UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21727
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First Trust Mortgage Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: April 30, 2015
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST BROOKFIELD
FIRST TRUST
MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2015
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2015
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 6
Statement of Assets and Liabilities.......................................... 12
Statement of Operations...................................................... 13
Statements of Changes in Net Assets.......................................... 14
Statement of Cash Flows...................................................... 15
Financial Highlights......................................................... 16
Notes to Financial Statements................................................ 17
Additional Information....................................................... 23
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Brookfield Investment Management Inc.
("Brookfield" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Mortgage Income Fund (the "Fund") to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Brookfield are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2015
Dear Shareholders:
Thank you for your investment in First Trust Mortgage Income Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2015, including a market overview and a
performance analysis for the period. We encourage you to read this report and
discuss it with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, for the six months covered
by this report, some economic and global factors, including the continued
conflict in the Middle East and a sharp decline in oil prices, created
volatility in the U.S. and global markets. Another factor that has impacted
markets is the fact that many economists are predicting the Federal Reserve will
begin to raise interest rates this year.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MORTGAGE INCOME FUND (FMY)
"AT A GLANCE"
AS OF APRIL 30, 2015 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $14.84
Common Share Net Asset Value ("NAV") $16.55
Premium (Discount) to NAV (10.33)%
Net Assets Applicable to Common Shares $69,722,473
Current Monthly Distribution per Common Share (1) $0.085
Current Annualized Distribution per Common Share $1.020
Current Distribution Rate on Closing Common Share Price (2) 6.87%
Current Distribution Rate on NAV (2) 6.16%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
4/14 15.94 17.57
15.95 17.50
15.88 17.58
15.99 17.58
16.08 17.60
5/14 16.01 17.58
15.70 17.59
15.71 17.57
15.82 17.57
6/14 15.90 17.55
15.76 17.53
15.79 17.48
15.77 17.41
7/14 15.72 17.39
15.43 17.37
15.45 17.38
15.60 17.35
15.52 17.37
8/14 15.50 17.35
15.49 17.32
15.46 17.39
15.37 17.34
9/14 15.20 17.31
14.96 17.20
14.88 17.14
15.00 16.96
15.04 17.01
10/14 15.12 17.02
15.06 16.94
14.99 16.94
14.97 16.93
11/14 15.10 16.92
15.05 16.91
14.92 16.83
14.92 16.77
12/14 14.94 16.79
14.85 16.71
14.94 16.65
14.87 16.56
14.79 16.56
1/15 14.86 16.53
14.72 16.59
14.89 16.66
14.90 16.66
2/15 14.81 16.65
14.64 16.68
14.58 16.66
14.77 16.57
3/15 14.75 16.57
14.91 16.51
14.73 16.55
14.78 16.51
14.82 16.51
4/15 14.84 16.55
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended Inception (5/25/05)
4/30/15 4/30/15 4/30/15 to 4/30/15
FUND PERFORMANCE (3)
NAV 0.62% 0.71% 4.67% 6.52%
Market Value 1.57% -0.46% 4.23% 4.87%
INDEX PERFORMANCE
Barclays Capital U.S. MBS:
Agency Fixed Rate MBS Index 1.93% 4.64% 3.56% 4.80%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 0.75
Weighted Average Life (Years) 5.94
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 77.3%
U.S. Government Agency Mortgage-Backed
Securities 22.4
Asset-Backed Securities 0.3
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Adjustable Rate Securities 60.0%
Fixed Rate Securities 29.2
Interest Only Securities 10.8
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 25.4%
AA+ 20.7
AA 1.7
AA- 7.1
A+ 17.4
A 2.9
BBB+ 0.9
BBB 0.3
BB+ 0.5
BB 2.8
B+ 1.0
B 1.5
B- 1.0
CCC 9.9
CCC- 0.9
CC 3.6
D 2.3
NR 0.1
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Total 100.0%
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(1) Most recent distribution paid or declared through 4/30/2015. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 4/30/2015. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
(4) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of the
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and ratings are not equivalent, the highest
ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or
lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The
credit ratings shown relate to the creditworthiness of the issuers of the
underlying securities in the Fund, and not to the Fund or its shares.
Credit ratings are subject to change.
NR Not Rated
Page 2
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PORTFOLIO COMMENTARY (UNAUDITED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2015
SUB-ADVISOR
Brookfield Investment Management Inc. (the "Firm" or the "Sub-Advisor") is a
registered investment advisor that invests in global listed real estate and
infrastructure equities, corporate credit and securitized credit strategies.
Headquartered in New York, NY, the Firm and its affiliates also maintain offices
and investment teams in Chicago, Boston and Toronto and had $19 billion of
assets under management as of March 31, 2015. The Firm has experience in the
management of institutional portfolios, retail mutual funds and various
commingled vehicles. The Sub-Advisor was established in 1989 and conducts the
public market activities of Brookfield Asset Management Inc.
The Firm is a wholly-owned subsidiary of Brookfield Asset Management Inc., a
global alternative asset manager with over $200 billion in assets under
management as of March 31, 2015. Brookfield Asset Management has over a 100-year
history of owning and operating assets with a focus on property, renewable
power, infrastructure and private equity. The company offers a range of public
and private investment products and services, which leverage its expertise and
experience and provide it with a competitive advantage in the markets where it
operates.
PORTFOLIO MANAGEMENT TEAM
ANTHONY BREAKS, CFA - SENIOR DIRECTOR
CHRIS WU - DIRECTOR
COMMENTARY
FIRST TRUST MORTGAGE INCOME FUND
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues its objectives by investing primarily in mortgage-backed securities
("MBS") representing part ownership in a pool of either residential or
commercial mortgage loans that, in the opinion of the Fund's Sub-Advisor, offer
an attractive combination of credit quality, yield and maturity. There can be no
assurance the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
MARKET RECAP AND OUTLOOK
Within the Securitized Products universe, non-Agency Residential Mortgage-Backed
Securities ("non-Agency RMBS") and Commercial Mortgage-Backed Securities
("CMBS") had strong returns for the six months ended April 30, 2015 driven by
improving collateral performance and strong investor demand.
