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
-----------
First Trust Mortgage Income Fund
------------------------------------------------------
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
------------------------------------------------------
(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
------------------------------------------------------
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
--------------
Date of fiscal year end: October 31
------------
Date of reporting period: April 30, 2017
------------------
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
MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2017
FIRST TRUST
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2017
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 4
Statement of Assets and Liabilities......................................... 11
Statement of Operations..................................................... 12
Statements of Changes in Net Assets......................................... 13
Statement of Cash Flows..................................................... 14
Financial Highlights........................................................ 15
Notes to Financial Statements............................................... 16
Additional Information...................................................... 22
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its 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 its respective
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may periodically provide additional information on Fund performance
on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of the relevant market
benchmark.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2017
Dear Shareholders:
Thank you for your investment in the First Trust Mortgage Income Fund (the
"Fund").
The year 2016 was a historic year all over the world. Many will remember some of
the events that occurred during the year: from the Brexit vote in the UK to
leave the European Union, to the results of the U.S. Presidential Election which
seemed unlikely at the beginning of 2016, to the first World Series Championship
for the Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment.
Additionally, First Trust has compiled the Fund's financial statements for you
to review. We encourage you to read this report and discuss it with your
financial advisor.
On November 8, 2016, Donald J. Trump was elected to become the 45th president in
our country's history. As I write this, he has just hit his 100th day in office,
always a historic marker for pundits, politicians, and voters. While no one has
a crystal ball and the ability to predict how the Trump administration will
shape the United States (and the world), there is no doubt that his populist
message resonated for many Americans. His message of improving lives for the
"average" American, while reducing the size and scope of the federal government,
also won him millions of votes. Many of his supporters believe that with his
background in business, Trump will make policy changes that will continue to
grow the economy and spur stock markets even higher. Many analysts predicted the
Dow Jones Industrial Average would hit a new benchmark, 20,000, in the first
days of the New Year. It took until January 25, 2017, but the Dow finally traded
over 20,000 on that day. On March 1, 2017, the Dow went past 21,000, a new
record. As with all change and a new administration, only time will tell where
our economy and the markets will go.
As of December 31, 2016, the S&P 500(R) Index (the "Index") was up 11.96% for
the year, on a total return basis, as measured by Bloomberg. As of April 30,
2017, the Index was up 7.16% (calendar year-to-date). The current bull market
(measuring from March 9, 2009 through April 28, 2017) is the second longest in
history, but lags the longest bull market by 4.17 years, according to Bespoke
Investment Group. We remain bullish on the economy, but continue to have a
long-term perspective. We believe investors should think long-term as well,
since no one can predict volatility and the inevitable ups and downs that occur
in the market.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue our relentless focus
on bringing the types of investments that we believe could help you reach your
financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MORTGAGE INCOME FUND (FMY)
"AT A GLANCE"
AS OF APRIL 30, 2017 (UNAUDITED)
------------------------------------------------------------------------------
FUND STATISTICS
------------------------------------------------------------------------------
Symbol on New York Stock Exchange FMY
Common Share Price $14.07
Common Share Net Asset Value ("NAV") $15.49
Premium (Discount) to NAV (9.17)%
Net Assets Applicable to Common Shares $65,250,162
Current Monthly Distribution per Common Share (1) $0.065
Current Annualized Distribution per Common Share $0.780
Current Distribution Rate on Common Share Price (2) 5.54%
Current Distribution Rate on NAV (2) 5.04%
------------------------------------------------------------------------------
--------------------------------------------------------
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
--------------------------------------------------------
Common Share Price NAV
4/16 14.49 15.57
14.20 15.52
14.39 15.50
14.53 15.51
5/16 14.46 15.53
14.40 15.47
14.40 15.47
14.36 15.47
6/16 14.37 15.48
14.40 15.45
14.61 15.44
14.57 15.49
14.54 15.49
7/16 14.70 15.50
14.58 15.47
14.56 15.45
14.60 15.47
8/16 14.51 15.48
14.56 15.44
14.50 15.44
14.54 15.45
14.46 15.44
9/16 14.40 15.50
14.41 15.48
14.28 15.49
14.10 15.51
10/16 14.00 15.54
13.94 15.50
13.76 15.53
13.76 15.43
11/16 14.00 15.51
14.07 15.42
14.06 15.45
13.97 15.43
14.06 15.44
12/16 14.06 15.44
14.08 15.39
14.07 15.39
14.02 15.39
1/17 14.09 15.44
14.20 15.45
14.08 15.48
14.17 15.48
2/17 14.10 15.51
14.07 15.47
14.06 15.46
14.07 15.47
14.16 15.48
3/17 14.06 15.49
14.05 15.48
14.10 15.48
14.09 15.48
4/17 14.07 15.49
------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return
----------------------------------------------------
6 Months Ended 1 Year Ended 5 Years Ended 10 Years Ended Inception (5/25/05)
4/30/17 4/30/17 4/30/17 4/30/17 to 4/30/17
FUND PERFORMANCE (3)
NAV 2.54% 5.29% 4.42% 6.35% 5.92%
Market Value 3.32% 2.76% 0.11% 6.30% 4.67%
INDEX PERFORMANCE
Bloomberg Barclays U.S. Mortgage Backed
Securities (MBS) Index -0.61% 0.66% 2.04% 4.18% 4.21%
------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------
PORTFOLIO CHARACTERISTICS
--------------------------------------------------------
Weighted Average Effective Duration 1.67
Weighted Average Effective Maturity 4.27
--------------------------------------------------------
--------------------------------------------------------
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
--------------------------------------------------------
Mortgage-Backed Securities 65.44%
U.S. Government Agency MBS 28.13
Asset-Backed Securities 1.75
Cash & Cash Equivalents 4.68
--------------------------------------------------------
Total 100.00%
=======
--------------------------------------------------------
% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
--------------------------------------------------------
Government 28.27%
AAA 0.21
AA+ 12.72
AA 3.20
AA- 4.80
A+ 10.96
A 0.92
A- 2.09
BBB+ 0.06
BBB 2.08
BBB- 0.96
BB+ 0.91
BB 0.08
BB- 2.42
B+ 2.06
B 1.14
B- 0.49
CCC 8.97
CC 0.93
D 2.63
NR 9.42
Cash & Cash Equivalents 4.68
--------------------------------------------------------
Total 100.00%
=======
(1) Most recent distribution paid or declared through 4/30/2017. 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 4/30/2017. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
(4) The ratings are by Standard & Poor's. A credit rating is an assessment
provided by a nationally recognized statistical rating organization
(NRSRO), of the creditworthiness of an issuer with respect to debt
obligations. Ratings are measured on a scale that generally ranges from
AAA (highest) to D (lowest). Investment grade is defined as those issuers
that have a long-term credit rating of BBB- or higher. Sub-investment
grade ratings are those rated BB+ or lower. "NR" indicates no rating. The
credit ratings shown relate to the credit worthiness of the issuers of the
underlying securities in the fund, and not to the fund or its shares. U.S.
