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: October 31, 2014
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST BROOKFIELD
FIRST TRUST
MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2014
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2014
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 12
Statement of Operations..................................................... 13
Statements of Changes in Net Assets......................................... 14
Statement of Cash Flows..................................................... 15
Financial Highlights........................................................ 16
Notes to Financial Statements............................................... 17
Report of Independent Registered Public Accounting Firm..................... 23
Additional Information...................................................... 24
Board of Trustees and Officers.............................................. 29
Privacy Policy.............................................................. 31
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Brookfield Investment Management Inc.
("Brookfield" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Mortgage Income Fund (the "Fund") to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Brookfield are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Mortgage Income Fund (the "Fund"). This report provides detailed
information about the Fund, including a performance review and the financial
statements for the past 12 months. I encourage you to read this document and
discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 17.27% during the period. First Trust Advisors L.P.
("First Trust") believes that staying invested in quality products through
different types of markets can benefit investors over the long term.
First Trust offers a variety of products that we believe could fit the financial
plans for many investors seeking long-term investment success. We invite you to
look at our investment products with your financial advisor to determine if any
of them might fit your financial goals. We believe that regularly discussing
your financial objectives and investment options with your financial advisor 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.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MORTGAGE INCOME FUND (FMY)
"AT A GLANCE"
AS OF OCTOBER 31, 2014 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $15.12
Common Share Net Asset Value ("NAV") $17.02
Premium (Discount) to NAV (11.16)%
Net Assets Applicable to Common Shares $71,708,258
Current Monthly Distribution per Common Share (1) $0.085
Current Annualized Distribution per Common Share $1.020
Current Distribution Rate on Closing Common Share Price (2) 6.75%
Current Distribution Rate on NAV (2) 5.99%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/13 15.79 17.63
15.91 17.58
15.89 17.61
15.95 17.62
15.89 17.65
11/13 15.70 17.63
15.50 17.62
15.16 17.56
15.33 17.52
12/13 15.52 17.47
15.60 17.54
15.63 17.70
15.79 17.71
15.90 17.70
1/14 15.79 17.68
15.76 17.66
15.80 17.70
15.86 17.72
2/14 15.94 17.72
15.82 17.67
15.94 17.65
15.79 17.64
3/14 15.74 17.59
15.88 17.56
15.94 17.57
16.00 17.62
4/14 16.01 17.58
15.95 17.50
15.88 17.58
15.99 17.58
16.08 17.60
5/14 16.01 17.58
15.70 17.59
15.71 17.57
15.82 17.57
6/14 15.90 17.55
15.76 17.53
15.79 17.48
15.77 17.41
7/14 15.72 17.39
15.43 17.37
15.45 17.38
15.60 17.35
15.52 17.37
8/14 15.50 17.35
15.49 17.32
15.46 17.39
15.37 17.34
9/14 15.20 17.31
14.96 17.20
14.88 17.14
15.00 16.96
15.04 17.01
10/14 15.12 17.02
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (5/25/05)
10/31/14 10/31/14 to 10/31/14
FUND PERFORMANCE (3)
NAV 3.01% 6.17% 6.80%
Market Value 2.17% 5.59% 4.96%
INDEX PERFORMANCE
Barclays Capital U.S. MBS:
Agency Fixed Rate MBS Index 4.11% 3.58% 4.82%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 1.45
Weighted Average Life (Years) 6.54
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 72.9%
U.S. Government Agency Mortgage-Backed
Securities 26.8
Asset-Backed Securities 0.3
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Adjustable Rate Securities 57.7%
Fixed Rate Securities 29.7
Interest Only Securities 12.6
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 30.3%
AA+ 21.3
AA 1.1
A+ 19.2
A 1.7
BBB+ 0.9
BBB 0.3
BB+ 0.6
BB 2.9
B 1.4
B- 1.9
CCC+ 0.2
CCC 11.2
CCC- 0.9
CC 3.6
D 2.4
NR 0.1
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Total 100.0%
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(1) Most recent distribution paid or declared through 10/31/2014. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2014. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
of less than one year. Past performance is not indicative of future
results.
(4) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch
Ratings or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and ratings are not equivalent, the highest
ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or
lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The
credit ratings shown relate to the creditworthiness of the issuers of the
underlying securities in the Fund, and not to the Fund or its shares.
Credit ratings are subject to change.
NR Not Rated
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2014
SUB-ADVISOR
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor. Brookfield is a wholly owned subsidiary of Brookfield Asset
Management, a global alternative asset manager with approximately $200 billion
in assets under management as of September 30, 2014. Brookfield Asset Management
has over a 100-year history of owning and operating assets with a focus on
property, renewable power, infrastructure and private equity. The company offers
a range of public and private investment products and services, which leverage
its expertise and experience and provide it with a competitive advantage in the
markets where it operates. On behalf of its clients, Brookfield Asset Management
is also an active investor in the public securities markets, where its
experience extends over 30 years. Over this time, the company has successfully
developed several investment operations and built expertise in the management of
institutional portfolios, retail mutual funds and various commingled vehicles.
Brookfield Asset Management's public market activities are conducted by
Brookfield, a registered investment advisor. These activities complement
Brookfield Asset Management's core competencies and included global listed real
estate and infrastructure equities, corporate credit and securitized credit
strategies. Headquartered in New York, NY, Brookfield maintains offices and
investment teams in Toronto, Chicago, Boston and London and has over $17 billion
of assets under management as of September 30, 2014.
PORTFOLIO MANAGEMENT TEAM
ANTHONY BREAKS, CFA - SENIOR DIRECTOR
CHRIS WU - DIRECTOR
COMMENTARY
FIRST TRUST MORTGAGE INCOME FUND
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues its objectives by investing primarily in mortgage-backed securities
("MBS") representing part ownership in a pool of either residential or
commercial mortgage loans that, in the opinion of the Fund's Sub-Advisor, offer
an attractive combination of credit quality, yield and maturity. There can be no
assurance that the Fund will achieve its investment objectives. The Fund may not
be appropriate for all investors.
MARKET RECAP AND OUTLOOK
Within the Securitized Products universe, Agency Residential Mortgage-Backed
Securities ("RMBS"), non-Agency RMBS and Commercial Mortgage-Backed Securities
("CMBS") all had strong returns for the fiscal year ended October 31, 2014
driven by improving collateral performance and strong investor demand.
On a macro level, economic conditions materially improved throughout 2014.
Headline unemployment fell from 7.2% to 5.8% over the fiscal year. Non-farm
payrolls averaged about a 220,000 per month increase through the period. This is
an acceleration of job growth from about 200,000 per month, on average, in 2013.
Consumer confidence rose from 72 at the start of the fiscal year to finish at
94, based upon the Confidence Board Consumer Confidence Index(R). Household debt
burden has ticked up slightly, indicating more confident consumer spending,
particularly in auto sales. Another area of increase is student loan debt, which
at $1.2 trillion as of October 31, 2014 nationally, is second only to mortgages
in contributing to total household debt. This debt is concentrated in a
relatively narrow demographic band and may hold back first-time home buyers on
the margin. The first-time home buyer also has fewer financing options than in
prior cycles, compounding the effect. There is potential for government policy
action to address student loan debt in the years to come.
Ten-year interest rates peaked above 3% briefly at the end of December 2013
before generally falling through October 31, 2014. The low point for yields was
the 2.13% close in mid-October before ending the fiscal year slightly higher at
2.34%, on October 31, 2014.
The Federal Reserve has concluded its purchase program for Treasury bonds and
Agency RMBS but will continue to reinvest paydowns. Agency RMBS issuance is very
low; however, we have yet to see how October's steeply lower rates affected
production. At some point, we expect Agency issuance will increase and will have
to adjust as private investors now stand alone as buyers.
