UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
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: January 31, 2014
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Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q 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 the
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. SCHEDULE OF INVESTMENTS. The Schedule of Investments is attached
herewith.
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
JANUARY 31, 2014 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - 75.3%
COLLATERALIZED MORTGAGE OBLIGATIONS - 60.6%
Adjustable Rate Mortgage Trust
$ 47,901 Series 2004-5, Class 1A1 (a)........... 2.52% 04/25/35 $ 46,451
Banc of America Mortgage Trust
81,980 Series 2002-L, Class 1A1 (a) (b)....... 2.62% 12/25/32 75,131
Bear Stearns Adjustable Rate Mortgage Trust
764,078 Series 2004-9, Class 12A1 (a).......... 2.86% 11/25/34 769,041
Chase Mortgage Finance Trust
174,355 Series 2007-A1, Class 1A3 (a).......... 2.71% 02/25/37 176,172
Countrywide Alternative Loan Trust
730,665 Series 2006-41CB, Class 2A17 .......... 6.00% 01/25/37 634,495
84,419 Series 2007-11T1, Class A37 (c)........ 39.07% 05/25/37 147,127
Countrywide Home Loan Mortgage Pass-Through
Trust
243,978 Series 2004-HYB1, Class 2A (a)......... 2.65% 05/20/34 234,641
719,582 Series 2006-21, Class A8 .............. 5.75% 02/25/37 668,227
Credit Suisse First Boston Mortgage
Securities Corp
1,462,832 Series 2004-AR2, Class 1A1 (a)......... 2.74% 03/25/34 1,447,543
1,491,345 Series 2004-AR8, Class 6A1 (a)......... 2.50% 09/25/34 1,532,367
DSLA Mortgage Loan Trust
1,224,326 Series 2007-AR1, Class 2A1A (a)........ 0.29% 04/19/47 1,054,143
GMAC Mortgage Corporation Loan Trust
265,576 Series 2004-AR1, Class 22A (a)......... 3.02% 06/25/34 257,025
GSAMP Trust
938,420 Series 2006-NC1, Class A2 (a).......... 0.34% 02/25/36 889,940
629,895 Series 2007-HE1, Class A2B (a)......... 0.26% 03/25/47 592,606
258,220 Series 2007-NC1, Class A2B (a)......... 0.26% 12/25/46 141,543
2,876,663 Series 2007-NC1, Class A2C (a)......... 0.31% 12/25/46 1,586,085
Harborview Mortgage Loan Trust
205,010 Series 2004-1, Class 2A (a)............ 2.49% 04/19/34 207,383
882,500 Series 2004-6, Class 3A1 (a)........... 2.70% 08/19/34 888,450
HLSS Servicer Advance Receivables Backed
Notes
580,110 Series 2013-T3, Class C3 (d)........... 2.39% 05/15/46 569,981
JP Morgan Mortgage Trust
2,173,060 Series 2005-ALT1, Class 4A1 (a)........ 5.13% 10/25/35 2,099,883
638,720 Series 2006-A2, Class 4A1 (a).......... 2.73% 08/25/34 644,152
212,252 Series 2006-A2, Class 5A3 (a).......... 2.55% 11/25/33 213,003
JP Morgan Re-REMIC
1,513,926 Series 2009-7, Class 12A1 (d).......... 6.25% 01/27/37 1,611,545
MASTR Asset Backed Securities Trust
1,270,688 Series 2006-HE5, Class A3 (a).......... 0.32% 11/25/36 741,101
261,944 Series 2006-HE5, Class A4 (a).......... 0.38% 11/25/36 154,082
1,822,357 Series 2006-NC2, Class A3 (a).......... 0.27% 08/25/36 925,938
831,819 Series 2006-NC2, Class A5 (a).......... 0.40% 08/25/36 432,404
Mellon Residential Funding Corp. Mortgage
Pass-Through Trust
351,507 Series 2001-TBC1, Class A1 (a)......... 0.85% 11/15/31 352,285
804,857 Series 2002-TBC2, Class A (a).......... 1.01% 08/15/32 800,613
See Notes to Quarterly Portfolio of Investments Page 1
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2014 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Morgan Stanley Mortgage Loan Trust
$ 589,426 Series 2004-7AR, Class 2A6 (a)......... 2.46% 09/25/34 $ 589,252
Nationstar Home Equity Loan Trust
1,731,000 Series 2006-B, Class AV4 (a)........... 0.44% 09/25/36 1,511,739
Provident Funding Mortgage Loan Trust
305,664 Series 2005-1, Class 1A1 (a)........... 2.70% 05/25/35 305,597
Residential Accredit Loans, Inc.
