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: October 31, 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)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2015
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 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
Report of Independent Registered Public Accounting Firm..................... 24
Additional Information...................................................... 25
Board of Trustees and Officers.............................................. 30
Privacy Policy.............................................................. 32
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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportolios.com.
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)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 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
annual report which contains detailed information about your investment for the
12 months ended October 31, 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, most of 2015 has been
volatile. Economic and global factors, such as the continued conflict in the
Middle East, a sharp decline in oil prices and terrorism around the world, have
impacted U.S. and global markets. Another factor that has weighed upon U.S.
markets for most of the year is the fact that many economists had predicted that
the Federal Reserve would begin to raise interest rates in 2015, which has still
not happened.
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 OCTOBER 31, 2015 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $14.58
Common Share Net Asset Value ("NAV") $16.05
Premium (Discount) to NAV (9.16)%
Net Assets Applicable to Common Shares $67,639,281
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) 7.00%
Current Distribution Rate on NAV (2) 6.36%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
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
4/15 14.82 16.51
14.87 16.51
14.75 16.54
14.75 16.58
14.74 16.59
5/15 14.73 16.53
14.51 16.54
14.50 16.51
14.35 16.47
6/15 14.19 16.52
14.18 16.44
14.31 16.46
14.45 16.44
14.34 16.42
7/15 14.65 16.38
14.61 16.28
14.39 16.26
14.40 16.22
8/15 14.42 16.24
14.36 16.16
14.38 16.17
14.30 16.17
9/15 14.34 16.15
14.38 16.04
14.44 16.08
14.55 16.04
14.54 16.06
10/15 14.58 16.05
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended 10 Years Ended Inception (5/25/05)
10/31/15 10/31/15 10/31/15 to 10/31/15
FUND PERFORMANCE (3)
NAV 1.06% 4.57% 6.37% 6.24%
Market Value 3.34% 1.46% 6.93% 4.80%
INDEX PERFORMANCE
Barclays Capital U.S. MBS:
Agency Fixed Rate MBS Index 2.52% 2.86% 4.82% 4.58%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 0.84
Weighted Average Life (Years) 5.51
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 79.74%
U.S. Government Agency Mortgage-Backed
Securities 18.54
Asset-Backed Securities 1.72
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Total 100.00%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Adjustable Rate Securities 61.56%
Fixed Rate Securities 30.79
Interest Only Securities 7.65
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Total 100.00%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 27.37%
AA+ 18.03
AA 3.58
AA- 11.07
A+ 11.22
A 3.16
BBB 0.32
BBB- 0.77
BB+ 0.78
BB 3.38
BB- 0.67
B 1.55
B- 1.01
CCC 8.07
CCC- 0.14
CC 6.66
D 2.15
NR 0.07
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Total 100.00%
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(1) Most recent distribution paid or declared through 10/31/2015. 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 10/31/2015. 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, DBRS, Inc., Kroll Bond Rating Agency, Inc., Morningstar Credit
Ratings, LLC, 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 rating is 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
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2015
SUB-ADVISOR
Brookfield Investment Management Inc. (the "Sub-Advisor") is a registered
investment advisor providing public securities strategies including global
listed real estate and infrastructure equities as well as corporate credit and
securitized credit. With over $17 billion of assets under management as of
September 30, 2015, the Sub-Advisor manages institutional separate accounts,
registered funds and other investment products for clients, including financial
institutions, public and private pension plans, insurance companies, endowments
and foundations, sovereign wealth funds and high net-worth investors.
Headquartered in New York, NY, the Sub-Advisor and its affiliates also maintain
offices in Boston, Chicago, London and Toronto.
The Sub-Advisor is an indirect wholly-owned subsidiary of Brookfield Asset
Management, Inc., a leading global alternative asset manager with over $200
billion of assets under management as of September 30, 2015.
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
The lower, longer view for future interest rates continues to remain in vogue.
The Federal Reserve Open Markets Committee (the "Fed") continues to leave the
federal funds rate unchanged at zero basis points to 25 basis points. After a
hold-off on an increase in September, we believe the market is now anticipating
that the Fed will lift the federal funds rate in December 2015 after a very
strong payroll report for October. We expect a measured pace for future
increases, given the backdrop of a weak global economy and a strengthening U.S.
dollar. We also expect that the long end of the yield curve will rise more
slowly than the front end.
For the consumer, gas prices remain low, and at the lower end of the labor
market there appears to be signs of wage inflation. These are positive
fundamental indicators for consumer and mortgage related securities, in our
opinion.
In our view, with the support of some good, although not great, economic data, a
forward view for interest rates of "lower, longer," is more likely to mean a
lower than expected limit to the long end of the yield curve as opposed to zero
short-term interest rates for a prolonged period of time. We continue to see
forward rate expectations remain low which has held back some of the potential
for price appreciation and performance, given many of our securities are indexed
to floating-rate benchmarks.
Over the past year, the interest rate curve, as measured by the difference
between the 2-year U.S. Treasury and the 10-year U.S. Treasury, has flattened by
approximately 45 basis points. With the U.S. 10-year yield reaching 2.14% in
October, interest rates are back to the lower end of the market's expected
range.
Residential mortgage loan delinquency rates have also continued to decline.
According to the Mortgage Bankers Association, the total delinquency rate as of
the second quarter of 2015 was 5.30%. The delinquency rate decreased for the
seventh consecutive quarter and reached the lowest level since the third quarter
of 2007. This level is down nearly 50% from the peak of 2010, and Commercial
Mortgage-Backed Securities' ("CMBS") delinquency rates are also down, now 5.3%,
according to Trepp, a real estate research firm, which is half of the 10.6% peak
seen in 2012. Interestingly the residential delinquency rates and the commercial
delinquency rates are at about the same level, and declining apace.
Residential mortgage credit provision remains quite limited due to regulatory
obstacles. Outside of Agency guaranteed mortgage instruments, there has been
little MBS issuance. With the upcoming implementation of new mortgage disclosure
requirements, we believe origination is likely to slow down, as banks and
lenders acclimate to the new rules. Most mainstream mortgage loans continue to
find a home on bank balance sheets, given the preferential regulatory treatment
for cleaner, larger balance mortgage loans. This lack of supply continues to
provide a supportive technical backdrop for MBS generally and for Non-Agency MBS
specifically. Additionally, annualized price volatility has declined
significantly, thereby expanding the buyer base.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2015
In our view, the limited access to mortgage credit is the most important
argument supporting the idea that home prices are nowhere near bubble territory.
Regulation, litigation and other issues all continue to limit access to
mortgages and continue to weigh on housing metrics like new home sales. While
many housing measures have remained weak, data related to housing supply has
been very strong, as trends like limited building, reduction in distressed
inventory and low levels of housing supply generally have contributed to home
price index increases. Home prices, as measured by the CoreLogic Home Price
Index, have continued to increase. CoreLogic's index, including distressed
sales, increased 7.7% in 2015 through October 31. Notably, this is ahead of most
expectations. On the residential side, household net worth has improved which
provides support to the economy. An increase in home price results in lower
loan-to-value ratio, which helps a borrower to re-gain lost equity, and to come
closer to meeting standards required to refinance at the low rates available.
