The following table describes the performance for the fiscal periods indicated.
Market price total return is calculated assuming an initial investment made at the market price at the
beginning of the period, reinvestment of all dividends and distributions at market price during the period,
and sale at the market price on the last day of the period. These figures have been derived from the
fund’s financial statements and, with respect to common stock, market price data for the fund’s common
shares.
See notes to financial statements.
NOTE
1—Significant Accounting Policies:
BNY Mellon Municipal Income, Inc. (the
“fund”), which is registered under the Investment Company Act of 1940, as amended (the “Act”),
is a diversified closed-end management investment company. The fund’s investment objective is to maximize
current income exempt from federal income tax to the extent consistent with the preservation of capital.
BNY Mellon Investment Adviser, Inc. (the “Adviser”), a wholly-owned subsidiary of The Bank of New
York Mellon Corporation (“BNY Mellon”), serves as the fund’s investment adviser. Insight North
America LLC (the “Sub-adviser”), a wholly-owned subsidiary of BNY Mellon and an affiliate of the
Adviser, serves as the fund’s sub-investment adviser. The fund’s Common Stock trades on the NYSE
American under the ticker symbol DMF.
The fund has outstanding 616 Series A
shares and 593 Series B shares, Auction Preferred Stock (“APS”), with a liquidation preference of
$25,000 per share (plus an amount equal to accumulated but unpaid dividends upon liquidation). APS dividend
rates are determined pursuant to periodic auctions or by reference to a market rate. Deutsche Bank Trust
Company America, as the Auction Agent, receives a fee from the fund for its services in connection with
such auctions. The fund also compensates broker-dealers generally at an annual rate of .15%-.25% of the
purchase price of shares of APS.
The fund is subject to certain restrictions
relating to the APS. Failure to comply with these restrictions could preclude the fund from declaring
any distributions to shareholders of Common Stock (“Common Shareholders”) or repurchasing shares
of Common Stock and/or could trigger the mandatory redemption of APS at liquidation value. Thus, redemptions
of APS may be deemed to be outside of the control of the fund.
The holders of APS,
voting as a separate class, have the right to elect at least two directors. The holders of APS will vote
as a separate class on certain other matters, as required by law. The fund’s Board of Directors (the
“Board”) has designated Nathan Leventhal and Benaree Pratt Wiley as directors to be elected by the
holders of APS.
The Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) is the exclusive reference of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority
of federal laws are also sources of authoritative GAAP for SEC
25
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
registrants. The fund is an investment company and applies the accounting and
reporting guidance of the FASB ASC Topic 946 Financial Services-Investment Companies. The fund’s financial
statements are prepared in accordance with GAAP, which may require the use of management estimates and
assumptions. Actual results could differ from those estimates.
The fund enters
into contracts that contain a variety of indemnifications. The fund’s maximum exposure under these
arrangements is unknown. The fund does not anticipate recognizing any loss related to these arrangements.
(a)
Portfolio valuation: The fair value of a financial instrument is the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (i.e., the exit price). GAAP establishes a fair value hierarchy that prioritizes
the inputs of valuation techniques used to measure fair value. This hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements).
Additionally,
GAAP provides guidance on determining whether the volume and activity in a market has decreased significantly
and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced
disclosures around valuation inputs and techniques used during annual and interim periods.
Various
inputs are used in determining the value of the fund’s investments relating to fair value measurements.
These inputs are summarized in the three broad levels listed below:
Level 1—unadjusted quoted
prices in active markets for identical investments.
Level 2—other significant
observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds,
credit risk, etc.).
Level 3—significant unobservable inputs (including
the fund’s own assumptions in determining the fair value of investments).
The
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated
with investing in those securities.
Changes in valuation techniques may result
in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques used
to value the fund’s investments are as follows:
26
Investments in securities, excluding short-term investment (other than U.S. Treasury
Bills) are valued each business day by an independent pricing service (the “Service”) approved by
the Board. Investments for which quoted bid prices are readily available and are representative of the
bid side of the market in the judgment of the Service are valued at the mean between the quoted bid prices
(as obtained by the Service from dealers in such securities) and asked prices (as calculated by the Service
based upon its evaluation of the market for such securities). Debt investments (which constitute a majority
of the portfolio securities) are carried at fair value as determined by the Service, based on methods
which include consideration of the following: yields or prices of municipal securities of comparable
quality, coupon, maturity and type; indications as to values from dealers; and general market conditions.
