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
(formerly known as First Trust/FIDAC 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, 2014
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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, 2014
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2014
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 12
Statement of Operations..................................................... 13
Statements of Changes in Net Assets......................................... 14
Statement of Cash Flows..................................................... 15
Financial Highlights........................................................ 16
Notes to Financial Statements............................................... 17
Additional Information...................................................... 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.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. 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 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, 2014
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Mortgage Income Fund (the "Fund").
As a shareholder, twice a year you receive a detailed report about your
investment, including portfolio commentary from the Fund's management team, a
performance analysis and a market and Fund outlook. Additionally, First Trust
Advisors L.P. ("First Trust") compiles the Fund's financial statements for you
to review. These reports are intended to keep you up-to-date on your investment,
and I encourage you to read this document and discuss it with your financial
advisor.
Despite some volatility, the six months covered by this report have been
positive for the U.S. markets. In fact, the S&P 500(R) Index, as measured on a
total return basis, rose 8.36% during the period. Of course, past performance
can never be an indicator of future performance, but First Trust believes that
staying invested in quality products through up and down markets and having a
long-term horizon can help investors reach their financial goals.
First Trust continues to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success.
Your financial advisor can tell you about the other investments First Trust
offers that might fit your financial goals. We encourage you to discuss those
goals with your financial advisor regularly so that he or she can help keep you
on track and help you choose investments that match your goals.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving 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, 2014 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $15.94
Common Share Net Asset Value ("NAV") $17.57
Premium (Discount) to NAV (9.28)%
Net Assets Applicable to Common Shares $74,016,720
Current Monthly Distribution per Common Share (1) $0.085
Current Annualized Distribution per Common Share $1.020
Current Distribution Rate on Closing Common Share Price (2) 6.40%
Current Distribution Rate on NAV (2) 5.81%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
4/13 16.91 17.83
16.93 17.81
16.92 17.93
16.82 18.01
16.49 18.04
5/13 16.23 17.94
15.96 17.73
15.79 17.65
15.62 17.70
6/13 15.87 17.50
15.46 17.44
15.80 17.28
15.57 17.25
7/13 15.53 17.31
15.41 17.33
15.26 17.34
15.18 17.50
15.18 17.49
8/13 15.30 17.51
15.47 17.50
15.54 17.49
15.57 17.54
9/13 15.55 17.54
15.52 17.50
15.48 17.50
15.40 17.54
10/13 15.65 17.59
15.91 17.58
15.89 17.61
15.95 17.62
15.89 17.65
11/13 15.70 17.63
15.50 17.62
15.16 17.56
15.33 17.52
12/13 15.52 17.47
15.60 17.54
15.63 17.70
15.79 17.71
15.90 17.70
1/14 15.79 17.68
15.76 17.66
15.80 17.70
15.86 17.72
2/14 15.94 17.72
15.82 17.67
15.94 17.65
15.79 17.64
3/14 15.74 17.59
15.88 17.56
15.94 17.57
16.00 17.62
16.01 17.58
4/14 15.94 17.57
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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 Inception (5/25/05)
4/30/14 4/30/14 4/30/14 to 4/30/14
FUND PERFORMANCE (3)
NAV 2.92% 5.19% 10.34% 7.19%
Market Value 4.25% 0.63% 9.38% 5.48%
INDEX PERFORMANCE
Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index 1.41% 0.57% 3.72% 4.92%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 1.25
Weighted Average Life (Years) 6.32
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 73.4%
U.S. Government Agency Mortgage-Backed Securities 26.2
Asset-Backed Securities 0.4
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Adjustable Rate Securities 57.1%
Fixed Rate Securities 29.5
Interest Only Securities 13.4
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 30.7%
AA+ 16.9
AA 1.1
A+ 19.4
A 5.3
BBB+ 2.2
BBB 2.3
BB+ 2.1
BB 3.0
B- 2.5
CCC+ 0.2
CCC 10.0
CCC- 0.9
CC 0.9
D 2.4
NR 0.1
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Total 100.0%
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(1) Most recent distribution paid or declared through 4/30/2014. 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 4/30/2014. 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 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
of less than one year. Past performance is not indicative of future
results.
(4) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of the
McGraw Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and ratings are not equivalent, the highest
ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or
lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The
credit ratings shown relate to the creditworthiness of the issuers of the
underlying securities in the Fund, and not to the Fund or its shares.
Credit ratings are subject to change.
NR Not Rated
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2014
SUB-ADVISOR
Brookfield Investment Management Inc. ("Brookfield") serves as the First Trust
Mortgage Income Fund's ("FMY" or the "Fund") sub-advisor. Brookfield is a
wholly-owned subsidiary of Brookfield Asset Management, a global alternative
asset manager with $190 billion in assets under management as of March 31, 2014.
Brookfield Asset Management has over a 100-year history of owning and operating
assets with a focus on property, renewable power, infrastructure and private
equity. The company offers a range of public and private investment products and
services, which leverage its expertise and experience and provide it with a
competitive advantage in the markets where it operates. On behalf of its
clients, Brookfield Asset Management is also an active investor in the public
securities markets, where its experience extends over 30 years. Over this time,
the company has successfully developed several investment operations and built
expertise in the management of institutional portfolios, retail mutual funds,
and structured product investments.
Brookfield Asset Management's public market activities are conducted by
Brookfield, a registered investment advisor. These activities complement
Brookfield Asset Management's core competencies and included global listed real
estate and infrastructure equities, corporate high yield investments,
opportunistic credit strategies and a dedicated insurance asset management
division. Headquartered in New York, NY, Brookfield maintains offices and
investment teams in Toronto, Chicago, Boston and London and has over $10 billion
of assets under management as of March 31, 2014.
