-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BrQHYM8J+XcDu3AlJ1ijxWi4aIXJqP1jQPWyzkvlHh7SMHsZhmStOB/4Rz8Tg5Jb HF2In9wBRX6bzy5PnD5/EA== 0000935069-09-001059.txt : 20090428 0000935069-09-001059.hdr.sgml : 20090428 20090428103006 ACCESSION NUMBER: 0000935069-09-001059 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20090228 FILED AS OF DATE: 20090428 DATE AS OF CHANGE: 20090428 EFFECTIVENESS DATE: 20090428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLAHERTY & CRUMRINE PREFERRED INCOME FUND INC CENTRAL INDEX KEY: 0000868578 IRS NUMBER: 954305694 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06179 FILM NUMBER: 09774412 BUSINESS ADDRESS: STREET 1: 301 E COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: (626) 795-7300 MAIL ADDRESS: STREET 1: 301 E COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 FORMER COMPANY: FORMER CONFORMED NAME: PREFERRED INCOME FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 n30.txt PFD N30 0209 FLAHERTY & CRUMRINE PREFERRED INCOME FUND To the Shareholders of Flaherty & Crumrine Preferred Income Fund: The start of fiscal 2009 has been a mixed bag--overall performance was negative but signs of improvement began to appear late in the Fund's 1st fiscal quarter ended February 28, 2009. During this period, the Fund's total return based on net asset value was -11.8%. The total return based on market price was - -1.2%. Since the middle of 2007, when the first signs of economic trouble appeared, financial markets throughout the world have experienced severe turmoil. The preferred market has been knocked around especially hard and, as a result, the performance of the Fund has suffered. In June 2007, the Fund's NAV was just above $15 per share. At the end of this past fiscal period it was $5.11. In the summer of 2007, the Fund was paying a monthly dividend of $0.086 per share; it is now $0.063. In addition to managing the Fund, we are shareholders and these numbers hurt. The temptation to rip out the rear-view mirror and concentrate on the road ahead is reinforced by the view from both. We have just experienced the worst markets in the history of the Fund, and it's not possible to know if we have seen the bottom. But if the first step towards recovery is admitting there is a problem, the massive de-leveraging of our financial system is such an admission. While painful, this will result in a much healthier economy going forward. In the meantime, however, there is a great deal of uncertainty and fear about how much bad debt is out there and about the government's plans for dealing with it. In the tumultuous days of late February, there were very real concerns about the viability of several large financial institutions. In addition, the hodge-podge of government programs introduced since September left many scratching their heads to find any real core strategy for recovery. Talk of nationalizing the banking system took on a life of its own, and prices of securities issued by most banks (debt, preferred and common stock) all seemed to be in freefall. On February 25th, the U.S. Treasury released details of its Capital Assistance Program; two days later, Citicorp announced a preferred for common exchange program; and in early March, several large banks announced that they were profitable in January and February. These developments muted talk of bank nationalization and financial meltdown. (Please see the Fund's website for a more detailed discussion dated February 27, 2009.) The events of late February, along with subsequent announcements by several banks that they expect to be profitable in the 1st quarter, have enticed some investors back into the market. Equally important, efforts to kick start the economy appear to be taking hold and some degree of confidence has been restored. As discussed in the Quarterly Economic Update on the Fund's website, we expect the growth rate of the U.S. economy to once again be positive by the 4th quarter of this year. As one would expect, for several quarters, bank issues have been the worst performing segment of the preferred market, as well as of the Fund's portfolio. Fortunately, the Fund's exposure to the banking industry was much less than it might otherwise have been--bank issues comprise about 60% of the entire preferred universe, but only 36%(1) of the portfolio as of February 28, 2009. Other than banks, the portfolio is invested in utilities 25%, insurance 15% and energy 9%. These positions helped dampen the negative impact of the banks, but they too are trading at historically low levels. Whereas concerns about credit quality have been the key factor driving the bank market, prices in these other segments have been impacted more by a widespread desire (or