Higher leverage has been an impediment to both refinancing and to relocate so
lower loan-to-value ratios can result in higher prepayment speed. Given current
conditions, we anticipate home prices will to continue to improve in 2016,
albeit at a more stable 4% to 5% per annum rate.
The commercial real estate market is quite different than the residential
market. While residential real estate and the U.S. consumer are now stabilizing
after deleveraging, commercial real estate is in a re-leveraging cycle. The RCA
Commercial Property Price Index, tracking major markets across the United
States, shows a significant 15% increase in value year-over-year as of September
30, 2015, the same as last year. The influx of foreign money for commercial
real-estate in top tier markets has been tremendous, pushing these markets well
above the pre-crisis peak in prices. We believe this trend may continue, given
the strength of the U.S. dollar, however the offset is that a great amount of
real estate capital came from sovereign wealth funds that swelled when oil
prices were over $100. With lower oil prices, these capital flows may be lower.
Credit is readily available for commercial properties and access to credit is
expanding along with the allowed leverage. Today is the day when it is again
important to take stock of risk and how risk is priced, in our opinion. We
believe the pricing for risk may not be adequate for more subordinated
securities in the more recently issued multi-borrower CMBS deals, particularly
given a market that is well into a re-leveraging phase. In fact, many of these
subordinated securities have widened 100 basis points to 200 basis points in
2015. That said, we believe more generous terms of credit are likely to
facilitate refinancing of more seasoned loans with a higher degree of leverage,
which we believe should benefit the Fund's seasoned CMBS holdings.
We continue to adopt a methodical approach to adding securities and adjusting
the Fund's exposure to benefit from market conditions and believe the Fund's
scale within the market is appropriate to capture security-specific
opportunities. We believe the Fund's holdings will continue to benefit from
solid fundamental improvements playing their way through loan performance and
cash flows in both the commercial and residential mortgage markets.
PERFORMANCE ANALYSIS
For the 12 month period ended October 31, 2015, the Fund had a total return1 of
1.06% 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 -9.16%, resulting in a total
return1 of 3.34% based on market price. During the period, the Fund's benchmark,
the Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index returned 2.52%.
All of the Fund's sectors rallied during the period with the exception of Agency
MBS derivatives, which reflected lower long-term interest rates. MBS remains one
of the widest spread assets in fixed-income, especially the non-Agency
Residential Mortgage-Backed Securities ("RMBS") and CMBS sectors. With interest
rates remaining low and competing investment-grade spreads remaining tight, this
advantage becomes especially attractive. The other advantage we see in these
sectors is that a substantial fraction carries a floating-rate coupon. Many
investors are trying to limit their exposure to fixed rates, which may
underperform in a rising-rate environment. For below investment-grade mortgage
bonds, fundamental improvements and stronger economic data has pushed prices
higher.
Agency MBS holdings in the Fund returned 0.12%, underperforming the Agency Fixed
Rate MBS Index. Among the fund's Agency MBS holdings are about 7% of Agency
Interest Only ("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 prepayment speeds rose, holding back the performance of Agency MBS
holdings as a whole. The index, being unhedged, benefitted fully from the rate
move.
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(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 Common 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 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2015
The past several months proved to be very volatile for interest rates. The
slowdown of China's economic growth and the one-time depreciation of Chinese
currency triggered a sharp sell-off of global stock markets. Flight-to-safety
trades drove 10-year Treasury rates from 2.35% down to almost 2%. The risk-off
sentiment hit high-yield bonds particularly hard and also negatively affected
MBS bonds that are viewed as risky assets, such as mezzanine CMBS, subprime, IOs
and Inverse Interest Only ("IIO") securities.
Non-Agency securities, comprising more than 70% of the Fund, performed in the
past year, generating about 132 basis points of gross return for the Fund as a
whole. For Prime, Alternative A-pager ("Alt-A") and CMBS bond securities, much
of this return came from high coupon based income offsetting prices that were
mixed to lower. Subprime underperformed as it is more sensitive to risk
sentiment and sold off along with other credit sensitive securities like
high-yield bonds. While high-yield bonds have struggled for fundamental reasons,
consumer credit is not facing the same headwinds. For this reason, we see
subprime RMBS as attractive at these prices and are selectively adding to the
Fund.
As of October 31, 2015, the Fund held 11% cash as a percentage of gross assets.
The Fund's primary purchases over the year were investment-grade prime hybrid
and subprime RMBS. With limited new issuance, particularly in RMBS, it has been
challenging to source attractive investment-grade mortgage assets with
sufficient income. For that reason, we have found CMBS especially attractive for
the investment-grade portion of the portfolio, especially the lower leverage
single-asset single-borrower transactions. Due to investment strategy changes
that recently became effective, we have a larger universe of potential
investment-grade assets and a larger potential allocation to below
investment-grade bonds. We expect to invest a substantial portion of the cash in
below investment-grade bonds in order to increase the Fund's income and use the
additional flexibility in the investment-grade allocation to make income
increasing trades where possible.
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, as the prices of securities held by the Fund decline,
the negative impact of the valuation changes on common share net asset value and
common shareholder 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 October 31, 2015, the Fund's leverage was relatively low at 7.3% 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 46
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 as we have been. 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 are likely to 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 October 31, 2015 and subject to change based on subsequent developments.
Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES - 77.7%
COLLATERALIZED MORTGAGE OBLIGATIONS - 58.5%
Accredited Mortgage Loan Trust
$ 498,198 Series 2003-2, Class A1............................. 4.98% 10/01/33 $ 510,031
ACE Securities Corp. Home Equity Loan Trust
1,160,481 Series 2006-ASAP6, Class A2D (a).................... 0.42% 12/25/36 605,376
Banc of America Mortgage Trust
56,219 Series 2002-L, Class 1A1 (a) (b).................... 2.38% 12/01/32 49,046
Chase Mortgage Finance Trust
356,435 Series 2007-A1, Class 1A3 (a)....................... 2.64% 02/01/37 353,762
Citigroup Mortgage Loan Trust
971,243 Series 2012-7, Class 10A2 (a) (c)................... 2.74% 09/01/36 865,833
Countrywide Alternative Loan Trust
68,779 Series 2007-11T1, Class A37 (b) (d)................. 38.84% 05/25/37 147,009
Countrywide Home Loan Mortgage Pass-Through Trust
859,088 Series 2003-46, Class 2A1 (a)....................... 2.85% 01/01/34 855,171
493,761 Series 2006-21, Class A8............................ 5.75% 02/01/37 470,150
821,312 Series 2006-HYB5, Class 3A1A (a).................... 2.71% 09/01/36 717,219
Credit Suisse First Boston Mortgage Securities Corp.
