Flaherty & Crumrine Preferred Income Fund Incorporated

FLAHERTY & CRUMRINE PREFERRED INCOME FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Fund (“PFD”):

Fiscal 2017 has been a very good year for preferred securities, and the third fiscal quarter1 continued in stride. Total return2 on net asset value (“NAV”) was 3.1% for the quarter, bringing total return for the first nine months of fiscal 2017 to 15.8%. Total return on market price over the same periods was 1.1% and 20.1%, respectively.

Credit conditions continue to provide a supportive backdrop for yields and spreads, as most issuers of preferreds maintain strong balance sheets. Bank payout ratios (common stock dividends plus share buybacks) are now averaging at or above 100% of current earnings, which means, as a group, banks are no longer adding to their common equity layer of capital. Normally, this could be cause for concern – but given years of balance-sheet strengthening since the financial crisis, these payout ratios are comfortably supported.

Political headlines of all flavors remain omnipresent, including topics such as healthcare reform, tax reform, immigration, and North Korea. Equity and fixed-income markets, however, have largely ignored a lack of near-term progress on these issues and focused on potential for positive economic developments – notably lower taxes and regulatory reform. There are winners and losers in all policy decisions, but markets are pricing in some upside from lower tax rates and reduced regulatory burdens.

Away from these headlines, we have been living in a low-volatility financial environment for quite some time, which has been positive for spreads of most fixed-income products. Mid- to longer-term interest rates generally fell during the quarter, although rates have remained relatively range-bound in recent years. For example, the constant-maturity 10-year Treasury yield, currently around 2.3%, has been within about 0.75% of today’s rate since mid-2011. The economy continues to expand moderately with few signs of higher inflation. As a result, the Federal Reserve is moving very deliberately in removing accommodative monetary policy. The Fed last hiked the federal funds rate in June and has another 0.25% hike penciled in for December. In October, it will begin scaling back reinvestment of Treasury and mortgage-backed securities acquired in the wake of the financial crisis. Although we expect markets will take unwinding of “quantitative easing” in stride, the Fed will be the first major central bank to shrink its balance sheet, and this is a new source of market uncertainty.

Financial regulators in the United Kingdom announced that London banks will no longer be required to submit quotes for LIBOR (London interbank offered rate) after December 31, 2021. Since LIBOR is a reference rate for trillions of dollars of financial instruments – including many floating and fixed-to-floating rate preferred securities – it will be critical to find an alternative benchmark reference rate for instruments continuing past 2021. The Federal Reserve assigned the Alternative Reference Rate Committee (ARRC) to work on a transition from U.S. Dollar LIBOR to a new benchmark reference rate, and they have already identified viable alternatives. Once an alternative is finalized, transition to a new benchmark reference rate will be complicated by the sheer number of instruments involved and mechanics of a change. This process will take time, but we believe market participants have a large incentive to get it right.

 

 

 

1 

June 1, 2017—August 31, 2017

2 

Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.


One of the best places to find total return this quarter was in the primary market. New issue supply has been limited all year, and redemptions of higher-coupon preferred securities have continued at a healthy pace. Many offerings were met with strong demand that exceeded deal size, which in turn pushed prices up. This robust primary market also boosted secondary markets, as prices adjusted to reflect new-issue clearing levels.

During the quarter, a modest drop in interest rates helped lower-coupon securities outperform higher-coupon securities at the margin. Like last quarter, it is difficult to identify laggards in the portfolio this year. Performance lag has been relative return – not absolute negative return – in most cases – typically a result of call (redemption) features embedded in most preferreds. As a security moves above its call price, the call option limits further upside potential as rates or spread move lower. Investors continue to earn coupons, many of which are tax-advantaged, but price increases become more limited.

Looking forward, returns should come mostly from the coupons on securities as the pace of price gains tapers off or even reverses. Compared to fixed-income alternatives, however, preferred securities continue to offer value. Market volatility could increase, and economic or credit conditions could change – which may cause spreads to widen – but we believe preferreds’ combination of credit quality and yield will be difficult to replace in other fixed-income asset classes.

