FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of Flaherty & Crumrine Preferred Income Fund:
The combination of falling interest rates and ongoing demand for preferred
securities helped the Fund produce excellent returns during its third fiscal
period ending August 31, 2010. For the three month period, total return on net
asset value was +12.1%. Total return using market price of Fund shares was
+18.5% during the period.
It has been quite an eventful summer in the preferred securities market.
We'll hit the highlights here, and readers willing to do a little extra-credit
homework will find more detailed discussions on the Fund's website.
In addition to strong performance of the Fund's investment portfolio, the
monthly dividend paid to shareholders was increased to $0.089 per share from
$0.0825, commencing with the August distribution. This 7.9% increase reflects
the ongoing favorable environment of relatively high yields on Fund investments
and the low cost of Fund borrowings.
We expect the level of economic growth to remain tepid over the coming
quarters and then to show gradual improvement. We anticipate the Fund's cost of
borrowing will follow a similar path, remaining low for a period, then
increasing gradually. Of course, unless income from the Fund's investments also
increases, a rise in the cost of borrowing would negatively impact the
distribution to shareholders.
Although economic activity has slowed recently, we do not expect the
economy to fall back into recession. In fact, we see some healthy signs, such as
a substantial increase in personal savings and steady levels of business
investment aimed at improving productivity. As individuals save more, some of
these dollars are likely to find their way into the preferred market. As
companies become more efficient, their financial condition generally improves.
These trends, along with declining interest rates, have helped boost the Fund's
investment performance.
In the aftermath of the financial meltdown, Congress and various bank
regulators set out to establish new rules to hopefully prevent a repeat of the
crisis. We are now getting a better sense of how new regulations will impact the
market. With passage of the Dodd-Frank Wall Street Reform and Consumer
Protection Act in July, along with increasing clarification from international
bank regulators, the fog is beginning to lift on the future role of preferred
securities as a source of capital for the banking industry(1).
Since our last letter, rule makers have indicated which security structures
they don't like, but have yet to decide what will be okay. It is now clear that
trust preferred securities, which are favored by banks as a form of capital,
will not meet the new standards. As a result, not only will there be no new
issues of this type, issuers will want to redeem or replace outstanding trust
preferreds sooner than was previously expected. In response, prices of many bank
trust preferred securities have moved higher--contributing to the Fund's strong
performance.
It is less clear what types of securities banks will be allowed to issue to
meet future capital requirements. We are monitoring the debate closely and
throwing in our two cents whenever appropriate. At this time, we believe the
parties are moving toward a sensible conclusion and will ultimately induce banks
to issue preferred securities suitable for the Fund's portfolio. Of course, we
will stay on top of this and report important developments in these letters or
on the Fund's website.
----------
(1) The treatment of preferred securities issued by NON-BANKS has not changed
in any meaningful way.
As of this writing, roughly 23% of the Fund's portfolio is invested in
trust preferred securities issued by U.S. banks. In light of the new rules, we
think it is likely that many of these issues will be redeemed, beginning in
2013. We'll have our work cut out for us trying to replace the income on these
securities, but until we have a better idea how the banks will replace these
issues, it is difficult to predict the impact on the Fund.
As always, we encourage you to visit www.pfdincome.com to read our
Quarterly Economic Update as well as a more detailed discussion of factors
affecting the wonderful world of preferred securities.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman President
October 15, 2010
2
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2010 (UNAUDITED)
FUND STATISTICS
---------------
Net Asset Value $ 11.49
Market Price $ 12.37
Premium 7.66%
Yield on Market Price 8.63%
Common Stock Shares Outstanding 10,734,121
MOODY'S RATINGS % OF NET ASSETS+
--------------- ----------------
A 6.5%
BBB 71.4%
BB 19.4%
Below "BB" 0.6%
Not Rated* 0.3%
Below Investment Grade** 15.2%
* Does not include net other assets and liabilities of 1.8%.