PORTFOLIO MANAGEMENT TEAM
ANTHONY BREAKS, CFA - SENIOR DIRECTOR
CHRIS WU - DIRECTOR
COMMENTARY
FIRST TRUST MORTGAGE INCOME FUND
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues its objectives by investing primarily in mortgage-backed securities
("MBS") representing part ownership in a pool of either residential or
commercial mortgage loans that, in the opinion of the Fund's sub-advisor, offer
an attractive combination of credit quality, yield and maturity. There can be no
assurance the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
MARKET RECAP AND OUTLOOK
Within the Securitized Products universe, Agency Residential Mortgage-Backed
Securities ("RMBS"), non-Agency RMBS and Commercial Mortgage-Backed Securities
("CMBS") all had strong returns for the first half of the 2014 fiscal year,
driven by improving collateral performance and strong investor demand.
On a macro level, economic conditions continued to improve as we left the first
quarter and headed into the second quarter. Headline unemployment fell from 7.2%
to 6.3% during the first quarter of 2014. Non-farm payrolls averaged about
200,000 per month, with April beating expectations as 288,000 jobs were added.
Jobless claims have floated down to just over 300,000 per month. Consumer
confidence has held at approximately 80 in recent months. Household debt burden
has ticked up slightly, indicating more confident consumer spending, in
particular in auto sales. Another area of increase is student loan debt, which
at $1 trillion nationally, is second only to mortgages in contributing to total
household debt. This debt is concentrated in a relatively narrow demographic
band and may hold back first-time home buyers on the margin. Student loan debt
burden may also loom as a government policy issue in years to come.
Ten-year interest rates peaked above 3% briefly at calendar year end before
settling back into a range between 2.6% and 2.8% in the first quarter. Most
recently, interest rates have shrugged off strengthening economic data in part
due to continuing weak European growth, various geopolitical events such as
military action in Crimea and, perhaps most importantly, investors that are
underinvested in interest-rate duration. While rates may linger at historically
low levels, we are returning to more historical norms for growth and
unemployment. This has eventually led to higher rates in past recoveries.
The Federal Reserve continues to reduce its purchase program for Treasury bonds
and Agency RMBS and we expect purchases to end completely later this year.
Agency RMBS issuance is down as rates have risen off historical lows and this
has muted the effect of lower Fed purchases. At some point, we expect Agency
issuance will increase and adjust as private investors stand alone as buyers.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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Away from Agency RMBS issuance, we are seeing little supply from dealer conduits
and real estate investment trusts , historically a source of non-Agency
mortgages. The Government Sponsored Enterprises ("GSEs") have turned into a
material source of new issue mortgage credit through the issuance of
risk-sharing securities. These securities convey a slice of risk from the GSEs
guarantee portfolio. Issuance of these securities has picked up and the Federal
Housing Finance Agency ("FHFA") director signaled an interest in tripling the
pace of issuance. During the semi-annual period ended April 30, 2014, Fannie Mae
and Freddie Mac issued a combined $4.1 billion, still small in the context of
non-Agency RMBS issuance historically but notable given overall low levels of
supply. CMBS issuance continued its recovery, with $42 billion in new
unguaranteed deals and $26 billion in Agency-guaranteed CMBS for the period.
Within residential real estate, prices have been on a steady rise since the
beginning of 2012. The pace of new construction has increased from approximately
600,000 to 1,100,000 units over the same period. This is still below long-term
averages of approximately 1,500,000, suggesting that an oversupply of new homes
will not imperil home prices. Given the lack of new construction after the
financial crisis and a recovery in household formation, we see housing demand
supporting prices for existing homes, the type that secure the mortgages in the
portfolio. The last report from Case-Shiller showed a 12.9% year-over-year
increase in its 20-city index.
Within commercial real estate, top-tier properties in major markets continue to
improve and prices now exceed peak levels from 2007. Secondary and tertiary
markets continue to recover and the pace of recovery has increased since the
middle of 2013. As the availability of commercial mortgage credit has greatly
improved, investors have now begun to look at opportunities beyond those major
markets. Oversupply has not been an issue in this real estate cycle, as new
construction virtually came to a halt during the financial crisis in 2008 and
2009 and, with the exception of the multifamily sector, remains low. The
relative lack of new construction should also assist further recovery in values
as demand for space returns and the lead times required to deliver new space
keeps supply in check. One area that continues to struggle is retail. Department
store sales continue to decline and the malls they anchor have struggled in
certain markets. We see no reason to see the trend reversing and choose to avoid
CMBS with outsize exposure to these weak retail properties.
Agency RMBS remains another key sector for the Fund. Rallies in interest rates
and low volatility over the past six-month period resulted in positive
performance for Agency RMBS. The 30-year mortgage rate returned to 4.2% from a
recent high of 4.5% at the beginning of 2014 and the prices of mortgage bonds
rose. Meanwhile, prepayment speeds declined even though mortgage rates have
dropped. Slower prepayment speeds were likely due to a harsh winter which slowed
down mortgage business and to the lagging effect of higher mortgage rates later
last year. Slow prepayment speeds have a positive impact on the valuation of
premium coupon pools, and interest-only ("IO") securities that receive only the
coupon associated with a pool of loans.
On the policy front, there were some recent new policy shifts proposed by Mel
Watt, the new Director of the FHFA. The purpose of policy change is to encourage
banks to loosen lending standards for mortgage loans. The most important aspect
is reducing put-back risk for banks. In the past, GSEs have been aggressively
pursuing banks for repurchase from Fannie Mae and Freddie Mac loans that
default. This makes banks hesitant to extend credit to less credit-worthy
borrowers. With the new rules, it is hopeful that banks will loosen lending
standards modestly and mortgage credit will be more available for people who
have not been able to refinance due to low FICO scores or high Loan-to-Value
Ratios ("LTV"). In this sense, this policy change should be positive for
discount non-Agency bonds as some non-Agency borrowers may get the opportunities
to refinance now. It is, however, modest bad news to high coupon Agency pools as
prepayment speeds will be marginally higher under the new policy. The biggest
risk is to IOs or IIOs (inverse interest-only securities), which are based on
premium coupon pools. We had been aware of this kind of potential risk so that
the portfolio's IO purchases have been focused on lower-coupon pools over the
past several months.