need) to sell. Investors ranging from hedge funds to broker/dealer firms to closed-end funds like PFD have been caught in a - ---------- (1) The bank component of the entire universe is based on par value, while calculation for the Fund's portfolio is based on market value. deleveraging cycle where falling prices force sales, and sales cause prices to fall further. This trend became readily evident during the latter part of last year. Only recently has it shown signs of abating. There are indications the market for preferred stocks has begun to stabilize. The indiscriminate selling has slowed and buyers are returning. We've been encouraged to see more rational investor behavior. For example, most companies in the utility industry are financially healthy, but until recently, investors were acting like they were all marching up to death's door. The same can be said for most insurance companies. And, in our opinion, there are still many healthy banks in the U.S., yet the market had seemed to think a bank is a bank is a bank (apologies to Gertrude Stein). In recent weeks, sanity appears to be creeping back into the market and some are viewing these anomalies as opportunities. The depressed prices of preferred securities have also attracted the interest of issuers themselves, and in the past few weeks several have launched formal tender offers or appear to be purchasing their securities in the open market. In this environment, a company's willingness to spend cash and purchase its own securities is a meaningful indication of just how cheap the securities have gotten. Another small but important sign of improvement was the ability of one company to raise capital by issuing preferred. FPL Capital, a subsidiary of a large public utility, sold $375 million of a new preferred security, and demand for the issue was strong. This was the first new preferred issue since last September! A vibrant new issue market would be a sure signal of the market's return to health, and while we're not there yet, we are encouraged by the response to this recent issue. In light of ongoing weakness in the preferred market, the Fund has continued to reduce the amount of leverage it employs. As the value of the Fund's investment portfolio declined, the ratios of assets to liabilities using required measures fell and the Fund reduced leverage to maintain coverage ratios. During the last quarter, the Fund announced the redemption of $10 million of its auction preferred shares on April 7th. One consequence of deleveraging over the past six months has been a reduction in the amount of income available for distribution to shareholders as dividends, and in December, the Fund reduced its dividend by 4.5%. Leverage remains an important part of the Fund's strategy for producing high current income and we have provided a more complete description on the Fund's website in a Leverage Update dated April 20, 2009. We are optimistic about the future. By no means are we out of the woods--there are many substantial challenges ahead. A wise friend used to counsel against betting on the end of the world, pointing out that it just doesn't happen that often (and if it does, there will be bigger issues to worry about!). Much of our optimism stems from just how far prices have fallen; the likelihood of more defaults is higher than in the past, but market prices imply widespread business failures, and we will take the other side of that bet. We hope you'll visit the Fund's website, www.preferredincome.com. Our most recent Economic Update breaks down the economic data in a useful and informative way. The website also keeps shareholders up-to-date on various issues affecting the Fund. Sincerely, /s/ Donald F. Crumrine /s/ Robert M. Ettinger Donald F. Crumrine Robert M. Ettinger Chairman of the Board President April 20, 2009 2 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OVERVIEW FEBRUARY 28, 2009 (UNAUDITED) FUND STATISTICS ON 2/28/09 Net Asset Value $ 5.11 Market Price $ 5.43 Premium 6.26% Yield on Market Price 13.92% Common Stock Shares Outstanding 10,600,205
MOODY'S RATINGS % OF NET ASSETS+ - --------------- ---------------- AA 4.2% A 17.2% BBB 39.9% BB 21.1% Below "BB" 1.2% Not Rated 4.1% ---- Below Investment Grade* 18.6%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
INDUSTRY CATEGORIES % OF NET ASSETS+ - ------------------- ---------------- Banking 36% Utilities 25% Insurance 15% Energy 9% Other 15%
TOP 10 HOLDINGS BY ISSUER % OF NET ASSETS+ - ------------------------- ---------------- Interstate Power & Light 5.1% PNC Financial Services 5.0% Liberty Mutual Group 5.0% Banco Santander 4.2% Sovereign Bancorp 3.9% Kinder Morgan 3.8% Bank of America 3.0% Union Electric 2.9% Ocean Spray 2.8% Enbridge Energy Partners 2.7%
