UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21727
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First Trust Mortgage Income Fund
(formerly known as First Trust/FIDAC Mortgage Income Fund)
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: April 30, 2013
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST BROOKFIELD
FIRST TRUST
MORTGAGE INCOME FUND
Semi-Annual Report
For the Six Months Ended
April 30, 2013
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2013
Shareholder Letter.......................................................... 1
At A Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 12
Statement of Operations..................................................... 13
Statements of Changes in Net Assets......................................... 14
Statement of Cash Flows..................................................... 15
Financial Highlights........................................................ 16
Notes to Financial Statements............................................... 17
Additional Information...................................................... 24
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Brookfield Investment Management Inc.
("Brookfield" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Mortgage Income Fund (the "Fund") to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Brookfield are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Mortgage Income Fund (the "Fund").
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been positive for the U.S. markets.
In fact, the S&P 500 Index, as measured on a total return basis, rose 14% during
the period and many economists and investors have felt positive about the
current market environment. Of course, past performance can never be an
indicator of future performance. As I have written many times, First Trust
believes that staying invested in quality products through up and down markets
and having a long-term horizon can help investors reach their financial goals.
First Trust offers a variety of products that we believe could fit many
financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees of First Trust Mortgage Income Fund and
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MORTGAGE INCOME FUND
"AT A GLANCE"
AS OF APRIL 30, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $16.91
Common Share Net Asset Value ("NAV") $17.83
Premium (Discount) to NAV (5.16)%
Net Assets Applicable to Common Shares $75,126,661
Current Monthly Distribution per Common Share (1) $0.100
Current Annualized Distribution per Common Share $1.200
Current Distribution Rate on Closing Common Share Price (2) 7.10%
Current Distribution Rate on NAV (2) 6.73%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
4/30/2012 19.85 17.70
19.74 17.62
19.76 17.59
18.90 17.43
5/25/2012 19.58 17.50
19.50 17.22
19.59 17.37
19.65 17.28
19.70 17.39
6/29/2012 19.81 17.40
19.60 17.24
19.42 17.31
19.55 17.45
7/27/2012 19.76 17.59
19.85 17.53
19.95 17.69
19.80 17.97
19.92 18.00
8/31/2012 20.02 17.92
20.07 17.92
20.20 18.11
20.23 18.03
9/28/2012 20.52 17.99
20.49 17.93
20.15 17.92
20.17 17.91
10/26/2012 18.70 17.90
18.08 17.79
18.20 17.86
17.99 17.81
18.60 17.81
11/30/2012 18.49 17.79
17.87 17.76
18.19 17.86
17.96 17.79
12/28/2012 17.74 17.62
18.41 17.84
18.47 17.93
18.51 17.92
1/25/2013 17.29 17.98
17.25 18.00
17.56 17.98
17.44 18.00
2/22/2013 17.14 17.95
17.20 17.81
16.77 17.92
16.57 17.88
16.60 17.84
3/28/2013 16.43 17.85
16.49 17.72
16.45 17.70
16.54 17.71
16.73 17.79
4/30/2013 16.91 17.83
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended Inception (5/25/2005)
4/30/2013 4/30/2013 4/30/2013 to 4/30/2013
FUND PERFORMANCE(3)
NAV 3.75% 10.44% 8.46% 7.44%
Market Value -7.25% -6.60% 9.11% 6.11%
INDEX PERFORMANCE
Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index 0.90% 1.86% 5.30% 5.33%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 1.32
Weighted Average Life (Years) 6.23
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 66.4%
U.S. Government Agency Mortgage-Backed Securities 33.2
Asset-Backed Securities 0.4
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Adjustable Rate Securities 44.8%
Fixed Rate Securities 44.5
Interest Only Securities 10.7
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 43.2%
AA+ 7.2
AA 1.9
A+ 12.3
A 0.9
BBB+ 2.7
BBB 2.1
BBB- 1.8
BB+ 1.4
BB 3.6
B- 2.4
CCC+ 2.9
CCC 13.1
CCC- 0.9
CC 0.8
D 2.7
NR 0.1
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Total 100.0%
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(1) Most recent distribution paid or declared through 4/30/2013. Subject to
change in the future. The distribution was decreased subsequent to
4/30/13. See Note 8 - Subsequent Events in the Notes to Financial
Statements.
(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 4/30/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of the
McGraw Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and the ratings are not equivalent, the
highest ratings are used. Sub-investment grade ratings are those rated
BB+/Ba1 or lower. Investment grade ratings are those rated BBB-/Baa3 or
higher. The credit ratings shown relate to the credit worthiness of the
issuers of the underlying securities in the Fund, and not to the Fund or
its shares. Credit ratings are subject to change.
NR Not rated
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2013
SUB-ADVISOR
BROOKFIELD INVESTMENT MANAGEMENT INC.
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset
Management, a global alternative asset manager with over $184 billion in assets
under management as of March 31, 2013. Brookfield Asset Management has over a
100-year history of owning and operating assets with a focus on property,
renewable power, infrastructure and private equity. The company offers a range
of public and private investment products and services, which leverage its
expertise and experience and provide it with a competitive advantage in the
markets where it operates. On behalf of its clients, Brookfield Asset Management
is also an active investor in the public securities markets, where its
experience extends over 30 years. Over this time, the company has successfully
developed several investment operations and built expertise in the management of
institutional portfolios, retail mutual funds, and structured product
investments.
Brookfield Asset Management's public market activities are conducted by
Brookfield Investment Management, a registered investment advisor. These
activities complement Brookfield Asset Management's core competencies and
include global listed real estate and infrastructure equities, corporate high
yield investments, opportunistic credit strategies and a dedicated insurance
asset management division. Headquartered in New York, NY, Brookfield Investment
Management maintains offices and investment teams in Toronto, Chicago, Boston
and London and has over $10 billion of assets under management as of March 31,
2013.
PORTFOLIO MANAGEMENT TEAM
ANTHONY BREAKS, CFA
SENIOR DIRECTOR
Mr. Breaks, who has over 15 years of investment experience, is a Portfolio
Manager on the Securitized Products Investments Team. He is a team leader in
mortgage-backed securities ("MBS") and asset-backed securities. Mr. Breaks has
also managed securitized products vehicles, such as structured investment
vehicles ("SIV"), asset-backed commercial paper ("ABCP") and collateralized debt
obligations ("CDOs"). Mr. Breaks earned a Bachelor of Science degree in
electrical engineering from the Massachusetts Institute of Technology. He holds
the Chartered Financial Analyst designation.
