Bank of Montreal 2008 Annual Report Download - page 137

Notes
BMO Financial Group 191st Annual Report 2008 | 133
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:
Note 19: Capital Trust Securities
We issue BMO Capital Trust Securities (“BOaTS”) through our consolidated
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 OSFI, 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.
Note 20: Interest Rate Risk
We earn interest on interest bearing assets and we pay interest on
interest bearing liabilities. We also have derivative instruments, such as
interest rate swaps and interest rate options, whose values are sensitive
to changes in interest rates. To the extent that we have assets, liabilities
and derivative 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 date 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 rep-
resents the position outstanding at the close of the business day and may
change significantly in subsequent periods based on customer behaviour
and the application of our asset and liability management policies.
The assumptions for the year ended October 31, 2008 were as follows:
Assets
Fixed term assets, such as residential mortgage loans and consumer
loans, are reported based upon the scheduled repayments and
estimated 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, 2008.
Redemption date Conversion date
Principal amount
Distribution At the option At the option
(Canadian $ in millions, except Distribution) Distribution dates per BOaTS (3) of the Trust of the holder 2008 2007
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%. (3) Distribution is paid on each trust security which has a par value of $1,000.
(2) After December 31, 2015, the distribution will be at the Bankers’ Acceptance Rate plus 1.5%.