Flaherty & Crumrine Preferred Income Fund Incorporated

FLAHERTY & CRUMRINE PREFERRED INCOME FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Fund (“PFD”):

The preferred market didn’t miss a beat in the third fiscal quarter1, continuing where it left off second quarter with additional positive returns. Total return2 on net asset value (“NAV”) was 6.1% for the quarter, bringing the total return for the first nine months of fiscal 2016 to 10.7%. Total return on market price over the same periods was 5.3% and 25.6%, respectively.

Tailwinds described earlier in the year continued unabated during the most recent quarter. Monetary policy globally was very accommodative; supply of new preferred securities was subdued; “legacy” (those losing regulatory-capital treatment) and higher-coupon preferred securities were redeemed at a healthy pace; and credit quality remained strong. Preferred securities offered yield to investors struggling to find it in other places, which resulted in strong demand and higher prices for the asset class.

There is a direct inverse relationship in fixed-income securities (including preferreds) between price and yield, and higher prices this year have led to much lower coupons for newly-issued preferred securities. Many new issues during the quarter yield in the range of 4.5%—5.5%, which in many cases is lower than early-2016 levels by almost 1.0%. These lower yields on preferreds were the result of lower overall interest rates (Treasuries and Swap Rates) and tighter spreads. Many issuers have taken advantage of persistently-low rates and positive market sentiment to refinance higher-coupon securities.

Although U.S. interest rates remain very low, the short end of the curve (notably T-bills and LIBOR) has moved higher in recent months as investors begin to factor in additional rate hikes by the Federal Reserve. The Federal Open Market Committee passed on a rate hike at its meeting on September 21, however, so markets continue to wrestle with predicting a future path of increases. Higher levels of 3-month LIBOR have resulted in higher leverage costs for the Fund, and future changes in this reference rate will be highly correlated to Federal Reserve rate changes. Although leverage still adds substantial incremental net income for the Fund, we expect that to decline modestly over time as borrowing costs rise.

We continue to see value in preferred securities, although security selection has become more challenging as yields have moved lower and older, higher-coupon issues have been refinanced. Flows into the preferred market (via mutual funds, exchange-traded funds (ETFs), asset managers, and retail investors) have been very strong for many years. If anything gives us pause, it is more this level of inflow than current valuations. ETFs that invest in preferreds have become very large relative to their target market segment ($25-par listed securities), and it isn’t clear where the outer limits are located. We know ETFs have been a source of volatility in the past (or opportunity, depending on one’s viewpoint), and we expect they could be again in the future. Preferreds should benefit from continued strong credit quality, reliably earning coupons—many of them tax-advantaged—over time. However, at current levels they are potentially more sensitive to changes in market sentiment than they were six months ago.

 

 

 

1 

June 1, 2016—August 31, 2016

2 

Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.


As always, we encourage you to visit the Fund’s website, www.preferredincome.com for timely and important information.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team

September 30, 2016

 

2


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2016 (Unaudited)

 

 

Fund Statistics       
Net Asset Value   $ 14.04   
Market Price   $ 15.64   
Premium     11.40
Yield on Market Price     6.91
Common Stock Shares Outstanding     11,095,683   

 

Moody’s Ratings*   % of Net Assets†  
A     1.4%   
BBB     64.8%   
BB     21.4%   
Below “BB”     1.1%   
Not Rated**     8.6%   
Below Investment Grade***     22.5%   

 

* Ratings are from Moody’s Investors Service, Inc. “Not Rated” securities are those with no ratings available from Moody’s.
** Does not include net other assets and liabilities of 2.7%
*** Below investment grade by all of Moody’s, S&P, and Fitch.
Industry Categories   % of Net Assets†

 

LOGO

 

Top 10 Holdings by Issuer   % of Net Assets†  
JPMorgan Chase     4.8%   
Liberty Mutual Group     4.7%   
MetLife     4.4%   
Wells Fargo & Company     4.1%   
Citigroup     4.0%   
Fifth Third Bancorp     3.8%   
M&T Bank Corporation     3.2%   
Morgan Stanley     3.0%   
PNC Financial Services Group     2.8%   
Enbridge Energy Partners     2.7%   
 
% of Net Assets****†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     60%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     46%   

 

**** This does not reflect year-end results or actual tax categorization of Fund distributions. These percentages can, and do, change, perhaps significantly, depending on market conditions. Investors should consult their tax advisor regarding their personal situation.
Net Assets includes assets attributable to the use of leverage.