CHRIS WU
DIRECTOR
Mr. Wu is a Portfolio Manager on the Securitized Products Investment Team
focusing on agency MBS. He is responsible for the firm's agency MBS exposures.
He develops quantitative tools to formulate research and develop trading
strategies for agency MBS exposures. Mr. Wu holds an MBA from New York
University as well as a Master of Science degree in computer science from
University of Saskatchewan. He also earned a Bachelor of Economics from Huazhong
University of Science and Technology in China.
COMMENTARY
FIRST TRUST MORTGAGE INCOME FUND
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues its objectives by investing primarily in MBS representing part ownership
in a pool of either residential or commercial mortgage loans that, in the
opinion of the Fund's Sub-Advisor, offer an attractive combination of credit
quality, yield and maturity. These securities may be issued by government
agencies or by private originators or issuers, generally in the form of
pass-through certificates, collateralized mortgage obligations, residential
mortgage-backed securities ("RMBS") or commercial mortgage-backed securities
("CMBS"). The Fund may leverage to an aggregate amount of up to 33.33% of the
Fund's Managed Assets. The Fund uses leverage primarily through the use of
repurchase agreements. There can be no assurance that the Fund will achieve its
investment objectives. The Fund may not be appropriate for all investors.
MARKET RECAP AND OUTLOOK
Within the Securitized Products universe, non-agency RMBS and CMBS both had
strong returns for the six-month period, driven by improving fundamentals and
extraordinary demand. Issuance of new issue prime deals from dealer conduits and
real estate investment trusts ("REITs") have become frequent, although volumes
remain far below pre-crisis levels. CMBS issuance continued its recovery with
$37.9 billion in new unguaranteed deals and $31.5 billion in agency guaranteed
CMBS. Agency derivatives, which include interest only ("IO") and inverse IO
securities, declined in prices during the fourth quarter of 2012 but rose in the
first quarter of 2013. Rising interest rates and slower prepayment speeds during
the first quarter led to higher valuation for agency derivatives. We believe
agency derivatives will benefit the Fund's portfolio when interest rates shift
upward in the long
Page 3
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PORTFOLIO COMMENTARY - (CONTINUED)
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term. We continue to see value in the Fund's derivative holdings which
generally have elements of protection from prepayment speeds over the long term.
For the U.S. housing market, we believe the low point in prices has passed and
the last 12 to 18 months of data have shown consistent strength. The six-month
period would have typically shown tepid to negative price levels because the
winter months see less home buying demand. In fact, we saw prices increase
nationally. Investors in securitized products were typically running
conservative assumptions and so the rebound in housing represents a change
versus prior forward expectations. The evolution in assumptions has come to
incorporate a base line of home price appreciation. We are seeing the improved
assumptions in higher prices for bonds, especially those backed by loans most
sensitive to housing prices, such as subprime securities, where we have placed
particular emphasis.
Technical factors are still in favor of agency pass-through securities and
Collateralized Mortgage Obligations ("CMOs"). The Federal Reserve is purchasing
$40 billion of agency MBS per month and it seems likely that the program will
last at least until the end of the year. The Federal Reserve's mortgage
purchases will remain the dominant factor in the supply and demand balance,
which we believe will support mortgage prices. The mortgage basis is modestly
attractive at the current level. We are focused on lower coupon TBAs (a "to be
announced" trade) for agency mortgage exposure as the monthly carries on these
TBAs are attractive.
We remain positive on most securitized products for the remainder of 2013, based
on continued improvement in forecasts for collateral performance and lower
required yields from investors. With a contraction in the premium for risk, we
remain focused on stability and income in evaluating mortgage investments. For
many investors, mortgage-backed securities are part of a few remaining products
that can offer that stability while still meeting return hurdles. Market
sentiment has become positive on housing and housing-related sectors on the view
that downside is limited and improvement will be the norm, as it has been for
about 15 months. We have been encouraged by positive housing data and our
leading indicators these last few quarters and have responded by purchasing
securities backed by higher "beta" collateral (such as Subprime and Option ARM
loans). In the preceding semi-annual period, we saw those investments outperform
lower beta products such as fixed-coupon prime MBS. We continue to believe this
is the best positioning for the Fund's portfolio as housing continues its
recovery.
Agency MBS returned -0.27% over the six-month period, although this sector
benefited from support through the Federal Reserve's mortgage purchase program.
The program started in September 2012 at a pace of $40 billion of agency MBS
pools per month. Since the program was well anticipated by the market, most
price appreciation of agency MBS appears to have occurred before September
instead of after the actual announcement. This would explain why the performance
of agency MBS did not improve during the six-month period. Given that the net
issuance of agency MBS was close to zero, the extra demand from the Federal
Reserve helped maintain the prices of agency MBS at premium levels. This
activity helped the Fund's specified pools and CMO holdings.
In the non-agency MBS side, virtually all sectors within the Fund's investment
guidelines rallied during the period, generally lowering projected yields.
Collateral assumptions are trending toward the upside due to improving housing
data as well as assumptions regarding defaults and loss severities. For many
securities, especially those projected to take principal losses, this has
supported forecasted yields even as prices have risen. The assumption of better
collateral performance leads to smaller bond loss projections and therefore
better yields at a given price. For securities expected to pay in full, improved
collateral performance cannot generally improve the yield at a given price.
There are no losses to cure with the improved performance. For the Fund's "A" or
better allocations, which are approximately 65% of the Fund, losses are
projected to be zero (or quite small) and so the price increases pose a
particular challenge. To the degree that we can, we look to sell bonds that have
little performance upside to improving housing fundamentals in favor of those we
believe can and will continue to rally. The price appreciation potential can
make up for what can be modest yields to maturity and we also look for split
investment-grade rated and less liquid securities that offer higher yields.
PERFORMANCE ANALYSIS
For the six months ended April 30, 2013, the Fund had a total return(1) of 3.75%
based on net asset value ("NAV"). For the period, the Fund traded from a premium
to NAV of 6.09% to a discount to NAV of -5.16%, resulting in a total return(1)
of -7.25%, based on market price. During the period, the Fund's benchmark, the
Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index, returned 0.90%.
Changes in interest rates were not a material contributor to the Fund's returns
over the period. The 10-Year U.S. Treasury bond yield began at 1.70% and ended
the period at 1.67%, with a range between 1.58% and 2.06% over the period.