** Below investment grade by both Moody's and S&P.
(PIE CHART)
INDUSTRY CATEGORIES % OF NET ASSETS+
------------------- ----------------
Banking 40%
Utilities 25%
Insurance 22%
Energy 6%
Financial Services 2%
Other 5%
TOP 10 HOLDINGS BY ISSUER % OF NET ASSETS+
------------------------- ----------------
Banco Santander 5.6%
Capital One Financial 4.2%
PNC Financial Services 4.1%
Liberty Mutual Group 4.0%
Comerica 3.7%
Dominion Resources 3.3%
Wells Fargo 3.2%
HSBC Plc 3.1%
Interstate Power & Light 3.0%
Metlife 3.0%
% OF NET ASSETS***+
-------------------
Holdings Generating Qualified Dividend Income (QDI) for
Individuals 41%
Holdings Generating Income Eligible for the Corporate
Dividends Received Deduction (DRD) 26%
*** 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, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 95.2%
BANKING -- 39.8%
$2,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .................................. $ 2,865,415(1)
355,000 Banco Santander, 10.50% Pfd., Series 10 ............................................ 10,327,838**(1)(2)
48,700 Bank of America Corporation, 6.70% Pfd. ............................................ 1,161,008*(1)
$ 500,000 BankAmerica Institutional, Series A, 8.07% 12/31/26, 144A**** ...................... 513,750
Barclays Bank PLC:
$3,000,000 6.278% .......................................................................... 2,523,750**(1)(2)
40,000 6.625% Pfd., Series 2 ........................................................... 952,400**(1)(2)
6,200 7.75% Pfd., Series 4 ............................................................ 159,774**(2)
35,000 8.125% Pfd., Series 5 ........................................................... 919,100**(1)(2)
87,500 BB&T Capital Trust VI, 9.60% Pfd. .................................................. 2,476,250(1)
$4,500,000 Capital One Capital III, 7.686% 08/15/36 ........................................... 4,556,250(1)
$ 500,000 Capital One Capital V, 10.25% 08/15/39 ............................................. 543,125
$2,500,000 Capital One Capital VI, 8.875% 05/15/40 ............................................ 2,650,000(1)
$5,210,000 Colonial BancGroup, 7.114%, 144A**** ............................................... 138,065++
$7,250,000 Comerica Capital Trust II, 6.576% 02/20/37 ......................................... 6,815,000(1)
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ......................................... 34,740*+
$ 750,000 Fifth Third Capital Trust IV, 6.50% 04/15/37 ....................................... 652,500
15,000 Fifth Third Capital Trust V, 7.25% Pfd. 08/15/67 ................................... 374,250
14,500 Fifth Third Capital Trust VII, 8.875% Pfd. 05/15/68 ................................ 383,798
1,250 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ................ 1,291,250(1)
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** .... 573,750(1)
3,750 First Tennessee Bank, Adj. Rate Pfd., 144A**** ..................................... 2,262,891*(1)
$ 600,000 First Tennessee Capital I, 8.07% 01/06/27, Series A ................................ 577,274
$ 500,000 First Tennessee Capital II, 6.30% 04/15/34, Series B ............................... 395,912
$1,500,000 First Union Capital II, 7.95% 11/15/29 ............................................. 1,734,587(1)
$1,000,000 First Union Institutional Capital I, 8.04% 12/01/26 ................................ 1,024,504(1)
$ 500,000 Fleet Capital Trust II, 7.92% 12/11/26 ............................................. 505,000
Goldman Sachs:
$ 500,000 Capital I, 6.345% 02/15/34 ...................................................... 467,131(1)
$3,713,000 Capital II, 5.793% .............................................................. 3,002,889(1)
2,500 STRIPES Custodial Receipts, Pvt. ................................................ 1,312,500*
135,000 HSBC Holdings PLC, 8.00% Pfd., Series 2 ............................................ 3,585,937**(2)
$ 500,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** ................................ 527,301
HSBC USA, Inc.:
48,000 6.50% Pfd., Series H ............................................................ 1,210,502*(1)
4,400 $2.8575 Pfd. 208,175*(1)
$ 300,000 JPMorgan Chase Capital XVIII, 6.95% 08/17/36, Series R ............................. 308,773
15,000 Keycorp Capital VIII, 7.00% Pfd. 06/15/66 .......................................... 375,000(1)
4
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
27,600 Keycorp Capital X, 8.00% Pfd. ...................................................... $ 717,600(1)
$ 550,000 Lloyds Banking Group PLC, 6.657%, 144A**** ......................................... 356,125**(2)+
$ 600,000 NB Capital Trust IV, 8.25% 04/15/27 ................................................ 619,313(1)
200,000 PNC Financial Services, 9.875% Pfd., Series F ...................................... 5,712,500*(1)
$1,750,000 PNC Preferred Funding Trust III, 8.70%, 144A**** ................................... 1,812,654(1)
1,750 Sovereign REIT, 12.00% Pfd., Series A, 144A**** .................................... 2,038,750
$2,400,000 Wachovia Capital Trust III, 5.80% .................................................. 2,058,000(1)
$1,000,000 Washington Mutual, 9.75%, 144A**** ................................................. 62,500++
$1,600,000 Webster Capital Trust IV, 7.65% 06/15/37 ........................................... 1,266,570(1)