 

3


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS

August 31, 2016 (Unaudited)

 

Shares/$ Par        

    Value    

 

 

Preferred Securities — 92.1%

   
       

Banking — 48.3%

               
  19,400     

Astoria Financial Corp., 6.50%, Series C

  $ 522,103  
$ 555,000     

Australia & New Zealand Banking Group Ltd., 6.75%, 144A****

    624,926 **(3)   
$ 400,000     

Banco Bilbao Vizcaya Argentaria SA, 9.00%, 144A****

    419,500 **(3)   
 

Bank of America Corporation:

   
$ 400,000     

6.30%, Series DD

    438,000  
$ 870,000     

8.00%, Series K

    896,100 *(1)   
$ 1,151,000     

8.125%, Series M

    1,186,794 *(1)   
  58,000     

Barclays Bank PLC, 7.10%, Series 3

    1,495,820 **(3)   
 

BNP Paribas:

   
$ 3,520,000     

7.375%, 144A****

    3,586,000 **(3)   
$ 1,500,000     

7.625%, 144A****

    1,581,000 **(3)   
 

Capital One Financial Corporation:

   
  7,000     

6.20%, Series F

    190,680  
  31,600     

6.70%, Series D

    907,631  
 

Citigroup, Inc.:

   
  103,800     

6.875%, Series K

    3,073,778 *(1)   
  119,778     

7.125%, Series J

    3,639,155 *(1)   
$ 2,299,000     

8.40%, Series E

    2,532,349 *(1)   
 

CoBank ACB:

   
  19,300     

6.125%, Series G, 144A****

    1,928,192  
  10,000     

6.20%, Series H, 144A****

    1,049,375  
  10,000     

6.25%, Series F, 144A****

    1,067,813 *(1)   
$ 447,000     

6.25%, Series I, 144A****

    485,035  
$ 5,210,000     

Colonial BancGroup, 7.114%, 144A****

    7,815 (4)(5)††   
  272,200     

Fifth Third Bancorp, 6.625%, Series I

    8,847,181 *(1)   
 

First Horizon National Corporation:

   
  795     

First Tennessee Bank, Adj. Rate, 3.75%(6), 144A****

    548,774 *(1)   
  1     

FT Real Estate Securities Company, 9.50%, 144A****

    1,302,500     
  32,050     

First Republic Bank, 6.70%, Series A

    832,419 *(1)   
 

Goldman Sachs Group:

   
$ 195,000     

5.70%, Series L

    199,436  
  50,000     

6.375%, Series K

    1,461,000 *(1)   
 

HSBC PLC:

   
$ 800,000     

HSBC Capital Funding LP, 10.176%, 144A****

    1,213,200 (1)(2)(3)   
$ 995,000     

HSBC Holdings PLC, 6.875%

    1,043,506 **(3)   
  111,700     

HSBC Holdings PLC, 8.00%, Series 2

    2,956,978 **(1)(3)   
  106,000     

Huntington Bancshares, Inc., 6.25%, Series D

    2,956,605 *(1)   

 

4


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

Shares/$ Par        

    Value    

 
Preferred Securities — (Continued)            
       Banking — (Continued)              
 

ING Groep NV:

   
  40,000     

6.375%

  $ 1,028,000 **(3)   
  35,000     

7.05%

    876,838 **(3)   
  23,400     

7.20%

    615,245 **(3)   
 

JPMorgan Chase & Company:

   
  61,700     

6.70%, Series T

    1,748,578 *(1)   
$ 4,715,000     

6.75%, Series S

    5,323,046 *(1)   
$ 4,000,000     

7.90%, Series I

    4,155,000 *(1)   
  112,500     

KeyCorp, 8.625%, Series C

    2,947,500  
 

M&T Bank Corporation:

