UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT
INVESTMENT COMPANY
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: January 31, 2016
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Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q 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 the
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. SCHEDULE OF INVESTMENTS. The Schedule of Investments is attached
herewith.
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES - 76.2%
COLLATERALIZED MORTGAGE OBLIGATIONS - 56.7%
Accredited Mortgage Loan Trust
$ 474,873 Series 2003-2, Class A1 ............................ 4.98% 10/01/33 $ 486,191
ACE Securities Corp. Home Equity Loan Trust
1,136,211 Series 2006-ASAP6, Class A2D (a).................... 0.65% 12/25/36 579,004
Banc of America Mortgage Trust
55,719 Series 2002-L, Class 1A1 (a) (b).................... 2.50% 12/01/32 48,940
Chase Mortgage Finance Trust
330,867 Series 2007-A1, Class 1A3 (a)....................... 2.72% 02/01/37 327,579
Citigroup Mortgage Loan Trust
965,630 Series 2012-7, Class 10A2 (a) (c)................... 2.74% 09/01/36 867,717
Countrywide Alternative Loan Trust
65,667 Series 2007-11T1, Class A37 (b) (d)................. 37.46% 05/25/37 146,315
Countrywide Home Loan Mortgage Pass-Through Trust
769,253 Series 2003-46, Class 2A1 (a)....................... 2.85% 01/01/34 763,906
467,494 Series 2006-21, Class A8 ........................... 5.75% 02/01/37 442,067
792,140 Series 2006-HYB5, Class 3A1A (a).................... 2.75% 09/01/36 691,264
Credit Suisse First Boston Mortgage Securities Corp.
399,950 Series 2004-AR2, Class 1A1 (a) (b).................. 2.93% 03/01/34 391,507
1,014,840 Series 2004-AR8, Class 6A1 (a)...................... 2.51% 09/01/34 1,011,431
Credit Suisse Mortgage Trust
954,184 Series 10-20R, Class 7A4 (a) (c).................... 3.50% 03/01/37 920,001
DSLA Mortgage Loan Trust
1,016,685 Series 2004-AR3, Class 2A2A (a)..................... 0.80% 07/19/44 988,510
1,050,821 Series 2007-AR1, Class 2A1A (a)..................... 0.57% 04/19/47 851,492
GMAC Mortgage Corporation Loan Trust
211,248 Series 2004-AR1, Class 22A (a)...................... 3.10% 06/01/34 206,057
GSR Mortgage Loan Trust
297,980 Series 2005-AR1, Class 4A1 (a)...................... 2.52% 01/01/35 289,577
Harborview Mortgage Loan Trust
607,318 Series 2004-6, Class 3A1 (a)........................ 2.99% 08/01/34 592,003
Home Equity Asset Trust
520,000 Series 2005-9, Class M1 (a)......................... 0.84% 04/25/36 425,174
Irwin Home Equity Loan Trust
559,737 Series 2006-3, Class 2A2 (c)........................ 5.83% 09/01/37 566,648
IXIS Real Estate Capital Trust
1,249,226 Series 2007-HE1, Class A3 (a)....................... 0.59% 05/25/37 430,402
JP Morgan Mortgage Trust
1,692,969 Series 2005-ALT1, Class 4A1 (a)..................... 2.70% 10/01/35 1,570,361
880,147 Series 2006-A2, Class 4A1 (a)....................... 2.72% 08/01/34 883,109
131,424 Series 2006-A2, Class 5A3 (a)....................... 2.68% 11/01/33 131,829
JP Morgan Re-REMIC
698,290 Series 2009-7, Class 12A1 (c)....................... 6.25% 01/01/37 723,722
MASTR Asset Backed Securities Trust
1,077,923 Series 2006-HE5, Class A3 (a)....................... 0.59% 11/25/36 662,304
222,207 Series 2006-HE5, Class A4 (a) (b)................... 0.65% 11/25/36 137,757
1,584,310 Series 2006-NC2, Class A3 (a)....................... 0.54% 08/25/36 728,159
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
MASTR Asset Backed Securities Trust (Continued)
$ 723,161 Series 2006-NC2, Class A5 (a)....................... 0.67% 08/25/36 $ 341,137
Mellon Residential Funding Corp. Mortgage Pass-Through
Trust
545,145 Series 2001-TBC1, Class A1 (a)...................... 1.13% 11/15/31 512,888
505,716 Series 2002-TBC2, Class A (a)....................... 1.29% 08/15/32 482,316
Morgan Stanley Mortgage Loan Trust
401,455 Series 2004-7AR, Class 2A6 (a)...................... 2.54% 09/01/34 395,306
Nomura Resecuritization Trust
1,200,764 Series 15-6R, Class 2A4 (c)......................... 7.90% 01/02/37 957,609
Provident Funding Mortgage Loan Trust
250,100 Series 2005-1, Class 1A1 (a)........................ 2.54% 05/01/35 250,538
Residential Accredit Loans, Inc.
