-----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, PJFfsB7yM26jzvyX8lvlUBnAP2TWfkm1RtI7lcTGiteuSNCWjKNazqA3Ur4kN9uD 2S2aVCtDqUzLUrcz5VnJtA== 0000950123-10-039601.txt : 20100428 0000950123-10-039601.hdr.sgml : 20100428 20100428160730 ACCESSION NUMBER: 0000950123-10-039601 CONFORMED SUBMISSION TYPE: N-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20100228 FILED AS OF DATE: 20100428 DATE AS OF CHANGE: 20100428 EFFECTIVENESS DATE: 20100428 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-Q SEC ACT: 1940 Act SEC FILE NUMBER: 811-06179 FILM NUMBER: 10777033 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-Q 1 nq.txt FLAHERTY AND CRUMRINE PREFERRED INCOME FUND 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, 2010 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: The new fiscal year began much like the previous year ended. For the three month period ended February 28, 2010, total return (principal change and income) on net asset value of the Fund was +10.9%. Over the same period, total return on market price of Fund shares was +27.2%. The strong performance came as credit markets continued to recover from the depths of the financial crisis last year. Economists and investors have expressed confidence that our financial system is back on track, and, although problems persist, seeds of recovery are in place. We share this view and encourage you to visit www.preferredincome.com to read our Quarterly Economic Update. Over the past several quarters, the focus of these letters has been the financial crisis and its impact on the Fund's investment portfolio. We experienced gut-wrenching market weakness starting in the second half of 2008 and continuing into early 2009, only to watch prices rebound dramatically in the months since. Never before have we seen such extreme volatility over a relatively short time frame. We expect smoother waters ahead, but, as always, the future will be filled with challenges and opportunities. We will take advantage of this relative calm to review the market for preferred securities a bit more broadly than our typical quarterly letter. After turbulence, the time seems right to take a step back and regain some perspective on the market. Readers can compare these broad market comments to the Fund's investments summarized on the following pages. As of February 28, 2010, the market for preferred securities has grown to $378 billion(1) from $231 billion in 2005. The issues that comprise the market are far from homogeneous. An issuer is now able to tailor a preferred security to its specific financing needs by choosing from a wide range of features. Because of the variety of terms preferreds have, it has become easier to define a preferred by what it is not--a preferred security is not senior debt and it is not common stock. Fifteen percent of the market is "traditional" preferred, i.e. the distributions to investors are DIVIDENDS, and paid from after-tax income of the issuer. These distributions may have after-tax benefits to investors. 85% is "taxable" preferred that pay INTEREST(2); these payments are treated as interest expense for issuers and ordinary income for investors. Many features of preferred securities are especially beneficial to companies in highly-regulated industries. Preferred issues from utilities, banks and insurance companies comprise over 80% of the preferred market. Of course, as the experience of the past couple of years serves to remind us, regulators can contribute to problems at the companies they regulate. Nonetheless, regulators recognize the critical role of the preferred market, and have helped facilitate growth in the asset class. Despite a rash of downgrades during the financial crisis, the market is still comprised of mostly investment-grade issues. 64% of preferred issues are rated Baa or higher. A substantially larger portion of the preferred universe is comprised of issuers with SENIOR DEBT rated investment grade. For this reason, preferred securities are widely considered to be the highest yielding asset class of investment grade companies. - ---------- (1) Market statistics used in this report, along with a wide range of additional information can be viewed by visiting the Flaherty & Crumrine website, www.preferredstockguide.com. (2) We include preferred securities issued in the United States by foreign domiciled entities in the "taxable" category; many of these issues make distributions considered to be dividends for some types of investors A word about credit analysis is in order. We have always based investment decisions on our internal credit research, and try to own credits that we believe are investment grade quality. Of course, credit analysis is more art than science, and no one does it perfectly, but we think our team does an outstanding job. Our focus is first and foremost on preferred securities. The objective of our credit analysis is to develop an in-depth opinion about the quality of each security in the Fund. This approach differs from the rating agencies, where the focus is primarily on the quality of an issuer's most senior debt. Once the senior debt rating is determined, a mechanical "notching" methodology is applied to rate subordinated classes of securities, such as the issuer's preferreds (rating agency methodology brings to mind the Bismarck quote, "laws are like sausages, it