FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of Flaherty & Crumrine Preferred Income Fund:
The Fund delivered a second consecutive quarter of double-digit returns as
financial markets continued to recover from lows hit earlier this year. During
the three-month period ended August 31st, total return on net asset value was
+24.4%, and total return on market value of Fund shares was +18.4%.
As the worst of the financial crisis appears to be behind us, prices on
most securities in the Fund's portfolio rose during the quarter. Although the
credit outlook for some issuers remains speculative and the prices of their
securities remain depressed, many securities that suffered the biggest declines
earlier in the year staged the most dramatic recoveries. That being said, while
prices in general are much higher than just three months ago, they remain well
below the highs reached in recent years. There should be further recovery if the
markets continue to normalize as we expect.
The strong performance over the past two quarters occurred despite the
negative impact of our investments in a few troubled companies. During the past
quarter, Colonial Bank was shut down by regulators. At this point, we are
assuming there will be no additional income earned and minimal principal
recovery on our investment in its parent, Colonial BancGroup, Inc. Two
additional credits, FBOP Bancorp and CIT Group, suspended distributions on the
securities owned by the Fund. Both companies are currently exploring strategies
to improve their financial condition.
One year ago, the world's financial system was on the brink of collapse. In
the blink of an eye, we went from a world in which anyone with a pulse could get
a loan to a virtual shutdown of the capital markets. Investors, large and small,
appeared ready to stuff money in a mattress rather than hand it over to a bank
or money market fund. Access to short-term liquidity, the life blood of
business, largely disappeared, and long-term financing was virtually
unobtainable. Banks simply stopped lending (not only to long-time customers, but
even more troublesome, to other banks), and capital market investors were in no
mood to provide new financing.
When compared to broader credit markets, the preferred market has a much
greater concentration in financial companies. In addition, the majority of
preferred issues are long-term and consequently tend to have more volatile
prices than other fixed-income instruments. As a result, the performance of the
preferred market (and the Fund) was dismal throughout the early part of the
financial crisis.
After one year, and massive amounts of government intervention, we see
signs of recovery and perhaps a greater sense of rationality in the markets. On
more than one occasion we've expressed our opinion that market volatility was
exacerbated by excessive amounts of leverage. We underestimated the extent to
which price declines could trigger selling by over-leveraged investors,
producing an accelerating downward price spiral. We learned some valuable
lessons during this financial chaos. We improved our analytic tools (and
hopefully developed a more refined sense of smell) to help us discern changes in
fundamental value from a leverage-fed frenzy. We further refined our credit
criteria to help us identify riskier issuers earlier in the credit cycle. And,
as leveraged investors ourselves, we have a keener appreciation for liquidity in
the Fund's portfolio.
We believe these lessons will improve ongoing management of the Fund. Don't
expect wholesale changes, but we would not be doing our job if we did not adapt
to this new, more turbulent environment. For instance, the Fund suspended its
hedging strategy last year, not because we no longer believe in hedging but
because we did not think it would work in a crisis environment. At some point in
the future, we anticipate reinstating the Fund's hedging strategy. Similarly, we
have increased the portfolio's emphasis on liquid issues and issuers. By doing
so, the Fund may give up some current income, but we believe this provides
greater flexibility in managing the portfolio and its leverage for the benefit
of shareholders.
In our last letter we indicated that the Fund was in the process of
replacing all remaining shares of Auction Preferred Stock with bank debt. The
switch is complete and the Fund's leverage is now comprised entirely of debt.
While the breakdown in the auction preferred stock market made the change
necessary, the Fund already is realizing some benefits from the new leverage.
Foremost among these benefits are lower borrowing expense and greater
flexibility in managing the portfolio.
All markets have endured tremendous upheaval over the past year. More
change is on the horizon, as the financial system moves from crisis to recovery.
The Fund will continue to assess and adapt to this new market environment. We
take that responsibility seriously, and we appreciate the support that
shareholders have given us.