As always, we encourage you to visit the Fund’s website, www.preferredincome.com, for important information.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team

September 30, 2017

 

2


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2017 (Unaudited)

 

 

Fund Statistics       
Net Asset Value   $ 14.44  
Market Price   $ 15.15  
Premium     4.92
Yield on Market Price     6.50
Common Stock Shares Outstanding     11,158,855  

 

Moody’s Ratings*   % of Net Assets†  
A     1.0%  
BBB     59.2%  
BB     29.6%  
Not Rated**     8.9%  
Below Investment Grade***     27.7%  

Senior Debt Rating Below

Investment Grade****

    0.1%  

 

* Ratings are from Moody’s Investors Service, Inc. “Not Rated” securities are those with no ratings available from Moody’s.
** Does not include net other assets and liabilities of 1.3%.
*** Below investment grade by all of Moody’s, S&P, and Fitch.
**** Issuer’s senior unsecured debt or issuer rating is below investment grade by all of Moody’s, S&P, and Fitch.
Industry Categories   % of Net Assets†

 

LOGO

 

Top 10 Holdings by Issuer   % of Net Assets†  
JPMorgan Chase & Co     4.7
MetLife     4.4
Wells Fargo & Company     4.0
PNC Financial Services Group     3.8
Citigroup Inc     3.7
Fifth Third Bancorp     3.2
BNP Paribas     3.2
Liberty Mutual Group     3.2
Morgan Stanley     3.1
Enbridge Energy Partners     3.1
 
% of Net Assets*****†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     60%  
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     45%  

 

***** This does not reflect year-end results or actual tax categorization of Fund distributions. These percentages can, and do, change, perhaps significantly, depending on market conditions. Investors should consult their tax advisor regarding their personal situation.
Net Assets includes assets attributable to the use of leverage.

 

3


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — 92.4%

   
       

Banking — 50.4%

               
  19,400    

Astoria Financial Corporation, 6.50%, Series C

  $ 501,538  
$ 1,655,000    

Australia & New Zealand Banking Group Ltd., 6.75% to 06/15/26 then
ISDA5 + 5.168%, 144A****

    1,853,682 **(2)   
$ 400,000    

Banco Bilbao Vizcaya Argentaria SA, 9.00% to 05/09/18 then
SW5 + 8.262%, 144A****

    416,016 **(2)   
$ 530,000    

Banco Mercantil del Norte SA, 7.625% to 01/06/28 then T10Y + 5.353%, 144A****

    572,135 **(2)   
 

Bank of America Corporation:

 

 
$ 400,000    

6.30% to 03/10/26 then 3ML + 4.553%, Series DD

    451,500  
$ 2,170,000    

8.00% to 01/30/18 then 3ML + 3.63%, Series K

    2,212,095 *(1)   
$ 1,751,000    

8.125% to 05/15/18 then 3ML + 3.64%, Series M

    1,812,723 *(1)   
$ 1,699,000    

Barclays Bank PLC, 7.875% to 03/15/22 then SW5 + 6.772%, 144A****

    1,851,823 **(2)   
 

BNP Paribas:

 

 
$ 5,315,000    

7.375% to 08/19/25 then SW5 + 5.15%, 144A****

    6,005,950 **(2)   
$ 1,500,000    

7.625% to 03/30/21 then SW5 + 6.314%, 144A****

    1,644,375 **(2)   
 

Capital One Financial Corporation:

 

 
  12,900    

6.00%, Series H

    342,656  
  7,000    

6.20%, Series F

    187,600  
  29,600    

6.70%, Series D

    805,490  
 

Citigroup, Inc.:

 

 
  103,800    

6.875% to 11/15/23 then 3ML + 4.13%, Series K

    3,004,231 *(1)   
  119,778    

7.125% to 09/30/23 then 3ML + 4.04%, Series J

    3,528,947 *(1)   
$ 2,299,000    

8.40% to 04/30/18 then 3ML + 4.0285%, min 7.7575%, Series E

    2,405,329 *(1)   
 

CoBank ACB:

 

 
  19,300    

6.125%, Series G, 144A****

    1,934,825  
  10,000    

6.20% to 01/01/25 then 3ML + 3.744%, Series H, 144A****

    1,075,938  
  10,000    

6.25% to 10/01/22 then 3ML + 4.557%, Series F, 144A****

    1,079,063 *(1)   
$ 447,000    

6.25% to 10/01/26 then 3ML + 4.66%, Series I, 144A****

    493,191  
$ 5,210,000    

Colonial BancGroup, 7.114%, 144A****

    7,815 (3)(4)††   
  258,558    

Fifth Third Bancorp, 6.625% to 12/31/23 then 3ML + 3.71%, Series I

    7,692,747 *(1)   
 

First Horizon National Corporation:

 

 
  795    

First Tennessee Bank, 3ML + 0.85%, min 3.75%, 3.75%(5), 144A****

    620,100 *(1)   
  1    

FT Real Estate Securities Company, 9.50% 03/31/31, 144A****

    1,298,750    
 

Goldman Sachs Group:

