FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of Flaherty & Crumrine Preferred Income Fund:
The new fiscal year began much like the previous year ended. For the three
month period ended February 28, 2010, total return (principal change and income)
on net asset value of the Fund was +10.9%. Over the same period, total return on
market price of Fund shares was +27.2%.
The strong performance came as credit markets continued to recover from the
depths of the financial crisis last year. Economists and investors have
expressed confidence that our financial system is back on track, and, although
problems persist, seeds of recovery are in place. We share this view and
encourage you to visit www.preferredincome.com to read our Quarterly Economic
Update.
Over the past several quarters, the focus of these letters has been the
financial crisis and its impact on the Fund's investment portfolio. We
experienced gut-wrenching market weakness starting in the second half of 2008
and continuing into early 2009, only to watch prices rebound dramatically in the
months since. Never before have we seen such extreme volatility over a
relatively short time frame. We expect smoother waters ahead, but, as always,
the future will be filled with challenges and opportunities.
We will take advantage of this relative calm to review the market for
preferred securities a bit more broadly than our typical quarterly letter. After
turbulence, the time seems right to take a step back and regain some perspective
on the market. Readers can compare these broad market comments to the Fund's
investments summarized on the following pages.
As of February 28, 2010, the market for preferred securities has grown to
$378 billion(1) from $231 billion in 2005. The issues that comprise the market
are far from homogeneous. An issuer is now able to tailor a preferred security
to its specific financing needs by choosing from a wide range of features.
Because of the variety of terms preferreds have, it has become easier to define
a preferred by what it is not--a preferred security is not senior debt and it is
not common stock.
Fifteen percent of the market is "traditional" preferred, i.e. the
distributions to investors are DIVIDENDS, and paid from after-tax income of the
issuer. These distributions may have after-tax benefits to investors. 85% is
"taxable" preferred that pay INTEREST(2); these payments are treated as interest
expense for issuers and ordinary income for investors.
Many features of preferred securities are especially beneficial to
companies in highly-regulated industries. Preferred issues from utilities, banks
and insurance companies comprise over 80% of the preferred market. Of course, as
the experience of the past couple of years serves to remind us, regulators can
contribute to problems at the companies they regulate. Nonetheless, regulators
recognize the critical role of the preferred market, and have helped facilitate
growth in the asset class.
Despite a rash of downgrades during the financial crisis, the market is
still comprised of mostly investment-grade issues. 64% of preferred issues are
rated Baa or higher. A substantially larger portion of the preferred universe is
comprised of issuers with SENIOR DEBT rated investment grade. For this reason,
preferred securities are widely considered to be the highest yielding asset
class of investment grade companies.
----------
(1) Market statistics used in this report, along with a wide range of
additional information can be viewed by visiting the Flaherty & Crumrine
website, www.preferredstockguide.com.
(2) We include preferred securities issued in the United States by foreign
domiciled entities in the "taxable" category; many of these issues make
distributions considered to be dividends for some types of investors
A word about credit analysis is in order. We have always based investment
decisions on our internal credit research, and try to own credits that we
believe are investment grade quality. Of course, credit analysis is more art
than science, and no one does it perfectly, but we think our team does an
outstanding job.
Our focus is first and foremost on preferred securities. The objective of
our credit analysis is to develop an in-depth opinion about the quality of each
security in the Fund. This approach differs from the rating agencies, where the
focus is primarily on the quality of an issuer's most senior debt. Once the
senior debt rating is determined, a mechanical "notching" methodology is applied
to rate subordinated classes of securities, such as the issuer's preferreds
(rating agency methodology brings to mind the Bismarck quote, "laws are like
sausages, it is better not to see them being made").
Much has been made recently about potential conflicts at the public rating
agencies. Whether the conflicts are real or perceived, the business model of the
agencies is likely to change. Regardless of how one views the public rating
agencies, we don't face those conflicts and care only about choosing the right
investments for the Fund. We pay close attention to the public ratings, but our
investment decisions are only made after we do our own homework.
One additional question that should be on the minds of shareholders: can
the Fund continue to produce double-digit quarterly returns? The answer
shouldn't be surprising--it's not likely. By a variety of measures, in our view,
the preferred market remains attractive relative to other asset classes. But the
disparity is not as glaring as it was last spring and, in fact, is now
approaching a range we consider normal.
