UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21727
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First Trust Mortgage Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: April 30, 2016
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST BROOKFIELD
FIRST TRUST
MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2016
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 11
Statement of Operations..................................................... 12
Statements of Changes in Net Assets......................................... 13
Statement of Cash Flows..................................................... 14
Financial Highlights........................................................ 15
Notes to Financial Statements............................................... 16
Additional Information...................................................... 22
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 periodically provide additional information on Fund performance
on the Fund's webpage at http://www.ftportfolios.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)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Mortgage Income Fund (the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016, 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.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite of the massive decline
in oil prices. Second, the tapering that began in 2014 by the Federal Reserve
(the "Fed") did not stop growth in the U.S. economy. Finally, the
long-anticipated rate hike by the Fed in December had little effect on the money
supply, and the stock market was not shocked by the hike. Early in 2016, many
investors were concerned that the volatility we saw in the market in 2015 would
continue, and it did. From December 31, 2015 through February 11, 2016, the S&P
500(R) Index declined by 10.27%. Since then, the market has made a steady
comeback, and as of April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MORTGAGE INCOME FUND (FMY)
"AT A GLANCE"
AS OF APRIL 30, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $14.49
Common Share Net Asset Value ("NAV") $15.57
Premium (Discount) to NAV (6.94)%
Net Assets Applicable to Common Shares $65,609,788
Current Monthly Distribution per Common Share (1) $0.075
Current Annualized Distribution per Common Share $0.900
Current Distribution Rate on Closing Common Share Price (2) 6.21%
Current Distribution Rate on NAV (2) 5.78%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
4/15 14.84 16.55
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
14.36 15.99
14.36 15.99
14.50 15.98
11/15 14.54 15.98
14.52 15.92
14.38 15.92
14.43 15.89
14.63 15.89
12/15 14.54 15.88
14.54 15.81
14.08 15.79
14.19 15.76
1/16 14.40 15.75
14.40 15.68
14.36 15.64
14.15 15.56
2/16 14.24 15.57
14.31 15.51
14.44 15.52
14.43 15.52
3/16 14.45 15.54
14.48 15.49
14.50 15.49
14.51 15.49
14.46 15.55
4/16 14.49 15.57
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended 10 Years Ended Inception (5/25/05)
4/30/16 4/30/16 4/30/16 4/30/16 to 4/30/16
FUND PERFORMANCE (3)
NAV 0.36% 0.80% 3.40% 6.31% 5.98%
Market Value 2.82% 4.61% 0.82% 7.13% 4.84%
INDEX PERFORMANCE
Barclays Capital U.S. MBS: Agency
Fixed Rate MBS Index 1.97% 2.56% 3.07% 4.90% 4.57%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 0.57
Weighted Average Life (Years) 5.22
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 80.30%
U.S. Government Agency Mortgage-Backed
Securities 18.01
Asset-Backed Securities 1.69
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Total 100.00%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Adjustable Rate Securities 58.28%
Fixed Rate Securities 34.94
Interest-Only Securities 6.78
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Total 100.00%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 24.15%
AA+ 16.01
AA 4.81
AA- 13.29
A+ 9.97
A 1.85
A- 1.62
BBB 2.82
BBB- 0.82
BB+ 1.47
BB 2.41
BB- 0.68
B+ 1.17
B 3.51
CCC+ 1.11
CCC 7.74
CCC- 0.15
CC 4.80
D 1.54
NR 0.08
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Total 100.00%
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(1) Most recent distribution paid or declared through 4/30/2016. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 4/30/2016. 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)
SEMI-ANNUAL REPORT
APRIL 30, 2016 (UNAUDITED)
SUB-ADVISOR
Brookfield Investment Management Inc. (the "Sub-Advisor") is an SEC-registered
investment adviser providing public securities strategies including global
listed real estate and infrastructure equities as well as corporate credit and
securitized credit. With over $16 billion of assets under management as of March
31, 2016, 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 $240 billion of assets under management as of
March 31, 2016. Please see Note 6 - Subsequent Events relating to the portfolio
management team of the Fund.
PORTFOLIO MANAGEMENT TEAM
ANTHONY BREAKS, CFA - MANAGING 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 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 Fund's assets are primarily mortgage-backed securities. Currently, we see
value in selective parts of the Agency guaranteed market and broad value across
many varieties of non-Agency securities. Non-Agency securities have an advantage
currently because they typically benefit from improvements in employment,
increasing home prices, and greater consumer spending on lower gasoline prices.
