UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-06179
Flaherty & Crumrine Preferred Income Fund Incorporated
(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
Pasadena, CA 91101
(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Incorporated
301 E. Colorado Boulevard, Suite 720
Pasadena, CA 91101
(Name and address of agent for service)
Registrant's telephone number, including area code: 626-795-7300
Date of fiscal year end: November 30
Date of reporting period: February 28, 2011
Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (Sections 239.24 and 274.5
of this chapter), to file reports with the Commission, not later than 60 days
after the close of the first and third fiscal quarters, pursuant to rule 30b1-5
under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may
use the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q unless the
Form displays a currently valid Office of Management and Budget ("OMB") control
number. Please direct comments concerning the accuracy of the information
collection burden estimate and any suggestions for reducing the burden to the
Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549. The OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. Section 3507.
ITEM 1. SCHEDULE OF INVESTMENTS.
The Schedule(s) of Investments is attached herewith.
FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of Flaherty & Crumrine Preferred Income Fund:
During the first fiscal quarter of 2011, the total return on net asset
value(1) of the Fund was +5.1%. Since the depth of the financial crisis, the
Fund has delivered eight consecutive quarters of positive returns. We never tire
of reporting positive returns, but our focus remains on providing high current
income to shareholders.
Present conditions for the Fund's dividend are about as good as we can
recall. Low short-term interest rates have continued to amplify the Fund's
leverage strategy - we are able to borrow funds at historically attractive
levels. At the same time, the investment portfolio is generating relatively high
levels of income. We don't see anything on the immediate horizon to change these
conditions, but one or both sides of the equation is likely to come under
pressure sometime down the road.
As of this writing, the world is still dealing with the devastating events
in Japan. Our thoughts go out to the people of Japan in these difficult times.
Global financial markets were weaker in the immediate aftermath of the disaster,
as investors assessed the impact. The Fund has very little direct exposure to
the Japanese economy, and we do not anticipate any material decline in the
credit quality of our holdings as a result of these events. Rest assured we are
monitoring the impact very closely.
The situation at the Fukushima Dai-Ichi nuclear plant has raised fresh
questions about nuclear power safety around the world. Since the Fund must have
at least 25% of the portfolio invested in the utility industry, the topic is
very relevant. We do not believe the incident in Japan will negatively impact
utility positions owned by the Fund in any material way. In the U.S., most
regulated utility companies have reduced their exposure to nuclear energy, and
very few have "bet the farm" on this form of power generation.
The European sovereign debt situation continues to simmer. It may boil over
in Portugal and require a bailout similar to those in Greece and Ireland. This
may create some turbulence in the preferred market, but the overall impact on
the Fund should be modest. The Fund has no direct investments in Portuguese
banks or sovereign debt. Although it does own securities issued by companies
with exposure to Portugal, we believe those exposures are manageable given the
strength and diversification of those companies' activities.
Preferred securities issued by banks comprise the largest portion of the
Fund's portfolio and, thus, play a critical role in the Fund's strategy. Bank
regulators here and abroad have analyzed bank securities in light of the
financial crisis, and some conclusions have begun to trickle out. The Basel
Committee on Bank Supervision, the body charged with setting global capital
standards, has finalized its recommendations for bank capital, although it will
be up to regulators in individual countries to adopt these standards. Bank
regulators in the U.S. have until July of this year to propose new capital
rules, and we expect final rules will be issued before year-end. Over time, we
expect the current crop of preferred securities issued by banks to be replaced
with new securities designed to conform to the new standards. As details of the
new securities become known, we will study them carefully and determine their
appropriateness for the Fund. Based on the information currently available, we
are optimistic about the transition.
----------
1 Following the methodology required by the SEC, total return includes
income, principal change and the impact of the Fund's leverage.