$1,000,000 Wells Fargo Capital XV, 9.75% ...................................................... 1,096,500(1)
------------
73,150,901
------------
FINANCIAL SERVICES -- 2.0%
5,000 Deutsche Bank Contingent Capital Trust II, 6.55% Pfd ............................... 118,957**(2)
33,000 Heller Financial, Inc., 6.687% Pfd., Series C ...................................... 3,209,250*(1)
10,300 HSBC Finance Corporation, 6.36% Pfd ................................................ 248,874*
Lehman Brothers Holdings, Inc.:
15,000 5.67% Pfd., Series D ............................................................ 4,170*++
19,500 5.94% Pfd., Series C ............................................................ 5,265*++
25,000 6.50% Pfd., Series F ............................................................ 1,812*++
27,500 7.95% Pfd ....................................................................... 467*++
------------
3,588,795
------------
INSURANCE -- 19.8%
$ 750,000 Ace Capital Trust II, 9.70% 04/01/30 ............................................... 919,787(1)(2)
$ 250,000 AON Corporation, 8.205% 01/01/27 ................................................... 271,050
25,000 Arch Capital Group Ltd., 8.00% Pfd., Series A ...................................... 646,875**(1)(2)
AXA SA:
$1,750,000 6.379%, 144A**** ................................................................ 1,435,000**(1)(2)
$3,000,000 6.463%, 144A**** ................................................................ 2,400,000**(1)(2)
35,900 Axis Capital Holdings, 7.50% Pfd., Series B ........................................ 3,200,711(1)(2)
90,600 Delphi Financial Group, 7.376% Pfd. 05/15/37 ....................................... 2,007,922(1)
$4,000,000 Everest Re Holdings, 6.60% 05/15/37 ................................................ 3,615,000(1)
Liberty Mutual Group:
$ 500,000 7.80% 03/15/37, 144A**** ........................................................ 445,000(1)
$4,100,000 10.75% 06/15/58, 144A**** ....................................................... 4,602,250(1)
$2,100,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** .................................. 2,425,500(1)
5
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
$2,400,000 MetLife, Inc., 10.75% 08/01/39 ..................................................... $ 3,042,778(1)
Principal Financial Group:
16,000 5.563% Pfd., Series A ........................................................... 1,365,000*
70,000 6.518% Pfd., Series B ........................................................... 1,760,675*(1)
Renaissancere Holdings Ltd.:
131,450 6.08% Pfd., Series C ............................................................ 2,990,487**(1)(2)
6,900 7.30% Pfd., Series B ............................................................ 173,362**(2)
119,500 Scottish Re Group Ltd., 7.25% Pfd. ................................................. 743,147**(2)+
$1,300,000 Stancorp Financial Group, 6.90% 06/01/67 ........................................... 1,122,577(1)
$ 750,000 USF&G Capital, 8.312% 07/01/46, 144A**** ........................................... 879,626(1)
$2,000,000 XL Capital Ltd., 6.50%, Series E ................................................... 1,527,600(1)(2)
$1,000,000 ZFS Finance USA Trust V, 6.50% 05/09/37, 144A**** 915,000
------------
36,489,347
------------
UTILITIES -- 25.1%
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 .......................... 1,005,938*(1)
$3,458,000 COMED Financing III, 6.35% 03/15/33 ................................................ 3,090,332(1)
$ 250,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 ................................. 252,851
Dominion Resources, Inc.:
$3,500,000 7.50% ........................................................................... 3,574,176(1)
77,000 8.375% Pfd., Series A ........................................................... 2,220,680(1)
40,000 Entergy Arkansas, Inc., 6.45% Pfd. ................................................. 967,500*(1)
20,000 Entergy Louisiana, Inc., 6.95% Pfd. ................................................ 1,925,626*
$2,000,000 FPL Group Capital, Inc., 6.65% 06/15/67 ............................................ 1,902,534(1)
Georgia Power Company:
5,000 6.125% Pfd ...................................................................... 130,156*
25,000 6.50% Pfd., Series 2007A ........................................................ 2,602,345*(1)
3,000 Gulf Power Company, 6.45% Pfd., Series 2007A ....................................... 305,270*(1)
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ..................................... 2,930,337*
190,000 Interstate Power & Light Company, 8.375% Pfd., Series B ............................ 5,512,375*
7,146 MDU Resources Group, 4.50% Pfd. 07/08/10 ........................................... 570,564*
22,430 Pacific Enterprises, $4.50 Pfd. .................................................... 1,940,897*(1)
$ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ............................ 498,488(1)
$4,400,000 Puget Sound Energy, Inc., 6.974% 06/01/67 .......................................... 4,090,407(1)
55,500 Scana Corporation, 7.70% Pfd. ...................................................... 1,574,535(1)
6
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
Southern California Edison:
32,100 6.00% Pfd., Series C ............................................................ $ 3,045,487*(1)
17,500 6.125% Pfd ...................................................................... 1,672,891*
