UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21727
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First Trust Mortgage Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: April 30, 2012
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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, 2012
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2012
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...................................................... 23
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, 2012
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.
First Trust remains committed to being a long-term investor and investment
manager and to bringing you quality financial solutions regardless of market ups
and downs. We have always believed, as I have written previously, that there are
two ways to attain success in reaching your financial goals: staying invested in
quality products and having a long-term investment horizon. We are committed to
this approach in the products we manage or supervise and offer to investors.
As you know, 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 2012 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, 2012 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $19.85
Common Share Net Asset Value ("NAV") $17.70
Premium (Discount) to NAV 12.15%
Net Assets Applicable to Common Shares $72,211,552
Current Monthly Distribution per Common Share (1) $0.160
Current Annualized Distribution per Common Share $1.920
Current Distribution Rate on Closing Common Share Price (2) 9.67%
Current Distribution Rate on NAV (2) 10.85%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
4/11 $20.78 $19.68
20.59 19.49
20.61 19.53
20.89 19.61
5/11 20.98 19.75
20.95 19.69
20.22 19.60
20.35 19.56
6/11 21.16 19.59
20.74 19.54
20.94 19.77
20.87 19.66
20.76 19.70
7/11 19.68 19.50
19.39 19.12
19.02 18.70
19.01 18.59
8/11 19.16 18.71
19.10 18.61
19.00 18.55
19.05 18.58
18.94 18.18
9/11 18.66 18.20
17.70 18.05
18.54 18.41
18.42 18.39
10/11 18.82 18.48
18.87 18.37
19.09 18.33
18.71 18.01
11/11 18.36 17.87
18.54 17.86
18.71 17.95
18.98 17.80
18.88 17.90
12/11 19.07 17.53
19.12 17.56
19.42 17.65
19.28 17.77
1/12 19.80 17.84
19.78 17.72
19.07 17.70
19.38 17.74
2/12 19.53 17.81
19.72 17.72
19.47 17.73
19.53 17.80
19.30 17.90
3/12 19.62 17.95
19.68 17.82
19.67 17.72
19.74 17.73
19.77 17.73
4/12 19.85 17.70
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PERFORMANCE (3)
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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)
4/30/2012 4/30/2012 4/30/2012 to 4/30/2012
FUND PERFORMANCE
NAV 1.74% 0.22% 8.31% 7.02%
Market Value 11.08% 6.44% 12.87% 8.08%
INDEX PERFORMANCE
Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index 2.13% 5.82% 6.27% 7.05%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 0.99
Weighted Average Life (Years) 4.62
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 60.4%
U.S. Government Agency Mortgage-Backed Securities 38.5
Asset-Backed Securities 1.1
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Fixed Rate Securities 59.7%
Adjustable Rate Securities 26.4
Interest Only Securities 13.9
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 62.7%
AA+ 2.3
AA 6.5
A+ 3.6
A 2.0
BBB+ 1.1
BB 1.2
BB- 0.5
B 3.1
B- 2.6
CCC+ 6.2
CCC 6.5
CC 1.5
D 0.2
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Total 100.0%
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(1) Most recent distribution paid or declared through 4/30/2012. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 4/30/2012. 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. or a
comparably rated NRSRO. For situations in which a security is rated by more
than one NRSRO and ratings are not equivalent, the highest ratings are
used. Sub-investment grade ratings are those rated BB+/Ba1 or lower.
Investment grade ratings are those rated BBB-/Baa3 or higher.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
SEMI-ANNUAL REPORT
APRIL 30, 2012
SUB-ADVISOR
BROOKFIELD INVESTMENT MANAGEMENT INC.
Brookfield Investment Management Inc. ("Brookfield" or the "Sub-Advisor") is a
wholly-owned subsidiary of Brookfield Asset Management, a global alternative
asset manager with approximately $150 billion in assets under management as of
March 31, 2012. 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 and also offers a range of public and private
investment products and services. On behalf of its clients, Brookfield Asset
Management is also an active investor in the public securities markets.
The public market activities of Brookfield, an SEC-registered investment
advisor, complement the firm's core competencies as a direct investor. These
activities encompass global listed real estate and infrastructure equities,
corporate high-yield investments, opportunistic credit strategies and a
dedicated insurance asset management division. Headquartered in New York, NY,
Brookfield maintains offices and investment teams in Toronto, Chicago, Boston
and London.
PORTFOLIO MANAGEMENT TEAM
ANTHONY BREAKS, CFA
DIRECTOR
Mr. Breaks is a Portfolio Manager on the Securitized Products Investments Team.
Mr. Breaks joined Brookfield in 2002 and is one of four team leaders in
mortgage-backed securities ("MBS") and asset-backed securities ("ABS") and is a
member of the team's securities analysis committee. In his role, Mr. Breaks is
one of the team's portfolio managers. Mr. Breaks has also managed securitized
product vehicles, such as structured investment vehicles ("SIVs"), asset-backed
commercial paper ("ABCP") and collateralized debt obligations ("CDOs") for
Brookfield and has experience in insurance company asset management. Mr. Breaks
earned a Bachelor of Science degree in Electrical Engineering from the
Massachusetts Institute of Technology. He holds the Chartered Financial Analyst
("CFA") designation.