We remain positive on most securitized products for the next year, based on
continued improvement in forecasts for collateral performance and expanding
credit for borrowers. Banks are more eager to lend now and the FHFA is reducing
put-back risk for banks. As a result, more borrowers should be able to refinance
their mortgage, and homes which are for sale should attract a broader audience
of buyers. Rents have been rising for several years, and with interest rates
still low, many households have a financial incentive to purchase rather than
rent. All of these dynamics support the current increase in home prices and
potential for further increases.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2014, the Fund had a total return1 of
2.92% based on net asset value ("NAV"). For the period, the Fund traded from a
discount to NAV of -10.44% to a discount to NAV of -9.28%, resulting in a total
return1 of 4.25%, based on market price. During the period, the Fund's
benchmark, the Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index, returned
1.41%.
The Fund's market price return benefited from a shrinking discount to NAV over
the period. In December 2013, many closed-end funds were hit by tax-motivated
selling pressure and feared interest rate increases. We are encouraged to see
the valuation gap decrease but there is still room for improvement for FMY and
other closed-end funds in general. Interestingly, some hedge funds and other
active investors bought closed-end fixed income funds to take advantage of the
discount at year end.
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(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns and
does not reflect sales load. Past performance is not indicative of future
results.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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All of the Fund's sectors rallied during the period, which reflected improved
assumptions for collateral performance and tightening spreads. Mortgage-backed
securities remain one of the widest spread assets in fixed-income, especially
for investment grade non-Agency RMBS and CMBS. As spreads have come in broadly,
this spread advantage becomes more attractive. The other advantage we see is in
the substantial fraction of mortgage product that carries a floating-rate
coupon. Many investors are trying to limit their exposure to fixed rates. For
below investment-grade mortgage bonds, fundamental improvements and stronger
economic data has pushed prices higher. The Fund took advantage of higher prices
to make some selective sales and position for more advantageous reinvestment.
While non-Agency RMBS had good performance during the period, Agency RMBS
outperformed with a return of approximately 3.8%. FMY holds a significant amount
of Agency IO securities and these benefited from a slowdown in their prepayment
speeds, thereby extending the stream of payments we expect. Valuations for
Agency IOs increase when prepayments slow down because the loan pool lasts
longer, extending the series of coupons paid to the IO class. We have carefully
positioned the Fund's IOs to mitigate its exposure to changing government
policy, rising home prices and changes in interest rates.
Changes in interest rates were not a material contributor to the Fund's returns
over the period. The 10-Year U.S. Treasury bond yield began at 2.56% and ended
the period at 2.65% with a range between 3% and 2.6%. While the swings were
meaningful, the overall change was minimal. The Fund is also positioned for low
exposure to interest rates as a whole. The swing in rates caused some large
retail bond funds to see meaningful redemptions. Sales of bonds to meet these
redemptions were an opportunity for the Fund to make some attractive purchases.
We anticipate short-term interest rates will begin to increase in the next 12 to
24 months as employment rises and the Fed's purchases of Treasury bonds and
Agency RMBS come to an end. The projected rise in short-term interest rates is
an additional source of value going forward. While these interest rate indices
remain low currently, the Fund has avoided substantial market value risk
associated with interest-rate volatility and is poised to capture the extra
income associated with future increases in short-term interest rates.
As of April 30, 2014, the Fund held 9.0% cash as a percentage of gross assets.
This is down from 10% cash as of March 31, 2014. The Fund's primary purchases
were investment-grade Prime Hybrid Adjustable Rate Mortgage RMBS. In addition to
those purchases, the Fund sold a meaningful portion of below "A" rated assets.
The sales allowed the Fund to recognize some large gains and also brought the
Fund on top of its 75% "A or better" ratings test. Addressing this ratings test
allows for more trading flexibility going forward and a better chance to put our
best ideas to work. We have put much of that cash to work in the Prime Hybrid
RMBS and we plan to turn over a portion of the Fund's A- or lower assets to
improve income. In particular, the Fund's BBB-rated bonds are consuming precious
credit capacity and earning little more yield than the Fund's "A or better"
holdings. Now that we have reached the test threshold through trading, we can
improve the Fund's income by swapping into higher-yielding but lower-rated
bonds.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of reverse repurchase
agreements. Please note that the Fund's benchmark does not utilize leverage. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income for common shareholders. However,
the use of leverage also can expose common shareholders to additional
volatility. For example, if the prices of securities held by the Fund decline,
the negative impact of the valuation changes on common share net asset value and
common shareholder total return is magnified by the use of leverage. Conversely,
leverage may enhance common share returns during periods when the prices of
securities held by the Fund generally are rising.
As of April 30, 2014, the Fund's leverage was relatively low at 10.86% 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 56
basis points annualized, which were substantially exceeded by the returns on the
Agency Pools we used as collateral.
Reverse repurchase borrowing remains expensive for many of the Fund's target
asset classes. For this reason, we may continue to employ leverage below the
Fund's maximum or to choose alternative assets, such as Agency Guaranteed
assets, to use as collateral as we have been recently. Financing costs may also
fall, thereby reversing this current dynamic. Where our overall budget for risk
warrants it and when the return opportunities are compelling, we are likely to
increase leverage in an attempt to improve returns. In periods of stability,
this may be an especially important tool.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities. These views represent the opinions of
Brookfield Investment Management Inc. and are not intended to predict or depict
the performance of any investment. These views are as of the close of business
on April 30, 2014 and subject to change based on subsequent developments.
Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES - 76.6%
COLLATERALIZED MORTGAGE OBLIGATIONS - 63.4%
Adjustable Rate Mortgage Trust
$ 47,503 Series 2004-5, Class 1A1 (a)............. 2.53% 04/25/35 $ 46,050
Banc of America Mortgage Trust
81,422 Series 2002-L, Class 1A1 (a) (b)......... 2.62% 12/25/32 74,681
Bear Stearns Adjustable Rate Mortgage Trust
746,564 Series 2004-9, Class 12A1 (a)............ 2.86% 11/25/34 750,343
580,861 Series 2005-5, Class A2 (a).............. 2.28% 08/25/35 591,437
Chase Mortgage Finance Trust
512,598 Series 2007-A1, Class 1A3 (a)............ 2.64% 02/25/37 516,799
Countrywide Alternative Loan Trust
712,461 Series 2006-41CB, Class 2A17............. 6.00% 01/25/37 618,419
82,747 Series 2007-11T1, Class A37 (c).......... 39.11% 05/25/37 145,457
Countrywide Home Loan Mortgage
Pass-Through Trust
239,485 Series 2004-HYB1, Class 2A (a)........... 2.57% 05/20/34 229,834
685,788 Series 2006-21, Class A8................. 5.75% 02/25/37 635,410
Credit Suisse First Boston Mortgage
Securities Corp.
1,447,380 Series 2004-AR2, Class 1A1 (a)........... 2.67% 03/25/34 1,430,706
1,431,268 Series 2004-AR8, Class 6A1 (a)........... 2.49% 09/25/34 1,446,468
DSLA Mortgage Loan Trust
1,355,612 Series 2004-AR3, Class 2A2A (a).......... 0.52% 07/19/44 1,304,868
1,216,319 Series 2007-AR1, Class 2A1A (a).......... 0.29% 04/19/47 1,027,947
GMAC Mortgage Corporation Loan Trust
257,167 Series 2004-AR1, Class 22A (a)........... 2.91% 06/25/34 245,072
GSAMP Trust
870,614 Series 2006-NC1, Class A2 (a)............ 0.33% 02/25/36 826,984
564,824 Series 2007-HE1, Class A2B (a)........... 0.25% 03/25/47 552,108
GSR Mortgage Loan Trust
472,719 Series 2005-AR1, Class 4A1 (a)........... 4.73% 01/25/35 468,584
Harborview Mortgage Loan Trust
198,393 Series 2004-1, Class 2A (a)................ 2.40% 04/19/34 200,444
876,926 Series 2004-6, Class 3A1 (a)............. 2.71% 08/19/34 876,862
JP Morgan Mortgage Trust
2,133,583 Series 2005-ALT1, Class 4A1 (a).......... 5.20% 10/25/35 2,053,074
601,123 Series 2006-A2, Class 4A1 (a)............ 2.73% 08/25/34 602,439
205,014 Series 2006-A2, Class 5A3 (a)............ 2.55% 11/25/33 205,559
JP Morgan Re-REMIC
1,418,775 Series 2009-7, Class 12A1 (d)............ 6.25% 01/27/37 1,492,399
MASTR Asset Backed Securities Trust
1,247,428 Series 2006-HE5, Class A3 (a)............ 0.31% 11/25/36 808,468
257,149 Series 2006-HE5, Class A4 (a)............ 0.37% 11/25/36 168,074
1,797,157 Series 2006-NC2, Class A3 (a)............ 0.26% 08/25/36 916,863
820,316 Series 2006-NC2, Class A5 (a)............ 0.39% 08/25/36 428,246
Mellon Residential Funding Corp.
Mortgage Pass-Through Trust
742,048 Series 2001-TBC1, Class A1 (a)........... 0.85% 11/15/31 744,736
793,342 Series 2002-TBC2, Class A (a)............ 1.01% 08/15/32 744,176
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Morgan Stanley Mortgage Loan Trust
$ 560,869 Series 2004-7AR, Class 2A6 (a)........... 2.47% 09/25/34 $ 560,829
Nationstar Home Equity Loan Trust
1,731,000 Series 2006-B, Class AV4 (a)............. 0.43% 09/25/36 1,517,064
Provident Funding Mortgage Loan Trust
303,817 Series 2005-1, Class 1A1 (a)............. 2.51% 05/25/35 303,896
Residential Accredit Loans, Inc.
795,957 Series 2004-QS2, Class CB................ 5.75% 02/25/34 839,100
Residential Funding Mortgage Securities I
116,411 Series 2005-S5, Class A5................. 5.25% 07/25/35 117,480
Securitized Asset Backed Receivables LLC
1,245,577 Series 2007-BR2, Class A2 (a)............ 0.38% 02/25/37 695,157
Structured Adjustable Rate Mortgage Loan
817,949 Trust Series 2004-2, Class 4A2 (a)....... 2.50% 03/25/34 817,638
Thornburg Mortgage Securities Trust
753,959 Series 2003-4, Class A1 (a).............. 0.79% 09/25/43 737,394
953,770 Series 2004-3, Class A (a)............... 0.89% 09/25/44 909,012
643,752 Series 2005-1, Class A3 (a).............. 2.25% 04/25/45 646,531
Wachovia Mortgage Loan Trust, LLC
655,747 Series 2006-A, Class 3A1 (a)............. 2.66% 05/20/36 632,992
WaMu Mortgage Pass-Through Certificates
987,805 Series 2004-AR1, Class A (a)............. 2.41% 03/25/34 996,017
999,821 Series 2004-AR10, Class A1B (a).......... 0.61% 07/25/44 987,080
761,286 Series 2004-AR13, Class A1A (a).......... 0.51% 11/25/34 731,807
17,149 Series 2005-AR1, Class A1A (a)........... 0.47% 01/25/45 15,823
1,448,183 Series 2005-AR11, Class A1A (a).......... 0.47% 08/25/45 1,357,355
1,218,189 Series 2005-AR2, Class 2A23 (a).......... 0.53% 01/25/45 1,206,312
1,365,256 Series 2005-AR6, Class 2A1A (a).......... 0.38% 04/25/45 1,295,331
631,711 Series 2005-AR9, Class A1A (a)........... 0.47% 07/25/45 602,500
1,238,474 Series 2006-AR5, Class A1A (a)........... 1.12% 06/25/46 1,088,534
Washington Mutual Alternative Mortgage
Pass-Through Certificates
49,766 Series 2007-5, Class A11 (c)............. 38.57% 06/25/37 87,711
Washington Mutual MSC Mortgage
Pass-Through Certificates
380,226 Series 2004-RA1, Class 2A................ 7.00% 03/25/34 404,474
Wells Fargo Mortgage Backed Securities Trust
781,470 Series 2003-H, Class A1 (a).............. 2.62% 09/25/33 796,714