   
$ 2,790,000     

6.450%, Series E

    3,117,825 *(1)   
$ 4,372,000     

6.875%, Series D, 144A****

    4,410,255 *(1)   
 

Morgan Stanley:

   
  154,665     

6.875%, Series F

    4,632,217 *(1)   
  80,516     

7.125%, Series E

    2,463,991 *(1)   
 

PNC Financial Services Group, Inc.:

   
  183,300     

6.125%, Series P

    5,552,615 *(1)   
$ 875,000     

6.75%, Series O

    988,750  
$ 2,160,000     

RaboBank Nederland, 11.00%, 144A****

    2,644,650 (1)(2)(3)   
  50,000     

Regions Financial Corporation, 6.375%, Series B

    1,476,625 *(1)   
  103,600     

Royal Bank of Scotland Group PLC, 7.25%, Series T

    2,630,404 **(1)(3)   
 

Sovereign Bancorp:

   
  1,750     

Sovereign REIT, 12.00%, Series A, 144A****

    2,229,063     
$ 1,565,000     

Standard Chartered PLC, 7.50%, 144A****

    1,567,348 **(3)   
  92,900     

State Street Corporation, 5.90%, Series D

    2,655,314 *(1)   
  10,000     

Texas Capital Bancshares Inc., 6.50%, Series A

    265,825  
  35,000     

US Bancorp, 6.50%, Series F

    1,093,838 *(1)   
 

Wells Fargo & Company:

   
  60,300     

5.85%, Series Q

    1,695,184 *(1)   
$ 2,075,000     

5.875%, Series U

    2,294,328 *(1)(2)   
  35,900     

6.625%, Series R

    1,100,335 *(1)   
$ 1,095,000     

7.98%, Series K

    1,159,331 *(1)   
  123,500     

8.00%, Series J

    3,410,144 *(1)   
 

Zions Bancorporation:

   
$ 1,000,000     

7.20%, Series J

    1,067,500  
  93,000     

7.90%, Series F

    2,446,830 *(1)   

 

 

   
      112,590,244     
   

 

 

   

 

5


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

Shares/$ Par        

    Value    

 
Preferred Securities — (Continued)            
       Financial Services — 0.2%              
$ 460,000     

AerCap Global Aviation Trust, 6.50% 06/15/45, 144A****

  $ 474,950 (3)   

 

 

   
      474,950     
   

 

 

   
       

Insurance — 23.6%

               
  82,392     

Allstate Corp., 6.625%, Series E

    2,321,189 *(1)   
$ 400,000     

Aon Corporation, 8.205% 01/01/27

    532,000 (1)(2)   
  112,500     

Arch Capital Group, Ltd., 6.75%, Series C

    2,980,406 **(1)(3)   
 

AXA SA:

   
$ 1,423,000     

6.379%, 144A****

    1,558,185 **(1)(2)(3)   
$ 500,000     

8.60% 12/15/30

    704,475 (3)   
  194,600     

Axis Capital Holdings Ltd., 6.875%, Series C

    5,091,223 **(1)(3)   
$ 1,400,000     

Catlin Insurance Company Ltd., 7.249%, 144A****

    1,081,500 (3)   
 

Chubb Ltd.:

   
$ 975,000     

Ace Capital Trust II, 9.70% 04/01/30

    1,479,563 (1)(2)(3)   
  95,600     

Delphi Financial Group, 7.376% 05/15/37

    2,133,075 (1)(2)   
  15,000     

Endurance Specialty Holdings, 6.35%, Series C

    418,050 **(3)   
$ 2,328,000     

Everest Re Holdings, 6.60% 05/15/37

    1,897,320 (1)(2)   
  10,000     

Hartford Financial Services Group, Inc., 7.875%

    315,625     
 

Liberty Mutual Group:

   
$ 500,000     

7.80% 03/15/37, 144A****

    581,250     
$ 5,157,000     

10.75% 06/15/58, 144A****

    7,799,963 (1)(2)   
 

MetLife:

   
$ 3,096,000     

MetLife, Inc., 10.75% 08/01/39

    4,992,300 (1)(2)   
$ 3,600,000     

MetLife Capital Trust X, 9.25% 04/08/38, 144A****

    5,155,475 (1)(2)   
 

