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, 2017
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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
MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2017
FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2017
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 5
Statement of Assets and Liabilities.......................................... 14
Statement of Operations...................................................... 15
Statements of Changes in Net Assets.......................................... 16
Financial Highlights......................................................... 17
Notes to Financial Statements................................................ 18
Report of Independent Registered Public Accounting Firm...................... 25
Additional Information....................................................... 26
Board of Trustees and Officers............................................... 31
Privacy Policy............................................................... 33
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Mortgage Income Fund (the "Fund") to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and its respective
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may periodically provide additional information on Fund performance
on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of a relevant market
benchmark.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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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, 2017
Dear Shareholders:
Thank you for your investment in First Trust Mortgage Income Fund.
First Trust is pleased to provide you with the annual report which contains
detailed information about your investment for the 12 months ended October 31,
2017, including a market overview and a performance analysis for the period. We
encourage you to read this report carefully and discuss it with your financial
advisor.
The U.S. bull market continued through the November 2016 election and the first
nine months of the Trump presidency. During that period, November 8, 2016
(Election Day 2016) through October 31, 2017, the S&P 500(R) Index (the "Index")
posted a total return of 22.73%, according to Bloomberg. Ten of the eleven Index
sectors were up on a total return basis as well. Since the beginning of 2017
through October 31, 2017, the Index has closed its trading sessions at all-time
highs on 50 occasions. Finally, as of October 31, 2017, the Index has spent the
entire year in positive territory. This has only happened in 10 different years
over the past seven decades.
The current bull market, as measured from March 9, 2009 through October 31,
2017, is the second longest in history. While we are optimistic about the U.S.
economy, we are also aware that no one can predict the future or know how
markets will perform in different economic environments. We believe that one
should invest for the long term and be prepared for market volatility by keeping
current on your portfolio and investing goals by speaking regularly with your
investment professional. It is also important to keep in mind that past
performance can never guarantee future results.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on bringing
the types of investments that we believe can help you reach your financial
goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MORTGAGE INCOME FUND (FMY)
"AT A GLANCE"
AS OF OCTOBER 31, 2017 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $14.39
Common Share Net Asset Value ("NAV") $15.47
Premium (Discount) to NAV (6.98)%
Net Assets Applicable to Common Shares $65,196,137
Current Monthly Distribution per Common Share (1) $0.065
Current Annualized Distribution per Common Share $0.780
Current Distribution Rate on Common Share Price (2) 5.42%
Current Distribution Rate on NAV (2) 5.04%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/16 14.00 15.53
13.94 15.50
13.76 15.53
13.76 15.43
11/16 14.00 15.51
14.07 15.42
14.06 15.45
13.97 15.43
14.06 15.44
12/16 14.06 15.44
14.08 15.39
14.07 15.39
14.02 15.39
1/17 14.09 15.44
14.20 15.45
14.08 15.48
14.17 15.48
2/17 14.10 15.51
14.07 15.47
14.06 15.46
14.07 15.47
14.16 15.48
3/17 14.06 15.49
14.05 15.48
14.10 15.48
14.09 15.48
4/17 14.07 15.49
14.07 15.46
14.08 15.51
14.05 15.49
5/17 14.13 15.58
14.11 15.54
14.06 15.53
14.11 15.52
14.14 15.53
6/17 14.20 15.53
14.20 15.50
14.22 15.49
14.17 15.51
7/17 14.19 15.52
14.29 15.52
14.07 15.51
14.17 15.51
8/17 14.29 15.56
14.23 15.54
14.21 15.55
14.28 15.50
14.29 15.52
9/17 14.23 15.50
14.13 15.46
14.20 15.46
14.37 15.45
14.20 15.47
10/17 14.39 15.47
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended 10 Years Ended Inception (5/25/05)
10/31/17 10/31/17 10/31/17 to 10/31/17
FUND PERFORMANCE (3)
NAV 5.25% 3.67% 6.09% 5.90%
Market Value 8.60% 0.98% 6.75% 4.89%
INDEX PERFORMANCE
Bloomberg Barclays U.S. Mortgage Backed
Securities (MBS) Index 0.53% 1.99% 4.03% 4.13%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Effective Duration 2.04
Weighted Average Effective Maturity 4.81
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 58.22%
U.S. Government Agency MBS 33.76
Asset-Backed Securities 1.62
Cash & Cash Equivalents 6.40
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Total 100.00%
=======
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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Government 33.76%
AAA 0.24
AA+ 12.49
AA 2.42
AA- 3.04
A+ 10.38
A 0.80
BBB+ 0.75
BBB 1.69
BBB- 1.12
BB+ 0.75
BB- 1.98
B+ 1.73
B 0.03
B- 0.24
CCC 8.07
CC 0.88
D 3.55
Not Rated 9.68
Cash & Cash Equivalents 6.40
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Total 100.00%
=======
(1) Most recent distribution paid or declared through 10/31/2017. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 10/31/2017. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
(4) The ratings are by Standard & Poor's. A credit rating is an assessment
provided by a nationally recognized statistical rating organization
(NRSRO), of the creditworthiness of an issuer with respect to debt
obligations. Ratings are measured on a scale that generally ranges from
AAA (highest) to D (lowest). Investment grade is defined as those issuers
that have a long-term credit rating of BBB- or higher. Sub-investment
grade ratings are those rated BB+ or lower. The credit ratings shown
relate to the credit worthiness of the issuers of the underlying
securities in the fund, and not to the fund or its shares. U.S. Treasury,
U.S. Agency and U.S. Agency mortgage-backed securities appear under
"Government". Credit ratings are subject to change.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2017 (UNAUDITED)
INVESTMENT MANAGER
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor which
offers customized portfolio management using its structured, quantitative
approach to security selection. As of October 31, 2017, First Trust managed or
supervised $113.943 billion in assets.
PORTFOLIO MANAGEMENT TEAM
JEREMIAH CHARLES - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
JIM SNYDER - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
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
will pursue its objectives by investing primarily in mortgage-backed securities
representing part ownership in a pool of either residential or commercial
mortgage loans that, in the opinion of the Fund's investment advisor, offer an
attractive combination of credit quality, yield and maturity. There can be no
assurance the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
MARKET RECAP
The fiscal year ended October 31, 2017 began with a bond market under pressure
in the aftermath of the U.S. Presidential election, with yields across the curve
moving meaningfully higher. The 2-year and 30-year Treasury's yield curve
steepened precipitously, led by the 30-year Treasury which sold off from 2.56%
in the days leading up to the election, to a yield of 3.18% in mid-December
2016. As expected, the Federal Reserve (the "Fed") raised rates in December,
beginning the path to normalization of monetary policy. As the calendar changed
to 2017, bond yields began to rally, particularly intermediate to longer-end
maturities, which caused the yield curve to begin a flattening trend that would
persist throughout 2017 as the Fed hiked overnight rates 2 more times through
September. The Fed announced plans to begin the tapering of its balance sheet,
which consists of large holdings of U.S. Treasuries and U.S. Agency
mortgage-backed securities ("MBS"). Agency MBS spreads widened on the year, led
primarily by market anxiety related to the mechanism by which the Fed would
unwind its $4.5 trillion balance sheet.
PERFORMANCE ANALYSIS
During the year ended October 31, 2017, the Fund returned 5.25% on a net asset
value ("NAV") basis, and 8.60% on a market price basis.
During the year ended October 31, 2017, the Bloomberg Barclays U.S. MBS Index
(the "Index") returned 0.53%.
During the year ended October 31, 2017, the Fund outperformed the Index by 4.72%
net of fees, on a NAV basis. Over the fiscal year, the Fund maintained a very
defensive duration in the portfolio relative to the Index. This was a key driver
of outperformance as U.S. bond market yields increased rather significantly. An
additional key contributor to outperformance was the continued reinvestment in
the legacy Non-Agency Residential Mortgage-Backed Securities ("RMBS") sector,
which performed well with spreads tightening into the broader bond market yield
backup. Additionally, the team continued to deploy significant excess cash
reserves and runoff from previously held Commercial Mortgage-Backed Securities
("CMBS") positions into more stable and less credit sensitive Agency
Mortgage-Backed Securities ("MBS") cash flows which helped to generate more
interest income. Lastly, a more active approach to yield curve management
utilizing Treasury futures helped to drive alpha into the strategy as the yield
curve flattening trend persisted throughout the first 10 months of 2017.