CHRIS WU
DIRECTOR
Mr. Wu joined Brookfield in 2007 and 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 the University of Saskatchewan. He also earned a Bachelor
of Economics degree from Huazhong University of Science and Technology in China.
COMMENTARY
FIRST TRUST MORTGAGE INCOME FUND
The First Trust Mortgage Income Fund's (the "Fund") primary investment objective
is to seek a high level of current income. As a secondary objective, the Fund
seeks to preserve capital. The Fund 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.(1) The Fund uses
leverage primarily through the use of repurchase agreements.
MARKET RECAP AND OUTLOOK
Securitized products performed well during the six-month period ended April 30,
2012, with "risk on" being the dominant theme. Trading activity was brisk for
the period as large amounts of supply met strong demand from insurance companies
and money managers. Supply included the last of Maiden Lane II, the Fed's
special purpose vehicle ("SPV") that purchased
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(1) The Fund's Managed Assets are the 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.
Page 3
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PORTFOLIO COMMENTARY - (CONTINUED)
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AIG's structured assets during the 2008 crisis. Although issuance of RMBS
continued to be light, there were three new issue deals announced in the first
quarter, two with new prime collateral and one with re-performing subprime
collateral. CMBS issuance continued its recovery with $4 billion in new deals
this quarter.
Economic signs have been stronger in the U.S., especially as warm weather seems
to have pulled forward some of the consumption typically associated with a
second quarter spring thaw. Unemployment continues to fall and consumer
confidence is rising. Given the data and minutes from the Federal Open Market
Committee meeting, a third round of Fed bond buying, so-called "QE3", now seems
unlikely. Government policy remains accommodative and the low-yield environment
is drawing investors toward higher-yielding sectors such as RMBS and CMBS.
European news was generally mixed but the strong uptake of Long Term Refinancing
Operations II buoyed European markets and kept global investors feeling bullish.
This bullish sentiment has also caused yields to converge as the premium for
riskier assets has narrowed, which has increased our preference for stability
and income.
From a real estate fundamental perspective, our current projection for home
prices is a further decline of 6.2% for the 2012 year-end. This is a reduction
from our 9.2% decline projection at year-end. As we approach a nadir in the
national averages, we expect to see more regional real estate markets tighten
and for strategic default to look less appealing to underwater borrowers.
More than 90% of new mortgages, including refinancing, are now guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae, and so any changes to government programs
can be an important driver of performance. Based on the published score card
memo, we now believe that the Federal Housing Finance Agency will begin
attempting to combine Fannie Mae and Freddie Mac and to sell first loss
protection in some future RMBS transactions. We also expect continued increases
in Ginnie Mae's insurance premiums as this is the only source of income to
replenish its dwindling reserve fund. These dynamics work against the White
House's policies expanding credit access. On the margin this will most likely
result in a stalemate and a low chance of greatly expanded credit.
Last quarter we posted positive returns in securitized products on improving
forecasts for collateral performance and lower-required yields from investors.
These dynamics are still intact now; therefore, we continue to remain optimistic
for returns. With a contraction in risk premiums, we remain focused on stability
and income. We believe bonds with these characteristics will be the first choice
for more conventional investors dipping a toe back into a market that may have
burned them not long ago. By contrast, more volatile bonds can rally more with a
"risk on" market; however, if their fundamental risks remain unresolved, it will
be difficult to harvest the paper gain. For these reasons, we continue to
emphasize senior prime RMBS, CMBS and seasoned Manufactured Housing.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2012, the Fund had a total return(2) of
1.74% based on net asset value ("NAV"). For the period, the Fund traded from a
premium to NAV of 2.77% to a premium to NAV of 12.15%, resulting in a total
return2 of 11.08% based on market price. During the period, the Fund's
benchmark, the Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index, returned
2.13%.
Over the course of the period, primary purchases for the Fund were investment
grade fixed-coupon CMBS and hybrid coupon non-Agency RMBS. We swapped a portion
of the Fund's exposure to Agency MBS derivatives as we repositioned to reduce
prepayment risk as interest rates fell. The purchases were funded with existing
cash, repaid principal on existing holdings and sales. In total, approximately
$4.9 million in senior non-Agency RMBS, $1.1 million in senior CMBS and $2
million of Agency derivatives were purchased.
With the portfolio close to the limit of below "A" grade allocation, we mostly
purchased bonds above the "A" grade during the past six months. In seeking bonds
with stable yield profiles, a sector we find particularly attractive is senior
prime RMBS.
We also prefer the most senior bonds in CMBS purchases as these bonds tend to
have considerable credit enhancement to avoid losses, and consequently have high
investment-grade ratings. When spreads on these bonds widen, we see an
opportunity to pick up spread to Agencies with more price upside potential.
Manufactured Housing is similarly remote from principal loss and with higher
spreads, although it is slower to find price appreciation in an improving
market.
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(2) Total return is based on the combination of reinvested dividend, capital
gains 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.
Page 4
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PORTFOLIO COMMENTARY - (CONTINUED)
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Currently, the leverage of the Fund is relatively low at 22.09%, as of April 30,
2012, given that the Fund may utilize leverage in an amount up to 33.33% of
Managed Assets. 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.
An important factor impacting the return of the Fund relative to its benchmarks
was the Fund's use of financial leverage through the use of bank borrowings. 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 evaluation 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. Leverage
had a positive impact on the performance of the Fund over this reporting period.