% OF NET ASSETS**+ ------------------ Holdings Generating Qualified Dividend Income (QDI) for Individuals 51% Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD) 45%
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY, DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR REGARDING THEIR PERSONAL SITUATION. + NET ASSETS INCLUDES ASSETS ATTRIBUTABLE TO THE USE OF LEVERAGE. 3 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS FEBRUARY 28, 2009 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ -------------- PREFERRED SECURITIES -- 84.8% BANKING -- 35.8% $ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ............... $ 2,677,850 Banco Santander: 34,248 Adj. Rate Pfd. ............................................... 248,726**(1) 277,150 6.50% Pfd. ................................................... 3,672,238**(1) 22,750 6.80% Pfd. ................................................... 277,778**(1) Bank of America Corporation: 108,000 Adj. Rate Pfd., Series 5 ..................................... 558,360* 200,000 6.25% Pfd. ................................................... 1,380,000* 48,700 6.70% Pfd. ................................................... 374,503* $ 4,800,000 Capital One Capital III, 7.686% 08/15/36 ........................ 2,181,634 $ 5,210,000 CBG Florida REIT Corporation, 7.114%, 144A**** .................. 527,189 CIT Group, Inc.: $ 905,000 6.10% 03/15/67 ............................................... 201,218 254,500 6.35% Pfd., Series A ......................................... 1,145,886* 38,500 Citigroup, Inc., 8.125% Pfd., Series AA ......................... 320,416*+ 50,000 Cobank, ACB, 7.00% Pfd., 144A**** ............................... 1,342,300* $ 4,400,000 Comerica Capital Trust II, 6.576% 02/20/37 ...................... 1,393,784 9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ...................... 2,058,750* $ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ............. 1,838,230(1) 1,250 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ..................................................... 262,500 22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** ........................................... 358,594 2,250 First Tennessee Bank, Adj. Rate Pfd., 144A**** .................. 787,500* $ 1,500,000 First Union Capital II, 7.95% 11/15/29 .......................... 1,248,728 Goldman Sachs: 7,800 Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 ............... 74,588 11 Pass-Through Certificates, Class B, 144A**** ................. 0*+ 2,500 STRIPES Custodial Receipts, Pvt. ............................. 25* HSBC USA, Inc.: 52,000 Adj. Rate Pfd., Series D ..................................... 627,250* 176,000 Adj. Rate Pfd., Series G ..................................... 1,535,160* 2,500 $2.8575 Pfd. ................................................. 65,625* 15,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 ......................... 153,638 $ 550,000 Lloyds Banking Group PLC, 6.657%, 144A**** ...................... 109,337**(1) 3,000 Merrill Lynch, Series II STRIPES Custodial Receipts, Pvt. ....... 7,530*+ 31,500 PFGI Capital Corporation, 7.75% Pfd. ............................ 573,892 274,200 PNC Financial Services, 9.875% Pfd., Series F ................... 4,414,620* $ 1,500,000 Regions Financing Trust II, 6.625% 05/15/47 ..................... 469,427
4 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2009 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ -------------- PREFERRED SECURITIES -- (CONTINUED) BANKING -- (CONTINUED) 271,480 Sovereign Bancorp, 7.30% Pfd., Series C ......................... $ 3,010,713* 20,100 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 .................. 240,446 1,000 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ................. 642,500 U.S. Bancorp, Auction Pass-Through Trust, Cl. B: 11 Series 2006-5, Variable Rate Pfd., 144A**** .................. 275*+ 11 Series 2006-6, Variable Rate Pfd., 144A**** .................. 275*+ $ 1,000,000 Washington Mutual Preferred Funding IV, 9.75%, 144A**** ......... 700++ $ 1,600,000 Webster Capital Trust IV, 7.65% 06/15/37 ........................ 651,232 -------------- 35,433,417 -------------- FINANCIAL SERVICES -- 0.0% Lehman Brothers Holdings, Inc.: 15,000 5.67% Pfd., Series D ......................................... 3,840*++ 19,500 5.94% Pfd., Series C ......................................... 4,877*++ 25,000 6.50% Pfd., Series F ......................................... 1,663*++ 27,500 7.95% Pfd. ................................................... 110*++ -------------- 10,490 -------------- INSURANCE -- 12.0% 27,500 Arch Capital Group Ltd., 8.00% Pfd., Series A ................... 