$3,000,000 Southern Union Company, 7.20% 11/01/66 ............................................. 2,722,500(1)
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ............................................ 234,375
$3,000,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ....................................... 2,838,792(1)
6,750 Xcel Energy, Inc., $4.08 Pfd., Series B ............................................ 532,238*
------------
46,141,294
------------
ENERGY -- 6.4%
$4,250,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ........................................ 4,271,322(1)
Enterprise Products Partners:
$ 750,000 7.00% 06/01/67 .................................................................. 692,249
$3,250,000 8.375% 08/01/66, Series A ....................................................... 3,351,371(1)
3,500 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** ....................................... 3,473,969*
------------
11,788,911
------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 0.2%
12,500 PS Business Parks, Inc., 6.70% Pfd., Series P ...................................... 302,156
------------
302,156
------------
MISCELLANEOUS INDUSTRIES -- 1.9%
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ................................ 3,520,000*(1)
------------
3,520,000
TOTAL PREFERRED SECURITIES ------------
(Cost $170,603,149) ............................................................. 174,981,404
------------
CORPORATE DEBT SECURITIES -- 2.9%
FINANCIAL SERVICES -- 0.2%
10,000 Ameriprise Financial, Inc., 7.75% 06/15/39 ......................................... 274,425(1)
------------
274,425
------------
7
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2010 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
INSURANCE -- 2.4%
$2,500,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ................................ $ 2,330,810(1)
$2,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ............................ 2,131,654(1)
------------
4,462,464
------------
UTILITIES -- 0.3%
20,000 Entergy Texas, Inc., 7.875% 06/01/39 ............................................... 575,200(1)
------------
575,200
TOTAL CORPORATE DEBT SECURITIES ------------
(Cost $4,192,390) ............................................................... 5,312,089
------------
COMMON STOCK -- 0.1%
BANKING -- 0.1%
3,620 CIT Group, Inc. .................................................................... 132,782*+
------------
TOTAL COMMON STOCK
(Cost $330,325) ................................................................. 132,782
------------
MONEY MARKET FUND -- 3.7%
6,874,830 BlackRock Provident Institutional, T-Fund .......................................... 6,874,830
------------
TOTAL MONEY MARKET FUND
(Cost $6,874,830) ............................................................... 6,874,830
------------
TOTAL INVESTMENTS (Cost $182,000,694***) ........................................... 101.9% 187,301,105
OTHER ASSETS AND LIABILITIES (Net) ................................................. (1.9)% (3,496,385)
----- ------------
NET ASSETS BEFORE LOAN ............................................................. 100.0%+++ $183,804,720
----- ------------
LOAN PRINCIPAL BALANCE .......................................................................... (60,500,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ...................................................... $123,304,720
============
----------
* 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, 2010, these
securities amounted to $32,038,931 or 17.4% of net assets before loan.
These securities have been determined to be liquid under the guidelines
established by the Board of Directors.
8
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2010 (UNAUDITED)
(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 $131,217,188 at August
31, 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
9
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 AUGUST 31, 2010 (UNAUDITED)
VALUE
------------
OPERATIONS:
Net investment income ....................................................... $ 8,627,740
Net realized gain/(loss) on investments sold during the period .............. 1,558,215
Change in net unrealized appreciation/depreciation of investments ........... 15,197,346
Distributions to APS* Shareholders from net investment income,
including changes in accumulated undeclared distributions ................ (70,977)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................ 25,312,324
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) ... (7,454,757)
------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................ (7,454,757)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and
Cash Purchase Plan ....................................................... 683,032
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM
FUND SHARE TRANSACTIONS .................................................. 683,032
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ............ $ 18,540,599
============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ......................................................... $104,764,121
Net increase in net assets during the period ................................ 18,540,599
------------
End of period ............................................................... $123,304,720
============
----------
* Auction Preferred Stock.