Continued low rates have created a challenging environment for reinvestment of
bond prepayments and sales. We anticipate interest rates to increase in the next
18 to 24 months as housing returns to historical norms of volume and
contribution to GDP and other parts of the economy also recover. We believe this
should result in a reduction in monetary stimulus and investors requiring higher
yields.
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(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in NAV per share for NAV returns and
changes in Common Share price for market value returns and does not reflect
sales load. Past performance is not indicative of future results.
Page 4
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PORTFOLIO COMMENTARY - (CONTINUED)
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Within the "A-" or below segment of the portfolio, we have emphasized Subprime
and Option ARM RMBS because we believe these types of securities would benefit
the most from improving housing data. As housing data showed continued
improvement over the quarter, the Fund's holdings of these securities showed
particularly strong price increases. We also continue to select securities based
on specific views of mortgage servicers, servicing behavior as well as
geographic differences which we believe are underappreciated in the marketplace.
During the period, primary purchases for the Fund were investment-grade Hybrid
ARM Prime RMBS and second priority CMBS. The purchases were funded with existing
cash, repaid principal on existing holdings and sales. As of April 30, 2013, the
Fund was almost fully invested as the cash position was approximately 8.4%. In
total, approximately $13.1 million in non-agency RMBS and CMBS were purchased
during the first quarter of 2013.
We have continued to focus on purchasing securities rated "A" or better. Within
this quality spectrum, we preferred Prime Hybrid RMBS over Option ARM securities
during the period as Option ARM securities rose in price to a greater degree. We
also looked to second priority CMBS. In considering the Fund's below "A" rated
securities, to the extent we have flexibility to purchase such securities, we
find Subprime RMBS and junior CMBS to be most attractive. All of these target
sectors rallied during the period, reflecting improved assumptions for
collateral performance. As prices shift, we continuously reassess the various
sectors and security types for relative value. Early in the period, we
identified first priority CMBS as having reached a price point that was
difficult to sustain and exposed to adverse collateral performance. In this
case, credit and/or bond loss was not the issue but, rather, that unanticipated
loan liquidations would repay a premium security at par. Therefore, during the
period, the Fund shifted into second priority CMBS which generally seeks to
protect against this type of risk and typically has higher yields. Liquidity was
favorable and we were able to reduce the Fund's cash position and trade for
relative value.
As of April 30, 2013, the Fund's leverage was relatively low at 14.47% of
Managed Assets, given that the Fund may utilize leverage in an amount up to
33.33% of Managed Assets. Leverage contributed positively to the Fund's
performance during the reporting period. More recently, we have reduced leverage
as yields on securities we can borrow against have fallen, while financing costs
have remained unchanged. This is particularly true of CMBS "super duper"
securities, the most senior bonds in a CMBS transaction. We sold the majority of
the Fund's holdings in this area at a substantial profit, as prices rose about
114% of par and the risk of earlier repayment mounted. As the spread between
asset yields and financing costs has narrowed for many asset classes, the range
of assets that we would choose to borrow against has also diminished and as a
result, leverage has been reduced. For this reason, we may continue to employ
leverage below its maximum or choose alternative assets, such as agency
guaranteed assets, to use as collateral. Financing costs may also fall, thereby
reversing this current dynamic. Where our overall budget for risk warrants it
and when the return opportunities are compelling, we are likely to increase
leverage in an attempt to improve returns. In periods of stability this may be
an especially important tool. Please note that the Fund's benchmark does not
utilize leverage.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of reverse repurchase
agreements. The Fund uses leverage because its managers believe that, over time,
leverage provides opportunities for additional income and total return for
common shareholders. However, the use of leverage also can expose common
shareholders to additional volatility. For example, as the prices of securities
held by the Fund decline, the negative impact of the valuation changes on common
share net asset value and common shareholder total return is magnified by the
use of leverage. Conversely, leverage may enhance common share returns during
periods when the prices of securities held by the Fund generally are rising.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities. These views represent the opinions of
Brookfield Investment Management Inc. and are not intended to predict or depict
the performance of any investment. These views are as of the close of business
on April 30, 2013 and subject to change based on subsequent developments.
Page 5
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES - 76.3%
COLLATERALIZED MORTGAGE OBLIGATIONS - 63.8%
Adjustable Rate Mortgage Trust
$ 110,757 Series 2004-5, Class 1A1 (a) ............ 3.27% 04/25/35 $ 108,145
Banc of America Mortgage Securities
104,254 Series 2002-L, Class 1A1 (a) (b) ........ 2.90% 12/25/32 95,871
BCAP LLC Trust
1,628,133 Series 2012-RR10, Class 7A5 (a) (c) ..... 2.88% 08/21/35 1,668,893
Bear Stearns Adjustable Rate Mortgage Trust
849,579 Series 2004-9, Class 12A3 (a) ........... 3.15% 11/25/34 813,709
Chase Mortgage Finance Trust
201,479 Series 2007-A1, Class 1A3 (a) ........... 2.98% 02/25/37 201,838
Countrywide Alternative Loan Trust
811,613 Series 2006-41CB, Class 2A17 ............ 6.00% 01/25/37 698,132
97,885 Series 2007-11T1, Class A37 (d) ......... 38.82% 05/25/37 187,036
Countrywide Home Loan Mortgage Pass
Through Trust
909,111 Series 2006-21, Class A8 ................ 5.75% 02/25/37 853,800
112,529 Series 2007-15, Class 2A2 ............... 6.50% 09/25/37 96,513
Countrywide Home Loans
273,162 Series 2004-HYB1, Class 2A (a)........... 2.82% 05/20/34 269,332
Credit Suisse First Boston Mortgage
Securities Corp.