Treasury, U.S. Agency and U.S. Agency mortgage-backed securities appear
under "Government". Credit ratings are subject to change.
NR Not Rated
Page 2
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor which
offers customized portfolio management using its structured, quantitative
approach to security selection. As of April 30, 2017, First Trust managed or
supervised $105.533 billion in assets.
PORTFOLIO MANAGEMENT TEAM
JEREMIAH CHARLES - VICE PRESIDENT, PORTFOLIO MANAGER
JIM SNYDER - VICE PRESIDENT, PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST MORTGAGE INCOME FUND
The First Trust Mortgage Income Fund's ("FMY" or the "Fund") primary investment
objective is to seek a high level of current income. As a secondary objective,
the Fund seeks to preserve capital. The Fund will pursue 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 investment 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
During the six-month period ended April 30, 2017, the U.S. bond market
experienced declines and higher rates across the maturity spectrum, led by the
5-year Treasury, which saw its yield increase by 51 basis points ("bps"). The
long end outperformed the 5-year Treasury, with the yield curve bear flattening
of 14bps. Fixed-rate Agency MBS spreads widened approximately 9bps over the
six-month period, to close at 24bps Treasury option-adjusted spread ("OAS"), as
measured using the BofA Merrill Lynch US Mortgage Backed Index calculations.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2017, the Fund returned 2.54% based on
net asset value ("NAV") and 3.32% on market price. During the same time period,
the Fund's benchmark, the Bloomberg Barclays U.S. MBS Index returned -0.61%. The
Fund outperformed the index by 3.15% net of fees for the period.
Over the six-month time period, the Fund maintained a very defensive duration in
the portfolio relative to the benchmark. This was a key driver of outperformance
over the six-month period as the broader U.S. bond market experienced
significant declines. An additional key contributor to outperformance was the
legacy Non-Agency Residential MBS sector. The portfolio management team
increased the overall allocation to the sector, which then experienced spread
tightening. The team also began to deploy significant excess cash reserves into
more stable, defensive Agency MBS cash flows which helped to generate interest
income and stabilize the overall duration distribution across the yield curve
profile of the strategy.
HISTORICAL EARNINGS
Income is recognized for financial statement purposes in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). Over the past two fiscal years ended October 31, 2015 and 2016, and the
semi-annual period ended April 30, 2017, U.S. GAAP basis gross income has been
lower than in previous fiscal years, as it has been impacted by yield
adjustments on certain legacy interest only securities due to changes in
prepayments and estimated future cash flows. Additionally, the U.S. GAAP basis
yield adjustments during the periods referenced had no impact on the Fund's net
asset value, its total return, or the tax characterization of its distributions.
For a per share breakdown of income and distributions for the past five and a
half fiscal years, please see the Financial Highlights on page 15 of this
semi-annual report.
MARKET OUTLOOK
The tail end of 2016 saw the Federal Reserve ("Fed") raise the Federal Funds
overnight target rate by 25bps and then another 25bps at the March 2017 meeting.
Additionally, the broader U.S. fixed-income markets saw significant sell-offs in
the immediate aftermath of the U.S. presidential election, with the new
administration promising deregulation, tax cuts, and infrastructure spending.
After the second Fed hike in March, the market began to rally on the back of the
markets wavering confidence in the new administration's ability to push
meaningful pro-growth agenda through. We do expect that the Fed will continue to
increase the overnight funding target rate with another two hikes for the
balance of 2017, and then address the deleveraging of the $4.5 trillion Fed
balance sheet. We believe the deleveraging will increase volatility in the U.S.
markets, put upward pressure on yields and lead to wider spreads across all U.S.
fixed-income markets.
Given our views and outlook on the markets, we plan to continue to manage the
Fund defensively versus the Fund's benchmark from a duration standpoint, while
maintaining our ongoing strategy of barbelling our duration across the yield
curve, with higher yielding, spread assets allocated primarily to defensive
short maturities. We continue to be bearish on the benchmark, and as such,
anticipate maintaining an underweight on the MBS basis.
Page 3
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES - 65.2%
COLLATERALIZED MORTGAGE OBLIGATIONS - 54.1%
Accredited Mortgage Loan Trust
$ 403,267 Series 2003-2, Class A1............................. 4.98% 10/01/33 $ 412,446
ACE Securities Corp. Home Equity Loan Trust
993,918 Series 2006-ASAP6, Class A2D (a).................... 1.21% 12/25/36 518,434
Banc of America Funding Corp.
146,940 Series 2008-R2, Class 1A4 (b)....................... 6.00% 09/01/37 152,880
Banc of America Mortgage Trust
53,533 Series 2002-L, Class 1A1 (a)........................ 2.52% 12/01/32 48,757
226,679 Series 2005-A, Class 2A1 (a)........................ 3.52% 02/01/35 225,851
Chase Mortgage Finance Trust
260,662 Series 2007-A1, Class 1A3 (a)....................... 3.36% 02/01/37 258,403
Citigroup Mortgage Loan Trust
364,573 Series 2005-6, Class A1 (a)......................... 2.69% 09/01/35 376,715
954,788 Series 2012-7, Class 10A2 (a) (b)................... 3.24% 09/01/36 889,988
Countrywide Asset-Backed Certificates
138,070 Series 2006-S8, Class A6............................ 5.51% 04/01/36 137,130
Countrywide Home Loan Mortgage Pass-Through Trust
527,141 Series 2003-46, Class 2A1 (a)....................... 3.30% 01/01/34 521,980
358,807 Series 2006-21, Class A8............................ 5.75% 02/01/37 310,300
604,962 Series 2006-HYB5, Class 3A1A (a).................... 3.20% 09/01/36 489,318
Credit Suisse First Boston Mortgage Securities Corp.