FUND AND MARKET OUTLOOK
Late in 2016 and into 2017, the Fed began monetary policy normalization in
earnest with three 25 basis points ("bps") hikes from December 2016 through June
2017. Additionally, the Fed announced plans in September 2017 to formally begin
reducing the size of its fixed income balance sheet. We expect that the Fed will
continue to raise the overnight Fed Funds rate with a potential of four hikes
during the 2017-2018 period. The labor markets have continued to tighten over
the past year, and with that, we expect income and wage growth to pick up
modestly. We believe measures of inflation will correspondingly pick up
modestly, potentially putting pressure for yields to rise on the longer maturity
segment of the bond market. As the Fed pushes on with interest rate
normalization, we anticipate that the simultaneous tapering of the Fed's
portfolio will have an impact on overall bond market valuations, causing
measures of volatility to increase and fixed income spreads to come under
pressure.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2017 (UNAUDITED)
Given our views and outlook on the markets, we plan to continue to manage the
fund defensively versus the Index from a duration standpoint while maintaining
our ongoing strategy of reinvesting in higher yielding, Non-Agency RMBS assets
allocated to the short end. As runoff continues from the CMBS side of the
portfolio, we expect to continue to reallocate to Agency MBS. As part of the
investment team's Agency MBS strategy, a substantial portion of the agency
securities have been invested in the interest-only sector to increase the income
and economic earnings of the portfolio. We believe this strategy can be very
effective with proper security selection, particularly when combined with
appropriate yield curve management. We are also investing in longer maturity
agency mortgages and Treasury futures to better position the portfolio for the
monetary tightening cycle and to partially offset the generally short maturity
sensitivity of the portfolio. Given our market outlook, we will continue to
deploy appropriate yield curve management strategies while also maintaining a
bearish view on the Agency MBS fixed rate index and, as such, will not look to
deploy leverage at current valuations. We believe this strategy will continue to
improve the portfolio results, particularly in the current interest rate
normalization cycle.
Page 4
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES - 58.0%
COLLATERALIZED MORTGAGE OBLIGATIONS - 51.1%
Accredited Mortgage Loan Trust
$ 370,918 Series 2003-2, Class A1............................. 4.98% 10/01/33 $ 379,044
ACE Securities Corp. Home Equity Loan Trust
946,718 Series 2006-ASAP6, Class A2D, 1 Mo. LIBOR +
0.22% (a)........................................ 1.46% 12/25/36 511,989
Banc of America Funding Corp.
112,482 Series 2008-R2, Class 1A4 (b)....................... 6.00% 09/01/37 116,269
Banc of America Mortgage Trust
52,819 Series 2002-L, Class 1A1 (c)........................ 2.51% 12/01/32 48,771
267,013 Series 2005-A, Class 2A1 (c)........................ 3.47% 02/01/35 266,550
Chase Mortgage Finance Trust
209,298 Series 2007-A1, Class 1A3 (c)....................... 3.62% 02/01/37 209,074
CHL Mortgage Pass-Through Trust
154,249 Series 2005-HYB3, Class 2A6B (c).................... 3.39% 06/01/35 155,848
Citigroup Mortgage Loan Trust
385,661 Series 2005-6, Class A1, US Treasury Yield Curve
Rate T Note Constant Maturity 1 Year + 2.10% (a). 3.41% 09/01/35 390,828
895,823 Series 2012-7, Class 10A2 (b) (c)................... 3.75% 09/01/36 897,005
Countrywide Asset-Backed Certificates
87,962 Series 2006-S8, Class A6............................ 5.51% 04/01/36 87,366
Countrywide Home Loan Mortgage Pass-Through Trust
515,408 Series 2003-46, Class 2A1 (c)....................... 3.59% 01/01/34 515,168
330,462 Series 2006-21, Class A8............................ 5.75% 02/01/37 294,487
520,411 Series 2006-HYB5, Class 3A1A (c).................... 3.52% 09/01/36 430,954
Credit Suisse First Boston Mortgage Securities Corp.
372,278 Series 2004-AR2, Class 1A1 (c)...................... 3.47% 03/01/34 372,358
574,156 Series 2004-AR8, Class 6A1 (c)...................... 3.36% 09/01/34 582,973
191,445 Series 2005-5, Class 3A2, 1 Mo. LIBOR +
0.30% (a)........................................ 1.54% 07/25/35 185,513
Deutsche ALT-A Securities, Inc., Mortgage Loan Trust
33,344 Series 2003-3, Class 3A1............................ 5.00% 10/01/18 33,530
DSLA Mortgage Loan Trust
775,279 Series 2004-AR3, Class 2A2A, 1 Mo. LIBOR +
0.37% (a)........................................ 1.61% 07/19/44 774,370
839,876 Series 2007-AR1, Class 2A1A, 1 Mo. LIBOR +
0.14% (a)........................................ 1.38% 04/19/47 792,653
GMAC Mortgage Corporation Loan Trust
134,849 Series 2004-AR1, Class 22A (c)...................... 4.01% 06/01/34 132,230
GSR Mortgage Loan Trust
14,655 Series 2003-10, Class 1A12 (c)...................... 3.38% 10/01/33 14,651
241,026 Series 2005-AR1, Class 4A1 (c)...................... 2.78% 01/01/35 233,967
Harborview Mortgage Loan Trust
472,894 Series 2004-6, Class 3A1 (c)........................ 3.83% 08/01/34 465,906
Home Equity Asset Trust
65,000 Series 2005-3, Class M4, 1 Mo. LIBOR + 0.64% (a).... 1.88% 08/25/35 65,792
520,000 Series 2005-9, Class M1, 1 Mo. LIBOR + 0.41% (a).... 1.65% 04/25/36 504,460
Impac CMB Trust
286,183 Series 2004-6, Class 1A2, 1 Mo. LIBOR +
0.78% (a)........................................ 2.02% 10/25/34 281,178
IXIS Real Estate Capital Trust
1,166,940 Series 2007-HE1, Class A3, 1 Mo. LIBOR +
0.16% (a)........................................ 1.40% 05/25/37 467,494
See Notes to Financial Statements Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
JP Morgan Mortgage Trust
$ 1,228,751 Series 2005-ALT1, Class 4A1 (c)..................... 3.68% 10/01/35 $ 1,161,786
1,102,603 Series 2006-A2, Class 4A1 (c)....................... 3.73% 08/01/34 1,115,802
272,122 Series 2006-A2, Class 5A3 (c)....................... 3.45% 11/01/33 277,598
JP Morgan Re-REMIC
247,486 Series 2009-7, Class 12A1 (b)....................... 6.25% 01/03/37 251,301
MASTR Alternative Loan Trust
3,909,764 Series 2006-2, Class 2A3, 1 Mo. LIBOR +
0.35% (a)........................................ 1.59% 03/25/36 802,383
MASTR Asset Backed Securities Trust
928,570 Series 2006-HE5, Class A3, 1 Mo. LIBOR +
0.16% (a)........................................ 1.40% 11/25/36 667,175
1,390,905 Series 2006-NC2, Class A3, 1 Mo. LIBOR +
0.11% (a)........................................ 1.35% 08/25/36 775,330
634,882 Series 2006-NC2, Class A5, 1 Mo. LIBOR +
0.24% (a)........................................ 1.48% 08/25/36 361,573
MASTR Asset Securitization Trust
22,578 Series 2003-11, Class 5A2........................... 5.25% 12/01/23 22,403
81,241 Series 2003-11, Class 6A16.......................... 5.25% 12/01/33 82,434
Mellon Residential Funding Corp. Mortgage Pass-Through Trust
399,358 Series 2001-TBC1, Class A1, 1 Mo. LIBOR +
0.70% (a)........................................ 1.94% 11/15/31 400,203
437,608 Series 2002-TBC2, Class A, 1 Mo. LIBOR +
0.86% (a)........................................ 2.10% 08/15/32 423,164
Meritage Mortgage Loan Trust
284,927 Series 2004-2, Class M3, 1 Mo. LIBOR + 0.98% (a).... 2.21% 01/25/35 282,453
Morgan Stanley Mortgage Loan Trust
728,647 Series 2004-7AR, Class 2A6 (c)...................... 3.40% 09/01/34 749,630
MortgageIT Trust
306,815 Series 2005-2, Class 2A, 1 Mo. LIBOR + 1.65% (a).... 2.89% 05/01/35 303,519
New Residential Mortgage Loan Trust
151,962 Series 2016-1A, Class A1 (b)........................ 3.75% 03/01/56 157,268
Nomura Asset Acceptance Corporation
616,347 Series 2004-AR4, Class M1, 1 Mo. LIBOR +
1.10% (a)........................................ 2.34% 12/25/34 616,285
Nomura Resecuritization Trust
1,263,000 Series 2015-6R, Class 2A4 (b) (c)................... 6.67% 01/02/37 1,057,384
Pretium Mortgage Credit Partners I LLC
625,929 Series 2017-NPL4, Class A1 (b) (d).................. 3.25% 08/27/32 630,635
Provident Funding Mortgage Loan Trust
108,771 Series 2004-1, Class 1A1 (c)........................ 3.33% 04/01/34 109,445
354,171 Series 2005-1, Class 1A1 (c)........................ 3.44% 05/01/35 356,057
Residential Accredit Loans, Inc.