 

 
$ 195,000    

5.70% to 05/10/19 then 3ML + 3.884%, Series L

    202,069  
  50,000    

6.375% to 05/10/24 then 3ML + 3.55%, Series K

    1,450,500 *(1)   

 

4


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

               
 

HSBC Holdings PLC:

 

 
$ 800,000    

HSBC Capital Funding LP, 10.176% to 06/30/30 then 3ML + 4.98%, 144A****

  $ 1,274,496 (1)(2)   
$ 350,000    

HSBC Holdings PLC, 6.00% to 05/22/27 then ISDA5 + 3.746%

    368,900 **(2)   
$ 995,000    

HSBC Holdings PLC, 6.875% to 06/01/21 then ISDA5 + 5.514%

    1,085,047 **(2)   
  73,627    

HSBC Holdings PLC, 8.00%, Series 2

    1,996,212 **(1) (2)   
  106,000    

Huntington Bancshares, Inc., 6.25%, Series D

    2,946,005 *(1)   
  40,000    

ING Groep NV, 6.375%

    1,033,200 **(2)   
 

JPMorgan Chase & Company:

 

 
  61,700    

6.70%, Series T

    1,664,666 *(1)   
$ 4,715,000    

6.75% to 02/01/24 then 3ML + 3.78%, Series S

    5,392,781 *(1)   
$ 4,000,000    

7.90% to 04/30/18 then 3ML + 3.47%, Series I

    4,125,000 *(1)   
  90,400    

KeyCorp, 6.125% to 12/15/26 then 3ML + 3.892%, Series E

    2,656,178  
$ 2,790,000    

M&T Bank Corporation, 6.45% to 02/15/24 then 3ML + 3.61%, Series E

    3,138,750 *(1)   
$ 540,000    

Macquarie Bank Ltd., 6.125% to 03/08/27 then SW5 + 3.703%, 144A****

    557,550 **(2)   
 

Morgan Stanley:

 

 
  20,000    

5.85% to 04/15/27 then 3ML + 3.491%, Series K

    545,250  
  154,665    

6.875% to 01/15/24 then 3ML + 3.94%, Series F

    4,502,685 *(1)   
  80,516    

7.125% to 10/15/23 then 3ML + 4.32%, Series E

    2,369,787 *(1)   
  174,600    

New York Community Bancorp, Inc., 6.375% to 03/17/27 then
3ML + 3.821%, Series A

    5,126,256  
 

PNC Financial Services Group, Inc.:

 

 
  289,800    

6.125% to 05/01/22 then 3ML + 4.067%, Series P

    8,257,126 *(1)   
$ 625,000    

6.75% to 08/01/21 then 3ML + 3.678%, Series O

    708,594 *(1)   
$ 2,160,000    

RaboBank Nederland, 11.00% to 06/30/19 then 3ML + 10.868%, 144A****

    2,486,700 (1)(2)   
  50,000  

Regions Financial Corporation, 6.375% to 09/15/24 then 3ML + 3.536%, Series B

    1,422,625 *(1)   
$ 4,000,000    

Societe Generale SA, 7.375% to 09/13/21 then SW5 + 6.238%, 144A****

    4,335,000 **(1) (2)   
 

Sovereign Bancorp:

   
  1,750    

Sovereign REIT, 12.00%, Series A, 144A****

    2,194,061    
 

Standard Chartered PLC:

 

 
$ 1,565,000    

7.50% to 04/02/22 then SW5 + 6.301%, 144A****

    1,698,494 **(2)   
$ 1,250,000    

7.75% to 04/02/23 then SW5 + 5.723%, 144A****

    1,365,625 **(2)   
  92,900    

State Street Corporation, 5.90% to 03/15/24 then 3ML + 3.108%, Series D

    2,596,787 *(1)   
  10,000    

Texas Capital Bancshares Inc., 6.50%, Series A

    253,525  
  35,000    

US Bancorp, 6.50% to 01/15/22 then 3ML + 4.468%, Series F

    1,017,537 *(1)   
  30,000    

Valley National Bancorp, 5.50% to 09/30/22 then 3ML + 3.578%, Series B

    795,000  

 

5


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

               
 

Wells Fargo & Company:

 