All of the preceding securities are generally categorized within Level 2 of the fair value hierarchy.
The Service is engaged under the general oversight of the Board.
When
market quotations or official closing prices are not readily available, or are determined not to accurately
reflect fair value, such as when the value of a security has been significantly affected by events after
the close of the exchange or market on which the security is principally traded, but before the fund
calculates its net asset value, the fund may value these investments at fair value as determined in accordance
with the procedures approved by the Board. Certain factors may be considered when fair valuing investments
such as: fundamental analytical data, the nature and duration of restrictions on disposition, an evaluation
of the forces that influence the market in which the securities are purchased and sold, and public trading
in similar securities of the issuer or comparable issuers. These securities are either categorized within
Level 2 or 3 of the fair value hierarchy depending on the relevant inputs used.
For
securities where observable inputs are limited, assumptions about market activity and risk are used and
such securities are generally categorized within Level 3 of the fair value hierarchy.
The following is a summary
of the inputs used as of March 31, 2022 in valuing the fund’s investments:
27
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
| | | | | | | |
| | Level
1-Unadjusted Quoted Prices | Level 2- Other Significant Observable Inputs | | Level
3-Significant Unobservable Inputs | Total | |
Assets ($) | | |
Investments in Securities:† | | |
Municipal
Securities | - | 255,967,414 | | - | 255,967,414 | |
Liabilities
($) | | |
Other Financial Instruments: | | |
Floating Rate Notes†† | - | (58,099,592) | | - | (58,099,592) | |
† See
Statement of Investments for additional detailed categorizations, if any.
†† Certain of the fund’s liabilities are held at carrying amount,
which approximates fair value for financial reporting purposes.
(b) Securities transactions
and investment income: Securities transactions are recorded on a trade date basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis. Interest income, adjusted
for accretion of discount and amortization of premium on investments, is earned from settlement date
and recognized on the accrual basis. Securities purchased or sold on a when-issued or delayed delivery
basis may be settled a month or more after the trade date.
(c) Risk: The value of the securities
in which the fund invests may be affected by political, regulatory, economic and social developments,
and developments that impact specific economic sectors, industries or segments of the market. In addition,
turbulence in financial markets and reduced liquidity in equity, credit and/or fixed income markets may
negatively affect many issuers, which could adversely affect the fund. Global economies and financial
markets are becoming increasingly interconnected, and conditions and events in one country, region or
financial market may adversely impact issuers in a different country, region or financial market. These
risks may be magnified if certain events or developments adversely interrupt the global supply chain;
in these and other circumstances, such risks might affect companies world-wide. Recent examples include
pandemic risks related to COVID-19 and aggressive measures taken world-wide in response by governments,
including closing borders, restricting international and domestic travel, and the imposition of prolonged
quarantines of large populations, and by businesses, including changes to operations and reducing staff.
The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect
certain countries, companies, industries and market sectors more dramatically than others. The COVID-19
pandemic has had, and any other outbreak of an infectious disease or other serious public health concern
could have, a significant negative impact on economic and market
28
conditions and could trigger a prolonged period of global economic slowdown. To
the extent the fund may overweight its investments in certain countries, companies, industries or market
sectors, such positions will increase the fund’s exposure to risk of loss from adverse developments
affecting those countries, companies, industries or sectors.
(d) Dividends and distributions to Common
Shareholders: Dividends and distributions are recorded on the ex-dividend date. Dividends from
net investment income are normally declared and paid monthly. Dividends from net realized capital gains,
if any, are normally declared and paid annually, but the fund may make distributions on a more frequent
basis to comply with the distribution requirements of the Internal Revenue Code of 1986, as amended (the
“Code”). To the extent that net realized capital gains can be offset by capital loss carryovers,
it is the policy of the fund not to distribute such gains. Income and capital gain distributions are
determined in accordance with income tax regulations, which may differ from GAAP.