is better not to see them being made"). Much has been made recently about potential conflicts at the public rating agencies. Whether the conflicts are real or perceived, the business model of the agencies is likely to change. Regardless of how one views the public rating agencies, we don't face those conflicts and care only about choosing the right investments for the Fund. We pay close attention to the public ratings, but our investment decisions are only made after we do our own homework. One additional question that should be on the minds of shareholders: can the Fund continue to produce double-digit quarterly returns? The answer shouldn't be surprising--it's not likely. By a variety of measures, in our view, the preferred market remains attractive relative to other asset classes. But the disparity is not as glaring as it was last spring and, in fact, is now approaching a range we consider normal. Of course, preferred security prices never experienced anything like the volatility they experienced during the recent financial crisis. Historically, investors have (quite properly) owned these securities for the income they produce; only recently have they attracted the attention of those more inclined toward casinos. Now that the economy is beginning to stabilize, the wrath of recent markets seems to have instilled a new sense of discipline and propriety on companies that lost their way. Nonetheless, we will continue to keep a close eye on how those companies adapt to this new environment. More information is always available on the Fund's website at www.preferredincome.com. Sincerely, /s/ Donald F. Crumrine /s/ Robert M. Ettinger Donald F. Crumrine Robert M. Ettinger Chairman of the Board President April 21, 2010 2 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OVERVIEW FEBRUARY 28, 2010 (UNAUDITED) FUND STATISTICS Net Asset Value $ 10.67 Market Price $ 11.37 Premium 6.56% Yield on Market Price 7.60% Common Stock Shares Outstanding 10,685,849
MOODY'S RATINGS % OF NET ASSETS+ - ----------------------- ---------------- AA 0.3% A 8.6% BBB 67.5% BB 19.6% Below "BB" 0.6% Not Rated 1.2% ---- Below Investment Grade* 15.2%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P. (PIE CHART)
INDUSTRY CATEGORIES % OF NET ASSETS+ - ------------------- ---------------- Other 4% Banking 41% Utilities 26% Insurance 22% Energy 6% Financial Services 1%
TOP 10 HOLDINGS BY ISSUER % OF NET ASSETS+ - ------------------------- ---------------- Banco Santander 6.8% PNC Financial Services 5.7% Capital One Financial 4.4% Liberty Mutual Group 4.1% Metlife 3.8% Dominion Resources 3.7% Comerica 3.5% Goldman Sachs 3.3% Interstate Power & Light 2.9% HSBC Plc 2.8%
% OF NET ASSETS**+ ------------------ Holdings Generating Qualified Dividend Income (QDI) for Individuals 43% Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD) 29%
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY, DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR REGARDING THEIR PERSONAL SITUATION. + NET ASSETS INCLUDES ASSETS ATTRIBUTABLE TO THE USE OF LEVERAGE. 3 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE - -------------- --------------- PREFERRED SECURITIES -- 95.0% BANKING -- 41.3% $ 2,750,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ............................. $ 2,861,625(1) 417,300 Banco Santander, 10.50% Pfd., Series 10 ....................................... 11,493,485**(1)(2) 48,700 Bank of America Corporation, 6.70% Pfd. ....................................... 1,079,192*(1) Barclays Bank PLC: $ 3,250,000 6.278% ..................................................................... 2,486,250(1)(2) 40,000 6.625% Pfd., Series 2 ...................................................... 863,600*(1)(2) 20,000 8.125% Pfd., Series 5 ...................................................... 502,000**(2) 87,500 BB&T Capital Trust VI, 9.60% Pfd. ............................................. 2,493,750(1) $ 5,100,000 Capital One Capital III, 7.686% 08/15/36 ...................................... 4,799,100(1) $ 2,500,000 Capital One Capital VI, 8.875% 05/15/40 ....................................... 2,671,040 $ 5,210,000 Colonial BancGroup, 7.114%, 144A**** .......................................... 15,630++ $ 7,100,000 Comerica Capital Trust II, 6.576% 02/20/37 .................................... 5,946,250(1) 9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** .................................... 61,740*++ 1,250 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ........... 1,162,500(1) 22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** ......................................................... 561,094(1) 3,250 First Tennessee Bank, Adj. Rate Pfd., 144A**** ................................ 1,851,484*(1) $ 600,000 First Tennessee Capital I, 8.07% 01/06/27, Series A ........................... 532,874 $ 500,000 First Tennessee Capital II, 6.30% 04/15/34, Series B .......................... 352,891 $ 1,500,000 First Union Capital II, 7.95% 11/15/29 ........................................ 1,542,829(1) Goldman Sachs: $ 5,040,000 Capital II, 5.793% ......................................................... 4,044,600(1) 2,500 STRIPES Custodial Receipts, Pvt. ........................................... 1,525,000* $ 500,000 HSBC USA Capital Trust II, 8.38% 05/15/27, 144A**** ........................... 