 
  15,000    

5.625%, Series Y

  $ 389,887  
  60,300    

5.85% to 09/15/23 then 3ML + 3.09%, Series Q

    1,638,502 *(1)   
$ 2,075,000    

5.875% to 06/15/25 then 3ML + 3.99%, Series U

    2,305,844 *(1)   
  35,900    

6.625% to 03/15/24 then 3ML + 3.69%, Series R

    1,031,407 *(1)   
$ 1,095,000    

7.98% to 03/15/18 then 3ML + 3.77%, Series K

    1,129,219 *(1)   
  123,500    

8.00%, Series J

    3,154,497 *(1)   
$ 1,000,000    

Zions Bancorporation, 7.20% to 09/15/23 then 3ML + 4.44%, Series J

    1,103,750  

 

 

   
    120,118,031    
   

 

 

   
       

Financial Services — 0.2%

               
$ 460,000    

AerCap Global Aviation Trust, 6.50% to 06/15/25 then
3ML + 4.30%, 06/15/45, 144A****

    499,100 (2)   

 

 

   
    499,100    
   

 

 

   
       

Insurance — 21.0%

               
  82,392    

Allstate Corporation, 6.625%, Series E

    2,225,614 *(1)   
$ 300,000    

Aon Corporation, 8.205% 01/01/27

    394,500 (1)   
 

Arch Capital Group, Ltd.:

 

 
  12,000    

5.25%, Series E

    297,030 **(2)   
  10,500    

5.45%, Series F

    265,650 **(2)   
  112,500    

6.75%, Series C

    2,905,031 **(1) (2)   
$ 1,423,000    

AXA SA, 6.379% to 12/14/36 then 3ML + 2.256%, 144A****

    1,630,217 **(1) (2)   
  21,450    

Axis Capital Holdings Ltd., 5.50%, Series E

    542,685 **(2)   
 

Chubb Ltd.:

   
$ 975,000    

Ace Capital Trust II, 9.70% 04/01/30

    1,477,125 (1)(2)   
  120,600    

Delphi Financial Group, 3ML + 3.19%, 4.505%(5) 05/15/37

    2,509,988 (1)   
  42,400    

Endurance Specialty Holdings, 6.35%, Series C

    1,135,154 **(1) (2)   
$ 2,328,000    

Everest Reinsurance Holdings, 3ML + 2.385%, 3.70%(5) 05/15/37

    2,182,500 (1)   
  10,000    

Hartford Financial Services Group, Inc., 7.875% to 04/15/22 then
3ML + 5.596%, 04/15/42

    306,625    
$ 3,736,000    

Liberty Mutual Group, 7.80% 03/15/37, 144A****

    4,730,710 (1)   
 

MetLife, Inc.:

 

 
$ 3,600,000    

9.25% 04/08/38, 144A****

    5,355,000 (1)   
$ 3,096,000    

10.75% 08/01/39

    5,209,020 (1)   
 

PartnerRe Ltd.:

 

 
  25,000    

5.875%, Series I

    645,750 **(1) (2)   
  5,600    

6.50%, Series G

    151,256 **(2)   
  94,510    

7.25%, Series H

    2,763,709 **(1) (2)   

 

6


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Insurance — (Continued)

               
$ 402,000    

Prudential Financial, Inc., 5.625% to 06/15/23 then 3ML + 3.92%, 06/15/43

  $ 435,668    
$ 4,043,000    

QBE Insurance Group Ltd., 7.50% to 11/24/23 then
SW10 + 6.03%, 11/24/43, 144A****

    4,669,665 (1)(2)   
 

Unum Group:

   
$ 2,820,000    

Provident Financing Trust I, 7.405% 03/15/38

    3,250,050 (1)   
  24,000    

W.R. Berkley Corporation, 5.75% 06/01/56

    630,060    
 

XL Group Limited:

 

 
$ 1,400,000    

Catlin Insurance Company Ltd., 3ML + 2.975%, 4.2811%(5), 144A****

    1,354,500 (1)(2)   
$ 5,500,000    

XL Capital Ltd., 3ML + 2.4575%, 3.7611%(5), Series E

    5,146,075 (1)(2)   

 

 

   
    50,213,582    
   

 

 

   
       

Utilities — 11.2%

               
 

Commonwealth Edison:

   
$ 3,127,000    

COMED Financing III, 6.35% 03/15/33

    3,451,426 (1)   
  145,000    

Dominion Resources, Inc., 5.25% 07/30/76, Series A

    3,738,463 (1)   
 

DTE Energy Company:

 