(1) These tables summarize the nine months ended August 31, 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.
10
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2009 THROUGH AUGUST 31, 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 ....................................................... 0.81
Net realized and unrealized gain/(loss) on investments ...................... 1.57
DISTRIBUTIONS TO APS* SHAREHOLDERS:
From net investment income .................................................. (0.01)
-----------
Total from investment operations ............................................ 2.37
-----------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income .................................................. (0.70)
-----------
Total distributions to Common Stock Shareholders ............................ (0.70)
-----------
Net asset value, end of period .............................................. $ 11.49
===========
Market value, end of period ................................................. $ 12.37
===========
Common Stock shares outstanding, end of period .............................. 10,734,121
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ ...................................................... 9.96%**
Net investment income, including payments to APS Shareholders+ .............. 9.88%**
Operating expenses including interest expense ............................... 2.32%**
Operating expenses excluding interest expense ............................... 1.60%**
SUPPLEMENTAL DATA:++
Portfolio turnover rate ..................................................... 24%***
Net assets before loan, end of period (in 000's) ............................ $ 183,805
Ratio of operating expenses including interest expense(2) to net assets
before loan and APS ...................................................... 1.55%**
Ratio of operating expenses excluding interest expense(2) to net assets
before loan and APS ...................................................... 1.07%**
(1) These tables summarize the nine months ended August 31, 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.
11
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
March 31, 2010 ......... 0.0720 11.08 11.32 11.08
April 30, 2010 ......... 0.0720 11.24 11.93 11.33
May 28, 2010 ........... 0.0825 10.48 10.67 10.48
June 30, 2010 .......... 0.0825 10.65 11.30 10.74
July 30, 2010 .......... 0.0825 11.15 12.33 11.71
August 31, 2010 ........ 0.0890 11.49 12.37 11.75
----------
(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.
12
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At August 31, 2010, the aggregate cost of securities for federal income tax
purposes was $181,998,123, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $26,736,042
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $21,433,060.
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.
Transfers in and out of levels are recognized at market value at the end of the
period. A summary of the inputs used to value the Fund's investments as of
August 31, 2010 is as follows:
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
AUGUST 31, 2010 PRICE INPUTS INPUTS
--------------- ----------- ------------ ------------
Preferred Securities
Banking $ 73,150,901 $44,448,294 $ 28,667,867 $34,740
Financial Services 3,588,795 367,831 3,220,964 --
Insurance 36,489,347 13,790,746 22,698,601 --
Utilities 46,141,294 13,011,922 33,129,372 --
Energy 11,788,911 -- 11,788,911 --
Real Estate Investment Trust (REIT) 302,156 302,156 -- --
Miscellaneous Industries 3,520,000 -- 3,520,000 --
Corporate Debt Securities 5,312,089 849,625 4,462,464 --
Common Stock
Banking 132,782 132,782 -- --
Money Market Fund 6,874,830 6,874,830 -- --
------------ ----------- ------------ -------
Total Investments $187,301,105 $79,778,186 $107,488,179 $34,740
============ =========== ============ =======
The Fund did not have any significant transfers in and out of Level 1 and
Level 2 during the period.
13
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The Fund's investments in Level 2 and Level 3 are based primarily on market
information, where available. This includes, but is not limited to, prices
provided by third-party providers, observable trading activity (including the
recency, depth, and consistency of such information with quoted levels), and the
depth and consistency of broker-quoted prices. In the event market information
is not directly available, comparable information may be observed for securities
that are similar in many respects to those being valued. The Fund may employ an
income approach for certain securities that also takes into account credit risk,
interest rate risk, and potential recovery prospects.
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) ... (14,760) (14,760)
Net purchases/(sales) .............................. -- --
Transfers in and/or out of Level 3 ................. -- --
-------- --------
BALANCE AS OF 8/31/10 .............................. $ 34,740 $ 34,740
For the period ended August 31, 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 $(14,760).
14
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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
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 Investment Servicing (US) 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)
PREFERRED INCOME FUND
Quarterly
Report
August 31, 2010
www.preferredincome.com