616,178 Series 2004-A, Class A1 (a).............. 2.63% 02/25/34 629,926
2,073,983 Series 2004-R, Class 1A1 (a)............. 2.62% 09/25/34 2,092,831
589,038 Series 2004-S, Class A1 (a).............. 2.62% 09/25/34 605,707
1,039,351 Series 2004-Y, Class 1A2 (a)............. 2.62% 11/25/34 1,039,070
584,554 Series 2005-AR10, Class 2A17 (a)......... 2.61% 06/25/35 593,500
390,237 Series 2005-AR16, Class 1A1 (a).......... 2.63% 08/25/33 401,403
482,477 Series 2005-AR3, Class 2A1 (a)........... 2.63% 03/25/35 489,706
844,073 Series 2005-AR8, Class 1A1 (a)........... 2.62% 06/25/35 864,818
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities
Trust (Continued)
$ 358,860 Series 2006-AR1, Class 2A5 (a)........... 5.35% 03/25/36 $ 358,008
1,085,707 Series 2006-AR10, Class 5A2 (a).......... 2.61% 07/25/36 1,056,259
530,845 Series 2007-16, Class 1A1................ 6.00% 12/28/37 551,564
607,017 Series 2007-2, Class 1A13................ 6.00% 03/25/37 581,552
146,898 Series 2007-8, Class 2A2................. 6.00% 07/25/37 143,148
------------
46,906,750
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 13.2%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ.................. 5.42% 10/10/45 1,021,285
Bayview Commercial Asset Trust
873,218 Series 2004-2, Class A (a) (d)........... 0.58% 08/25/34 821,220
Credit Suisse Commercial Mortgage Trust
820,000 Series 2007-C2, Class A3................. 5.54% 01/15/49 901,701
GS Mortgage Securities Trust
910,950 Series 2007-GG10, Class A4 (a)........... 6.00% 08/10/45 1,012,769
HLSS Servicer Advance Receivables
Backed Notes
750,000 Series 2013-T5, Class CT5 (d)............ 2.52% 08/15/46 747,652
JP Morgan Chase Commercial Mortgage
Securities Trust
1,500,000 Series 2007-LD12, Class A4............... 5.88% 02/15/51 1,672,689
890,000 Series 2012-PHH, Class C (a) (d)......... 2.52% 10/15/25 892,741
LB-UBS Commercial Mortgage Trust
420,000 Series 2007-C1, Class AM................. 5.46% 02/15/40 462,609
100,000 Series 2007-C2, Class AM (a)............. 5.49% 02/15/40 107,650
Merrill Lynch Mortgage Investors Trust
574,753 Series 2004-D, Class A1 (a).............. 0.81% 09/25/29 575,217
Mid-State Capital Corp. Trust
622,746 Series 2004-1, Class M1.................. 6.50% 08/15/37 673,988
VNDO Mortgage Trust
900,000 Series 2012-6AVE, Class A (d)............ 3.00% 11/15/30 876,250
------------
9,765,771
------------
TOTAL MORTGAGE-BACKED SECURITIES............................................ 56,672,521
(Cost $54,501,710) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 27.4%
COLLATERALIZED MORTGAGE OBLIGATIONS - 11.6%
Federal Home Loan Mortgage Corp.
2,265,226 Series 2807, Class SB, IO (c)............ 7.30% 11/15/33 473,114
13,874 Series 3195, Class SX (c)................ 45.16% 07/15/36 36,838
451,583 Series 3562, Class KI, IO................ 4.50% 11/15/22 14,302
5,614 Series 3593, Class IP, IO................ 5.00% 06/15/36 1
2,785,026 Series 3619, Class EI, IO................ 4.50% 05/15/24 213,299
2,067,641 Series 3692, Class PS, IO (c)............ 6.45% 05/15/38 222,950
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corp. (Continued)
$ 4,381,338 Series 3726, Class KI, IO................ 3.50% 04/15/25 $ 396,433
3,066,679 Series 3870, Class WS, IO (c)............ 6.45% 06/15/31 520,976
Federal National Mortgage Association
887,526 Series 2005-122, Class SN (c)............ 27.99% 01/25/36 1,231,764
250,640 Series 2008-50, Class AI, IO............. 5.50% 06/25/23 16,557
4,355,687 Series 2010-103, Class ID, IO............ 5.00% 09/25/40 952,523
7,399,187 Series 2010-139, Class KI, IO............ 1.09% 12/25/40 391,048
887,025 Series 2010-142, Class PS, IO (c)........ 5.90% 05/25/40 93,439
1,132,841 Series 2010-145, Class TI, IO............ 3.50% 12/25/20 82,713
3,315,316 Series 2010-40, Class MI, IO............. 4.50% 08/25/24 225,550
3,100,302 Series 2012-125, Class MI................ 3.50% 11/25/42 721,382
4,357,182 Series 2013-32, Class IG................. 3.50% 04/25/33 838,427
Federal National Mortgage Association, STRIP
3,168,978 Series 406, Class 6, IO.................. 4.00% 01/25/41 548,785
Government National Mortgage Association
1,271,511 Series 2009-65, Class NJ, IO............. 5.50% 07/20/39 110,330
3,563,820 Series 2010-115, Class IQ, IO............ 4.50% 11/20/38 526,835
7,890,994 Series 2011-131, Class EI, IO............ 4.50% 08/20/39 860,317
1,466,773 Series 2011-69, Class CI, IO............. 5.00% 03/20/36 72,390
------------
8,549,973
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 4.1%
Government National Mortgage Association
17,060,676 Series 2011-152, Class IO, IO (a)........ 1.34% 08/16/51 976,186
8,540,831 Series 2012-100, Class IO, IO (a) (e).... 0.83% 08/16/52 563,123
11,929,034 Series 2012-70, Class IO, IO (a) (e)..... 0.96% 08/16/52 768,599
7,376,124 Series 2012-78, Class IO, IO (a) (e)..... 1.06% 06/16/52 542,068
2,603,907 Series 2012-95, Class IO, IO (a) (e)..... 1.04% 02/16/53 214,542
------------
3,064,518
------------
PASS-THROUGH SECURITIES - 11.7%
Fannie Mae REMICs
926,416 Series 2005-83, Class LZ................. 5.50% 10/25/35 963,986
Federal Home Loan Mortgage Corp.