837,447 Series 2004-QS2, Class CB ............. 5.75% 02/25/34 903,536
Residential Funding Mortgage Securities I
142,937 Series 2005-S5, Class A5 .............. 5.25% 07/25/35 144,561
Securitized Asset Backed Receivables LLC
1,261,376 Series 2007-BR2, Class A2 (a).......... 0.39% 02/25/37 638,845
Structured Adjustable Rate Mortgage Loan
Trust 2.52% 03/25/34 851,282
853,371 Series 2004-2, Class 4A2 (a)...........
Thornburg Mortgage Securities Trust
980,820 Series 2004-3, Class A (a)............. 0.90% 09/25/44 946,807
Wachovia Mortgage Loan Trust, LLC
682,181 Series 2006-A, Class 3A1 (a)........... 2.66% 05/20/36 658,693
WaMu Mortgage Pass-Through Certificates
725,417 Series 2004-AR1, Class A (a)........... 2.53% 03/25/34 732,667
1,021,324 Series 2004-AR10, Class A1B (a)........ 0.61% 07/25/44 1,009,728
1,490,961 Series 2005-AR11, Class A1A (a)........ 0.48% 08/25/45 1,406,917
1,241,941 Series 2005-AR2, Class 2A23 (a)........ 0.54% 01/25/45 1,164,771
1,404,547 Series 2005-AR6, Class 2A1A (a)........ 0.39% 04/25/45 1,322,548
656,277 Series 2005-AR9, Class A1A (a)......... 0.48% 07/25/45 626,032
1,259,906 Series 2006-AR5, Class A1A (a)......... 1.13% 06/25/46 1,109,903
Washington Mutual Alternative Mortgage
Pass-Through Certificates
50,844 Series 2007-5, Class A11 (c)........... 38.53% 06/25/37 90,140
Washington Mutual MSC Mortgage Pass-Through
Certificates
405,998 Series 2004-RA1, Class 2A ............. 7.00% 03/25/34 429,921
Wells Fargo Mortgage Backed Securities
Trust
819,018 Series 2003-H, Class A1 (a)............ 2.62% 09/25/33 835,389
654,787 Series 2004-A, Class A1 (a)............ 2.66% 02/25/34 670,353
2,182,063 Series 2004-R, Class 1A1 (a)........... 2.62% 09/25/34 2,230,892
625,222 Series 2004-S, Class A1 (a)............ 2.62% 09/25/34 643,942
1,087,341 Series 2004-Y, Class 1A2 (a)........... 2.62% 11/25/34 1,087,047
610,954 Series 2005-AR10, Class 2A17 (a)....... 2.63% 06/25/35 622,008
408,626 Series 2005-AR16, Class 1A1 (a)........ 2.66% 08/25/33 421,302
517,596 Series 2005-AR3, Class 2A1 (a)......... 2.63% 03/25/35 525,788
868,489 Series 2005-AR8, Class 1A1 (a)......... 2.62% 06/25/35 890,788
376,609 Series 2006-AR1, Class 2A5 (a)......... 5.32% 03/25/36 374,324
1,123,309 Series 2006-AR10, Class 5A2 (a)........ 2.61% 07/25/36 1,092,362
571,655 Series 2007-16, Class 1A1 ............. 6.00% 12/28/37 594,107
656,641 Series 2007-2, Class 1A13 ............. 6.00% 03/25/37 632,347
Page 2 See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2014 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities
Trust (Continued)
$ 156,683 Series 2007-8, Class 2A2 .............. 6.00% 07/25/37 $ 151,911
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45,108,856
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 14.7%
Banc of America Commercial Mortgage Trust 5.42% 10/10/45 1,000,273
1,000,000 Series 2006-6, Class AJ ...............
Bayview Commercial Asset Trust 0.59% 08/25/34 862,495
924,929 Series 2004-2, Class A (a) (d).........
Credit Suisse Commercial Mortgage Trust 5.54% 01/15/49 904,880
820,000 Series 2007-C2, Class A3 ..............
GS Mortgage Securities Trust 5.81% 08/10/45 1,104,350
1,000,000 Series 2007-GG10, Class A4 (a).........
HLSS Servicer Advance Receivables Backed 2.52% 08/15/46 749,992
Notes
750,000 Series 2013-T5, Class CT5 (d)..........
JP Morgan Chase Commercial Mortgage 5.88% 02/15/51 1,683,768
Securities Trust
1,500,000 Series 2007-LD12, Class A4 ............
