Bank of Montreal 2007 Annual Report Download - page 123

BMO Financial Group 190th Annual Report 2007 119
Notes
Note 19: Capital Trust Securities
Holders of the BOaTS are entitled to receive semi-annual
non-cumulative fixed cash distributions as long as we declare dividends
on our preferred shares, or if no such shares are outstanding, on
our common shares in accordance with our ordinary dividend practice.
The terms of the BOaTS are as follows:
We issue BMO Capital Trust Securities (“BOaTS”) through our con-
solidated subsidiary BMO Capital Trust (the “Trust”). The proceeds
of the BOaTS are used to purchase mortgages. Upon consolidation,
the BOaTS are reported in our Consolidated Balance Sheet either
as non-controlling interest in subsidiaries or as capital trust securities,
depending on the terms of the BOaTS.
Redemption by the Trust
On or after the redemption dates indicated above, and subject to the
prior approval of the Superintendent of Financial Institutions Canada,
the Trust may redeem the BOaTS in whole without the consent of
the holders.
Conversion by the Holders
On or after the conversion dates indicated above, the BOaTS Series A,
B and C may be exchanged for our Class B Preferred shares, Series 7,
8 and 9, respectively, at the option of the holders.
Automatic Exchange
The BOaTS Series A, B, C, D and E will each be automatically exchanged
for 40 of our Class B Preferred shares, Series 7, 8, 9, 11 and 12, respec-
tively, without the consent of the holders on the occurrence of specific
events such as a wind-up of Bank of Montreal, a regulatory requirement
to increase capital or violations of regulatory capital requirements.
Change in Accounting Policy
On November 1, 2004, we adopted the CICA’s new accounting
requirements on the classification of financial instruments as liabilities
or equity. The new rules require that our capital trust securities,
which are ultimately convertible into a variable number of our common
shares at the holders’ option, be classified as liabilities. We reclassified
$1,150 million of our capital trust securities, Series A, B and C, previously
recorded in other liabilities as non-controlling interest in subsidiaries,
to capital trust securities. The distributions made on those capital trust
securities are now recorded as interest expense.
See Note 21 for the impact of this change in accounting policy
on our consolidated financial statements.
Note 20: Interest Rate Risk
We earn interest on interest bearing assets and we pay interest
on interest bearing liabilities. We also have off-balance sheet financial
instruments whose values are sensitive to changes in interest rates.
To the extent that we have assets, liabilities and financial instruments
maturing or repricing at different points in time, we are exposed to
interest rate risk.
Interest Rate Gap Position
The determination of the interest rate sensitivity or gap position by
necessity encompasses numerous assumptions. It is based on the earlier
of the repricing or maturity date of assets, liabilities and derivatives
used to manage interest rate risk.
The gap position presented is as at October 31 of each year. It repre-
sents the position outstanding at the close of the business day and may
change significantly in subsequent periods based on customer behaviours
and the application of our asset and liability management policies.
The assumptions for the year ended October 31, 2007 were as follows:
Assets
Fixed term assets, such as residential mortgage loans and consumer
loans, are reported based upon the scheduled repayments and esti-
mated prepayments that reflect expected borrower behaviour.
Trading and underwriting (mark-to-market) assets and interest
bearing assets on which the customer interest rate changes with
the prime rate or other short-term market rates are reported in the
zero to three months category.
Fixed rate and non-interest bearing assets with no defined maturity
are reported based upon expected account balance behaviour.
Liabilities
Fixed rate liabilities, such as investment certificates, are reported at
scheduled maturity with estimated redemptions that reflect expected
depositor behaviour.
Interest bearing deposits on which the customer interest rate
changes with the prime rate or other short-term market rates are
reported in the zero to three months category.
Fixed rate and non-interest bearing liabilities with no defined
maturity are reported based upon expected account balance behaviour.
Capital
Common shareholders’ equity is reported as non-interest sensitive.
Yields
Yields are based upon the effective interest rates for the assets or
liabilities on October 31, 2007.
Redemption date Conversion date
Principal amount
Distribution At the option At the option
(Canadian $ in millions, except Distribution) Distribution dates per BOaTS of the Trust of the holder 2007 2006
Capital Trust Securities
Series A June 30, December 31 $ 34.52 December 31, 2005 December 31, 2010 $ 350 $ 350
Series B June 30, December 31 33.24 June 30, 2006 June 30, 2011 400 400
Series C June 30, December 31 33.43 December 31, 2006 June 30, 2012 400 400
1,150 1,150
Non-Controlling Interest
Series D June 30, December 31 $ 27.37(1) December 31, 2009 600 600
Series E June 30, December 31 23.17(2) December 31, 2010 450 450
1,050 1,050
Total Capital Trust Securities $ 2,200 $ 2,200
(1) After December 31, 2014, the distribution will be at the Bankers’ Acceptance Rate plus 1.5%. (2) After December 31, 2015, the distribution will be at the Bankers’ Acceptance Rate plus 1.5%.