380,262 Series 2004-AR2, Class 1A1 (a)...................... 3.40% 03/01/34 373,987
662,522 Series 2004-AR8, Class 6A1 (a)...................... 3.08% 09/01/34 664,956
207,619 Series 2005-5, Class 3A2 (a)........................ 1.29% 07/25/35 199,709
Deutsche ALT-A Securities Inc Mortgage Loan Trust
38,172 Series 2003-3, Class 3A1............................ 5.00% 10/01/18 38,501
DSLA Mortgage Loan Trust
819,254 Series 2004-AR3, Class 2A2A (a)..................... 1.36% 07/19/44 797,147
888,522 Series 2007-AR1, Class 2A1A (a)..................... 1.13% 04/19/47 781,030
GMAC Mortgage Corporation Loan Trust
150,547 Series 2004-AR1, Class 22A (a)...................... 3.75% 06/01/34 147,230
GSR Mortgage Loan Trust
17,690 Series 2003-10, Class 1A12 (a)...................... 2.93% 10/01/33 17,545
207,455 Series 2005-AR1, Class 4A1 (a)...................... 2.79% 01/01/35 197,799
Harborview Mortgage Loan Trust
487,548 Series 2004-6, Class 3A1 (a)........................ 3.53% 08/01/34 469,813
Home Equity Asset Trust
65,000 Series 2005-3, Class M4 (a)......................... 1.63% 08/25/35 62,009
520,000 Series 2005-9, Class M1 (a)......................... 1.40% 04/25/36 493,014
Impac CMB Trust
325,744 Series 2004-6, Class 1A2 (a)........................ 1.77% 10/25/34 313,633
Irwin Home Equity Loan Trust
53,025 Series 2006-3, Class 2A2 (b)........................ 5.83% 09/01/37 53,090
IXIS Real Estate Capital Trust
1,189,632 Series 2007-HE1, Class A3 (a)....................... 1.15% 05/25/37 427,940
JP Morgan Mortgage Trust
1,355,448 Series 2005-ALT1, Class 4A1 (a)..................... 3.27% 10/01/35 1,270,739
1,289,997 Series 2006-A2, Class 4A1 (a)....................... 3.18% 08/01/34 1,296,313
Page 4 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
$ 325,213 Series 2006-A2, Class 5A3 (a)....................... 3.12% 11/01/33 $ 330,279
JP Morgan Re-REMIC
320,386 Series 2009-7, Class 12A1 (b)....................... 6.25% 01/03/37 326,357
MASTR Alternative Loan Trust
3,975,853 Series 2006-2, Class 2A3 (a)........................ 1.34% 03/25/36 823,191
MASTR Asset Backed Securities Trust
970,626 Series 2006-HE5, Class A3 (a)....................... 1.15% 11/25/36 643,889
1,446,594 Series 2006-NC2, Class A3 (a)....................... 1.10% 08/25/36 786,355
660,301 Series 2006-NC2, Class A5 (a)....................... 1.23% 08/25/36 367,477
MASTR Asset Securitization Trust
24,005 Series 2003-11, Class 5A2........................... 5.25% 12/01/23 23,683
112,786 Series 2003-11, Class 6A16.......................... 5.25% 12/01/33 114,458
Mellon Residential Funding Corp.
Mortgage Pass-Through Trust
382,836 Series 2001-TBC1, Class A1 (a)...................... 1.69% 11/15/31 359,763
390,498 Series 2002-TBC2, Class A (a)....................... 1.85% 08/15/32 373,867
Meritage Mortgage Loan Trust
335,081 Series 2004-2, Class M3 (a)......................... 1.97% 01/25/35 322,168
Morgan Stanley Mortgage Loan Trust
856,746 Series 2004-7AR, Class 2A6 (a)...................... 3.22% 09/01/34 871,683
MortgageIT Trust
346,414 Series 2005-2, Class 2A (a)......................... 2.63% 05/01/35 339,074
Nomura Asset Acceptance Corporation
718,304 Series 2004-AR4, Class M1 (a)....................... 1.59% 12/25/34 672,381
Nomura Resecuritization Trust
1,263,000 Series 2015-6R, Class 2A4 (a) (b)................... 6.97% 01/02/37 1,033,008
Provident Funding Mortgage Loan Trust
118,483 Series 2004-1, Class 1A1 (a)........................ 3.23% 04/01/34 118,190
105,901 Series 2005-1, Class 1A1 (a)........................ 3.42% 05/01/35 105,893
Residential Accredit Loans, Inc.
173,087 Series 2006-QO1, Class 2A1 (a)...................... 1.26% 02/25/46 119,322
2,129,881 Series 2006-QS6, Class 1AV, IO (a).................. 0.75% 06/01/36 62,989
Residential Asset Securitization Trust
51,079 Series 2004-A3, Class A7............................ 5.25% 06/01/34 52,629
Saxon Asset Securities Trust
1,032,472 Series 2007-2, Class A2D (a)........................ 1.29% 05/25/47 781,586
Springleaf Mortgage Loan Trust
138,421 Series 2013-3A, Class A (b)......................... 1.87% 09/01/57 138,650
850,000 Series 2013-3A, Class M3 (b)........................ 5.00% 09/01/57 850,201
Structured Adjustable Rate Mortgage Loan Trust
500,681 Series 2004-2, Class 4A2 (a)........................ 3.32% 03/01/34 500,488
Structured Asset Securities Corp. Mortgage
Pass-Through Certificates
53,839 Series 2001-SB1, Class A2........................... 3.38% 08/01/31 53,402
Thornburg Mortgage Securities Trust
426,145 Series 2003-4, Class A1 (a)......................... 1.63% 09/25/43 412,034