We encourage you to visit the Fund's website www.preferredincome.com for a
more in-depth discussion of conditions in the preferred markets, as well as the
broader economy.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
------------------------------------- ----------------------------------------
Donald F. Crumrine Robert M. Ettinger
Chairman President
April 5, 2011
2
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
FEBRUARY 28, 2011 (UNAUDITED)
FUND STATISTICS
---------------
Net Asset Value $ 12.16
Market Price $ 12.13
Discount 0.25%
Yield on Market Price 8.90%
Common Stock Shares Outstanding 10,767,784
% OF
MOODY'S RATINGS NET ASSETS+
--------------- -----------
A 6.0%
BBB 73.8%
BB 17.6%
Below "BB" 0.8%
Not Rated* 0.4%
Below Investment Grade** 14.7%
* Does not include net other assets and liabilities of 1.4%.
** Below investment grade by both Moody's and S&P.
(PIE CHART)
% OF
INDUSTRY CATEGORIES NET ASSETS+
------------------- -----------
Financial Services 2%
Other 4%
Banking 40%
Utilities 25%
Insurance 22%
Energy 7%
% OF
TOP 10 HOLDINGS BY ISSUER NET ASSETS+
------------------------- -----------
Banco Santander 5.2%
Capital One Financial 4.2%
PNC Financial Services 3.9%
Metlife 3.9%
Liberty Mutual Group 3.9%
Wells Fargo 3.9%
HSBC Plc 2.9%
Enbridge Energy Partners 2.7%
Interstate Power & Light 2.7%
Southern California Edison 2.5%
% OF NET
ASSETS***+
----------
Holdings Generating Qualified
Dividend Income (QDI) for
Individuals 40%
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
FEBRUARY 28, 2011 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 94.8%
BANKING -- 39.9%
2,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ................................... $ 2,866,498(1)
355,000 Banco Santander, 10.50% Pfd., Series 10 ............................................. 10,150,338**(1)(2)
Bank of America Corporation:
38,015 8.625% Pfd ....................................................................... 992,192*
32,085 6.70% Pfd ........................................................................ 766,190*(1)
$ 500,000 BankAmerica Institutional, Series A, 8.07% 12/31/26, 144A**** ....................... 510,000
Barclays Bank PLC:
$ 3,250,000 6.278% ........................................................................... 2,811,250**(1)(2)
1,200 7.75% Pfd., Series 4 ............................................................. 30,468**(2)
75,000 8.125% Pfd., Series 5 ............................................................ 1,933,500**(1)(2)
58,500 BB&T Capital Trust VI, 9.60% Pfd. 08/01/64 .......................................... 1,661,400(1)
$ 1,500,000 BBVA International Preferred, 5.919% ................................................ 1,218,480**(1)(2)
$ 750,000 BNP Paribas, 7.195%, 144A**** ....................................................... 718,125**(2)
$ 4,750,000 Capital One Capital III, 7.686% 08/15/36 ............................................ 4,934,062(1)
$ 500,000 Capital One Capital V, 10.25% 08/15/39 .............................................. 546,250
$ 2,500,000 Capital One Capital VI, 8.875% 05/15/40 ............................................. 2,671,875(1)
62,300 Citigroup Capital XIII, 7.875% Pfd. 10/30/40 ........................................ 1,694,030(1)
$ 5,210,000 Colonial BancGroup, 7.114%, 144A**** ................................................ 260,500++
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** .......................................... 93,420*(3)+
$ 750,000 Fifth Third Capital Trust IV, 6.50% 04/15/37 ........................................ 736,875
15,000 Fifth Third Capital Trust V, 7.25% Pfd. 08/15/67 .................................... 375,000
130,000 Fifth Third Capital Trust VI, 7.25% Pfd. 11/15/67 ................................... 3,258,125(1)
14,500 Fifth Third Capital Trust VII, 8.875% Pfd. 05/15/68 ................................. 380,951
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**** ...................................... 2,459,766*(1)
$ 500,000 First Tennessee Capital II, 6.30% 04/15/34, Series B ................................ 472,500
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 .............................................. 1,642,954(1)
$ 1,000,000 First Union Institutional Capital I, 8.04% 12/01/26 ................................. 1,025,021(1)
$ 500,000 Fleet Capital Trust II, 7.92% 12/11/26 .............................................. 511,250
Goldman Sachs:
$ 785,000 Capital I, 6.345% 02/15/34 ....................................................... 771,016(1)
$ 1,058,000 Capital II, 5.793% ............................................................... 915,170(1)