403,872 Series 2004-AR2, Class 1A1 (a) (b).................. 2.93% 03/01/34 396,489
1,121,058 Series 2004-AR8, Class 6A1 (a)...................... 2.47% 09/01/34 1,119,140
Credit Suisse Mortgage Trust
978,000 Series 10-20R, Class 7A4 (a) (c).................... 3.50% 03/01/37 940,573
DSLA Mortgage Loan Trust
1,086,970 Series 2004-AR3, Class 2A2A (a)..................... 0.57% 07/19/44 1,058,069
1,078,039 Series 2007-AR1, Class 2A1A (a)..................... 0.34% 04/19/47 897,393
GMAC Mortgage Corporation Loan Trust
215,044 Series 2004-AR1, Class 22A (a)...................... 3.09% 06/01/34 210,422
GSR Mortgage Loan Trust
330,182 Series 2005-AR1, Class 4A1 (a)...................... 2.27% 01/01/35 322,197
Harborview Mortgage Loan Trust
666,421 Series 2004-6, Class 3A1 (a)........................ 2.94% 08/01/34 648,779
Home Equity Asset Trust
520,000 Series 2005-9, Class M1 (a)......................... 0.61% 04/25/36 438,240
IXIS Real Estate Capital Trust
1,257,690 Series 2007-HE1, Class A3 (a)....................... 0.36% 05/25/37 445,553
JP Morgan Mortgage Trust
1,759,224 Series 2005-ALT1, Class 4A1 (a)..................... 2.67% 10/01/35 1,643,167
919,261 Series 2006-A2, Class 4A1 (a)....................... 2.72% 08/01/34 924,656
142,882 Series 2006-A2, Class 5A3 (a)....................... 2.57% 11/01/33 143,658
JP Morgan Re-REMIC
849,836 Series 2009-7, Class 12A1 (c)....................... 6.25% 01/01/37 887,159
MASTR Asset Backed Securities Trust
1,108,997 Series 2006-HE5, Class A3 (a)....................... 0.36% 11/25/36 699,930
228,612 Series 2006-HE5, Class A4 (a) (b)................... 0.42% 11/25/36 145,498
1,610,166 Series 2006-NC2, Class A3 (a)....................... 0.31% 08/25/36 812,594
734,964 Series 2006-NC2, Class A5 (a)....................... 0.44% 08/25/36 380,172
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Mellon Residential Funding Corp. Mortgage
Pass-Through Trust
$ 589,115 Series 2001-TBC1, Class A1 (a)...................... 0.90% 11/15/31 $ 555,382
541,302 Series 2002-TBC2, Class A (a)....................... 1.06% 08/15/32 516,615
Morgan Stanley Mortgage Loan Trust
424,280 Series 2004-7AR, Class 2A6 (a)...................... 2.51% 09/01/34 418,663
Nomura Resecuritization Trust
1,219,939 Series 15-6R, Class 2A4 (c)......................... 7.93% 01/02/37 975,219
Provident Funding Mortgage Loan Trust
256,425 Series 2005-1, Class 1A1 (a)........................ 2.49% 05/01/35 257,272
Residential Accredit Loans, Inc.
225,349 Series 2006-QO1, Class 2A1 (a)...................... 0.47% 02/25/46 133,309
Saxon Asset Securities Trust
1,185,801 Series 2007-2, Class A2D (a)........................ 0.50% 05/25/47 831,047
Securitized Asset Backed Receivables LLC
1,146,362 Series 2007-BR2, Class A2 (a)....................... 0.43% 02/25/37 634,625
Structured Adjustable Rate Mortgage Loan Trust
674,836 Series 2004-2, Class 4A2 (a)........................ 2.56% 03/01/34 663,313
Thornburg Mortgage Securities Trust
544,495 Series 2003-4, Class A1 (a)......................... 0.84% 09/25/43 528,750
433,302 Series 2005-1, Class A3 (a)......................... 2.22% 04/01/45 431,894
Towd Point Mortgage Trust
1,107,580 Series 15-2, Class 2A1 (a) (c)...................... 3.75% 11/01/57 1,152,837
Wachovia Mortgage Loan Trust, LLC
473,819 Series 2006-A, Class 3A1 (a)........................ 2.75% 05/01/36 455,509
WaMu Mortgage Pass-Through Certificates
299,975 Series 2003-AR5, Class A7 (a)....................... 2.56% 06/01/33 305,174
751,097 Series 2004-AR1, Class A (a)........................ 2.43% 03/01/34 754,462
805,140 Series 2004-AR10, Class A1B (a)..................... 0.62% 07/25/44 779,058
629,791 Series 2004-AR13, Class A1A (a)..................... 0.92% 11/25/34 603,565
859,168 Series 2005-AR1, Class A1A (a)...................... 0.52% 01/25/45 814,880
1,211,019 Series 2005-AR11, Class A1A (a)..................... 0.52% 08/25/45 1,134,502
88,868 Series 2005-AR2, Class 2A21 (a)..................... 0.53% 01/25/45 82,860
1,116,377 Series 2005-AR6, Class 2A1A (a)..................... 0.43% 04/25/45 1,053,733
513,051 Series 2005-AR9, Class A1A (a)...................... 0.52% 07/25/45 494,801
844,068 Series 2006-AR2, Class 1A1 (a)...................... 2.32% 03/01/36 804,938
Washington Mutual Alternative Mortgage
Pass-Through Certificates
41,146 Series 2007-5, Class A11 (b) (d).................... 38.30% 06/25/37 94,630
Washington Mutual MSC Mortgage Pass-Through
Certificates
586,674 Series 2004-RA1, Class 2A........................... 7.00% 03/01/34 623,490
Wells Fargo Mortgage Backed Securities Trust
604,872 Series 2003-H, Class A1 (a)......................... 2.74% 09/01/33 607,444
424,890 Series 2004-A, Class A1 (a)......................... 2.66% 02/01/34 426,258
1,577,163 Series 2004-R, Class 1A1 (a)........................ 2.74% 09/01/34 1,605,172
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities Trust (Continued)
$ 413,901 Series 2004-S, Class A1 (a)......................... 2.73% 09/01/34 $ 425,290
783,479 Series 2004-Y, Class 1A2 (a)........................ 2.69% 11/01/34 780,232
399,393 Series 2005-AR10, Class 2A17 (a).................... 2.70% 06/01/35 407,831
861,269 Series 2005-AR16, Class 1A1 (a)..................... 2.69% 08/01/33 879,199
405,246 Series 2005-AR3, Class 2A1 (a)...................... 2.74% 03/01/35 411,175
627,906 Series 2005-AR8, Class 1A1 (a)...................... 2.72% 06/01/35 641,253
822,695 Series 2006-AR10, Class 5A2 (a)..................... 2.74% 07/01/36 801,223
275,819 Series 2007-16, Class 1A1........................... 6.00% 12/04/37 285,402
406,785 Series 2007-2, Class 1A13........................... 6.00% 03/01/37 401,095
101,858 Series 2007-8, Class 2A2............................ 6.00% 07/01/37 100,517
--------------
39,559,905
--------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 19.2%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ............................. 5.42% 10/01/45 1,018,347
650,000 Series 2007-3, Class AJ, STRIP...................... 5.73% 06/01/49 671,655
Bayview Commercial Asset Trust
675,625 Series 2004-2, Class A (a) (c)...................... 0.63% 08/25/34 646,204
BXHTL Mortgage Trust
800,000 Series 2015-JWRZ, Class B (a) (c)................... 1.90% 05/15/29 793,497
Carefree Portfolio Trust
1,250,000 Series 2014-CARE, Class B (a) (c)................... 2.05% 11/15/19 1,260,091
Citigroup Commercial Mortgage Trust
1,525,000 Series 2014-388G, Class B (a) (c)................... 1.25% 06/15/33 1,509,968
COMM Mortgage Trust
1,000,000 Series 2014-KYO, Class B (a) (c).................... 1.50% 06/11/27 990,372
Greenwich Capital Commercial Funding Corp.