More information is always available on the Fund's website, including
discussion of many of the topics in this letter. In addition, our thoughts on
the economic outlook are published quarterly and posted to the site. We
encourage you to visit the website at www.preferredincome.com.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
October 15, 2009
2
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2009 (UNAUDITED)
FUND STATISTICS ON 8/31/09
Net Asset Value $ 8.73
Market Price $ 8.50
Discount 2.63%
Yield on Market Price 8.89%
Common Stock Shares
Outstanding 10,664,392
MOODY'S RATINGS % OF NET ASSETS+
--------------- ----------------
AA 0.3%
A 19.4%
BBB 55.9%
BB 18.9%
Below "BB" 1.6%
Not Rated 3.1%
-----
Below Investment Grade* 17.3%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
(PIE CHART)
INDUSTRY CATEGORIES % OF NET ASSETS+
------------------- ----------------
Financial Services 1%
Other 2%
Banking 43%
Utilities 26%
Insurance 21%
Energy 7%
TOP 10 HOLDINGS BY ISSUER % OF NET ASSETS+
------------------------- ----------------
PNC Financial Services 6.9%
Banco Santander 6.5%
Sovereign Bancorp 4.5%
Metlife 4.3%
Liberty Mutual Group 4.1%
Comerica 3.6%
Dominion Resources 3.5%
Interstate Power & Light 3.5%
Goldman Sachs 3.2%
Capital One Financial 3.2%
% OF NET ASSETS**+
------------------
Holdings Generating Qualified Dividend
Income (QDI) for Individuals 49%
Holdings Generating Income Eligible
for the Corporate Dividends
Received Deduction (DRD) 36%
** 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, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 97.2%
BANKING -- 42.7%
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .......................................... $ 3,012,129(1)
Banco Santander:
47,248 Adj. Rate Pfd ........................................................................... 745,692**(1)(2)
273,950 6.50% Pfd ............................................................................... 6,342,627**(1)(2)
79,400 6.80% Pfd ............................................................................... 1,913,739**(1)(2)
48,700 Bank of America Corporation, 6.70% Pfd. .................................................... 971,565*(1)
$ 2,400,000 Barclays Bank PLC, 6.278% .................................................................. 1,707,000**(1)(2)
45,000 BB&T Capital Trust VI, 9.60% Pfd. .......................................................... 1,178,100(1)
$ 5,500,000 Capital One Capital III, 7.686% 08/15/36 ................................................... 4,345,000(1)
CIT Group, Inc.:
32,500 5.189% Pfd., Series B ................................................................... 141,173*+
$ 905,000 6.10% 03/15/67 .......................................................................... 99,550+
154,500 6.35% Pfd., Series A .................................................................... 426,806*+
50,000 Cobank, ACB, 7.00% Pfd., 144A**** .......................................................... 1,745,315*(1)
$ 5,210,000 Colonial BancGroup, 7.114%, 144A**** ....................................................... 91,175+
$ 7,100,000 Comerica Capital Trust II, 6.576% 02/20/37 ................................................. 4,899,000(1)
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ................................................. 385,313*+
1,250 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ........................ 1,131,250(1)
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** ............ 492,892(1)
2,500 First Tennessee Bank, Adj. Rate Pfd., 144A**** ............................................. 1,013,281*(1)
$ 500,000 First Tennessee Capital II, 6.30% 04/15/34, Series B ....................................... 282,724
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 ..................................................... 1,346,721(1)
Goldman Sachs:
$ 5,001,000 Capital II, 5.793% ...................................................................... 3,675,735(1)
11 Pass-Through Certificates, Class B, 144A**** ............................................ 182,600*+
2,500 STRIPES Custodial Receipts, Pvt. ........................................................ 515,000*
HSBC USA, Inc.:
43,900 Adj. Rate Pfd., Series D ................................................................ 914,108*(1)
176,000 Adj. Rate Pfd., Series G ................................................................ 3,284,600*(1)
2,500 $2.8575 Pfd. ............................................................................ 96,750*(1)
11,300 Keycorp Capital VIII, 7.00% Pfd. 06/15/66 .................................................. 217,101
10,000 Keycorp Capital X, 8.00% Pfd. .............................................................. 213,650
$ 550,000 Lloyds Banking Group PLC, 6.657%, 144A**** ................................................. 236,893**(2)
31,500 PFGI Capital Corporation, 7.75% Pfd. ....................................................... 738,281(1)