DISCLOSURE
Fixed-income investing entails credit risks and interest rate risks. When
interest rates rise, bond prices generally fall, and the Fund's share prices can
fall. Investments in below-investment-grade ("high-yield" or "junk") bonds are
more at risk of default and are subject to liquidity risk. Mortgage-backed
securities are subject to prepayment risk.
This management discussion contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements that are based on various assumptions (some of which are beyond
Brookfield's control) may be identified by reference to a future period or
periods or by the use of forward-looking terminology, such as "may," "will,"
"believe," "expect," "anticipate," "continue," "should," "intend," or similar
terms or variations on those terms or the negative of those terms. Although we
believe that the expectations contained in any forward-looking statement are
based on reasonable assumptions, we can give no assurance that our expectations
will be attained. We do not undertake, and specifically disclaim any obligation,
to publicly release any update or supplement to any forward-looking statements
to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
Opinions expressed herein are as of April 30, 2012 and subject to change.
Page 5
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES - 73.1%
COLLATERALIZED MORTGAGE OBLIGATIONS - 52.9%
Adjustable Rate Mortgage Trust
$ 288,625 Series 2004-5, Class 1A1 (a)............... 3.06% 04/25/35 $ 263,575
Banc of America Funding Corp.
949,197 Series 2005-F, Class 4A1 (a)............... 2.79% 09/20/35 643,601
Banc of America Mortgage Securities
108,083 Series 2002-L, Class 1A1 (a)............... 2.78% 12/25/32 88,404
135,683 Series 2004-K, Class 4A1 (a)............... 5.25% 12/25/34 125,571
1,486,698 Series 2007-1, Class 1A26 ................. 6.00% 03/25/37 1,337,756
Bear Stearns Adjustable Rate Mortgage Trust
1,097,821 Series 2004-9, Class 12A3 (a).............. 2.91% 11/25/34 1,029,679
969,925 Series 2004-10, Class 12A3 (a)............. 2.79% 01/25/35 852,842
Chase Mortgage Finance Corp.
596,530 Series 2007-A3, Class 3A1 (a).............. 5.64% 12/25/37 513,044
Countrywide Alternative Loan Trust
187,349 Series 2004-14T2, Class A6 ................ 5.50% 08/25/34 187,313
1,225,375 Series 2005-J1, Class 2A1 ................. 5.50% 02/25/25 1,193,684
119,346 Series 2007-11T1, Class A37 (d)............ 38.59% 05/25/37 205,223
Countrywide Home Loan Mortgage Pass
Through Trust
1,138,137 Series 2006-21, Class A8 .................. 5.75% 02/25/37 916,019
138,378 Series 2007-15, Class 2A2 ................. 6.50% 09/25/37 111,114
Countrywide Home Loans
310,383 Series 2004-HYB1, Class 2A (a)............. 2.84% 05/20/34 279,069
218,115 Series 2005-20, Class A7 .................. 5.25% 12/25/27 189,217
844,623 Series 2005-J4, Class A4 .................. 5.50% 11/25/35 848,852
Credit Suisse First Boston Mortgage
Securities Corp.
2,000,605 Series 2004-AR2, Class 1A1 (a)............. 2.91% 03/25/34 1,580,894
First Horizon Mortgage Trust
726,567 Series 2006-2, Class 1A3 .................. 6.00% 08/25/36 666,716
GMAC Mortgage Corporation Loan Trust
366,482 Series 2004-AR1, Class 22A (a)............. 3.26% 06/25/34 327,747
GSR Mortgage Loan Trust
315,180 Series 2005-AR2, Class 5A1 (a)............. 2.67% 04/25/35 286,637
2,161,577 Series 2007-1F, Class 3A10, IO ............ 6.00% 01/25/37 203,340
Harborview Mortgage Loan Trust
300,838 Series 2004-1, Class 2A (a)................ 2.80% 04/19/34 277,639
1,159,692 Series 2004-6, Class 3A1 (a)............... 2.83% 08/19/34 900,586
JP Morgan Mortgage Trust
2,649,190 Series 2005-ALT1, Class 4A1 (a)............ 5.24% 10/25/35 2,064,934
1,033,434 Series 2006-A2, Class 4A1 (a).............. 2.80% 08/25/34 1,004,495
JP Morgan Re-REMIC
2,493,745 Series 2009-7, Class 12A1 (a) (b).......... 6.25% 01/27/37 2,555,489
MASTR Alternative Loan Trust
615,348 Series 2004-8, Class 5A1 .................. 6.00% 09/25/34 650,997
MASTR Asset Securitization Trust
1,124,629 Series 2006-2, Class 1A10 (a).............. 6.00% 06/25/36 978,993
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Mellon Residential Funding Corp
$ 581,250 Series 2001-TBC1, Class A1 (a)............. 0.94% 11/15/31 $ 563,073
Merrill Lynch Mortgage Investors Trust
1,376,260 Series 2005-A7, Class 2A1 (a).............. 5.25% 09/25/35 1,235,625
Morgan Stanley Mortgage Loan Trust
241,115 Series 2004-7AR, Class 2A6 (a)............. 2.65% 09/25/34 211,769
Provident Funding Mortgage Loan Trust
456,367 Series 2005-1, Class 1A1 (a)............... 2.97% 05/25/35 412,411
Residential Accredit Loans, Inc.