650,000 Series 2007-GG11, Class AJ, STRIP................... 6.05% 12/01/49 666,741
Hudsons Bay Simon JV Trust
510,000 Series 2015-HBFL, Class DFL (a) (c)................. 3.85% 08/05/34 510,000
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (c).................... 1.89% 11/15/29 1,046,281
LB-UBS Commercial Mortgage Trust
835,000 Series 2007-C1, Class AM............................ 5.46% 02/11/40 867,811
440,000 Series 2007-C2, Class AM............................ 5.49% 02/11/40 457,123
UBS-Barclays Commercial Mortgage Trust
15,244,145 Series 2013-C5, Class XA, IO (a) (c)................ 1.09% 03/01/46 884,936
VNDO Mortgage Trust
990,000 Series 2012-6AVE, Class A (c)....................... 3.00% 11/01/30 1,000,560
Wachovia Bank Commercial Mortgage Trust
650,000 Series 2007-C33, Class AJ, STRIP.................... 5.95% 02/01/51 666,990
--------------
12,990,576
--------------
TOTAL MORTGAGE-BACKED SECURITIES.................................................. 52,550,481
(Cost $52,265,014) --------------
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- --------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 18.0%
COLLATERALIZED MORTGAGE OBLIGATIONS - 7.0%
Federal Home Loan Mortgage Corp.
$ 1,519,055 Series 2807, Class SB, IO (d)....................... 7.25% 11/15/33 $ 262,506
13,874 Series 3195, Class SX (b) (d)....................... 44.88% 07/15/36 56,755
2,126 Series 3562, Class KI, IO (b)....................... 4.50% 11/01/22 0
1,412,479 Series 3619, Class EI, IO (b)....................... 4.50% 05/01/24 58,896
999,192 Series 3692, Class PS, IO (b) (d)................... 6.40% 05/15/38 50,231
2,806,778 Series 3726, Class KI, IO........................... 3.50% 04/01/25 183,537
2,068,794 Series 3870, Class WS, IO (d)....................... 6.40% 06/15/31 297,981
1,450,718 Series 4206, Class IA, IO (b)....................... 3.00% 03/01/33 220,236
Federal National Mortgage Association
508,581 Series 2005-122, Class SN (d)....................... 27.81% 01/25/36 547,233
74,105 Series 2008-50, Class AI, IO (b).................... 5.50% 06/01/23 3,002
3,177,858 Series 2010-103, Class ID, IO (b)................... 5.00% 09/01/40 466,940
5,118,595 Series 2010-139, Class KI, IO (b)................... 1.09% 12/01/40 274,880
314,139 Series 2010-142, Class PS, IO (b) (d)............... 5.85% 05/25/40 14,972
755,408 Series 2010-145, Class TI, IO (b)................... 3.50% 12/01/20 47,899
1,708,368 Series 2010-40, Class MI, IO (b).................... 4.50% 08/01/24 63,994
3,438,290 Series 2012-112, Class BI, IO....................... 3.00% 09/01/31 381,277
2,656,389 Series 2012-125, Class MI, IO (b)................... 3.50% 11/01/42 492,059
3,615,166 Series 2013-32, Class IG, IO (b).................... 3.50% 04/01/33 525,056
Federal National Mortgage Association, STRIP
2,161,024 Series 406, Class 6, IO (b)......................... 4.00% 01/01/41 392,169
Government National Mortgage Association
557,241 Series 2009-65, Class NJ, IO (b).................... 5.50% 07/01/39 46,385
2,234,813 Series 2010-115, Class IQ, IO....................... 4.50% 11/01/38 169,300
3,975,931 Series 2011-131, Class EI, IO....................... 4.50% 08/01/39 204,191
107,636 Series 2011-69, Class CI, IO (b).................... 5.00% 03/01/36 187
--------------
4,759,686
--------------
PASS-THROUGH SECURITIES - 11.0%
Fannie Mae REMICs
919,284 Series 2005-83, Class LZ............................ 5.50% 10/01/35 976,815
Federal Home Loan Mortgage Corp.
1,000,000 Gold Pool........................................... 3.50% 10/31/45 1,038,281
1,105,990 Pool A94738 (e)..................................... 4.50% 11/01/40 1,196,224
749,490 Pool K36017 (e)..................................... 5.00% 09/01/47 808,129
Federal National Mortgage Association
1,574,787 Pool 831145 (e)..................................... 6.00% 12/01/35 1,804,221
1,438,575 Pool 843971 (e)..................................... 6.00% 11/01/35 1,634,632
--------------
7,458,302
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES........................... 12,217,988
(Cost $17,205,994) --------------
ASSET-BACKED SECURITIES - 1.7%
Green Tree Financial Corp.
31,170 Series 1997-2, Class A6 (b)......................... 7.24% 06/15/28 32,056
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- --------------
ASSET-BACKED SECURITIES (CONTINUED)
Green Tree Financial Corp. (Continued)
$ 48,237 Series 1997-3, Class A6 (b)......................... 7.32% 03/15/28 $ 50,597
47,414 Series 1997-7, Class A6 (b)......................... 6.76% 07/15/28 48,667
Mid-State Capital Corp. Trust
543,298 Series 2004-1, Class M1............................. 6.50% 08/01/37 585,457
387,643 Series 2005-1, Class A.............................. 5.75% 01/01/40 419,526
--------------
TOTAL ASSET-BACKED SECURITIES..................................................... 1,136,303
(Cost $1,170,563) --------------
TOTAL INVESTMENTS - 97.4%......................................................... 65,904,772
(Cost $70,641,571) (f) --------------
PRINCIPAL
VALUE DESCRIPTION VALUE
--------------- ----------------------------------------------------------------------------------- --------------
REVERSE REPURCHASE AGREEMENTS - (7.8%)
(3,383,000) With JP Morgan 0.42% dated 10/05/15, to be repurchased at
$3,384,144 on 11/03/15......................................................... (3,383,000)
(1,926,000) With JP Morgan 0.54% dated 09/09/15, to be repurchased at
$1,928,600 on 12/08/15......................................................... (1,926,000)
--------------
TOTAL REVERSE REPURCHASE AGREEMENTS............................................... (5,309,000)
--------------
NET OTHER ASSETS AND LIABILITIES - 10.4%.......................................... 7,043,509
--------------
NET ASSETS - 100.0%............................................................... $ 67,639,281
==============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at October 31, 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) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of 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 October 31, 2015,
securities noted as such amounted to $13,463,530, or 19.91% of net assets.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at October 31, 2015.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for federal income tax purposes is $69,356,936. As of
October 31, 2015, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$3,608,601 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$7,060,765.
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)
OCTOBER 31, 2015
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
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 10/31/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ ------------- ------------
Mortgage-Backed Securities......................... $ 52,550,481 $ -- $ 52,550,481 $ --
U.S. Government Agency Mortgage-Backed Securities.. 12,217,988 -- 12,217,988 --
Asset-Backed Securities............................ 1,136,303 -- 1,136,303 --
------------ ------------ ------------- ------------
Total Investments.................................. $ 65,904,772 $ -- $ 65,904,772 $ --
============ ============ ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2015 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Reverse Repurchase Agreements...................... $ (5,309,000) $ -- $ (5,309,000) $ --
============ ============ ============= ============
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 October 31, 2015.