Of course, preferred security prices never experienced anything like the
volatility they experienced during the recent financial crisis. Historically,
investors have (quite properly) owned these securities for the income they
produce; only recently have they attracted the attention of those more inclined
toward casinos. Now that the economy is beginning to stabilize, the wrath of
recent markets seems to have instilled a new sense of discipline and propriety
on companies that lost their way. Nonetheless, we will continue to keep a close
eye on how those companies adapt to this new environment.
More information is always available on the Fund's 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
April 21, 2010
2
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
FEBRUARY 28, 2010 (UNAUDITED)
FUND STATISTICS
Net Asset Value $ 10.67
Market Price $ 11.37
Premium 6.56%
Yield on Market Price 7.60%
Common Stock Shares
Outstanding 10,685,849
MOODY'S RATINGS % OF NET ASSETS+
----------------------- ----------------
AA 0.3%
A 8.6%
BBB 67.5%
BB 19.6%
Below "BB" 0.6%
Not Rated 1.2%
----
Below Investment Grade* 15.2%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
(PIE CHART)
INDUSTRY CATEGORIES % OF NET ASSETS+
------------------- ----------------
Other 4%
Banking 41%
Utilities 26%
Insurance 22%
Energy 6%
Financial Services 1%
TOP 10 HOLDINGS BY ISSUER % OF NET ASSETS+
------------------------- ----------------
Banco Santander 6.8%
PNC Financial Services 5.7%
Capital One Financial 4.4%
Liberty Mutual Group 4.1%
Metlife 3.8%
Dominion Resources 3.7%
Comerica 3.5%
Goldman Sachs 3.3%
Interstate Power & Light 2.9%
HSBC Plc 2.8%
% OF NET ASSETS**+
------------------
Holdings Generating Qualified Dividend
Income (QDI) for Individuals 43%
Holdings Generating Income Eligible for
the Corporate Dividends Received
Deduction (DRD) 29%
** 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
FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
-------------- ---------------
PREFERRED SECURITIES -- 95.0%
BANKING -- 41.3%
$ 2,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ............................. $ 2,861,625(1)
417,300 Banco Santander, 10.50% Pfd., Series 10 ....................................... 11,493,485**(1)(2)
48,700 Bank of America Corporation, 6.70% Pfd. ....................................... 1,079,192*(1)
Barclays Bank PLC:
$ 3,250,000 6.278% ..................................................................... 2,486,250(1)(2)
40,000 6.625% Pfd., Series 2 ...................................................... 863,600*(1)(2)
20,000 8.125% Pfd., Series 5 ...................................................... 502,000**(2)
87,500 BB&T Capital Trust VI, 9.60% Pfd. ............................................. 2,493,750(1)
$ 5,100,000 Capital One Capital III, 7.686% 08/15/36 ...................................... 4,799,100(1)
$ 2,500,000 Capital One Capital VI, 8.875% 05/15/40 ....................................... 2,671,040
$ 5,210,000 Colonial BancGroup, 7.114%, 144A**** .......................................... 15,630++
$ 7,100,000 Comerica Capital Trust II, 6.576% 02/20/37 .................................... 5,946,250(1)
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** .................................... 61,740*++
1,250 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ........... 1,162,500(1)
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd.,
Series B, 144A**** ......................................................... 561,094(1)
3,250 First Tennessee Bank, Adj. Rate Pfd., 144A**** ................................ 1,851,484*(1)
$ 600,000 First Tennessee Capital I, 8.07% 01/06/27, Series A ........................... 532,874
$ 500,000 First Tennessee Capital II, 6.30% 04/15/34, Series B .......................... 352,891
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 ........................................ 1,542,829(1)
Goldman Sachs:
$ 5,040,000 Capital II, 5.793% ......................................................... 4,044,600(1)
2,500 STRIPES Custodial Receipts, Pvt. ........................................... 1,525,000*
$ 500,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** ........................... 478,731
HSBC USA, Inc.:
46,200 Adj. Rate Pfd., Series D ................................................... 1,076,576*(1)
109,700 6.50% Pfd., Series H ....................................................... 2,667,081*(1)
4,400 $2.8575 Pfd. ............................................................... 194,260*(1)
$ 950,000 JPMorgan Chase Capital XXVII, 7.00% 11/01/39, Series AA ....................... 968,468
15,000 JPMorgan Chase Capital XXVIII, 7.20% Pfd. 12/22/39 ............................ 395,157
15,000 Keycorp Capital VIII, 7.00% Pfd. 06/15/66 ..................................... 334,688(1)
23,500 Keycorp Capital X, 8.00% Pfd. ................................................. 587,265(1)