PartnerRe Ltd.:

   
  25,000     

5.875%, Series I

    690,000 **(1)(3)   
  5,600     

6.50%, Series G

    163,016 **(3)   
  94,510     

7.25%, Series H

    2,972,576 **(1)(2)(3)   
$ 402,000     

Prudential Financial, Inc., 5.625% 06/15/43

    431,648     
 

QBE Insurance:

   
$ 3,325,000     

QBE Capital Funding III Ltd., 7.25% 05/24/41, 144A****

    3,786,344 (1)(3)   
 

Unum Group:

   
$ 2,820,000     

Provident Financing Trust I, 7.405% 03/15/38

    3,166,417 (1)(2)   
  24,000     

W.R. Berkley Corporation, 5.75% 06/01/56

    630,060     
 

XL Group PLC:

   
$ 5,500,000     

XL Capital Ltd., 6.50%, Series E

    4,130,500 (1)(2)(3)   

 

 

   
      55,012,160     
   

 

 

   

 

6


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

Shares/$ Par        

    Value    

 
Preferred Securities — (Continued)            
       Utilities — 11.2%              
  10,000     

Baltimore Gas & Electric Company, 6.70%, Series 1993

  $ 1,018,438 *(1)   
 

Commonwealth Edison:

   
$ 2,953,000     

COMED Financing III, 6.35% 03/15/33

    3,149,059 (1)(2)   
  122,000     

Dominion Resources, Inc., 5.25% 07/30/76, Series A

    3,143,025     
  18,000     

DTE Energy Company, 5.375% 06/01/76, Series B

    471,825     
$ 2,180,000     

Emera, Inc., 6.75% 06/15/76, Series 2016A

    2,361,470 (1)(3)   
  25,000     

Georgia Power Company, 6.50%, Series 2007A

    2,632,033 *(1)   
  25,000     

Indianapolis Power & Light Company, 5.65%

    2,553,908  
  84,500     

Integrys Energy Group, Inc., 6.00%

    2,323,961 (1)   
 

Nextera Energy:

   
$ 1,500,000     

FPL Group Capital, Inc., 6.65% 06/15/67, Series C

    1,256,250 (1)(2)   
 

PECO Energy:

   
$ 500,000     

PECO Energy Capital Trust III, 7.38% 04/06/28, Series D

    606,439 (1)   
 

PPL Corp:

   
  59,000     

PPL Capital Funding, Inc., 5.90%, Series B

    1,589,018 (1)(2)   
$ 2,250,000     

PPL Capital Funding, Inc., 6.70% 03/30/67, Series A

    1,953,693 (1)(2)   
$ 2,850,000     

Puget Sound Energy, Inc., 6.974% 06/01/67, Series A

    2,445,671     
  20,000     

SCE Trust V, 5.45%, Series K

    593,250  

 

 

   
      26,098,040     
   

 

 

   

 

 

 
       

Energy — 3.6%

               
$ 7,302,000     

Enbridge Energy Partners LP, 8.05% 10/01/37

    6,234,083 (1)(2)   
$ 450,000     

Enterprise Products Operating L.P., 8.375% 08/01/66, Series A

    422,438     
  16,900     

Kinder Morgan, Inc., 9.75%, Series A

    848,042  
$ 1,000,000     

Transcanada Pipelines, Ltd., 5.875% 08/15/76, Series 2016A

    1,068,125 (3)   

 

 

   
      8,572,688     
   

 

 

   

 

 

 
       

Real Estate Investment Trust (REIT) — 1.5%

               
 

National Retail Properties, Inc.:

   
  40,000     

5.70%, Series E

    1,067,300 (1)   
  14,624     

6.625%, Series D

    378,798     
 

PS Business Parks, Inc.:

   
  4,000     

5.70%, Series V

    105,450     
  56,560     

6.45%, Series S

    1,467,308 (1)(2)   
  17,500     

Regency Centers Corporation, 6.625%, Series 6

    455,219     

 

 

   
      3,474,075     
   

 