1,905,059 Pool A94738 (e).......................... 4.50% 11/01/40 2,048,203
762,841 Pool K36017 (e).......................... 5.00% 09/01/47 821,451
Federal National Mortgage Association
2,042,652 Pool 831145 (e).......................... 6.00% 12/01/35 2,292,083
2,213,567 Pool 843971 (e).......................... 6.00% 11/01/35 2,507,662
------------
8,633,385
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES..................... 20,247,876
(Cost $21,999,164) ------------
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
ASSET-BACKED SECURITIES - 0.3%
Green Tree Financial Corp.
$ 66,736 Series 1997-2, Class A6.................. 7.24% 06/15/28 $ 70,298
82,179 Series 1997-3, Class A6.................. 7.32% 03/15/28 88,501
95,419 Series 1997-7, Class A6.................. 6.76% 07/15/28 100,423
------------
TOTAL ASSET-BACKED SECURITIES............................................... 259,222
(Cost $257,248) ------------
TOTAL INVESTMENTS - 104.3%.................................................. 77,179,619
(Cost $76,758,122) (f) ------------
PRINCIPAL
VALUE DESCRIPTION AMOUNT
------------ ---------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (12.2%)
(1,341,000) With JP Morgan 1.28% dated 02/07/14, to be repurchased at
$1,345,305 on 05/08/14.................................................. (1,341,000)
(428,000) With JP Morgan 1.00% dated 04/28/14, to be repurchased at
$428,357 on 05/28/14.................................................... (428,000)
(4,518,000) With JP Morgan 0.38% dated 04/09/14, to be repurchased at
$4,522,293 on 07/08/14.................................................. (4,518,000)
(2,733,000) With JP Morgan 0.38% dated 04/16/14, to be repurchased at
$2,735,625 on 07/16/14.................................................. (2,733,000)
------------
TOTAL REVERSE REPURCHASE AGREEMENTS......................................... (9,020,000)
NET OTHER ASSETS AND LIABILITIES - 7.9%..................................... 5,857,101
------------
NET ASSETS - 100.0%......................................................... $ 74,016,720
============
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2014.
(b) Illiquid, as determined by Brookfield Investment Management Inc.
("Brookfield"), the Fund's sub-advisor.
(c) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at April 30, 2014.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registrupon 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, 2014,
securities noted as such amounted to $4,830,262, or 6.53% of net assets.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2014, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $4,451,276 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $4,029,779.
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2014 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
4/30/2014 PRICES INPUTS INPUTS
------------- ----------- ------------- -------------
Mortgage-Backed Securities......................... $ 56,672,521 $ -- $ 56,672,521 $ --
U.S. Government Agency Mortgage-Backed Securities.. 20,247,876 -- 20,247,876 --
Asset-Backed Securities............................ 259,222 -- 259,222 --
------------- ----------- ------------- -------------
TOTAL.............................................. $ 77,179,619 $ -- $ 77,179,619 $ --
============= =========== ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2014 PRICES INPUTS INPUTS
------------- ----------- ------------- -------------
Reverse Repurchase Agreements...................... $ (9,020,000) $ -- $ (9,020,000) $ --
============= =========== ============= =============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2014.
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2014 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $76,758,122).......................................................................... $ 77,179,619
Cash........................................................................................... 7,032,499
Restricted cash................................................................................ 620,000
Receivables:
Interest.................................................................................... 356,813
Investment securities sold.................................................................. 3,653
Prepaid expenses............................................................................... 20,050
------------
Total Assets................................................................................ 85,212,634
------------
LIABILITIES:
Reverse repurchase agreements.................................................................. 9,020,000
Payables:
Investment securities purchased............................................................. 2,036,218
Investment advisory fees.................................................................... 68,484
Audit and tax fees.......................................................................... 28,390
Administrative fees......................................................................... 11,136
Printing fees............................................................................... 11,069
Interest on reverse repurchase agreements................................................... 5,487
Transfer agent fees......................................................................... 4,838
Legal fees.................................................................................. 4,319
Custodian fees.............................................................................. 3,223
Trustees' fees and expenses................................................................. 1,717
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 262
------------
Total Liabilities........................................................................... 11,195,914
------------
NET ASSETS..................................................................................... $ 74,016,720
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 79,212,199
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... (357,802)
Accumulated net realized gain (loss) on investments............................................ (5,301,305)
Net unrealized appreciation (depreciation) on investments...................................... 421,497
------------
NET ASSETS..................................................................................... $ 74,016,720
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 17.57
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2014 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 2,933,461
------------
Total investment income..................................................................... 2,933,461
------------
EXPENSES:
Investment advisory fees....................................................................... 416,399
Excise tax expense............................................................................. 110,924
Administrative fees............................................................................ 57,311
Interest expense on reverse repurchase agreements.............................................. 27,437
Audit and tax fees............................................................................. 24,894
Transfer agent fees............................................................................ 19,962
Printing fees.................................................................................. 17,312
Trustees' fees and expenses.................................................................... 8,859
Custodian fees................................................................................. 7,744
Financial reporting fees....................................................................... 4,625
Legal fees..................................................................................... 3,824
Other.......................................................................................... 18,166
------------
Total expenses.............................................................................. 717,457
------------
NET INVESTMENT INCOME.......................................................................... 2,216,004
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... (868,924)
Net change in unrealized appreciation (depreciation) on investments......................... 559,577
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (309,347)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 1,906,657
============
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2014 ENDED
(UNAUDITED) 10/31/2013
-------------- ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 2,216,004 $ 5,229,032
Net realized gain (loss)........................................................... (868,924) 1,859,581
Net change in unrealized appreciation (depreciation)............................... 559,577 (3,064,553)
Net increase from payment by the sub-advisor (a)................................... -- 5,310
-------------- ------------
Net increase (decrease) in net assets resulting from operations.................... 1,906,657 4,029,370
-------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (2,148,689) (5,244,634)
-------------- ------------
Total distributions to shareholders................................................ (2,148,689) (5,244,634)
-------------- ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested............................................. -- 35,399
-------------- ------------
Net increase (decrease) in net assets resulting from capital transactions.......... -- 35,399
-------------- ------------
Total increase (decrease) in net assets............................................ (242,032) (1,179,865)
NET ASSETS:
Beginning of period................................................................ 74,258,752 75,438,617
-------------- ------------
End of period...................................................................... $ 74,016,720 $ 74,258,752
============== ============
Accumulated net investment income (loss) at end of period.......................... $ (357,802) $ (425,117)
============== ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 4,213,115 4,211,129
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... -- 1,986
-------------- ------------
Common Shares at end of period..................................................... 4,213,115 4,213,115
============== ============
(a) See Note 3 in the Notes to Financial Statements.
