.

11.3 Contingent Assets are not recognized in the Financial Statements.

12. INCOME TAX

Income Tax comprises current tax and deferred tax for the year. The deferred tax assets / liability is recognised in accordance with Accounting Standard 22 issued by the Institute of Chartered Accountants of India.

13. NET PROFIT

The Net Profit disclosed in the Profit and Loss Account is after considering :

a. Provision for taxes on income in accordance with statutory requirements.

b. Provision for Standard Assets and NonPerforming Assets.

c. Provision for depreciation on Investments

d. Other usual and necessary provisions.

14. PROPOSED DIVIDEND

In term of AS 4 - "Contingencies and Events occurring after the Balance Sheet date" proposed dividend or dividend declared after Balance Sheet date is not shown as "Other Liability" in the Balance Sheet, instead a note on the same will be included in the Financial Statement. Such proposed dividend will be appropriated from the "Reserves and Surplus" only after the approval of the shareholder.

15. SPECIAL RESERVES

Revenue and other Reserve include Special Reserve created under Section 36(i)(viii) of the Income Tax Act, 1961 with the approval of the Board of Directors of the Bank.

16. CORPORATE SOCIAL RESPONSIBILITY

The expenditure towards Corporate Social Responsibility in accordance with the Companies Act, 2013 is recognised in the Profit and Loss Account.

17. OPERATING LEASES

Leases where all the risks and rewards of ownership are retained by the lessor are classified as 'Operating Lease'. Operating Lease payments are recognised as an expense in the Profit and Loss Account as per the lease terms. Initial direct costs in respect of operating leases such as legal costs, brokerage costs etc., are recognised as expense in the Profit and Loss Account.