274,200 PNC Financial Services, 9.875% Pfd., Series F .............................................. 7,299,890*(1)
$ 1,600,000 PNC Preferred Funding Trust III, 8.70%, 144A**** ........................................... 1,411,699(1)
171,480 Sovereign Bancorp, 7.30% Pfd., Series C .................................................... 4,100,516*(1)
4
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
20,100 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ............................................. $ 460,943(1)
1,750 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ............................................ 1,579,375
U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
11 Series 2006-5, Variable Rate Pfd., 144A**** ............................................. 275*+
11 Series 2006-6, Variable Rate Pfd., 144A**** ............................................. 275*+
$ 1,000,000 Washington Mutual, 9.75%, 144A**** ......................................................... 15,000++
$ 1,600,000 Webster Capital Trust IV, 7.65% 06/15/37 ................................................... 944,000(1)
27,500 Wells Fargo & Company, 8.00% Pfd., Series J ................................................ 675,125*(1)
------------
58,832,868
------------
FINANCIAL SERVICES -- 0.3%
$ 500,000 General Electric Capital Corporation, 6.375% 11/15/67 ...................................... 404,356
Lehman Brothers Holdings, Inc.:
15,000 5.67% Pfd., Series D .................................................................... 5,550*++
19,500 5.94% Pfd., Series C .................................................................... 6,435*++
25,000 6.50% Pfd., Series F .................................................................... 2,813*++
27,500 7.95% Pfd. .............................................................................. 2,613*++
------------
421,767
------------
INSURANCE -- 19.7%
$ 1,000,000 Ace Capital Trust II, 9.70% 04/01/30 ....................................................... 1,003,484(1)(2)
Arch Capital Group Ltd.:
2,600 7.875% Pfd., Series B ................................................................... 59,598**(2)
24,900 8.00% Pfd., Series A .................................................................... 605,879**(1)(2)
AXA SA:
$ 1,500,000 6.379%, 144A**** ........................................................................ 1,117,500**(1)(2)
$ 4,000,000 6.463%, 144A**** ........................................................................ 2,980,000**(1)(2)
35,900 Axis Capital Holdings, 7.50% Pfd., Series B ................................................ 2,340,231(1)(2)
90,600 Delphi Financial Group, 7.376% Pfd. 05/15/37 ............................................... 1,562,850(1)
$ 3,000,000 Everest Re Holdings, 6.60% 05/15/37 ........................................................ 2,115,000(1)
Liberty Mutual Group:
$ 2,000,000 7.80% 03/15/37, 144A**** ................................................................ 1,430,000(1)
$ 3,900,000 10.75% 06/15/58, 144A**** ............................................................... 3,490,500(1)
$ 500,000 MetLife Capital Trust IV, 7.875% 12/15/37, 144A**** ........................................ 447,500(1)
$ 4,200,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** 4,094,530(1)
$ 1,250,000 MetLife, Inc., 10.75% 08/01/39 ............................................................. 1,409,896(1)
5
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
Principal Financial Group:
5,000 5.563% Pfd., Series A ................................................................... $ 317,500*
80,000 6.518% Pfd., Series B ................................................................... 1,452,200*(1)
Renaissancere Holdings Ltd.:
82,050 6.08% Pfd., Series C .................................................................... 1,524,489**(1)(2)
10,700 7.30% Pfd., Series B .................................................................... 234,785**(2)
119,500 Scottish Re Group Ltd., 7.25% Pfd. ......................................................... 294,269**(2)+
$750,000 USF&G Capital, 8.312% 07/01/46, 144A**** ................................................... 721,121(1)
------------
27,201,332
------------
UTILITIES -- 25.7%
300 Alabama Power Company, 4.52% Pfd. .......................................................... 22,209*(1)
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 .................................. 890,000*(1)
2,780 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. .................. 281,141*
$ 2,491,000 COMED Financing III, 6.35% 03/15/33 ........................................................ 1,937,442(1)
Dominion Resources, Inc.:
$ 3,500,000 7.50% ................................................................................... 2,873,605(1)
76,000 8.375% Pfd., Series A ................................................................... 2,014,000(1)
Duquesne Light Company:
9,190 4.15% Pfd. .............................................................................. 264,212*(1)