1,930,338 Series 2004-AR2, Class 1A1 (a) .......... 2.84% 03/25/34 1,859,139
DSLA Mortgage Loan Trust
1,282,413 Series 2007-AR1, Class 2A1A (a) ......... 0.34% 04/19/47 1,063,109
GMAC Mortgage Corporation Loan Trust
332,490 Series 2004-AR1, Class 22A (a) .......... 3.57% 06/25/34 315,891
GSAMP Trust
809,942 Series 2007-HE1, Class A2B (a) .......... 0.30% 03/25/47 655,024
140,106 Series 2007-NC1, Class A2A (a) .......... 0.25% 12/25/46 75,875
271,113 Series 2007-NC1, Class A2B (a) .......... 0.30% 12/25/46 148,037
3,020,295 Series 2007-NC1, Class A2C (a) .......... 0.35% 12/25/46 1,662,687
Harborview Mortgage Loan Trust
271,186 Series 2004-1, Class 2A (a) ............. 2.72% 04/19/34 267,571
1,076,608 Series 2004-6, Class 3A1 (a) ............ 2.95% 08/19/34 1,074,859
JP Morgan Mortgage Trust
2,384,290 Series 2005-ALT1, Class 4A1 (a) ......... 5.19% 10/25/35 2,271,947
792,388 Series 2006-A2, Class 4A1 (a) ........... 3.01% 08/25/34 806,767
260,045 Series 2006-A2, Class 5A3 (a) ........... 2.90% 11/25/33 266,063
JP Morgan Re-REMIC
1,976,642 Series 2009-7, Class 12A1 (c) ........... 6.25% 01/27/37 2,042,343
Lavendar Trust
1,123,257 Series 2010-RR2A, Class A4 (c) .......... 6.25% 10/26/36 709,733
MASTR Asset Backed Securities Trust
266,038 Series 2006-HE5, Class A2 (a)............ 0.30% 11/25/36 165,106
1,368,198 Series 2006-HE5, Class A3 (a)............ 0.36% 11/25/36 856,571
282,045 Series 2006-HE5, Class A4 (a)............ 0.42% 11/25/36 178,140
1,909,835 Series 2006-NC2, Class A3 (a)............ 0.31% 08/25/36 983,900
871,748 Series 2006-NC2, Class A5 (a)............ 0.44% 08/25/36 458,547
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
MASTR Asset Securitization Trust
$ 919,790 Series 2006-2, Class 1A10 ............... 6.00% 06/25/36 $ 916,515
Mellon Residential Funding Corp.
413,570 Series 2001-TBC1, Class A1 (a) .......... 0.90% 11/15/31 408,655
1,057,816 Series 2002-TBC2, Class A (a) ........... 1.06% 08/15/32 1,028,031
Morgan Stanley Capital, Inc.
394,974 Series 2005-HE6, Class A2C (a) .......... 0.52% 11/25/35 391,535
Morgan Stanley Mortgage Loan Trust
652,259 Series 2004-7AR, Class 2A6 (a)........... 2.63% 09/25/34 661,542
Nationstar Home Equity Loan Trust
1,731,000 Series 2006-B, Class AV4 (a) ............ 0.48% 09/25/36 1,481,366
Natixis Real Estate Capital Trust
1,372,830 Series 2007-HE2, Class A2 (a) ........... 0.45% 07/25/37 509,572
137,192 Series 2007-HE2, Class A3 (a) ........... 0.50% 07/25/37 51,239
281,653 Series 2007-HE2, Class A4 (a) ........... 0.60% 07/25/37 107,051
Park Place Securities, Inc.
467,829 Series 2004-MHQ1, Class M1 (a) .......... 1.25% 12/25/34 467,968
Provident Funding Mortgage Loan Trust
336,127 Series 2005-1, Class 1A1 (a)............. 2.81% 05/25/35 329,487
Residential Accredit Loans, Inc.
978,667 Series 2004-QS2, Class CB................ 5.75% 02/25/34 1,027,744
Residential Funding Mortgage Securities I
285,933 Series 2005-S5, Class A5 ................ 5.25% 07/25/35 288,729
Securitized Asset Backed Receivables LLC
1,318,516 Series 2007-BR2, Class A2 (a) ........... 0.43% 02/25/37 677,456
Thornburg Mortgage Securities Trust
1,172,292 Series 2004-3, Class A (a) .............. 0.94% 09/25/44 1,132,731
Wachovia Mortgage Loan Trust, LLC
815,361 Series 2006-A, Class 3A1 (a)............. 2.67% 05/20/36 802,800
WaMu Mortgage Pass Through Certificates
1,141,194 Series 2004-AR10, Class A1B (a) ........ 0.67% 07/25/44 1,100,144
280,235 Series 2004-AR8, Class A2 (a) 0.65% 06/25/44 267,979
1,459,099 Series 2005-AR11, Class A1A (a) ........ 0.52% 08/25/45 1,365,468
1,626,426 Series 2005-AR19, Class A1A2 (a) ....... 0.49% 12/25/45 1,528,112
744,554 Series 2005-AR9, Class A1A (a).......... 0.52% 07/25/45 718,609
1,343,096 Series 2005-AR2, Class 2A23 (a) ........ 0.58% 01/25/45 1,275,911
1,373,290 Series 2006-AR5, Class A1A (a).......... 1.17% 06/25/46 1,201,724
Washington Mutual Alternative Mortgage
Pass-Through Certificates
58,670 Series 2007-5, Class A11 (d) ............ 38.28% 06/25/37 106,132
Washington Mutual MSC Mortgage Pass-Through
549,195 Series 2004-RA1, Class 2A ............... 7.00% 03/25/34 581,848
Wells Fargo Mortgage Backed Securities Trust
1,149,891 Series 2003-H, Class A1 (a) ............. 4.63% 09/25/33 1,179,563
887,221 Series 2004-A, Class A1 (a) ............. 4.92% 02/25/34 916,991
973,894 Series 2004-Y, Class 1A2 (a) ............ 2.68% 11/25/34 988,524
483,580 Series 2005-AR16, Class 1A1 (a) ......... 2.74% 08/25/33 497,792
495,000 Series 2006-AR1, Class 2A5 (a) 5.35% 03/25/36 496,106
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------ -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Wells Fargo Mortgage Backed Securities Trust (Continued)
$ 1,305,322 Series 2006-AR10, Class 5A2 (a) ......... 2.61% 07/25/36 $ 1,199,744
1,401,456 Series 2007-10, Class 1A18 .............. 6.00% 07/25/37 1,427,627
892,998 Series 2007-16, Class 1A1 ............... 6.00% 12/28/37 959,947
819,589 Series 2007-2, Class 1A13 ............... 6.00% 03/25/37 812,288
203,225 Series 2007-8, Class 2A2 ................ 6.00% 07/25/37 201,674
------------
47,963,182
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 12.5%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ ................. 5.42% 10/10/45 911,972
Credit Suisse Mortgage Capital Certificates
820,000 Series 2007-C2, Class A3 ................ 5.54% 01/15/49 939,403
GS Mortgage Securities Corp II
1,000,000 Series 2007-GG10, Class A4 (a) .......... 5.98% 08/10/45 1,156,398
JP Morgan Chase Commercial Mortgage
Securities Corp
1,500,000 Series 2007-LD12, Class A4 .............. 5.88% 02/15/51 1,760,773
800,000 Series 2009-IWST, Class C (a) (c) ....... 7.45% 12/05/27 999,245
LB-UBS Commercial Mortgage Trust
420,000 Series 2007-C1, Class AM................. 5.46% 02/15/40 480,026
Morgan Stanley Capital I Trust
980,000 Series 2007-IQ16, Class AM (a) .......... 6.30% 12/12/49 1,170,647
820,000 Series 2008-T29, Class AM (a) ........... 6.45% 01/11/43 999,430
VNO Mortgage Trust
900,000 Series 2012-6AVE, Class A (c) ........... 3.00% 11/15/30 931,607
------------
9,349,501
------------
TOTAL MORTGAGE-BACKED SECURITIES ........................................... 57,312,683
(Cost $52,814,496) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 38.1%
COLLATERALIZED MORTGAGE OBLIGATIONS - 12.8%
Federal Home Loan Mortgage Corp.