Prices of non-Agency RMBS have benefited from improving home prices. Prices of
single family homes were up 4.5% in 2014, per CoreLogic HPI Data. This follows
gains of 11.2% in 2013 and 9.2% in 2012. This has substantially improved
homeowner equity and consequently, we have seen improved performance on the
underlying loans. According to the Mortgage Bankers Association, the total
delinquency number for the first quarter of 2015 was 5.41%, which was down from
5.68% in the fourth quarter of 2014, extending a low not seen since 2007. We
believe that home price appreciation will slow in 2015, leveling off in the 3%
to 5% range. That said, we believe the odds may favor a surprise to the upside,
as continued low interest rates may drive additional refinancing, or
unanticipated wage inflation that may improve access to credit and ability to
service existing debt.
Access to credit for residential borrowers has remained stubbornly limited. This
is the strongest argument against the idea that home prices are approaching
bubble territory. Regulation, litigation and other issues all continue to limit
access to mortgage credit, continuing to weigh on housing metrics like new home
sales. While new home sales have remained weak, data related to housing supply
has been very supportive. Limited building and a reduction in distressed
inventory, such as bank foreclosures, has reduced supply for existing homes and
this has contributed to home price index increases. Given current conditions, we
expect home prices to continue to improve, albeit at a more stable 4% per annum
rate. Increasing home prices result in lower loan-to-value ratios, which
continue to help more borrowers regain lost equity, and come closer to meeting
standards required to refinance at historically low mortgage rates.
Like residential real estate, commercial real-estate markets in the U.S.
continue to improve in 2015. CMBS delinquency rates are down to 5.6%, from a
peak of 10.3% seen in 2012. The aggregate index for commercial property prices
is now above the peak seen prior to the global financial crisis, as measured by
Moody's CPPI, a widely followed index of commercial real-estate prices. For
commercial real estate, credit is readily available and access to credit
continues to expand along with the allowed leverage.
Page 3
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PORTFOLIO COMMENTARY (UNAUDITED) (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2015
We believe the expansion in credit, combined with an aggressive buyer base for
new issues has facilitated relatively unrestrained commercial property lending.
With risk retention requirements on the horizon in 2016, we believe there will
be additional pressure on lenders to be aggressive, and on buyers of new CMBS to
invest before risk retention interferes. As such, we prefer more seasoned
securities that may benefit from loans refinancing into the strong new issue
market rather than extending or defaulting. We are also focused on a particular
type of new issue backed by large loans on single properties. The collateral for
these securities is a large, high quality, well understood asset. The loan to
value ratio for the security, a measure of credit protection, is much lower than
it would be in a traditional CMBS transaction.
The interest rate environment has been very supportive of real-estate assets,
with low rates persisting longer than was anticipated. Now the focus for the
rates market is on when the Federal Reserve will raise short-term interest rates
and how quickly it will introduce subsequent hikes. First quarter economic data
was tepid, with some weakness in employment and manufacturing numbers. The
severe winter, a sharp decline in oil prices, and an increase in the U.S. dollar
are credited with weighing on GDP in the first quarter. Economic drivers for
mortgages and ABS tend to follow consumer and consumption trends. We note that
on balance, savings to consumers from cheaper gas prices is not being spent.
Instead we see continued deleveraging of the household balance sheet and a
somewhat higher savings rate.
Over the six months ended April 30, 2015, 10-year U.S. Treasury rates have
continued to drift lower, ending the period just a bit above 2% and the interest
rate curve, as measured by the two-year U.S. Treasury and the 10-year U.S.
Treasury, has flattened over 25 basis points. With the U.S. 10-year interest
rate at about 2%, interest rates are now back to the lower end of their
post-crisis trading range. A new round of stimulus in Europe is likely to keep
pressure on U.S. rates, with the German 10-year Bund very close to zero percent
yield and other core EU sovereigns trading under one percent.
The Federal Reserve (the "Fed") concluded its purchase program for Treasury
bonds and Agency RMBS in October 2014, though they will continue to reinvest
principal payments for the time being. Agency RMBS net issuance was less than
$50 billion as existing home sales slowed in 2014. This has muted the effect of
lower Fed purchases and held mortgage yields to a tight spread over Treasuries.
At some point, we expect Agency Residential Mortgage-Backed Securities ("Agency
RMBS") issuance will increase and the mortgage basis will have to widen as
private investors will be the sole buyers. This cycle could mean an even larger
supply of Agency RMBS because non-Agency RMBS issuance has been and is likely to
remain quite low due to heavy regulation.
Away from Agency RMBS issuance, we continue to see little supply of new issue
non-Agency RMBS. Issuance from dealer conduits and real estate investment
trusts, historically a source of non-Agency mortgages, has been sporadic at
best, and immaterial compared to the existing stock of pre-crisis securities.
The Government Sponsored Enterprises ("GSEs") have turned into a material source
of new issue mortgage credit through the issuance of credit risk-sharing
securities. These securities convey a slice of risk from the GSEs guarantee
portfolio to private investors.
Through the first quarter of 2015, Fannie Mae and Freddie Mac issued a combined
$4.22 billion of risk-sharing deals, still small in the context of pre-crisis
non-Agency RMBS issuance but notable given current low levels of supply. CMBS
issuance in the first quarter was robust, with $29.4 billion in new unguaranteed
deals and $13.7 billion in Agency-guaranteed CMBS.
Agency RMBS remains another key sector for the Fund. Falling interest rates and
good carries resulted in positive performance for Agency RMBS. The 30-year
mortgage rate remained below 4% and the prices of mortgage bonds rose. The
increases in prepayment speeds, however, were muted even though mortgage rates
have fallen. Slow prepayment speeds were mostly due to a slow housing market and
restrictive lending standards by mortgage banks. This mitigated the negative
impact of lower interest rates on the valuation of premium coupon pools, and
interest-only ("IO") securities that receive only the coupon associated with a
pool of loans.
We remain positive on most securitized products for this year, based on
continued improvement in forecasts for collateral performance. Expansion of
credit for borrowers has slowed versus market expectations and this remains an
area of potential improvement for our markets, though likely not in the near
term. Banks have been slow to expand borrowing beyond Agency-eligible loans and
non-Agency eligible loans to otherwise very clean, typically high net worth
borrowers. Rents have been rising for several years, and with interest rates
still low, many households have a financial incentive to purchase rather than
rent. This first time home buyer has a number of Agency-eligible programs to
facilitate that purchase. These dynamics support the current increase in home
prices and potential for further increases, though likely at a more measured
pace than in 2012 and 2013.