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2014 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ 1,906,657
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
Purchases of investments.................................................. (32,947,847)
Sales, maturities and paydowns on investments............................. 36,292,695
Net amortization/accretion of premiums/discounts on investments........... (41,533)
Net realized gain/loss on investments..................................... 868,924
Net change in unrealized appreciation/depreciation on investments......... (559,577)
CHANGES IN ASSETS AND LIABILITIES:
Increase in restricted cash............................................... (58,000)
Decrease in interest receivable........................................... 61,355
Increase in prepaid expenses.............................................. (13,801)
Increase in interest payable on reverse repurchase agreements............. 2,686
Decrease in investment advisory fees payable.............................. (3,022)
Decrease in audit and tax fees payable.................................... (21,810)
Increase in legal fees payable............................................ 30
Decrease in printing fees payable......................................... (2,061)
Decrease in administrative fees payable................................... (202)
Decrease in custodian fees payable........................................ (11,511)
Increase in transfer agent fees payable................................... 1,188
Increase in Trustees' fees and expenses payable........................... 111
Increase in other liabilities payable..................................... 168
-------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 5,474,450
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income........... (2,148,689)
Repurchases of reverse repurchase agreements.............................. (20,605,000)
Reverse repurchase agreements borrowings.................................. 19,571,000
-------------
CASH USED IN FINANCING ACTIVITIES............................................... (3,182,689)
-------------
Increase in cash................................................................ 2,291,761
Cash at beginning of period..................................................... 4,740,738
-------------
CASH AT END OF PERIOD........................................................... $ 7,032,499
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 24,751
=============
See Notes to Financial Statements Page 15
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
4/30/2014 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2013 10/31/2012 10/31/2011 (b) 10/31/2010 (a) 10/31/2009
---------- ---------- ---------- -------------- -------------- ----------
Net asset value, beginning of period........ $ 17.63 $ 17.91 $ 18.43 $ 19.59 $ 19.63 $ 18.03
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 0.53 1.25 1.28 1.69 2.06 1.57
Net realized and unrealized gain (loss)..... (0.08) (0.28) 0.17 (0.82) (0.45) 1.40
-------- -------- -------- -------- -------- --------
Total from investment operations............ 0.45 0.97 1.45 0.87 1.61 2.97
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (0.51) (1.25) (2.03) (2.03) (1.65) (1.37)
-------- -------- -------- -------- -------- --------
Total from distributions.................... (0.51) (1.25) (2.03) (2.03) (1.65) (1.37)
-------- -------- -------- -------- -------- --------
Premium from shares sold in at the market
offering................................ -- -- 0.06 -- -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period.............. $ 17.57 $ 17.63 $ 17.91 $ 18.43 $ 19.59 $ 19.63
======== ======== ======== ======== ======== ========
Market value, end of period................. $ 15.94 $ 15.79 $ 19.00 $ 18.94 $ 20.70 $ 17.91
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (c)... 2.92% 6.04%(d) 8.30% 4.60% 9.01% 18.21%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (c)...... 4.25% (10.47)% 11.86% 1.68% 26.18% 23.91%
======== ======== ======== ======== ======== ========
--------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 74,017 $ 74,259 $ 75,439 $ 75,014 $ 79,495 $ 79,462
Ratio of total expenses to average net
assets.................................. 1.95%(e) 1.96% 2.47% 2.23% 2.00% 2.07%
Ratio of total expenses to average net
assets excluding interest expense....... 1.88%(e) 1.83% 2.20% 2.14% 1.95% 1.99%
Ratio of net investment income (loss) to
average net assets...................... 6.02%(e) 7.01% 7.28% 8.74% 10.50% 9.01%
Portfolio turnover rate..................... 37% 109% 52% 47% 36% 39%
--------------------------------------------------
(a) On September 20, 2010, the Fund's Board of Trustees approved a new
investment management agreement with First Trust Advisors L.P. and a new
investment sub-advisory agreement with Fixed Income Discount Advisory
Company ("FIDAC"), and on December 6, 2010, the Fund's shareholders voted
to approve both agreements.
(b) Effective April 29, 2011, the Fund's Board of Trustees approved Brookfield
Investment Management Inc. ("Brookfield") as the investment sub-advisor to
the Fund, replacing FIDAC. The Fund's shareholders approved the investment
sub-advisory agreement with Brookfield on July 25, 2011.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) The Fund received reimbursements from Brookfield in the amount of $5,310.
The reimbursements from Brookfield represent less than $0.01 per share and
had no effect on the Fund's total return.
(e) Annualized.