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2015
ASSETS:
Investments, at value
(Cost $70,641,571).......................................................................... $ 65,904,772
Cash........................................................................................... 8,199,682
Restricted cash................................................................................ 788,066
Interest receivable............................................................................ 261,382
Prepaid expenses............................................................................... 5,689
------------
Total Assets................................................................................ 75,159,591
------------
LIABILITIES:
Reverse Repurchase Agreements.................................................................. 5,309,000
Payables:
Investment securities purchased............................................................. 2,057,962
Investment advisory fees.................................................................... 61,991
Audit and tax fees.......................................................................... 50,200
Administrative fees......................................................................... 17,375
Printing fees............................................................................... 10,180
Transfer agent fees......................................................................... 3,545
Custodian fees.............................................................................. 3,506
Interest on reverse repurchase agreements................................................... 2,597
Trustees' fees and expenses................................................................. 1,402
Financial reporting fees.................................................................... 771
Legal fees.................................................................................. 769
Other liabilities.............................................................................. 1,012
------------
Total Liabilities........................................................................... 7,520,310
------------
NET ASSETS..................................................................................... $ 67,639,281
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 75,520,047
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... 1,284,635
Accumulated net realized gain (loss) on investments............................................ (4,470,733)
Net unrealized appreciation (depreciation) on investments...................................... (4,736,799)
------------
NET ASSETS..................................................................................... $ 67,639,281
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 16.05
============
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 YEAR ENDED OCTOBER 31, 2015
INVESTMENT INCOME:
Interest....................................................................................... $ 5,376,123
------------
Total investment income..................................................................... 5,376,123
------------
EXPENSES:
Investment advisory fees....................................................................... 764,719
Administrative fees............................................................................ 87,689
Audit and tax fees............................................................................. 51,791
Transfer agent fees............................................................................ 36,943
Interest expense on reverse repurchase agreements.............................................. 32,011
Printing fees.................................................................................. 25,168
Trustees' fees and expenses.................................................................... 16,787
Custodian fees................................................................................. 14,359
Financial reporting fees....................................................................... 9,250
Legal fees..................................................................................... 3,217
Other.......................................................................................... 37,349
------------
Total expenses.............................................................................. 1,079,283
------------
NET INVESTMENT INCOME.......................................................................... 4,296,840
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... (1,637,322)
Net change in unrealized appreciation (depreciation) on investments......................... (2,431,118)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (4,068,440)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 228,400
============
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/2015 10/31/2014
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 4,296,840 $ 4,309,401
Net realized gain (loss)............................................................ (1,637,322) (396,097)
Net increase from payment by the sub-advisor (a).................................... -- 1,180
Net change in unrealized appreciation (depreciation)................................ (2,431,118) (2,167,601)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... 228,400 1,746,883
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (1,990,325) (4,297,377)
Return of capital................................................................... (2,307,052) --
-------------- --------------
Total distributions to shareholders................................................. (4,297,377) (4,297,377)
-------------- --------------
Total increase (decrease) in net assets............................................. (4,068,977) (2,550,494)
NET ASSETS:
Beginning of period................................................................. 71,708,258 74,258,752
-------------- --------------
End of period....................................................................... $ 67,639,281 $ 71,708,258
============== ==============
Accumulated net investment income (loss) at end of period........................... $ 1,284,635 $ 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 YEAR ENDED OCTOBER 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations..................... $ 228,400
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Purchases of investments...................................................... (31,164,625)
Sales, maturities and paydowns on investments................................. 34,725,118
Net amortization/accretion of premiums/discounts on investments............... (630,668)
Net realized gain/loss on investments......................................... 1,637,322
Net change in unrealized appreciation/depreciation on investments............. 2,431,118
Net change in restricted cash................................................. (738,066)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................... 101,785
Decrease in prepaid expenses.................................................. 198
Increase in interest payable on reverse repurchase agreements................. 110
Decrease in investment advisory fees payable.................................. (6,377)
Decrease in legal fees payable................................................ (1,519)
Decrease in printing fees payable............................................. (2,012)
Decrease in administrative fees payable....................................... (566)
Decrease in custodian fees payable............................................ (117)
Decrease in transfer agent fees payable....................................... (2,790)
Decrease in trustees' fees and expenses payable............................... (65)
Increase in other liabilities payable......................................... 497
-------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................... $ 6,577,743
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............... (1,990,325)
Distributions to Common Shareholders from return of capital................... (2,307,052)
Repurchases of reverse repurchase agreements.................................. (37,388,000)
Reverse repurchase agreements borrowings...................................... 34,226,000
-------------
CASH USED IN FINANCING ACTIVITIES................................................... (7,459,377)
-------------
Increase in cash.................................................................... (881,634)
Cash at beginning of period......................................................... 9,081,316
-------------
CASH AT END OF PERIOD............................................................... $ 8,199,682
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ $ 31,901
=============
See Notes to Financial Statements Page 15
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------
2015 2014 2013 2012 2011 (a)
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period............ $ 17.02 $ 17.63 $ 17.91 $ 18.43 $ 19.59
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 1.02 1.02 1.25 1.28 1.69
Net realized and unrealized gain (loss) (0.97) (0.61) (0.28) 0.17 (0.82)
------- ------- ------- ------- -------
Total from investment operations................ 0.05 0.41 0.97 1.45 0.87
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.47) (1.02) (1.25) (2.03) (2.03)
Return of capital............................... (0.55) -- -- -- --
------- ------- ------- ------- -------
Total distributions to Common
Shareholders................................. (1.02) (1.02) (1.25) (2.03) (2.03)
------- ------- ------- ------- -------
Premium from shares sold in Common Share
offering..................................... -- -- -- 0.06 --
------- ------- ------- ------- -------
Net asset value, end of period.................. $ 16.05 $ 17.02 $ 17.63 $ 17.91 $ 18.43
======= ======= ======= ======= =======
Market value, end of period..................... $ 14.58 $ 15.12 $ 15.79 $ 19.00 $ 18.94
======= ======= ======= ======= =======
TOTAL RETURN BASED ON NET ASSET VALUE (b)....... 1.06% 3.01% (c) 6.04% (c) 8.30% 4.60%
======= ======= ======= ======= =======
TOTAL RETURN BASED ON MARKET VALUE (b).......... 3.34% 2.17% (10.47)% 11.86% 1.68%
======= ======= ======= ======= =======
------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $67,639 $71,708 $74,259 $75,439 $75,014
Ratio of total expenses to average net assets 1.55% 1.78% 1.96% 2.47% 2.23%
Ratio of total expenses to average net assets
excluding interest expense................... 1.51% 1.72% 1.83% 2.20% 2.14%
Ratio of net investment income (loss) to
average net assets........................... 6.18% 5.84% 7.01% 7.28% 8.74%
Portfolio turnover rate......................... 46% 54% 109% 52% 47%
------------------------------------------------
(a) 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 Fixed Income Discount Advisory Company. The Fund's
shareholders approved the investment sub-advisory agreement with
Brookfield on July 25, 2011.