Page 4
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PORTFOLIO COMMENTARY (UNAUDITED) (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2015
PERFORMANCE ANALYSIS
For the six month period ended April 30, 2015, the Fund had a total return(1) of
0.62% based on net asset value ("NAV"). For the period, the Fund traded from a
discount to NAV of -11.16% to a discount to NAV of -10.33%, resulting in a total
return1 of 1.57%, based on market price. During the period, the Fund's
benchmark, the Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index (the
"Index") returned 1.93%.
All of the Fund's sectors rallied during the period with the exception of Agency
derivatives, which reflected improved assumptions for collateral performance and
tightening spreads. MBS remains one of the widest spread assets in fixed income,
especially for investment-grade non-Agency RMBS and CMBS. As spreads have come
in broadly, this spread advantage becomes more attractive. The other advantage
we see is in the substantial fraction of mortgage product that carries a
floating-rate coupon. Many investors are trying to limit their exposure to fixed
rates. For below investment-grade mortgage bonds, fundamental improvements and
stronger economic data has pushed prices higher.
Agency MBS holdings in the Fund modestly underperformed the Index, which
benefited from falling interest rates. The Fund holds about 10% of Agency IO
securities which we use to hedge against an interest rate rise. The valuation of
IO securities was negatively impacted by falling interest rates as expectations
for prepayment speeds rose. Lower prices of IOs therefore dragged the
performance of Agency RMBS holdings.
We anticipate short-term interest rates will begin to increase in the next six
to nine months as employment continues to strengthen and the Fed begins
reversing years of stimulus. We believe the Fund is positioned with low interest
risk and so the rise in short-term interest rates will be reflected in increased
income as our floating-rate investments reset to higher rates.
As of April 30, 2015, the Fund held 10% cash as a percentage of gross assets.
The Fund's primary purchases were investment-grade Prime Hybrid Adjustable Rate
Mortgage RMBS. With limited new issuance, particularly in RMBS, it has been
challenging to source attractive investment-grade mortgage assets with
sufficient income. We continue to find attractive purchase candidates, albeit on
a slower timeline. The Fund invests up to 25% of its managed assets in
securities that at the time of investment are rated below "A" by at least one
rating agency or are unrated but judged to be of comparable quality by the
Fund's Sub-Advisor. With this limit, we utilize flexibility to do relative value
trading among A- or lower rated assets and put our best ideas to work. In
particular, we are evaluating the Fund's BBB-rated bonds. They consume precious
credit capacity and typically earn little more yield than the Fund's "A or
better" holdings.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of reverse repurchase
agreements. Please note that the Fund's benchmark does not utilize leverage. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income for common shareholders. However,
the use of leverage also can expose common shareholders to additional
volatility. For example, if the prices of securities held by the Fund decline,
the negative impact of the valuation changes on common share net asset value and
common share total return is magnified by the use of leverage. Conversely,
leverage may enhance common share returns during periods when the prices of
securities held by the Fund generally are rising.
As of April 30, 2015, the Fund's leverage was relatively low at 8.6% of Managed
Assets, given that the Fund may utilize leverage in an amount up to 33.33% of
Managed Assets. Leverage contributed positively to the Fund's performance during
the reporting period. Borrowing costs were approximately 47 basis points
annualized, which is well below the returns we achieved on the Agency Pools we
borrowed against.
Reverse repurchase borrowing remains expensive for many of the Fund's target
asset classes. For this reason, we may continue to employ leverage below its
maximum or to choose alternative assets, such as Agency Guaranteed assets, to
use as collateral. Financing costs may also fall, thereby reversing this current
dynamic. Where our overall budget for risk warrants it and when the return
opportunities are compelling, we may increase leverage in an attempt to improve
returns. In periods of stability, this may be an especially important tool.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities. These views represent the opinions of
Brookfield Investment Management Inc. and are not intended to predict or depict
the performance of any investment. These views are as of the close of business
on April 30, 2015 and subject to change based on subsequent developments.
-----------------------
(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns and
does not reflect sales load. Past performance is not indicative of future
results.
Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES - 75.7%
COLLATERALIZED MORTGAGE OBLIGATIONS - 55.6%
ACE Securities Corp. Home Equity Loan Trust
$ 1,213,160 Series 2006-ASAP6, Class A2D (a).................... 0.39% 12/25/36 $ 655,038
Banc of America Mortgage Trust
56,796 Series 2002-L, Class 1A1 (a) (b).................... 2.42% 12/25/32 49,917
Bear Stearns Adjustable Rate Mortgage Trust
607,965 Series 2004-9, Class 12A1 (a)....................... 2.78% 11/25/34 607,056
Chase Mortgage Finance Trust
410,399 Series 2007-A1, Class 1A3 (a)....................... 2.53% 02/25/37 405,558
Countrywide Alternative Loan Trust
613,950 Series 2006-41CB, Class 2A17........................ 6.00% 01/25/37 550,470
74,365 Series 2007-11T1, Class A37 (b) (c)................. 38.93% 05/25/37 155,898
Countrywide Home Loan Mortgage Pass-Through Trust
1,040,074 Series 2003-46, Class 2A1 (a)....................... 2.74% 01/19/34 1,035,693
564,123 Series 2006-21, Class A8............................ 5.75% 02/25/37 535,259
914,556 Series 2006-HYB5, Class 3A1A (a).................... 2.54% 09/20/36 784,864
Credit Suisse First Boston Mortgage Securities Corp.