95,568 Series 2002-QS18, Class A1 ................ 5.50% 12/25/17 97,829
1,102,771 Series 2004-QS2, Class CB ................. 5.75% 02/25/34 1,110,693
Residential Funding Mortgage Securities I
438,658 Series 2005-S5, Class A5 .................. 5.25% 07/25/35 436,963
Structured Asset Securities Corp.
930,000 Series 2005-16, Class 1A2 ................. 5.50% 09/25/35 829,124
Thornburg Mortgage Securities Trust
1,376,346 Series 2004-3, Class A (a)................. 0.98% 09/25/44 1,244,331
Wachovia Mortgage Loan Trust, LLC
941,876 Series 2006-A, Class 3A1 (a)............... 4.32% 05/20/36 864,467
Washington Mutual Alternative Mortgage
Pass-Through Certificates
72,298 Series 2007-5, Class A11 (d)............... 38.05% 06/25/37 118,860
Washington Mutual Msc Mortgage
Pass-Through
679,138 Series 2004-RA1, Class 2A ................. 7.00% 03/25/34 725,481
Wells Fargo Mortgage Backed Securities Trust
1,235,424 Series 2004-A, Class A1 (a)................ 4.85% 02/25/34 1,264,622
599,846 Series 2004-EE, Class 2A2 (a).............. 2.67% 12/25/34 605,050
2,746,000 Series 2005-9, Class 2A9 .................. 5.25% 10/25/35 2,726,752
600,839 Series 2005-AR16, Class 1A1 (a)............ 2.75% 08/25/33 607,998
495,000 Series 2006-AR1, Class 2A5 (a)............. 5.37% 03/25/36 461,527
291,126 Series 2006-AR10, Class 5A2 (a)............ 2.67% 07/25/36 222,493
1,735,655 Series 2007-10, Class 1A18 ................ 6.00% 07/25/37 1,614,784
1,329,977 Series 2007-16, Class 1A1 ................. 6.00% 12/28/37 1,361,421
1,021,732 Series 2007-2, Class 1A13 ................. 6.00% 03/25/37 935,022
260,725 Series 2007-8, Class 2A2 .................. 6.00% 07/25/37 256,023
------------
38,189,748
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 20.2%
Banc of America Merrill Lynch Commercial
Mortgage, Inc.
1,000,000 Series 2006-6, Class A4 ................... 5.36% 10/10/45 1,106,531
1,000,000 Series 2007-2, Class A4 (a) (c)............ 5.63% 04/10/49 1,140,647
Citigroup/Deutsche Bank Commercial
Mortgage Trust
1,000,000 Series 2007-CD4, Class A4 ................. 5.32% 12/11/49 1,112,776
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
MORTGAGE-BACKED SECURITIES - (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES - (CONTINUED)
Credit Suisse Mortgage Capital Certificates
$ 820,000 Series 2007-C2, Class A3 (a)............... 5.54% 01/15/49 $ 894,138
Greenwich Capital Commercial Funding Corp.
1,000,000 Series 2007-GG11, Class A4 (c)............. 5.74% 12/10/49 1,117,898
1,000,000 Series 2007-GG9, Class A4 ................. 5.44% 03/10/39 1,110,759
GS Mortgage Securities Corp II
1,000,000 Series 2007-GG10, Class A4 (a)............. 5.79% 08/10/45 1,114,880
JP Morgan Chase Commercial Mortgage
Securities Corp
905,000 Series 2007-CB18, Class A4 ................ 5.44% 06/12/47 1,019,177
LB-UBS Commercial Mortgage Trust
1,200,000 Series 2007-C7, Class A3 (a) (c)........... 5.87% 09/15/45 1,376,044
Merrill Lynch/Countrywide Commercial
Mortgage Trust
1,200,000 Series 2007-7, Class A4 (a) (c)............ 5.75% 06/12/50 1,302,238
Morgan Stanley Capital I, Inc.
1,000,000 Series 2007-IQ14, Class A4 (a) (c)......... 5.69% 04/15/49 1,100,474
Wachovia Bank Commercial Mortgage Trust
1,000,000 Series 2007-C30, Class A5 (c).............. 5.34% 12/15/43 1,087,647
1,000,000 Series 2007-C32, Class A3 (a).............. 5.74% 06/15/49 1,088,446
-----------
14,571,655
-----------
TOTAL MORTGAGE-BACKED SECURITIES ........................................ 52,761,403
(Cost $49,862,068) -----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 47.3%
COLLATERALIZED MORTGAGE OBLIGATIONS - 22.7%
Federal Home Loan Mortgage Corp.