153,819 Series 2006-QO1, Class 2A1, 1 Mo. LIBOR +
0.27% (a)........................................ 1.51% 02/25/46 114,946
1,929,621 Series 2006-QS6, Class 1AV, IO (c).................. 0.75% 06/01/36 51,607
Residential Asset Securitization Trust
46,077 Series 2004-A3, Class A7............................ 5.25% 06/01/34 47,515
Saxon Asset Securities Trust
986,654 Series 2007-2, Class A2D, 1 Mo. LIBOR + 0.30% (a)... 1.54% 05/25/47 743,011
Structured Adjustable Rate Mortgage Loan Trust
451,805 Series 2004-2, Class 4A2 (c)........................ 3.40% 03/01/34 454,570
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Structured Asset Securities Corp. Mortgage Pass-Through
Certificates
$ 46,607 Series 2001-SB1, Class A2........................... 3.38% 08/01/31 $ 46,245
Thornburg Mortgage Securities Trust
377,453 Series 2003-4, Class A1, 1 Mo. LIBOR + 0.64% (a).... 1.88% 09/25/43 366,683
Towd Point Mortgage Trust
615,455 Series 2015-2, Class 2A1 (b)........................ 3.75% 11/01/57 631,481
Wachovia Mortgage Loan Trust, LLC
399,941 Series 2006-A, Class 3A1 (c)........................ 3.30% 05/01/36 393,334
WaMu Mortgage Pass-Through Certificates
189,678 Series 2003-AR5, Class A7 (c)....................... 3.06% 06/01/33 193,450
493,084 Series 2004-AR1, Class A (c)........................ 3.16% 03/01/34 503,778
574,698 Series 2004-AR10, Class A1B, 1 Mo. LIBOR +
0.42% (a)........................................ 1.66% 07/25/44 573,246
465,525 Series 2004-AR13, Class A1A, 1 Mo. LIBOR +
0.72% (a)........................................ 1.96% 11/25/34 462,993
88,156 Series 2004-AR3, Class A2 (c)....................... 3.16% 06/01/34 89,998
608,178 Series 2005-AR1, Class A1A, 1 Mo. LIBOR +
0.64% (a)........................................ 1.88% 01/25/45 605,255
881,716 Series 2005-AR11, Class A1A, 1 Mo. LIBOR +
0.32% (a)........................................ 1.56% 08/25/45 884,227
805,713 Series 2005-AR6, Class 2A1A, 1 Mo. LIBOR +
0.46% (a)........................................ 1.70% 04/25/45 793,838
342,180 Series 2005-AR9, Class A1A, 1 Mo. LIBOR +
0.64% (a)........................................ 1.88% 07/25/45 341,672
593,542 Series 2006-AR2, Class 1A1 (c)...................... 2.95% 03/01/36 569,560
Washington Mutual Alternative Mortgage Pass-Through
Certificates
26,824 Series 2007-5, Class A11, 1 Mo. LIBOR x -6 +
39.48% (e)....................................... 32.05% 06/25/37 49,881
Washington Mutual MSC Mortgage Pass-Through
Certificates
411,148 Series 2004-RA1, Class 2A........................... 7.00% 03/01/34 450,277
Wells Fargo Mortgage Backed Securities Trust
457,505 Series 2003-H, Class A1 (c)......................... 3.59% 09/01/33 466,890
507,063 Series 2004-A, Class A1 (c)......................... 3.22% 02/01/34 524,346
53,516 Series 2004-EE, Class 3A1 (c)....................... 3.76% 12/01/34 55,801
955,147 Series 2004-R, Class 1A1 (c)........................ 3.61% 09/01/34 969,381
229,051 Series 2004-S, Class A1 (c)......................... 3.47% 09/01/34 234,443
482,524 Series 2004-Y, Class 1A2 (c)........................ 3.45% 11/01/34 494,929
6,290 Series 2004-Z, Class 2A1 (c)........................ 3.08% 12/01/34 6,421
26,494 Series 2004-Z, Class 2A2 (c)........................ 3.08% 12/01/34 27,045
244,292 Series 2005-AR10, Class 2A17 (c).................... 3.37% 06/01/35 251,154
514,052 Series 2005-AR16, Class 1A1 (c)..................... 3.47% 08/01/33 528,423
372,762 Series 2005-AR3, Class 2A1 (c)...................... 3.53% 03/01/35 378,321
367,535 Series 2005-AR8, Class 1A1 (c)...................... 3.36% 06/01/35 376,025
410,575 Series 2006-13, Class A5............................ 6.00% 10/01/36 407,761
120,974 Series 2007-16, Class 1A1........................... 6.00% 12/04/37 126,738
210,432 Series 2007-2, Class 1A13........................... 6.00% 03/01/37 209,792
49,031 Series 2007-8, Class 2A2............................ 6.00% 07/01/37 49,364
---------------
33,288,657
---------------
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES - 6.9%
Bayview Commercial Asset Trust
$ 465,879 Series 2004-2, Class A, 1 Mo. LIBOR +
0.65% (a) (b).................................... 1.67% 08/25/34 $ 456,147
BXHTL Mortgage Trust
800,000 Series 2015-JWRZ, Class B, 1 Mo. LIBOR +
1.70% (a) (f).................................... 2.94% 05/15/29 802,008
Hudsons Bay Simon JV Trust
510,000 Series 2015-HBFL, Class DFL, 1 Mo. LIBOR +
3.65% (a) (b).................................... 4.89% 08/05/34 511,194
UBS-Barclays Commercial Mortgage Trust
14,664,397 Series 2013-C5, Class XA, IO (b) (c)................ 1.00% 03/01/46 616,264
Wachovia Bank Commercial Mortgage Trust
445,722 Series 2007-C30, Class AJ........................... 5.41% 12/01/43 455,194
650,000 Series 2007-C33, Class AJ, STRIP (c)................ 6.00% 02/01/51 667,425
Waldorf Astoria Boca Raton Trust
1,000,000 Series 2016-BOCA, Class E, 1 Mo. LIBOR +
4.35% (a) (f).................................... 5.59% 06/15/29 1,003,394
---------------
4,511,626
---------------
TOTAL MORTGAGE-BACKED SECURITIES................................................... 37,800,283
(Cost $37,458,013) ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 33.6%
COLLATERALIZED MORTGAGE OBLIGATIONS - 23.8%
Federal Home Loan Mortgage Corp.
25,212 Series 1007, Class H, 1 Mo. LIBOR x -1 +
20.88% (e)....................................... 19.21% 10/15/20 28,964
41,068 Series 1394, Class ID, Cost of Funds 11th District of
San Francisco x -4.67 + 44.56%, Capped at
9.57% (e)........................................ 9.57% 10/15/22 47,437
40,555 Series 2303, Class SW, Cost of Funds 11th District of
San Francisco x -15.87 + 121.11%, Capped at
10.00% (e)....................................... 10.00% 03/01/24 8,291
102,773 Series 2334, Class QS, 1 Mo. LIBOR x -3.5 +
28.18% (e)....................................... 23.84% 07/15/31 161,500
242,983 Series 2383, Class SD, IO, 1 Mo. LIBOR x -1 +
8.00% (e)........................................ 6.76% 11/15/31 42,800
417,072 Series 2439, Class XI, IO, 1 Mo. LIBOR x -1 +
7.74% (e)........................................ 6.50% 03/01/32 89,346
89,351 Series 2641, Class KW............................... 4.50% 07/01/18 89,738
937,717 Series 2807, Class SB, IO, 1 Mo. LIBOR x -1 +
7.45% (e)........................................ 6.21% 11/15/33 185,958
1,902,424 Series 2975, Class SJ, IO, 1 Mo. LIBOR x -1 +
6.65% (e)........................................ 5.41% 05/15/35 276,602
321,747 Series 3012, Class GK, 1 Mo. LIBOR x -4.5 +
24.75% (e)....................................... 19.18% 06/15/35 503,700
201,024 Series 3108, Class QZ............................... 6.00% 02/01/36 277,028
13,874 Series 3195, Class SX, 1 Mo. LIBOR x -6.5 +
46.15% (e)....................................... 38.10% 07/15/36 52,788
273,719 Series 3210, Class ZA............................... 6.00% 09/01/36 341,061
133,695 Series 3410, Class HC............................... 5.50% 02/01/38 147,242
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Corp. (Continued)
$ 219,110 Series 3451, Class SB, IO, 1 Mo. LIBOR x -1 +
6.03% (e)........................................ 4.79% 05/15/38 $ 29,323
220,327 Series 3619, Class EI, IO........................... 4.50% 05/01/24 2,012
177,495 Series 3692, Class PS, IO, 1 Mo. LIBOR x -1 +
6.60% (e)........................................ 5.36% 05/15/38 4,088
1,437,770 Series 3726, Class KI, IO........................... 3.50% 04/01/25 71,446
1,821,401 Series 3784, Class BI, IO........................... 3.50% 01/01/21 68,499
250,000 Series 3797, Class KB............................... 4.50% 01/01/41 276,872
1,264,949 Series 3870, Class WS, IO, 1 Mo. LIBOR x -1 +
6.60% (e)........................................ 5.36% 06/15/31 143,412
382,304 Series 3898, Class NI, IO........................... 5.00% 07/01/40 20,791
90,221 Series 4021, Class IP, IO........................... 3.00% 03/01/27 7,190
1,156,412 Series 4206, Class IA, IO........................... 3.00% 03/01/33 161,982
500,491 Series 4615, Class GT, 1 Mo. LIBOR x -4 +
16.00% (e)....................................... 4.00% 10/15/42 462,793