411,607 Series 2004-AR2, Class 1A1 (a) (b).................. 2.92% 03/25/34 403,658
1,220,398 Series 2004-AR8, Class 6A1 (a)...................... 2.36% 09/25/34 1,217,904
DSLA Mortgage Loan Trust
1,155,550 Series 2004-AR3, Class 2A2A (a)..................... 0.55% 07/19/44 1,123,629
1,125,277 Series 2007-AR1, Class 2A1A (a)..................... 0.32% 04/19/47 942,689
GMAC Mortgage Corporation Loan Trust
224,618 Series 2004-AR1, Class 22A (a)...................... 2.92% 06/25/34 216,975
GSR Mortgage Loan Trust
335,687 Series 2005-AR1, Class 4A1 (a)...................... 2.23% 01/25/35 326,330
Harborview Mortgage Loan Trust
166,619 Series 2004-1, Class 2A (a)......................... 2.41% 04/19/34 165,858
750,390 Series 2004-6, Class 3A1 (a)........................ 2.62% 08/19/34 721,453
JP Morgan Mortgage Trust
1,903,361 Series 2005-ALT1, Class 4A1 (a)..................... 4.57% 10/25/35 1,785,130
1,037,629 Series 2006-A2, Class 4A1 (a)....................... 2.50% 08/25/34 1,041,374
162,332 Series 2006-A2, Class 5A3 (a)....................... 2.43% 11/25/33 163,040
JP Morgan Re-REMIC
1,185,953 Series 2009-7, Class 12A1 (d)....................... 6.25% 01/27/37 1,251,643
MASTR Asset Backed Securities Trust
1,154,479 Series 2006-HE5, Class A3 (a)....................... 0.34% 11/25/36 797,033
237,988 Series 2006-HE5, Class A4 (a) (b)................... 0.40% 11/25/36 165,732
1,660,529 Series 2006-NC2, Class A3 (a)....................... 0.29% 08/25/36 882,005
757,952 Series 2006-NC2, Class A5 (a)....................... 0.42% 08/25/36 413,847
Mellon Residential Funding Corp.
Mortgage Pass-Through Trust
620,282 Series 2001-TBC1, Class A1 (a)...................... 0.88% 11/15/31 610,146
666,553 Series 2002-TBC2, Class A (a)....................... 1.04% 08/15/32 635,385
Merrill Lynch Mortgage Investors Trust
625,168 Series 2004-HB1, Class A3 (a)....................... 2.12% 04/25/29 618,294
Morgan Stanley Mortgage Loan Trust
473,246 Series 2004-7AR, Class 2A6 (a)...................... 2.43% 09/25/34 473,839
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Provident Funding Mortgage Loan Trust
$ 276,263 Series 2005-1, Class 1A1 (a)........................ 2.49% 05/25/35 $ 276,837
Residential Accredit Loans, Inc.
236,099 Series 2006-QO1, Class 2A1 (a)...................... 0.45% 02/25/46 139,776
Securitized Asset Backed Receivables LLC
1,185,947 Series 2007-BR2, Class A2 (a)....................... 0.41% 02/25/37 676,372
Structured Adjustable Rate Mortgage Loan Trust
722,601 Series 2004-2, Class 4A2 (a)........................ 2.51% 03/25/34 711,765
Thornburg Mortgage Securities Trust
597,879 Series 2003-4, Class A1 (a)......................... 0.82% 09/25/43 580,631
500,633 Series 2005-1, Class A3 (a)......................... 2.22% 04/25/45 504,329
Wachovia Mortgage Loan Trust, LLC
534,965 Series 2006-A, Class 3A1 (a)........................ 2.68% 05/20/36 514,260
WaMu Mortgage Pass-Through Certificates
839,646 Series 2004-AR1, Class A (a)........................ 2.44% 03/25/34 844,265
869,863 Series 2004-AR10, Class A1B (a)..................... 0.60% 07/25/44 840,273
664,859 Series 2004-AR13, Class A1A (a)..................... 0.90% 11/25/34 636,060
929,960 Series 2005-AR1, Class A1A (a)...................... 0.50% 01/25/45 879,448
1,292,648 Series 2005-AR11, Class A1A (a)..................... 0.50% 08/25/45 1,231,103
96,841 Series 2005-AR2, Class 2A21 (a)..................... 0.51% 01/25/45 89,962
1,218,333 Series 2005-AR6, Class 2A1A (a)..................... 0.41% 04/25/45 1,157,514
557,589 Series 2005-AR9, Class A1A (a)...................... 0.50% 07/25/45 536,854
893,191 Series 2006-AR2, Class 1A1 (a)...................... 2.32% 03/25/36 833,050
Washington Mutual Alternative Mortgage
Pass-Through Certificates
43,713 Series 2007-5, Class A11 (b) (c).................... 38.39% 06/25/37 84,432
Washington Mutual MSC Mortgage
Pass-Through Certificates
652,303 Series 2004-RA1, Class 2A........................... 7.00% 03/25/34 695,056
Wells Fargo Mortgage Backed Securities Trust
665,170 Series 2003-H, Class A1 (a)......................... 2.62% 09/25/33 674,646
485,986 Series 2004-A, Class A1 (a)......................... 2.64% 02/25/34 487,617
1,737,343 Series 2004-R, Class 1A1 (a)........................ 2.62% 09/25/34 1,765,993
479,362 Series 2004-S, Class A1 (a)......................... 2.62% 09/25/34 491,679
879,272 Series 2004-Y, Class 1A2 (a)........................ 2.61% 11/25/34 875,710
454,476 Series 2005-AR10, Class 2A17 (a).................... 2.63% 06/25/35 464,112
991,862 Series 2005-AR16, Class 1A1 (a)..................... 2.61% 08/25/33 1,014,315
462,059 Series 2005-AR3, Class 2A1 (a)...................... 2.61% 03/25/35 466,219
706,658 Series 2005-AR8, Class 1A1 (a)...................... 2.65% 06/25/35 721,967
928,824 Series 2006-AR10, Class 5A2 (a)..................... 2.65% 07/25/36 900,824
354,626 Series 2007-16, Class 1A1........................... 6.00% 12/28/37 367,408
473,304 Series 2007-2, Class 1A13........................... 6.00% 03/25/37 466,472
116,921 Series 2007-8, Class 2A2............................ 6.00% 07/25/37 115,340
--------------
38,780,006
--------------
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES - 20.1%
Banc of America Commercial Mortgage Trust
$ 1,000,000 Series 2006-6, Class AJ............................. 5.42% 10/10/45 $ 1,037,520
650,000 Series 2007-3, Class AJ, STRIP...................... 5.74% 06/10/49 680,550
Bayview Commercial Asset Trust
723,002 Series 2004-2, Class A (a) (d)...................... 0.61% 08/25/34 691,708
Carefree Portfolio Trust
1,250,000 Series 2014-CARE, Class B (a) (d)................... 2.03% 11/15/19 1,258,200
Citigroup Commercial Mortgage Trust
1,525,000 Series 2014-388G, Class B (a) (d)................... 1.23% 06/15/33 1,521,405
COMM Mortgage Trust
1,000,000 Series 2014-KYO, Class B (a) (d).................... 1.48% 06/11/27 998,171
Commercial Mortgage Trust
950,000 Series 2005-GG5, Class AM........................... 5.28% 04/10/37 962,355
Greenwich Capital Commercial Funding Corp.