910,997 Series 2641, Class SC (d).................. 13.42% 07/15/33 974,510
5,225,649 Series 2807, Class SB, IO (d).............. 7.21% 11/15/33 806,978
444,795 Series 3069, Class LI, IO ................. 5.50% 08/15/32 16,659
238,394 Series 3195, Class SX (d).................. 44.59% 07/15/36 431,091
1,812,905 Series 3562, Class KI, IO ................. 4.50% 11/15/22 88,224
1,847,855 Series 3593, Class IP, IO ................. 5.00% 06/15/36 104,001
7,450,243 Series 3619, Class EI, IO ................. 4.50% 05/15/24 581,538
4,412,630 Series 3692, Class PS, IO (d).............. 6.36% 05/15/38 610,366
1,560,992 Series 3702, Class SK (d).................. 13.98% 08/15/40 1,600,549
10,997,980 Series 3726, Class KI, IO ................. 3.50% 04/15/25 948,205
5,247,081 Series 3870, Class WS, IO (d).............. 6.36% 06/15/31 790,081
Federal Home Loan Mortgage Corp., STRIP
3,778,290 Series 232, Class IO, IO .................. 5.00% 08/01/35 544,756
Federal National Mortgage Association
2,153,660 Series 2005-122, Class SN (d).............. 27.65% 01/25/36 2,785,768
267,213 Series 2005-91, Class SH (d)............... 22.96% 05/25/33 322,270
2,019,804 Series 2008-50, Class AI, IO .............. 5.50% 06/25/23 94,925
5,844,490 Series 2010-103, Class ID, IO ............. 5.00% 09/25/40 992,579
8,861,030 Series 2010-139, Class KI, IO ............. 1.09% 12/25/40 434,674
3,947,309 Series 2010-142, Class PS, IO (d).......... 5.81% 05/25/40 451,879
2,713,666 Series 2010-145, Class TI, IO ............. 3.50% 12/25/20 222,730
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- -------------------------------------------- ---------- ----------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED)
Federal National Mortgage Association (Continued)
$ 9,273,434 Series 2010-40, Class MI, IO .............. 4.50% 08/25/24 $ 647,181
Federal National Mortgage Association, STRIP
4,095,525 Series 360, Class 2, IO ................... 5.00% 08/01/35 599,968
6,443,483 Series 406, Class 6, IO (a)................ 4.00% 01/25/41 792,417
Government National Mortgage Association
2,613,148 Series 2009-65, Class NJ, IO .............. 5.50% 07/20/39 300,977
5,075,631 Series 2010-115, Class IQ, IO ............. 4.50% 11/20/38 845,921
4,622,833 Series 2011-69, Class CI, IO .............. 5.00% 03/20/36 379,492
-----------
16,367,739
-----------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 2.6%
Government National Mortgage Association
13,116,950 Series 2011-131, Class EI, IO ............. 4.50% 08/20/39 1,890,332
-----------
PASS-THROUGH SECURITIES - 22.0%
Fannie Mae REMICs
2,215,724 Series 2005-83, Class LZ (c)............... 5.50% 10/25/35 2,369,781
1,217,880 Series 2010-110, Class WG (c).............. 5.50% 09/25/40 1,247,585
Federal Home Loan Mortgage Corp.
2,501,242 Pool A94738 (c)............................ 4.50% 11/01/40 2,671,786
1,297,878 Pool K36017 (c)............................ 5.00% 09/01/47 1,393,673
Federal National Mortgage Association
3,351,974 Pool 831145 (c)............................ 6.00% 12/01/35 3,743,343
4,002,456 Pool 843971 (c)............................ 6.00% 11/01/35 4,496,041
-----------
15,922,209
-----------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES .................. 34,180,280
(Cost $34,664,122) -----------
ASSET-BACKED SECURITIES - 2.5%
Green Tree Financial Corp.
119,562 Series 1997-2, Class A6 (a)................ 7.24% 06/15/28 130,885
131,496 Series 1997-3, Class A6 ................... 7.32% 03/15/28 144,669
164,467 Series 1997-7, Class A6 ................... 6.76% 07/15/29 176,921
Lehman ABS Manufactured Housing Contract
Trust
260,195 Series 2001-B, Class A4 ................... 5.27% 04/15/40 266,131
Mid-State Trust
266,165 Series 2006-1, Class A .................... 5.79% 10/15/40 275,990
Park Place Securities, Inc.
819,705 Series 2004-MHQ1, Class M1 (a)............. 0.94% 12/25/34 813,421
-----------
TOTAL ASSET-BACKED SECURITIES ............................................ 1,808,017
(Cost $1,783,172) -----------
TOTAL INVESTMENTS (e) - 122.9% ........................................... 88,749,700
(Cost $86,309,362) -----------
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL
VALUE DESCRIPTION AMOUNT
------------ ---------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (28.3%)
$(5,591,250) With Credit Suisse 1.80% dated 02/06/12, to be repurchased at
$5,616,690 on 05/07/12................................................. $(5,591,250)
(3,351,000) With Credit Suisse 0.90% dated 03/30/12, to be repurchased at
$3,356,110 on 05/30/12................................................. (3,351,000)
(7,677,000) With Credit Suisse 0.37% dated 04/13/12, to be repurchased at
$7,684,101 on 07/12/12................................................. (7,677,000)
(3,852,000) With Credit Suisse 0.40% dated 04/18/12, to be repurchased at
$3,855,852 on 07/17/12................................................. (3,852,000)
-----------
TOTAL REVERSE REPURCHASE AGREEMENTS ...................................... (20,471,250)
NET OTHER ASSETS AND LIABILITIES - 5.4% .................................. 3,933,102
-----------
NET ASSETS - 100.0% ...................................................... $72,211,552
===========
(a) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2012.