 
  18,000    

5.375% 06/01/76, Series B

    466,063    
  10,000    

6.00% 12/15/76, Series F

    271,427    
$ 2,180,000    

Emera, Inc., 6.75% to 06/15/26 then 3ML + 5.44%, 06/15/76, Series 2016A

    2,498,266 (1)(2)   
  25,000    

Georgia Power Company, 6.50%, Series 2007A

    2,544,533 *(1)   
  25,000    

Indianapolis Power & Light Company, 5.65%

    2,578,908  
  84,500    

Integrys Energy Group, Inc., 6.00% to 08/01/23 then 3ML + 3.22%, 08/01/73

    2,367,056 (1)   
 

NextEra Energy:

   
$ 1,500,000    

FPL Group Capital, Inc., 3ML + 2.125%, 3.3706%(5) 06/15/67, Series C

    1,432,500 (1)   
 

PECO Energy:

   
$ 500,000    

PECO Energy Capital Trust III, 7.38% 04/06/28, Series D

    595,534 (1)   
 

PPL Corp:

 

 
  44,960    

PPL Capital Funding, Inc., 5.90% 04/30/73, Series B

    1,154,236 (1)   
$ 2,250,000    

PPL Capital Funding, Inc., 3ML + 2.665%, 3.9614%(5) 03/30/67, Series A

    2,221,875 (1)   
$ 2,850,000    

Puget Sound Energy, Inc., 6.974% to 12/01/17 then
3ML + 2.53%, 06/01/67, Series A

    2,778,750 (1)   
 

Southern California Edison:

   
  20,000    

SCE Trust V, 5.45% to 03/15/26 then 3ML + 3.79%, Series K

    571,450  

 

 

   
    26,670,487    
   

 

 

   

 

7


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Energy — 5.2%

               
$ 1,120,000    

Enbridge, Inc., 6.00% to 01/15/27 then 3ML + 3.89%, 01/15/77

  $ 1,187,715 (2)   
$ 7,302,000    

Enbridge Energy Partners LP, 8.05% to 10/01/17 then 3ML + 3.7975%, 10/01/37

    7,302,000 (1)   
 

Enterprise Products Operating L.P.:

 

 
$ 450,000    

3ML + 3.7075%, 5.0181%(5) 08/01/66

    451,769    
$ 500,000    

5.25% to 08/16/27 then 3ML + 3.033%, 08/16/77, Series E

    501,625    
  16,900    

Kinder Morgan, Inc., 9.75%, 10/26/2018, Series A

    718,419  
 

Transcanada Pipelines, Ltd.:

 

 
$ 1,000,000    

5.30% to 03/15/27 then 3ML + 3.208%, 03/15/77, Series 2017-A

    1,032,075 (2)   
$ 1,000,000    

5.875% to 08/15/26 then 3ML + 4.64%, 08/15/76, Series 2016-A

    1,092,500 (1)(2)   

 

 

   
    12,286,103    
   

 

 

   
       

Real Estate Investment Trust (REIT) — 0.6%

               
 

National Retail Properties, Inc.:

 

 
  5,500    

5.20%, Series F

    136,235    
  37,500    

5.70%, Series E

    957,844 (1)   
 

PS Business Parks, Inc.:

 

 
  10,260    

5.20%, Series W

    258,680    
  4,000    

5.70%, Series V

    102,530    
  1,500    

5.75%, Series U

    37,920    

 

 

   
    1,493,209    
   

 

 

   
       

Miscellaneous Industries — 3.8%

               
 

BHP Billiton Limited:

   
$ 400,000    

BHP Billiton Finance U.S.A., Ltd., 6.75% to 10/19/25 then
SW5 + 5.093%, 10/19/75, 144A****

    465,000 (2)   
$ 833,000    

General Electric Company, 5.00% to 01/21/21 then 3ML + 3.33%, Series D

    880,898 *(1)   
 

Land O’ Lakes, Inc.:

 

 
$ 260,000    

7.25%, Series B, 144A****

    281,450  
$ 3,900,000    

8.00%, Series A, 144A****

    4,314,375 *(1)   
  34,700    

Ocean Spray Cranberries, Inc., 6.25%, 144A****

    3,201,075  

 

 

   
    9,142,798    
   

 

 

   
 

Total Preferred Securities
(Cost $205,377,373)

    220,423,310    
   

 

 

   

 

8


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Corporate Debt Securities — 5.4%

   
       

Banking — 2.6%

               
$ 2,140,000    

Regions Financial Corporation, 7.375% 12/10/37, Sub Notes

  $ 2,928,598 (1)   
  107,400    

Texas Capital Bancshares Inc., 6.50% 09/21/42, Sub Notes

    2,758,838 (1)   
  18,000    

Zions Bancorporation, 6.95% to 09/15/23 then 3ML + 3.89%, 09/15/28, Sub Notes

    540,563 (1)   