Away from Agency RMBS issuance, we are seeing little supply from dealer conduits
and real estate investment trusts, historically a source of non-Agency
mortgages. The Government Sponsored Enterprises ("GSEs") have turned into a
material source of new issue mortgage credit through the issuance of
risk-sharing securities. These securities convey a slice of risk from the GSEs
guarantee portfolio. Issuance of these securities has picked up and the Director
of the Federal Housing Finance Agency ("FHFA") signaled an interest in tripling
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2014
the pace of issuance. During the Fund's fiscal year, Fannie Mae and Freddie Mac
issued a combined $8.9 billion, still small in the context of non-Agency RMBS
issuance historically, but notable given overall low levels of supply. CMBS
issuance has slowed a bit with $60 billion in new unguaranteed deals and $53
billion in Agency-guaranteed CMBS for the period.
Within residential real estate, prices have been on a steady rise since the
beginning of 2012. The pace of new construction has increased from approximately
600,000 to 1,000,000 units since the beginning of 2012 through October 31, 2014.
This is still below long-term averages of approximately 1,500,000, suggesting
that an oversupply of new homes will not imperil home prices. Given the lack of
new construction after the financial crisis and a recovery in household
formation, we see housing demand supporting prices for existing homes: the type
that secure the mortgages in the Fund's portfolio. The last report from
Case-Shiller showed a 5.6% year-over-year increase in its 20-city index. This
represents a slowing of price increases from double digit gains through 2013.
Within commercial real estate, top-tier properties in major markets continue to
improve and indeed prices now exceed peak levels from 2007. Secondary and
tertiary markets continue to recover and the pace of recovery has increased
since the middle of 2013. The availability of commercial mortgage credit has
greatly improved, and the deal-making has now broadened beyond major markets.
Oversupply has not been an issue in this real estate cycle, as new construction
virtually came to a halt during the financial crisis in 2008 and 2009 and, with
the exception of the multifamily sector, remains low. The relative lack of new
construction should also assist further recovery in values as demand for space
returns and the lead times required to deliver new space keeps supply in check.
One area that continues to struggle is retail. Department store sales continue
to decline and the malls they anchor have struggled in certain markets. We see
no reason to see the trend reversing and choose to avoid CMBS with larger
exposure to these weak retail properties.
Agency RMBS remains another key sector for the Fund. Rallies in interest rates
and low volatility over the period resulted in positive performance for Agency
RMBS. The 30-year mortgage rate dropped to 4% from 4.5% at the beginning of 2014
and the prices of mortgage bonds rose. The increase of prepayment speeds,
however, was muted even though mortgage rates have dropped. Slow prepayment
speeds were mostly due to a slow housing market and restrictive lending
standards by mortgage banks, which mitigated the negative impact of lower
interest rates on the valuation of premium coupon pools, and interest-only
("IO") securities that receive only the coupon associated with a pool of loans.
We remain positive on most securitized products for the next year, based on
continued improvement in forecasts for collateral performance. Expansion of
credit for borrowers has slowed versus market expectations and this remains an
area of potential improvement for markets in which the Fund invests. Banks have
been slow to expand borrowing beyond Agency-eligible loans and non-Agency
eligible loans to otherwise very clean, typically high net worth borrowers.
Putback risk for banks has been somewhat reduced through actions of the FHFA but
banks remain very cautious in their underwriting of even agency eligible loans.
That said, home prices continue to increase and rates remain low. As a result,
we believe more borrowers should be able to refinance their mortgages, and homes
which are for sale should attract a broader audience of buyers. Rents have been
rising for several years, and with interest rates still low, many households
have a financial incentive to purchase rather than rent. All of these dynamics
support the current increase in home prices and potential for further increases.
PERFORMANCE ANALYSIS
For the one-year period ended October 31, 2014, the Fund had a total return1 of
3.01% based on net asset value ("NAV"). For the period, the Fund traded from a
discount to NAV of -10.44% to a discount to NAV of -11.16%, resulting in a total
return(1) of 2.17%, based on market price. During the period, the Fund's
benchmark, the Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index returned
4.11%.
In December 2013, many closed-end funds were hit by tax-motivated selling
pressure and feared interest rate increases. This selling pressure caused NAV
discounts to expand for many bond funds, including the Fund. Those concerns
continue and the Fund remains at a substantial discount, albeit lower than the
13.75% reached in December 2013. Interestingly, some hedge funds and other
active investors bought closed-end fixed-income funds to take advantage of the
discount. With the passage of time, it is clear that the rate rise that worried
retail investors has not occurred; in fact, just the opposite occurred. Interest
rates fell during 2014. Overall, we believe the Fund is positioned to moderate
the impact of interest rate increases. When interest rates do begin to rise, we
believe we will see differentiated performance from the Fund.
All of the Fund's sectors rallied during the period with the exception of Agency
derivatives, which reflected improved assumptions for collateral performance and
tightening spreads. MBS remains one of the widest spread assets in fixed income,
especially for investment-grade non-Agency RMBS and CMBS. As spreads have come
in broadly, this spread advantage becomes more attractive. The other advantage
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(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns and
does not reflect sales load. Past performance is not indicative of future
results.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2014
we see is in the substantial fraction of mortgage product that carries a
floating-rate coupon. Many investors are trying to limit their exposure to fixed
rates. For below investment-grade mortgage bonds, fundamental improvements and
stronger economic data has pushed prices higher.
Agency MBS holdings in the Fund modestly underperformed the Agency Fixed Rate
MBS Index, which benefited from falling interest rates. The Fund held about
12.6% of IO securities as of October 31, 2014, which were used to hedge against
an interest rate rise. The valuation of IO securities was negatively impacted by
falling interest rates as expectations for prepayment speeds rose. Lower prices
of IOs therefore dragged the performance of Agency MBS holdings.
We anticipate short-term interest rates will begin to increase in the next 12 to
24 months as employment continues to strengthen and the Fed begins reversing
years of stimulus. We believe the Fund is positioned with low interest rate risk
and that the rise in short-term interest rates will be reflected in increased
income as the Fund's floating rate investments reset to higher rates.
As of October 31, 2014, the Fund held approximately 11.0% cash as a percentage
of gross assets. In October, the Fund sold some investment-grade senior CMBS
bonds that had appreciated considerably among other assets, which resulted in an
increase in the Fund's cash allocation. The Fund's primary purchases were
investment-grade Prime Hybrid Adjustable Rate Mortgage RMBS and investment-grade
CMBS. With limited new issuance, particularly in RMBS, it has been challenging
to source attractive investment-grade mortgage assets with sufficient income. We
continue to find attractive purchase candidates, albeit on a slower timeline. In
addition to those purchases, the Fund sold a meaningful portion of below A rated
assets. These sales allowed the Fund to recognize some large gains and keep the
Fund in compliance with its 75% "A or better" ratings test. With this investment
limit, we utilize flexibility to do relative value trading among A- or lower
rated assets and put our best ideas to work. In particular, we are evaluating
the Fund's BBB rated bonds, one of which we sold in third quarter. They consume
precious credit capacity and typically earn little more yield than the Fund's "A
or better" holdings.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of reverse repurchase
agreements. Please note that the Fund's benchmark does not utilize leverage. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income for common shareholders. However,
the use of leverage also can expose common shareholders to additional
volatility. For example, if the prices of securities held by the Fund decline,
the negative impact of the valuation changes on common share net asset value and
common shareholder total return is magnified by the use of leverage. Conversely,
leverage may enhance common share returns during periods when the prices of
securities held by the Fund generally are rising.
As of October 31, 2014, the Fund's leverage was relatively low at 10.6% of
Managed Assets, given that the Fund may utilize leverage in an amount up to
33.33% of Managed Assets. Leverage contributed positively to the Fund's
performance during the reporting period. Borrowing costs were approximately 53
basis points annualized, which were substantially exceeded by the returns on the
Agency Pools the Fund used as collateral.
Reverse repurchase borrowing remains expensive for many of the Fund's target
asset classes. For this reason, we may continue to employ leverage below its
maximum or choose alternative assets, such as Agency Guaranteed assets, to use
as collateral. Financing costs may also fall, thereby reversing this current
dynamic. Where our overall budget for risk warrants it and when the return
opportunities are compelling, we are likely to increase leverage in an attempt
to improve returns. In periods of stability, this may be an especially important
tool.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities. These views represent the opinions of
Brookfield Investment Management Inc. and are not intended to predict or depict
the performance of any investment. These views are as of the close of business
on October 31, 2014 and subject to change based on subsequent developments.
Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES - 73.1%
COLLATERALIZED MORTGAGE OBLIGATIONS - 61.1%
ACE Securities Corp. Home Equity Loan Trust
$ 1,250,911 Series 2006-ASAP6, Class A2D (a)........... 0.37% 12/25/36 $ 660,391
Banc of America Mortgage Trust
80,293 Series 2002-L, Class 1A1 (a) (b)........... 2.62% 12/25/32 74,124
Bear Stearns Adjustable Rate Mortgage Trust
619,383 Series 2004-9, Class 12A1 (a).............. 2.80% 11/25/34 618,869
499,292 Series 2005-5, Class A2 (a)................ 2.26% 08/25/35 502,575
Chase Mortgage Finance Trust
452,929 Series 2007-A1, Class 1A3 (a).............. 2.55% 02/25/37 448,308
Countrywide Alternative Loan Trust
662,603 Series 2006-41CB, Class 2A17............... 6.00% 01/25/37 578,200
76,901 Series 2007-11T1, Class A37 (b) (c)........ 39.11% 05/25/37 135,725
Countrywide Home Loan Mortgage
Pass-Through Trust
1,126,772 Series 2003-46, Class 2A1 (a).............. 2.76% 01/19/34 1,123,268
622,277 Series 2006-21, Class A8................... 5.75% 02/25/37 592,032
920,071 Series 2006-HYB5, Class 3A1A (a)........... 2.55% 09/20/36 782,258
Credit Suisse First Boston Mortgage
Securities Corp.
1,417,043 Series 2004-AR2, Class 1A1 (a) (b)......... 2.67% 03/25/34 1,404,507
1,337,133 Series 2004-AR8, Class 6A1 (a)............. 2.40% 09/25/34 1,345,672
DSLA Mortgage Loan Trust
1,249,438 Series 2004-AR3, Class 2A2A (a)............ 0.53% 07/19/44 1,215,812
1,172,157 Series 2007-AR1, Class 2A1A (a)............ 0.30% 04/19/47 972,823
GMAC Mortgage Corporation Loan Trust
228,753 Series 2004-AR1, Class 22A (a)............. 2.89% 06/25/34 220,761
GSR Mortgage Loan Trust
393,395 Series 2005-AR1, Class 4A1 (a)............. 4.43% 01/25/35 386,060
Harborview Mortgage Loan Trust
177,827 Series 2004-1, Class 2A (a)................ 2.38% 04/19/34 178,262
789,100 Series 2004-6, Class 3A1 (a)............... 2.61% 08/19/34 763,002
JP Morgan Mortgage Trust
2,031,117 Series 2005-ALT1, Class 4A1 (a)............ 5.18% 10/25/35 1,915,497
545,976 Series 2006-A2, Class 4A1 (a).............. 2.50% 08/25/34 541,325
185,719 Series 2006-A2, Class 5A3 (a).............. 2.47% 11/25/33 186,548
JP Morgan Re-REMIC
1,348,862 Series 2009-7, Class 12A1 (d).............. 6.25% 01/27/37 1,429,058
MASTR Asset Backed Securities Trust
1,199,334 Series 2006-HE5, Class A3 (a).............. 0.31% 11/25/36 814,602
247,235 Series 2006-HE5, Class A4 (a) (b).......... 0.37% 11/25/36 169,448
1,728,627 Series 2006-NC2, Class A3 (a).............. 0.26% 08/25/36 918,041
789,035 Series 2006-NC2, Class A5 (a).............. 0.39% 08/25/36 428,876
Mellon Residential Funding Corp.
Mortgage Pass-Through Trust
670,815 Series 2001-TBC1, Class A1 (a)............. 0.85% 11/15/31 668,148
706,523 Series 2002-TBC2, Class A (a).............. 1.01% 08/15/32 673,830
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Morgan Stanley Mortgage Loan Trust
$ 507,450 Series 2004-7AR, Class 2A6 (a)............. 2.47% 09/25/34 $ 509,471
Provident Funding Mortgage Loan Trust
281,530 Series 2005-1, Class 1A1 (a)............... 2.50% 05/25/35 281,934
Residential Accredit Loans, Inc.
258,262 Series 2006-QO1, Class 2A1 (a)............. 0.42% 02/25/46 153,927
Residential Funding Mortgage Securities I
49,949 Series 2005-S5, Class A5 (b)............... 5.25% 07/25/35 50,123
Securitized Asset Backed Receivables LLC
1,215,748 Series 2007-BR2, Class A2 (a).............. 0.38% 02/25/37 726,264
Structured Adjustable Rate Mortgage Loan Trust
764,161 Series 2004-2, Class 4A2 (a)............... 2.51% 03/25/34 766,977
Thornburg Mortgage Securities Trust
676,013 Series 2003-4, Class A1 (a)................ 0.79% 09/25/43 653,632
582,448 Series 2005-1, Class A3 (a)................ 2.23% 04/25/45 588,908
Wachovia Mortgage Loan Trust, LLC
586,026 Series 2006-A, Class 3A1 (a)............... 2.66% 05/20/36 565,843
WaMu Mortgage Pass-Through Certificates
924,565 Series 2004-AR1, Class A (a)............... 2.41% 03/25/34 925,371
934,207 Series 2004-AR10, Class A1B (a)............ 0.57% 07/25/44 902,925
706,017 Series 2004-AR13, Class A1A (a)............ 0.51% 11/25/34 682,947
993,989 Series 2005-AR1, Class A1A (a)............. 0.47% 01/25/45 939,426
1,357,490 Series 2005-AR11, Class A1A (a)............ 0.47% 08/25/45 1,308,717
103,193 Series 2005-AR2, Class 2A21 (a)............ 0.48% 01/25/45 95,769
1,135,189 Series 2005-AR2, Class 2A23 (a)............ 0.53% 01/25/45 1,057,759
1,291,631 Series 2005-AR6, Class 2A1A (a)............ 0.38% 04/25/45 1,243,795
585,313 Series 2005-AR9, Class A1A (a)............. 0.47% 07/25/45 562,667
969,735 Series 2006-AR2, Class 1A1 (a)............. 2.33% 03/25/36 904,793
1,182,506 Series 2006-AR5, Class A1A (a)............. 1.10% 06/25/46 1,034,810
Washington Mutual Alternative Mortgage
Pass-Through Certificates
45,497 Series 2007-5, Class A11 (b) (c)........... 38.57% 06/25/37 90,093
Washington Mutual MSC Mortgage
Pass-Through Certificates
363,709 Series 2004-RA1, Class 2A.................. 7.00% 03/25/34 387,008
Wells Fargo Mortgage Backed Securities Trust
716,455 Series 2003-H, Class A1 (a)................ 2.62% 09/25/33 726,011
547,609 Series 2004-A, Class A1 (a)................ 2.64% 02/25/34 552,209
1,921,849 Series 2004-R, Class 1A1 (a)............... 2.62% 09/25/34 1,953,831
533,291 Series 2004-S, Class A1 (a)................ 2.62% 09/25/34 545,130
944,048 Series 2004-Y, Class 1A2 (a)............... 2.61% 11/25/34 942,155
513,642 Series 2005-AR10, Class 2A17 (a)........... 2.61% 06/25/35 516,654
1,076,919 Series 2005-AR16, Class 1A1 (a)............ 2.59% 08/25/33 1,100,462
445,420 Series 2005-AR3, Class 2A1 (a)............. 2.60% 03/25/35 449,293
773,492 Series 2005-AR8, Class 1A1 (a)............. 2.61% 06/25/35 787,572
1,002,471 Series 2006-AR10, Class 5A2 (a)............ 2.62% 07/25/36 964,603
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- ---------- ---------- --------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities
Trust (Continued)
$ 438,330 Series 2007-16, Class 1A1.................. 6.00% 12/28/37 $ 454,632
548,403 Series 2007-2, Class 1A13.................. 6.00% 03/25/37 535,998
127,704 Series 2007-8, Class 2A2................... 6.00% 07/25/37 126,519
--------------
43,836,250
--------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 12.0%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ.................... 5.42% 10/10/45 1,035,233
650,000 Series 2007-3, Class AJ, STRIP............. 5.56% 06/10/49 675,716
Bayview Commercial Asset Trust
821,420 Series 2004-2, Class A (a) (d)............. 0.58% 08/25/34 782,088
Commercial Mortgage Trust
950,000 Series 2005-GG5, Class AM.................. 5.28% 04/10/37 981,069
650,000 Series 2007-GG11, Class AJ, STRIP.......... 6.05% 12/10/49 681,164
JP Morgan Chase Commercial Mortgage
Securities Trust
1,500,000 Series 2007-LD12, Class A4................. 5.88% 02/15/51 1,641,728
LB-UBS Commercial Mortgage Trust
420,000 Series 2007-C1, Class AM................... 5.46% 02/15/40 452,089
100,000 Series 2007-C2, Class AM................... 5.49% 02/15/40 106,220
Mid-State Capital Corp. Trust
596,675 Series 2004-1, Class M1.................... 6.50% 08/15/37 645,049
VNDO Mortgage Trust
900,000 Series 2012-6AVE, Class A (d).............. 3.00% 11/15/30 896,412
Wachovia Bank Commercial Mortgage Trust
650,000 Series 2007-C33, Class AJ, STRIP........... 5.94% 02/15/51 684,808
--------------
8,581,576
--------------
TOTAL MORTGAGE-BACKED SECURITIES......................................... 52,417,826
(Cost $51,392,664) --------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 26.9%
COLLATERALIZED MORTGAGE OBLIGATIONS - 10.0%
Federal Home Loan Mortgage Corp.