(b) This security, sold within the terms of a private placement
memorandum, is exempt from registration upon resale under Rule 144A
under the Securities Act of 1933, as amended, and may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. The Fund does not have the right to demand that
this security be registered. This security is valued according to the
valuation procedures as stated in the Portfolio Valuation footnote
(Note 2A in the Notes to Financial Statements) and is not expressed as
a discount to the carrying value of a comparable unrestricted
security. This security was acquired on September 9, 2009, has a
current carrying cost of $2,444,021, a carrying value per share of
$1.02 and represents 3.54% of net assets.
(c) This security or a portion of this security is segregated as
collateral for reverse repurchase agreements.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at April 30, 2012.
(e) Aggregate cost for financial reporting purposes, which approximates
the aggregate cost for federal income tax purposes. As of April 30,
2012, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $5,748,298 and
the aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $3,307,960.
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, 2012 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2012 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2012 PRICES INPUTS INPUTS
------------ ------------ ------------ -----------
Mortgage-Backed Securities......................... $ 52,761,403 $ -- $ 52,761,403 $ --
U.S. Government Agency Mortgage-Backed
Securities...................................... 34,180,280 -- 34,180,280 --
Asset-Backed Securities............................ 1,808,017 -- 1,808,017 --
------------ --------- ------------ ---------
Total Investments ................................. $ 88,749,700 $ -- $ 88,749,700 $ --
============ ========= ============ =========
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2012 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $86,309,362)......................................................................... $88,749,700
Cash .......................................................................................... 3,098,646
Restricted cash................................................................................ 280,000
Prepaid expenses............................................................................... 20,162
Interest receivable............................................................................ 711,034
-----------
Total Assets............................................................................ $92,859,542
-----------
LIABILITIES:
Reverse repurchase agreements.................................................................. 20,471,250
Payables:
Investment advisory fees.................................................................... 77,033
Interest on reverse repurchase agreements................................................... 28,420
Audit and tax fees.......................................................................... 24,204
Printing fees............................................................................... 10,540
Custodian fees.............................................................................. 10,231
Administrative fees......................................................................... 7,500
Transfer agent fees......................................................................... 6,580
Legal fees.................................................................................. 5,332
Trustees' fees and expenses................................................................. 1,758
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 4,371
-----------
Total Liabilities....................................................................... 20,647,990
-----------
NET ASSETS..................................................................................... $72,211,552
===========
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $77,081,656
Par value...................................................................................... 40,800
Accumulated net investment income (loss)....................................................... (519,014)
Accumulated net realized gain (loss) on investments............................................ (6,832,228)
Net unrealized appreciation (depreciation) on investments...................................... 2,440,338
-----------
NET ASSETS..................................................................................... $72,211,552
===========
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 17.70
===========
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,079,981
===========
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2012 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 857,885
-----------
Total investment income.................................................................. 857,885
-----------
EXPENSES:
Investment advisory fees....................................................................... 471,590
Excise tax expense............................................................................. 229,244
Interest expense on reverse repurchase agreements.............................................. 94,482
Administrative fees............................................................................ 44,998
Printing fees.................................................................................. 24,003
Audit and tax fees............................................................................. 22,804
Transfer agent fees............................................................................ 22,257
Trustees' fees and expenses.................................................................... 13,156
Legal fees..................................................................................... 9,234
Custodian fees................................................................................. 7,869
Financial reporting fees....................................................................... 4,625
Other.......................................................................................... 30,774
-----------
Total expenses........................................................................... 975,036
-----------
NET INVESTMENT INCOME.......................................................................... (117,151)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments.................................................. (623,052)
Net change in unrealized appreciation (depreciation) on investments...................... 2,130,076
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 1,507,024
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 1,389,873
===========
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2012 ENDED
(UNAUDITED) 10/31/2011
-------------- --------------
OPERATIONS:
Net investment income (loss)....................................................... $ (117,151) $ 6,873,389
Net realized gain (loss)........................................................... (623,052) 1,524,527
Net change in unrealized appreciation (depreciation)............................... 2,130,076 (4,901,731)
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................... 1,389,873 3,496,185
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (4,359,941) (8,244,891)
Net realized gain.................................................................. -- --
Return of capital.................................................................. -- --
-------------- --------------
Total distributions to shareholders................................................ (4,359,941) (8,244,891)
-------------- --------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested............................................. 167,379 268,427
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions.......... 167,379 268,427
-------------- --------------
Total increase (decrease) in net assets............................................ (2,802,689) (4,480,279)
NET ASSETS:
Beginning of period................................................................ 75,014,241 79,494,520
-------------- --------------
End of period...................................................................... $ 72,211,552 $ 75,014,241
============== ==============
Accumulated net investment income (loss) at end of period.......................... $ (519,014) $ 3,958,078
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 4,070,832 4,056,945
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 9,149 13,887
-------------- --------------
Common Shares at end of period..................................................... 4,079,981 4,070,832
============== ==============
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2012 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations $ 1,389,873
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating activities:
Purchases of investments.................................................. (42,082,577)