Towd Point Mortgage Trust
715,756 Series 2015-2, Class 2A1 (a) (b).................... 3.75% 11/01/57 735,315
See Notes to Financial Statements Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wachovia Mortgage Loan Trust, LLC
$ 385,845 Series 2006-A, Class 3A1 (a)........................ 3.08% 05/01/36 $ 368,836
WaMu Mortgage Pass-Through Certificates
212,074 Series 2003-AR5, Class A7 (a)....................... 2.87% 06/01/33 214,547
570,714 Series 2004-AR1, Class A (a)........................ 3.14% 03/01/34 579,398
641,273 Series 2004-AR10, Class A1B (a)..................... 1.41% 07/25/44 618,350
496,944 Series 2004-AR13, Class A1A (a)..................... 1.71% 11/25/34 478,088
98,656 Series 2004-AR3, Class A2 (a)....................... 2.97% 06/01/34 99,821
661,666 Series 2005-AR1, Class A1A (a)...................... 1.63% 01/25/45 652,581
954,847 Series 2005-AR11, Class A1A (a)..................... 1.31% 08/25/45 940,082
867,863 Series 2005-AR6, Class 2A1A (a)..................... 1.22% 04/25/45 824,253
386,505 Series 2005-AR9, Class A1A (a)...................... 1.63% 07/25/45 377,988
637,236 Series 2006-AR2, Class 1A1 (a)...................... 2.91% 03/01/36 603,457
Washington Mutual Alternative Mortgage
Pass-Through Certificates
31,410 Series 2007-5, Class A11 (c)........................ 33.54% 06/25/37 64,203
Washington Mutual MSC Mortgage
Pass-Through Certificates
425,002 Series 2004-RA1, Class 2A........................... 7.00% 03/01/34 465,510
Wells Fargo Mortgage Backed Securities Trust
539,357 Series 2003-H, Class A1 (a)......................... 3.02% 09/01/33 545,716
560,851 Series 2004-A, Class A1 (a)......................... 3.11% 02/01/34 565,907
58,386 Series 2004-EE, Class 3A1 (a)....................... 3.25% 12/01/34 60,483
1,070,522 Series 2004-R, Class 1A1 (a)........................ 3.03% 09/01/34 1,080,972
274,945 Series 2004-S, Class A1 (a)......................... 3.05% 09/01/34 280,006
609,557 Series 2004-Y, Class 1A2 (a)........................ 3.00% 11/01/34 604,198
7,581 Series 2004-Z, Class 2A1 (a)........................ 3.00% 12/01/34 7,672
31,932 Series 2004-Z, Class 2A2 (a)........................ 3.00% 12/01/34 32,315
274,148 Series 2005-AR10, Class 2A17 (a).................... 3.09% 06/01/35 279,533
571,929 Series 2005-AR16, Class 1A1 (a)..................... 3.23% 08/01/33 585,939
256,693 Series 2005-AR3, Class 2A1 (a)...................... 3.12% 03/01/35 258,610
431,825 Series 2005-AR8, Class 1A1 (a)...................... 3.14% 06/01/35 438,127
491,658 Series 2006-13, Class A5............................ 6.00% 10/01/36 487,583
176,670 Series 2007-16, Class 1A1........................... 6.00% 12/04/37 185,139
248,124 Series 2007-2, Class 1A13........................... 6.00% 03/01/37 246,501
60,911 Series 2007-8, Class 2A2............................ 6.00% 07/01/37 60,873
---------------
35,271,677
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 11.1%
Banc of America Commercial Mortgage Trust
555,211 Series 2007-3, Class AJ, STRIP (a).................. 5.85% 06/01/49 559,101
Bayview Commercial Asset Trust
505,670 Series 2004-2, Class A (a) (b)...................... 1.64% 08/25/34 469,489
BXHTL Mortgage Trust
800,000 Series 2015-JWRZ, Class B (a) (d)................... 2.69% 05/15/29 799,668
COMM Mortgage Trust
150,000 Series 2007-C9, Class AJ............................ 5.65% 12/01/49 150,830
Greenwich Capital Commercial Funding Corp.
700,000 Series 2007-GG11, Class AJ (a)...................... 6.24% 12/01/49 711,351
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
Hudsons Bay Simon JV Trust
$ 510,000 Series 2015-HBFL, Class DFL (a) (b)................. 4.64% 08/05/34 $ 507,970
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (b).................... 2.69% 11/15/29 1,042,348
UBS-Barclays Commercial Mortgage Trust
14,789,360 Series 2013-C5, Class XA, IO (a) (b)................ 1.15% 03/01/46 683,110
Wachovia Bank Commercial Mortgage Trust
659,091 Series 2007-C30, Class AJ........................... 5.41% 12/01/43 668,154
650,000 Series 2007-C33, Class AJ, STRIP (a)................ 6.18% 02/01/51 662,592
Waldorf Astoria Boca Raton Trust
1,000,000 Series 2016-BOCA, Class E (a) (d)................... 5.34% 06/15/29 1,003,768
---------------
7,258,381
---------------
TOTAL MORTGAGE-BACKED SECURITIES................................................... 42,530,058
(Cost $42,722,106) ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 28.0%
COLLATERALIZED MORTGAGE OBLIGATIONS - 17.3%
Federal Home Loan Mortgage Corp.