3,261,551 Series 2807, Class SB, IO (d) ........... 7.25% 11/15/33 528,953
82,105 Series 3069, Class LI, IO ............... 5.50% 08/15/32 422
64,872 Series 3195, Class SX (d) ............... 44.86% 07/15/36 94,454
919,321 Series 3562, Class KI, IO ............... 4.50% 11/15/22 29,937
596,859 Series 3593, Class IP, IO ............... 5.00% 06/15/36 12,740
4,416,449 Series 3619, Class EI, IO ............... 4.50% 05/15/24 278,936
3,120,693 Series 3692, Class PS, IO (d) ........... 6.40% 05/15/38 313,990
281,681 Series 3702, Class SK (d) ............... 14.10% 08/15/40 285,110
6,384,800 Series 3726, Class KI, IO ............... 3.50% 04/15/25 545,981
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------ -------------------------------------------- ---------- ----------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Federal Home Loan Mortgage Corp. (Continued)
$ 3,912,597 Series 3870, Class WS, IO (d) ........... 6.40% 06/15/31 $ 646,745
Federal Home Loan Mortgage Corp., STRIP
2,214,876 Series 232, Class IO, IO................. 5.00% 08/01/35 275,286
Federal National Mortgage Association
1,690,132 Series 2005-122, Class SN (d) ........... 27.80% 01/25/36 2,374,096
810,470 Series 2008-50, Class AI, IO ............ 5.50% 06/25/23 41,309
5,004,450 Series 2010-103, Class ID, IO ........... 5.00% 09/25/40 743,873
8,222,117 Series 2010-139, Class KI, IO ........... 1.09% 12/25/40 393,622
1,789,921 Series 2010-142, Class PS, IO (d) ....... 5.85% 05/25/40 208,668
1,808,596 Series 2010-145, Class TI, IO ........... 3.50% 12/25/20 139,199
5,127,519 Series 2010-40, Class MI, IO ............ 4.50% 08/25/24 295,915
Federal National Mortgage Association, STRIP
2,493,115 Series 360, Class 2, IO ................. 5.00% 08/01/35 295,451
4,072,801 Series 406, Class 6, IO ................. 4.00% 01/25/41 348,223
Government National Mortgage Association
1,913,035 Series 2009-65, Class NJ, IO ............ 5.50% 07/20/39 195,858
4,480,136 Series 2010-115, Class IQ, IO ........... 4.50% 11/20/38 549,518
11,162,062 Series 2011-131, Class EI, IO ........... 4.50% 08/20/39 899,493
2,688,630 Series 2011-69, Class CI, IO ............ 5.00% 03/20/36 127,329
------------
9,625,108
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 3.1%
Government National Mortgage Association
9,003,078 Series 2012-100, Class IO, IO (a) (e) ... 0.89% 08/16/52 684,504
12,132,272 Series 2012-70, Class IO, IO (a) (e) .... 0.96% 08/16/52 850,909
7,503,190 Series 2012-78, Class IO, IO (a) (e) .... 1.06% 06/16/52 581,325
2,670,780 Series 2012-95, Class IO, IO (a) (e) .... 1.05% 02/16/53 243,695
------------
2,360,433
------------
PASS-THROUGH SECURITIES - 22.2%
Fannie Mae REMICs
1,275,964 Series 2005-83, Class LZ (e) ............. 5.50% 10/25/35 1,326,357
Federal Home Loan Mortgage Corp.
5,000,000 Gold Pool ................................ 3.50% 04/01/42 5,316,406
2,178,046 Pool A94738 (e) .......................... 4.50% 11/01/40 2,334,530
1,285,542 Pool K36017 (e) .......................... 5.00% 09/01/47 1,370,433
Federal National Mortgage Association
2,706,577 Pool 831145 (e) .......................... 6.00% 12/01/35 3,018,347
2,930,937 Pool 843971 (e) .......................... 6.00% 11/01/35 3,290,349
------------
16,656,422
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES .................... 28,641,963
(Cost $31,230,402) ------------
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------ -------------------------------------------- ---------- ----------- ------------
ASSET-BACKED SECURITIES - 0.5%
Green Tree Financial Corp.
$ 92,654 Series 1997-2, Class A6 ................. 7.24% 06/15/28 $ 98,830
105,542 Series 1997-3, Class A6 ................. 7.32% 03/15/28 115,634
129,113 Series 1997-7, Class A6 ................. 6.76% 07/15/28 137,844
------------
TOTAL ASSET-BACKED SECURITIES .............................................. 352,308
(Cost $345,146) ------------
TOTAL INVESTMENTS - 114.9% ................................................. 86,306,954
(Cost $84,390,044) (f) ------------
PRINCIPAL
VALUE DESCRIPTION AMOUNT
------------ ---------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (16.9%)
(1,361,000) With JP Morgan 0.70% dated 04/04/13, to be repurchased at
$1,361,849 on 05/06/13 .................................................. (1,361,000)
(1,445,000) With JP Morgan 1.05% dated 04/08/13, to be repurchased at
$1,446,264 on 05/08/13 .................................................. (1,445,000)
(5,910,000) With JP Morgan 0.42% dated 04/11/13, to be repurchased at
$5,912,207 on 05/13/13 .................................................. (5,910,000)
(3,508,000) With JP Morgan 0.42% dated 04/15/13, to be repurchased at
$3,509,228 on 05/15/13 .................................................. (3,508,000)
(487,000) With JP Morgan 1.05% dated 04/26/13, to be repurchased at
$487,454 on 05/28/13 .................................................... (487,000)
------------
TOTAL REVERSE REPURCHASE AGREEMENTS .................................... (12,711,000)
NET OTHER ASSETS AND LIABILITIES - 2.0% ................................ 1,530,707
------------
NET ASSETS - 100.0% .................................................... $ 75,126,661
============
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at April 30, 2013.