Sales, maturities and paydowns on investments............................. 46,779,747
Net amortization/accretion of premiums/discounts on investments........... 1,896,787
Net realized gain/loss on investments..................................... 623,052
Net change in unrealized appreciation/depreciation on investments......... (2,130,076)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable........................................... 91,306
Increase in prepaid expenses.............................................. (12,004)
Decrease in restricted cash............................................... 210,000
Increase in interest payable on reverse repurchase agreements............. 9,062
Decrease in investment advisory fees payable.............................. (5,877)
Decrease in audit and tax fees payable.................................... (20,980)
Increase in legal fees payable............................................ 3,356
Decrease in printing fees payable......................................... (1,062)
Increase in custodian fees payable........................................ 6,346
Increase in transfer agent fees payable................................... 2,874
Decrease in Trustees' fees and expenses payable........................... (1,534)
Increase in other liabilities payable..................................... 449
-----------
CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 6,758,742
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Common Shares reinvested...................................... 167,379
Distributions to Common Shareholders from net investment income........... (4,359,941)
Repurchases of reverse repurchase agreements.............................. (53,725,750)
Reverse repurchase agreements borrowings.................................. 51,203,250
-----------
CASH USED BY FINANCING ACTIVITIES............................................... (6,715,062)
--------------
Increase in cash................................................................ 43,680
Cash at beginning of period..................................................... 3,054,966
--------------
CASH AT END OF PERIOD............................................................ $ 3,098,646
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 85,420
==============
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
4/30/2012 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2011 (b) 10/31/2010 (a) 10/31/2009 10/31/2008 10/31/2007
----------- -------------- ------------- ---------- ---------- ----------
Net asset value, beginning of period... $ 18.43 $ 19.59 $ 19.63 $ 18.03 $ 18.66 $ 18.41
--------- --------- ---------- --------- --------- ---------
Income from investment operations:
Net investment income (loss)............ (0.03) 1.69 2.06 1.57 1.49 1.04
Net realized and unrealized gain (loss). 0.37 (0.82) (0.45) 1.40 (1.00) 0.23
--------- --------- ---------- --------- --------- ---------
Total from investment operations........ 0.34 0.87 1.61 2.97 0.49 1.27
--------- --------- ---------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income................... (1.07) (2.03) (1.65) (1.37) (1.12) (1.02)
--------- --------- ---------- --------- --------- ---------
Total from distributions................ (1.07) (2.03) (1.65) (1.37) (1.12) (1.02)
--------- --------- ---------- --------- --------- ---------
Net asset value, end of period.......... $ 17.70 $ 18.43 $ 19.59 19.63 $ 18.03 $ 18.66
========= ========= ========== ========= ========= =========
Market value, end of period............. $ 19.85 $ 18.94 $ 20.70 $ 17.91 $ 15.71 $ 16.32
========= ========= ========== ========= ========= =========
Total return based on net asset value (c) 1.74% 4.60% 9.01% 18.21% 3.38% 7.80%
========= ========= ========== ========= ========= =========
Total return based on market value....(c) 11.08% 1.68% 26.18% 23.91% 2.94% 4.69%
========= ========= ========== ========= ========= =========
---------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).... $ 72,212 $ 75,014 $ 79,495 $ 79,462 $ 72,956 $ 75,487
Ratio of total expenses to average net
assets................................. 2.39% (d) 2.23% 2.00% 2.07% 2.69% 3.24%
Ratio of total expenses to average net assets
excluding interest expense........... 2.13% (d) 2.14% 1.95% 1.99% 1.83% 1.71%
Ratio of net investment income (loss) to
average net assets................... (0.01)%(d) 8.74% 10.50% 9.01% 7.93% 5.70%
Portfolio turnover rate................. 47% 47% 36% 39% 10% 22%
---------------------------------------------------
(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) Annualized.
Page 16 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
1. FUND DESCRIPTION
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 in mortgage-backed securities that, in the
opinion of Brookfield Investment Management Inc. ("Brookfield" or the
"Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 ("MBS"),
asset-backed securities ("ABS") 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. However, 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:
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;
Page 17
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
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 investments.
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, 2012, 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, 2012, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements are utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing under which Fund assets are pledged as collateral to secure
a short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back by the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Page 18
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
Information for the six months ended April 30, 2012:
Maximum amount outstanding during the period.................. $22,993,750
Average amount outstanding during the period*................. $22,143,157
Average Common Shares outstanding during the period........... 4,075,582
Average debt per Common Share outstanding during the period... $5.43
* 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, 2012.
During the six months ended April 30, 2012, the interest rates ranged from 0.31%
to 1.65%, with a weighted average interest rate of 0.83%, on borrowings by the
Fund under reverse repurchase agreements, which had interest expense that
aggregated $94,482.
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 or IO security and
all of the principal is distributed to holders of another type of security known
as a principal-only or PO security. These securities are identified on the
Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An interest-only security ("IO security") is the interest-only portion of a MBS
that receives some or all of the interest portion of the underlying MBS 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 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 will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. Certain capital accounts in the
financial statements are periodically adjusted for permanent differences in
order to reflect their tax character. These permanent differences are primarily
due to the varying treatment of income and gain/loss on portfolio securities
held by the Fund and have no impact on net assets or NAV per share. Temporary
differences, which arise from recognizing certain items of income, expense and
gain/loss in different periods for financial statement and tax purposes, will
reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2011 was as follows:
Distributions paid from:
Ordinary income.................................... $8,244,891
Capital gain....................................... --
Return of capital.................................. --
Page 19
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
As of October 31, 2011, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income...................... $ 7,646,720
Undistributed capital gains........................ --
---------------
Total undistributed earnings....................... 7,646,720
Accumulated capital and other losses............... (6,209,176)
Net unrealized appreciation (depreciation)......... (3,378,380)
---------------
Total accumulated earnings (losses)................ (1,940,836)
Other.............................................. --
Paid-in capital.................................... 76,955,077
---------------
Net assets......................................... $ 75,014,241
===============
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 98.2% of the Fund's taxable income
exceeds the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry realized capital losses forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under 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. At October 31, 2011, the
Fund had a capital loss carryforward for federal income tax purposes of
$6,209,176, expiring as follows:
EXPIRATION DATE AMOUNT
October 31, 2014 $ 2,859,304
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887
During the taxable year ended October 31, 2011, the Fund utilized capital loss
carryforwards in the amount of $897,649.