478,731 HSBC USA, Inc.: 46,200 Adj. Rate Pfd., Series D ................................................... 1,076,576*(1) 109,700 6.50% Pfd., Series H ....................................................... 2,667,081*(1) 4,400 $2.8575 Pfd. ............................................................... 194,260*(1) $ 950,000 JPMorgan Chase Capital XXVII, 7.00% 11/01/39, Series AA ....................... 968,468 15,000 JPMorgan Chase Capital XXVIII, 7.20% Pfd. 12/22/39 ............................ 395,157 15,000 Keycorp Capital VIII, 7.00% Pfd. 06/15/66 ..................................... 334,688(1) 23,500 Keycorp Capital X, 8.00% Pfd. ................................................. 587,265(1) $ 550,000 Lloyds Banking Group PLC, 6.657%, 144A**** .................................... 294,250**(2)+ 25,000 Morgan Stanley Capital Trust VIII, 6.45% Pfd. 04/15/67 ........................ 546,750 31,500 PFGI Capital Corporation, 7.75% Pfd. .......................................... 720,563(1) 250,300 PNC Financial Services, 9.875% Pfd., Series F ................................. 7,336,919*(1) $ 1,600,000 PNC Preferred Funding Trust III, 8.70%, 144A**** .............................. 1,677,274(1) 1,750 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ............................... 1,999,375
4 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE - -------------- --------------- PREFERRED SECURITIES -- (CONTINUED) BANKING -- (CONTINUED) $ 2,400,000 Wachovia Capital Trust III, 5.80% ............................................. $ 1,956,000 $ 1,000,000 Washington Mutual, 9.75%, 144A**** ............................................ 32,500++ $ 1,600,000 Webster Capital Trust IV, 7.65% 06/15/37 ...................................... 1,040,000(1) $ 1,000,000 Wells Fargo Capital XV, 9.75% ................................................. 1,090,700 --------------- 70,243,491 --------------- FINANCIAL SERVICES -- 0.5% $ 500,000 General Electric Capital Corporation, 6.375% 11/15/67 ......................... 448,125 15,300 HSBC Finance Corporation, 6.36% Pfd. .......................................... 354,769* Lehman Brothers Holdings, Inc.: 15,000 5.67% Pfd., Series D ....................................................... 7,125*++ 19,500 5.94% Pfd., Series C ....................................................... 8,775*++ 25,000 6.50% Pfd., Series F ....................................................... 3,813*++ 27,500 7.95% Pfd. ................................................................. 3,768*++ --------------- 826,375 --------------- INSURANCE -- 19.5% $ 1,000,000 Ace Capital Trust II, 9.70% 04/01/30 .......................................... 1,162,374(1)(2) 22,800 Arch Capital Group Ltd., 8.00% Pfd., Series A ................................. 577,125**(1)(2) AXA SA: $ 1,500,000 6.379%, 144A**** ........................................................... 1,211,250**(1)(2) $ 3,000,000 6.463%, 144A**** ........................................................... 2,392,500**(1)(2) 35,900 Axis Capital Holdings, 7.50% Pfd., Series B ................................... 3,073,937(1)(2) 90,600 Delphi Financial Group, 7.376% Pfd. 05/15/37 .................................. 1,817,662(1) $ 3,540,000 Everest Re Holdings, 6.60% 05/15/37 ........................................... 2,849,700(1) Liberty Mutual Group: $ 800,000 7.80% 03/15/37, 144A**** ................................................... 692,000(1) $ 4,000,000 10.75% 06/15/58, 144A**** .................................................. 4,360,000(1) $ 500,000 MetLife Capital Trust IV, 7.875% 12/15/37, 144A**** ........................... 495,000(1) $ 2,000,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ............................. 2,240,000(1) MetLife, Inc.: 89,400 6.50% Pfd., Series B ....................................................... 2,209,298*(1) $ 1,250,000 10.75% 08/01/39 ............................................................ 1,544,152(1) Principal Financial Group: 5,000 5.563% Pfd., Series A ...................................................... 411,250* 100,000 6.518% Pfd., Series B ...................................................... 2,261,250*(1) Renaissancere Holdings Ltd.: 122,250 6.08% Pfd., Series C ....................................................... 2,518,350**(1)(2)
5 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE - -------------- --------------- PREFERRED SECURITIES -- (CONTINUED) INSURANCE -- (CONTINUED) 6,900 6.60% Pfd., Series D .......................................................... $ 149,454**(2) 9,200 7.30% Pfd., Series B .......................................................... 224,963**(2) 119,500 Scottish Re Group Ltd., 7.25% Pfd. ............................................ 700,569**(2)+ $ 750,000 USF&G Capital, 8.312% 07/01/46, 144A**** ...................................... 776,964(1) $ 2,000,000 XL Capital Ltd., 6.50%, Series E .............................................. 1,587,600(1)(2) --------------- 33,255,398 --------------- UTILITIES -- 25.9% 10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ..................... 977,813*(1) $ 2,491,000 COMED Financing III, 6.35% 03/15/33 ........................................... 2,038,042(1) $ 250,000 Dominion Resources Capital Trust I, 7.83% 12/01/27 ............................ 