2,800 STRIPES Custodial Receipts, Pvt .................................................. 1,932,000*(3)
132,900 HSBC Holdings PLC, 8.00% Pfd., Series 2 ............................................. 3,599,264**(1)(2)
$ 500,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** ................................. 503,249
4
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2011 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
HSBC USA, Inc.:
42,000 6.50% Pfd., Series H ............................................................. $ 1,025,065*(1)
1,000 $2.8575 Pfd. ..................................................................... 48,375*
$ 1,725,000 JPMorgan Chase Capital XVIII, 6.95% 08/17/36, Series R .............................. 1,815,316(1)
21,360 Keycorp Capital VIII, 7.00% Pfd. 06/15/66 ........................................... 535,335(1)
65,640 Keycorp Capital IX, 6.75% Pfd. 12/15/66 ............................................. 1,616,385
27,600 Keycorp Capital X, 8.00% Pfd. 03/15/68 .............................................. 717,048(1)
$ 550,000 Lloyds Banking Group PLC, 6.657%, 144A**** .......................................... 422,125**(2)+
20,000 Morgan Stanley Capital Trust VI, 6.60% Pfd. 02/01/46 ................................ 486,450
3,000 National City Capital Trust II, 6.625% Pfd. 11/15/36 ................................ 74,885
$ 860,000 NB Capital Trust IV, 8.25% 04/15/27 ................................................. 885,800(1)
200,000 PNC Financial Services, 9.875% Pfd., Series L ....................................... 5,750,000*(1)
$ 1,750,000 PNC Preferred Funding Trust III, 8.70%, 144A**** .................................... 1,885,084(1)
1,750 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ..................................... 1,998,938
$ 2,400,000 Wachovia Capital Trust III, 5.80% ................................................... 2,193,000(1)
$ 1,200,000 Wachovia Capital Trust V, 7.965% 06/01/27, 144A**** ................................. 1,260,353(1)
$ 1,000,000 Washington Mutual, 9.75%, 144A**** .................................................. 25,000++
$ 1,600,000 Webster Capital Trust IV, 7.65% 06/15/37 ............................................ 1,603,968(1)
15,000 Wells Fargo & Company, 8.00% Pfd., Series J ......................................... 413,700*
$ 1,000,000 Wells Fargo Capital XV, 9.75% ....................................................... 1,102,500(1)
------------
78,166,046
------------
FINANCIAL SERVICES -- 2.2%
Heller Financial, Inc.:
33,000 6.687% Pfd., Series C ............................................................ 3,225,750*(1)
5,760 6.95% Pfd., Series D ............................................................. 585,180*
17,904 HSBC Finance Corporation, 6.36% Pfd ................................................. 422,919*
Lehman Brothers Holdings, Inc.:
15,000 5.67% Pfd., Series D ............................................................. 4,125*++
19,500 5.94% Pfd., Series C ............................................................. 5,070*++
25,000 6.50% Pfd., Series F ............................................................. 1,588*++
27,500 7.95% Pfd ........................................................................ 206*++
------------
4,244,838
------------
INSURANCE -- 19.9%
$ 975,000 Ace Capital Trust II, 9.70% 04/01/30 ................................................ 1,218,750(1)(2)
$ 250,000 AON Corporation, 8.205% 01/01/27 .................................................... 280,938
5
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2011 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
14,300 Arch Capital Group Ltd., 8.00% Pfd., Series A ....................................... $ 361,523**(1)(2)
AXA SA:
$ 1,750,000 6.379%, 144A**** ................................................................. 1,603,437**(1)(2)
$ 1,750,000 6.463%, 144A**** ................................................................. 1,564,062**(1)(2)
35,900 Axis Capital Holdings, 7.50% Pfd., Series B ......................................... 3,547,369(1)(2)
90,600 Delphi Financial Group, 7.376% Pfd. 05/15/37 ........................................ 2,197,050(1)
$ 4,000,000 Everest Re Holdings, 6.60% 05/15/37 ................................................. 3,930,000(1)
$ 4,100,000 Liberty Mutual Group, 10.75% 06/15/58, 144A**** ..................................... 5,381,250(1)
$ 900,000 MetLife Capital Trust IV, 7.875% 12/15/37, 144A**** ................................. 974,250(1)
$ 2,775,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ................................... 3,371,625(1)