(b) 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.
(c) 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 return.
Page 16 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015
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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." 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 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.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
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
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 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 October 31, 2015, is
included with the Fund's Portfolio of Investments.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015
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.
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 October 31, 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 October 31, 2015.
Information for the year ended October 31, 2015:
Maximum amount outstanding during the period................... $8,471,000
Average amount outstanding during the period*.................. $6,913,942
Average Common Shares outstanding during the period............ 4,213,115
Average debt per Common Share outstanding during the period.... $1.64
* 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 year ended October 31, 2015.
During the year ended October 31, 2015, the interest rates ranged from 0.34% to
1.06%, with a weighted average interest rate of 0.46%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$32,011.
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 and have the effect of
creating leverage. 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
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015
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.
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. Permanent differences
incurred during the fiscal year ended October 31, 2015, primarily as a result of
differing book/tax treatment on recognition of amortization/accretion on
portfolio holdings, have been reclassified at year end to reflect a decrease in
accumulated net investment income (loss) by $1,373,391, an increase in
accumulated net realized gain (loss) on investments by $1,565,058 and a decrease
to paid-in capital of $191,667. Net assets were not affected by this
reclassification.
The tax character of distributions paid during the fiscal year ended October 31,
2015, and 2014, was as follows:
Distributions paid from: 2015 2014
Ordinary income................................... $ 1,990,325 $4,297,377
Capital gain...................................... -- --
Return of capital................................. 2,307,052 --
As of October 31, 2015, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ --
Undistributed capital gains....................... --
-----------
Total undistributed earnings...................... --
Accumulated capital and other losses.............. (4,470,733)
Net unrealized appreciation (depreciation)........ (3,452,164)
-----------
Total accumulated earnings (losses)............... (7,922,897)
Other............................................. --
Paid-in capital................................... 75,562,178
-----------
Net assets........................................ $67,639,281
===========
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, 2015, the Fund had pre-enactment net capital
losses for federal income tax purposes of $3,349,872. At October 31, 2015, the
Fund had post-enactment net capital losses for federal income tax purposes of
$1,120,861 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
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015
During the taxable year ended October 31, 2015, the Fund did not utilize any
pre-enactment capital loss carryforwards.
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 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of October 31, 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.
J. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES:
Offsetting Assets and Liabilities require entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statements of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are 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. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
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. MNAs provide the right, in the event
of default (including bankruptcy and insolvency), for the non-defaulting
counterparty to liquidate the collateral and calculate the net exposure to the
defaulting party or request additional collateral.
At October 31, 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 $ (5,309,000) $ -- $ (5,309,000) $ 5,309,000 $ -- $ --
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.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015
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.
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 a reimbursement 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 year ended October 31,
2015, were $12,458,054 and $19,703,825, respectively. The proceeds from sales
and paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the year ended October 31, 2015, were
$16,300,963 and $18,424,155, 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. CHANGES TO INVESTMENT STRATEGY
The Board of Trustees of the Fund approved certain changes to the Fund's
investment strategy ("New Investment Strategy") that were implemented on October
5, 2015, as described below.
PREVIOUS INVESTMENT STRATEGY
The Fund may invest up to 25% of its managed assets in securities that at the
time of investment are rated below "A" (at or below the investment grade ratings
of "Baa," "BBB," and "BBB" by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies, Inc.
("S&P") and Fitch Ratings, Inc. ("Fitch")), each a nationally recognized
statistical rating organization ("NRSRO"), or were unrated but judged to be of
comparable quality by Brookfield Investment Management Inc. ("Brookfield"), the
Fund's investment sub-advisor.
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015
NEW INVESTMENT STRATEGY
The Fund may invest up to 35% of its managed assets in securities that at the
time of investment are rated below "BBB-" or the equivalent (i.e. below
investment grade rating) by NRSROs such as Moody's, S&P, Fitch, DBRS, Inc.,
Kroll Bond Rating Agency, Inc., or Morningstar Credit Ratings, LLC, or were
unrated but judged to be of comparable quality by Brookfield.
7. SUBSEQUENT EVENTS
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
were the following subsequent events:
On November 19, 2015, the Fund declared a distribution of $0.085 per share to
Common Shareholders of record on December 3, 2015, payable December 10, 2015.
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as the President and Chief Executive Officer of the Fund,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas to
serve as the President and Chief Executive Officer and Mr. Donald Swade,
formerly an Assistant Treasurer of the Fund, to serve as the Treasurer, Chief
Financial Officer and Chief Accounting Officer of the Fund.
Page 23
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST MORTGAGE INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Mortgage Income Fund (the "Fund"), including the portfolio of investments,
as of October 31, 2015, and the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2015 by correspondence with the Fund's
custodian and brokers; when replies were not received from brokers, we performed
other auditing procedures. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust Mortgage Income Fund as of October 31, 2015, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 22, 2015
Page 24
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ADDITIONAL INFORMATION
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 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 25
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 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.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 29, 2015, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2015, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
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.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015 (UNAUDITED)
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.
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.
MORTGAGE AND ASSET-BACKED SECURITIES RISK: The value of mortgage and asset
backed securities can fall if the owners of the underlying mortgages or other
obligations pay off their mortgages or other obligations sooner than expected,
which could happen when interest rates fall or for other reasons. Mortgage and
asset backed securities are also subject to extension risk, which is the risk
that rising interest rates could cause mortgages or other obligations underlying
the securities to be prepaid more slowly than expected, which would, in effect,
convert a short or medium duration mortgage or asset backed security into a
longer duration security, increasing its sensitivity to interest rate changes
and causing its price to decline. Mortgage and asset-backed security values may
also be affected by the creditworthiness of the servicing agent for the pool,
the originator of the loans or receivables or entities providing for any credit
enhancement.
A mortgage backed security may be negatively affected by the quality of the
mortgages underlying such security and the structure of its issuer. For example,
if a mortgage underlying a certain mortgage backed security defaults, the value
of that security may decrease.