650,000 Series 2007-GG11, Class AJ, STRIP................... 6.25% 12/10/49 689,053
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (d).................... 1.88% 11/15/29 1,044,269
LB-UBS Commercial Mortgage Trust
835,000 Series 2007-C1, Class AM............................ 5.46% 02/15/40 890,162
440,000 Series 2007-C2, Class AM............................ 5.49% 02/15/40 465,957
Mid-State Capital Corp. Trust
573,384 Series 2004-1, Class M1............................. 6.50% 08/15/37 618,878
401,894 Series 2005-1, Class A.............................. 5.75% 01/15/40 435,754
UBS-Barclays Commercial Mortgage Trust
15,358,467 Series 2013-C5, Class XA, IO (a) (d)................ 1.25% 03/10/46 984,608
VNDO Mortgage Trust
990,000 Series 2012-6AVE, Class A (d)....................... 3.00% 11/15/30 1,009,300
Wachovia Bank Commercial Mortgage Trust
650,000 Series 2007-C33, Class AJ, STRIP.................... 6.15% 02/15/51 684,561
--------------
13,972,451
--------------
TOTAL MORTGAGE-BACKED SECURITIES................................................. 52,752,457
(Cost $52,062,066) --------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 22.0%
COLLATERALIZED MORTGAGE OBLIGATIONS - 8.1%
Federal Home Loan Mortgage Corp.
1,756,243 Series 2807, Class SB, IO (c)....................... 7.27% 11/15/33 274,476
13,874 Series 3195, Class SX (b) (c)....................... 44.97% 07/15/36 45,872
141,774 Series 3562, Class KI, IO (b)....................... 4.50% 11/15/22 934
1,824,176 Series 3619, Class EI, IO (b)....................... 4.50% 05/15/24 90,523
1,394,396 Series 3692, Class PS, IO (b) (c)................... 6.42% 05/15/38 85,617
3,268,402 Series 3726, Class KI, IO........................... 3.50% 04/15/25 221,089
2,409,208 Series 3870, Class WS, IO (c)....................... 6.42% 06/15/31 312,279
1,528,386 Series 4206, Class IA, IO (b)....................... 3.00% 03/15/33 227,231
Federal National Mortgage Association
565,791 Series 2005-122, Class SN (c)....................... 27.88% 01/25/36 620,085
120,735 Series 2008-50, Class AI, IO (b).................... 5.50% 06/25/23 5,647
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ------------------------------------------------------- ---------- ---------- --------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 3,619,948 Series 2010-103, Class ID, IO (b)................... 5.00% 09/25/40 $ 529,720
6,091,006 Series 2010-139, Class KI, IO (b)................... 1.09% 12/25/40 311,989
531,381 Series 2010-142, Class PS, IO (b) (c)............... 5.87% 05/25/40 29,052
854,090 Series 2010-145, Class TI, IO (b)................... 3.50% 12/25/20 51,811
2,230,081 Series 2010-40, Class MI, IO (b).................... 4.50% 08/25/24 94,079
3,757,077 Series 2012-112, Class BI, IO....................... 3.00% 09/25/31 478,140
2,834,915 Series 2012-125, Class MI, IO (b)................... 3.50% 11/25/42 576,954
3,911,872 Series 2013-32, Class IG, IO (b).................... 3.50% 04/25/33 550,732
Federal National Mortgage Association, STRIP
2,548,621 Series 406, Class 6, IO (b)......................... 4.00% 01/25/41 505,962
Government National Mortgage Association
736,713 Series 2009-65, Class NJ, IO (b).................... 5.50% 07/20/39 62,037
2,722,127 Series 2010-115, Class IQ, IO....................... 4.50% 11/20/38 243,186
5,309,734 Series 2011-131, Class EI, IO....................... 4.50% 08/20/39 329,987
595,451 Series 2011-69, Class CI, IO (b).................... 5.00% 03/20/36 9,708
--------------
5,657,110
--------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 2.0%
Government National Mortgage Association
15,021,522 Series 2011-152, Class IO, IO (a)................... 1.16% 08/16/51 714,859
10,048,171 Series 2012-70, Class IO, IO (a) (e)................ 0.84% 08/16/52 520,576
2,381,340 Series 2012-95, Class IO, IO (a) (e)................ 0.88% 02/16/53 163,147
--------------
1,398,582
--------------
PASS-THROUGH SECURITIES - 11.9%
Fannie Mae REMICs
926,416 Series 2005-83, Class LZ............................ 5.50% 10/25/35 972,271
Federal Home Loan Mortgage Corp.
1,286,462 Pool A94738 (e)..................................... 4.50% 11/01/40 1,399,074
754,539 Pool K36017 (e)..................................... 5.00% 09/01/47 824,782
Federal National Mortgage Association
1,748,423 Pool 831145 (e)..................................... 6.00% 12/01/35 2,020,688
1,724,455 Pool 843971 (e)..................................... 6.00% 11/01/35 2,002,778
1,000,000 Freddie Mac Gold Pool.................................. 3.50% 03/31/45 1,046,231
--------------
8,265,824
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES.......................... 15,321,516
(Cost $20,741,846) --------------
ASSET-BACKED SECURITIES - 0.2%
Green Tree Financial Corp.