258,849 Dominion Resources, Inc.: $ 3,500,000 7.50% ...................................................................... 3,469,329(1) 90,000 8.375% Pfd., Series A ...................................................... 2,560,500(1) 40,000 Entergy Arkansas, Inc., 6.45% Pfd. ............................................ 891,252*(1) $ 2,000,000 FPL Group Capital, Inc., 6.65% 06/15/67 ....................................... 1,862,612 Georgia Power Company: 12,600 6.125% Pfd. ................................................................ 316,543*(1) 12,500 6.50% Pfd., Series 2007A ................................................... 1,264,844*(1) 3,000 Gulf Power Company, 6.45% Pfd., Series 2007A .................................. 296,815*(1) 32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................ 2,831,369* 170,900 Interstate Power & Light Company, 8.375% Pfd., Series B ....................... 4,966,781*(1) Pacific Enterprises: 22,430 $4.50 Pfd. ................................................................. 1,762,157*(1) 10,000 $4.75 Pfd., Series 53 ...................................................... 830,800*(1) $ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ....................... 470,343(1) $ 4,400,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ..................................... 3,921,051(1) 60,000 Scana Corporation, 7.70% Pfd. ................................................. 1,622,400(1) Southern California Edison: 35,000 6.00% Pfd., Series C ....................................................... 3,189,375*(1) 11,500 6.125% Pfd. ................................................................ 1,075,610*(1) $ 3,000,000 Southern Union Company, 7.20% 11/01/66 ........................................ 2,707,500(1) $ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ....................................... 228,750 18,800 Union Electric Company, $7.64 Pfd. ............................................ 1,883,525*(1)
6 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE - -------------- --------------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) $ 3,900,000 Wisconsin Energy Corporation, 6.25% 05/15/67 .................................. $ 3,602,843(1) 14,750 Xcel Energy, Inc., $4.08 Pfd., Series B ....................................... 1,076,013* --------------- 44,105,116 --------------- ENERGY -- 6.1% $ 4,700,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ................................... 4,647,821(1) Enterprise Products Partners: $ 750,000 7.00% 06/01/67 ............................................................. 680,930 $ 1,500,000 8.375% 08/01/66, Series A .................................................. 1,518,735(1) 3,500 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** .................................. 3,503,500* --------------- 10,350,986 --------------- MISCELLANEOUS INDUSTRIES -- 1.7% 40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................... 2,903,752*(1) --------------- 2,903,752 --------------- TOTAL PREFERRED SECURITIES (Cost $161,811,457) ........................................................ 161,685,118 --------------- CORPORATE DEBT SECURITIES -- 2.7% FINANCIAL SERVICES -- 0.1% 10,000 Ameriprise Financial, Inc., 7.75% 06/15/39 .................................... 259,225(1) --------------- 259,225 --------------- INSURANCE -- 2.3% $ 2,200,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........................... 1,933,961(1) $ 2,000,000 UnumProvident Corporation, 7.25% 03/15/28, Senior Notes ....................... 1,902,702(1) --------------- 3,836,663 --------------- UTILITIES -- 0.3% 20,000 Entergy Texas, Inc., 7.875% 06/01/39 .......................................... 567,000 --------------- 567,000 --------------- TOTAL CORPORATE DEBT SECURITIES (Cost $3,944,512) .......................................................... 4,662,888 ---------------
7 Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2010 (UNAUDITED)
SHARES/$ PAR VALUE - --------------- --------------- COMMON STOCK -- 0.1% BANKING -- 0.1% 3,620 CIT Group, Inc. ............................................................... $ 131,877*+ --------------- TOTAL COMMON STOCK (Cost $330,325) ............................................................ 131,877 --------------- MONEY MARKET FUND -- 1.7% 2,855,270 BlackRock Provident Institutional, T-Fund ..................................... 2,855,270 --------------- TOTAL MONEY MARKET FUND (Cost $2,855,270) .......................................................... 2,855,270 --------------- TOTAL INVESTMENTS (Cost $168,941,564***) ........................................... 99.5% 169,335,153 OTHER ASSETS AND LIABILITIES (Net) ................................................. 0.5% 778,957 ----- --------------- NET ASSETS BEFORE LOAN ............................................................. 100.0%+++ $ 170,114,110 ----- --------------- LOAN PRINCIPAL BALANCE ......................................................................... (56,100,000) --------------- TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 114,014,110 ===============