$ 550,000 Lloyds Banking Group PLC, 6.657%, 144A**** .................................... 294,250**(2)+
25,000 Morgan Stanley Capital Trust VIII, 6.45% Pfd. 04/15/67 ........................ 546,750
31,500 PFGI Capital Corporation, 7.75% Pfd. .......................................... 720,563(1)
250,300 PNC Financial Services, 9.875% Pfd., Series F ................................. 7,336,919*(1)
$ 1,600,000 PNC Preferred Funding Trust III, 8.70%, 144A**** .............................. 1,677,274(1)
1,750 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ............................... 1,999,375
4
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
-------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
$ 2,400,000 Wachovia Capital Trust III, 5.80% ............................................. $ 1,956,000
$ 1,000,000 Washington Mutual, 9.75%, 144A**** ............................................ 32,500++
$ 1,600,000 Webster Capital Trust IV, 7.65% 06/15/37 ...................................... 1,040,000(1)
$ 1,000,000 Wells Fargo Capital XV, 9.75% ................................................. 1,090,700
---------------
70,243,491
---------------
FINANCIAL SERVICES -- 0.5%
$ 500,000 General Electric Capital Corporation, 6.375% 11/15/67 ......................... 448,125
15,300 HSBC Finance Corporation, 6.36% Pfd. .......................................... 354,769*
Lehman Brothers Holdings, Inc.:
15,000 5.67% Pfd., Series D ....................................................... 7,125*++
19,500 5.94% Pfd., Series C ....................................................... 8,775*++
25,000 6.50% Pfd., Series F ....................................................... 3,813*++
27,500 7.95% Pfd. ................................................................. 3,768*++
---------------
826,375
---------------
INSURANCE -- 19.5%
$ 1,000,000 Ace Capital Trust II, 9.70% 04/01/30 .......................................... 1,162,374(1)(2)
22,800 Arch Capital Group Ltd., 8.00% Pfd., Series A ................................. 577,125**(1)(2)
AXA SA:
$ 1,500,000 6.379%, 144A**** ........................................................... 1,211,250**(1)(2)
$ 3,000,000 6.463%, 144A**** ........................................................... 2,392,500**(1)(2)
35,900 Axis Capital Holdings, 7.50% Pfd., Series B ................................... 3,073,937(1)(2)
90,600 Delphi Financial Group, 7.376% Pfd. 05/15/37 .................................. 1,817,662(1)
$ 3,540,000 Everest Re Holdings, 6.60% 05/15/37 ........................................... 2,849,700(1)
Liberty Mutual Group:
$ 800,000 7.80% 03/15/37, 144A**** ................................................... 692,000(1)
$ 4,000,000 10.75% 06/15/58, 144A**** .................................................. 4,360,000(1)
$ 500,000 MetLife Capital Trust IV, 7.875% 12/15/37, 144A**** ........................... 495,000(1)
$ 2,000,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ............................. 2,240,000(1)
MetLife, Inc.:
89,400 6.50% Pfd., Series B ....................................................... 2,209,298*(1)
$ 1,250,000 10.75% 08/01/39 ............................................................ 1,544,152(1)
Principal Financial Group:
5,000 5.563% Pfd., Series A ...................................................... 411,250*
100,000 6.518% Pfd., Series B ...................................................... 2,261,250*(1)
Renaissancere Holdings Ltd.:
122,250 6.08% Pfd., Series C ....................................................... 2,518,350**(1)(2)
5
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
-------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
6,900 6.60% Pfd., Series D .......................................................... $ 149,454**(2)
9,200 7.30% Pfd., Series B .......................................................... 224,963**(2)
119,500 Scottish Re Group Ltd., 7.25% Pfd. ............................................ 700,569**(2)+
$ 750,000 USF&G Capital, 8.312% 07/01/46, 144A**** ...................................... 776,964(1)
$ 2,000,000 XL Capital Ltd., 6.50%, Series E .............................................. 1,587,600(1)(2)
---------------
33,255,398
---------------
UTILITIES -- 25.9%
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ..................... 977,813*(1)
$ 2,491,000 COMED Financing III, 6.35% 03/15/33 ........................................... 2,038,042(1)
$ 250,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 ............................ 258,849
Dominion Resources, Inc.:
$ 3,500,000 7.50% ...................................................................... 3,469,329(1)
90,000 8.375% Pfd., Series A ...................................................... 2,560,500(1)
40,000 Entergy Arkansas, Inc., 6.45% Pfd. ............................................ 891,252*(1)
$ 2,000,000 FPL Group Capital, Inc., 6.65% 06/15/67 ....................................... 1,862,612
