Bank of Montreal Issues 539,639 Accelerated Return Notes Linked to Financial Sector Basket

Structural Details and Pricing of the Accelerated Return Notes

Bank of Montreal priced the Accelerated Return Notes on July 23, 2026, with settlement scheduled for July 30, 2026. The offering comprised 539,639 units at $10 principal amount each, generating total public offering proceeds of $5,396,390 before transaction expenses. The underwriting discount totaled $0.175 per unit, or $94,436.82 in aggregate, with an additional hedging-related charge of $0.05 per unit embedded in the notes structure. After these costs, BMO received $9.825 per unit, or approximately $5.3 million in net proceeds before expenses.

The notes incorporate a leveraged return mechanism designed to provide enhanced upside participation while preserving downside risk exposure. Investors receive a three-to-one participation rate on increases in the underlying basket value, subject to a cap of $12.77 per unit—representing a maximum capped return of 27.70% over the principal amount. If the basket value declines, investors face proportional losses on a dollar-for-dollar basis, with potential loss of up to 100% of principal. The notes contain no periodic coupon payments; all economic value transfer occurs at maturity on September 24, 2027, approximately 14 months from issuance.

Composition and Weighting of the Underlying Basket

The notes are linked to a basket of fifteen financial sector equity securities, each assigned an approximately equal weighting as of the pricing date. The disclosure does not identify each individual security by name or ticker symbol within this section; however, the filing references that complete details about the Basket Stocks, including ticker symbols and weightings, are provided under "The Basket" section of the term sheet. This equal-weight approach means that each of the fifteen securities contributes roughly 6.67% to the overall basket composition at inception, though weightings may adjust over time due to corporate events affecting individual holdings.

The basket construction targets the financial services sector broadly, capturing diversified exposure to institutions within that industry. The pricing mechanism for the Ending Value calculates the basket performance on the Calculation Day, scheduled for September 17, 2027, using methodologies specified in the product supplement. The filing indicates that the Calculation Day is subject to postponement in the event of Market Disruption Events, ensuring that valuation occurs on a trading day when reliable market data is available for all underlying securities.

Initial Valuation and Difference from Public Offering Price

Bank of Montreal determined an initial estimated value of $9.21 per unit as of the pricing date, meaningfully below the $10.00 public offering price paid by investors. This $0.79 per unit valuation gap reflects several structural components inherent to the notes. The estimated value calculation aggregates a fixed-income debt component priced using BMO's internal funding rate for structured notes, plus the value of one or more derivative transactions that economically replicate the notes' upside-capped and downside-exposed payoff profile. The filing emphasizes that the internal funding rate used in this valuation typically represents a discount from credit spreads BMO would incur when issuing conventional fixed-rate debt securities.

The difference between the offering price and initial estimated value results from three primary factors: the discount embedded in BMO's internal funding rate relative to conventional debt spreads, the underwriting discount of $0.175 per unit, and the hedging-related charge of $0.05 per unit. Together, these costs reduce both the economic value of the notes to investors and their initial estimated value at pricing. The filing notes that actual value of the notes at any time will reflect numerous factors and cannot be predicted with accuracy, cautioning investors that the initial estimated value should not be construed as a guarantee of secondary market liquidity or resale value.

Credit Risk and Unsecured Nature of the Obligation

The notes represent unsecured senior debt obligations of Bank of Montreal, ranking equally with all other unsecured senior debt from the issuer outstanding at any time. The disclosure explicitly states that any payments due on the notes—including all principal repayment and any contingent returns based on basket performance—are subject to the full credit risk of Bank of Montreal. Should BMO experience financial distress or default, noteholders would rank behind secured creditors and have no collateral backing their claims. The notes are not insured by the Canada Deposit Insurance Corporation, the Federal Deposit Insurance Corporation, the Deposit Insurance Fund, or any other governmental agency, leaving investors exposed to issuer counterparty risk.

As a result, the value and repayment profile of the notes depend not only on the performance of the underlying basket of financial sector securities but also on the creditworthiness and financial stability of Bank of Montreal itself. Investors should evaluate both the embedded performance risk (linked to the fifteen underlying equities) and the issuer credit risk (tied to BMO's financial condition) when assessing the suitability of these notes for their portfolio objectives. The filing provides no separate credit rating or detailed financial metrics for Bank of Montreal within this disclosure, directing readers to the prospectus and product supplement for additional information about the issuer.

Comparison to Conventional Debt Securities and Investor Suitability

The notes differ materially from conventional fixed-income securities in several dimensions relevant to investor decision-making. Unlike traditional bonds or notes, these instruments provide no periodic interest payments or coupon coupons; instead, all economic returns depend on the path-dependent performance of the underlying basket and are realized only at maturity. This structure eliminates ongoing income but introduces equity-like leverage on the upside, capped at 27.70%, paired with full downside exposure if the basket declines. The filing acknowledges these are "important differences" from conventional debt, including "different investment risks and certain additional costs."

The disclosure identifies potential investor profiles suitable for the notes: investors who anticipate moderate increases in the basket value, are willing to accept capped returns and forgo periodic interest, accept loss of principal on downside moves, and believe the three-to-one upside leverage justifies the capped ceiling and downside exposure. Conversely, investors seeking stable income streams, principal protection, or unlimited upside participation would likely find conventional securities or alternative products more appropriate. The limited secondary market liquidity—with no exchange listing—compounds this consideration, as investors may face difficulty exiting positions before maturity or may incur significant bid-ask spreads if liquidity is sought.