Non-Agency securities also have more differentiated characteristics in terms of
structure and collateral. We believe this differentiation creates more market
inefficiencies of which we can take advantage for outperformance and income
improvement. Market volatility remained high through the fourth quarter of 2015
and first quarter of 2016. Subprime and Option Adjustable-Rate Mortgage ("ARM")
securities were most sensitive to the risk-off sentiment. Commercial
Mortgage-Backed Securities ("CMBS") also showed particular sensitivity due to
more supply from new issuance and expanded credit terms that we might compare
with leveraged corporate securities. Leveraged corporate securities staged an
impressive rally in March to close the first quarter of 2016 with a gain.
Securitized products lagged this broader rally in risk markets and we took that
as an opportunity to purchase more credit-oriented bonds.
For the consumer, gas prices remain low, and at the lower end of the labor
market there appears to be some 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 longer-end of the yield curve as opposed to
zero short-term interest rates for a prolonged period of time. We have seen
forward rate expectations decline most quarters since mid-2013, and this has
certainly held back some of the potential for price appreciation and
performance, given many of our securities are indexed to floating-rate
benchmarks. We now believe these securities offer value, in light of low forward
rate expectations.
Residential delinquency rates have also continued to decline. According to the
Mortgage Bankers Association, the total delinquency rate as of the fourth
quarter of 2015 was 4.77%. The delinquency rate reached the lowest level since
the third quarter of 2006, down more than 50% from the peak of 2010. CMBS
delinquency rates at the end of 2015 were 5.2%, according to Trepp, which is
half of the 10.6% peak seen in 2012.
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 implementation of new mortgage disclosure
requirements, banks and lenders have struggled to implement new systems. As a
result, origination has declined, and the time to close a loan has increased. In
addition, we believe the new rules and penalties are likely to result in a
modestly tighter credit environment. 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 specifically for
non-Agency MBS.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2016 (UNAUDITED)
Home prices, as measured by CoreLogic, have continued to increase. CoreLogic's
Home Price Index, including distressed sales, increased 5.4% in 2015 and 2.72%
during the first quarter of 2016. Notably, this was ahead of most expectations.
Even with more of the new housing entrants as renters, and with more limited
income growth and tight credit, the influx of foreign buyers for stable U.S.
dollar ("USD") assets, has been a benefit to many housing markets. An increase
in home prices results in lower loan-to-value ratios, which equates to a
borrower regaining lost equity, bringing them closer to meeting today's tighter
lending standards. Higher leverage has been an impediment to both refinancing
and to relocation so lower loan-to-value ratios can result in higher prepayment
speed. Given current conditions, we anticipate home prices will continue to
improve, albeit at the more stable 4% to 5% per annum rate.
The commercial real estate market is quite different from the residential
market. While residential real estate and the U.S. consumer are now stabilizing
after deleveraging, commercial real estate is in a releveraging cycle. The RCA
Commercial Property Price Index tracking major markets across the United States
shows a significant 12% increase for 2015. The influx of foreign money for
commercial real-estate in top-tier markets has been significant, pushing these
markets well above the pre-crisis peak in prices. We are concerned that more
recent real-estate performance is likely to be much more tempered going forward,
and in light of the more curbed financing availability, that problems may become
more observable.
We believe the pricing for risk may not be adequate for more recently issued
subordinated securities from multi-borrower CMBS deals, particularly given a
market that is well into a releveraging phase. In fact, many of these post 2010
vintage subordinated securities have widened 300-400 basis points in early 2016.
That said, the Fund's seasoned CMBS holdings, have benefitted from the
appreciation in the real-estate markets and we continue to see selected
opportunity in the legacy market.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2016, the Fund had a total return1 of
0.36% based on net asset value ("NAV"). For the period, the Fund traded from a
discount to NAV of -9.16% to a discount to NAV of -6.94%, resulting in a total
return1 of 2.82%, based on market price. During the period, the Fund's
benchmark, the Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index returned
1.97%.
As of April 30, 2016, the Fund held approximately 18% in U.S. Government Agency
MBS, approximately 80% in non-Agency MBS and less than 2% in Asset-Backed
Securities. Approximately 35% of the bonds were fixed-rate holdings,
approximately 58% were Adjustable-Rate Securities, and approximately 7% were
Interest-Only (IO) securities. The Fund's leverage was relatively low at 7.1% 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 66
basis points annualized, which is well below the returns we achieved on the
bonds we borrowed against.
On an NAV basis, the Fund underperformed its benchmark. Interest rates rallied
significantly over the past six months with the 10-Year U.S. Treasury rate
dropping by about 30 basis points. This contributed to the benchmark's 1.97%
return over the six months, mostly due to duration return. However, the Fund
maintained a lower duration, which makes it much less sensitive to interest rate
moves.
The Agency MBS part of the portfolio generated 42 basis points of gross return
for the Fund as a whole, or approximately 2.4% returns for agency holdings. The
Fund's agency holdings outperformed the benchmark during this period mainly due
to solid performance of IO securities. Even though lower interest rates tend to
increase the risk of fast prepayments for IOs and decrease their value,
prepayment speeds were relatively stable during the six-month period, which
helped IOs hold value. The Fund maintains a certain percentage of Agency
derivatives to offset the duration of fixed-rate securities. We believe this
will benefit the Fund should rates rise in the future.