 

 

   
    6,227,999    
   

 

 

   
       

Insurance — 1.2%

               
$ 2,000,000    

Liberty Mutual Insurance, 7.697% 10/15/97, 144A****

    2,866,118 (1)   

 

 

   
    2,866,118    
   

 

 

   
       

Energy — 0.9%

               
$ 1,680,000    

Energy Transfer Partners LP, 8.25% 11/15/29

    2,214,034 (1)   

 

 

   
      2,214,034    
   

 

 

   
       

Communication — 0.6%

               
 

Qwest Corporation:

 

 
  45,500    

6.50% 09/01/56

    1,154,449    
  5,000    

6.75% 06/15/57

    128,563    
  400    

6.875% 10/01/54

    10,473    

 

 

   
    1,293,485    
   

 

 

   
       

Miscellaneous Industries — 0.1%

               
  10,000    

eBay, Inc., 6.00% 02/01/56

    270,425    

 

 

   
    270,425    
   

 

 

   
 

Total Corporate Debt Securities
(Cost $10,406,340)

    12,872,061    
   

 

 

   
 

Common Stock — 0.9%

   
       

Banking — 0.1%

               
  3,620    

CIT Group, Inc.

    162,357  

 

 

   
    162,357    
   

 

 

   
       

Energy — 0.8%

               
  99,212    

Kinder Morgan, Inc.

    1,917,768  

 

 

   
    1,917,768    
 

 

 

   

 

9


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Common Stock — (Continued)

   
       

Insurance — 0.0%

               
  19,896    

WMI Holdings Corporation, 144A****

  $ 24,870 *†   

 

 

   
    24,870    
   

 

 

   
 

Total Common Stock
(Cost $3,041,295)

    2,104,995    
   

 

 

   
 

Money Market Fund — 0.3%

 
  762,236    

BlackRock Liquidity Funds:
T-Fund, Institutional Class

    762,236    

 

 

   
 

Total Money Market Fund
(Cost $762,236)

    762,236    
   

 

 

   

Total Investments (Cost $219,587,244***)

     99.0%       236,162,602  

Other Assets And Liabilities (Net)

     1.0%       2,376,471  
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡    $ 238,539,073  
  

 

 

   

 

 

 

Loan Principal Balance

 

    (77,400,000
    

 

 

 

Total Net Assets Available To Common Stock

 

  $ 161,139,073  
    

 

 

 

 

10


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

 

* Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At August 31, 2017, these securities amounted to $62,157,669 or 26.1% of total managed assets.
(1) 

All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $145,059,355 at August 31, 2017.

(2) 

Foreign Issuer.

(3) 

Level 3, illiquid security (designation is unaudited; see Note 2: Significant Accounting Policies).

(4) 

Valued at fair value as determined in good faith by or under the direction of the Board of Directors as of August 31, 2017.

(5) 

Represents the rate in effect as of the reporting date.

Non-income producing.
†† The issuer has filed for bankruptcy protection. As a result, the Fund may not be able to recover the principal invested and also does not expect to receive income on this security going forward.
The percentage shown for each investment category is the total value of that category as a percentage of total managed assets.

 

    ABBREVIATIONS:

3ML

    3-Month ICE LIBOR USD A/360

ISDA5

    5-year USD ICE Swap Semiannual 30/360

SW5

    5-year USD Swap Semiannual 30/360

SW10

    10-year USD Swap Semiannual 30/360

T10Y

    Federal Reserve H.15 10-Yr Constant Maturity Treasury Semiannual yield

 

11


 

Flaherty & Crumrine Preferred Income Fund Incorporated

STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)

For the period from December 1, 2016 through August 31, 2017 (Unaudited)

 

 

     Value  

OPERATIONS:

  

Net investment income

   $ 7,763,090  

Net realized gain/(loss) on investments sold during the period

     1,104,572  

Change in net unrealized appreciation/(depreciation) of investments

     13,876,806  
  

 

 

 

Net increase in net assets resulting from operations

     22,744,468  

DISTRIBUTIONS:

  

Dividends paid from net investment income to Common Stock Shareholders(2)

     (8,754,598
  

 

 

 

Total Distributions to Common Stock Shareholders

     (8,754,598

FUND SHARE TRANSACTIONS:

  

Increase from shares issued under the Dividend Reinvestment and
Cash Purchase Plan

     669,013  
  

 

 

 

Net increase in net assets available to Common Stock resulting from
Fund share transactions

     669,013  

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  
  

 

 

 

FOR THE PERIOD

   $ 14,658,883  
  

 

 

 
       

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 146,480,190  

Net increase in net assets during the period

     14,658,883  
  

 

 

 

End of period

   $ 161,139,073  
  

 

 

 

 

(1) 

These tables summarize the nine months ended August 31, 2017 and should be read in conjunction with the Fund’s audited financial statements, including notes to the financial statements, in its Annual Report dated November 30, 2016.