Market Disruption Events and Calculation Day Adjustments

The notes incorporate provisions to address Market Disruption Events that may affect the reliable valuation of the underlying basket on the scheduled Calculation Day of September 17, 2027. The filing indicates that if such disruption occurs on that date, the Calculation Day is subject to postponement, ensuring that the Ending Value is determined using market data from a trading day when all fifteen underlying securities and the basket can be reliably priced. The specific criteria defining a Market Disruption Event, along with postponement rules and any ultimate deemed-value mechanics if disruption persists, are detailed in product supplement STOCK ARN-1 beginning on page PS-20 of that document.

This postponement feature protects noteholders from having their payoff calculated during periods of market stress or dysfunction that might distort individual security prices or prevent trading in one or more underlying holdings. However, the filing does not disclose the maximum postponement period, any fallback valuation methodology if disruption extends indefinitely, or other contingencies. Investors relying on the maturity date of September 24, 2027, should recognize that the actual valuation date may shift if market conditions warrant, potentially extending the holding period slightly beyond the nominal 14-month tenor.

Underlying Basket Performance and Leverage Mechanics

The payoff structure of the notes employs a three-to-one participation rate on upside moves in the basket, subject to a hard cap of $12.77 per unit (27.70% return). This design means that if the basket appreciates by 10% from its Starting Value of 100, investors would ordinarily receive $13.00 per unit (the $10 principal plus a $3.00 gain representing 300% of the 10% basket move). However, because the capped return limits total repayment to $12.77 per unit, a basket appreciation exceeding 9.23% would trigger the cap, capping investor gains. Conversely, if the basket declines by any percentage, investors lose that amount dollar-for-dollar; a 50% basket decline results in a $5.00 loss per unit, leaving only $5.00 of the original $10 principal.

The Starting Value is fixed at 100.00 as of the pricing date. The Ending Value is calculated on the Calculation Day using methodologies specified in the product supplement and is based on the closing prices or levels of the fifteen underlying financial sector securities. The price multiplier for each Basket Stock is initially set at 1, though it may adjust for certain corporate events such as stock splits, mergers, or special distributions affecting individual holdings. This adjustment mechanism aims to preserve the economic exposure to each underlying company despite corporate actions that would otherwise alter per-share values, though the filing does not detail the specific adjustment formulas or the circumstances triggering them.

Registration, Underwriting, and Secondary Market Considerations

The offering was conducted pursuant to Bank of Montreal's Registration Statement No. 333-285508, filed with the Securities and Exchange Commission. The notes are offered under Product Supplement No. STOCK ARN-1 dated September 8, 2025, and the Prospectus Supplement and Prospectus both dated March 25, 2025. BofA Securities served as the lead underwriter and joint calculation agent alongside BMO Capital Markets Corp. The SEC has not approved or disapproved the notes, nor has it determined whether the offering documents are truthful or complete, as required by federal securities law disclosures.

The notes are not listed or traded on any exchange, meaning investors cannot easily buy or sell them in a public secondary market. This lack of liquidity represents a material consideration for investors who may need to exit their position before September 24, 2027. BMO and the underwriters may provide a secondary market for the notes on an as-available basis, but the filing explicitly warns of "limited secondary market liquidity," suggesting that bid-ask spreads may be wide and purchase-and-sale opportunities may be sparse. Investors should treat these notes as buy-and-hold instruments with a defined maturity date rather than as liquid, tradable securities.

Risk Factors and Investor Disclosures

The filing directs readers to detailed Risk Factors disclosures beginning on page TS-6 of the term sheet and page PS-5 of product supplement STOCK ARN-1 for comprehensive enumeration of investment risks. These risks include but are not limited to issuer credit risk (Bank of Montreal), market risk (the performance of the fifteen underlying financial securities), volatility risk (the capped upside limiting gains if the basket rises sharply), liquidity risk (the limited secondary market for the notes), and structural risks related to leverage, capping, and the absence of periodic income. The notes also carry reinvestment risk, as investors receive no interim cash flows to reinvest until maturity.

Additionally, the notes are subject to certain regulatory and tax considerations that may affect their value or suitability depending on investor circumstances. The filing states that the notes are not "bail-inable" and are not subject to conversion into Bank of Montreal common shares or the common shares of any affiliates under subsection 39.2(2.3) of the Canada Deposit Insurance Corporation Act, confirming they remain conventional debt rather than loss-absorbent capital instruments. Investors are advised to consult tax and legal professionals regarding the treatment of these notes in their specific jurisdictions and tax situations, as the filing does not address tax implications.

Additional Documentation and Information Resources

Bank of Montreal has made the complete Note Prospectus available to investors via SEC EDGAR and through the underwriters. The offering documents include this term sheet, Product Supplement STOCK ARN-1 dated September 8, 2025, and the Prospectus Supplement and Prospectus both dated March 25, 2025. These materials are incorporated by reference into the registration statement and provide comprehensive details on the notes' terms, the composition and methodology for calculating the underlying basket, adjustment procedures for corporate events, Market Disruption Event protocols, and extensive risk disclosures.

Investors may access these documents without cost through the SEC website or by contacting BofA Securities or MLPF&S by calling toll-free at 1-800-294-1322. The filing emphasizes that any prior oral statements or contemporaneous written materials not included in the official Note Prospectus are superseded by the prospectus documents. Before investing, the filing strongly recommends that potential investors read the full prospectus materials, including all Risk Factors and product supplement details, to understand the complete terms, conditions, and risks associated with these notes.