Common
Shareholders will have their distributions reinvested in additional shares of the fund, unless such Common
Shareholders elect to receive cash, at the lower of the market price or net asset value per share (but
not less than 95% of the market price). If market price is equal to or exceeds net asset value, shares
will be issued at net asset value. If net asset value exceeds market price, Computershare Inc., the transfer
agent for the fund’s Common Stock, will buy fund shares in the open market and reinvest those shares
accordingly.
On March 30, 2022, the Board declared a cash dividend of $.029
per share from net investment income, payable on April 29, 2022 to Common Shareholders of record as of
the close of business on April 14, 2022. The ex-dividend date was April 13, 2022.
(e) Dividends and distributions
to shareholders of APS: Dividends, which are cumulative, are generally reset every seven days for each
series of APS pursuant to a process specified in related fund charter documents. Dividend rates as of
March 31, 2022, for each series of APS were as follows: Series A–.785% and Series B–.785%. These
rates reflect the “maximum rates” under the governing instruments as a result of “failed auctions”
in which sufficient clearing bids are not received. The average dividend rates for the period ended March
31, 2022 for each series of APS were as follows: Series A–.180% and Series B–.170%.
(f)
Federal income taxes: It is the policy of the fund to continue to qualify as a regulated investment
company, which can distribute tax-exempt dividends, by complying with the applicable provisions of the
29
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
Code, and to make distributions of income and net realized capital gain sufficient
to relieve it from substantially all federal income and excise taxes.
As
of and during the period ended March 31, 2022, the fund did not have any liabilities for any uncertain
tax positions. The fund recognizes interest and penalties, if any, related to uncertain tax positions
as income tax expense in the Statement of Operations. During the period ended March 31, 2022, the fund
did not incur any interest or penalties.
Each tax year in the three-year period
ended September 30, 2021 remains subject to examination by the Internal Revenue Service and state taxing
authorities.
The fund is permitted to carry forward capital losses for
an unlimited period. Furthermore, capital loss carryovers retain their character as either short-term
or long-term capital losses.
The fund has an unused capital loss carryover of $11,464,567
available for federal income tax purposes to be applied against future net realized capital gains, if
any, realized subsequent to September 30, 2021. The fund has $5,888,311 of short-term capital losses
and $5,576,256 of long-term capital losses which can be carried forward for an unlimited period.
The tax character of distributions paid to shareholders during the fiscal year
ended September 30, 2021 was as follows: tax-exempt income $8,751,801. The tax character of current year
distributions will be determined at the end of the current fiscal year.
(g) New accounting pronouncements:
In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and
in January 2021, the FASB issued Accounting Standards Update 2021-01, Reference Rate Reform (Topic 848):
Scope (“ASU 2021-01”), which provides optional, temporary relief with respect to the financial reporting
of contracts subject to certain types of modifications due to the planned discontinuation of the LIBOR
and other interbank offered rates as of the end of 2021. The temporary relief provided by ASU 2020-04
and ASU 2021-01 is effective for certain reference rate-related contract modifications that occur during
the period from March 12, 2020 through December 31, 2022. Management is evaluating the impact of ASU
2020-04 and ASU 2021-01 on the fund’s investments, derivatives,
debt and other contracts that will undergo reference rate-related modifications as a result of the reference
rate reform. Management is also currently actively working with other financial institutions and counterparties
to modify contracts as required by applicable regulation and within the regulatory deadlines.
30
NOTE
2—Management Fee, Sub-Investment Advisory Fee and Other Transactions with Affiliates:
(a) Pursuant to a management
agreement (the “Agreement”) with the Adviser, the management fee is computed at the annual rate of
.70% of the value of the fund’s average weekly net assets (including net assets representing APS outstanding)
and is payable monthly. The Agreement provides that if in any full fiscal year the aggregate expenses
of the fund (excluding taxes, interest on borrowings, brokerage fees and extraordinary expenses) exceed
the expense limitation of any state having jurisdiction over the fund, the fund may deduct from payments
to be made to the Adviser, or the Adviser will bear, the amount of such excess to the extent required
by state law. During the period ended March 31, 2022, there was no expense reimbursement pursuant to
the Agreement.
Pursuant to a sub-investment advisory agreement between the
Adviser and the Sub-adviser, the Adviser pays the Sub-adviser a monthly fee at an annual rate of .336%
of the value of the fund’s average weekly net assets, (including net assets representing APS outstanding).