485,719**(1) 35,900 Axis Capital Holdings, 7.50% Pfd., Series B ..................... 2,170,830(1) 90,600 Delphi Financial Group, 7.376% Pfd. 05/15/37 .................... 925,253 $ 3,000,000 Everest Re Holdings, 6.60% 05/15/37 ............................. 1,070,283 Liberty Mutual Group: $ 4,500,000 7.80% 03/15/37, 144A**** ..................................... 1,802,354 $ 500,000 10.75% 06/15/58, 144A**** .................................... 265,331 $ 2,000,000 MetLife Capital Trust IV, 7.875% 12/15/37, 144A**** ............. 1,254,504 $ 1,500,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ............... 1,001,360 $ 2,000,000 PartnerRe Finance II, 6.44% 12/01/66 ............................ 770,842(1) Renaissancere Holdings Ltd.: 73,050 6.08% Pfd., Series C ......................................... 945,998**(1) 19,700 6.60% Pfd., Series D ......................................... 279,740**(1) 119,500 Scottish Re Group Ltd., 7.25% Pfd. .............................. 294,269**(1)+ $ 750,000 USF&G Capital, 8.312% 07/01/46, 144A**** ........................ 610,826 -------------- 11,877,309 --------------
5 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2009 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ -------------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- 25.0% Alabama Power Company: 300 4.52% Pfd. ................................................... $ 20,559* 5,734 4.72% Pfd. ................................................... 410,339* 25,000 6.45% Pfd. ................................................... 528,908* 5,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ....... 512,813* 900 Central Hudson Gas & Electric Corporation, 4.96% Pfd., Series E, Pvt. ............................................... 69,778* 2,780 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ................................................... 278,348* $ 2,491,000 COMED Financing III, 6.35% 03/15/33 ............................. 1,355,438 $ 500,000 Dominion Resources, Inc., 7.50% ................................. 325,402 Duquesne Light Company: 7,675 4.10% Pfd. ................................................... 175,566* 9,190 4.15% Pfd. ................................................... 221,709* 910 4.20% Pfd. ................................................... 21,158* 5,490 $2.10 Pfd., Series A ......................................... 120,780* 25,000 Entergy Arkansas, Inc., 6.45% Pfd. .............................. 507,813* Georgia Power Company: 12,600 6.125% Pfd. .................................................. 309,110* 5,500 6.50% Pfd., Series 07-A ...................................... 470,250* 2,010 Great Plains Energy, Inc., 4.50% Pfd. ........................... 157,293* 50,000 Hawaiian Electric Company, Inc., 5.25% Pfd., Series H, Pvt. ..... 739,065* 32,650 Indianapolis Power & Light Company, 5.65% Pfd. .................. 2,325,294* 199,000 Interstate Power & Light Company, 8.375% Pfd., Series B ......... 5,096,888* Pacific Enterprises: 22,430 $4.50 Pfd. ................................................... 1,750,242* 10,000 $4.75 Pfd., Series 53 ........................................ 784,063* 1,095 PacifiCorp, 5.40% Pfd. .......................................... 89,379* $ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ......... 428,317 $ 2,475,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ....................... 1,386,000 25,000 Southern California Edison, 6.00% Pfd., Series C ................ 1,879,688* $ 1,000,000 Southern Union Company, 7.20% 11/01/66 .......................... 505,000 $ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ......................... 333,713 Union Electric Company: 14,150 4.56% Pfd. ................................................... 923,288* 18,800 $7.64 Pfd. ................................................... 1,901,150* $ 1,900,000 Wisconsin Energy Corporation, 6.25% 05/15/67 .................... 1,160,619 -------------- 24,787,970 --------------
6 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2009 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ -------------- PREFERRED SECURITIES -- (CONTINUED) ENERGY -- 9.2% $ 4,500,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ..................... $ 2,686,590 $ 2,600,000 Enterprise Products Partners, 7.034% 01/15/68 ................... 1,679,405 3,500 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** .................... 3,802,094* 10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ..................... 953,125*(1) -------------- 9,121,214 -------------- MISCELLANEOUS INDUSTRIES -- 2.8% 40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ............. 2,735,000* -------------- 2,735,000 -------------- TOTAL PREFERRED SECURITIES (Cost $153,970,383) .......................................... 83,965,400 -------------- CORPORATE DEBT SECURITIES -- 2.9% INSURANCE -- 2.9% $ 4,729,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ............. 2,884,435 -------------- 2,884,435 -------------- TOTAL CORPORATE DEBT SECURITIES (Cost $4,646,173) ............................................ 2,884,435 -------------- MONEY MARKET FUND -- 10.1% 9,969,776 BlackRock Provident Institutional, T-Fund ....................... 9,969,776 -------------- TOTAL MONEY MARKET FUND (Cost $9,969,776) ............................................ 9,969,776 --------------