Non-Agency securities, comprising more than 70% of the Fund, experienced a tough
period for securitized credit. Non-Agency Residential Mortgage-Backed Securities
("RMBS") and CMBS contributed a combined 39 basis points for the Fund as a
whole. Some of the underperformance came from subprime and option ARM securities
which will tend to trade with more sensitivity to risk markets. With market
sentiment improved and collateral performance improving, we expect to recover
the first quarter price declines in the coming months. The volatility has
created some attractive trading opportunities and we expect to see more
opportunities this year.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities. These views represent the opinions of
Brookfield Investment Management Inc. and are not intended to predict or depict
the performance of any investment. These views are as of the close of business
on April 30, 2016 and subject to change based on subsequent developments.
-----------------------------
(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns and
does not reflect sales load. Past performance is not indicative of future
results.
Page 4
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES - 76.2%
COLLATERALIZED MORTGAGE OBLIGATIONS - 55.1%
Accredited Mortgage Loan Trust
$ 454,681 Series 2003-2, Class A1............................. 4.98% 10/01/33 $ 465,541
ACE Securities Corp. Home Equity Loan Trust
1,114,741 Series 2006-ASAP6, Class A2D (a).................... 0.66% 12/25/36 583,078
Banc of America Mortgage Trust
55,289 Series 2002-L, Class 1A1 (a) (b).................... 2.50% 12/01/32 48,501
Chase Mortgage Finance Trust
318,166 Series 2007-A1, Class 1A3 (a)....................... 2.81% 02/01/37 314,258
Citigroup Mortgage Loan Trust
964,938 Series 2012-7, Class 10A2 (a) (c)................... 2.74% 09/01/36 874,397
Countrywide Alternative Loan Trust
63,853 Series 2007-11T1, Class A37 (b) (d)................. 37.39% 05/25/37 147,342
Countrywide Asset-Backed Certificates
302,814 Series 2006-S8, Class A6............................ 5.51% 04/01/36 300,614
Countrywide Home Loan Mortgage Pass-Through Trust
701,860 Series 2003-46, Class 2A1 (a)....................... 2.86% 01/01/34 694,926
449,226 Series 2006-21, Class A8............................ 5.75% 02/01/37 412,958
725,531 Series 2006-HYB5, Class 3A1A (a).................... 2.76% 09/01/36 639,570
Credit Suisse First Boston Mortgage Securities Corp.
396,044 Series 2004-AR2, Class 1A1 (a)...................... 3.06% 03/01/34 388,646
923,925 Series 2004-AR8, Class 6A1 (a)...................... 2.54% 09/01/34 913,761
DSLA Mortgage Loan Trust
986,599 Series 2004-AR3, Class 2A2A (a)..................... 0.81% 07/19/44 953,371
1,023,716 Series 2007-AR1, Class 2A1A (a)..................... 0.58% 04/19/47 817,601
GMAC Mortgage Corporation Loan Trust
210,658 Series 2004-AR1, Class 22A (a)...................... 3.24% 06/01/34 204,920
GSR Mortgage Loan Trust
273,317 Series 2005-AR1, Class 4A1 (a)...................... 2.52% 01/01/35 263,567
Harborview Mortgage Loan Trust
590,680 Series 2004-6, Class 3A1 (a)........................ 3.02% 08/01/34 563,976
Home Equity Asset Trust
520,000 Series 2005-9, Class M1 (a)......................... 0.85% 04/25/36 424,858
Irwin Home Equity Loan Trust
484,472 Series 2006-3, Class 2A2 (c)........................ 5.83% 09/01/37 490,310
IXIS Real Estate Capital Trust
1,236,529 Series 2007-HE1, Class A3 (a)....................... 0.60% 05/25/37 441,580
JP Morgan Mortgage Trust
1,623,763 Series 2005-ALT1, Class 4A1 (a)..................... 2.81% 10/01/35 1,497,610
799,024 Series 2006-A2, Class 4A1 (a)....................... 2.72% 08/01/34 802,535
127,682 Series 2006-A2, Class 5A3 (a)....................... 2.68% 11/01/33 128,276
JP Morgan Re-REMIC
680,303 Series 2009-7, Class 12A1 (c)....................... 6.25% 01/01/37 701,515
MASTR Asset Backed Securities Trust
1,057,072 Series 2006-HE5, Class A3 (a)....................... 0.60% 11/25/36 629,681
1,550,231 Series 2006-NC2, Class A3 (a)....................... 0.55% 08/25/36 762,248
707,606 Series 2006-NC2, Class A5 (a)....................... 0.68% 08/25/36 358,142
See Notes to Financial Statements Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Mellon Residential Funding Corp.
