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% --
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DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
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