(2) 

May include income earned, but not paid out, in prior fiscal year.

 

12


 

Flaherty & Crumrine Preferred Income Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2016 through August 31, 2017 (Unaudited)

For a Common Stock share outstanding throughout the period

 

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 13.18  
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.70  

Net realized and unrealized gain/(loss) on investments

     1.35  
  

 

 

 

Total from investment operations

     2.05  
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.79
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.79
  

 

 

 

Net asset value, end of period

   $ 14.44  
  

 

 

 

Market value, end of period

   $ 15.15  
  

 

 

 

Common Stock shares outstanding, end of period

     11,158,855  
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

 

Net investment income†

     6.65 %* 

Operating expenses including interest expense

     2.30 %* 

        Operating expenses excluding interest expense

     1.30 %* 

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     13 %** 

Total managed assets, end of period (in 000’s)

   $ 238,539  

Ratio of operating expenses including interest expense to total managed assets

     1.54 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.87 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2017 and should be read in conjunction with the Fund’s audited financial statements, including notes to the financial statements, in its Annual Report dated November 30, 2016.

* Annualized.
** Not annualized.
The net investment income ratio reflects income net of operating expenses, including interest expense.
†† Information presented under heading Supplemental Data includes loan principal balance.

 

13


 

Flaherty & Crumrine Preferred Income Fund Incorporated

FINANCIAL HIGHLIGHTS (Continued)

Per Share of Common Stock (Unaudited)

 

 

     Total
Dividends
Paid
     Net Asset
Value
     NYSE
Closing Price
     Dividend
Reinvestment
Price(1)
 

December 30, 2016

   $ 0.0880      $ 13.26      $ 14.49      $ 13.77  

January 31, 2017

     0.0880        13.58        14.31        13.59  

February 28, 2017

     0.0880        13.83        14.51        13.83  

March 31, 2017

     0.0880        13.82        15.09        14.34  

April 30, 2017

     0.0880        14.09        15.03        14.28  

May 31, 2017

     0.0880        14.25        15.25        14.49  

June 30, 2017

     0.0880        14.45        15.74        14.95  

July 31, 2017

     0.0880        14.54        14.62        14.54  

August 31, 2017

     0.0820        14.44        15.15        14.44  

 

(1)

Whenever the net asset value per share of the Fund’s Common Stock is less than or equal to the market price per share on the reinvestment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of Common Stock will be purchased in the open market.

 

14


 

Flaherty & Crumrine Preferred Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2017, the aggregate cost of securities for federal income tax purposes was $229,429,993, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $23,555,624 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $16,823,015.

 

2. Additional Accounting Standards

Fair Value Measurements: The Fund has analyzed all existing investments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:

 

•       Level 1 –

  quoted prices in active markets for identical securities

•       Level 2 –

  other significant observable inputs (including quoted prices for similar securities, 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. Transfers in and out of levels are recognized at market value at the end of the period.

 

15


 

Flaherty & Crumrine Preferred Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

A summary of the inputs used to value the Fund’s investments as of August 31, 2017 is as follows:

 

     Total
Value at
August 31, 2017
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 120,118,031      $ 104,144,013      $ 15,966,203      $ 7,815  

Financial Services

     499,100               499,100         

Insurance

     50,213,582        28,014,327        22,199,255         

Utilities

     26,670,487        14,721,336        11,949,151         

Energy

     12,286,103        4,984,103        7,302,000         

Real Estate Investment Trust (REIT)

     1,493,209        1,493,209                

Miscellaneous Industries

     9,142,798        1,345,898        7,796,900         

Corporate Debt Securities

           

Banking

     6,227,999        3,299,401        2,928,598         

Insurance

     2,866,118               2,866,118         

Energy

     2,214,034               2,214,034         

Communication

     1,293,485        1,293,485                

Miscellaneous Industries

     270,425        270,425                

Common Stock

           

Banking

     162,357        162,357                

Energy

     1,917,768        1,917,768                

Insurance

     24,870        24,870                

Money Market Fund

     762,236        762,236                
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 236,162,602      $ 162,433,428      $ 73,721,359      $ 7,815  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the reporting period, securities with an aggregate market value of $1,853,682 were transferred into Level 1 from Level 2. The securities were transferred due to an increase in the quantity and quality of information related to trading activity or broker quotes for these securities. During the period, there were no transfers into Level 2 from Level 1. During the reporting period, there were no transfers into or out of Level 3.