8,433,990 Series 4619, Class IB, IO........................... 4.00% 12/01/47 1,096,257
Federal Home Loan Mortgage Corp., STRIP
462,375 Series 243, Class 2, IO............................. 5.00% 11/01/35 88,153
Federal National Mortgage Association
80,956 Series 2002-80, Class IO............................ 6.00% 09/01/32 16,142
134,871 Series 2003-15, Class MS, IO, 1 Mo. LIBOR x -1 +
8.00% (e)........................................ 6.76% 03/25/33 30,061
176,398 Series 2003-44, Class IU, IO........................ 7.00% 06/01/33 41,829
959,984 Series 2004-49, Class SN, IO, 1 Mo. LIBOR x -1 +
7.10% (e)........................................ 5.86% 07/25/34 151,099
25,693 Series 2004-74, Class SW, 1 Mo. LIBOR x -1 +
15.50% (e)....................................... 13.03% 11/25/31 34,493
500,000 Series 2004-W10, Class A6........................... 5.75% 08/01/34 559,018
305,184 Series 2005-122, Class SN, 1 Mo. LIBOR x -4 +
28.60% (e)....................................... 23.65% 01/25/36 409,001
45,598 Series 2005-59 SU, 1 Mo. LIBOR x -5 +
25.50% (e)....................................... 19.31% 06/25/35 64,646
197,025 Series 2006-105, Class ZA........................... 6.00% 11/01/36 259,976
158,483 Series 2006-5, Class 3A2, 1 Mo. LIBOR +
2.08% (a)........................................ 3.32% 05/01/35 167,014
118,846 Series 2007-100, Class SM, IO, 1 Mo. LIBOR x -1 +
6.45% (e)........................................ 5.21% 10/25/37 18,691
214,643 Series 2007-30, Class ZM............................ 4.25% 04/01/37 235,737
437,873 Series 2007-37, Class SB, IO, 1 Mo. LIBOR x -1 +
6.75% (e)........................................ 5.51% 05/25/37 83,109
294,177 Series 2008-17, Class BE............................ 5.50% 10/01/37 354,713
5,601 Series 2008-50, Class AI, IO........................ 5.50% 06/01/23 186
399,000 Series 2009-28, Class HX............................ 5.00% 05/01/39 474,201
163,625 Series 2009-37, Class NZ............................ 5.71% 02/01/37 204,937
967,177 Series 2010-10, Class NI, IO........................ 5.00% 01/01/39 24,795
2,087,452 Series 2010-103, Class ID, IO....................... 5.00% 09/01/40 284,532
934,908 Series 2010-104, Class CI, IO....................... 4.00% 09/01/20 32,386
2,750,078 Series 2010-139, Class KI, IO....................... 1.09% 12/01/40 108,951
61,918 Series 2010-142, Class PS, IO, 1 Mo. LIBOR x -1 +
6.05% (e)........................................ 4.81% 05/25/40 892
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
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)
$ 327,470 Series 2010-145, Class TI, IO....................... 3.50% 12/01/20 $ 12,400
276,869 Series 2010-40, Class MI, IO........................ 4.50% 08/01/24 1,534
86,686 Series 2010-99, Class SG, 1 Mo. LIBOR x -5 +
25.00% (e)....................................... 18.83% 09/01/40 142,041
493,231 Series 2011-13, Class GI, IO........................ 5.00% 11/01/25 14,916
204,425 Series 2011-5, Class IK, IO......................... 8.00% 02/01/21 16,500
250,000 Series 2011-52, Class LB............................ 5.50% 06/01/41 284,187
2,778,766 Series 2011-66, Class QI, IO........................ 3.50% 07/01/21 108,435
190,465 Series 2012-111, Class B............................ 7.00% 10/01/42 217,357
2,333,905 Series 2012-112, Class BI, IO....................... 3.00% 09/01/31 240,674
1,954,567 Series 2012-125, Class MI, IO....................... 3.50% 11/01/42 416,379
34,961 Series 2012-74, Class OA............................ (g) 03/01/42 32,124
489,450 Series 2012-74, Class SA, IO, 1 Mo. LIBOR x -1 +
6.65% (e)........................................ 5.41% 03/25/42 76,862
34,961 Series 2012-75, Class AO............................ (g) 03/01/42 32,124
2,610,092 Series 2013-32, Class IG, IO........................ 3.50% 04/01/33 371,272
620,838 Series 2013-51, Class PI, IO........................ 3.00% 11/01/32 75,572
4,376,668 Series 2015-20, Class ES, IO, 1 Mo. LIBOR x -1 +
6.15% (e)........................................ 4.91% 04/25/45 795,686
1,919,862 Series 2015-76, Class BI, IO........................ 4.00% 10/01/39 232,489
5,030,808 Series 2015-97, Class AI, IO........................ 4.00% 09/01/41 796,781
168,142 Series 2016-74, Class LI, IO........................ 3.50% 09/01/46 59,358
Federal National Mortgage Association, STRIP
89,428 Series 305, Class 12, IO (h)........................ 6.50% 12/01/29 18,012
94,579 Series 355, Class 18, IO............................ 7.50% 11/01/33 24,327
1,365,240 Series 406, Class 6, IO (h)......................... 4.00% 01/01/41 261,687
Government National Mortgage Association
178,633 Series 2004-95, Class QZ............................ 4.50% 11/01/34 191,938
354,250 Series 2005-33, Class AY............................ 5.50% 04/01/35 399,916
112,517 Series 2005-68, Class DP, 1 Mo. LIBOR x -2.41 +
16.43% (e)....................................... 13.45% 06/17/35 136,934
498,539 Series 2005-68, Class KI, IO, 1 Mo. LIBOR x -1 +
6.30% (e)........................................ 5.06% 09/20/35 74,456
55,214 Series 2006-28, Class VS, 1 Mo. LIBOR x -13 +
87.10% (e)....................................... 70.99% 06/20/36 174,936
130,726 Series 2007-50, Class AI, IO, 1 Mo. LIBOR x -1 +
6.78% (e)........................................ 5.54% 08/20/37 22,674
421,543 Series 2007-68, Class PI, IO, 1 Mo. LIBOR x -1 +
6.65% (e)........................................ 5.41% 11/20/37 76,252
100,000 Series 2008-2, Class HB............................. 5.50% 01/01/38 118,700
220,000 Series 2008-32, Class JD............................ 5.50% 04/01/38 261,996
365,356 Series 2008-73, Class SK, IO, 1 Mo. LIBOR x -1 +
6.74% (e)........................................ 5.50% 08/20/38 57,842
1,494,760 Series 2009-100, Class SL, IO, 1 Mo. LIBOR x -1 +
6.50% (e)........................................ 5.26% 05/16/39 100,042
308,250 Series 2009-12, Class IE, IO........................ 5.50% 03/01/39 59,353
1,055,842 Series 2009-62, Class EI, IO........................ 5.00% 05/01/38 5,969
172,162 Series 2009-65, Class NJ, IO........................ 5.50% 07/01/39 11,209
115,013 Series 2009-79, Class PZ............................ 6.00% 09/01/39 147,894
1,036,916 Series 2010-115, Class IQ, IO....................... 4.50% 11/01/38 43,613
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- ------------------------------------------------------- ---------- ---------- ---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Government National Mortgage Association (Continued)
$ 715,000 Series 2010-61, Class KE............................ 5.00% 05/01/40 $ 841,205
762,529 Series 2011-131, Class EI, IO....................... 4.50% 08/01/39 32,204
69,722 Series 2016-139, Class MZ........................... 1.50% 07/01/45 44,466
135,000 Series 2017-4, Class CZ............................. 3.00% 01/01/47 120,022
100,383 Series 2017-H18, Class DZ (h)....................... 4.59% 09/01/67 113,658
---------------
15,507,678
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 0.3%
Government National Mortgage Association
218,000 Series 2013-57, Class D (h)......................... 2.35% 06/01/46 192,680
---------------
192,680
---------------
PASS-THROUGH SECURITIES - 9.5%
Federal Home Loan Mortgage Corp.
917,152 Gold Pool........................................... 3.00% 08/01/46 919,684
445,192 Pool A94738......................................... 4.50% 11/01/40 475,669
545,950 Pool K36017......................................... 5.00% 09/01/47 581,450
Federal National Mortgage Association
22,478 Pool 535919......................................... 6.50% 05/01/21 24,922
1,047,510 Pool 831145......................................... 6.00% 12/01/35 1,193,121
1,029,745 Pool 843971......................................... 6.00% 11/01/35 1,184,359
929,613 Pool AS9194......................................... 4.50% 12/01/44 1,000,754
831,603 Pool AT2720......................................... 3.00% 05/01/43 836,850
---------------
6,216,809
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES............................ 21,917,167
(Cost $23,465,302) ---------------
ASSET-BACKED SECURITIES - 1.6%
Green Tree Financial Corp.