 

   

 

 

 

 

7


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

Shares/$ Par        

    Value    

 
Preferred Securities — (Continued)            
       Miscellaneous Industries — 3.7%              
 

BHP Billiton Limited:

   
$ 400,000     

BHP Billiton Finance U.S.A., Ltd., 6.75% 10/19/75, 144A****

  $ 457,500 (3)   
$ 833,000     

General Electric Company, 5.00%, Series D

    894,434 *(1)   
$ 3,900,000     

Land O’ Lakes, Inc., 8.00%, 144A****

    4,148,626 *(1)(2)   
  34,700     

Ocean Spray Cranberries, Inc., 6.25%, 144A****

    3,120,831  

 

 

   
      8,621,391     
   

 

 

   

 

 

 
 

Total Preferred Securities
(Cost $203,749,808)

    214,843,548     
   

 

 

   

 

Corporate Debt Securities — 5.2%

   
       

Banking — 2.5%

               
$ 2,140,000     

Regions Financial Corporation, 7.375% 12/10/37, Sub Notes

    2,789,576 (1)(2)   
  94,000     

Texas Capital Bancshares Inc., 6.50% 09/21/42, Sub Notes

    2,452,695     
  18,000     

Zions Bancorporation, 6.95% 09/15/28, Sub Notes

    554,985 (1)(2)   

 

 

   
      5,797,256     
   

 

 

   
       

Financial Services — 0.2%

               
  19,163     

Affiliated Managers Group, Inc., 6.375% 08/15/42

    511,125     

 

 

   
      511,125     
   

 

 

   
       

Insurance — 1.2%

               
$ 2,000,000     

Liberty Mutual Insurance, 7.697% 10/15/97, 144A****

    2,680,460 (1)(2)   

 

 

   
      2,680,460     
   

 

 

   
       

Energy — 0.9%

               
$ 1,680,000     

Energy Transfer Partners LP, 8.25% 11/15/29

    2,091,786 (1)(2)   

 

 

   
      2,091,786     
   

 

 

   
       

Communication — 0.3%

               
  25,000     

Qwest Corporation, 6.50% 09/01/56

    648,810     

 

 

   
      648,810     
   

 

 

   
       

Miscellaneous Industries — 0.1%

               
  10,000     

eBay, Inc., 6.00% 02/01/56

    274,425     

 

 

   
      274,425     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $9,938,576)

    12,003,862     
   

 

 

   

 

8


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

Shares/$ Par        

    Value    

 
Common Stock — 1.0%            
       Banking — 0.1%              
  3,620     

CIT Group, Inc.

  $ 133,506  

 

 

   
      133,506     
   

 

 

   
       

Energy — 0.9%

               
  99,212     

Kinder Morgan, Inc.

    2,167,782  

 

 

   
      2,167,782     
   

 

 

   
       

Insurance — 0.0%

               
  19,896     

WMI Holdings Corporation, 144A****

    49,541 *†   

 

 

   
      49,541     
   

 

 

   
 

Total Common Stock
(Cost $3,041,295)

    2,350,829     
   

 

 

   

 

Money Market Fund — 0.7%

               
 

BlackRock Liquidity Funds:

   
  1,519,896     

T-Fund, Institutional Class

    1,519,896     

 

 

   
 

Total Money Market Fund
(Cost $1,519,896)

    1,519,896     
   

 

 

   

Total Investments (Cost $218,249,575***)

     99.0%        230,718,135     

Other Assets And Liabilities (Net)

     1.0%        2,436,535     
  

 

 

   

 

 

   

 

 

 

Total Managed Assets

     100.0% ‡    $ 233,154,670     
  

 

 

   

 

 

   

 

 

 

Loan Principal Balance

  

    (77,400,000  
    

 

 

   

Total Net Assets Available To Common Stock

  

  $ 155,754,670     
    

 

 

   

 

 

 

 

9


 

Flaherty & Crumrine Preferred Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (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 August 31, 2016, these securities amounted to $55,560,071 or 23.8% of total managed assets.
(1) 

All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $143,554,545 at August 31, 2016.