32,118 Series 1007, Class H (c)............................ 19.54% 10/15/20 38,578
47,533 Series 1394, Class ID (c)........................... 9.57% 10/15/22 55,955
46,602 Series 2303, Class SW (c)........................... 10.00% 03/01/24 10,203
455,276 Series 2439, Class XI, IO (c)....................... 6.50% 03/01/32 101,565
1,059,331 Series 2807, Class SB, IO (c)....................... 6.46% 11/15/33 214,392
2,178,913 Series 2975, Class SJ, IO (c)....................... 5.66% 05/15/35 346,758
13,874 Series 3195, Class SX (c)........................... 39.69% 07/15/36 52,930
192,082 Series 3410, Class HC............................... 5.50% 02/01/38 204,697
458,172 Series 3619, Class EI, IO........................... 4.50% 05/01/24 8,344
325,906 Series 3692, Class PS, IO (c)....................... 5.61% 05/15/38 11,184
1,684,230 Series 3726, Class KI, IO........................... 3.50% 04/01/25 91,384
2,354,340 Series 3784, Class BI, IO........................... 3.50% 01/01/21 101,048
250,000 Series 3797, Class KB............................... 4.50% 01/01/41 282,436
1,401,404 Series 3870, Class WS, IO (c)....................... 5.61% 06/15/31 168,154
504,628 Series 3898, Class NI, IO........................... 5.00% 07/01/40 32,076
103,920 Series 4021, Class IP, IO........................... 3.00% 03/01/27 9,359
1,229,261 Series 4206, Class IA, IO........................... 3.00% 03/01/33 176,697
510,528 Series 4615, Class GT (c)........................... 4.00% 10/15/42 484,029
Federal National Mortgage Association
152,274 Series 2003-15, Class MS, IO (c).................... 7.01% 03/25/33 35,347
28,077 Series 2004-74, Class SW (c)........................ 13.51% 11/25/31 38,613
500,000 Series 2004-W10, Class A6........................... 5.75% 08/01/34 571,694
340,369 Series 2005-122, Class SN (c)....................... 24.64% 01/25/36 341,737
171,347 Series 2006-5, Class 3A2 (a)........................ 3.10% 05/01/35 180,731
210,138 Series 2007-30, Class ZM............................ 4.25% 04/01/37 232,878
266,425 Series 2008-17, Class BE............................ 5.50% 10/01/37 325,086
8,122 Series 2008-50, Class AI, IO........................ 5.50% 06/01/23 369
353,000 Series 2009-28, Class HX............................ 5.00% 05/01/39 410,369
159,029 Series 2009-37, Class NZ............................ 5.71% 02/01/37 202,833
1,587,094 Series 2010-10, Class NI, IO........................ 5.00% 01/01/39 55,651
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 2,330,112 Series 2010-103, Class ID, IO....................... 5.00% 09/01/40 $ 325,117
1,289,486 Series 2010-104, Class CI, IO....................... 4.00% 09/01/20 52,767
3,336,191 Series 2010-139, Class KI, IO....................... 1.09% 12/01/40 141,797
67,400 Series 2010-142, Class PS, IO (c)................... 5.06% 05/25/40 2,117
412,597 Series 2010-145, Class TI, IO....................... 3.50% 12/01/20 18,467
567,042 Series 2010-40, Class MI, IO........................ 4.50% 08/01/24 7,130
269,541 Series 2011-5, Class IK, IO......................... 8.00% 02/01/21 25,132
3,499,745 Series 2011-66, Class QI, IO........................ 3.50% 07/01/21 176,220
224,830 Series 2012-111, Class B............................ 7.00% 10/01/42 265,363
2,528,413 Series 2012-112, Class BI, IO....................... 3.00% 09/01/31 262,981
2,138,472 Series 2012-125, Class MI, IO....................... 3.50% 11/01/42 430,469
2,866,510 Series 2013-32, Class IG, IO........................ 3.50% 04/01/33 412,569
671,952 Series 2013-51, Class PI, IO........................ 3.00% 11/01/32 79,952
1,589,029 Series 2015-20, Class ES, IO (c).................... 5.16% 04/25/45 281,992
2,179,765 Series 2015-76, Class BI, IO........................ 4.00% 10/01/39 266,773
5,513,845 Series 2015-97, Class AI, IO........................ 4.00% 09/01/41 923,480
168,142 Series 2016-74, Class LI, IO........................ 3.50% 09/01/46 58,259
Federal National Mortgage Association, STRIP
109,398 Series 355, Class 18, IO............................ 7.50% 11/01/33 29,276
1,494,574 Series 406, Class 6, IO............................. 4.00% 01/01/41 283,109
Government National Mortgage Association
174,666 Series 2004-95, Class QZ............................ 4.50% 11/01/34 191,214
226,871 Series 2005-33, Class AY............................ 5.50% 04/01/35 257,231
128,608 Series 2005-68, Class DP (c)........................ 14.04% 06/17/35 160,113
180,223 Series 2005-68, Class KI, IO (c).................... 5.31% 09/20/35 29,750
149,241 Series 2007-50, Class AI, IO (c).................... 5.78% 08/20/37 27,038
220,000 Series 2008-32, Class JD............................ 5.50% 04/01/38 265,144
410,859 Series 2008-73, Class SK, IO (c).................... 5.75% 08/20/38 68,608
233,933 Series 2009-65, Class NJ, IO........................ 5.50% 07/01/39 16,600
111,623 Series 2009-79, Class PZ............................ 6.00% 09/01/39 156,263
1,256,474 Series 2010-115, Class IQ, IO....................... 4.50% 11/01/38 70,566
715,000 Series 2010-61, Class KE............................ 5.00% 05/01/40 857,223
1,205,261 Series 2011-131, Class EI, IO....................... 4.50% 08/01/39 50,546
69,202 Series 2016-139, Class MZ........................... 1.50% 07/01/45 44,220
Government National Mortgage Association, IO
480,464 Series 2007-68, Class PI (c)........................ 5.66% 11/20/37 89,249
1,817,262 Series 2009-100, Class SL (c)....................... 5.51% 05/16/39 151,911
---------------
11,263,743
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 0.3%
Government National Mortgage Association
218,000 Series 2013-57, Class D............................. 2.35% 06/01/46 192,214
---------------
192,214
---------------
PASS-THROUGH SECURITIES - 10.4%
Federal Home Loan Mortgage Corp.
957,363 Gold Pool........................................... 3.00% 08/01/46 956,989
674,622 Pool A94738......................................... 4.50% 11/01/40 728,056
549,580 Pool K36017......................................... 5.00% 09/01/47 591,192
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association
$ 1,116,531 Pool 831145......................................... 6.00% 12/01/35 $ 1,275,358
1,131,040 Pool 843971......................................... 6.00% 11/01/35 1,312,634
971,717 Pool AS9194......................................... 4.50% 12/01/44 1,062,557
894,403 Pool AT2720......................................... 3.00% 05/01/43 898,693
---------------
6,825,479
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES............................ 18,281,436
(Cost $20,118,171) ---------------
ASSET-BACKED SECURITIES - 1.7%
Green Tree Financial Corp.
1,409 Series 1997-2, Class A6............................. 7.24% 06/15/28 1,412
16,296 Series 1997-3, Class A6............................. 7.32% 03/15/28 16,741
7,977 Series 1997-7, Class A6............................. 6.76% 07/15/28 8,051
109,875 Series 1998-4, Class A7 (a)......................... 6.87% 04/01/30 118,196
Mid-State Capital Corp. Trust
456,056 Series 2004-1, Class M1............................. 6.50% 08/01/37 493,942
463,420 Series 2005-1, Class A.............................. 5.75% 01/01/40 499,222
---------------
TOTAL ASSET-BACKED SECURITIES...................................................... 1,137,564
(Cost $1,130,969) ---------------
TOTAL INVESTMENTS - 94.9%.......................................................... 61,949,058
(Cost $63,971,246) (e)
NET OTHER ASSETS AND LIABILITIES - 5.1%............................................ 3,301,104
---------------
NET ASSETS - 100.0%................................................................ $ 65,250,162
===============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2017.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), 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 First Trust Advisors L.P.
("First Trust" or the "Advisor"), the Fund's advisor. 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,
2017, securities noted as such amounted to $6,882,406, or 10.55% of net
assets.