1,999,362 Series 2807, Class SB, IO (c).............. 7.30% 11/15/33 370,664
13,874 Series 3195, Class SX (b) (c).............. 45.16% 07/15/36 36,763
301,431 Series 3562, Class KI, IO (b).............. 4.50% 11/15/22 6,261
2,264,217 Series 3619, Class EI, IO (b).............. 4.50% 05/15/24 144,547
1,722,762 Series 3692, Class PS, IO (b) (c).......... 6.45% 05/15/38 144,677
3,818,984 Series 3726, Class KI, IO.................. 3.50% 04/15/25 291,596
2,785,454 Series 3870, Class WS, IO (c).............. 6.45% 06/15/31 466,458
1,568,888 Series 4206, Class IA, IO (b).............. 3.00% 03/15/33 241,882
Federal National Mortgage Association
758,139 Series 2005-122, Class SN (c).............. 27.99% 01/25/36 970,925
177,800 Series 2008-50, Class AI, IO (b)........... 5.50% 06/25/23 9,970
3,946,499 Series 2010-103, Class ID, IO (b).......... 5.00% 09/25/40 684,005
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
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)
$ 6,818,461 Series 2010-139, Class KI, IO (b).......... 1.09% 12/25/40 $ 317,499
673,827 Series 2010-142, Class PS, IO (b) (c)...... 5.90% 05/25/40 51,943
968,559 Series 2010-145, Class TI, IO (b).......... 3.50% 12/25/20 64,663
2,791,808 Series 2010-40, Class MI, IO (b)........... 4.50% 08/25/24 166,803
4,038,450 Series 2012-112, Class BI, IO.............. 3.00% 09/25/31 558,954
2,960,128 Series 2012-125, Class MI, IO (b).......... 3.50% 11/25/42 527,931
4,148,338 Series 2013-32, Class IG, IO (b)........... 3.50% 04/25/33 694,944
Federal National Mortgage Association, STRIP
2,865,198 Series 406, Class 6, IO (b)................ 4.00% 01/25/41 390,356
Government National Mortgage Association
974,839 Series 2009-65, Class NJ, IO (b)........... 5.50% 07/20/39 84,074
3,143,640 Series 2010-115, Class IQ, IO.............. 4.50% 11/20/38 394,788
6,546,726 Series 2011-131, Class EI, IO.............. 4.50% 08/20/39 548,216
1,011,078 Series 2011-69, Class CI, IO (b)........... 5.00% 03/20/36 31,149
--------------
7,199,068
--------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 4.0%
Government National Mortgage Association
16,363,670 Series 2011-152, Class IO, IO (a).......... 1.30% 08/16/51 907,202
8,459,893 Series 2012-100, Class IO, IO (a) (e)...... 0.83% 08/16/52 528,764
11,672,957 Series 2012-70, Class IO, IO (a) (e)....... 0.97% 08/16/52 725,994
7,235,263 Series 2012-78, Class IO, IO (a) (e)....... 1.05% 06/16/52 491,448
2,534,367 Series 2012-95, Class IO, IO (a) (e)....... 0.98% 02/16/53 192,794
--------------
2,846,202
--------------
PASS-THROUGH SECURITIES - 12.9%
1,000,000 Fannie Mae Pool............................ 4.00% 11/30/44 1,061,719
Fannie Mae REMICs
926,416 Series 2005-83, Class LZ................... 5.50% 10/25/35 962,628
Federal Home Loan Mortgage Corp.
1,679,561 Pool A94738 (e)............................ 4.50% 11/01/40 1,820,476
758,747 Pool K36017 (e)............................ 5.00% 09/01/47 825,149
Federal National Mortgage Association
1,877,253 Pool 831145 (e)............................ 6.00% 12/01/35 2,147,749
2,099,407 Pool 843971 (e)............................ 6.00% 11/01/35 2,410,191
--------------
9,227,912
--------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES.................. 19,273,182
(Cost $22,604,191) --------------
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- ---------- ---------- --------------
ASSET-BACKED SECURITIES - 0.3%
Green Tree Financial Corp.
$ 54,564 Series 1997-2, Class A6 (b)................ 7.24% 06/15/28 $ 57,027
70,370 Series 1997-3, Class A6 (b)................ 7.32% 03/15/28 75,147
79,065 Series 1997-7, Class A6 (b)................ 6.76% 07/15/28 82,601
--------------
TOTAL ASSET-BACKED SECURITIES............................................ 214,775
(Cost $214,609) --------------
TOTAL INVESTMENTS - 100.3%............................................... 71,905,783
(Cost $74,211,464) (f) --------------
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- ------------------------------------------------------------------------- --------------
REVERSE REPURCHASE AGREEMENTS - (11.8%)
(1,257,000) With JP Morgan 1.00% dated 10/06/14, to be repurchased at
$1,258,086 on 11/06/14............................................... (1,257,000)
(4,290,000) With JP Morgan 0.34% dated 10/06/14, to be repurchased at
$4,286,707 on 01/05/15............................................... (4,290,000)
(2,522,000) With JP Morgan 0.37% dated 10/14/14, to be repurchased at
$2,524,333 on 01/12/15............................................... (2,522,000)
(402,000) With JP Morgan 1.00% dated 10/27/14, to be repurchased at
$402,336 on 11/26/14................................................. (402,000)
--------------
TOTAL REVERSE REPURCHASE AGREEMENTS...................................... (8,471,000)
--------------
NET OTHER ASSETS AND LIABILITIES - 11.5%................................. 8,273,475
--------------
NET ASSETS - 100.0%...................................................... $ 71,708,258
==============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at October 31, 2014.
(b) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by Brookfield Investment
Management Inc. ("Brookfield"), the Fund's sub-advisor.
(c) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at October 31, 2014.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by Brookfield. Although market instability can
result in periods of increased overall market illiquidity, liquidity for
each security is determined based on security specific factors and
assumptions, which require subjective judgment. At October 31, 2014,
securities noted as such amounted to $3,107,558, or 4.33% of net assets.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for federal income tax purposes is $73,904,992. As of
October 31, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$5,580,078 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$7,579,287.
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 10/31/2014 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ ------------- ------------
Mortgage-Backed Securities......................... $ 52,417,826 $ -- $ 52,417,826 $ --
U.S. Government Agency Mortgage-Backed Securities.. 19,273,182 -- 19,273,182 --
Asset-Backed Securities............................ 214,775 -- 214,775 --
------------ ------------ ------------- ------------
Total Investments.................................. $ 71,905,783 $ -- $ 71,905,783 $ --
============ ============ ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2014 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Reverse Repurchase Agreements...................... $ (8,471,000) $ -- $ (8,471,000) $ --
============ ============ ============= ============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2014.