7 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2009 (UNAUDITED) TOTAL INVESTMENTS (Cost $168,586,332***) ............................. 97.8% $ 96,819,611 OTHER ASSETS AND LIABILITIES (Net) ................................... 2.2% 2,193,066 ----- -------------- TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ............. 100.0%+++ $ 99,012,677 ----- -------------- AUCTION PREFERRED STOCK (APS) REDEMPTION VALUE ....................... (44,800,000) -------------- TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ........................... $ 54,212,677 ==============
- ---------- * 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, 2009, these securities amounted to $21,398,949 or 21.6% of net assets. These securities have been determined to be liquid under the guidelines established by the Board of Directors. (1) 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 available to Common and Preferred Stock. ABBREVIATIONS: CABCO -- Corporate Asset Backed Corporation PFD. -- Preferred Securities PVT. -- Private Placement Securities STRIPES -- Structured Residual Interest Preferred Enhanced Securities 8 Flaherty & Crumrine Preferred Income Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1) FOR THE PERIOD FROM DECEMBER 1, 2008 THROUGH FEBRUARY 28, 2009 (UNAUDITED)
VALUE -------------- OPERATIONS: Net investment income ....................................................... $ 2,731,837 Net realized gain/(loss) on investments sold during the period .............. (3,705,379) Change in net unrealized appreciation/depreciation of investments ........... (5,680,353) Distributions to APS* Shareholders from net investment income, including changes in accumulated undeclared distributions ................ (507,079) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................ (7,160,974) DISTRIBUTIONS: Dividends paid from net investment income to Common Stock Shareholders(2) ... (2,001,890) -------------- TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................ (2,001,890) FUND SHARE TRANSACTIONS: Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan ............................................................ 98,166 -------------- NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE TRANSACTIONS .................................................. 98,166 -------------- NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ............ $ (9,064,698) ============== NET ASSETS AVAILABLE TO COMMON STOCK: Beginning of period. ........................................................ $ 63,277,375 Net decrease in net assets during the period ................................ (9,064,698) -------------- End of period ............................................................... $ 54,212,677 ==============
- ---------- * Auction Preferred Stock. (1) These tables summarize the three months ended February 28, 2009 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2008. (2) May include income earned, but not paid out, in prior fiscal year. 9 Flaherty & Crumrine Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS(1) FOR THE PERIOD FROM DECEMBER 1, 2008 THROUGH FEBRUARY 28, 2009 (UNAUDITED) FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD. PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period ........................................ $ 5.98 -------------- INVESTMENT OPERATIONS: Net investment income ....................................................... 0.26 Net realized and unrealized gain/(loss) on investments. ..................... (0.89) DISTRIBUTIONS TO APS* SHAREHOLDERS: From net investment income .................................................. (0.05) -------------- Total from investment operations ............................................ (0.68) -------------- DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS: From net investment income .................................................. (0.19) -------------- Total distributions to Common Stock Shareholders ............................ (0.19) -------------- Net asset value, end of period .............................................. $ 5.11 ============== Market value, end of period ................................................. $ 5.43 ============== Common Stock shares outstanding, end of period .............................. 10,600,205 ============== RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Net investment income+ ...................................................... 14.03%** Operating expenses .......................................................... 2.24%** SUPPLEMENTAL DATA:++ Portfolio turnover rate ..................................................... 6%*** Total net assets available to Common and Preferred Stock, end of period (in 000's) ........................................................ $ 99,013 Ratio of operating expenses to total average net assets available to Common and Preferred Stock ............................................... 1.21%**
(1) These tables summarize the three months ended February 28, 2009 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2008. * Auction Preferred Stock. ** Annualized. *** Not Annualized. + The net investment income ratios reflect income net of operating expenses and payments to APS Shareholders. ++ Information presented under heading Supplemental Data includes APS. 10 Flaherty & Crumrine Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS (CONTINUED) PER SHARE OF COMMON STOCK (UNAUDITED)
TOTAL NYSE DIVIDEND DIVIDENDS NET ASSET CLOSING REINVESTMENT PAID VALUE PRICE PRICE(1) --------- --------- ------- ------------ December 31, 2008 .............. $0.0630 $6.50 $5.90 $6.56 January 30, 2009 ............... 0.0630 6.08 7.05 6.70 February 27, 2009 .............. 0.0630 5.11 5.43 5.16
- ---------- (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, 2009 the aggregate cost of securities for federal income tax purposes was $168,794,750, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $1,122,295 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $73,097,434. 2. ADDITIONAL ACCOUNTING STANDARDS STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 157 "FAIR VALUE MEASUREMENTS" ("SFAS 157") In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" ("SFAS 157") effective for fiscal years beginning after November 15, 2007. This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. The Fund has adopted SFAS 157 as of December 1, 2007. The three levels of the fair value hierarchy under SFAS 157 are described below: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) 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, 2009 is as follows:
OTHER FINANCIAL INSTRUMENTS INVESTMENTS (UNREALIZED IN SECURITIES APPRECIATION/ VALUATION INPUTS (MARKET VALUE) DEPRECIATION)* - ---------------- -------------- --------------- Level 1 - Quoted Prices .......................... $36,425,291 $-- Level 2 - Other Significant Observable Inputs .... 60,394,320 -- Level 3 - Significant Unobservable Inputs ........ -- -- ----------- --- TOTAL ............................................ $96,819,611 $--
* Other financial instruments are derivative instruments not reflected in the Portfolio of Investments, such as futures, forwards and swaps which are valued at the unrealized appreciation/depreciation on the investment. As of February 28, 2009 the Fund does not have any other financial instruments. 12 Flaherty & Crumrine Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. SECTION 19 NOTICES Section 19 of the Investment Company Act of 1940 requires registered investment companies to include a notice with the payment of a dividend if a portion of that dividend may come from sources other than undistributed net income (other sources could include realized gains from the sale of securities and non-taxable return of capital). Copies of the Section 19 notices for the Fund are available on the website at www.preferredincome.com. The amounts and sources of distributions reported below are only estimates and are not being provided for tax reporting purposes. Form 1099-DIV will be sent to shareholders in January 2010 reporting the amount and tax characterization of distributions for the 2009 calendar year.
SOURCE OF DISTRIBUTIONS AS OF 2/28/09 ------------------------------------------------ NET NET RETURN TOTAL PER INVESTMENT REALIZED OF COMMON INCOME CAPITAL GAINS CAPITAL SHARE ---------- ------------- ------- --------- Calendar 2009 Distributions .............. $0.1197 $0.00 $0.0063 $0.126 Percentage of Total Distributions ........ 95.0% 0.0% 5.0% --
13 [This page intentionally left blank] [This page intentionally left blank] 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 PREFERRED INCOME FUND LOGO) Quarterly Report February 28, 2009 www.preferredincome.com -----END PRIVACY-ENHANCED MESSAGE-----