(c) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at April 30, 2017.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the 1933 Act, and
may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2C - Restricted Securities in the
Notes to Financial Statements).
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $1,723,234 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $3,745,422.
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2017 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2017 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
4/30/2017 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Mortgage-Backed Securities......................... $ 42,530,058 $ -- $ 42,530,058 $ --
U.S. Government Agency Mortgage-Backed
Securities...................................... 18,281,436 -- 18,281,436 --
Asset-Backed Securities............................ 1,137,564 -- 1,137,564 --
------------ ------------ ------------- ------------
Total Investments.................................. 61,949,058 -- 61,949,058 --
Futures Contracts.................................. 9,031 9,031 -- --
------------ ------------ ------------- ------------
Total.............................................. $ 61,958,089 $ 9,031 $ 61,949,058 $ --
============ ============ ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2017 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Futures Contracts................................. $ (4,406) $ (4,406) $ -- $ --
============ ============ ============= ============
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, 2017.
OPEN FUTURES CONTRACTS AT APRIL 30, 2017 (see Note 2D - Futures Contracts in the
Notes to Financial Statements):
UNREALIZED
NUMBER OF EXPIRATION NOTIONAL APPRECIATION /
CONTRACTS MONTH VALUE (DEPRECIATION)
----------- ----------- ----------- --------------
LONG FUTURES CONTRACTS
U.S. Treasury Long Bond Futures 2 Jun-2017 $ 305,938 $ 9,031
SHORT FUTURES CONTRACTS
U.S. Treasury 5-Year Notes 8 Jun-2017 (947,250) (4,406)
----------- --------------
$ (641,312) $ 4,625
=========== ==============
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2017 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $63,971,246).......................................................................... $ 61,949,058
Cash........................................................................................... 3,042,528
Restricted cash segregated as collateral for open futures contracts............................ 50,000
Receivables:
Interest.................................................................................... 303,769
Variation margin............................................................................ 6,457
Prepaid expenses............................................................................... 18,815
------------
Total Assets................................................................................ 65,370,627
------------
LIABILITIES:
Payables:
Investment advisory fees.................................................................... 45,550
Audit and tax fees.......................................................................... 29,198
Transfer agent fees......................................................................... 21,607
Administrative fees......................................................................... 9,739
Printing fees............................................................................... 8,200
Custodian fees.............................................................................. 1,745
Trustees' fees and expenses................................................................. 1,470
Legal fees.................................................................................. 772
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 1,413
------------
Total Liabilities........................................................................... 120,465
------------
NET ASSETS..................................................................................... $ 65,250,162
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 73,952,951
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... (1,735,956)
Accumulated net realized gain (loss) on investments and futures................................ (4,991,401)
Net unrealized appreciation (depreciation) on investments and futures.......................... (2,017,563)
------------
NET ASSETS..................................................................................... $ 65,250,162
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 15.49
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 417,642
------------
Total investment income..................................................................... 417,642
------------
EXPENSES:
Investment advisory fees....................................................................... 274,476
Audit and tax fees............................................................................. 24,923
Administrative fees............................................................................ 24,467
Transfer agent fees............................................................................ 20,169
Printing fees.................................................................................. 18,131
Trustees' fees and expenses.................................................................... 8,451
Custodian fees................................................................................. 6,885
Financial reporting fees....................................................................... 4,624
Legal fees..................................................................................... 1,780
Other.......................................................................................... 11,106
------------
Total expenses.............................................................................. 395,012
------------
NET INVESTMENT INCOME.......................................................................... 22,630
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 29
Futures..................................................................................... 1,832
------------
Net realized gain (loss)....................................................................... 1,861
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 1,427,323
Futures..................................................................................... 4,625
------------
Net change in unrealized appreciation (depreciation)........................................... 1,431,948
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 1,433,809
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 1,456,439
============
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2017 ENDED
(UNAUDITED) 10/31/2016
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 22,630 $ (72,393)
Net realized gain (loss)............................................................ 1,861 416,597
Net change in unrealized appreciation (depreciation)................................ 1,431,948 1,287,288
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... 1,456,439 1,631,492
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (1,643,115) (2,266,839)
Return of capital................................................................... -- (1,567,096)
-------------- --------------
Total distributions to shareholders................................................. (1,643,115) (3,833,935)
-------------- --------------
Total increase (decrease) in net assets............................................. (186,676) (2,202,443)
NET ASSETS:
Beginning of period................................................................. 65,436,838 67,639,281
-------------- --------------
End of period....................................................................... $ 65,250,162 $ 65,436,838
============== ==============
Accumulated net investment income (loss) at end of period........................... $ (1,735,956) $ (115,471)
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at end of period...................................................... 4,213,115 4,213,115
============== ==============
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2017 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations..................... $ 1,456,439
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
Purchases of investments...................................................... (11,674,651)
Sales, maturities and paydowns on investments................................. 8,615,086
Net amortization/accretion of premiums/discounts on investments............... 1,780,782
Net realized gain/loss on investments......................................... (29)
Net change in unrealized appreciation/depreciation on investments............. (1,427,323)
Decrease in restricted cash for reverse repurchase agreements................. 788,066
Increase in restricted cash segregated as collateral for open futures
contracts.................................................................. (50,000)
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable............................................... (25,389)
Increase in variation margin receivable....................................... (6,457)
Increase in prepaid expenses.................................................. (18,815)
Decrease in investment advisory fees payable.................................. (1,432)
Decrease in audit and tax fees payable........................................ (21,002)
Decrease in legal fees payable................................................ (51)