(2) 

All or a portion of this security has been rehypothecated. The total value of such securities was $52,588,755 at August 31, 2016.

(3) 

Foreign Issuer.

(4) 

Illiquid security (designation is unaudited).

(5) 

Valued at fair value as determined in good faith by or under the direction of the Board of Directors as of August 31, 2016.

(6) 

Represents the rate in effect as of the reporting date.

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.

 

10


 

Flaherty & Crumrine Preferred Income Fund Incorporated

STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)

For the period from December 1, 2015 through August 31, 2016 (Unaudited)

 

 

     Value  

OPERATIONS:

  

Net investment income

   $ 9,233,868   

Net realized gain/(loss) on investments sold during the period

     107,683   

Change in net unrealized appreciation/(depreciation) of investments

     6,256,988   
  

 

 

 

Net increase in net assets resulting from operations

     15,598,539   

DISTRIBUTIONS:

  

Dividends paid from net investment income to Common Stock Shareholders(2)

     (8,970,732
  

 

 

 

Total Distributions to Common Stock Shareholders

     (8,970,732

FUND SHARE TRANSACTIONS:

  

Increase from shares issued under the Dividend Reinvestment and
Cash Purchase Plan

     530,016   
  

 

 

 

Net increase in net assets available to Common Stock resulting from
Fund share transactions

     530,016   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  
  

 

 

 

FOR THE PERIOD

   $ 7,157,823   
  

 

 

 
       

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 148,596,847   

Net increase in net assets during the period

     7,157,823   
  

 

 

 

End of period

   $ 155,754,670   
  

 

 

 

 

(1) 

These tables summarize the nine months ended August 31, 2016 and should be read in conjunction with the Fund’s audited financial statements, including notes to financial statements, in its Annual Report dated November 30, 2015.

(2) 

May include income earned, but not paid out, in prior fiscal year.

 

11


 

Flaherty & Crumrine Preferred Income Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2015 through August 31, 2016 (Unaudited)

For a Common Stock share outstanding throughout the period

 

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 13.44   
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.83   

Net realized and unrealized gain/(loss) on investments

     0.58   
  

 

 

 

Total from investment operations

     1.41   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.81
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.81
  

 

 

 

Net asset value, end of period

   $ 14.04   
  

 

 

 

Market value, end of period

   $ 15.64   
  

 

 

 

Common Stock shares outstanding, end of period

     11,095,683   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     8.33 %* 

Operating expenses including interest expense

     2.08 %* 

        Operating expenses excluding interest expense

     1.37 %* 

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     11 %** 

Total managed assets, end of period (in 000’s)

   $ 233,155   

Ratio of operating expenses including interest expense to total managed assets

     1.36 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.90 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2016 and should be read in conjunction with the Fund’s audited financial statements, including notes to financial statements, in its Annual Report dated November 30, 2015.

* Annualized.
** Not annualized.
The net investment income ratio reflects income net of operating expenses, including interest expense.
†† Information presented under heading Supplemental Data includes loan principal balance.

 

12


 

Flaherty & Crumrine Preferred Income Fund Incorporated

FINANCIAL HIGHLIGHTS (Continued)

Per Share of Common Stock (Unaudited)

 

 

     Total
Dividends
Paid
     Net Asset
Value
     NYSE
Closing Price
     Dividend
Reinvestment
Price(1)
 

December 31, 2015

   $ 0.0900       $ 13.28       $ 12.92       $ 12.97   

January 29, 2016

     0.0900         13.10         13.09         13.10   

February 29, 2016

     0.0900         12.86         13.16         12.86   

March 31, 2016

     0.0900         13.15         14.15         13.44   

April 29, 2016

     0.0900         13.20         14.51         13.78   

May 31, 2016

     0.0900         13.47         15.13         14.37   

June 30, 2016

     0.0900         13.54         15.64         14.86   

July 29, 2016

     0.0900         13.85         15.85         15.06   

August 31, 2016

     0.0900         14.04         15.64         14.86   

 

(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.

 

13


 

Flaherty & Crumrine Preferred Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2016, the aggregate cost of securities for federal income tax purposes was $227,392,345, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $21,987,550 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $18,661,760.