- ---------- * Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income. ** Securities distributing Qualified Dividend Income only. *** Aggregate cost of securities held. **** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At February 28, 2010, these securities amounted to $28,643,505 or 16.8% of net assets before loan. These securities have been determined to be liquid under the guidelines established by the Board of Directors. (1) All or a portion of this security has been pledged as collateral for the Fund's loan. The total value of such securities was $125,486,320 at February 28, 2010. (2) Foreign Issuer. + Non-income producing. ++ The issuer has filed for bankruptcy protection. As a result, the Fund may not be able to recover the principal invested and also does not expect to receive income on this security going forward. +++ The percentage shown for each investment category is the total value of that category as a percentage of net assets before the loan. ABBREVIATIONS: PFD. -- Preferred Securities PVT. -- Private Placement Securities REIT -- Real Estate Investment Trust STRIPES -- Structured Residual Interest Preferred Enhanced Securities 8 Flaherty & Crumrine Preferred Income Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1) FOR THE PERIOD FROM DECEMBER 1, 2009 THROUGH FEBRUARY 28, 2010 (UNAUDITED)
VALUE --------------- OPERATIONS: Net investment income ....................................................................... $ 2,750,803 Net realized gain/(loss) on investments sold during the period .............................. (1,565,597) Change in net unrealized appreciation/depreciation of investments ........................... 10,290,524 Distributions to APS* Shareholders from net investment income, including changes in accumulated undeclared distributions ................................ (70,977) --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................................ 11,404,753 DISTRIBUTIONS: Dividends paid from net investment income to Common Stock Shareholders(2) ................... (2,306,539) --------------- TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ............................................ (2,306,539) FUND SHARE TRANSACTIONS: Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan .......... 151,775 --------------- NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE TRANSACTIONS ............................................................................. 151,775 --------------- NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ............................ $ 9,249,989 =============== NET ASSETS AVAILABLE TO COMMON STOCK: Beginning of period. ........................................................................ $ 104,764,121 Net increase in net assets during the period ................................................ 9,249,989 --------------- End of period ............................................................................... $ 114,014,110 ===============
- ---------- * Auction Preferred Stock. (1) These tables summarize the three months ended February 28, 2010 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2009. (2) May include income earned, but not paid out, in prior fiscal year. 9 Flaherty & Crumrine Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS(1) FOR THE PERIOD FROM DECEMBER 1, 2009 THROUGH FEBRUARY 28, 2010 (UNAUDITED) FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD. PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period ........................................................ $ 9.82 --------------- INVESTMENT OPERATIONS: Net investment income ....................................................................... 0.26 Net realized and unrealized gain/(loss) on investments. ..................................... 0.82 DISTRIBUTIONS TO APS* SHAREHOLDERS: From net investment income .................................................................. (0.01) --------------- Total from investment operations ............................................................ 1.07 --------------- DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS: From net investment income .................................................................. (0.22) --------------- Total distributions to Common Stock Shareholders ............................................ (0.22) --------------- Net asset value, end of period .............................................................. $ 10.67 =============== Market value, end of period ................................................................. $ 11.37 =============== Common Stock shares outstanding, end of period .............................................. 10,685,849 =============== RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Net investment income+ ...................................................................... 10.07%** Net investment income, including payments to APS Shareholders+ .............................. 9.81%** Operating expenses including interest expense. .............................................. 2.33%** Operating expenses excluding interest expense ............................................... 1.67%** SUPPLEMENTAL DATA:++ Portfolio turnover rate ..................................................................... 4%*** Net assets before loan, end of period (in 000's) ............................................ $ 170,114 Ratio of operating expenses including interest expense(2) to net assets before loan and APS. ..................................................................... 1.57%** Ratio of operating expenses excluding interest expense(2) to net assets before loan and APS. ..................................................................... 1.13%**