Decrease in printing fees payable............................................. (2,743)
Increase in administrative fees payable....................................... 1,797
Decrease in custodian fees payable............................................ (5,374)
Increase in transfer agent fees payable....................................... 14,301
Increase in Trustees' fees and expenses payable............................... 35
Decrease in financial reporting fees payable.................................. (2)
Decrease in other liabilities................................................. (120)
--------------
CASH USED IN OPERATING ACTIVITIES................................................... $ (576,882)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............... (1,643,115)
--------------
CASH USED IN FINANCING ACTIVITIES................................................... (1,643,115)
--------------
Decrease in cash.................................................................... (2,219,997)
Cash at beginning of period......................................................... 5,262,525
--------------
CASH AT END OF PERIOD............................................................... $ 3,042,528
==============
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, 2017 -----------------------------------------------------------------------
(UNAUDITED) 2016 (a) 2015 2014 2013 2012
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period... $ 15.53 $ 16.05 $ 17.02 $ 17.63 $ 17.91 $ 18.43
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)........... 0.01 (0.02) 1.02 1.02 1.25 1.28
Net realized and unrealized gain
(loss).............................. 0.34 0.41 (0.97) (0.61) (0.28) 0.17
------- ------- ------- ------- ------- -------
Total from investment operations....... 0.35 0.39 0.05 0.41 0.97 1.45
------- ------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.................. (0.39) (0.54) (0.47) (1.02) (1.25) (2.03)
Return of capital...................... -- (0.37) (0.55) -- -- --
------- ------- ------- ------- ------- -------
Total distributions to Common
Shareholders........................ (0.39) (0.91) (1.02) (1.02) (1.25) (2.03)
------- ------- ------- ------- ------- -------
Premium from shares sold in Common
Share offering...................... -- -- -- -- -- 0.06
------- ------- ------- ------- ------- -------
Net asset value, end of period......... $ 15.49 $ 15.53 $ 16.05 $ 17.02 $ 17.63 $ 17.91
======= ======= ======= ======= ======= =======
Market value, end of period............ $ 14.07 $ 14.00 $ 14.58 $ 15.12 $ 15.79 $ 19.00
======= ======= ======= ======= ======= =======
TOTAL RETURN BASED ON NET ASSET VALUE
(b)................................. $ 2.54% 3.05% 1.06% 3.01% (c) 6.04% (c) 8.30%
======= ======= ======= ======= ======= =======
TOTAL RETURN BASED ON MARKET VALUE
(b)................................. $ 3.32% 2.26% 3.34% 2.17% (10.47)% 11.86%
======= ======= ======= ======= ======= =======
----------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)... $65,250 $65,437 $67,639 $71,708 $74,259 $75,439
Ratio of total expenses to average
net assets.......................... 1.22% (d) 1.47% 1.55% 1.78% 1.96% 2.47%
Ratio of total expenses to average
net assets excluding interest
expense............................. 1.22% (d) 1.43% 1.51% 1.72% 1.83% 2.20%
Ratio of net investment income (loss)
to average net assets............... 0.07% (d) (0.11)% 6.18% 5.84% 7.01% 7.28%
Portfolio turnover rate................ 14% 49% 46% 54% 109% 52%
----------------------------
(a) Effective September 19, 2016, the portfolio management of the Fund
transitioned to the First Trust Mortgage Securities Team. Schroder
Investment Management North America Inc. acquired the portfolio management
team of Brookfield Investment Management Inc. ("Brookfield"), previously
responsible for the portfolio management of the Fund, resulting in the
automatic termination of the investment sub-advisory agreement among
Brookfield, First Trust and the Fund. In connection with the change in
portfolio management, First Trust agreed to lower the investment
management fee payable by the Fund to a rate of 0.85% of the Fund's
managed assets, a decrease from the Fund's previous investment management
fee of 1.00% of the Fund's managed assets.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) The Fund received reimbursements from Brookfield in the amount of $1,180
and $5,310 for the years ended October 31, 2014 and 2013, respectively.
The reimbursements from Brookfield represent less than $0.01 per share and
had no effect on the Fund's total return.
(d) Annualized.
See Notes to Financial Statements Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (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
(the "SEC") under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol FMY on the New York Stock
Exchange ("NYSE").
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 First Trust Advisors L.P. ("First Trust" or the
"Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Advisor's Pricing Committee, in
accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by a
third-party 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.
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a third-party pricing service is
unable to provide a market price; securities whose trading has been formally
suspended; a security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the third-party pricing service, does not reflect
the security's fair value. As a general principle, the current fair value of a
security would appear to be the amount which the owner might reasonably expect
to receive for the security upon its current sale. When fair value prices are
used, generally they will differ from market quotations or official closing
prices on the applicable exchanges. A variety of factors may be considered in
determining the fair value of such securities, including, but not limited to,
the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2017, is
included with the Fund's Portfolio of Investments.
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and the accretion of discounts are recorded using the effective interest method.
The Fund invests in interest-only securities. For these securities, if there is
a change in the estimated cash flows, based on an evaluation of current
information, then the estimated yield is adjusted. Additionally, if the
evaluation of current information indicates a permanent impairment of the
security, the cost basis of the security is written down and a loss is
recognized. Debt obligations may be placed on non-accrual status and the related
interest income may be reduced by ceasing current accruals and writing off
interest receivables when the collection of all or a portion of interest has
become doubtful based on consistently applied procedures. A debt obligation is
removed from non-accrual status when the issuer resumes interest payments or
when collectability of interest is reasonably assured.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments until
payment is made. At April 30, 2017, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
C. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2017, the Fund held restricted securities
as shown in the following table that the Advisor has deemed illiquid pursuant to
procedures adopted by the Fund's Board of Trustees. 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. The Fund does not have the right to demand
that such securities be registered. These securities are valued according to the
valuation procedures as stated in the Portfolio Valuation note (Note 2A) and are
not expressed as a discount to the carrying value of a comparable unrestricted
security. There are no unrestricted securities with the same maturity dates and
yields for these issuers.
% OF
ACQUISITION PRINCIPAL CURRENT CARRYING NET
SECURITY DATE VALUE PRICE COST VALUE ASSETS
------------------------------------------------------------------------------------------------------------------
BXHTL Mortgage Trust, Series
2015-JWRZ, Class B 6/19/15 $ 800,000 $ 99.96 $ 800,000 $ 799,668 1.22%
Waldorf Astoria Boca Raton Trust,
Series 2016-BOCA, Class E 7/12/16 1,000,000 100.38 1,000,000 1,003,768 1.54
----------- ----------- ------
$ 1,800,000 $ 1,803,436 2.76%
=========== =========== ======
D. FUTURES CONTRACTS
The Fund may purchase or sell (i.e., is long or short) exchange-listed futures
contracts to hedge against changes in interest rates (interest rate risk).
Futures contracts are agreements between the Fund and a counterparty to buy or
sell a specific quantity of an underlying instrument at a specified price and at
a specified date. Depending on the terms of the contract, futures contracts are
settled either through physical delivery of the underlying instrument on the
settlement date or by payment of a cash settlement amount on the settlement
date. Open futures contracts can also be closed out prior to settlement by
entering into an offsetting transaction in a matching futures contract. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain margin deposits on the futures contract. When the
contract is closed or expires, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in
"Net realized gain (loss) on futures" on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures contacts
are marked to market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures" on the
Statement of Operations. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are included in "Variation margin payable or receivable" on the Statement of
Assets and Liabilities.