Mortgage Pass-Through Trust
$ 509,343 Series 2001-TBC1, Class A1 (a)...................... 1.13% 11/15/31 $ 475,615
445,350 Series 2002-TBC2, Class A (a)....................... 1.29% 08/15/32 423,645
Morgan Stanley Mortgage Loan Trust
375,761 Series 2004-7AR, Class 2A6 (a)...................... 2.61% 09/01/34 368,170
Nomura Asset Acceptance Corporation
906,124 Series 2004-AR4, Class M1 (a)....................... 1.04% 12/25/34 847,738
Nomura Resecuritization Trust
1,173,230 Series 2015-6R, Class 2A4 (a) (c)................... 7.82% 01/02/37 892,593
Provident Funding Mortgage Loan Trust
222,923 Series 2005-1, Class 1A1 (a)........................ 2.85% 05/01/35 222,576
Residential Accredit Loans, Inc.
205,277 Series 2006-QO1, Class 2A1 (a)...................... 0.71% 02/25/46 120,597
Saxon Asset Securities Trust
1,143,194 Series 2007-2, Class A2D (a)........................ 0.74% 05/25/47 798,487
Springleaf Mortgage Loan Trust
850,000 Series 2013-3A, Class M3 (c)........................ 5.00% 09/01/57 859,020
Structured Adjustable Rate Mortgage Loan Trust
617,147 Series 2004-2, Class 4A2 (a)........................ 2.82% 03/01/34 603,621
Thornburg Mortgage Securities Trust
501,190 Series 2003-4, Class A1 (a)......................... 1.08% 09/25/43 484,234
Towd Point Mortgage Trust
977,777 Series 2015-2, Class 2A1 (a) (c).................... 3.75% 11/01/57 1,008,042
Wachovia Mortgage Loan Trust, LLC
415,090 Series 2006-A, Class 3A1 (a)........................ 2.87% 05/01/36 395,760
WaMu Mortgage Pass-Through Certificates
270,497 Series 2003-AR5, Class A7 (a)....................... 2.61% 06/01/33 273,081
700,619 Series 2004-AR1, Class A (a)........................ 2.77% 03/01/34 702,676
751,660 Series 2004-AR10, Class A1B (a)..................... 0.86% 07/25/44 716,805
591,465 Series 2004-AR13, Class A1A (a)..................... 1.16% 11/25/34 536,575
786,217 Series 2005-AR1, Class A1A (a)...................... 1.08% 01/25/45 737,962
1,114,669 Series 2005-AR11, Class A1A (a)..................... 0.76% 08/25/45 1,032,172
1,058,110 Series 2005-AR6, Class 2A1A (a)..................... 0.67% 04/25/45 993,919
473,145 Series 2005-AR9, Class A1A (a)...................... 1.08% 07/25/45 447,737
796,851 Series 2006-AR2, Class 1A1 (a)...................... 2.51% 03/01/36 727,560
Washington Mutual Alternative Mortgage
Pass-Through Certificates
38,672 Series 2007-5, Class A11 (b) (d).................... 36.85% 06/25/37 94,477
Washington Mutual MSC Mortgage
Pass-Through Certificates
582,052 Series 2004-RA1, Class 2A........................... 7.00% 03/01/34 611,453
Wells Fargo Mortgage Backed Securities Trust
559,198 Series 2003-H, Class A1 (a)......................... 2.74% 09/01/33 556,962
405,849 Series 2004-A, Class A1 (a)......................... 2.83% 02/01/34 403,990
1,457,348 Series 2004-R, Class 1A1 (a)........................ 2.74% 09/01/34 1,471,630
368,083 Series 2004-S, Class A1 (a)......................... 2.76% 09/01/34 375,041
750,651 Series 2004-Y, Class 1A2 (a)........................ 2.81% 11/01/34 742,142
354,932 Series 2005-AR10, Class 2A17 (a).................... 2.82% 06/01/35 359,865
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities Trust (Continued)
$ 730,168 Series 2005-AR16, Class 1A1 (a)..................... 2.86% 08/01/33 $ 749,545
352,791 Series 2005-AR3, Class 2A1 (a)...................... 2.76% 03/01/35 355,367
555,468 Series 2005-AR8, Class 1A1 (a)...................... 2.88% 06/01/35 563,192
676,552 Series 2006-13, Class A5............................ 6.00% 10/01/36 689,132
249,910 Series 2007-16, Class 1A1........................... 6.00% 12/04/37 259,243
347,959 Series 2007-2, Class 1A13........................... 6.00% 03/01/37 341,911
87,851 Series 2007-8, Class 2A2 (b)........................ 6.00% 07/01/37 86,727
---------------
36,153,044
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 21.1%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ............................. 5.42% 10/01/45 995,220
650,000 Series 2007-3, Class AJ, STRIP...................... 5.54% 06/01/49 647,379
Bayview Commercial Asset Trust
631,355 Series 2004-2, Class A (a) (c)...................... 0.87% 08/25/34 578,910
BXHTL Mortgage Trust
800,000 Series 2015-JWRZ, Class B (a) (c)................... 2.13% 05/15/29 788,962
Carefree Portfolio Trust
1,250,000 Series 2014-CARE, Class B (a) (c)................... 2.28% 11/15/19 1,249,007
Citigroup Commercial Mortgage Trust
1,525,000 Series 2014-388G, Class B (a) (c)................... 1.48% 06/15/33 1,524,892
COMM Mortgage Trust
150,000 Series 2007-C9, Class AJ............................ 5.65% 12/01/49 150,473
1,000,000 Series 2014-KYO, Class B (a) (c).................... 1.74% 06/11/27 995,178
Greenwich Capital Commercial Funding Corp.
