Bank of Montreal Launches 539,639 Accelerated Return Notes Backed by Financial Sector Equity Basket

Pricing and Structural Features of the Accelerated Return Notes

Bank of Montreal priced the Accelerated Return Notes on July 23, 2026, with settlement on July 30, 2026. The issuance included 539,639 units at $10 each, generating gross proceeds of $5,396,390 before expenses. The underwriting discount was $0.175 per unit, totaling $94,436.82, alongside a $0.05 per unit hedging-related embedded charge. After these deductions, net proceeds amounted to approximately $5.3 million or $9.825 per unit.

These notes feature a leveraged return structure offering investors a 3-to-1 participation rate on gains in the underlying basket, capped at $12.77 per unit, representing a maximum 27.70% return above principal. Conversely, investors bear full downside risk on losses dollar-for-dollar, potentially losing up to 100% of principal. The notes do not pay periodic coupons; all returns are realized at maturity on September 24, 2027, about 14 months after issuance.

Underlying Basket Composition and Weighting

The basket comprises fifteen financial sector equities, each equally weighted at approximately 6.67% as of pricing. While the disclosure does not list individual securities or ticker symbols in this section, full details are available in the term sheet’s "The Basket" section. The basket aims to provide diversified exposure across the financial services industry. Basket performance is measured on the Calculation Day, September 17, 2027, with provisions to postpone in case of Market Disruption Events to ensure reliable valuation.

Initial Valuation Versus Offering Price

Bank of Montreal’s initial estimated value for each note was $9.21, significantly below the $10 public offering price. This $0.79 difference reflects structural components including the internal funding rate used for the fixed-income portion, the underwriting discount, and hedging costs. The internal funding rate typically represents a discount compared to conventional debt credit spreads. The filing cautions that this initial valuation does not guarantee secondary market liquidity or resale value.

Issuer Credit Risk and Unsecured Debt Status

The notes constitute unsecured senior debt obligations of Bank of Montreal, ranking equally with other unsecured senior debt. Payments, including principal and contingent returns, depend entirely on BMO’s creditworthiness. In the event of financial distress or default, noteholders have no collateral protection and rank behind secured creditors. These notes are not insured by any governmental agency, exposing investors to issuer counterparty risk.

Therefore, investors must consider both the basket’s performance risk and BMO’s financial health when evaluating these notes. The filing does not provide separate credit ratings or detailed financial metrics for BMO, referring investors to the prospectus and product supplement for further information.

Differences from Traditional Debt and Target Investor Profile

Unlike conventional bonds, these notes do not offer periodic interest payments. Returns depend solely on the underlying basket’s performance, realized at maturity, combining equity-like leverage on the upside (capped at 27.70%) with full downside exposure. The filing highlights these as significant differences involving distinct risks and additional costs compared to traditional fixed-income securities.

Suitable investors are those expecting moderate basket appreciation, willing to accept capped returns without periodic income, and prepared to bear principal loss risk. Investors seeking stable income, principal protection, or unlimited upside may prefer conventional securities. The notes lack exchange listing and have limited secondary market liquidity, making them best suited for buy-and-hold strategies.

Market Disruption Event Provisions and Calculation Day Flexibility

The notes include provisions to postpone the Calculation Day from September 17, 2027, if Market Disruption Events occur, ensuring valuation occurs on a trading day with reliable market data for all underlying securities. Detailed definitions and postponement rules are outlined in product supplement STOCK ARN-1. This feature protects investors from distorted pricing during market stress but may extend the effective maturity beyond the nominal 14-month tenor.

Basket Performance Mechanics and Leverage Details

Investors receive triple participation in basket gains up to a capped return of $12.77 per unit (27.70%). For example, a 10% basket increase would normally yield $13.00 per unit, but the cap limits the payout to $12.77, capping gains beyond a 9.23% basket rise. Losses are dollar-for-dollar; a 50% basket drop results in a $5.00 loss per unit.

The Starting Value is fixed at 100.00 at pricing, with the Ending Value calculated on the Calculation Day based on closing prices of the fifteen equities. Price multipliers start at 1 but may adjust for corporate actions such as splits or mergers to maintain economic exposure. Specific adjustment formulas are detailed in the product supplement.

Registration, Underwriting, and Secondary Market Details

The offering was conducted under Bank of Montreal’s SEC Registration Statement No. 333-285508, with notes offered pursuant to Product Supplement STOCK ARN-1 dated September 8, 2025, and Prospectus Supplement and Prospectus dated March 25, 2025. BofA Securities acted as lead underwriter and joint calculation agent with BMO Capital Markets Corp. The SEC has neither approved nor disapproved the notes nor verified the offering documents’ accuracy.

The notes are not exchange-listed and lack a robust secondary market, limiting liquidity. BMO and underwriters may provide limited secondary trading, but wide bid-ask spreads and scarce trading opportunities are expected. Investors should consider these notes as buy-and-hold instruments with maturity on September 24, 2027.

Risk Factors and Regulatory Disclosures

Comprehensive risk disclosures appear on page TS-6 of the term sheet and page PS-5 of product supplement STOCK ARN-1. Risks include issuer credit risk, market risk from the underlying equities, volatility risk due to capped upside, liquidity risk, and structural risks related to leverage and absence of periodic income. Reinvestment risk is also present since no interim cash flows occur.

The notes are not "bail-inable" and will not convert into BMO common shares under the Canada Deposit Insurance Corporation Act, confirming their status as conventional debt. Investors should consult tax and legal advisors regarding jurisdiction-specific implications, as the filing does not address tax treatment.

Access to Offering Documents and Investor Resources

Bank of Montreal provides the full Note Prospectus via SEC EDGAR and through underwriters. Documents include this term sheet, Product Supplement STOCK ARN-1, Prospectus Supplement, and Prospectus, all incorporated by reference. These materials detail terms, basket composition, adjustment procedures, Market Disruption Event protocols, and risk disclosures.

Investors may obtain documents free of charge from the SEC website or by contacting BofA Securities or MLPF&S at 1-800-294-1322. The filing stresses that only the official prospectus documents supersede any prior oral or written statements. Prospective investors are urged to thoroughly review all materials before investing to fully understand the notes’ terms and risks.