LB-UBS Commercial Mortgage Trust 5.46% 02/15/40 463,013
420,000 Series 2007-C1, Class AM ..............
Merrill Lynch Mortgage Investors Trust 0.82% 09/25/29 616,768
616,506 Series 2004-D, Class A1 (a)............
Mid-State Capital Corp. Trust 6.50% 08/15/37 683,263
630,936 Series 2004-1, Class M1 ...............
Morgan Stanley Capital I Trust
980,000 Series 2007-IQ16, Class AM (a)......... 6.10% 12/12/49 1,112,515
820,000 Series 2008-T29, Class AM (a).......... 6.28% 01/11/43 941,080
VNDO Mortgage Trust
900,000 Series 2012-6AVE, Class A (d).......... 3.00% 11/15/30 864,145
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10,986,542
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TOTAL MORTGAGE-BACKED SECURITIES ........................................ 56,095,398
(Cost $53,570,815) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 34.1%
COLLATERALIZED MORTGAGE OBLIGATIONS - 10.7%
Federal Home Loan Mortgage Corp
2,389,838 Series 2807, Class SB, IO (c).......... 7.30% 11/15/33 471,850
20,566 Series 3195, Class SX (c).............. 45.15% 07/15/36 57,271
516,963 Series 3562, Class KI, IO ............. 4.50% 11/15/22 18,148
78,536 Series 3593, Class IP, IO ............. 5.00% 06/15/36 338
3,042,055 Series 3619, Class EI, IO ............. 4.50% 05/15/24 244,351
2,255,864 Series 3692, Class PS, IO (c).......... 6.45% 05/15/38 277,530
4,637,258 Series 3726, Class KI, IO ............. 3.50% 04/15/25 454,666
3,164,687 Series 3870, Class WS, IO (c).......... 6.45% 06/15/31 574,196
See Notes to Quarterly Portfolio of Investments Page 3
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2014 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corp., STRIP
$ 1,558,407 Series 232, Class IO, IO .............. 5.00% 08/01/35 $ 292,423
Federal National Mortgage Association
887,526 Series 2005-122, Class SN (c).......... 27.97% 01/25/36 1,324,478
301,856 Series 2008-50, Class AI, IO .......... 5.50% 06/25/23 20,181
4,457,267 Series 2010-103, Class ID, IO ......... 5.00% 09/25/40 900,519
7,540,537 Series 2010-139, Class KI, IO ......... 1.09% 12/25/40 400,142
961,558 Series 2010-142, Class PS, IO (c)...... 5.89% 05/25/40 118,739
1,219,980 Series 2010-145, Class TI, IO ......... 3.50% 12/25/20 90,244
3,624,933 Series 2010-40, Class MI, IO .......... 4.50% 08/25/24 259,472
Federal National Mortgage Association,
STRIP
1,747,935 Series 360, Class 2, IO ............... 5.00% 08/01/35 328,493
3,281,361 Series 406, Class 6, IO ............... 4.00% 01/25/41 577,690
Government National Mortgage Association
1,432,239 Series 2009-65, Class NJ, IO .......... 5.50% 07/20/39 129,374
3,726,165 Series 2010-115, Class IQ, IO ......... 4.50% 11/20/38 413,994
8,367,992 Series 2011-131, Class EI, IO ......... 4.50% 08/20/39 919,142
1,644,073 Series 2011-69, Class CI, IO .......... 5.00% 03/20/36 83,691
------------
7,956,932
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 4.2%
Government National Mortgage Association
17,127,002 Series 2011-152, Class IO, IO (a)...... 1.34% 08/16/51 1,008,566
8,580,817 Series 2012-100, Class IO, IO (a) (e).. 0.83% 08/16/52 573,572
11,980,809 Series 2012-70, Class IO, IO (a) (e)... 0.96% 08/16/52 785,246
7,408,356 Series 2012-78, Class IO, IO (a) (e)... 1.06% 06/16/52 531,927
2,627,470 Series 2012-95, Class IO, IO (a) (e)... 1.04% 02/16/53 223,288
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3,122,599
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PASS-THROUGH SECURITIES - 19.2%
Fannie Mae REMICs 5.50% 10/25/35 963,055
926,416 Series 2005-83, Class LZ ..............