700,000 Series 2007-GG11, Class AJ.......................... 6.03% 12/01/49 691,182
Hudsons Bay Simon JV Trust
510,000 Series 2015-HBFL, Class DFL (a) (c)................. 4.09% 08/05/34 507,457
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (c).................... 2.13% 11/15/29 1,030,171
JP Morgan Chase Commercial Mortgage Securities Corp
222,650 Series 2007-CB18, Class A4.......................... 5.44% 06/01/47 226,724
LB-UBS Commercial Mortgage Trust
210,000 Series 2007-C1, Class AJ............................ 5.48% 02/11/40 209,007
835,000 Series 2007-C1, Class AM............................ 5.46% 02/11/40 847,454
440,000 Series 2007-C2, Class AM............................ 5.49% 02/11/40 446,965
200,000 Series 2007-C6, Class AJ (a)........................ 6.32% 07/11/40 198,805
Morgan Stanley Capital I Trust
540,000 Series 2007-T25, Class AM........................... 5.54% 11/01/49 550,281
UBS-Barclays Commercial Mortgage Trust
15,127,274 Series 2013-C5, Class XA, IO (a) (c)................ 1.07% 03/01/46 814,129
Wachovia Bank Commercial Mortgage Trust
740,000 Series 2007-C30, Class AJ........................... 5.41% 12/01/43 729,425
650,000 Series 2007-C33, Class AJ, STRIP.................... 6.15% 02/01/51 642,834
---------------
13,824,455
---------------
TOTAL MORTGAGE-BACKED SECURITIES.................................................... 49,977,499
(Cost $50,709,955) ---------------
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 17.1%
COLLATERALIZED MORTGAGE OBLIGATIONS - 6.1%
Federal Home Loan Mortgage Corp.
$ 1,357,001 Series 2807, Class SB, IO (d)....................... 7.02% 11/15/33 $ 210,758
13,874 Series 3195, Class SX (b) (d)....................... 43.33% 07/15/36 58,605
1,072,341 Series 3619, Class EI, IO (b)....................... 4.50% 05/01/24 35,517
735,957 Series 3692, Class PS, IO (b) (d)................... 6.17% 05/15/38 35,734
2,497,080 Series 3726, Class KI, IO (b)....................... 3.50% 04/01/25 142,719
1,855,508 Series 3870, Class WS, IO (d)....................... 6.17% 06/15/31 245,752
1,365,805 Series 4206, Class IA, IO........................... 3.00% 03/01/33 195,826
Federal National Mortgage Association
446,107 Series 2005-122, Class SN (b) (d)................... 26.84% 01/25/36 502,875
37,749 Series 2008-50, Class AI, IO (b).................... 5.50% 06/01/23 1,369
2,895,874 Series 2010-103, Class ID, IO (b)................... 5.00% 09/01/40 421,211
4,515,867 Series 2010-139, Class KI, IO (b)................... 1.09% 12/01/40 231,636
184,562 Series 2010-142, Class PS, IO (b) (d)............... 5.61% 05/25/40 8,390
621,199 Series 2010-145, Class TI, IO (b)................... 3.50% 12/01/20 34,664
1,316,178 Series 2010-40, Class MI, IO (b).................... 4.50% 08/01/24 33,944
3,148,990 Series 2012-112, Class BI, IO....................... 3.00% 09/01/31 305,761
2,519,682 Series 2012-125, Class MI, IO....................... 3.50% 11/01/42 449,997
3,365,391 Series 2013-32, Class IG, IO........................ 3.50% 04/01/33 459,886
Federal National Mortgage Association, STRIP
1,960,112 Series 406, Class 6, IO............................. 4.00% 01/01/41 321,745
Government National Mortgage Association
419,805 Series 2009-65, Class NJ, IO (b).................... 5.50% 07/01/39 32,516
1,877,838 Series 2010-115, Class IQ, IO (b)................... 4.50% 11/01/38 118,303
3,021,549 Series 2011-131, Class EI, IO (b)................... 4.50% 08/01/39 121,539
---------------
3,968,747
---------------
PASS-THROUGH SECURITIES - 11.0%
Fannie Mae REMICs
915,276 Series 2005-83, Class LZ............................ 5.50% 10/01/35 997,740
Federal Home Loan Mortgage Corp.