225,128 Series 2006-QO1, Class 2A1 (a)...................... 0.70% 02/25/46 133,462
Saxon Asset Securities Trust
1,169,064 Series 2007-2, Class A2D (a)........................ 0.73% 05/25/47 788,183
Securitized Asset Backed Receivables LLC
1,131,329 Series 2007-BR2, Class A2 (a)....................... 0.66% 02/25/37 602,075
Springleaf Mortgage Loan Trust
850,000 Series 2013-3A, Class M3 (c)........................ 5.00% 09/01/57 863,259
Structured Adjustable Rate Mortgage Loan Trust
647,987 Series 2004-2, Class 4A2 (a)........................ 2.60% 03/01/34 635,420
Thornburg Mortgage Securities Trust
518,917 Series 2003-4, Class A1 (a)......................... 1.07% 09/25/43 502,922
Towd Point Mortgage Trust
1,032,311 Series 15-2, Class 2A1 (a) (c)...................... 3.75% 11/01/57 1,071,643
Wachovia Mortgage Loan Trust, LLC
420,032 Series 2006-A, Class 3A1 (a)........................ 2.81% 05/01/36 401,535
WaMu Mortgage Pass-Through Certificates
290,485 Series 2003-AR5, Class A7 (a)....................... 2.56% 06/01/33 294,231
742,563 Series 2004-AR1, Class A (a)........................ 2.45% 03/01/34 746,961
766,675 Series 2004-AR10, Class A1B (a)..................... 0.85% 07/25/44 740,470
611,688 Series 2004-AR13, Class A1A (a)..................... 1.15% 11/25/34 584,902
822,393 Series 2005-AR1, Class A1A (a)...................... 1.07% 01/25/45 778,268
1,155,310 Series 2005-AR11, Class A1A (a)..................... 0.75% 08/25/45 1,080,321
1,092,047 Series 2005-AR6, Class 2A1A (a)..................... 0.66% 04/25/45 1,021,929
494,872 Series 2005-AR9, Class A1A (a)...................... 1.07% 07/25/45 467,250
818,469 Series 2006-AR2, Class 1A1 (a)...................... 2.41% 03/01/36 779,033
Washington Mutual Alternative Mortgage Pass-Through
Certificates
39,851 Series 2007-5, Class A11 (b) (d).................... 36.92% 06/25/37 95,028
Washington Mutual MSC Mortgage Pass-Through Certificates
584,335 Series 2004-RA1, Class 2A .......................... 7.00% 03/01/34 621,531
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Wells Fargo Mortgage Backed Securities Trust
$ 586,824 Series 2003-H, Class A1 (a)......................... 2.74% 09/01/33 $ 587,557
414,969 Series 2004-A, Class A1 (a)......................... 2.83% 02/01/34 414,961
1,501,420 Series 2004-R, Class 1A1 (a)........................ 2.74% 09/01/34 1,522,090
391,371 Series 2004-S, Class A1 (a)......................... 2.74% 09/01/34 400,341
760,183 Series 2004-Y, Class 1A2 (a)........................ 2.80% 11/01/34 753,604
379,115 Series 2005-AR10, Class 2A17 (a).................... 2.75% 06/01/35 385,800
791,612 Series 2005-AR16, Class 1A1 (a)..................... 2.74% 08/01/33 804,854
385,602 Series 2005-AR3, Class 2A1 (a)...................... 2.74% 03/01/35 389,608
587,663 Series 2005-AR8, Class 1A1 (a)...................... 2.74% 06/01/35 598,051
265,652 Series 2007-16, Class 1A1 .......................... 6.00% 12/04/37 277,098
373,461 Series 2007-2, Class 1A13 .......................... 6.00% 03/01/37 368,511
94,716 Series 2007-8, Class 2A2 ........................... 6.00% 07/01/37 93,479
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37,607,197
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COMMERCIAL MORTGAGE-BACKED SECURITIES - 19.5%
Banc of America Commercial Mortgage Trust
1,000,000 Series 2006-6, Class AJ ............................ 5.42% 10/01/45 998,078
650,000 Series 2007-3, Class AJ, STRIP ..................... 5.57% 06/01/49 649,711
Bayview Commercial Asset Trust
651,672 Series 2004-2, Class A (a) (c)...................... 0.86% 08/25/34 621,528
BXHTL Mortgage Trust
800,000 Series 2015-JWRZ, Class B (a) (c)................... 2.13% 05/15/29 790,694
Carefree Portfolio Trust
1,250,000 Series 2014-CARE, Class B (a) (c)................... 2.28% 11/15/19 1,246,896
Citigroup Commercial Mortgage Trust
1,525,000 Series 2014-388G, Class B (a) (c)................... 1.48% 06/15/33 1,486,187
COMM Mortgage Trust
1,000,000 Series 2014-KYO, Class B (a) (c).................... 1.73% 06/11/27 980,487
Greenwich Capital Commercial Funding Corp.