Page 16 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (UNAUDITED)
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
trades under the ticker symbol FMY on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing primarily in mortgage-backed securities
that, in the opinion of Brookfield Investment Management Inc. ("Brookfield" or
the "Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value in
accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Market quotations and prices
used to value the Fund's investments are primarily obtained from third party
pricing services. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are valued on the basis of valuations
provided by dealers who make markets in such securities or by an
independent pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate at fair value. These securities generally include, but are not limited
to, restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933, as amended) for which a pricing
service is unable to provide a market price; securities whose trading has been
formally suspended; a security whose market price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the owner might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities,
including, but not limited to, the following:
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (UNAUDITED)
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2014, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
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 ("IO Security"). 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, 2014, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (UNAUDITED)
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements are utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing under which Fund assets are pledged as collateral to secure
a short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back by the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Restricted cash in the amount of $620,000, as shown on the Statement of Assets
and Liabilities, is associated with reverse repurchase agreements outstanding as
of April 30, 2014.
Information for the six months ended April 30, 2014:
Maximum amount outstanding during the period ................. $10,054,000
Average amount outstanding during the period* ................ $9,732,011
Average Common Shares outstanding during the period .......... 4,213,115
Average debt per Common Share outstanding during the period... $2.31
* 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, 2014.
During the six months ended April 30, 2014, the interest rates ranged from 0.38%
to 1.28%, with a weighted average interest rate of 0.56%, on borrowings by the
Fund under reverse repurchase agreements, which had interest expense that
aggregated $27,437.
D. INVERSE FLOATING-RATE SECURITIES:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities, if
any, are identified on the Portfolio of Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an IO Security and all of the
principal is distributed to holders of another type of security known as a
principal-only security. These securities, if any, are identified on the
Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended October 31,
2013, was as follows:
Distributions paid from:
Ordinary income................................. $ 5,244,634
Capital gain.................................... --
Return of capital............................... --
As of October 31, 2013, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ 2,534,578
Undistributed capital gains....................... --
--------------
Total undistributed earnings...................... 2,534,578
Accumulated capital and other losses.............. (4,432,381)
Net unrealized appreciation (depreciation)........ (3,097,775)
--------------
Total accumulated earnings (losses)............... (4,995,578)
Other............................................. --
Paid-in capital................................... 79,254,330
--------------
Net assets........................................ $ 74,258,752
==============
H. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. At October 31, 2013, the Fund had pre-enactment net capital
losses for federal income tax purposes of $4,432,381 expiring as follows:
EXPIRATION DATE AMOUNT
October 31, 2014 $ 1,082,509
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887
During the taxable year ended October 31, 2013, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $1,262,615.
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 2010, 2011,
2012 and 2013 remain open to federal and state audit. As of April 30, 2014,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (UNAUDITED)
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets (the average
daily total asset value of the Fund minus the sum of the Fund's liabilities
other than the principal amount of borrowings or reverse repurchase agreements,
if any). First Trust also provides fund reporting services to the Fund for a
flat annual fee in the amount of $9,250.
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee of 0.50% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
During the year ended October 31, 2013, the Fund received reimbursements from
the Sub-Advisor of $5,310 in connection with a trade error.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust 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,
2014, were $21,614,069 and $8,309,119 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, 2014, were
$27,034,924 and $9,046,769 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:
On May 20, 2014, the Fund declared a dividend of $0.085 per share to Common
Shareholders of record on June 4, 2014, payable June 16, 2014.
On June 19, 2014, the Fund declared a dividend of $0.085 per share to Common
Shareholders of record on July 3, 2014, payable July 15, 2014.
Page 21
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (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.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (UNAUDITED)
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.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund (formerly First Trust Active Dividend
Income Fund), First Trust High Income Long/Short Fund, First Trust Energy
Infrastructure Fund, First Trust MLP and Energy Income Fund and First Trust
Intermediate Duration Preferred & Income Fund was held on April 23, 2014 (the
"Annual Meeting"). At the Annual Meeting, Trustee Robert F. Keith was elected by
the Common Shareholders of the First Trust Mortgage Income Fund as a Class I
Trustee for a three-year term expiring at the Fund's annual meeting of
shareholders in 2017. The number of votes cast in favor of Mr. Keith was
3,668,805, the number of votes against was 46,128 and the number of abstentions
was 498,182. James A. Bowen, Richard E. Erickson, Thomas R. Kadlec and Niel B.
Nielson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Advisor or Sub-Advisor may take
temporary defensive positions.
SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Sub-Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2014 (UNAUDITED)
INTEREST RATE RISK: The Fund may also hold MBS which are Stripped
Mortgage-Backed Securities, IO securities and PO securities. Generally speaking,
when interest rates are falling and prepayment rates are increasing, the value
of a PO security will rise and the value of an IO security will fall.
Conversely, when interest rates are rising and prepayment rates are decreasing,
generally the value of a PO security will fall and the value of an IO security
will rise.
LEVERAGE RISK: Borrowings up to 33-1/3% (or such other percentage as permitted
by law) of Fund assets (including the amount borrowed) less liabilities other
than borrowings may be utilized in the Fund. Leverage may be used for investment
purposes and to meet cash requirements. The leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. Reverse repurchase agreements are used to leverage the
Fund's assets. Reverse repurchase agreements are subject to the risks that the
market value of the Fund's securities sold may decline below the price of the
securities the Fund is obligated to repurchase, and that the securities may not
be returned to the Fund. From time to time the amount of the leverage may be
changed in response to actual or anticipated changes in interest rates or the
value of the Fund's investment portfolio. There can be no assurance that the
leverage strategies will be successful.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are invested at market interest rates that are below the Fund portfolio's
current earnings rate; and (iii) credit risk, which is the risk that a security
in the Fund's portfolio will decline in price or the issuer fails to make
interest payments when due because the issuer of the security experiences a
decline in its financial status.
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/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2014
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2014
-----------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 20, 2014
-----------------
* Print the name and title of each signing officer under his or her signature.