(b) Illiquid.
(c) This security, sold within the terms of a private placement memorandum is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by Brookfield Investment Management Inc., the
Fund's sub-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, 2013, securities noted as such
amounted to $6,351,821, or 8.45% of net assets.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at April 30, 2013.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2013, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $6,703,197 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $4,786,287.
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2013 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
4/30/2013 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Mortgage-Backed Securities......................... $ 57,312,683 $ -- $ 57,312,683 $ --
U.S. Government Agency Mortgage-Backed Securities.. 28,641,963 -- 28,641,963 --
Asset-Backed Securities............................ 352,308 -- 352,308 --
------------ ------------ ------------ ------------
TOTAL.............................................. $ 86,306,954 $ -- $ 86,306,954 --
============ ============ ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2013 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Reverse Repurchase Agreements...................... $(12,711,000) $ -- $(12,711,000) $ --
============ ============ ============ ============
All transfers in and out of the Levels during the period are assumed to be on
the last day of the period at their current value. There were no transfers
between Levels at April 30, 2013.
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $84,390,044).......................................................................... $ 86,306,954
Cash........................................................................................... 6,318,357
Restricted cash................................................................................ 97,000
Interest receivable............................................................................ 477,164
Prepaid expenses............................................................................... 45,931
------------
Total Assets................................................................................ 93,245,406
------------
LIABILITIES:
Reverse repurchase agreements.................................................................. 12,711,000
Payables:
Investment securities purchased............................................................. 5,261,302
Investment advisory fees.................................................................... 71,972
Audit and tax fees.......................................................................... 27,712
Administrative fees......................................................................... 11,541
Printing fees............................................................................... 9,143
Custodian fees.............................................................................. 8,947
Transfer agent fees......................................................................... 7,666
Interest on reverse repurchase agreements................................................... 3,791
Legal fees.................................................................................. 2,904
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 1,996
------------
Total Liabilities........................................................................... 18,118,745
------------
NET ASSETS.................................................................................. $ 75,126,661
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 79,358,509
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... (1,615,850)
Accumulated net realized gain (loss) on investments............................................ (4,575,039)
Net unrealized appreciation (depreciation) on investments...................................... 1,916,910
------------
NET ASSETS..................................................................................... $ 75,126,661
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 17.83
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2013 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 3,418,970
------------
Total investment income..................................................................... 3,418,970
------------
EXPENSES:
Investment advisory fees....................................................................... 461,098
At the market offering costs................................................................... 120,352
Interest expense on reverse repurchase agreements.............................................. 72,999
Administrative fees............................................................................ 58,110
Audit and tax fees............................................................................. 24,377
Transfer agent fees............................................................................ 19,881
Printing fees.................................................................................. 17,623
Custodian fees................................................................................. 7,940
Trustees' fees and expenses.................................................................... 7,782
Financial reporting fees....................................................................... 4,625
Legal fees..................................................................................... 3,331
Other.......................................................................................... 12,286
------------
Total expenses.............................................................................. 810,404
------------
NET INVESTMENT INCOME.......................................................................... 2,608,566
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 1,081,081
Net increase from payment by the sub-advisor (a)............................................ 5,310
Net change in unrealized appreciation (depreciation) on investments......................... (1,009,563)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 76,828
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 2,685,394
============
(a) See Note 3 in the Notes to Financial Statements.
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2013 ENDED
(UNAUDITED) 10/31/2012
-------------- ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 2,608,566 $ 5,302,779
Net realized gain (loss)........................................................... 1,081,081 (1,903,304)
Net increase from payment by the sub-advisor (a)................................... 5,310 --
Net change in unrealized appreciation (depreciation)............................... (1,009,563) 2,616,211
-------------- ------------
Net increase (decrease) in net assets resulting from operations.................... 2,685,394 6,015,686
-------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (3,032,749) (8,321,681)
Net realized gain.................................................................. -- --
Return of capital.................................................................. -- --
-------------- ------------
Total distributions to shareholders................................................ (3,032,749) (8,321,681)
-------------- ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold through at the market offerings................... -- 2,403,089
Proceeds from Common Shares reinvested............................................. 35,399 327,282
-------------- ------------
Net increase (decrease) in net assets resulting from capital transactions.......... 35,399 2,730,371
-------------- ------------
Total increase (decrease) in net assets............................................ (311,956) 424,376
NET ASSETS:
Beginning of period................................................................ 75,438,617 75,014,241
-------------- ------------
End of period...................................................................... $ 75,126,661 $ 75,438,617
============== ============
Accumulated net investment income (loss) at end of period.......................... $ (1,615,850) $ (1,191,667)
============== ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 4,211,129 4,070,832
Common Shares sold through at the market offerings................................. -- 122,655
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 1,986 17,642
-------------- ------------
Common Shares at end of period..................................................... 4,213,115 4,211,129
============== ============
(a) See Note 3 in the Notes to Financial Statements.