Mortgage backed securities issued by a private issuer, such as commercial
mortgage backed securities, generally entail greater risk than obligations
directly or indirectly guaranteed by the U.S. government or a government
sponsored entity.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Mortgage Income Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Brookfield
Investment Management Inc. (the "Sub-Advisor"), at a meeting held on June 16,
2015. The Board determined that the continuation of the Agreements is in the
best interests of the Fund in light of the extent and quality of the services
provided and such other matters as the Board considered to be relevant in the
exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 20, 2015 and June 16, 2015, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor (including the relevant personnel
responsible for these
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015 (UNAUDITED)
services and their experience); the advisory and sub-advisory fees for the Fund
as compared to fees charged to other clients of the Advisor and the Sub-Advisor
and as compared to fees charged to a peer group of funds selected by Management
Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"); expenses
of the Fund as compared to expense ratios of the funds in the MPI Peer Group;
performance information for the Fund; the nature of expenses incurred in
providing services to the Fund and the potential for economies of scale, if any;
financial data on the Advisor and the Sub-Advisor; any fall-out benefits to the
Advisor and the Sub-Advisor; and information on the Advisor's and the
Sub-Advisor's compliance programs. The Board reviewed initial materials with the
Advisor at a special meeting held on April 20, 2015, at which the Independent
Trustees and their counsel met separately to discuss the information provided by
the Advisor and the Sub-Advisor. Following the April meeting, independent legal
counsel on behalf of the Independent Trustees requested certain clarifications
and supplements to the materials provided, and those were considered at an
executive session of the Independent Trustees and independent legal counsel held
prior to the June 16, 2015 meeting, as well as at the meeting. The Board applied
its business judgment to determine whether the arrangements between the Fund and
the Advisor and among the Fund, the Advisor and the Sub-Advisor are reasonable
business arrangements from the Fund's perspective as well as from the
perspective of shareholders. The Board considered that shareholders chose to
invest or remain invested in the Fund knowing that the Advisor and the
Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
With respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. The Board considered the significant asset
growth of the First Trust Fund Complex and the Advisor's concomitant investment
in infrastructure and personnel dedicated to the First Trust funds. With respect
to the Sub-Advisory Agreement, the Board noted the background and experience of
the Sub-Advisor's portfolio management team. The Board reviewed the materials
provided by the Sub-Advisor and considered the services that the Sub-Advisor
provides to the Fund, including the Sub-Advisor's day-to-day management of the
Fund's investments. In light of the information presented and the considerations
made, the Board concluded that the nature, extent and quality of services
provided to the Fund by the Advisor and the Sub-Advisor under the Agreements
have been and are expected to remain satisfactory and that the Sub-Advisor,
under the oversight of the Advisor, has managed the Fund consistent with its
investment objectives and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non fund clients, noting that the Advisor does not
provide advisory services to other funds with investment objectives and policies
similar to the Fund's, but does provide services to certain separately managed
accounts that may have investment objectives and policies similar to the Fund's.
The Board noted that the Advisor charges a lower advisory fee rate to the
separately managed accounts, as well as the Advisor's statement that the nature
of the services provided to the separately managed accounts is not comparable to
those provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other closed end funds it manages, noting that the Fund's sub-advisory fee rate
is lower than the advisory fee rates charged by the Sub-Advisor to the other
funds it manages. In addition, the Board reviewed data prepared by MPI showing
the advisory fee and expense ratio of the Fund as compared to the advisory fees
and expense ratios of the MPI Peer Group. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) the Fund is unique in its composition, which
makes assembling peers with similar strategies and asset mix difficult; (ii)
peer funds may use different amounts and types of leverage with different costs
associated with them or may use no leverage; (iii) none of the peer funds employ
an advisor/sub-advisor management structure; and (iv) all of the peer funds are
larger than the Fund, which causes the Fund's fixed expenses to be higher on a
percentage basis as compared to the larger peer funds. The Board took these
limitations into account in considering the peer data. In reviewing the peer
data, the Board noted that the Fund's advisory fee, based on average net assets,
was below the median of the MPI Peer Group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also reviewed
data prepared by MPI comparing the Fund's performance for periods ended December
31, 2014 to the performance of the MPI Peer Group and to a benchmark index. In
reviewing the Fund's performance as compared to the performance of the MPI Peer
Group, the Board took into account the limitations described above with respect
to creating a relevant peer group for the Fund. The Board also considered data
from MPI on the Fund's annual distribution rate as of December 31, 2014 as
compared to the MPI Peer Group and the Fund's leverage costs versus the leverage
costs of applicable funds in the MPI Peer Group. The Board considered
information provided by the Advisor on the Fund's leverage as well, including
that leverage was accretive to the Fund's total return in 2014. In addition, the
Board compared the Fund's premium/discount over the past eight quarters to the
average and median premium/discount over the same period of a peer group
selected by the Advisor, as well as data on the average premium/discount for
2014 for the funds in the MPI Peer Group, and considered factors that may impact
a fund's premium/discount.
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015 (UNAUDITED)
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has made and continues to make significant
investments in personnel and infrastructure and considered whether fee levels
reflect any economies of scale for the benefit of shareholders. The Board
determined that due to the Fund's closed-end structure, the potential for
realization of economies of scale as Fund assets grow was not a material factor
to be considered. The Board also considered the costs of the services provided
and profits realized by the Advisor from serving as investment advisor to the
Fund for the twelve months ended December 31, 2014, as well as product-line
profitability data for the same period, as set forth in the materials provided
to the Board. The Board noted the inherent limitations in the profitability
analysis, and concluded that the pre-tax profits estimated to have been realized
by the Advisor in connection with the management of the Fund were not
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund, including
the Advisor's compensation for fund reporting services pursuant to a separate
Fund Reporting Services Agreement.
The Board noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it does not expect
economies of scale to be present in connection with its provision of services to
the Fund. The Board considered that the sub-advisory fee rate was negotiated at
arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered data provided by the Sub-Advisor with respect
to the profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board
noted the inherent limitations in the profitability analysis and concluded that
the profitability analysis for the Advisor was more relevant, although the
estimated profitability of the Sub-Advisory Agreement appeared to be not
unreasonable in light of the services provided to the Fund. The Board noted that
the Sub-Advisor does not maintain any soft-dollar arrangements and that the
Sub-Advisor indicated that it does not anticipate any material fall-out benefits
from its relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 29
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE (1) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 117 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real
120 East Liberty Drive, o Since Fund Inception Estate Limited Partnership; Member,
Suite 400 Sportsmed LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 117 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund Inception (May 2007 to March 2010), Inc., ADM
Suite 400 ADM Investor Services, Inc. Investor Services
Wheaton, IL 60187 (Futures Commission Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 117 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since June 2006 Consulting) Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 117 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Inception Harapan Educational Foundation Transport, Inc.
Suite 400 (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee, o Three-Year Term Chief Executive Officer (December 2010 117 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund Inception 2010), First Trust Advisors L.P. and First
Suite 400 Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-----------------------------
(1) Currently, James A. Bowen and Niel B. Nielson, as Class III Trustees, are
serving as trustees until the Fund's 2016 annual meeting of shareholders.
Robert F. Keith, as a Class I Trustee, is serving as a trustee until the
Fund's 2017 annual meeting of shareholders. Richard E. Erickson and Thomas
R. Kadlec, as Class II Trustees, are serving as trustees until the Fund's
2018 annual meeting of shareholders
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 30
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President First Trust Advisors L.P. and First Trust
Suite 400 Accounting Officer o Since January 2012 Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Inception Counsel, BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor); Secretary of
D.O.B.: 05/60 Stonebridge Advisors LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Fund Inception First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since
D.O.B.: 12/66 January 2011
o Assistant Secretary
since Fund Inception
-----------------------------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 31
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PRIVACY POLICY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2015 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist usin the distribution of investor
materials such as trustees, banks,financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 32
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.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the last
two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements
or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal
years were $45,000 for the fiscal year ended October 31, 2014 and $45,000
for the fiscal year ended October 31, 2015.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the
audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item were $0 for the fiscal year ended October 31,
2014 and $0 for the fiscal year ended October 31, 2015.
Audit-Related Fees (Investment Advisor) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item were $0 for the fiscal year ended October
31, 2014 and $0 for the fiscal year ended October 31, 2015.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last two
fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $5,200
for the fiscal year ended October 31, 2014 and $5,200 for the fiscal year
ended October 31, 2015. These fees were for tax return preparation and
review.