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2014
ASSETS:
Investments, at value
(Cost $74,211,464).......................................................................... $ 71,905,783
Cash........................................................................................... 9,081,316
Restricted cash................................................................................ 50,000
Interest receivable............................................................................ 363,167
Prepaid expenses............................................................................... 5,887
------------
Total Assets................................................................................ 81,406,153
------------
LIABILITIES:
Reverse repurchase agreements.................................................................. 8,471,000
Payables:
Investment securities purchased............................................................. 1,060,708
Investment advisory fees.................................................................... 68,368
Audit and tax fees.......................................................................... 50,200
Administrative fees......................................................................... 17,941
Printing fees............................................................................... 12,192
Transfer agent fees......................................................................... 6,335
Custodian fees.............................................................................. 3,623
Interest on reverse repurchase agreements................................................... 2,487
Legal fees.................................................................................. 2,288
Trustees' fees and expenses................................................................. 1,467
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 515
------------
Total Liabilities........................................................................... 9,697,895
------------
NET ASSETS..................................................................................... $ 71,708,258
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 78,018,766
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... 351,511
Accumulated net realized gain (loss) on investments............................................ (4,398,469)
Net unrealized appreciation (depreciation) on investments...................................... (2,305,681)
------------
NET ASSETS..................................................................................... $ 71,708,258
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 17.02
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2014
INVESTMENT INCOME:
Interest....................................................................................... $ 5,624,951
------------
Total investment income..................................................................... 5,624,951
------------
EXPENSES:
Investment advisory fees....................................................................... 830,027
Administrative fees............................................................................ 114,939
Excise tax expense............................................................................. 110,924
Audit and tax fees............................................................................. 51,904
Interest expense on reverse repurchase agreements.............................................. 49,301
Transfer agent fees............................................................................ 40,226
Printing fees.................................................................................. 31,117
Trustees' fees and expenses.................................................................... 17,194
Custodian fees................................................................................. 14,602
Financial reporting fees....................................................................... 9,250
Legal fees..................................................................................... 4,211
Other.......................................................................................... 41,855
------------
Total expenses.............................................................................. 1,315,550
------------
NET INVESTMENT INCOME.......................................................................... 4,309,401
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... (396,097)
Net increase from payment by the sub-advisor (a)............................................ 1,180
Net change in unrealized appreciation (depreciation) on investments......................... (2,167,601)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (2,562,518)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 1,746,883
============
(a) See Note 3 in the Notes to Financial Statements.
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2014 10/31/2013
-------------- --------------
OPERATIONS:
Net investment income (loss)....................................................... $ 4,309,401 $ 5,229,032
Net realized gain (loss)........................................................... (396,097) 1,859,581
Net increase from payment by the sub-advisor (a)................................... 1,180 5,310
Net change in unrealized appreciation (depreciation)............................... (2,167,601) (3,064,553)
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................... 1,746,883 4,029,370
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (4,297,377) (5,244,634)
-------------- --------------
Total distributions to shareholders................................................ (4,297,377) (5,244,634)
-------------- --------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested............................................. -- 35,399
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions.......... -- 35,399
-------------- --------------
Total increase (decrease) in net assets............................................ (2,550,494) (1,179,865)
NET ASSETS:
Beginning of period................................................................ 74,258,752 75,438,617
-------------- --------------
End of period...................................................................... $ 71,708,258 $ 74,258,752
============== ==============
Accumulated net investment income (loss) at end of period.......................... $ 351,511 $ (425,117)
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 4,213,115 4,211,129
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... -- 1,986
-------------- --------------
Common Shares at end of period..................................................... 4,213,115 4,213,115
============== ==============
(a) See Note 3 in the Notes to Financial Statements.
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operation..................... $ 1,746,883
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Purchases of investments..................................................... (46,461,608)
Sales, maturities and paydowns on investments................................ 51,991,015
Net amortization/accretion of premiums/discounts on investments.............. (177,284)
Net realized gain/loss on investments........................................ 396,097
Net increase from payment by sub-advisor..................................... (1,180)
Net change in unrealized appreciation/depreciation on investments............ 2,167,601
Net change in restricted cash................................................ 512,000
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable.............................................. 55,001
Decrease in prepaid expenses................................................. 362
Decrease in interest payable on reverse repurchase agreements................ (314)
Decrease in investment advisory fees payable................................. (3,138)
Decrease in legal fees payable............................................... (2,001)
Decrease in printing fees payable............................................ (938)
Increase in administrative fees payable...................................... 6,603
Decrease in custodian fees payable........................................... (11,111)
Increase in transfer agent fees payable...................................... 2,685
Decrease in trustees' fees and expenses payable.............................. (139)
Increase in other liabilities payable........................................ 421
--------------
CASH PROVIDED BY OPERATING ACTIVITIES.............................................. $ 10,220,955
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income.............. (4,297,377)
Repurchases of reverse repurchase agreements................................. (45,100,000)
Reverse repurchase agreements borrowings..................................... 43,517,000
--------------
CASH USED IN FINANCING ACTIVITIES.................................................. (5,880,377)
--------------
Increase in cash................................................................... 4,340,578
Cash at beginning of period........................................................ 4,740,738
--------------
CASH AT END OF PERIOD.............................................................. $ 9,081,316
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for excise tax......................................... $ 110,924
==============
Cash paid during the period for interest........................................... $ 49,615
==============
See Notes to Financial Statements Page 15
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
10/31/2014 10/31/2013 10/31/2012 10/31/2011 (b) 10/31/2010 (a)
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period............ $ 17.63 $ 17.91 $ 18.43 $ 19.59 $ 19.63
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 1.02 1.25 1.28 1.69 2.06
Net realized and unrealized gain (loss)......... (0.61) (0.28) 0.17 (0.82) (0.45)
------- ------- ------- ------- -------
Total from investment operations................ 0.41 0.97 1.45 0.87 1.61
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (1.02) (1.25) (2.03) (2.03) (1.65)
------- ------- ------- ------- -------
Total from distributions........................ (1.02) (1.25) (2.03) (2.03) (1.65)
------- ------- ------- ------- -------
Premium from shares sold in at the market
offering..................................... -- -- 0.06 -- --
------- ------- ------- ------- -------
Net asset value, end of period.................. $ 17.02 $ 17.63 $ 17.91 $ 18.43 $ 19.59
======= ======= ======= ======= =======
Market value, end of period..................... $ 15.12 $ 15.79 $ 19.00 $ 18.94 $ 20.70
======= ======= ======= ======= =======
TOTAL RETURN BASED ON NET ASSET VALUE (c)....... 3.01% (d) 6.04% (d) 8.30% 4.60% 9.01%
======= ======= ======= ======= =======
TOTAL RETURN BASED ON MARKET VALUE (c).......... 2.17% (10.47)% 11.86% 1.68% 26.18%
======= ======= ======= ======= =======
------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $71,708 $74,259 $75,439 $75,014 $79,495
Ratio of total expenses to average net assets... 1.78% 1.96% 2.47% 2.23% 2.00%
Ratio of total expenses to average net assets...
excluding interest expense................... 1.72% 1.83% 2.20% 2.14% 1.95%
Ratio of net investment income (loss) to
average net assets........................... 5.84% 7.01% 7.28% 8.74% 10.50%
Portfolio turnover rate......................... 54% 109% 52% 47% 36%
------------------------------------------------
(a) On September 20, 2010, the Fund's Board of Trustees approved a new
investment management agreement with First Trust Advisors L.P. and a new
investment sub-advisory agreement with Fixed Income Discount Advisory
Company ("FIDAC"), and on December 6, 2010, the Fund's shareholders voted
to approve both agreements.
(b) Effective April 29, 2011, the Fund's Board of Trustees approved Brookfield
Investment Management Inc. ("Brookfield") as the investment sub-advisor to
the Fund, replacing FIDAC. The Fund's shareholders approved the investment
sub-advisory agreement with Brookfield on July 25, 2011.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) The Fund received reimbursements from Brookfield in the amount of $1,180
and $5,310 for the years ended October 31, 2014 and 2013, respectively.