The fair values of the Fund’s investments are generally based on market information and quotes received from brokers or independent pricing services that are approved by the Board of Directors and are unaffiliated with the Adviser. To assess the continuing appropriateness of security valuations, management, in consultation with the Adviser, regularly compares current prices to prior prices, prices across comparable securities, actual sale prices for securities in the Fund’s portfolio, and market information obtained by the Adviser as a function of being an active market participant.

Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades—or the same information for securities that are similar in many respects to those being valued—are classified as

 

16


 

Flaherty & Crumrine Preferred Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.

The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:

 

           

Preferred Securities

 
      Total Investments      Banking  

Balance as of 11/30/16

   $ 7,815      $ 7,815  

Accrued discounts/premiums

             

Realized gain/(loss)

             

Change in unrealized appreciation/(depreciation)

             

Purchases

             

Sales

             

Transfer in

             

Transfer out

             

Balance as of 08/31/17

   $ 7,815      $ 7,815  

For the nine months ended August 31, 2017, total change in unrealized gain/(loss) on Level 3 securities still held at period-end and included in the change in net assets was $0.

The following table summarizes the valuation techniques used and unobservable inputs developed to determine the fair value of Level 3 investments:

 

Category  

Fair Value

at 08/31/17

     Valuation Technique     Unobservable Input     Input Range (Wgt Avg)  

Preferred Securities

        

(Banking)

  $ 7,815        Bankruptcy recovery      
Credit/Structure-specific
recovery
 
 
    0.00% - 0.50% (0.15%)  

The significant unobservable inputs used in the fair value measurement technique for bankruptcy recovery are based on recovery analysis that is specific to the security being valued, including the level of subordination and structural features of the security, and the current status of any bankruptcy or liquidation proceedings. Observable market trades in bankruptcy claims are utilized by management, when available, to assess the appropriateness of valuations, although the frequency of trading depends on the specific credit and seniority of the claim. Expected recoveries in bankruptcy by security type and industry do not tend to deviate much from historical recovery rates, which are very low (sometimes zero) for preferred securities and more moderate for senior debt. Significant changes in these inputs would result in a significantly higher or lower fair value measurement.

 

 

17


 

Flaherty & Crumrine Preferred Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

3. Subsequent Event

Management has evaluated the impact of all subsequent events in the Fund through the date this quarterly report was issued, and has determined that there was the following subsequent event:

The Fund recently amended its committed financing agreement with BNP Paribas Prime Brokerage International, Ltd. (“Financing Agreement”). Effective September 1, 2017, the lender charges an annualized rate of one-month LIBOR (reset monthly) plus 0.80% on the drawn (borrowed) balance. Prior to that date, the lender charged an annualized rate of three-month LIBOR (reset quarterly) plus 0.90% on the drawn balance. The lender’s charges on the undrawn (committed) balance remain unchanged at an annualized rate of 0.65%. As of September 1, 2017, the committed amount and amount borrowed was $77,400,000. The Financing Agreement may be amended from time to time to allow for changes in the committed amount.

 

18


 

Directors

R. Eric Chadwick, CFA

Chairman of the Board

Morgan Gust

David Gale

Karen H. Hogan

Officers

R. Eric Chadwick, CFA

Chief Executive Officer and

President

Chad C. Conwell

Chief Compliance Officer,

Vice President and Secretary

Bradford S. Stone

Chief Financial Officer,

Vice President and Treasurer

Roger W. Ko

Assistant Treasurer

Laurie C. Lodolo

Assistant Compliance Officer,

Assistant Treasurer and

Assistant Secretary

Linda M. Puchalski

Assistant Treasurer

Investment Adviser

Flaherty & Crumrine Incorporated

e-mail: flaherty@pfdincome.com

Questions concerning your shares of Flaherty & Crumrine Preferred Income Fund?

   

If your shares are held in a Brokerage Account, contact your Broker.

   

If you have physical possession of your shares in certificate form, contact the Fund’s Transfer Agent & Shareholder Servicing Agent —

BNY Mellon c/o Computershare

P.O. Box 30170

College Station, TX 77842-3170

1-866-351-7446

This report is sent to shareholders of Flaherty & Crumrine Preferred Income Fund Incorporated for their information. It is not a Prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report.

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Quarterly

Report

August 31, 2017

www.preferredincome.com