1,000,000 Gold Pool........................................... 3.00% 04/30/46 1,045,859
1,082,670 Pool A94738 (e)..................................... 4.50% 11/01/40 1,183,189
745,021 Pool K36017 (e)..................................... 5.00% 09/01/47 806,518
Federal National Mortgage Association
1,453,666 Pool 831145 (e)..................................... 6.00% 12/01/35 1,674,395
1,325,437 Pool 843971 (e)..................................... 6.00% 11/01/35 1,535,626
---------------
7,243,327
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES............................. 11,212,074
(Cost $14,981,932) ---------------
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
ASSET-BACKED SECURITIES - 1.6%
Green Tree Financial Corp.
$ 20,508 Series 1997-2, Class A6 (b)......................... 7.24% 06/15/28 $ 20,487
37,158 Series 1997-3, Class A6 (b)......................... 7.32% 03/15/28 38,976
34,161 Series 1997-7, Class A6 (b)......................... 6.76% 07/15/28 34,845
Mid-State Capital Corp. Trust
515,455 Series 2004-1, Class M1............................. 6.50% 08/01/37 554,263
371,939 Series 2005-1, Class A.............................. 5.75% 01/01/40 401,947
---------------
TOTAL ASSET-BACKED SECURITIES....................................................... 1,050,518
(Cost $1,077,866) ---------------
TOTAL INVESTMENTS - 94.9%........................................................... 62,240,091
(Cost $66,769,753) (f) ---------------
PRINCIPAL
VALUE DESCRIPTION VALUE
--------------- ----------------------------------------------------------------------------------- ---------------
REVERSE REPURCHASE AGREEMENTS - (7.7%)
(5,018,004) With JP Morgan 0.70% dated 04/01/16, to be repurchased at
$5,021,028 on 05/02/16........................................................... (5,018,004)
---------------
TOTAL REVERSE REPURCHASE AGREEMENTS................................................. (5,018,004)
---------------
NET OTHER ASSETS AND LIABILITIES - 12.8%............................................ 8,387,701
---------------
NET ASSETS - 100.0%................................................................. $ 65,609,788
===============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2016.
(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 April 30, 2016,
securities noted as such amounted to $12,314,583, or 18.77% of net assets.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at April 30, 2016.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $1,668,870 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $6,198,532.
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
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 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
4/30/2016 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Mortgage-Backed Securities......................... $ 49,977,499 $ -- $ 49,977,499 $ --
U.S. Government Agency Mortgage-Backed Securities.. 11,212,074 -- 11,212,074 --
Asset-Backed Securities............................ 1,050,518 -- 1,050,518 --
------------ ------------ ------------- ------------
Total Investments.................................. $ 62,240,091 $ -- $ 62,240,091 $ --
============ ============ ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Reverse Repurchase Agreements...................... $ (5,018,004) $ -- $ (5,018,004) $ --
============ ============ ============= ============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $66,769,753).......................................................................... $ 62,240,091
Cash........................................................................................... 8,499,018
Restricted cash................................................................................ 788,066
Interest receivable............................................................................ 256,118
Prepaid expenses............................................................................... 13,105
------------
Total Assets................................................................................ 71,796,398
------------
LIABILITIES:
Reverse Repurchase Agreements.................................................................. 5,018,004
Payables:
Investment securities purchased............................................................. 1,045,831
Investment advisory fees.................................................................... 57,700
Audit and tax fees.......................................................................... 26,997
Printing fees............................................................................... 8,864
Transfer agent fees......................................................................... 7,692
Administrative fees......................................................................... 6,688
Trustees' fees and expenses................................................................. 6,021
Custodian fees.............................................................................. 3,736
Interest on reverse repurchase agreements................................................... 2,927
Legal fees.................................................................................. 1,379
Financial reporting fees.................................................................... 771
------------
Total Liabilities........................................................................... 6,186,610
------------
NET ASSETS..................................................................................... $ 65,609,788
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 75,520,047
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... (1,036,475)
Accumulated net realized gain (loss) on investments............................................ (4,386,253)
Net unrealized appreciation (depreciation) on investments...................................... (4,529,662)
------------
NET ASSETS..................................................................................... $ 65,609,788
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 15.57
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 241,870
------------
Total investment income..................................................................... 241,870
------------
EXPENSES:
Investment advisory fees....................................................................... 354,826
Audit and tax fees............................................................................. 25,949
Administrative fees............................................................................ 24,799
Transfer agent fees............................................................................ 19,896
Interest expense on reverse repurchase agreements.............................................. 16,911
Printing fees.................................................................................. 13,238