6,466 Series 1997-3, Class A6............................. 7.32% 03/15/28 6,542
96,401 Series 1998-4, Class A7............................. 6.87% 04/01/30 103,541
Mid-State Capital Corp. Trust
425,950 Series 2004-1, Class M1............................. 6.50% 08/01/37 464,889
436,194 Series 2005-1, Class A.............................. 5.75% 01/01/40 474,940
---------------
TOTAL ASSET-BACKED SECURITIES...................................................... 1,049,912
(Cost $1,018,405) ---------------
TOTAL INVESTMENTS - 93.2%.......................................................... 60,767,362
(Cost $61,941,720) (i)
NET OTHER ASSETS AND LIABILITIES - 6.8%............................................ 4,428,775
---------------
NET ASSETS - 100.0%................................................................ $ 65,196,137
===============
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
FUTURES CONTRACTS (see Note 2D - Futures Contracts in the Notes to Financial
Statements):
UNREALIZED
APPRECIATION
NUMBER OF EXPIRATION NOTIONAL (DEPRECIATION)/
FUTURES CONTRACTS POSITION CONTRACTS DATE VALUE VALUE
--------------------------------------- ------------- ------------- ---------- ---------- ---------------
U.S. Treasury 10-Year Notes Long 2 Dec-2017 $ 249,875 $ (3,687)
U.S. Treasury Long Bond Futures Long 9 Dec-2017 1,372,219 (11,688)
U.S. Treasury Ultra 10-Year Notes Long 1 Dec-2017 133,922 (547)
---------- ---------------
Total Futures Contracts $1,756,016 $ (15,922)
========== ===============
-----------------------------
(a) Floating or variable rate security.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended (the "1933 Act"), and may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be liquid by First Trust Advisors L.P.
("First Trust" or the "Advisor"), the Fund's advisor. Although market
instability can result in periods of increased overall market illiquidity,
liquidity for each security is determined based on security specific
factors and assumptions, which require subjective judgment. At October 31,
2017, securities noted as such amounted to $5,324,948, or 8.17% of net
assets.
(c) Collateral Strip Rate security. Coupon is based on the weighted net
interest rate of the investment's underlying collateral. The interest rate
resets periodically.
(d) Step-up security. A security where the coupon increases or steps up at a
predetermined date. Interest rate shown reflects the rate in effect at
October 31, 2017.
(e) Inverse floating rate instrument.
(f) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the 1933 Act, and
may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2C - Restricted Securities in the
Notes to Financial Statements).
(g) Zero coupon security.
(h) Weighted Average Coupon security. Coupon is based on the blended interest
rate of the underlying holdings, which may have different coupons. The
coupon may change in any period.
(i) Aggregate cost for federal income tax purposes is $62,547,714. As of
October 31, 2017, the aggregate gross unrealized appreciation for all
investments in which there was an excess of value over tax cost was
$1,938,052 and the aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost over value was
$3,734,326. The net unrealized depreciation was $1,796,274. The amounts
presented are inclusive of derivative contracts.
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 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2017 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2017 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Mortgage-Backed Securities......................... $ 37,800,283 $ -- $ 37,800,283 $ --
U.S. Government Agency Mortgage-Backed Securities.. 21,917,167 -- 21,917,167 --
Asset-Backed Securities............................ 1,049,912 -- 1,049,912 --
------------ ------------ ------------- ------------
Total Investments.................................. $ 60,767,362 $ -- $ 60,767,362 $ --
============ ============ ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2017 PRICES INPUTS INPUTS
------------ ------------ ------------- ------------
Futures Contracts.................................. $ (15,922) $ (15,922) $ -- $ --
============ ============ ============= ============
All transfers in and out of the Levels during the period are assumed to occur on
the last day of the period at their current value. There were no transfers
between Levels at October 31, 2017.
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2017
ASSETS:
Investments, at value
(Cost $61,941,720).......................................................................... $ 60,767,362
Cash........................................................................................... 4,158,637
Restricted cash segregated as collateral for open futures contracts............................ 50,000
Receivables:
Interest.................................................................................... 321,422
Variation margin............................................................................ 41,298
Prepaid expenses............................................................................... 4,379
------------
Total Assets................................................................................ 65,343,098
------------
LIABILITIES:
Payables:
Investment advisory fees.................................................................... 47,030
Audit and tax fees.......................................................................... 38,333
Administrative fees......................................................................... 17,353
Printing fees............................................................................... 15,459
Investment securities purchased............................................................. 14,484
Transfer agent fees......................................................................... 6,187
Custodian fees.............................................................................. 4,472
Trustees' fees and expenses................................................................. 1,351
Financial reporting fees.................................................................... 771
Legal fees.................................................................................. 366
Other liabilities.............................................................................. 1,155
------------
Total Liabilities........................................................................... 146,961
------------
NET ASSETS..................................................................................... $ 65,196,137
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 70,345,343
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... (621,916)
Accumulated net realized gain (loss) on investments and futures................................ (3,379,141)
Net unrealized appreciation (depreciation) on investments and futures.......................... (1,190,280)
------------
NET ASSETS..................................................................................... $ 65,196,137
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 15.47
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2017
INVESTMENT INCOME:
Interest....................................................................................... $ 1,546,835
------------
Total investment income..................................................................... 1,546,835
------------
EXPENSES:
Investment advisory fees....................................................................... 554,424
Administrative fees............................................................................ 58,045
Audit and tax fees............................................................................. 51,125
Printing fees.................................................................................. 38,110
Transfer agent fees............................................................................ 36,848
Custodian fees................................................................................. 17,197
Trustees' fees and expenses.................................................................... 16,577
Financial reporting fees....................................................................... 9,250
Legal fees..................................................................................... 4,387
Other.......................................................................................... 31,823
------------
Total expenses.............................................................................. 817,786
------------
NET INVESTMENT INCOME.......................................................................... 729,049
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 29
Futures..................................................................................... 57,220
------------
Net realized gain (loss)....................................................................... 57,249
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 2,275,153
Futures..................................................................................... (15,922)
------------
Net change in unrealized appreciation (depreciation)........................................... 2,259,231
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 2,316,480
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 3,045,529
============
See Notes to Financial Statements Page 15
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2017 10/31/2016
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 729,049 $ (72,393)
Net realized gain (loss)............................................................ 57,249 416,597
Net change in unrealized appreciation (depreciation)................................ 2,259,231 1,287,288
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... 3,045,529 1,631,492
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (1,917,888) (2,266,839)
Return of capital................................................................... (1,368,342) (1,567,096)
-------------- --------------
Total distributions to shareholders................................................. (3,286,230) (3,833,935)
-------------- --------------
Total increase (decrease) in net assets............................................. (240,701) (2,202,443)
NET ASSETS:
Beginning of period................................................................. 65,436,838 67,639,281
-------------- --------------
End of period....................................................................... $ 65,196,137 $ 65,436,838
============== ==============
Accumulated net investment income (loss) at end of period........................... $ (621,916) $ (115,471)
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at end of period...................................................... 4,213,115 4,213,115
============== ==============
Page 16 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------
2017 2016 (a) 2015 2014 2013
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period....... $ 15.53 $ 16.05 $ 17.02 $ 17.63 $ 17.91
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............... 0.18 (0.02) 1.02 1.02 1.25
Net realized and unrealized gain (loss).... 0.54 0.41 (0.97) (0.61) (0.28)
------- ------- ------- ------- -------
Total from investment operations........... 0.72 0.39 0.05 0.41 0.97
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income...................... (0.46) (0.54) (0.47) (1.02) (1.25)
Return of capital.......................... (0.32) (0.37) (0.55) -- --
------- ------- ------- ------- -------
Total distributions to Common
Shareholders............................ (0.78) (0.91) (1.02) (1.02) (1.25)
------- ------- ------- ------- -------
Net asset value, end of period............. $ 15.47 $ 15.53 $ 16.05 $ 17.02 $ 17.63
======= ======= ======= ======= =======
Market value, end of period................ $ 14.39 $ 14.00 $ 14.58 $ 15.12 $ 15.79
======= ======= ======= ======= =======
TOTAL RETURN BASED ON NET ASSET VALUE (b).. 5.25% 3.05% 1.06% 3.01% (c) 6.04% (c)
======= ======= ======= ======= =======
TOTAL RETURN BASED ON MARKET VALUE (b)..... 8.60% 2.26% 3.34% 2.17% (10.47)%
======= ======= ======= ======= =======
-----------------------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)....... $65,196 $65,437 $67,639 $71,708 $74,259
Ratio of total expenses to average net
assets.................................. 1.25% 1.47% 1.55% 1.78% 1.96%
Ratio of total expenses to average net
assets excluding interest expense....... 1.25% 1.43% 1.51% 1.72% 1.83%
Ratio of net investment income (loss) to
average net assets...................... 1.12% (0.11)% 6.18% 5.84% 7.01%
Portfolio turnover rate.................... 27% 49% 46% 54% 109%
-----------------------------
(a) Effective September 19, 2016, the portfolio management of the Fund
transitioned to the First Trust Mortgage Securities Team. Schroder
Investment Management North America Inc. acquired the portfolio management
team of Brookfield Investment Management Inc. ("Brookfield"), previously
responsible for the portfolio management of the Fund, resulting in the
automatic termination of the investment sub-advisory agreement among
Brookfield, First Trust and the Fund. In connection with the change in
portfolio management, First Trust agreed to lower the investment
management fee payable by the Fund to a rate of 0.85% of the Fund's
managed assets, a decrease from the Fund's previous investment management
fee of 1.00% of the Fund's managed assets.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) The Fund received reimbursements from Brookfield in the amount of $1,180
and $5,310 for the years ended October 31, 2014 and 2013, respectively.