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2013 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ................ $ 2,685,394
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (50,441,978)
Sales, maturities and paydowns on investments............................. 63,873,104
Net amortization/accretion of premiums/discounts on investments........... 801,379
Net realized gain/loss on investments..................................... (1,081,081)
Net increase from payment by sub-advisor.................................. (5,310)
Net change in unrealized appreciation/depreciation on investments......... 1,009,563
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable........................................... 133,409
Decrease in prepaid expenses.............................................. 77,585
Decrease in restricted cash............................................... 770,000
Decrease in interest payable on reverse repurchase agreements............. (9,838)
Decrease in investment advisory fees payable.............................. (11,271)
Decrease in audit and tax fees payable.................................... (20,124)
Decrease in legal fees payable............................................ (3,404)
Decrease in printing fees payable......................................... (6,331)
Increase in administrative fees payable................................... 4,041
Increase in custodian fees payable........................................ 4,855
Increase in transfer agent fees payable................................... 2,795
Decrease in Trustees' fees and expenses payable........................... (1,660)
Decrease in other liabilities payable..................................... (6,290)
-------------
CASH PROVIDED BY OPERATING ACTIVITIES..................................... $ 17,774,838
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Common Shares reinvested...................................... 35,399
Distributions to Common Shareholders from net investment income........... (3,032,749)
Repurchases of reverse repurchase agreements.............................. (90,106,968)
Reverse repurchase agreements borrowings.................................. 78,557,793
-------------
CASH USED BY FINANCING ACTIVITIES............................................... (14,546,525)
--------------
Increase in cash.......................................................... 3,228,313
Cash at beginning of period............................................... 3,090,044
--------------
CASH AT END OF PERIOD..................................................... $ 6,318,357
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 82,837
==============
See Notes to Financial Statements Page 15
FIRST TRUST MORTGAGE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
4/30/2013 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2012 10/31/2011 (b) 10/31/2010 (a) 10/31/2009 10/31/2008
----------- ---------- -------------- -------------- ---------- ----------
Net asset value, beginning of period....... $ 17.91 $ 18.43 $ 19.59 $ 19.63 $ 18.03 $ 18.66
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............... 0.62 1.28 1.69 2.06 1.57 1.49
Net realized and unrealized gain (loss).... 0.02 0.17 (0.82) (0.45) 1.40 (1.00)
--------- --------- --------- --------- --------- ---------
Total from investment operations........... 0.64 1.45 0.87 1.61 2.97 0.49
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income...................... (0.72) (2.03) (2.03) (1.65) (1.37) (1.12)
--------- --------- --------- --------- --------- ---------
Total from distributions................... (0.72) (2.03) (2.03) (1.65) (1.37) (1.12)
--------- --------- --------- --------- --------- ---------
Premium from shares sold in at the market
offering................................ -- 0.06 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net asset value, end of period............. $ 17.83 $ 17.91 $ 18.43 $ 19.59 $ 19.63 $ 18.03
========= ========= ========= ========= ========= =========
Market value, end of period................ $ 16.91 $ 19.00 $ 18.94 $ 20.70 $ 17.91 $ 15.71
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON NET ASSET VALUE (c).. 3.75% (d) 8.30% 4.60% 9.01% 18.21% 3.38%
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON MARKET VALUE (c)..... (7.25)% 11.86% 1.68% 26.18% 23.91% 2.94%
========= ========= ========= ========= ========= =========
--------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)....... $ 75,127 $ 75,439 $ 75,014 $ 79,495 $ 79,462 $ 72,956
Ratio of total expenses to average net
assets ................................. 2.17% (e) 2.47% 2.23% 2.00% 2.07% 2.69%
Ratio of total expenses to average net
assets excluding interest expense....... 1.98% (e) 2.20% 2.14% 1.95% 1.99% 1.83%
Ratio of net investment income (loss) to
average net assets...................... 7.00% (e) 7.28% 8.74% 10.50% 9.01% 7.93%
Portfolio turnover rate.................... 54% 52% 47% 36% 39% 10%
--------------------------------------------------
(a) On September 20, 2010, the Fund's Board of Trustees approved a new
investment management agreement with First Trust Advisors L.P. and a new
investment sub-advisory agreement with Fixed Income Discount Advisory
Company ("FIDAC"), and on December 6, 2010, the Fund's shareholders voted
to approve both agreements.
(b) Effective April 29, 2011, the Fund's Board of Trustees approved Brookfield
Investment Management Inc. ("Brookfield") as the investment sub-advisor to
the Fund, replacing FIDAC. The Fund's shareholders approved the investment
sub-advisory agreement with Brookfield on July 25, 2011.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) The Fund received reimbursements from Brookfield in the amount of $5,310.
The reimbursements from the Sub-Advisor represent less than $0.01 per
share and had no effect on the Fund's total return.
(e) Annualized.
Page 16 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund trades under the ticker symbol FMY on the New York Stock Exchange
("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing primarily in mortgage-backed securities
that, in the opinion of Brookfield Investment Management Inc. ("Brookfield" or
the "Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
As previously disclosed in the Fund's October 31, 2012, annual report, effective
March 8, 2013, upon due notice, the Fund's investment strategy was modified to
permit the Fund to invest up to 10% of its Managed Assets in other MBS (as
defined in the Fund's Prospectus) and ABS securities, including non-mortgage ABS
securities.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Fund's securities will be valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are valued on the basis of valuations
provided by dealers who make markets in such securities or by an independent
pricing service approved by the Fund's Board of Trustees, which may use
the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
In the event that the pricing service or dealer does not provide a valuation, or
the valuations received are deemed unreliable, the Fund's Board of Trustees has
designated First Trust Advisors L.P. ("First Trust") to use a fair value method
to value the Fund's securities. Additionally, if events occur after the close of
the principal markets for certain securities (e.g., domestic debt and foreign
securities) that could materially affect the Fund's NAV, First Trust may use a
fair value method to value the Fund's securities. The use of fair value pricing
is governed by valuation procedures adopted by the Fund's Board of Trustees, and
in accordance with the provisions of the 1940 Act. As a general principle, the
fair value of a security is the amount which the Fund might reasonably expect to
receive for the security upon its current sale. In light of the judgment
involved in fair valuations, there can be no assurance that a fair value
assigned to a particular security will be the amount which the Fund might be
able to receive upon its current sale. Fair valuation of a security is based on
the consideration of all available information, including, but not limited to,
the following:
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for identical
investments. An active market is a market in which transactions for the
investment occur with sufficient frequency and volume to provide pricing
information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets that
are non-active. A non-active market is a market where there are few
transactions for the investment, the prices are not current, or
price quotations vary substantially either over time or among market
makers, or in which little information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds, loss
severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may
reflect the reporting entity's own assumptions about the assumptions that
market participants would use in pricing the investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2013, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and the accretion of discounts are recorded using the effective interest method.
The Fund invests in interest-only securities. 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 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, 2013, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements were utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing under which Fund assets are pledged as collateral to secure
a short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back to the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Information for the six months ended April 30, 2013:
Maximum amount outstanding during the period $24,242,850
Average amount outstanding during the period* $17,754,911
Average Common Shares outstanding during the period 4,212,480
Average debt per Common Share outstanding during the period $4.21
* The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the six months ended April 30, 2013.
During the six months ended April 30, 2013, the interest rates ranged from 0.42%
to 1.76%, with a weighted average interest rate of 0.82%, on borrowings by the
Fund under reverse repurchase agreements, which had interest expense that
aggregated $72,999.