If market conditions change unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contract and may realize a loss. The use of
futures contracts involves the risk of imperfect correlation in movements in the
price of the futures contracts, interest rates and the underlying instruments.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
E. INVERSE FLOATING-RATE SECURITIES
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio and have the effect of
creating leverage. These securities, if any, are identified on the Portfolio of
Investments.
F. STRIPPED MORTGAGE-BACKED SECURITIES
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
G. 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.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Distributions from income and capital gains are determined in accordance with
federal income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2016, was as follows:
Distributions paid from:
Ordinary income................................... $ 2,266,839
Capital gain...................................... --
Return of capital................................. 1,567,096
As of October 31, 2016, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ --
Undistributed capital gains....................... --
--------------
Total undistributed earnings...................... --
Accumulated capital and other losses.............. (4,993,262)
Net unrealized appreciation (depreciation)........ (3,564,982)
--------------
Total accumulated earnings (losses)............... (8,558,244)
Other............................................. --
Paid-in capital................................... 73,995,082
--------------
Net assets........................................ $ 65,436,838
==============
I. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
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, 2016, the Fund had pre-enactment net capital
losses for federal income tax purposes of $3,349,872. At October 31, 2016, the
Fund had post-enactment net capital losses for federal income tax purposes of
$1,643,390 to be carried forward indefinitely. The pre-enactment net capital
losses for federal income tax purposes will expire as follows:
EXPIRATION DATE AMOUNT
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887
During the taxable year ended October 31, 2016, the Fund did not utilize any
pre-enactment capital loss carryforwards.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of April 30, 2017,
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.
J. EXPENSES
The Fund will pay all expenses directly related to its operations.
K. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trusts funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
L. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.85% 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.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. 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 administrator, fund
accountant, and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BNYM 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 custodian, BNYM is responsible for custody
of the Fund's assets. BNYM IS and BNYM are subsidiaries of The Bank of New York
Mellon Corporation, a financial holding company.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. 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.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2017, were $5,262,992 and $5,520,590, 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, 2017, were
$403,961 and 8,211,125, respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at April
30, 2017, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------------ ------------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------ ------------------ ----------------------------- --------- ----------------------------- ---------
Futures Interest Rate Risk Variation Margin Receivable $ 6,457 Variation Margin Payable $ --
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended April 30, 2017, on derivatives instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION INTEREST RATE RISK
----------------------------------------------------------------------------------
Net realized gain (loss) on futures $ 1,832
Net change in unrealized appreciation (depreciation) on futures 4,625
During the six months ended April 30, 2017, the amount of notional values of
futures contracts opened and closed were $3,627,813 and $4,269,125,
respectively.
The Fund does not have the right to offset financial assets and financial
liabilities related to futures contracts on the Statement of Assets and
Liabilities.
6. 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.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On May 22, 2017, the Fund declared a distribution of $0.065 per share to Common
Shareholders of record on June 5, 2017, payable June 15, 2017.
Page 21
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
Page 22
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Qs
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 Fund held its Annual Meeting of Shareholders ("Annual Meeting") on April 24,
2017. At the Annual Meeting, 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 2020.
The number of votes cast in favor of Mr. Keith was 3,650,202, the number of
votes against was 162,640 and the number of broker non-votes was 400,273. 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.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are invested at market interest rates that are below the Fund portfolio's
current earnings rate; and (iii) credit risk, which is the risk that a security
in the Fund's portfolio will decline in price or the issuer fails to make
interest payments when due because the issuer of the security experiences a
decline in its financial status.
INTEREST RATE RISK: The Fund may also hold MBS which are Stripped
Mortgage-Backed Securities, IO securities and PO securities. Generally speaking,
when interest rates are falling and prepayment rates are increasing, the value
of a PO security will rise and the value of an IO security will fall.
Conversely, when interest rates are rising and prepayment rates are decreasing,
generally the value of a PO security will fall and the value of an IO security
will rise.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. When the Advisor 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 may take temporary defensive
positions.
LEVERAGE RISK: Borrowings up to 33-1/3% (or such other percentage as permitted
by law) of Fund assets (including the amount borrowed) less liabilities other
than borrowings may be utilized in the Fund. Leverage may be used for investment
purposes and to meet cash requirements. The leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. Reverse repurchase agreements are used to leverage the
Fund's assets. Reverse repurchase agreements are subject to the risks that the
market value of the Fund's securities sold may decline below the price of the
securities the Fund is obligated to repurchase, and that the securities may not
be returned to the Fund. From time to time the amount of the leverage may be
changed in response to actual or anticipated changes in interest rates or the
value of the Fund's investment portfolio. There can be no assurance that the
leverage strategies will be successful.
MORTGAGE AND ASSET-BACKED SECURITIES RISK: The value of mortgage and
asset-backed securities can fall if the owners of the underlying mortgages or
other obligations pay off their mortgages or other obligations sooner than
expected, which could happen when interest rates fall or for other reasons.
Mortgage and asset-backed securities are also subject to extension risk, which
is the risk that rising interest rates could cause mortgages or other
obligations underlying the securities to be prepaid more slowly than expected,
which would, in effect, convert a short or medium duration mortgage or
asset-backed security into a longer duration security, increasing its
sensitivity to interest rate changes and causing its price to decline. Mortgage
and asset-backed security values may also be affected by the creditworthiness of
the servicing agent for the pool, the originator of the loans or receivables or
entities providing for any credit enhancement.
Page 23
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
APRIL 30, 2017 (UNAUDITED)
A mortgage backed security may be negatively affected by the quality of the
mortgages underlying such security and the structure of its issuer. For example,
if a mortgage underlying a certain mortgage backed security defaults, the value
of that security may decrease.
Mortgage backed securities issued by a private issuer, such as commercial
mortgage backed securities, generally entail greater risk than obligations
directly or indirectly guaranteed by the U.S. government or a government
sponsored entity.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.
SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
Page 24
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
ADMINISTRATOR,
FUND ACCOUNTANT,
AND CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Mortgage Income Fund
------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2017
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2017
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 20, 2017
-------------------
* Print the name and title of each signing officer under his or her signature.