Trustees' fees and expenses.................................................................... 8,806
Custodian fees................................................................................. 7,023
Financial reporting fees....................................................................... 4,625
Legal fees..................................................................................... 1,984
Other.......................................................................................... 20,497
------------
Total expenses.............................................................................. 498,554
------------
NET INVESTMENT INCOME.......................................................................... (256,684)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 84,480
Net change in unrealized appreciation (depreciation) on investments......................... 207,137
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 291,617
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 34,933
============
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
4/30/2016 ENDED
(UNAUDITED) 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ (256,684) $ 4,296,840
Net realized gain (loss)............................................................ 84,480 (1,637,322)
Net change in unrealized appreciation (depreciation)................................ 207,137 (2,431,118)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... 34,933 228,400
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (2,064,426) (1,990,325)
Return of capital................................................................... -- (2,307,052)
-------------- --------------
Total distributions to shareholders................................................. (2,064,426) (4,297,377)
-------------- --------------
Total increase (decrease) in net assets............................................. (2,029,493) (4,068,977)
NET ASSETS:
Beginning of period................................................................. 67,639,281 71,708,258
-------------- --------------
End of period....................................................................... $ 65,609,788 $ 67,639,281
============== ==============
Accumulated net investment income (loss) at end of period........................... $ (1,036,475) $ 1,284,635
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at end of period...................................................... 4,213,115 4,213,115
============== ==============
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations..................... $ 34,933
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
Purchases of investments...................................................... (15,862,698)
Sales, maturities and paydowns on investments................................. 17,128,655
Net amortization/accretion of premiums/discounts on investments............... 1,678,210
Net realized gain/loss on investments......................................... (84,480)
Net change in unrealized appreciation/depreciation on investments............. (207,137)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................... 5,264
Increase in prepaid expenses.................................................. (7,416)
Increase in interest payable on reverse repurchase agreements................. 330
Decrease in investment advisory fees payable.................................. (4,291)
Decrease in audit and tax fees payable........................................ (23,203)
Increase in legal fees payable................................................ 610
Decrease in printing fees payable............................................. (1,316)
Decrease in administrative fees payable....................................... (10,687)
Increase in custodian fees payable............................................ 230
Increase in transfer agent fees payable....................................... 4,147
Increase in Trustees' fees and expenses payable............................... 4,619
Decrease in other liabilities................................................. (1,012)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................... $ 2,654,758
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............... (2,064,426)
Repurchases of reverse repurchase agreements.................................. (28,945,000)
Reverse repurchase agreements borrowings...................................... 28,654,004
--------------
CASH USED IN FINANCING ACTIVITIES................................................... (2,355,422)
--------------
Increase in cash.................................................................... 299,336
Cash at beginning of period......................................................... 8,199,682
--------------
CASH AT END OF PERIOD............................................................... $ 8,499,018
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ $ 16,581
==============
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, 2016 ---------------------------------------------------------------
(UNAUDITED) 2015 2014 2013 2012 2011 (a)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period....... $ 16.05 $ 17.02 $ 17.63 $ 17.91 $ 18.43 $ 19.59
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............... (0.06) 1.02 1.02 1.25 1.28 1.69
Net realized and unrealized gain (loss).... 0.07 (0.97) (0.61) (0.28) 0.17 (0.82)
------- ------- ------- ------- ------- -------
Total from investment operations........... 0.01 0.05 0.41 0.97 1.45 0.87
------- ------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income...................... (0.49) (0.47) (1.02) (1.25) (2.03) (2.03)
Return of capital.......................... -- (0.55) -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions to Common
Shareholders............................ (0.49) (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............. $ 15.57 $ 16.05 $ 17.02 $ 17.63 $ 17.91 $ 18.43
======= ======= ======= ======= ======= =======
Market value, end of period................ $ 14.49 $ 14.58 $ 15.12 $ 15.79 $ 19.00 $ 18.94
======= ======= ======= ======= ======= =======
TOTAL RETURN BASED ON NET ASSET VALUE (b).. 0.36% 1.06% 3.01% (c) 6.04% (c) 8.30% 4.60%
======= ======= ======= ======= ======= =======
TOTAL RETURN BASED ON MARKET VALUE (b)..... 2.82% 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)....... $65,610 $67,639 $71,708 $74,259 $75,439 $75,014
Ratio of total expenses to average net
assets.................................. 1.51% (d) 1.55% 1.78% 1.96% 2.47% 2.23%
Ratio of total expenses to average net
assets excluding interest expense....... 1.46% (d) 1.51% 1.72% 1.83% 2.20% 2.14%
Ratio of net investment income (loss) to
average net assets...................... (0.78)% (d) 6.18% 5.84% 7.01% 7.28% 8.74%
Portfolio turnover rate.................... 23% 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.