Federal Home Loan Mortgage Corp
5,000,000 Gold Pool ............................. 3.50% 11/13/43 5,061,719
1,913,576 Pool A94738 (e)........................ 4.50% 11/01/40 2,050,582
1,105,502 Pool K36017 (e)........................ 5.00% 09/01/47 1,183,686
Federal National Mortgage Association
2,215,491 Pool 831145 (e)........................ 6.00% 12/01/35 2,466,923
2,308,907 Pool 843971 (e)........................ 6.00% 11/01/35 2,594,736
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14,320,701
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ................. 25,400,232
(Cost $27,944,895) ------------
ASSET-BACKED SECURITIES - 0.4%
Green Tree Financial Corp
73,296 Series 1997-2, Class A6 ............... 7.24% 06/15/28 77,491
Page 4 See Notes to Quarterly Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2014 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON STATED MATURITY VALUE
---------------- ------------------------------------------- ----------- --------------- ------------
ASSET-BACKED SECURITIES (CONTINUED)
Green Tree Financial Corp. (Continued)
$ 87,283 Series 1997-3, Class A6 ............... 7.32% 03/15/28 $ 94,317
104,427 Series 1997-7, Class A6 ............... 6.76% 07/15/28 110,280
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TOTAL ASSET-BACKED SECURITIES ........................................... 282,088
(Cost $279,108) ------------
TOTAL INVESTMENTS - 109.8% .............................................. 81,777,718
(Cost $81,794,818) (f) ------------
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (13.0%)
(1,419,000) With JP Morgan 1.24% dated 11/08/13, to be repurchased at
$1,423,444 on 02/07/14 ............................................. (1,419,000)
(438,000) With JP Morgan 1.01% dated 01/30/14, to be repurchased at
$438,356 on 02/28/14 ............................................... (438,000)
(4,766,000) With JP Morgan 0.40% dated 01/10/14, to be repurchased at
$4,770,713 on 04/09/14 ............................................. (4,766,000)
(3,061,000) With JP Morgan 0.40% dated 01/16/14, to be repurchased at
$3,064,061 on 04/16/14 ............................................. (3,061,000)
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TOTAL REVERSE REPURCHASE AGREEMENTS ..................................... (9,684,000)
------------
NET OTHER ASSETS AND LIABILITIES - 3.2% ................................. 2,402,127
------------
NET ASSETS - 100.0% ..................................................... $ 74,495,845
============
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(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at January 31, 2014.
(b) Illiquid, as determined by Brookfield Investment Management Inc.
("Brookfield"), the Fund's sub-advisor.
(c) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at January 31, 2014.
(d) 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 January 31, 2014,
securities noted as such amounted to $4,658,158, or 6.25% of net assets.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of January 31, 2014,
the aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $4,891,649 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $4,908,749.
See Notes to Quarterly Portfolio of Investments Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2014 (UNAUDITED)
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
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of January 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Quarterly
Portfolio of Investments):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
1/31/2014 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Mortgage-Backed Securities...................... $ 56,095,398 $ -- $ 56,095,398 $ --
U.S. Government Agency Mortgage-Backed
Securities.................................... 25,400,232 -- 25,400,232 --
Asset-Backed Securities......................... 282,088 -- 282,088 --
------------- ----------- ------------- ------------
Total........................................... $ 81,777,718 $ -- $ 81,777,718 $ --
============= =========== ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
1/31/2014 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Reverse Repurchase Agreements .................. $ (9,684,000) $ -- $ (9,684,000) $ --
============= =========== ============= ============
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 January 31, 2014.
Page 6 See Notes to Quarterly Portfolio of Investments
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2014 (UNAUDITED)
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
("SEC") 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").
2. VALUATION AND INVESTMENT PRACTICES
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 in
accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Market quotations and prices
used to value the Fund's investments are primarily obtained from third party
pricing services. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are 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.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
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 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 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. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange. 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;
Page 7
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2014 (UNAUDITED)
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 methodology 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 January 31, 2014, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
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 January 31, 2014, 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 a 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.
Information for the fiscal period ended January 31, 2014:
Maximum amount outstanding during the period ................. $10,054,000
Average amount outstanding during the period*................. $9,964,902
Average Common Shares outstanding during the period........... 4,213,115
Average debt per Common Share outstanding during the period... $2.37
* 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 fiscal period ended January 31, 2014.
During the fiscal period ended January 31, 2014, the interest rates ranged from
0.40% to 1.24%, with a weighted average interest rate of 0.57%, on borrowings by
the Fund under reverse repurchase agreements, which had interest expense that
aggregated $14,550.
Page 8
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2014 (UNAUDITED)
D. INVERSE FLOATING-RATE SECURITIES:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities, if
any, are identified on the Portfolio of Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
Page 9
ITEM 2. 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 last fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 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: March 20, 2014
-------------------
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: March 20, 2014
-------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: March 20, 2014
-------------------
* Print the name and title of each signing officer under his or her signature.