$ 2,400,000 MetLife, Inc., 10.75% 08/01/39 ...................................................... 3,326,652(1)
Principal Financial Group:
16,000 5.563% Pfd., Series A ............................................................ 1,549,000*(1)
87,500 6.518% Pfd., Series B ............................................................ 2,140,381*(1)
60,000 Renaissancere Holdings Ltd., 6.08% Pfd., Series C ................................... 1,404,000**(1)(2)
119,500 Scottish Re Group Ltd., 7.25% Pfd. .................................................. 1,101,647**(2)+
$ 1,300,000 Stancorp Financial Group, 6.90% 06/01/67 ............................................ 1,249,550(1)
$ 750,000 USF&G Capital, 8.312% 07/01/46, 144A**** ............................................ 842,974(1)
$ 2,000,000 XL Capital Ltd., 6.50%, Series E .................................................... 1,870,000(1)(2)
$ 1,000,000 ZFS Finance USA Trust V, 6.50% 05/09/37, 144A**** ................................... 1,002,500(1)
------------
38,916,958
------------
UTILITIES -- 24.2%
60,000 Alabama Power Company, 6.45% Pfd .................................................... 1,590,000*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ........................... 1,008,750*(1)
20,600 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 .................................... 1,019,700
$ 3,458,000 COMED Financing III, 6.35% 03/15/33 ................................................. 2,894,626(1)
$ 250,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 .................................. 253,572
Dominion Resources, Inc.:
$ 3,500,000 7.50% 06/30/66 ................................................................... 3,643,976(1)
22,500 8.375% Pfd. 06/15/64, Series A ................................................... 649,125(1)
40,000 Entergy Arkansas, Inc., 6.45% Pfd. .................................................. 967,500*(1)
20,000 Entergy Louisiana, Inc., 6.95% Pfd. ................................................. 1,947,500*
$ 2,715,000 FPL Group Capital, Inc., 6.65% 06/15/67 ............................................. 2,704,849(1)
Georgia Power Company:
4,248 6.125% Pfd ....................................................................... 109,784*
25,000 6.50% Pfd., Series 2007A ......................................................... 2,607,813*(1)
3,000 Gulf Power Company, 6.45% Pfd., Series 2007A ........................................ 303,042*(1)
6
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2011 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
32,650 Indianapolis Power & Light Company, 5.65% Pfd ....................................... $ 3,045,634*
185,596 Interstate Power & Light Company, 8.375% Pfd., Series B ............................. 5,301,086*(1)
7,146 MDU Resources Group, 4.50% Pfd. 07/08/10 ............................................ 583,292*
$ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ............................. 500,190(1)
$ 600,000 PPL Capital Funding, 6.70% 03/30/67, Series A ....................................... 590,224
39,000 PPL Electric Utilities Corporation, 6.25% Pfd ....................................... 977,438*
$ 3,800,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ........................................... 3,775,859(1)
55,500 Scana Corporation, 7.70% Pfd. 01/30/65 .............................................. 1,551,225(1)
Southern California Edison:
32,100 6.00% Pfd., Series C ............................................................. 3,085,613*(1)
17,500 6.125% Pfd ....................................................................... 1,731,954*(1)
$ 550,000 Southern Union Company, 7.20% 11/01/66 .............................................. 519,750(1)
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ............................................. 213,750(3)
3,000 Virginia Electric & Power Company, $6.98 Pfd. ....................................... 307,031*
$ 1,900,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ........................................ 1,900,036(1)
3,700 Wisconsin Public Service Corporation, 6.88% Pfd. .................................... 390,003*
$ 3,250,000 WPS Resources Corporation, 6.11% 12/01/66 ........................................... 3,164,388(1)
------------
47,337,710
------------
ENERGY -- 6.8%
$ 5,000,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ......................................... 5,333,450(1)
$ 4,000,000 Enterprise Products Partners, 8.375% 08/01/66, Series A ............................. 4,319,704(1)
3,500 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** ........................................ 3,651,156*