The reimbursements from Brookfield represent less than $0.01 per share and
had no effect on the Fund's total return.
Page 16 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
trades under the ticker symbol FMY on The New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing primarily in mortgage-backed securities
that, in the opinion of Brookfield Investment Management Inc. ("Brookfield" or
the "Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e. a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor") in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in
which these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities
(or equity securities) of the issuer/borrower, or comparable
companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any,
securing the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of
earnings and/or cash flows) being paid for similar businesses
in that industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2014, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and the accretion of discounts are recorded using the effective interest method.
The Fund invests in interest-only securities. For these securities, if there is
a change in the estimated cash flows, based on an evaluation of current
information, then the estimated yield is adjusted. Additionally, if the
evaluation of current information indicates a permanent impairment of the
security, the cost basis of the security is written down and a loss is
recognized. Debt obligations may be placed on non-accrual status and the related
interest income may be reduced by ceasing current accruals and writing off
interest receivables when the collection of all or a portion of interest has
become doubtful based on consistently applied procedures. A debt obligation is
removed from non-accrual status when the issuer resumes interest payments or
when collectability of interest is reasonably assured.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014
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 October 31, 2014, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements were utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing under which Fund assets are pledged as collateral to secure
a short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back by the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Restricted cash in the amount of $50,000, as shown on the Statement of Assets
and Liabilities, is associated with reverse repurchase agreements outstanding as
of October 31, 2014.
Information for the year ended October 31, 2014:
Maximum amount outstanding during the period.................. $10,054,000
Average amount outstanding during the period*................. $ 9,242,479
Average Common Shares outstanding during the period........... 4,213,115
Average debt per Common Share outstanding during the period... $ 2.19
* 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 year ended October 31, 2014.
During the year ended October 31, 2014, the interest rates ranged from 0.34% to
1.28%, with a weighted average interest rate of 0.53%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$49,301.
D. INVERSE FLOATING-RATE SECURITIES:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities, if
any, are identified on the Portfolio of Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended October 31, 2014, primarily as a result of
differing book/tax treatment on recognition of amortization/accretion on
portfolio holdings, have been reclassified at year end to reflect an increase in
accumulated net investment income (loss) by $764,604, an increase in accumulated
net realized gain (loss) on investments by $428,829 and a decrease to paid-in
capital of $1,193,433. Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal year ended October 31,
2014, and 2013, was as follows:
Distributions paid from: 2014 2013
Ordinary income................................. $ 4,297,377 $ 5,244,634
As of October 31, 2014, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ 45,039
Undistributed capital gains....................... --
-----------
Total undistributed earnings...................... 45,039
Accumulated capital and other losses.............. (4,398,469)
Net unrealized appreciation (depreciation)........ (1,999,209)
-----------
Total accumulated earnings (losses)............... (6,352,639)
Other............................................. --
Paid-in capital................................... 78,060,897
-----------
Net assets........................................ $71,708,258
===========
H. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. At October 31, 2014, the Fund had pre-enactment net capital
losses for federal income tax purposes of $3,349,872. At October 31, 2014, the
Fund had post-enactment net capital losses for federal income tax purposes of
$1,048,597 to be carried forward indefinitely. The pre-enactment net capital
losses for federal income tax purposes will expire as follows:
EXPIRATION DATE AMOUNT
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887
During the taxable year ended October 31, 2014, the Fund did not utilize any
pre-enactment capital loss carryforwards.
At October 31, 2014, the Fund had pre-enactment capital loss carryforwards that
expired in the amount of $1,082,509.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of October 31, 2014,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
J. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to help
investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
instruments and transactions subject to master netting or similar agreements. In
addition, in January 2013, FASB issued Accounting Standards Update No. 2013-1
"Clarifying the Scope of Offsetting Assets and Liabilities" ("ASU 2013-1"),
specifying exactly which transactions are subject to offsetting disclosures. The
scope of the disclosure requirements is limited to derivative instruments,
repurchase agreements and reverse repurchase agreements, and securities
borrowing and securities lending transactions. ASU 2011-11 and ASU 2013-1 are
effective for financial statements with fiscal years beginning on or after
January 1, 2013, and interim periods within those fiscal years.
The Fund adopted the disclosure requirement on netting for the current reporting
period. For financial reporting purposes, the Fund does not offset financial
assets and financial liabilities that are subject to master netting arrangements
or similar agreements on the Statement of Assets and Liabilities. The Fund's
right to setoff may be restricted or prohibited by the bankruptcy or insolvency
laws of the particular jurisdiction to which a specific master netting or
similar agreement counterparty is subject.
At October 31, 2014, reverse repurchase agreement assets and liabilities (by
type) on a gross basis are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Gross Amounts Liabilities Presented ----------------------------
Amounts of Offset in the in the Statement Cash
Recognized Statement of Assets of Assets and Financial Segregated as Net
Liabilities and Liabilities Liabilities Instruments Collateral Amount
------------------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase
Agreements $ (8,471,000) $ -- $ (8,471,000) $ 8,471,000 $ -- $ --
K. ACCOUNTING PRONOUNCEMENT:
In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-11,
Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions,
Repurchase Financings, and Disclosures. A repurchase-to-maturity transaction is
one where the repurchase agreement settles at the same time as the maturity of
the transferred financial asset. These transactions, unlike other repurchase
agreements, were accounted for as sales and purchases instead of being treated
as secured borrowings. This ASU changes that accounting practice and treats all
repurchase agreements as secured borrowings. The ASU additionally requires two
new disclosures which are intended to: a) disclose information on transferred
assets accounted for as sales in transactions that are economically similar to
repurchase agreements, and b) provide increased transparency about the types of
collateral pledged in repurchase agreements and similar transactions accounted
for as secured borrowings.
The ASU impacts all entities that enter into repurchase-to-maturity
transactions, entities that account for these transactions as a sale and a
purchase, and entities that engage in repurchase agreements and securities
lending transactions.
The ASU is effective for financial statements with fiscal years beginning on or
after December 15, 2014 and interim periods within those fiscal years.
Management is evaluating the impact, if any, of this guidance on the Fund's
financial statement disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets (the average
daily total asset value of the Fund minus the sum of the Fund's liabilities
other than the principal amount of borrowings or reverse repurchase agreements,
if any). First Trust also provides fund reporting services to the Fund for a
flat annual fee in the amount of $9,250.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee of 0.50% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
During the year ended October 31, 2014, the Fund received reimbursements from
the Sub-Advisor of $1,180 in connection with a trade error.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the year ended October 31,
2014, were $25,412,077 and $17,049,362, respectively. The proceeds from sales
and paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the year ended October 31, 2014, were
$29,770,103 and $22,006,257, respectively.
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On November 20, 2014, the Fund declared a distribution of $0.085 per share to
Common Shareholders of record on December 3, 2014, payable December 10, 2014.
Page 22
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST MORTGAGE INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Mortgage Income Fund (the "Fund"), including the portfolio of investments,
as of October 31, 2014, and the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2014 by correspondence with the Fund's
custodian and brokers; where replies were not received, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust Mortgage Income Fund as of October 31, 2014, and the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 23, 2014
Page 23
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (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.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 28, 2014, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2014, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund (formerly First Trust Active Dividend
Income Fund), First Trust High Income Long/Short Fund, First Trust Energy
Infrastructure Fund, First Trust MLP and Energy Income Fund and First Trust
Intermediate Duration Preferred & Income Fund was held on April 23, 2014 (the
"Annual Meeting"). At the Annual Meeting, Trustee Robert F. Keith was elected by
the Common Shareholders of the First Trust Mortgage Income Fund as a Class I
Trustee for a three-year term expiring at the Fund's annual meeting of
shareholders in 2017. The number of votes cast in favor of Mr. Keith was
3,668,805, the number of votes against was 46,128 and the number of abstentions
was 498,182. James A. Bowen, Richard E. Erickson, Thomas R. Kadlec and Niel B.
Nielson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Advisor or Sub-Advisor may take
temporary defensive positions.
SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (UNAUDITED)
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.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Mortgage Income Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Brookfield
Investment Management Inc. (the "Sub-Advisor"), at a meeting held on June 8-9,
2014. The Board of Trustees determined that the continuation of the Agreements
is in the best interests of the Fund in light of the extent and quality of the
services provided and such other matters as the Board considered to be relevant
in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs.
Following receipt of this information, counsel to the Independent Trustees posed
follow-up questions to the Advisor, and the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub-Advisor, including the supplemental responses. The Board applied its
business judgment to determine whether the arrangements between the Fund and the
Advisor and among the Fund, the Advisor and the Sub-Advisor are reasonable
business arrangements from the Fund's perspective as well as from the
perspective of shareholders. The Board considered that shareholders chose to
invest or remain invested in the Fund knowing that the Advisor and the
Sub-Advisor manage the Fund.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (UNAUDITED)
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. With respect to the Sub-Advisory Agreement,
the Board noted the background and experience of the Sub-Advisor's portfolio
management team. The Board reviewed the materials provided by the Sub-Advisor
and considered the services that the Sub-Advisor provides to the Fund, including
the Sub-Advisor's day-to-day management of the Fund's investments, noting that
the Sub-Advisor had become responsible for investment advisory services to the
Fund in April 2011. In light of the information presented and the considerations
made, the Board concluded that the nature, extent and quality of services
provided to the Fund by the Advisor and the Sub-Advisor under the Agreements
have been and are expected to remain satisfactory and that the Sub-Advisor,
under the oversight of the Advisor, has managed the Fund consistent with its
investment objectives and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non fund clients, noting that the Advisor does not
provide advisory services to other funds with investment objectives and policies
similar to the Fund's, but does provide services to certain separately managed
accounts that may have investment objectives and policies similar to the Fund's.
The Board noted that the Advisor charges a lower advisory fee rate to the
separately managed accounts, as well as the Advisor's statement that the nature
of the services provided to the separately managed accounts is not comparable to
those provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other closed end funds it manages, noting that the Fund's sub-advisory fee rate
is lower than the advisory fee rate charged by the Sub-Advisor to the other
funds it manages. In addition, the Board reviewed data prepared by Lipper Inc.
("Lipper"), an independent source, showing the advisory fees and expense ratios
of the Fund as compared to the advisory fees and expense ratios of an expense
peer group selected by Lipper and similar data from the Advisor for a separate
peer group selected by the Advisor. The Board noted that the Lipper and Advisor
peer groups included only three overlapping peer funds. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) the Fund is unique in its composition, which
makes assembling peers with similar strategies and asset mix difficult; (ii)
peer funds may use different amounts and types of leverage which have different
costs associated with them or may use no leverage; (iii) some peer funds do not
employ an advisor/sub-advisor management structure; and (iv) most of the peer
funds are larger than the Fund, which causes the Fund's fixed expenses to be
higher on a percentage basis as compared to the larger peer funds. The Board
took these limitations into account in considering the peer data. In reviewing
the peer data, the Board noted that the Fund's contractual advisory fee was
above the median of the Lipper peer group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also received
data prepared by Lipper comparing the Fund's performance to a performance peer
universe selected by Lipper and to a benchmark. In reviewing the Fund's
performance as compared to the performance of the Lipper performance peer
universe, the Board took into account the limitations described above with
respect to creating a relevant peer group for the Fund. The Board also
considered the Fund's dividend yield as of March 31, 2014 and information
provided by the Advisor on the Fund's leverage, including that leverage was
accretive to the Fund's total return in 2013. In addition, the Board compared
the Fund's premium/discount over the past eight quarters to the average and
median premium/discount of the Advisor peer group over the same period and
considered the factors that may impact a fund's premium/discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board determined that due to the Fund's
closed end structure, the potential for realization of economies of scale as
Fund assets grow was not a material factor to be considered. The Board also
considered the costs of the services provided and profits realized by the
Advisor from serving as investment advisor to the Fund for the twelve months
ended December 31, 2013, as well as product-line profitability data for the same
period, as set forth in the materials provided to the Board. The Board noted the
inherent limitations in the profitability analysis, and concluded that the
Advisor's estimated profitability appeared to be not excessive in light of the
services provided to the Fund. In addition, the Board considered fall out
benefits described by the Advisor that may be realized from its relationship
with the Fund, including the Advisor's compensation for fund reporting services
pursuant to a separate Fund Reporting Services Agreement.
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (UNAUDITED)
The Board noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it does not expect
economies of scale to be present in connection with its provision of services to
the Fund. The Board considered that the sub-advisory fee rate was negotiated at
arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered data provided by the Sub-Advisor with respect
to the profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board
noted the inherent limitations in the profitability analysis and concluded that
the profitability analysis for the Advisor was more relevant, although the
profitability of the Sub-Advisory Agreement appeared to be not excessive in
light of the services provided to the Fund. The Board noted that the Sub-Advisor
does not maintain any soft-dollar arrangements and that the Sub-Advisor
indicated that it does not anticipate any material fall out benefits from its
relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 28
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE (1) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 111 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real
120 East Liberty Drive, o Since Fund Inception Estate Limited Partnership; Member,
Suite 400 Sportsmed LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 111 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund Inception (May 2007 to March 2010), Inc., ADM
Suite 400 ADM Investor Services, Inc. Investor Services
Wheaton, IL 60187 (Futures Commission Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 111 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since June 2006 Consulting) Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 111 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Inception Harapan Educational Foundation Transport, Inc.
Suite 400 (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee, o Three-Year Term Chief Executive Officer (December 2010 111 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund Inception 2010), First Trust Advisors L.P. and First
Suite 400 Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-----------------------------
(1) Currently, Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees,
are serving as trustees until the Fund's 2015 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, as Class III Trustees,
are serving as trustees until the Fund's 2016 annual meeting of
shareholders. Robert F. Keith, as a Class I Trustee, is serving as a
trustee until the Fund's 2017 annual meeting of shareholders.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 29
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to Present), First Trust
Suite 400 Accounting Officer o Since January 2012 Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Inception Counsel, BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor); Secretary of
D.O.B.: 05/60 Stonebridge Advisors LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Fund Inception First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust
120 E. Liberty Drive, and Assistant Secretary Advisors L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since
D.O.B.: 12/66 January 2011
o Assistant Secretary
since Fund Inception
-----------------------------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 30
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
Brookfield Place
250 Vesey Street, 15th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by
the registrant or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and
that relates to any element of the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of
this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual
financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were $45,000 for the fiscal year
ended October 31, 2013 and $45,000 for the fiscal year ended 2014.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements
and are not reported under paragraph (a) of this Item were $0 for
the fiscal year ended October 31, 2013 and $0 for the fiscal year
ended October 31, 2014.
Audit-Related Fees (Investment Advisor) -- The aggregate fees billed
in each of the last two fiscal years for assurance and related
services by the principal accountant that are reasonably related to
the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of this Item
were $0 for the fiscal year ended October 31, 2013 and $0 for the
fiscal year ended October 31, 2014.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax
planning were $5,200 for the fiscal year ended October 31, 2013 and
$5,200 for the fiscal year ended October 31, 2014. These fees were
for tax return preparation.
Tax Fees (Investment Advisor) -- The aggregate fees billed in each
of the last two fiscal years for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax
planning were $0 for the fiscal year ended October 31, 2013 and $0
for the fiscal year ended October 31, 2014.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended October 31, 2013 and $0 for the fiscal year ended
October 31, 2014.
All Other Fees (Investment Adviser) The aggregate fees billed in
each of the last two fiscal years for products and services provided
by the principal accountant to the Registrant, other than the
services reported in paragraphs (a) through (c) of this Item were $0
for the fiscal year ended October 31, 2013 and $0 for the fiscal
year ended October 31, 2014.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the Registrant and the Registrant's investment
adviser of this Item that were approved by the audit committee
pursuant to the pre-approval exceptions included in paragraph
(c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X
are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the
most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent
employees was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the adviser that
provides ongoing services to the registrant for the Registrant's
fiscal year ended October 31, 2013 were $5,200 for the Registrant
and $3,000 for the Registrant's investment adviser and for the
Registrant's fiscal year ended October 31, 2014 were $5,200 for the
Registrant and $43,500 for the Registrant's investment adviser.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and
any entity controlling, controlled by, or under common control with
the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
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.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
Information provided as of December 23, 2014.