910 4.20% Pfd. .............................................................................. 28,551*(1)
25,000 Entergy Arkansas, Inc., 6.45% Pfd. ......................................................... 518,750*(1)
Georgia Power Company:
12,600 6.125% Pfd. ............................................................................. 305,708*(1)
12,500 6.50% Pfd., Series 2007A ................................................................ 1,201,173*(1)
3,000 Gulf Power Company, 6.45% Pfd., Series 2007A ............................................... 281,336*(1)
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ............................................. 2,619,144*
170,900 Interstate Power & Light Company, 8.375% Pfd., Series B .................................... 4,795,881*(1)
Pacific Enterprises:
22,430 $4.50 Pfd. .............................................................................. 1,717,297*(1)
10,000 $4.75 Pfd., Series 53 ................................................................... 794,688*(1)
$ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D .................................... 425,115(1)
$ 3,475,000 Puget Sound Energy, Inc., 6.974% 06/01/67 .................................................. 2,790,057(1)
Southern California Edison:
35,000 6.00% Pfd., Series C .................................................................... 2,757,346*(1)
11,500 6.125% Pfd. ............................................................................. 928,985*(1)
$ 2,350,000 Southern Union Company, 7.20% 11/01/66 ..................................................... 1,768,375(1)
6
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2009 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 .................................................... $ 341,250
Union Electric Company:
14,150 4.56% Pfd. .............................................................................. 944,513*(1)
18,800 $7.64 Pfd. .............................................................................. 1,828,888*(1)
$ 3,900,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ............................................... 3,085,411(1)
------------
35,415,077
------------
ENERGY -- 6.9%
$ 4,500,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ................................................ 3,802,405(1)
Enterprise Products Partners:
$ 1,000,000 7.034% 01/15/68 ......................................................................... 821,217(1)
$ 1,500,000 8.375% 08/01/66, Series A ............................................................... 1,302,871(1)
3,500 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** ............................................... 3,195,063*
$ 500,000 Teppco Partners LP, 7.00% 06/01/67 ......................................................... 397,212
------------
9,518,768
------------
MISCELLANEOUS INDUSTRIES -- 1.9%
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................................ 2,672,500*(1)
------------
2,672,500
------------
TOTAL PREFERRED SECURITIES
(Cost $156,297,857) ..................................................................... 134,062,312
------------
CORPORATE DEBT SECURITIES -- 1.8%
FINANCIAL SERVICES -- 0.2%
10,000 Ameriprise Financial, Inc., 7.75% 06/15/39 ................................................. 240,025(1)
------------
240,025
------------
INSURANCE -- 1.6%
$ 1,200,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........................................ 799,129(1)
$ 2,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes .................................... 1,485,472(1)
------------
2,284,601
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $2,610,616) ....................................................................... 2,524,626
------------
7
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2009 (UNAUDITED)
VALUE
------------
MONEY MARKET FUND -- 0.1%
89,679 BlackRock Provident Institutional, T-Fund .................................................. $ 89,679
------------
TOTAL MONEY MARKET FUND
(Cost $89,679) .......................................................................... 89,679
------------
TOTAL INVESTMENTS (Cost $158,998,152***) ....................................................... 99.1% 136,676,617
OTHER ASSETS AND LIABILITIES (Net) ............................................................. 0.9% 1,175,261
----- ------------
NET ASSETS BEFORE LOAN ......................................................................... 100.0%+++ $137,851,878
----- ------------
LOAN PRINCIPAL BALANCE .................................................................................... (44,800,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................................................ $ 93,051,878
============
----------
* 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, 2009, these
securities amounted to $29,233,186 or 21.2% of net assets. These securities
have been determined to be liquid under the guidelines established by the
Board of Directors.