D. INVERSE FLOATING-RATE SECURITIES:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities are
identified on the Portfolio of Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some point in the future.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended October 31,
2012, was as follows:
Distributions paid from:
Ordinary income................................. $ 8,321,681
Capital gain.................................... --
Return of capital............................... --
As of October 31, 2012, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................... $ 1,006,840
Undistributed capital gains..................... --
------------
Total undistributed earnings.................... 1,006,840
Accumulated capital and other losses............ (5,661,430)
Net unrealized appreciation (depreciation)...... 727,966
------------
Total accumulated earnings (losses)............. (3,926,624)
Other........................................... --
Paid-in capital................................. 79,365,241
------------
Net assets...................................... $ 75,438,617
============
H. INCOME AND OTHER TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward 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, 2012, the Fund had pre-enactment net capital
losses for federal income tax purposes of $5,661,430 expiring as follows:
EXPIRATION DATE AMOUNT
October 31, 2014 $ 2,311,558
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887
During the taxable year ended October 31, 2012, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $620,694.
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 ending 2009, 2010,
2011, and 2012 remain open to federal and state audit. As of April 30, 2013,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
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
Page 20
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
management services, First Trust is entitled to a monthly fee calculated at an
annual rate of 1.00% of the Fund's Managed Assets (the average daily total asset
value of the Fund minus the sum of the Fund's liabilities other than the
principal amount of borrowings or reverse repurchase agreements, if any). First
Trust also provides fund reporting services to the Fund for a flat annual fee in
the amount of $9,250.
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee of 0.50% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
During the six-month period ended April 30, 2013, the Fund received
reimbursements from the Sub-Advisor of $5,310 in connection with a trade error.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
chairman will serve two-year terms until December 31, 2013, before rotating to
serve as chairman of another committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds 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,
2013, were $36,945,030 and $13,031,265, 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, 2013, were
$40,928,679 and $22,944,425, respectively.
5. COMMON SHARE OFFERING
On June 21, 2012, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading Institutional Services, LLC ("JonesTrading") whereby
the Fund may offer and sell up to 1,000,000 Common Shares from time to time
through JonesTrading as agent for the offer and sale of the Common Shares. Sales
of Common Shares pursuant to the sales agreement may be made in negotiated
transactions or transactions that are deemed to be "at the market" as defined in
Rule 415 under the Securities Act of 1933, as amended, including sales made
directly on the NYSE or sales made through a market maker other than on an
exchange, at an offering price equal to or in excess of the net asset value per
share of the Fund's Common Shares at the time such Common Shares are initially
sold. The Fund intends to use the net proceeds from the sale of the Common
Shares in accordance with its investment objectives and policies. Sales of
Common Shares made under the sales agreement will be made pursuant to a "shelf"
registration statement on Form N-2 (the "Registration Statement") that will
require the Fund to obtain effectiveness from the SEC on an annual basis. The
Registration Statement has not been effective since February 2013 and therefore
Common Shares have not been offered under the sales agreement since that time.
Any future sales of Common Shares under the sales agreement will be made
pursuant to an effective Registration Statement. Transactions related to
offerings under such sales agreement are as follows:
COMMON NET PROCEEDS
SHARES NET PROCEEDS NET ASSET VALUE RECEIVED IN EXCESS
SOLD RECEIVED OF SHARES SOLD OF NET ASSET VALUE
----------- -------------- --------------- ----------------------
Six Months Ended 4/30/13 -- $ -- $ -- $ --
Year Ended 10/31/12 122,655 2,403,089 2,163,307 239,782
Page 21
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
Additionally, offering costs of $212,203 related to this offering have been
recorded as a prepaid asset and are being amortized to expense by the Fund on a
straight line basis over the lesser of one year or until the Fund sells
1,000,000 Common Shares related to this offering.
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. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Advisor or Sub-Advisor may take
temporary defensive positions.
SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Sub-Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.
INTEREST RATE RISK: The Fund may also hold MBS which are Stripped
Mortgage-Backed Securities, IO securities and PO securities. Generally speaking,
when interest rates are falling and prepayment rates are increasing, the value
of a PO security will rise and the value of an IO security will fall.
Conversely, when interest rates are rising and prepayment rates are decreasing,
generally the value of a PO security will fall and the value of an IO security
will rise.
LEVERAGE RISK: Borrowings up to 33-1/3% (or such other percentage as permitted
by law) of Fund assets (including the amount borrowed) less liabilities other
than borrowings may be utilized in the Fund. Leverage may be used for investment
purposes and to meet cash requirements. The leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. Reverse repurchase agreements are used to leverage the
Fund's assets. Reverse repurchase agreements are subject to the risks that the
market value of the Fund's securities sold may decline below the price of the
securities the Fund is obligated to repurchase, and that the securities may not
be returned to the Fund. From time to time the amount of the leverage may be
changed in response to actual or anticipated changes in interest rates or the
value of the Fund's investment portfolio. There can be no assurance that the
leverage strategies will be successful.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are invested at market interest rates that are below the Fund portfolio's
current earnings rate; and (iii) credit risk, which is the risk that a security
in the Fund's portfolio will decline in price or the issuer fails to make
interest payments when due because the issuer of the security experiences a
decline in its financial status.
Page 22
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On May 20, 2013, the Fund declared a dividend of $0.085 per share to Common
Shareholders of record on June 5, 2013, payable June 17, 2013. This is a
decrease from the prior month's distribution paid on May 15, 2013, of $0.10 per
share.
On June 20, 2013, the Fund declared a dividend of $0.085 per share to Common
Shareholders of record on July 3, 2013, payable July 15, 2013.
Page 23
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
Page 24
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2013 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Active Dividend Income Fund, First Trust High Income
Long/Short Fund and First Trust Energy Infrastructure Fund, was held on April
17, 2013 (the "Annual Meeting"). At the Annual Meeting, Trustees James A. Bowen
and Niel B. Nielson were elected by the Common Shareholders of the First Trust
Mortgage Income Fund as Class III Trustees for three-year terms expiring at the
Fund's annual meeting of shareholders in 2016. The number of votes cast in favor
of Mr. Bowen was 3,691,670, the number of votes against was 220,385 and the
number of abstentions was 301,060. The number of votes cast in favor of Mr.
Nielson was 3,695,816, the number against was 216,239 and the number of
abstentions was 301,060. Richard E. Erickson, Thomas R. Kadlec and Robert F.
Keith are the other current and continuing Trustees.
Page 25
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
3 World Financial Center
200 Vesey Street, 10th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Mortgage Income Fund
------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 18, 2013
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 18, 2013
------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 18, 2013
------------------
* Print the name and title of each signing officer under his or her signature.