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset
Management, a global alternative asset manager with approximately $200 billion
in assets under management as of September 30, 2014. Brookfield Asset Management
has over a 100-year history of owning and operating assets with a focus on
property, renewable power, infrastructure and private equity. The company offers
a range of public and private investment products and services, which leverage
its expertise and experience and provide it with a competitive advantage in the
markets where it operates. On behalf of its clients, Brookfield Asset Management
is also an active investor in the public securities markets, where its
experience extends over 30 years. Over this time, the company has successfully
developed several investment operations and built expertise in the management of
institutional portfolios, retail mutual funds and various commingled vehicles.
Brookfield Asset Management's public market activities are conducted by
Brookfield Investment Management, a registered investment advisor. These
activities complement Brookfield Asset Management's core competencies and
include global listed real estate and infrastructure equities, corporate
high-yield investments, opportunistic credit strategies and a dedicated
insurance asset management division. Headquartered in New York, NY, Brookfield
Investment Management maintains offices and investment teams in Toronto,
Chicago, Boston and London and has over $17 billion of assets under management
as of September 30, 2014.
Anthony Breaks, CFA, Director
Mr. Breaks is a Portfolio Manager on the Securitized Products Investments team
and has worked for Brookfield since May 2002. He is the portfolio manager
responsible for the day-to-day management of the Registrant and is responsible
for security analysis, trading and the overall management of the portfolio's
exposures. Mr. Breaks is a team leader in MBS/ABS and is a member of the team's
securities analysis committee. Mr. Breaks also has managed securitized product
vehicles, such as SIV, ABCP and 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 designation.
Chris Wu, Director
Mr. Wu is a Portfolio Manager on the Securitized Products Investment Team
focusing on agency MBS. He has worked for the firm since March 2007 and is
responsible for the firm's agency MBS exposures. He is responsible for the
Agency MBS exposures of the Registrant and performs security analysis, trading
and monitoring of the Agency MBS positions. He develops quantitative tools to
formulate research and develop trading strategies for agency MBS exposures. Mr.
Wu holds an MBA from New York University as well as a Master of Science degree
in Computer Science from University of Saskatchewan. He also earned a Bachelor
of Economics from Huazhong University of Science and Technology in China.
(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND
POTENTIAL CONFLICTS OF INTEREST
Information provided as of October 31, 2014.
# of Accounts Total Assets
Total Managed for which for which
Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Based on is Based on
Team Member Type of Accounts* Managed Total Assets Performance Performance
-----------------
1. Anthony Breaks Registered Investment Companies: 0 $ 0 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $ 0 0 $ 0
---------------------------------
Other Accounts: 2 $430 0 $ 0
---------------
2. Chris Wu Registered Investment Companies: 0 $ 0 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $ 0 0 $ 0
---------------------------------
Other Accounts: 0 $ 0 0 $ 0
---------------
PORTFOLIO MANAGER MATERIAL CONFLICTS OF INTEREST
Potential conflicts of interest may arise when the portfolio managers have
day-to-day management responsibilities with respect to one or more other funds
or other accounts, as is the case for the portfolio managers of the Registrant.
These potential conflicts may include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible
for managing multiple funds and/or accounts may devote unequal time and
attention to the management of those funds and/or accounts. As a result, the
portfolio manager may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as the case may be if he or she were to devote substantially more attention to
the management of a single fund. The effects of this potential conflict may be
more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.
Allocation of Limited Investment Opportunities. If a portfolio manager
identifies a limited investment opportunity that may be suitable for multiple
funds and/or accounts, the opportunity may be allocated among these several
funds or accounts, which may limit a client's ability to take full advantage of
the investment opportunity.
Pursuit of Differing Strategies. At times, a portfolio manager may determine
that an investment opportunity may be appropriate for only some of the funds
and/or accounts for which he or she exercises investment responsibility, or may
decide that certain of the funds and/or accounts should take differing positions
with respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.
Variation in Compensation. A conflict of interest may arise where the financial
or other benefits available to the portfolio manager differ among the funds
and/or accounts that he or she manages. If the structure of the investment
adviser's management fee and/or the portfolio manager's compensation differs
among funds and/or accounts (such as where certain funds or accounts pay higher
management fees or performance-based management fees), the portfolio manager
might be motivated to help certain funds and/or accounts over others. The
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain or raise assets under
management or to enhance the portfolio manager's performance record or to derive
other rewards, financial or otherwise, could influence the portfolio manager to
lend preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
Related Business Opportunities. The investment adviser or its affiliates may
provide more services (such as distribution or recordkeeping) for some types of
funds or accounts than for others. In such cases, a portfolio manager may
benefit, either directly or indirectly, by devoting disproportionate attention
to the management of fund and/or accounts that provide greater overall returns
to the investment manager and its affiliates.
Brookfield has adopted compliance policies and procedures that are designed to
address the various conflicts of interest that may arise for it and the
individuals that it employs. For example, Brookfield seeks to minimize the
effects of competing interests for the time and attention of portfolio managers
by assigning portfolio managers to manage funds and accounts that share a
similar investment style. Brookfield also has adopted trade allocation
procedures that are designed to facilitate the fair allocation of limited
investment opportunities among multiple funds and accounts.
(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
PORTFOLIO MANAGER COMPENSATION
Information provided as of October 31, 2014.
Brookfield compensates its portfolio managers based on the scale and complexity
of their portfolio responsibilities, the total return performance of funds and
accounts managed by the portfolio manager on an absolute basis and versus
appropriate peer groups of similar size and strategy, as well as the management
skills displayed in managing their subordinates and the teamwork displayed in
working with other members of the firm. Since the portfolio managers are
responsible for multiple funds and accounts, investment performance is evaluated
on an aggregate basis almost equally weighted among performance, management and
teamwork. Base compensation for Brookfield's portfolio managers varies in line
with a portfolio manager's seniority and position. The compensation of portfolio
managers with other job responsibilities (such as acting as an executive officer
of Brookfield or supervising various departments) includes consideration of the
scope of such responsibilities and the portfolio manager's performance in
meeting them. Brookfield seeks to compensate portfolio managers commensurate
with their responsibilities and performance, and competitive with other firms
within the investment management industry. Salaries, bonuses and stock-based
compensation also are influenced by the operating performance of Brookfield and
its parent company, Brookfield Asset Management Inc. While the salaries of
Brookfield's portfolio managers are comparatively fixed, cash bonuses and
stock-based compensation may fluctuate significantly from year to year. Bonuses
are determined on a discretionary basis by the senior executives of Brookfield
and measured by individual and team-oriented performance guidelines. The amount
of the Long Term Incentive Plan (LTIP) is approved by the board of directors
annually and there is a rolling vesting schedule to aid in retention of key
people. A key component of this program is achievement of client objectives in
order to properly align interests with our clients. Further, the incentive
compensation of all investment personnel who work on each strategy is directly
tied to the relative performance of the strategy and its clients.
The compensation structure of each Portfolio Manager and other investment
professionals has four primary components:
o A base salary;
o An annual cash bonus;
o If applicable, long-term compensation consisting of restricted stock
units or stock options of the Investment Adviser's ultimate parent
company, Brookfield Asset Management, Inc. and
o If applicable, long term compensation consisting of restricted stock
units in private funds managed by the investment professional
Each Portfolio Manager also receives certain retirement, insurance, and other
benefits that are broadly available to all employees. Compensation of each
Portfolio Manager is reviewed on an annual basis by senior management.
(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of October 31, 2014.
DOLLAR RANGE OF FUND
SHARES BENEFICIALLY
NAME OWNED
Anthony Breaks $ 0
Chris Wu $ 0
(B) Not applicable.
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) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(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: Decemnber 23, 2014
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: Decemnber 23, 2014
--------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: Decemnber 23, 2014
--------------------
* Print the name and title of each signing officer under his or her signature.