(1) These tables summarize the three months ended February 28, 2010 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2009. (2) Does not include distributions to APS Shareholders. * Auction Preferred Stock. ** Annualized. *** Not Annualized. + The net investment income ratios reflect income net of operating expenses, including interest expense. ++ Information presented under heading Supplemental Data includes APS and loan principal balance. 10 Flaherty & Crumrine Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS (CONTINUED) PER SHARE OF COMMON STOCK (UNAUDITED)
TOTAL DIVIDEND DIVIDENDS NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) --------- --------- ------------- ------------ December 31, 2009 .................. $0.0720 $10.31 $10.47 $10.31 January 29, 2010 ................... 0.0720 10.52 10.59 10.52 February 26, 2010 .................. 0.0720 10.67 11.37 10.80
- ---------- (1) Whenever the net asset value per share of the Fund's Common Stock is less than or equal to the market price per share on the reinvestment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of Common Stock will be purchased in the open market. 11 Flaherty & Crumrine Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES At February 28, 2010 the aggregate cost of securities for federal income tax purposes was $168,938,993, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $23,247,156 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $22,850,996. 2. ADDITIONAL ACCOUNTING STANDARDS FAIR VALUE MEASUREMENT: The inputs and valuation techniques used to measure fair value of the Fund's investments are summarized into three levels as described in the hierarchy below: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund's net assets as of February 28, 2010 is as follows:
LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE FEBRUARY 28, 2010 PRICE INPUTS INPUTS ----------------- ----------- ----------- ------------ Preferred Securities Banking $ 70,243,491 $46,919,881 $23,261,870 $61,740 Financial Services 826,375 802,894 23,481 -- Insurance 33,255,398 14,737,823 18,517,575 -- Utilities 44,105,116 12,935,553 31,169,563 -- Energy 10,350,986 -- 10,350,986 -- Miscellaneous Industries 2,903,752 -- 2,903,752 -- Corporate Debt Securities 4,662,888 826,225 3,836,663 -- Common Stock Banking 131,877 131,877 -- -- Money Market Fund 2,855,270 2,855,270 -- -- ------------ ----------- ----------- ------- Total Investments $169,335,153 $79,209,523 $90,063,890 $61,740 ============ =========== =========== =======
12 Flaherty & Crumrine Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:
PREFERRED SECURITIES -------------------- TOTAL INVESTMENTS BANKING ----------------- -------------------- BALANCE AS OF 11/30/09 ............................ $ 49,500 $49,500 Accrued discounts/premiums ........................ -- -- Realized gain/(loss) .............................. -- -- Change in unrealized appreciation/(depreciation) .. 12,240 12,240 Net purchases/(sales) ............................. -- -- Transfers in and/or out of Level 3 ................ -- -- -------- -------- BALANCE AS OF 2/28/10 ............................. $ 61,740 $ 61,740
For the period ended February 28, 2010, total change in unrealized gain/(loss) on Level 3 securities still held at period end and included in the change in net assets was $12,240. 13 [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 LOGO) FLAHERTY & CRUMRINE PREFERRED INCOME FUND Quarterly Report February 28, 2010 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 April 26, 2010 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 April 26, 2010 By (Signature and Title)* /s/ R. Eric Chadwick ------------------------------------------------------ R. Eric Chadwick, Chief Financial Officer, Treasurer and Vice President (principal financial officer) Date April 26, 2010 * Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 cert302.txt CERT 302 CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, Donald F. Crumrine, certify that: 1. I have reviewed this report on Form N-Q of Flaherty & Crumrine Preferred Income Fund Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the schedules of investments included in this report fairly present in all material respects the investments of the registrant as of the end of the fiscal quarter for which the report is filed; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 26, 2010 /s/ Donald F. Crumrine ---------------------------------------- Donald F. Crumrine, Director, Chairman of the Board and Chief Executive Officer (principal executive officer) CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, R. Eric Chadwick, certify that: 1. I have reviewed this report on Form N-Q of Flaherty & Crumrine Preferred Income Fund Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the schedules of investments included in this report fairly present in all material respects the investments of the registrant as of the end of the fiscal quarter for which the report is filed; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 26, 2010 /s/ R. Eric Chadwick ---------------------------------------- R. Eric Chadwick, Chief Financial Officer, Treasurer and Vice President (principal financial officer) -----END PRIVACY-ENHANCED MESSAGE-----