650,000 Series 2007-GG11, Class AJ ......................... 6.03% 12/01/49 645,483
Hudsons Bay Simon JV Trust
510,000 Series 2015-HBFL, Class DFL (a) (c)................. 4.08% 08/05/34 502,471
Hyatt Hotel Portfolio Trust
1,040,000 Series 2015-HYT, Class B (a) (c).................... 2.13% 11/15/29 1,035,537
JP Morgan Chase Commercial Mortgage Securities Corp
153,082 Series 2007-CB18, Class A4 ......................... 5.44% 06/01/47 156,498
LB-UBS Commercial Mortgage Trust
835,000 Series 2007-C1, Class AM ........................... 5.46% 02/11/40 858,787
440,000 Series 2007-C2, Class AM ........................... 5.49% 02/11/40 450,081
UBS-Barclays Commercial Mortgage Trust
15,186,744 Series 2013-C5, Class XA, IO (a) (c)................ 1.08% 03/01/46 857,559
VNDO Mortgage Trust
990,000 Series 2012-6AVE, Class A (c)....................... 3.00% 11/01/30 994,899
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- --------------- ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES (CONTINUED)
Wachovia Bank Commercial Mortgage Trust
$ 650,000 Series 2007-C33, Class AJ, STRIP ................... 6.15% 02/01/51 $ 655,832
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12,930,728
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TOTAL MORTGAGE-BACKED SECURITIES...................................................... 50,537,925
(Cost $51,008,558) ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 17.5%
COLLATERALIZED MORTGAGE OBLIGATIONS - 6.5%
Federal Home Loan Mortgage Corp.
1,434,365 Series 2807, Class SB, IO (d)....................... 7.02% 11/15/33 232,790
13,874 Series 3195, Class SX (b) (d)....................... 43.37% 07/15/36 58,956
1,227,456 Series 3619, Class EI, IO (b)....................... 4.50% 05/01/24 44,940
838,771 Series 3692, Class PS, IO (b) (d)................... 6.17% 05/15/38 42,355
2,672,084 Series 3726, Class KI, IO .......................... 3.50% 04/01/25 159,438
1,957,602 Series 3870, Class WS, IO (d)....................... 6.17% 06/15/31 268,887
1,392,436 Series 4206, Class IA, IO (b)....................... 3.00% 03/01/33 203,081
Federal National Mortgage Association
507,831 Series 2005-122, Class SN (d)....................... 26.89% 01/25/36 565,592
54,881 Series 2008-50, Class AI, IO (b).................... 5.50% 06/01/23 2,055
3,015,785 Series 2010-103, Class ID, IO (b)................... 5.00% 09/01/40 444,253
4,787,236 Series 2010-139, Class KI, IO (b)................... 1.09% 12/01/40 250,499
235,225 Series 2010-142, Class PS, IO (b) (d)............... 5.62% 05/25/40 11,195
705,179 Series 2010-145, Class TI, IO (b)................... 3.50% 12/01/20 41,727
1,509,262 Series 2010-40, Class MI, IO (b).................... 4.50% 08/01/24 47,154
3,293,992 Series 2012-112, Class BI, IO ...................... 3.00% 09/01/31 334,211
2,580,529 Series 2012-125, Class MI, IO (b)................... 3.50% 11/01/42 466,217
3,465,548 Series 2013-32, Class IG, IO (b).................... 3.50% 04/01/33 484,177
Federal National Mortgage Association, STRIP
2,059,421 Series 406, Class 6, IO (b)......................... 4.00% 01/01/41 356,008
Government National Mortgage Association
483,946 Series 2009-65, Class NJ, IO (b).................... 5.50% 07/01/39 39,374
2,039,465 Series 2010-115, Class IQ, IO ...................... 4.50% 11/01/38 138,155
3,487,099 Series 2011-131, Class EI, IO ...................... 4.50% 08/01/39 152,857
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4,343,921
------------
PASS-THROUGH SECURITIES - 11.0%
Fannie Mae REMICs
915,276 Series 2005-83, Class LZ ........................... 5.50% 10/01/35 993,464
Federal Home Loan Mortgage Corp.
1,000,000 Gold Pool .......................................... 3.50% 01/31/46 1,045,379
1,095,065 Pool A94738 (e)..................................... 4.50% 11/01/40 1,192,737
747,271 Pool K36017 (e)..................................... 5.00% 09/01/47 806,958
Federal National Mortgage Association
1,510,477 Pool 831145 (e)..................................... 6.00% 12/01/35 1,729,128
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- -------------------------------------------------------- ----------- --------------- ------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
PASS-THROUGH SECURITIES (CONTINUED)
Federal National Mortgage Association (Continued)
$ 1,335,579 Pool 843971 (e)..................................... 6.00% 11/01/35 $ 1,533,600
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7,301,266
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES............................... 11,645,187
(Cost $15,961,527) ------------
ASSET-BACKED SECURITIES - 1.6%
Green Tree Financial Corp.