The reimbursements from Brookfield represent less than $0.01 per share and
had no effect on the Fund's total return.
See Notes to Financial Statements Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
(the "SEC") under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol FMY on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing primarily in mortgage-backed securities
that, in the opinion of First Trust Advisors L.P. ("First Trust" or the
"Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Advisor's Pricing Committee, in
accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by a
third-party pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a third-party pricing service is
unable to provide a market price; securities whose trading has been formally
suspended; a security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the third-party pricing service, does not reflect
the security's fair value. As a general principle, the current fair value of a
security would appear to be the amount which the owner might reasonably expect
to receive for the security upon its current sale. When fair value prices are
used, generally they will differ from market quotations or official closing
prices on the applicable exchanges. A variety of factors may be considered in
determining the fair value of such securities, including, but not limited to,
the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2017, is
included with the Fund's Portfolio of Investments.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and the accretion of discounts are recorded using the effective interest method.
The Fund invests in interest-only securities. For these securities, if there is
a change in the estimated cash flows, based on an evaluation of current
information, then the estimated yield is adjusted. Additionally, if the
evaluation of current information indicates a permanent impairment of the
security, the cost basis of the security is written down and a loss is
recognized. Debt obligations may be placed on non-accrual status and the related
interest income may be reduced by ceasing current accruals and writing off
interest receivables when the collection of all or a portion of interest has
become doubtful based on consistently applied procedures. A debt obligation is
removed from non-accrual status when the issuer resumes interest payments or
when collectability of interest is reasonably assured.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments until
payment is made. At October 31, 2017, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
C. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of October 31, 2017, the Fund held restricted
securities as shown in the following table that the Advisor has deemed illiquid
pursuant to procedures adopted by the Fund's Board of Trustees. Although market
instability can result in periods of increased overall market illiquidity,
liquidity for each security is determined based on security-specific factors and
assumptions, which require subjective judgment. The Fund does not have the right
to demand that such securities be registered. These securities are valued
according to the valuation procedures as stated in the Portfolio Valuation note
(Note 2A) and are not expressed as a discount to the carrying value of a
comparable unrestricted security. There are no unrestricted securities with the
same maturity dates and yields for these issuers.
% OF
ACQUISITION PRINCIPAL CURRENT CARRYING NET
SECURITY DATE VALUE PRICE COST VALUE ASSETS
-------------------------------------------------------------------------------------------------------------------
BXHTL Mortgage Trust, Series
2015-JWRZ, Class B 6/19/15 $ 800,000 $ 100.25 $ 800,000 $ 802,008 1.23%
Waldorf Astoria Boca Raton Trust,
Series 2016-BOCA, Class E 7/12/16 1,000,000 100.34 1,000,000 1,003,394 1.54
----------- ----------- ------
$ 1,800,000 $ 1,805,402 2.77%
=========== =========== ======
D. FUTURES CONTRACTS
The Fund may purchase or sell (i.e., is long or short) exchange-listed futures
contracts to hedge against changes in interest rates (interest rate risk).
Futures contracts are agreements between the Fund and a counterparty to buy or
sell a specific quantity of an underlying instrument at a specified price and at
a specified date. Depending on the terms of the contract, futures contracts are
settled either through physical delivery of the underlying instrument on the
settlement date or by payment of a cash settlement amount on the settlement
date. Open futures contracts can also be closed out prior to settlement by
entering into an offsetting transaction in a matching futures contract. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain margin deposits on the futures contract. When the
contract is closed or expires, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed or expired. This gain or loss is included in
"Net realized gain (loss) on futures" on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures contacts
are marked to market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures" on the
Statement of Operations. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are included in "Variation margin" payable or receivable on the Statement of
Assets and Liabilities.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017
If market conditions change unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contract and may realize a loss. The use of
futures contracts involves the risk of imperfect correlation in movements in the
price of the futures contracts, interest rates and the underlying instruments.
E. INVERSE FLOATING-RATE SECURITIES
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio and have the effect of
creating leverage. These securities, if any, are identified on the Portfolio of
Investments.
F. STRIPPED MORTGAGE-BACKED SECURITIES
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
G. INTEREST-ONLY SECURITIES
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Distributions from income and capital gains are determined in accordance with
federal income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended October 31, 2017, resulting in book and
tax accounting differences, have been reclassified at year end to reflect an
increase in accumulated net investment income (loss) by $682,394, an increase in
accumulated net realized gain (loss) on investments by $1,556,872 and a decrease
to paid-in capital of $2,239,266. Net assets were not affected by this
reclassification.
The tax character of distributions paid during the fiscal years ended October
31, 2017 and 2016 was as follows:
Distributions paid from: 2017 2016
Ordinary income................................. $ 1,917,888 $ 2,266,839
Capital gain.................................... -- --
Return of capital............................... 1,368,342 1,567,096
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017
As of October 31, 2017, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................... $ --
Undistributed capital gains..................... --
--------------
Total undistributed earnings.................... --
Accumulated capital and other losses............ (3,395,063)
Net unrealized appreciation (depreciation)...... (1,796,274)
--------------
Total accumulated earnings (losses)............. (5,191,337)
Other........................................... --
Paid-in capital................................. 70,387,474
--------------
Net assets...................................... $ 65,196,137
==============
I. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
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, 2017, the Fund had pre-enactment net capital
losses for federal income tax purposes of $1,421,887. At October 31, 2017, the
Fund had post-enactment net capital losses for federal income tax purposes of
$1,973,176 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, 2018 $1,421,887
At October 31, 2017, $1,927,985 of the Fund's capital loss carryforward expired.
During the taxable year ended October 31, 2017, the Fund did not utilize any
pre-enactment capital loss carryforwards.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2014, 2015,
2016 and 2017 remain open to federal and state audit. As of October 31, 2017,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
J. EXPENSES
The Fund will pay all expenses directly related to its operations.
K. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. In part, the
new and amended rules and forms amend Regulation S-X and require standardized,
enhanced disclosures about derivatives in a fund's financial statements, as well
as other amendments. The compliance date for the amendments of Regulation S-X
was August 1, 2017, and resulted in additional disclosure for variable interest
rate securities and derivative instruments within the Portfolio of Investments.
The new form types and other rule amendments will be effective for the First
Trust funds, including the Fund, for reporting periods beginning on and after
June 1, 2018. Management is evaluating the new form types and other rule
amendments that are effective on and after June 1, 2018 to determine the impact
to the Fund.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017
L. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.85% of the Fund's Managed Assets (the average
daily total asset value of the Fund minus the sum of the Fund's liabilities
other than the principal amount of borrowings or reverse repurchase agreements,
if any). First Trust also provides fund reporting services to the Fund for a
flat annual fee in the amount of $9,250.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund. The
Bank of New York Mellon ("BNYM") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BNYM is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BNYM is responsible for custody
of the Fund's assets. BNYM IS and BNYM are subsidiaries of The Bank of New York
Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the year ended October 31,
2017, were $10,680,279 and $7,371,159, 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, 2017, were
$1,213,379 and $15,503,283, respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
October 31, 2017, the primary underlying risk exposure and the location of these
instruments as presented on the Statements of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
------------------------------------ ------------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------- ------------------ ----------------------- ---------- ----------------------- ----------
Unrealized appreciation Unrealized depreciation
Futures Interest Rate Risk on futures contracts* $ -- on futures contracts* $ 15,922
* Includes cumulative appreciation (depreciation) on futures contracts as
reported in the Portfolio of Investments. Only the current day's variation
margin is reported within the Statement of Assets and Liabilities.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
October 31, 2017, on derivatives instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION INTEREST RATE RISK
-------------------------------------------------------------------------------
Net realized gain (loss) on futures $ 57,220
Net change in unrealized appreciation (depreciation) on futures (15,922)
During the year ended October 31, 2017, the amount of notional values of futures
contracts opened and closed were $14,175,506 and $12,403,568, respectively.