 

2. Additional Accounting Standards

Fair Value Measurements: The Fund has analyzed all existing investments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy 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. Transfers in and out of levels are recognized at market value at the end of the period.

 

14


 

Flaherty & Crumrine Preferred Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

A summary of the inputs used to value the Fund’s investments as of August 31, 2016 is as follows:

 

     Total
Value at
August 31, 2016
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 112,590,244       $ 91,059,297       $ 21,523,132       $ 7,815   

Financial Services

     474,950                 474,950           

Insurance

     55,012,160         30,292,068         24,720,092           

Utilities

     26,098,040         13,692,492         12,405,548           

Energy

     8,572,688         2,338,605         6,234,083           

Real Estate Investment Trust (REIT)

     3,474,075         3,474,075                   

Miscellaneous Industries

     8,621,391         1,351,934         7,269,457           

Corporate Debt Securities

           

Banking

     5,797,256         3,007,680         2,789,576           

Financial Services

     511,125         511,125                   

Insurance

     2,680,460                 2,680,460           

Energy

     2,091,786                 2,091,786           

Communication

     648,810         648,810                   

Miscellaneous Industries

     274,425         274,425                   

Common Stock

           

Banking

     133,506         133,506                   

Energy

     2,167,782         2,167,782                   

Insurance

     49,541         49,541                   

Money Market Fund

     1,519,896         1,519,896                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 230,718,135       $ 150,521,236       $ 80,189,084       $ 7,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the reporting period, there were no transfers into Level 1 from Level 2 or into Level 2 from Level 1.

The fair values of the Fund’s investments are generally based on market information and quotes received from brokers or independent pricing services that are approved by the Board of Directors and are unaffiliated with the Adviser. To assess the continuing appropriateness of security valuations, management, in consultation with the Adviser, regularly compares current prices to prior prices, prices across comparable securities, actual sale prices for securities in the Fund’s portfolio, and market information obtained by the Adviser as a function of being an active market participant.

Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades—or the same information for securities that are similar in many respects to those being valued—are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.

 

15


 

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 11/30/15

   $ 7,815       $ 7,815   

Accrued discounts/premiums

               

Realized gain/(loss)

               

Change in unrealized appreciation/(depreciation)

               

Purchases

               

Sales

               

Transfer in

               

Transfer out

               

Balance as of 08/31/16

   $ 7,815       $ 7,815   

For the nine months ended August 31, 2016, total change in unrealized gain/(loss) on Level 3 securities still held at period-end and included in the change in net assets was $0.

The following table summarizes the valuation techniques used and unobservable inputs developed to determine the fair value of Level 3 investments:

 

Category  

Fair Value

at 08/31/16

     Valuation Technique     Unobservable Input     Input Range (Wgt Avg)  

Preferred Securities

        

(Banking)

  $ 7,815         Bankruptcy recovery       
 
Credit/Structure-specific
recovery
  
  
    0.00% - 0.50% (0.15%)   

The significant unobservable inputs used in the fair value measurement technique for bankruptcy recovery are based on recovery analysis that is specific to the security being valued, including the level of subordination and structural features of the security, and the current status of any bankruptcy or liquidation proceedings. Observable market trades in bankruptcy claims are utilized by management, when available, to assess the appropriateness of valuations, although the frequency of trading depends on the specific credit and seniority of the claim. Expected recoveries in bankruptcy by security type and industry do not tend to deviate much from historical recovery rates, which are very low (sometimes zero) for preferred securities and more moderate for senior debt. Significant changes in these inputs would result in a significantly higher or lower fair value measurement.

 

 

16


 

Directors

R. Eric Chadwick, CFA

Chairman of the Board

David Gale

Morgan Gust

Karen H. Hogan

Officers

R. Eric Chadwick, CFA

Chief Executive Officer and

President

Chad C. Conwell

Chief Compliance Officer,

Vice President and Secretary

Bradford S. Stone

Chief Financial Officer,

Vice President and Treasurer

Roger W. Ko

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 c/o Computershare

P.O. Box 30170

College Station, TX 77842-3170

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.

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Report

August 31, 2016

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