43,374 Series 1997-2, Class A6 (b)......................... 7.24% 06/15/28 44,992
59,454 Series 1997-3, Class A6 (b)......................... 7.32% 03/15/28 62,977
63,482 Series 1997-7, Class A6 (b)......................... 6.76% 07/15/28 65,615
--------------
TOTAL ASSET-BACKED SECURITIES.................................................... 173,584
(Cost $174,826) --------------
TOTAL INVESTMENTS - 97.9%......................................................... 68,247,557
(Cost $72,978,738) (f) --------------
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- --------------------------------------------------------------------------------- --------------
REVERSE REPURCHASE AGREEMENTS - (9.5%)
$ (3,892,000) With JP Morgan 0.39% dated 4/06/15, to be repurchased at
$3,895,837 on 07/06/15........................................................ $ (3,892,000)
(634,000) With JP Morgan 1.03% dated 4/10/15, to be repurchased at
$634,563 on 05/11/15.......................................................... (634,000)
(2,128,000) With JP Morgan 0.38% dated 4/13/15, to be repurchased at
$2,128,629 on 05/11/15........................................................ (2,128,000)
--------------
TOTAL REVERSE REPURCHASE AGREEMENTS.............................................. (6,654,000)
--------------
NET OTHER ASSETS AND LIABILITIES - 11.6%......................................... 8,128,916
--------------
NET ASSETS - 100.0%.............................................................. $ 69,722,473
==============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2015.
(b) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by Brookfield Investment
Management Inc. ("Brookfield"), the Fund's sub-advisor.
(c) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at April 30, 2015.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by Brookfield. Although market instability can
result in periods of increased overall market illiquidity, liquidity for
each security is determined based on security specific factors and
assumptions, which require subjective judgment. At April 30, 2015,
securities noted as such amounted to $8,759,304, or 12.56% of net assets.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $2,773,137 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $7,504,318.
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 4/30/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ ------------- ------------
Mortgage-Backed Securities......................... $ 52,752,457 $ -- $ 52,752,457 $ --
U.S. Government Agency Mortgage-Backed Securities.. 15,321,516 -- 15,321,516 --
Asset-Backed Securities............................ 173,584 -- 173,584 --
------------ ------------ ------------- ------------
Total Investments.................................. $ 68,247,557 $ -- $ 68,247,557 $ --
============ ============ ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2015 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Reverse Repurchase Agreements...................... $ (6,654,000) $ -- $ (6,654,000) $ --
============ ============ ============= ============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2015.
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2015 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $72,978,738).......................................................................... $ 68,247,557
Cash........................................................................................... 8,189,693
Restricted cash................................................................................ 788,066
Interest receivable............................................................................ 316,197
Prepaid expenses............................................................................... 19,716
------------
Total Assets................................................................................ 77,561,229
------------
LIABILITIES:
Reverse repurchase agreements.................................................................. 6,654,000
Payables:
Investment securities purchased............................................................. 1,049,135
Investment advisory fees.................................................................... 62,850
Audit and tax fees.......................................................................... 28,480
Printing fees............................................................................... 11,416
Administrative fees......................................................................... 11,207
Transfer agent fees......................................................................... 8,022
Custodian fees.............................................................................. 6,287
Legal fees.................................................................................. 2,825
Interest on reverse repurchase agreements................................................... 1,839
Trustees' fees and expenses................................................................. 1,459
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 465
------------
Total Liabilities........................................................................... 7,838,756
------------
NET ASSETS..................................................................................... $ 69,722,473
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 78,018,766
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... 960,741
Accumulated net realized gain (loss) on investments............................................ (4,567,984)
Net unrealized appreciation (depreciation) on investments...................................... (4,731,181)
------------
NET ASSETS..................................................................................... $ 69,722,473
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 16.55
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 3,321,737
------------
Total investment income..................................................................... 3,321,737
------------
EXPENSES:
Investment advisory fees....................................................................... 387,917
Administrative fees............................................................................ 57,263
Audit and tax fees............................................................................. 24,870
Transfer agent fees............................................................................ 19,924
Interest expense on reverse repurchase agreements.............................................. 18,686
Printing fees.................................................................................. 15,333
Trustees' fees and expenses.................................................................... 8,458
Custodian fees................................................................................. 7,511
Financial reporting fees....................................................................... 4,625
Legal fees..................................................................................... 2,086
Other.......................................................................................... 17,145
------------
Total expenses.............................................................................. 563,818
------------
NET INVESTMENT INCOME.......................................................................... 2,757,919
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... (169,515)
Net change in unrealized appreciation (depreciation) on investments......................... (2,425,500)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (2,595,015)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 162,904
============
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
4/30/2015 ENDED
(UNAUDITED) 10/31/2014
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 2,757,919 $ 4,309,401
Net realized gain (loss)............................................................ (169,515) (396,097)
Net increase from payment by the sub-advisor (a).................................... -- 1,180
Net change in unrealized appreciation (depreciation)................................ (2,425,500) (2,167,601)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... 162,904 1,746,883
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (2,148,689) (4,297,377)
-------------- --------------
Total distributions to shareholders................................................. (2,148,689) (4,297,377)
-------------- --------------
Total increase (decrease) in net assets............................................. (1,985,785) (2,550,494)
NET ASSETS:
Beginning of period................................................................. 71,708,258 74,258,752
-------------- --------------
End of period....................................................................... $ 69,722,473 $ 71,708,258
============== ==============
Accumulated net investment income (loss) at end of period........................... $ 960,741 $ 351,511
============== ==============
COMMON SHARES:
Common Shares at end of period...................................................... 4,213,115 4,213,115
============== ==============
(a) See Note 3 in the Notes to Financial Statements.