Georgia Power Company:
12,600 6.125% Pfd. ................................................................ 316,543*(1)
12,500 6.50% Pfd., Series 2007A ................................................... 1,264,844*(1)
3,000 Gulf Power Company, 6.45% Pfd., Series 2007A .................................. 296,815*(1)
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................ 2,831,369*
170,900 Interstate Power & Light Company, 8.375% Pfd., Series B ....................... 4,966,781*(1)
Pacific Enterprises:
22,430 $4.50 Pfd. ................................................................. 1,762,157*(1)
10,000 $4.75 Pfd., Series 53 ...................................................... 830,800*(1)
$ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ....................... 470,343(1)
$ 4,400,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ..................................... 3,921,051(1)
60,000 Scana Corporation, 7.70% Pfd. ................................................. 1,622,400(1)
Southern California Edison:
35,000 6.00% Pfd., Series C ....................................................... 3,189,375*(1)
11,500 6.125% Pfd. ................................................................ 1,075,610*(1)
$ 3,000,000 Southern Union Company, 7.20% 11/01/66 ........................................ 2,707,500(1)
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ....................................... 228,750
18,800 Union Electric Company, $7.64 Pfd. ............................................ 1,883,525*(1)
6
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
-------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
$ 3,900,000 Wisconsin Energy Corporation, 6.25% 05/15/67 .................................. $ 3,602,843(1)
14,750 Xcel Energy, Inc., $4.08 Pfd., Series B ....................................... 1,076,013*
---------------
44,105,116
---------------
ENERGY -- 6.1%
$ 4,700,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ................................... 4,647,821(1)
Enterprise Products Partners:
$ 750,000 7.00% 06/01/67 ............................................................. 680,930
$ 1,500,000 8.375% 08/01/66, Series A .................................................. 1,518,735(1)
3,500 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** .................................. 3,503,500*
---------------
10,350,986
---------------
MISCELLANEOUS INDUSTRIES -- 1.7%
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................... 2,903,752*(1)
---------------
2,903,752
---------------
TOTAL PREFERRED SECURITIES
(Cost $161,811,457) ........................................................ 161,685,118
---------------
CORPORATE DEBT SECURITIES -- 2.7%
FINANCIAL SERVICES -- 0.1%
10,000 Ameriprise Financial, Inc., 7.75% 06/15/39 .................................... 259,225(1)
---------------
259,225
---------------
INSURANCE -- 2.3%
$ 2,200,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........................... 1,933,961(1)
$ 2,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ....................... 1,902,702(1)
---------------
3,836,663
---------------
UTILITIES -- 0.3%
20,000 Entergy Texas, Inc., 7.875% 06/01/39 .......................................... 567,000
---------------
567,000
---------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $3,944,512) .......................................................... 4,662,888
---------------
7
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
--------------- ---------------
COMMON STOCK -- 0.1%
BANKING -- 0.1%
3,620 CIT Group, Inc. ............................................................... $ 131,877*+
---------------
TOTAL COMMON STOCK
(Cost $330,325) ............................................................ 131,877
---------------
MONEY MARKET FUND -- 1.7%
2,855,270 BlackRock Provident Institutional, T-Fund ..................................... 2,855,270
---------------
TOTAL MONEY MARKET FUND
(Cost $2,855,270) .......................................................... 2,855,270
---------------
TOTAL INVESTMENTS (Cost $168,941,564***) ........................................... 99.5% 169,335,153
OTHER ASSETS AND LIABILITIES (Net) ................................................. 0.5% 778,957
----- ---------------
NET ASSETS BEFORE LOAN ............................................................. 100.0%+++ $ 170,114,110
----- ---------------
LOAN PRINCIPAL BALANCE ......................................................................... (56,100,000)
---------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 114,014,110
===============
----------
* 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 February 28, 2010, these
securities amounted to $28,643,505 or 16.8% of net assets before loan.
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 $125,486,320 at
February 28, 2010.