The Fund does not have the right to offset financial assets and financial
liabilities related to futures contracts on the Statements of Assets and
Liabilities.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 24
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND THE BOARD OF TRUSTEES 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, 2017, and the related statement of operations 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 audit 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, 2017, by correspondence with the Fund's
custodian and brokers; when replies were not received from brokers, 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 First
Trust Mortgage Income Fund as of October 31, 2017, the results of its operations
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 20, 2017
Page 25
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's 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 May 1, 2017, 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
Distributions paid to foreign shareholders during the Fund's fiscal year ended
October 31, 2017 that were properly designated by the Fund as "interest-related
dividends" or "short-term capital gain dividends," may not be subject to federal
income tax provided that the income was earned directly by such foreign
shareholders.
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2017, 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 Fund held its Annual Meeting of Shareholders ("Annual Meeting") on April 24,
2017. At the Annual Meeting, Robert F. Keith was elected by the Common
Shareholders of the First Trust Mortgage Income Fund as a Class I Trustee for a
three-year term expiring at the Fund's annual meeting of shareholders in 2020.
The number of votes cast in favor of Mr. Keith was 3,650,202, the number of
votes against was 162,640 and the number of broker non-votes was 400,273. James
A. Bowen, Richard E. Erickson, Thomas R. Kadlec and Niel B. Nielson are the
other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are invested at market interest rates that are below the Fund portfolio's
current earnings rate; and (iii) credit risk, which is the risk that a security
in the Fund's portfolio will decline in price or the issuer fails to make
interest payments when due because the issuer of the security experiences a
decline in its financial status.
INTEREST RATE RISK: The Fund may also hold MBS which are Stripped
Mortgage-Backed Securities, IO securities and principal-only securities ("PO
securities"). Generally speaking, when interest rates are falling and prepayment
rates are increasing, the value of a PO security will rise and the value of an
IO security will fall. Conversely, when interest rates are rising and prepayment
rates are decreasing, generally the value of a PO security will fall and the
value of an IO security will rise.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. When the Advisor determines that it is temporarily unable to follow
the Fund's investment strategy or that it is impractical to do so (such as when
a market disruption event has occurred and trading in the securities is
extremely limited or absent), the Advisor may take temporary defensive
positions.
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (UNAUDITED)
LEVERAGE RISK: Borrowings up to 33-1/3% (or such other percentage as permitted
by law) of Fund assets (including the amount borrowed) less liabilities other
than borrowings may be utilized in the Fund. Leverage may be used for investment
purposes and to meet cash requirements. The leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. Reverse repurchase agreements are used to leverage the
Fund's assets. Reverse repurchase agreements are subject to the risks that the
market value of the Fund's securities sold may decline below the price of the
securities the Fund is obligated to repurchase, and that the securities may not
be returned to the Fund. From time to time the amount of the leverage may be
changed in response to actual or anticipated changes in interest rates or the
value of the Fund's investment portfolio. There can be no assurance that the
leverage strategies will be successful.
MORTGAGE AND ASSET-BACKED SECURITIES RISK: The value of mortgage and
asset-backed securities can fall if the owners of the underlying mortgages or
other obligations pay off their mortgages or other obligations sooner than
expected, which could happen when interest rates fall or for other reasons.
Mortgage and asset-backed securities are also subject to extension risk, which
is the risk that rising interest rates could cause mortgages or other
obligations underlying the securities to be prepaid more slowly than expected,
which would, in effect, convert a short or medium duration mortgage or
asset-backed security into a longer duration security, increasing its
sensitivity to interest rate changes and causing its price to decline. Mortgage
and asset-backed security values may also be affected by the creditworthiness of
the servicing agent for the pool, the originator of the loans or receivables or
entities providing for any credit enhancement.
A mortgage backed security may be negatively affected by the quality of the
mortgages underlying such security and the structure of its issuer. For example,
if a mortgage underlying a certain mortgage backed security defaults, the value
of that security may decrease.
Mortgage backed securities issued by a private issuer, such as commercial
mortgage backed securities, generally entail greater risk than obligations
directly or indirectly guaranteed by the U.S. government or a government
sponsored entity.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.
SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
U.S. GOVERNMENT AND AGENCY SECURITIES RISK: The Fund may invest in U.S.
government obligations. U.S. government obligations include U.S. Treasury
obligations and securities issued or guaranteed by various agencies of the U.S.
government or by various instrumentalities, which have been established or
sponsored by the U.S. government. U.S. Treasury obligations are backed by the
"full faith and credit" of the U.S. government. Securities issued or guaranteed
by federal agencies and U.S. government sponsored instrumentalities may or may
not be backed by the full faith and credit of the U.S. government.
INVESTMENT MANAGEMENT AGREEMENT
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT
The Board of Trustees (the "Board") of First Trust Mortgage Income Fund (the
"Fund"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Agreement") between
the Fund and First Trust Advisors L.P. (the "Advisor") for a one-year period
ending June 30, 2018 at a meeting held on June 12, 2017. The Board determined
that the continuation of the Agreement 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. At meetings held on April 24, 2017 and June 12, 2017, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor responding to requests for information from counsel to the Independent
Trustees that, among other things, outlined the services provided by the
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (UNAUDITED)
Advisor to the Fund (including the relevant personnel responsible for these
services and their experience); the advisory fee rate payable by the Fund as
compared to fees charged to a peer group of funds compiled by Management
Practice, Inc. ("MPI"), an independent source (the "MPI Peer Group"), and as
compared to fees charged to other clients of the Advisor; expenses of the Fund
as compared to expense ratios of the funds in the MPI Peer Group; performance
information for the Fund; 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; any fall out benefits to the Advisor; and information on the
Advisor's compliance program. The Board reviewed initial materials with the
Advisor at the meeting held on April 24, 2017, prior to which the Independent
Trustees and their counsel met separately to discuss the information provided by
the Advisor. Following the April meeting, independent legal counsel on behalf of
the Independent Trustees requested certain clarifications and supplements to the
materials provided, and the information provided in response to those requests
was considered at an executive session of the Independent Trustees and
independent legal counsel held prior to the June 12, 2017 meeting, as well as at
the meeting held that day. The Board applied its business judgment to determine
whether the arrangement between the Fund and the Advisor continues to be a
reasonable business arrangement from the Fund's perspective as well as from the
perspective of shareholders. The Board determined that, given the totality of
the information provided with respect to the Agreement, the Board had received
sufficient information to renew the Agreement. The Board considered that
shareholders chose to invest or remain invested in the Fund knowing that the
Advisor manages the Fund.
In reviewing the Agreement, the Board considered the nature, extent and quality
of the services provided by the Advisor under the Agreement. The Board
considered that the Advisor is responsible for the overall management and
administration of the Fund and reviewed all of the services provided by the
Advisor to the Fund, as well as the background and experience of the persons
responsible for such services. The Board noted that the Advisor's Mortgage
Securities Team assumed responsibility for the day-to-day management of the
Fund's investments on September 19, 2016. The Board considered the background
and experience of the members of the Mortgage Securities Team and received a
presentation from the Team at the April 24, 2017 meeting. The Board considered
the Advisor's statement that it applies the same oversight model internally with
its Mortgage Securities Team as it uses for overseeing external sub-advisors,
including portfolio risk monitoring and performance review. In reviewing the
services provided, the Board noted the compliance program that had been
developed by the Advisor and considered that it includes a robust program for
monitoring the Advisor's and the Fund's compliance with the 1940 Act, as well as
the Fund's compliance with its investment objectives and policies. The Board
also considered a report from the Advisor with respect to its risk management
functions related to the operation of the Fund. Finally, as part of the Board's
consideration of the Advisor's services, the Advisor, in its written materials
and at the April 24, 2017 meeting, described to the Board the scope of its
ongoing investment in additional infrastructure and personnel to maintain and
improve the quality of services provided to the Fund and the other funds in the
First Trust Fund Complex. In light of the information presented and the
considerations made, the Board concluded that the nature, extent and quality of
the services provided to the Fund by the Advisor under the Agreement have been
and are expected to remain satisfactory and that the Advisor has managed the
Fund consistent with its investment objectives and policies.