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations..................... $ 162,904
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
Purchases of investments...................................................... (16,988,584)
Sales, maturities and paydowns on investments................................. 18,735,323
Net amortization/accretion of premiums/discounts on investments............... (695,101)
Net realized gain/loss on investments......................................... 169,515
Net change in unrealized appreciation/depreciation on investments............. 2,425,500
Net change in restricted cash................................................. (738,066)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................... 46,970
Increase in prepaid expenses.................................................. (13,829)
Decrease in interest payable on reverse repurchase agreements................. (648)
Decrease in investment advisory fees payable.................................. (5,518)
Decrease in audit and tax fees payable........................................ (21,720)
Increase in legal fees payable................................................ 537
Decrease in printing fees payable............................................. (776)
Decrease in administrative fees payable....................................... (6,734)
Increase in custodian fees payable............................................ 2,664
Increase in transfer agent fees payable....................................... 1,687
Decrease in trustees' fees and expenses payable............................... (8)
Decrease in other liabilities................................................. (50)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................... $ 3,074,066
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............... (2,148,689)
Repurchases of reverse repurchase agreements.................................. (21,713,000)
Reverse repurchase agreements borrowings...................................... 19,896,000
--------------
CASH USED IN FINANCING ACTIVITIES................................................... (3,965,689)
--------------
Decrease in cash.................................................................... (891,623)
Cash at beginning of period......................................................... 9,081,316
--------------
CASH AT END OF PERIOD............................................................... $ 8,189,693
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ $ 19,334
==============
See Notes to Financial Statements Page 15
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
4/30/2015 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2014 10/31/2013 10/31/2012 10/31/2011 (b) 10/31/2010 (a)
----------- ---------- ---------- ---------- -------------- --------------
Net asset value, beginning of period... $ 17.02 $ 17.63 $ 17.91 $ 18.43 $ 19.59 $ 19.63
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)........... 0.65 1.02 1.25 1.28 1.69 2.06
Net realized and unrealized gain (loss) (0.61) (0.61) (0.28) 0.17 (0.82) (0.45)
-------- -------- -------- -------- -------- --------
Total from investment operations....... 0.04 0.41 0.97 1.45 0.87 1.61
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.................. (0.51) (1.02) (1.25) (2.03) (2.03) (1.65)
-------- -------- -------- -------- -------- --------
Total from distributions............... (0.51) (1.02) (1.25) (2.03) (2.03) (1.65)
-------- -------- -------- -------- -------- --------
Premium from shares sold in at the
market offering..................... -- -- -- 0.06 -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period......... $ 16.55 $ 17.02 $ 17.63 $ 17.91 $ 18.43 $ 19.59
======== ======== ======== ======== ======== ========
Market value, end of period............ $ 14.84 $ 15.12 $ 15.79 $ 19.00 $ 18.94 $ 20.70
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET
VALUE (c) .......................... 0.62% 3.01% (d) 6.04% (d) 8.30% 4.60% 9.01%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET
VALUE (c)........................... 1.57% 2.17% (10.47)% 11.86% 1.68% 26.18%
======== ======== ======== ======== ======== ========
---------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)... $ 69,722 $ 71,708 $ 74,259 $ 75,439 $ 75,014 $ 79,495
Ratio of total expenses to average net
assets.............................. 1.62% (e) 1.78% 1.96% 2.47% 2.23% 2.00%
Ratio of total expenses to average net
assets excluding interest expense... 1.56% (e) 1.72% 1.83% 2.20% 2.14% 1.95%
Ratio of net investment income (loss)
to average net assets............... 7.91% (e) 5.84% 7.01% 7.28% 8.74% 10.50%
Portfolio turnover rate................ 24% 54% 109% 52% 47% 36%
---------------------------------------
(a) On September 20, 2010, the Fund's Board of Trustees approved a new
investment management agreement with First Trust Advisors L.P. and a new
investment sub-advisory agreement with Fixed Income Discount Advisory
Company ("FIDAC"), and on December 6, 2010, the Fund's shareholders voted
to approve both agreements.
(b) Effective April 29, 2011, the Fund's Board of Trustees approved Brookfield
Investment Management Inc. ("Brookfield") as the investment sub-advisor to
the Fund, replacing FIDAC. The Fund's shareholders approved the investment
sub-advisory agreement with Brookfield on July 25, 2011.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) The Fund received reimbursements from Brookfield in the amount of $1,180
and $5,310 for the years ended October 31, 2014 and 2013, respectively.
The reimbursements from Brookfield represent less than $0.01 per share and
had no effect on the Fund's total returns.
(e) Annualized.
Page 16 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
trades under the ticker symbol FMY on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing primarily in mortgage-backed securities
that, in the opinion of Brookfield Investment Management Inc. ("Brookfield" or
the "Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and the accretion of discounts are recorded using the effective interest method.
The Fund invests in interest-only securities. For these securities, if there is
a change in the estimated cash flows, based on an evaluation of current
information, then the estimated yield is adjusted. Additionally, if the
evaluation of current information indicates a permanent impairment of the
security, the cost basis of the security is written down and a loss is
recognized. Debt obligations may be placed on non-accrual status and the related
interest income may be reduced by ceasing current accruals and writing off
interest receivables when the collection of all or a portion of interest has
become doubtful based on consistently applied procedures. A debt obligation is
removed from non-accrual status when the issuer resumes interest payments or
when collectability of interest is reasonably assured.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments until
payment is made. At April 30, 2015, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements were utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as financing under which Fund assets are pledged as collateral to secure a
short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back by the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Restricted cash in the amount of $788,066, as shown on the Statement of Assets
and Liabilities, is associated
with reverse repurchase agreements outstanding as of April 30, 2015.
Information for the six months ended April 30, 2015:
Maximum amount outstanding during the period................... $8,471,000
Average amount outstanding during the period*.................. $7,915,928
Average Common Shares outstanding during the period............ 4,213,115
Average debt per Common Share outstanding during the period.... $1.88
* The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the six months ended April 30, 2015.
During the six months ended April 30, 2015, the interest rates ranged from 0.34%
to 1.06%, with a weighted average interest rate of 0.47%, on borrowings by the
Fund under reverse repurchase agreements, which had interest expense that
aggregated $18,686.
D. INVERSE FLOATING-RATE SECURITIES:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities, if
any, are identified on the Portfolio of Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2014, was as follows:
Distributions paid from:
Ordinary income................................. $ 4,297,377
As of October 31, 2014, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ 45,039
Undistributed capital gains....................... --
--------------
Total undistributed earnings...................... 45,039
Accumulated capital and other losses.............. (4,398,469)
Net unrealized appreciation (depreciation)........ (1,999,209)
--------------
Total accumulated earnings (losses)............... (6,352,639)
Other............................................. --
Paid-in capital................................... 78,060,897
--------------
Net assets........................................ $ 71,708,258
==============
H. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. At October 31, 2014, the Fund had pre-enactment net capital
losses for federal income tax purposes of $3,349,872. At October 31, 2014, the
Fund had post-enactment net capital losses for federal income tax purposes of
$1,048,597 to be carried forward indefinitely. The pre-enactment net capital
losses for federal income tax purposes will expire as follows:
EXPIRATION DATE AMOUNT
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887
During the taxable year ended October 31, 2014, the Fund did not utilize any
pre-enactment capital loss carryforwards.