(1) All or a portion of this security has been pledged as collateral for the
Fund's loan. The total value of such securities was $118,303,745 at August
31, 2009.
(2) Foreign Issuer.
+ 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 net assets before the loan.
ABBREVIATIONS:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
REIT -- Real Estate Investment Trust
STRIPES -- Structured Residual Interest Preferred Enhanced Securities
8
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2008 THROUGH AUGUST 31, 2009 (UNAUDITED)
VALUE
------------
OPERATIONS:
Net investment income .................................................................................. $ 7,258,434
Net realized gain/(loss) on investments sold during the period ......................................... (14,684,815)
Change in net unrealized appreciation/depreciation of investments ...................................... 43,764,833
Distributions to APS* Shareholders from net investment income, including changes in accumulated
undeclared distributions ............................................................................ (1,041,660)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................................... 35,296,792
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) .............................. (6,024,386)
------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ....................................................... (6,024,386)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan ..................... 502,097
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE TRANSACTIONS ............ 502,097
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ....................................... $ 29,774,503
============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period .................................................................................... $ 63,277,375
Net increase in net assets during the period ........................................................... 29,774,503
------------
End of period $ 93,051,878
============
----------
* Auction Preferred Stock.
(1) These tables summarize the nine months ended August 31, 2009 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2008.
(2) May include income earned, but not paid out, in prior fiscal year.
9
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2008 THROUGH AUGUST 31, 2009 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................................... $ 5.98
-----------
INVESTMENT OPERATIONS:
Net investment income .................................................................................. 0.69
Net realized and unrealized gain/(loss) on investments ................................................. 2.73
DISTRIBUTIONS TO APS* SHAREHOLDERS:
From net investment income ............................................................................. (0.10)
-----------
Total from investment operations ....................................................................... 3.32
-----------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ............................................................................. (0.57)
-----------
Total distributions to Common Stock Shareholders ....................................................... (0.57)
-----------
Net asset value, end of period ......................................................................... $ 8.73
===========
Market value, end of period ............................................................................ $ 8.50
===========
Common Stock shares outstanding, end of period ......................................................... 10,664,392
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ ................................................................................. 13.86%**
Net investment income, including payments to APS Shareholders+ ......................................... 11.87%**
Operating expenses including interest expense. ......................................................... 2.54%**
Operating expenses excluding interest expense .......................................................... 2.31%**
SUPPLEMENTAL DATA:++
Portfolio turnover rate ................................................................................ 42%***
Net assets before loan, end of period (in 000's) ....................................................... $ 137,852
Ratio of operating expenses including interest expense(2) to net assets before loan and APS ............ 1.51%**
Ratio of operating expenses excluding interest expense(2) to net assets before loan and APS ............ 1.37%**
----------
(1) These tables summarize the nine months ended August 31, 2009 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2008.
(2) Does not include distributions to APS Shareholders.
* Auction Preferred Stock.
** Annualized.
*** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses,
including interest expense.
++ Information presented under heading Supplemental Data includes APS and loan
principal balance.
10
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2009 (UNAUDITED)
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
--------- --------- ------------- ------------
December 31, 2008 ................ $0.0630 $6.50 $5.90 $6.56
January 30, 2009 ................. 0.0630 6.08 7.05 6.70
February 27, 2009 ................ 0.0630 5.11 5.43 5.16
March 31, 2009 ................... 0.0630 5.30 5.50 5.30
April 30, 2009 ................... 0.0630 5.81 6.02 5.81
May 29, 2009 ..................... 0.0630 7.18 7.35 7.18
June 30, 2009 .................... 0.0630 7.64 8.00 7.64
July 31, 2009 .................... 0.0630 8.18 8.11 8.20
August 31, 2009 .................. 0.0630 8.73 8.50 8.60
----------
(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.