------------
13,304,310
------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 0.2%
12,500 PS Business Parks, Inc., 6.70% Pfd., Series P ....................................... 302,156
------------
302,156
------------
MISCELLANEOUS INDUSTRIES -- 1.6%
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ................................. 3,230,000*(1)
------------
3,230,000
------------
TOTAL PREFERRED SECURITIES
(Cost $178,590,442) .............................................................. 185,502,018
------------
7
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2011 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
CORPORATE DEBT SECURITIES -- 3.7%
BANKING -- 0.2%
$ 415,000 Goldman Sachs Group, 6.75% 10/01/37, Sub Notes ............................ $ 426,683
------------
426,683
------------
INSURANCE -- 2.2%
$ 2,500,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ....................... 2,267,640(1)
$ 2,000,000 UnumProvident Corporation, 7.25% 03/15/28 ................................. 2,095,080(1)
------------
4,362,720
------------
UTILITIES -- 1.3%
$ 2,175,000 Southern Union Company, 8.25% 11/15/29, Senior Notes ...................... 2,474,276(1)
------------
2,474,276
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $6,237,204) ...................................................... 7,263,679
------------
COMMON STOCK -- 0.1%
BANKING -- 0.1%
3,620 CIT Group, Inc. ........................................................... 156,818*+
------------
TOTAL COMMON STOCK
(Cost $330,325) ........................................................ 156,818
------------
MONEY MARKET FUND -- 0.7%
1,350,318 BlackRock Liquidity Funds, T-Fund ......................................... 1,350,318
------------
TOTAL MONEY MARKET FUND
(Cost $1,350,318) ...................................................... 1,350,318
------------
TOTAL INVESTMENTS (Cost $186,508,289***) ................................................. 99.3% 194,272,833
OTHER ASSETS AND LIABILITIES (Net) ....................................................... 0.7% 1,424,630
----- ------------
TOTAL MANAGED ASSETS ..................................................................... 100.0%+++ $195,697,463
----- ------------
LOAN PRINCIPAL BALANCE ................................................................... (64,800,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ............................................... $130,897,463
============
8
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2011 (UNAUDITED)
----------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers. At February 28, 2011, these
securities amounted to $35,890,454 or 18.3% of total managed assets.
(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 $142,695,281 at
February 28, 2011.
(2) Foreign Issuer.
(3) Illiquid.
+ Non-income producing.
++ The issuer has filed for bankruptcy protection. As a result, the Fund may
not be able to recover the principal invested and also does not expect to
receive income on this security going forward.
+++ The percentage shown for each investment category is the total value of
that category as a percentage of total managed assets.
ABBREVIATIONS:
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, 2010 THROUGH FEBRUARY 28, 2011 (UNAUDITED)
VALUE
------------
OPERATIONS:
Net investment income ....................................................... $ 2,999,210
Net realized gain/(loss) on investments sold during the period .............. 1,574,559
Change in net unrealized appreciation/depreciation of investments ........... 1,891,930
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................ 6,465,699
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) ... (3,230,335)
------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................ (3,230,335)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and Cash Purchase
Plan ..................................................................... 100,976
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM
FUND SHARE TRANSACTIONS .................................................. 100,976
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ............ $ 3,336,340
============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ......................................................... $127,561,123
Net increase in net assets during the period ................................ 3,336,340
------------
End of period ............................................................... $130,897,463
============
----------
(1) These tables summarize the three months ended February 28, 2011 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2010.