(d) Annualized.
See Notes to Financial Statements Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
trades under the ticker symbol FMY on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing primarily in mortgage-backed securities
that, in the opinion of Brookfield Investment Management Inc. ("Brookfield" or
the "Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors. Please see Note
6 - Subsequent Events relating to the portfolio management team of the Fund.
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 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
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 April 30, 2016, is
included with the Fund's Portfolio of Investments.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
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 April 30, 2016, 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 pledged as collateral for reverse repurchase agreements
outstanding as of April 30, 2016. The securities pledged as collateral for
reverse repurchase agreements are U.S. Government Agency Mortgage-Backed
Securities and are footnoted in the Portfolio of Investments. If the value of
the securities pledged as collateral decreases, the Fund would be required to
pledge additional securities to meet the collateral requirements of the
agreement. In the event that the counterparty fails to return the securities
pledged as collateral in a timely manner, or at all, the Fund risks not being
able to sell the securities at a desired time.
Information for the six months ended April 30, 2016:
Maximum amount outstanding during the period................... $5,309,000
Average amount outstanding during the period*.................. $5,101,918
Average Common Shares outstanding during the period............ 4,213,115
Average debt per Common Share outstanding during the period.... $1.21
* The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the six months ended April 30, 2016.
During the six months ended April 30, 2016, the interest rates ranged from 0.42%
to 0.73%, with a weighted average interest rate of 0.66%, on borrowings by the
Fund under reverse repurchase agreements, which had interest expense that
aggregated $16,911.
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.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
F. INTEREST-ONLY SECURITIES
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Distributions from income and capital gains are determined in accordance with
federal income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2015, was as follows:
Distributions paid from:
Ordinary income................................. $ 1,990,325
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 and 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 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
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 April 30, 2016,
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 jurisdiction 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 April 30, 2016, 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 $ (5,018,004) $ -- $ (5,018,004) $ 5,018,004 $ -- $ --
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. Please see Note 6 - Subsequent Events relating
to the portfolio management team of the Fund.
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
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
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. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2016, were $9,360,039 and $5,490,528, respectively. The proceeds from sales and
paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the six months ended April 30, 2016, were
$9,684,862 and $7,443,793, respectively.
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. SUBSEQUENT 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:
The Fund announced on May 17, 2016 that it has been informed that Schroder
Investment Management North America Inc. ("Schroders") had reached an agreement
with the Sub-Advisor to acquire the Brookfield portfolio management team
responsible for portfolio management of the Fund ("Acquisition"). The
consummation of the Acquisition would be considered an "assignment" (as defined
in the Investment Company Act of 1940, as amended) of the investment
sub-advisory agreement among the Fund, Brookfield and First Trust, which would
result in its automatic termination. According to Schroders, the Acquisition of
the Fund's portfolio management team is expected to be completed in the third
quarter of 2016. First Trust is currently evaluating the impact of the
Acquisition on the Fund. The Acquisition will not have any effect on the
investment management agreement between the Fund and First Trust. First Trust
has served as the Fund's investment manager since the Fund's inception and will
continue to serve in such capacity following the Acquisition.
On May 19, 2016, the Fund declared a distribution of $0.075 per share to Common
Shareholders of record on June 3, 2016, payable June 15, 2016.
Page 21
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (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 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust 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 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust Mortgage Income Fund as Class III Trustees for a three-year term expiring
at the Fund's annual meeting of shareholders in 2019. The number of votes cast
in favor of Mr. Bowen was 3,339,139, the number of votes against was 352,697 and
the number of broker non-votes was 521,279. The number of votes cast in favor of
Mr. Nielson was 3,332,225, the number of votes against was 359,611 and the
number of broker non-votes was 521,279. Richard E. Erickson, Thomas R. Kadlec
and Robert F. Keith 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.
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.
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.
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.
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.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2016 (UNAUDITED)
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.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Sub-Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.
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.
Page 24
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
Brookfield Place
250 Vesey Street, 15th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(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/ James M. Dykas
----------------------------------------
James M. Dykas, President
and Chief Executive Officer
(principal executive officer)
Date: June 20, 2016
--------------------
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/ James M. Dykas
----------------------------------------
James M. Dykas, President
and Chief Executive Officer
(principal executive officer)
Date: June 20, 2016
--------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date: June 20, 2016
--------------------
* Print the name and title of each signing officer under his or her signature.