11
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At August 31, 2009 the aggregate cost of securities for federal income tax
purposes was $159,206,570, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $12,741,106
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $35,271,059.
2. ADDITIONAL ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 157 "FAIR VALUE
MEASUREMENTS" ("SFAS 157")
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("SFAS 157") effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. The Fund has adopted SFAS
157 as of December 1, 2007. The three levels of the fair value hierarchy under
SFAS 157 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)
In April 2009, FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly",
("FSP 157-4"). FSP 157-4 is effective for fiscal years and interim periods
ending after June 15, 2009. FSP 157-4 provides additional guidance for
estimating fair value in accordance with SFAS 157, when the volume and level of
activity for the asset or liability have significantly decreased. FSP 157-4 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. FSP 157-4 requires entities to describe the inputs and valuation
techniques used to measure fair value and changes in those techniques and
related inputs during the period. FSP 157-4 expands the three-level hierarchy
disclosure and the level three-roll forward disclosure for each major security
type as described in paragraph 19 of SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities."
12
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The inputs or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those securities. A
summary of the inputs used to value the Fund's net assets as of August 31, 2009
is as follows:
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
AUGUST 31, 2009 PRICE INPUTS INPUTS
--------------- ----------- ----------- ------------
Preferred Securities
Banking $ 58,832,868 $29,539,362 $28,908,193 $385,313
Financial Services 421,767 17,411 404,356 --
Insurance 27,201,332 5,734,070 21,467,262 --
Utilities 35,415,077 7,115,589 28,299,488 --
Energy 9,518,768 -- 9,518,768 --
Miscellaneous Industries 2,672,500 -- 2,672,500 --
Corporate Debt Securities 2,524,626 240,025 2,284,601 --
Money Market Fund 89,679 89,679 -- --
------------ ----------- ----------- --------
Total Investments $136,676,617 $42,736,136 $93,555,168 $385,313
============ =========== =========== ========
Following is a reconciliation of Level 3 investments for which significant
unobservable inputs were used to determine fair value:
PREFERRED
TOTAL SECURITIES
INVESTMENTS BANKING
----------- -----------
BALANCE AS OF 11/30/08 ........... $ -- $ --
Accrued discounts/premiums. ...... -- --
Realized gain/(loss) ............. -- --
Change in unrealized
appreciation/(depreciation) ... (4,339,687) (4,339,687)
Net purchases/(sales) ............ -- --
Transfers in and/or out of
Level 3 ....................... 4,725,000 4,725,000
----------- -----------
BALANCE AS OF 8/31/09 ............ $ 385,313 $ 385,313
13
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. SECTION 19 NOTICES
Section 19 of the Investment Company Act of 1940 requires registered
investment companies to include a notice with the payment of a dividend if a
portion of that dividend may come from sources other than undistributed net
income (other sources could include realized gains from the sale of securities
and non-taxable return of capital). Copies of the Section 19 notices for the
Fund are available on the website at www.preferredincome.com.
The amounts and sources of distributions reported below are only estimates
and are not being provided for tax reporting purposes. Form 1099-DIV will be
sent to shareholders in January 2010 reporting the amount and tax
characterization of distributions for the 2009 calendar year.
SOURCE OF DISTRIBUTIONS
AS OF 8/31/09
------------------------------------
NET NET RETURN
INVESTMENT REALIZED OF
INCOME CAPITAL GAINS CAPITAL
---------- ------------- -------
Calendar 2009 Percentage of Total
Distributions ................. 95.0% 0.0% 5.0%
14
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(FLAHERTY & CRUMRINE LOGO)
PREFERRED INCOME FUND
Quarterly
Report
August 31, 2009
www.preferredincome.com
DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
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 --
PNC Global Investment Servicing (U.S.) Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
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.