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 2008, 2009,
2010 and 2011 remain open to federal and state audit. As of April 30, 2012,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
J. ACCOUNTING PRONOUNCEMENTS:
In May 2011, the Financial Accounting Standards Board ("FASB") issued ASU
2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs," modifying Topic 820, "Fair Value
Measurements and Disclosures." At the same time, the International Accounting
Standards Board ("IASB") issued International Financial Reporting Standard
("IFRS") 13, "Fair Value Measurement." The objective of the FASB and IASB is
convergence of their guidance on fair value measurements and disclosures.
Specifically, the ASU requires reporting entities to disclose (i) the amounts of
any transfers between Level 1 and Level 2, and the reasons for the transfers,
(ii) for Level 3 fair value measurements, quantitative information about
significant unobservable inputs used, (iii) a description of the valuation
processes used by the reporting entity, and (iv) a narrative description of the
sensitivity of the fair value measurement to changes in unobservable inputs if a
change in those inputs might result in a significantly higher or lower fair
value measurement. The effective date of the ASU is for interim and annual
periods beginning after December 15, 2011. Management is currently evaluating
the impact of the updated standard on the Fund's financial statements.
Page 20
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. First Trust is responsible for the ongoing monitoring of
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund. For these investment management services, First Trust is entitled to a
monthly fee calculated at an annual rate of 1.00% of the Fund's Managed Assets
(the 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.
BNY Mellon Investment Servicing (US) Inc. serves as the Fund's Administrator,
Fund Accountant and Transfer Agent in accordance with certain fee arrangements.
The Bank of New York Mellon serves as the Fund's Custodian in accordance with
certain fee arrangements.
Effective January 23, 2012, James A. Bowen resigned from his position as the
President and Chief Executive Officer of the Fund. He will continue as a
Trustee, the Chairman of the Board of Trustees and a member of the Executive
Committee. The Board elected Mark R. Bradley to serve as the President and Chief
Executive Officer of the Fund and James M. Dykas to serve as the Treasurer,
Chief Financial Officer and Chief Accounting Officer of the Fund.
Effective January 1, 2012, each Trustee who is not an officer or employee of
First Trust, any sub-advisor or any of their affiliates ("Independent Trustee")
is paid an 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. Prior to January 1, 2012, each Independent Trustee received an annual
retainer of $10,000 per trust for the first 14 trusts of the First Trust Fund
Complex and an annual retainer for $7,500 per trust for each additional trust in
the First Trust Fund Complex. The annual retainer was allocated equally among
each of the trusts.
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. Prior to January 1, 2012, the annual amounts paid were $10,000, $5,000
and $2,500, respectively. 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 before rotating to serve as
chairman of another committee or as Lead Independent Trustee. The officers and
"Interested" Trustee receive no compensation from the Fund for acting in such
capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the six months ended April 30,
2012 were $21,911,449 and $20,162,945, 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, 2012 were
$11,427,714 and $35,352,033, respectively.
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. 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
Page 21
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
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.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On May 21, 2012, the Fund declared a dividend of $0.16 per share to Common
Shareholders of record on June 5, 2012, payable June 15, 2012.
On June 20, 2012, the Fund declared a dividend of $0.16 per share to Common
Shareholders of record on July 5, 2012, payable July 16, 2012.
On June 21, 2012, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with 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.
Page 22
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV")
at the time of valuation, the Fund will issue new shares at a
price equal to the greater of (i) NAV per Common Share on that
date or (ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation,
the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer
shares than if the dividend or distribution had been paid in
Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common
Shares in the open market within 30 days of the valuation date
except where temporary curtailment or suspension of purchases is
necessary to comply with federal securities laws. Interest will
not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 23
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND
APRIL 30, 2012 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of 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 and First Trust High Income
Long/Short Fund was held on Monday, April 18, 2012 (the "Annual Meeting"). At
the Annual Meeting, Thomas R. Kadlec and Richard E. Erickson were elected by the
Common Shareholders of the First Trust Mortgage Income Fund as Class I Trustees
for a three-year term expiring at the Fund's annual meeting of shareholders in
2015. The number of votes cast in favor of Mr. Kadlec was 3,627,290, the number
of votes against was 46,868 and the number of abstentions was 401,919. The
number of votes cast in favor of Mr. Erickson was 3,612,890, the number of votes
against was 61,268 and the number of abstentions was 401,919. James A. Bowen,
Niel B. Nielson and Robert F. Keith are the other current and continuing
Trustees.
Page 24
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
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
1 Wall Street
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 25, 2012
------------------
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 25, 2012
------------------
By (Signature and Title)* /s/ James M. Dykas
-------------------------------------------------------
James M. Dykas, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date: June 25, 2012
------------------
* Print the name and title of each signing officer under his or her signature.