(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, 2010 THROUGH FEBRUARY 28, 2011 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................................ $ 11.86
------------
INVESTMENT OPERATIONS:
Net investment income ....................................................... 0.28
Net realized and unrealized gain/(loss) on investments ...................... 0.32
------------
Total from investment operations ............................................ 0.60
------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income .................................................. (0.30)
------------
Total distributions to Common Stock Shareholders ............................ (0.30)
------------
Net asset value, end of period .............................................. $ 12.16
============
Market value, end of period ................................................. $ 12.13
============
Common Stock shares outstanding, end of period .............................. 10,767,784
============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ ...................................................... 9.50%*
Operating expenses including interest expense ............................... 2.15%*
Operating expenses excluding interest expense ............................... 1.50%*
SUPPLEMENTAL DATA:++
Portfolio turnover rate ..................................................... 6%**
Total managed assets, end of period (in 000's) .............................. $ 195,697
Ratio of operating expenses including interest expense to total managed
assets ................................................................... 1.44%*
Ratio of operating expenses excluding interest expense to total managed
assets ................................................................... 1.00%*
(1) These tables summarize the three months ended February 28, 2011 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2010.
* Annualized.
** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses,
including interest expense.
++ Information presented under heading Supplemental Data includes 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, 2010 - Extra .. $0.0300 $11.82 $11.62 $11.66
December 31, 2010 .......... 0.0900 11.82 11.62 11.66
January 31, 2011 ........... 0.0900 11.92 11.80 11.90
February 28, 2011 .......... 0.0900 12.16 12.13 12.16
----------
(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 February 28, 2011, the aggregate cost of securities for federal income
tax purposes was $186,308,944, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was
$27,784,796 and the aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $19,820,907.
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
February 28, 2011 is as follows:
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
FEBRUARY 28, 2011 PRICE INPUTS INPUTS
----------------- ----------- ------------ ------------
Preferred Securities
Banking $ 78,166,046 $52,812,015 $ 25,260,611 $93,420
Financial Services 4,244,838 422,919 3,821,919 --
Insurance 38,916,958 20,258,378 18,658,580 --
Utilities 47,337,710 11,255,196 36,082,514 --
Energy 13,304,310 -- 13,304,310 --
Real Estate Investment Trust (REIT) 302,156 302,156 -- --
Miscellaneous Industries 3,230,000 -- 3,230,000 --
Corporate Debt Securities 7,263,679 2,900,959 4,362,720 --
Common Stock
Banking 156,818 156,818 -- --
Money Market Fund 1,350,318 1,350,318 -- --
------------ ----------- ------------ -------
Total Investments $194,272,833 $89,458,759 $104,720,654 $93,420
============ =========== ============ =======
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 11/30/10 ............................. $39,816 $39,816
Accrued discounts/premiums ......................... -- --
Realized gain/(loss) ............................... -- --
Change in unrealized appreciation/(depreciation) ... 53,604 53,604
Net purchases/(sales) .............................. -- --
Transfers in and/or out of Level 3 ................. -- --
------- -------
BALANCE AS OF 2/28/11 .............................. $93,420 $93,420
======= =======
For the period ended February 28, 2011, total change in unrealized
gain/(loss) on Level 3 securities still held at period-end and included in the
change in net assets was $53,604.
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 Shareowner Services
P.O. Box 358035
Pittsburgh, PA 15252-8035
1-866-351-7446
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND
INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
(FLAHERTY & CRUMRINE LOGO)
PREFERRED INCOME FUND
Quarterly Report
February 28, 2011
www.preferredincome.com
ITEM 2. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's last
fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of
the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Flaherty & Crumrine Preferred Income Fund Incorporated
By (Signature and Title)* /s/ Donald F. Crumrine
------------------------------------------------------
Donald F. Crumrine, Director,
Chairman of the Board and Chief
Executive Officer
(principal executive officer)
Date 4/21/11
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Donald F. Crumrine
------------------------------------------------------
Donald F. Crumrine, Director,
Chairman of the Board and Chief
Executive Officer
(principal executive officer)
Date 4/21/11
By (Signature and Title)* /s/ R. Eric Chadwick
------------------------------------------------------
R. Eric Chadwick,
Chief Financial Officer, Treasurer and Vice
President
(principal financial officer)
Date 4/21/11
* Print the name and title of each signing officer under his or her
signature.