26,341 Series 1997-2, Class A6 (b)......................... 7.24% 06/15/28 26,291
42,724 Series 1997-3, Class A6 (b)......................... 7.32% 03/15/28 44,624
40,638 Series 1997-7, Class A6 (b)......................... 6.76% 07/15/28 41,582
Mid-State Capital Corp. Trust
530,164 Series 2004-1, Class M1 ............................ 6.50% 08/01/37 570,718
377,836 Series 2005-1, Class A ............................. 5.75% 01/01/40 408,599
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TOTAL ASSET-BACKED SECURITIES...................................................... 1,091,814
(Cost $1,123,072) ------------
TOTAL INVESTMENTS - 95.3%.......................................................... 63,274,926
(Cost $68,093,157) (f) ------------
PRINCIPAL
VALUE DESCRIPTION VALUE
---------------- -------------------------------------------------------------------------------------- ------------
REVERSE REPURCHASE AGREEMENTS - (7.6%)
(3,159,000) With JP Morgan 0.70% dated 01/05/16, to be repurchased at
$3,160,781 on 02/03/16............................................................ (3,159,000)
(1,905,000) With JP Morgan 0.70% dated 01/08/16, to be repurchased at
$1,905,963 on 02/03/16............................................................ (1,905,000)
------------
TOTAL REVERSE REPURCHASE AGREEMENTS................................................... (5,064,000)
------------
NET OTHER ASSETS AND LIABILITIES - 12.3%.............................................. 8,157,539
------------
NET ASSETS - 100.0%................................................................... $ 66,368,465
============
-----------------------------
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at January 31, 2016.
(b) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by Brookfield Investment
Management Inc. ("Brookfield"), the Fund's sub-advisor.
See Notes to Portfolio of Investments
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JANUARY 31, 2016 (UNAUDITED)
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by Brookfield. 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 January 31, 2016,
securities noted as such amounted to $14,486,857, or 21.83% of net assets.
(d) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at January 31, 2016.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of January 31, 2016,
the aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $1,858,594 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $6,676,825.
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
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of January 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Portfolio
of Investments):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
1/31/2016 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Mortgage-Backed Securities...................... $ 50,537,925 $ -- $ 50,537,925 $ --
U.S. Government Agency Mortgage-Backed
Securities................................... 11,645,187 -- 11,645,187 --
Asset-Backed Securities......................... 1,091,814 -- 1,091,814 --
------------- ----------- ------------- ------------
Total Investments............................... $ 63,274,926 $ -- $ 63,274,926 $ --
============= =========== ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
1/31/2016 PRICES INPUTS INPUTS
------------- ----------- ------------- ------------
Reverse Repurchase Agreements .................. $ (5,064,000) $ -- $ (5,064,000) $ --
============= =========== ============= ============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at January 31, 2016.
See Notes to Portfolio of Investments
NOTES TO PORTFOLIO OF INVESTMENTS
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, and is registered with the Securities and Exchange Commission
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, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies."
2. VALUATION AND INVESTMENT PRACTICES
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 Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
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) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2016 (UNAUDITED)
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
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
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or 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 January 31, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
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 January 31, 2016, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED)
FIRST TRUST MORTGAGE INCOME FUND (FMY)
JANUARY 31, 2016 (UNAUDITED)
C. REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements were utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as financing under which Fund assets are pledged as collateral to secure a
short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back by the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Information for the fiscal year-to-date period ended January 31, 2016:
Maximum amount outstanding during the period.................. $5,309,000
Average amount outstanding during the period*................. $5,169,011
Average Common Shares outstanding during the period........... 4,213,115
Average debt per Common Share outstanding during the period... $1.23
* The average amount outstanding during the period was calculated by adding
the borrowings at the end of each day and dividing the sum by the number
of days in the fiscal year-to-date period ended January 31, 2016.
During the fiscal year-to-date period ended January 31, 2016, the interest rates
ranged from 0.42% to 0.70%, with a weighted average interest rate of 0.60%, on
borrowings by the Fund under reverse repurchase agreements, which had interest
expense that aggregated $7,982.
D. INVERSE FLOATING-RATE SECURITIES
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio and have the effect of
creating leverage. These securities, if any, are identified on the Portfolio of
Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
ITEM 2. 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 last fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 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: March 22, 2016
------------------
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: March 22, 2016
------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: March 22, 2016
------------------
* Print the name and title of each signing officer under his or her signature.