(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, 2009 THROUGH FEBRUARY 28, 2010 (UNAUDITED)
VALUE
---------------
OPERATIONS:
Net investment income ....................................................................... $ 2,750,803
Net realized gain/(loss) on investments sold during the period .............................. (1,565,597)
Change in net unrealized appreciation/depreciation of investments ........................... 10,290,524
Distributions to APS* Shareholders from net investment income,
including changes in accumulated undeclared distributions ................................ (70,977)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................................ 11,404,753
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) ................... (2,306,539)
---------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................................ (2,306,539)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan .......... 151,775
---------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE
TRANSACTIONS ............................................................................. 151,775
---------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ............................ $ 9,249,989
===============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period. ........................................................................ $ 104,764,121
Net increase in net assets during the period ................................................ 9,249,989
---------------
End of period ............................................................................... $ 114,014,110
===============
----------
* Auction Preferred Stock.
(1) These tables summarize the three months ended February 28, 2010 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2009.
(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, 2009 THROUGH FEBRUARY 28, 2010 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................................................ $ 9.82
---------------
INVESTMENT OPERATIONS:
Net investment income ....................................................................... 0.26
Net realized and unrealized gain/(loss) on investments. ..................................... 0.82
DISTRIBUTIONS TO APS* SHAREHOLDERS:
From net investment income .................................................................. (0.01)
---------------
Total from investment operations ............................................................ 1.07
---------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income .................................................................. (0.22)
---------------
Total distributions to Common Stock Shareholders ............................................ (0.22)
---------------
Net asset value, end of period .............................................................. $ 10.67
===============
Market value, end of period ................................................................. $ 11.37
===============
Common Stock shares outstanding, end of period .............................................. 10,685,849
===============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ ...................................................................... 10.07%**
Net investment income, including payments to APS Shareholders+ .............................. 9.81%**
Operating expenses including interest expense. .............................................. 2.33%**
Operating expenses excluding interest expense ............................................... 1.67%**
SUPPLEMENTAL DATA:++
Portfolio turnover rate ..................................................................... 4%***
Net assets before loan, end of period (in 000's) ............................................ $ 170,114
Ratio of operating expenses including interest expense(2) to net assets
before loan and APS. ..................................................................... 1.57%**
Ratio of operating expenses excluding interest expense(2) to net assets
before loan and APS. ..................................................................... 1.13%**
(1) These tables summarize the three months ended February 28, 2010 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2009.
(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
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
--------- --------- ------------- ------------
December 31, 2009 .................. $0.0720 $10.31 $10.47 $10.31
January 29, 2010 ................... 0.0720 10.52 10.59 10.52
February 26, 2010 .................. 0.0720 10.67 11.37 10.80
----------
(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 February 28, 2010 the aggregate cost of securities for federal income
tax purposes was $168,938,993, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was
$23,247,156 and the aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $22,850,996.
2. ADDITIONAL ACCOUNTING STANDARDS
FAIR VALUE MEASUREMENT: The inputs and valuation techniques used to measure
fair value of the Fund's investments are summarized into three levels as
described in the hierarchy 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. A
summary of the inputs used to value the Fund's net assets as of February 28,
2010 is as follows:
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
FEBRUARY 28, 2010 PRICE INPUTS INPUTS
----------------- ----------- ----------- ------------
Preferred Securities
Banking $ 70,243,491 $46,919,881 $23,261,870 $61,740
Financial Services 826,375 802,894 23,481 --
Insurance 33,255,398 14,737,823 18,517,575 --
Utilities 44,105,116 12,935,553 31,169,563 --
Energy 10,350,986 -- 10,350,986 --
Miscellaneous Industries 2,903,752 -- 2,903,752 --
Corporate Debt Securities 4,662,888 826,225 3,836,663 --
Common Stock
Banking 131,877 131,877 -- --
Money Market Fund 2,855,270 2,855,270 -- --
------------ ----------- ----------- -------
Total Investments $169,335,153 $79,209,523 $90,063,890 $61,740
============ =========== =========== =======
12
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 11/30/09 ............................ $ 49,500 $49,500
Accrued discounts/premiums ........................ -- --
Realized gain/(loss) .............................. -- --
Change in unrealized appreciation/(depreciation) .. 12,240 12,240
Net purchases/(sales) ............................. -- --
Transfers in and/or out of Level 3 ................ -- --
-------- --------
BALANCE AS OF 2/28/10 ............................. $ 61,740 $ 61,740
For the period ended February 28, 2010, total change in unrealized
gain/(loss) on Level 3 securities still held at period end and included in the
change in net assets was $12,240.
13
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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.
(FLAHERTY & CRUMRINE LOGO)
FLAHERTY & CRUMRINE
PREFERRED INCOME FUND
Quarterly Report
February 28, 2010
www.preferredincome.com