Tax Fees (Investment Advisor) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $0 for
the fiscal year ended October 31, 2014 and $0 for the fiscal year ended
October 31, 2015.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the Registrant, other than the services reported in
paragraphs (a) through (c) of this Item were $0 for the fiscal year ended
October 31, 2014 and $0 for the fiscal year ended October 31, 2015.
All Other Fees (Investment Adviser) The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the Registrant, other than the services reported in
paragraphs (a) through (c) of this Item were $0 for the fiscal year ended
October 31, 2014 and $0 for the fiscal year ended October 31, 2015.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's engagement
to audit the registrant's financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant for the Registrant's fiscal year ended October 31, 2014 were
$5,200 for the Registrant and $43,500 for the Registrant's investment
adviser and for the Registrant's fiscal year ended October 31, 2015 were
$5,200 for the Registrant and $12,500 for the Registrant's investment
adviser.
(h) The registrant's audit committee of the board of directors has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by, or
under common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
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.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
Information provided as of December 24, 2015.
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor.
Anthony Breaks, CFA, Director
Mr. Breaks is a co-portfolio manager of the registrant responsible for the
day-to-day management of the portfolio. He is responsible for security analysis,
trading and the overall management of the portfolio's exposures. He has worked
for Brookfield since May 2002.
Chris Wu, Director
Mr. Wu is a co-portfolio manager of the registrant responsible for the
day-to-day management of the portfolio. He is responsible for the Agency MBS
exposures. He performs security analysis, trading and monitoring of the Agency
MBS positions. He has worked for Brookfield since March 2007.
(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND
POTENTIAL CONFLICTS OF INTEREST
Information provided as of October 31, 2015.
# of Accounts Total Assets
Total Managed for which for which
Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Based on is Based on
Team Member Type of Accounts* Managed Total Assets Performance Performance
-----------------
1. Anthony Breaks Registered Investment Companies: 0 $ 0 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 1 $ 46 0 $ 0
---------------------------------
Other Accounts: 3 $485 0 $ 0
---------------
2. Chris Wu Registered Investment Companies: 0 $ 0 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $ 0 0 $ 0
---------------------------------
Other Accounts: 0 $ 0 0 $ 0
---------------
PORTFOLIO MANAGER MATERIAL CONFLICTS OF INTEREST
Potential conflicts of interest may arise when a fund's portfolio manager has
day-to-day management responsibilities with respect to one or more other funds
or other accounts, as is the case for the portfolio managers of the Fund. These
potential conflicts may include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible
for managing multiple funds and/or accounts may devote unequal time and
attention to the management of those funds and/or accounts. As a result, the
portfolio manager may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as the case may be if he or she were to devote substantially more attention to
the management of a single fund. The effects of this potential conflict may be
more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.
Allocation of Limited Investment Opportunities. If a portfolio manager
identifies a limited investment opportunity that may be suitable for multiple
funds and/or accounts, the opportunity may be allocated among these several
funds or accounts, which may limit a client's ability to take full advantage of
the investment opportunity.
Pursuit of Differing Strategies. At times, a portfolio manager may determine
that an investment opportunity may be appropriate for only some of the funds
and/or accounts for which he or she exercises investment responsibility, or may
decide that certain of the funds and/or accounts should take differing positions
with respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.
Variation in Compensation. A conflict of interest may arise where the financial
or other benefits available to the portfolio manager differ among the funds
and/or accounts that he or she manages. If the structure of the investment
adviser's management fee and/or the portfolio manager's compensation differs
among funds and/or accounts (such as where certain funds or accounts pay higher
management fees or performance-based management fees), the portfolio manager
might be motivated to help certain funds and/or accounts over others. The
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain or raise assets under
management or to enhance the portfolio manager's performance record or to derive
other rewards, financial or otherwise, could influence the portfolio manager to
lend preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
Related Business Opportunities. The investment adviser or its affiliates may
provide more services (such as distribution or recordkeeping) for some types of
funds or accounts than for others. In such cases, a portfolio manager may
benefit, either directly or indirectly, by devoting disproportionate attention
to the management of fund and/or accounts that provide greater overall returns
to the investment manager and its affiliates.
Brookfield Investment Management Inc. ("Brookfield") has adopted compliance
policies and procedures that are designed to address the various conflicts of
interest that may arise for it and the individuals that it employs. For example,
Brookfield seeks to minimize the effects of competing interests for the time and
attention of portfolio managers by assigning portfolio managers to manage funds
and accounts that share a similar investment style. Brookfield also has adopted
trade allocation procedures that are designed to facilitate the fair allocation
of limited investment opportunities among multiple funds and accounts.
(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
PORTFOLIO MANAGER COMPENSATION
Information provided as of October 31, 2015.
Brookfield compensates its portfolio managers based on the scale and complexity
of their portfolio responsibilities, the total return performance of funds and
accounts managed by the portfolio manager on an absolute basis and versus
appropriate peer groups of similar size and strategy, as well as the management
skills displayed in managing their subordinates and the teamwork displayed in
working with other members of the firm. Since the portfolio managers are
responsible for multiple funds and accounts, investment performance is evaluated
on an aggregate basis almost equally weighted among performance, management and
teamwork. Base compensation for Brookfield's portfolio managers varies in line
with a portfolio manager's seniority and position. The compensation of portfolio
managers with other job responsibilities (such as acting as an executive officer
of Brookfield or supervising various departments) includes consideration of the
scope of such responsibilities and the portfolio manager's performance in
meeting them. Brookfield seeks to compensate portfolio managers commensurate
with their responsibilities and performance, and competitive with other firms
within the investment management industry. Salaries, bonuses and stock-based
compensation also are influenced by the operating performance of Brookfield and
its parent company, Brookfield Asset Management Inc. While the salaries of
Brookfield's portfolio managers are comparatively fixed, cash bonuses and
stock-based compensation may fluctuate significantly from year to year. Bonuses
are determined on a discretionary basis by the senior executives of Brookfield
and measured by individual and team-oriented performance guidelines. The amount
of the Long Term Incentive Plan (LTIP) is approved by the board of directors
annually and there is a rolling vesting schedule to aid in retention of key
people. A key component of this program is achievement of client objectives in
order to properly align interests with our clients. Further, the incentive
compensation of all investment personnel who work on each strategy is directly
tied to the relative performance of the strategy and its clients.
The compensation structure of each Portfolio Manager and other investment
professionals has four primary components:
o A base salary;
o An annual cash bonus;
o If applicable, long-term compensation consisting of restricted stock
units or stock options of the Investment Adviser's ultimate parent
company, Brookfield Asset
Management, Inc. and
o If applicable, long term compensation consisting of restricted stock
units in private funds managed by the investment professional
Each Portfolio Manager also receives certain retirement, insurance, and other
benefits that are broadly available to all employees. Compensation of each
Portfolio Manager is reviewed on an annual basis by senior management.
(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of October 31, 2015.
DOLLAR RANGE OF FUND
SHARES BENEFICIALLY
NAME OWNED
Anthony Breaks $ 0
Chris Wu $ 0
(B) Not applicable.
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.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) 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: December 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: December 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: December 22, 2015
-------------------
* Print the name and title of each signing officer under his or her signature.