The Board considered the advisory fee rate payable under the Agreement for the
services provided. The Board noted that in connection with the Mortgage
Securities Team assuming management of the Fund, the Advisor reduced the Fund's
advisory fee from 1.00% to 0.85% of total managed assets. The Board received and
reviewed information showing the advisory fee rates and expense ratios of the
peer funds in the MPI Peer Group, as well as advisory fee rates charged by the
Advisor to other fund and non-fund clients, as applicable. With respect to the
MPI Peer Group, the Board discussed with representatives of the Advisor how the
MPI Peer Group was assembled, 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 with different costs
associated with them; (iii) all 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; and (iv) some of the peer funds are part of a
larger fund complex that may allow for additional economies of scale. The Board
took these limitations into account in considering the peer data, and noted that
the advisory fee rate payable by the Fund after the fee reduction, based on
average managed assets, was below the median of the MPI Peer Group. With respect
to fees charged to other clients, the Board considered differences between the
Fund and other clients that limited their comparability. In considering the
advisory fee rate overall, the Board also considered the Advisor's statement
that it seeks to meet investor needs through innovative and value-added
investment solutions and the Advisor's description of its long-term commitment
to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor for the Fund. The Board determined that this process continues to be
effective for reviewing the Fund's performance. The Board received and reviewed
information comparing the Fund's performance for periods ended December 31, 2016
to the performance of the MPI Peer Group and to that of a benchmark index. In
reviewing the Fund's performance as compared to the performance of the MPI Peer
Group, the Board took into account the limitations described above with respect
to creating a relevant peer group for the Fund. Based on the information
provided on net asset value performance, the Board noted that the Fund
underperformed the MPI Peer Group average for the one-, three- and five-year
periods ended December 31, 2016. The Board also noted that the Fund outperformed
the benchmark index in the one- and five-year periods but underperformed the
benchmark index in the three-year period ended December 31, 2016. In considering
Fund performance, the Board considered the Mortgage Securities Team's discussion
of its repositioning of the Fund's portfolio and the recent performance of the
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (UNAUDITED)
Fund. In addition, the Board considered information provided by the Advisor on
the impact of leverage on the Fund's returns, noting that the Mortgage
Securities Team determined to reduce the Fund's leverage. The Board also
received information on the Fund's annual distribution rate as of December 31,
2016 and the Fund's average trading discount during 2016 and comparable
information for the peer group.
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory fee continues to be reasonable and appropriate in
light of the nature, extent and quality of the services provided by the Advisor
to the Fund under the Agreement.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. 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
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2016 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
inherent limitations in the profitability analysis and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
unreasonable. 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. The Board concluded that the character and
amount of potential fall-out benefits to the Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 30
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (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, Officer, Wheaton Orthopedics; 151 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 E. Liberty Drive, o Since Fund Limited Partnership (June 1992 to
Suite 400 Inception December 2016); Member, Sportsmed LLC
Wheaton, IL 60187 (April 2007 to November 2015)
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Investor Services, Inc. 151 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International,
D.O.B.: 11/57 Futures Industry
Assocation, and
National Futures
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial 151 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since June 2006 Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 151 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Fund Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (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, First Trust 151 None
Chairman of the Board Advisors L.P. and First Trust Portfolios
120 E. Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor) and
D.O.B.: 09/55 Stonebridge Advisors LLC (Investment
Advisor)
-----------------------------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2020 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2019 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 31
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (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)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust Advisors
D.O.B.: 01/66 L.P. and First Trust Portfolios L.P.; Chief Financial
Officer (January 2016 to Present), BondWave LLC
(Software Development Company) and
Stonebridge Advisors LLC (Investment Advisor)
Donald P. Swade Treasurer, Chief o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Financial Officer and President (April 2012 to July 2016), First Trust
Suite 400 Chief Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 08/72
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Inception Counsel, BondWave LLC; Secretary, Stonebridge
Wheaton, IL 60187 Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director, First Trust Advisors L.P. and
120 E. Liberty Drive, First Trust Portfolios L.P.
Suite 400 o Since Fund Inception
Wheaton, IL 60187
D.O.B: 02/70
Kristi A. Maher Chief Compliance o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, Officer and and First Trust Portfolios L.P.
Suite 400 Assistant Secretary o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Inception
-----------------------------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 32
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2017 (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.
USE OF WEB ANALYTICS
We currently use third party analytics tools, Google Analytics and AddThis to
gather information for purposes of improving First Trust's website and marketing
our products and services to you. These tools employ cookies, which are small
pieces of text stored in a file by your web browser and sent to websites that
you visit, to collect information, track website usage and viewing trends such
as the number of hits, pages visited, videos and PDFs viewed and the length of
user sessions in order to evaluate website performance and enhance navigation of
the website. We may also collect other anonymous information, which is generally
limited to technical and web navigation information such as the IP address of
your device, internet browser type and operating system for purposes of
analyzing the data to make First Trust's website better and more useful to our
users. The information collected does not include any personal identifiable
information such as your name, address, phone number or email address unless you
provide that information through the website for us to contact you in order to
answer your questions or respond to your requests. To find out how to opt-out of
these services click on: Google Analytics and AddThis.
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).
May 2017
Page 33
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
ADMINISTRATOR,
FUND ACCOUNTANT,
AND CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(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, 2016 and $45,000
for the fiscal year ended October 31, 2017.
(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 $3,000 for the fiscal year ended October
31, 2016 and $0 for the fiscal year ended October 31, 2017. The 2016
audit-related fees reflect fees for auditing data after migration to new
fund accounting software.
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, 2016 and $0 for the fiscal year ended October 31, 2017.
(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, 2016 and $17,067 for the fiscal year
ended October 31, 2017. These fees were for tax return preparation and
review.
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, 2016 and $0 for the fiscal year ended
October 31, 2017.
(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, 2016 and $0 for the fiscal year ended October 31, 2017.
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, 2016 and $0 for the fiscal year ended October 31, 2017.
(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, 2016 were
$5,200 for the Registrant and $13,000 for the Registrant's investment
adviser and for the Registrant's fiscal year ended October 31, 2017 were
$17,067 for the Registrant and $44,000 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 January 3, 2017.
Effective September 19, 2016, the day-to-day management of the registrant's
portfolio transitioned to the First Trust Mortgage Securities Team, led by Jim
Snyder and Jeremiah Charles.
JIM SNYDER. Mr. Snyder is a Portfolio Manager for the First Trust Mortgage
Securities Team. Prior to joining First Trust in 2013, Mr. Snyder worked as a
Senior Portfolio Manager at Fort Sheridan Advisors where he managed mortgage
portfolios for institutional clients. Mr. Snyder has led several mortgage
trading and portfolio groups at Deerfield Capital, Spyglass Capital & Trading
and American Express Financial Advisors. Mr. Snyder managed AXP Federal Income
Fund, and developed mortgage trading strategies for Spyglass Capital and
Deerfield's Mortgage REIT and Opportunity Fund. Mr. Snyder holds a B.S. and M.A.
in Economics from DePaul University and an MBA from University of Chicago Booth
School of Business.
JEREMIAH CHARLES. Mr. Charles is a Portfolio Manager for the First Trust
Mortgage Securities Team. Prior to joining First Trust in 2013, Mr. Charles
worked as a Vice President of Mortgage Product Sales for CRT Capital where he
advised pension funds, hedge funds, and institutional money managers. Before
joining CRT in 2011, Mr. Charles spent 6 years with Deerfield Capital Management
LLC as a Senior Vice President and Senior Portfolio Manager for the Mortgage
Trading team. He began his professional career as an Analyst at Piper Jaffray.
Mr. Charles holds a B.S. in Finance from the Leeds School of Business at the
University of Colorado, and a M.S. in Real Estate Finance with Honors from the
Charles H. Kellstadt Graduate School of Business at DePaul University.
(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND
POTENTIAL CONFLICTS OF INTEREST
Information provided as of October 31, 2017.
# of Accounts Total Assets
Managed for which for which
Total 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. Jeremiah Charles Registered Investment Companies: 4 $943,565,544 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $ 0 0 $ 0
---------------------------------
Other Accounts: 0 $ 0 0 $ 0
---------------
2. James Snyder Registered Investment Companies: 4 $943,565,544 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 a portfolio manager of the
Registrant has day-to-day management responsibilities with respect to one or
more other funds or other accounts. The First Trust Mortgage Securities Team
adheres to its trade allocation policy utilizing a pro-rata methodology to
address this conflict.
First Trust and its affiliate, First Trust Portfolios L.P. ("FTP"), have in
place a joint Code of Ethics and Insider Trading Policies and Procedures that
are designed to (a) prevent First Trust personnel from trading securities based
upon material inside information in the possession of such personnel and (b)
ensure that First Trust personnel avoid actual or potential conflicts of
interest or abuse of their positions of trust and responsibility that could
occur through such activities as front running securities trades for the
Registrant. Personnel are required to have duplicate confirmations and account
statements delivered to First Trust and FTP compliance personnel who then
compare such trades to trading activity to detect any potential conflict
situations.
(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
PORTFOLIO MANAGER COMPENSATION
Information provided as of October 31, 2017.
The compensation structure for the Mortgage Securities Team of First Trust is
based upon a fixed salary as well as a discretionary bonus determined by the
management of First Trust.
Salaries are determined by management and are based upon an individual's
position and overall value to the firm. Bonuses are also determined by
management and are based upon an individual's overall contribution to the
success of the firm and the profitability of the firm. Salaries and bonuses for
members of the First Trust Advisors L.P. Mortgage Securities Team are not based
upon criteria such as performance of the Registrant and are not directly tied to
the value of assets of the Fund.
(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of October 31, 2017.
DOLLAR RANGE OF FUND
SHARES BENEFICIALLY
NAME OWNED
Jeremiah Charles $ 0
James Snyder $ 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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2017
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2017
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 20, 2017
-------------------
* Print the name and title of each signing officer under his or her signature.