(b)
The
fund compensates The Bank of New York Mellon, a subsidiary of BNY Mellon and an affiliate of the Adviser,
under a custody agreement, for providing custodial services for the fund. These fees are determined
based on net assets and transaction activity. During the period ended March 31, 2022, the fund was charged
$2,304 pursuant to the custody agreement.
The fund has an arrangement
with the custodian whereby the fund may receive earnings credits when positive cash balances are maintained,
which are used to offset custody fees. For financial reporting purposes, the fund includes net earnings
credits, if any, as an expense offset in the Statement of Operations.
During
the period ended March 31, 2022, the fund was charged $4,731 for services performed by the Chief Compliance
Officer and his staff. These fees are included in Chief Compliance Officer fees in the Statement of Operations.
The components of “Due to BNY Mellon Investment Adviser, Inc. and affiliates”
in the Statement of Assets and Liabilities consist of: management fees of $122,737, custodian fees of
$1,219 and Chief Compliance Officer fees of $2,351.
(c) Each Board member also
serves as a Board member of other funds in the BNY Mellon Family of Funds complex. Annual retainer fees
and attendance fees are allocated to each fund based on net assets.
31
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
NOTE
3—Securities Transactions:
The aggregate amount of purchases and sales of investment
securities, excluding short-term securities, during the period ended March 31, 2022, amounted to $35,546,174
and $35,999,598, respectively.
Inverse Floater Securities: The fund participates
in secondary inverse floater structures in which fixed-rate, tax-exempt municipal bonds are transferred
to a trust (the “Inverse Floater Trust”). The Inverse Floater Trust typically issues two variable
rate securities that are collateralized by the cash flows of the fixed-rate, tax-exempt municipal bonds.
One of these variable rate securities pays interest based on a short-term floating rate set by a remarketing
agent at predetermined intervals (“Trust Certificates”). A residual interest tax-exempt security
is also created by the Inverse Floater Trust, which is transferred to the fund, and is paid interest
based on the remaining cash flows of the Inverse Floater Trust, after payment of interest on the other
securities and various expenses of the Inverse Floater Trust. An Inverse Floater Trust may be collapsed
without the consent of the fund due to certain termination events such as bankruptcy, default or other
credit event.
The fund accounts for the transfer of bonds to the Inverse
Floater Trust as secured borrowings, with the securities transferred remaining in the fund’s investments,
and the Trust Certificates reflected as fund liabilities in the Statement of Assets and Liabilities.
The fund may invest in inverse floater securities on either a non-recourse or
recourse basis. These securities are typically supported by a liquidity facility provided by a bank or
other financial institution (the “Liquidity Provider”) that allows the holders of the Trust Certificates
to tender their certificates in exchange for payment from the Liquidity Provider of par plus accrued
interest on any business day prior to a termination event. When the fund invests in inverse floater securities
on a non-recourse basis, the Liquidity Provider is required to make a payment under the liquidity facility
due to a termination event to the holders of the Trust Certificates. When this occurs, the Liquidity
Provider typically liquidates all or a portion of the municipal securities held in the Inverse Floater
Trust. A liquidation shortfall occurs if the Trust Certificates exceed the proceeds of the sale of the
bonds in the Inverse Floater Trust (“Liquidation Shortfall”). When a fund invests in inverse floater
securities on a recourse basis, the fund typically enters into a reimbursement agreement with the Liquidity
Provider where the fund is required to repay the Liquidity Provider the amount of any Liquidation Shortfall.
As a result, a fund investing in a recourse inverse floater security bears the risk of loss with respect
to any Liquidation Shortfall.
32
The average amount of borrowings outstanding under the inverse floater structure
during the period ended March 31, 2022 was approximately $62,487,257, with a related weighted average
annualized interest rate of .72%.
At March 31, 2022, accumulated net unrealized
appreciation on investments was $5,463,994, consisting of $9,702,616 gross unrealized appreciation and
$4,238,622 gross unrealized depreciation.
At March 31, 2022, the cost of investments
for federal income tax purposes was substantially the same as the cost for financial reporting purposes
(see the Statement of Investments).
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