At October 31, 2014, the Fund had pre-enactment capital loss carryforwards that
expired in the amount of $1,082,509.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of April 30, 2015,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
J. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to help
investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
instruments and transactions eligible for offset on the Statement of Assets and
Liabilities, and disclose instruments and transactions subject to master netting
or similar agreements. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying exactly which transactions are subject
to offsetting disclosures. The scope of the disclosure requirements is limited
to derivative instruments, repurchase agreements and reverse repurchase
agreements, and securities borrowing and securities lending transactions. ASU
2011-11 and ASU 2013-1 are effective for financial statements with fiscal years
beginning on or after January 1, 2013, and interim periods within those fiscal
years.
The Fund adopted the disclosure requirement on netting for the current reporting
period. For financial reporting purposes, the Fund does not offset financial
assets and financial liabilities that are subject to master netting arrangements
or similar agreements on the Statement of Assets and Liabilities. The Fund's
right to setoff may be restricted or prohibited by the bankruptcy or insolvency
laws of the particular jusisdiction to which a specific master netting or
similar agreement counterparty is subject.
At April 30, 2015, reverse repurchase agreement assets and liabilities (by type)
on a gross basis are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Gross Amounts Liabilities Presented ----------------------------
Amounts of Offset in the in the Statement Cash
Recognized Statement of Assets of Assets and Financial Segregated as Net
Liabilities and Liabilities Liabilities Instruments Collateral Amount
------------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase
Agreements $ (6,654,000) $ -- $ (6,654,000) $ 6,654,000 $ -- $ --
K. ACCOUNTING PRONOUNCEMENT:
In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-11,
Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions,
Repurchase Financings, and Disclosures. A repurchase-to-maturity transaction is
one where the repurchase agreement settles at the same time as the maturity of
the transferred financial asset. These transactions, unlike other repurchase
agreements, were accounted for as sales and purchases instead of being treated
as secured borrowings. This ASU changes that accounting practice and treats all
repurchase agreements as secured borrowings. The ASU additionally requires two
new disclosures which are intended to:
a) disclose information on transferred assets accounted for as sales in
transactions that are economically similar to repurchase agreements, and b)
provide increased transparency about the types of collateral pledged in
repurchase agreements and similar transactions accounted for as secured
borrowings.
The ASU impacts all entities that enter into repurchase-to-maturity
transactions, entities that account for these transactions as a sale and a
purchase, and entities that engage in repurchase agreements and securities
lending transactions.
The ASU is effective for financial statements with fiscal years beginning on or
after December 15, 2014 and interim periods within those fiscal years.
Management is evaluating the impact, if any, of this guidance on the Fund's
financial statement disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets (the average
daily total asset value of the Fund minus the sum of the Fund's liabilities
other than the principal amount of borrowings or reverse repurchase agreements,
if any). First Trust also provides fund reporting services to the Fund for a
flat annual fee in the amount of $9,250.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee of 0.50% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
During the year ended October 31, 2014, the Fund received reimbursements from
the Sub-Advisor of $1,180 in connection with a trade error.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2015, were $7,383,712 and $9,593,299, respectively. The proceeds from sales and
paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the six months ended April 30, 2015, were
$8,313,793 and $10,421,530, respectively.
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On May 20, 2015, the Fund declared a distribution of $0.085 per share to Common
Shareholders of record on June 3, 2015, payable June 15, 2015.
Page 22
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com;
(3) on the SEC's website at http://www.sec.gov; and (4) for review and copying
at the SEC's Public Reference Room ("PRR") in Washington, DC. Information
regarding the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund, First Trust Intermediate Duration Preferred & Income Fund and First Trust
New Opportunities MLP & Energy Fund was held on April 20, 2015 (the "Annual
Meeting"). At the Annual Meeting, Richard E. Erickson and Thomas R. Kadlec were
elected by the Common Shareholders of the First Trust Mortgage Income Fund as
Class II Trustees for a three-year term expiring at the Fund's annual meeting of
shareholders in 2018. The number of votes cast in favor of Mr. Erickson was
3,633,358, the number of votes against was 66,234 and the number of broker
non-votes was 513,523. The number of votes cast in favor of Mr. Kadlec was
3,637,913, the number of votes against was 61,679 and the number of broker
non-votes was 513,523. James A. Bowen, Robert F. Keith and Niel B. Nielson are
the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Advisor or Sub-Advisor may take
temporary defensive positions.
SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Sub-Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.
INTEREST RATE RISK: The Fund may also hold MBS which are Stripped
Mortgage-Backed Securities, IO securities and PO securities. Generally speaking,
when interest rates are falling and prepayment rates are increasing, the value
of a PO security will rise and the value of an IO security will fall.
Conversely, when interest rates are rising and prepayment rates are decreasing,
generally the value of a PO security will fall and the value of an IO security
will rise.
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2015 (UNAUDITED)
LEVERAGE RISK: Borrowings up to 33-1/3% (or such other percentage as permitted
by law) of Fund assets (including the amount borrowed) less liabilities other
than borrowings may be utilized in the Fund. Leverage may be used for investment
purposes and to meet cash requirements. The leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. Reverse repurchase agreements are used to leverage the
Fund's assets. Reverse repurchase agreements are subject to the risks that the
market value of the Fund's securities sold may decline below the price of the
securities the Fund is obligated to repurchase, and that the securities may not
be returned to the Fund. From time to time the amount of the leverage may be
changed in response to actual or anticipated changes in interest rates or the
value of the Fund's investment portfolio. There can be no assurance that the
leverage strategies will be successful.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are invested at market interest rates that are below the Fund portfolio's
current earnings rate; and (iii) credit risk, which is the risk that a security
in the Fund's portfolio will decline in price or the issuer fails to make
interest payments when due because the issuer of the security experiences a
decline in its financial status.
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
Brookfield Place
250 Vesey Street, 15th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(1)(a) Not applicable.
(2)(a) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(3)(a) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Mortgage Income Fund
--------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 22, 2015
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 22, 2015
----------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 22, 2015
----------------
* Print the name and title of each signing officer under his or her signature.