<![CDATA[Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated]]>

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           811-06495                                        

              Flaherty & Crumrine Preferred Income Opportunity 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: August 31, 2013

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 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. § 3507.

Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.

FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Opportunity Fund:

Total return on net asset value (“NAV”)1 was -4.7% during the third fiscal quarter2, reducing total return on NAV fiscal year-to-date to +2.3%. In addition, during the quarter the Fund, like many other closed-end income-oriented funds, saw the relationship between its market price and NAV swing from a premium to a discount, resulting in total return on market value of -10.6%. Clearly, this represented a setback in what had been a sustained period of positive returns in both the Fund’s NAV and market valuation. During the quarter, prices of all fixed-income securities, including preferred securities, declined and yields increased as markets reacted swiftly to expectations that the Federal Reserve might taper its quantitative easing earlier than anticipated.

Virtually all sectors of the fixed-income market turned in negative results during the quarter. U.S. Treasury 10-year notes and 30-year bonds experienced the largest declines with total returns of -4.6% and -6.5%, as their yields increased by 0.7% and 0.4%, respectively. Long-term corporate bonds performed moderately better than long-term U.S. Treasuries, with a total return of -4.7% for the Barclays Long U.S. Corporate Bond Index. Even including the impact of expenses and leverage, the Fund’s NAV performed as well as unlevered total returns on those other long-term segments of fixed-income markets.

The quarter began with the Federal Open Market Committee (“FOMC”) having just indicated that it might begin tapering the pace of its program of securities purchases sooner than the market was expecting. Longer-term interest rates moved higher with a fair amount of consistency throughout the quarter, as markets digested the news and adjusted expectations for future monetary policy actions. Markets are driven by expectations more than actual results, and while we believe the market priced in more risk than was justified based on the outlook for growth in the U.S. economy, uncertainty surrounding a potential change in policy outlook led investors to reduce portfolio duration substantially. At its September meeting, the FOMC surprised the market yet again by continuing its program of securities purchases without tapering its pace. Since then, we have seen some recovery in fixed-income markets. Although we do not expect long-term Treasury rates to decline significantly, interest-rate risk premiums still appear high, providing investors with some protection against eventual removal of highly accommodative monetary policy.

The preferred securities market was not immune to the change in outlook for interest rates and a desire by many investors to reduce duration in their portfolios. In many cases, spreads on preferred securities widened relative to Treasuries, adding to price declines already associated with higher rates. Retail preferred securities were particularly weak as we witnessed meaningful reductions in the sizes of preferred-securities exchange-traded funds—which had grown in size to represent about 9% of the retail market at the beginning of this quarter. Preferred securities issued in the early part of the year, most with very low coupons, were among the worst performers. Fortunately, we weren’t tempted by many of those new issues—much preferring the higher coupons available in the secondary market. Institutional preferred securities fared much better, and as they have a larger allocation in the portfolio they were partially responsible for limiting negative returns during the quarter.

 

 

1 

Following the methodology required by the SEC, total return assumes dividend reinvestment and includes income and principal change, plus the impact of the Fund’s leverage and expenses.

2 

June 1st—August 31st.

Creditworthiness of most preferred-securities issuers continues to improve. Corporate earnings are growing at a moderate pace and corporate leverage remains low. Banks’ problem loans are declining, capital levels are healthy (especially in the U.S.) and new lending is slowly picking up. Rising home prices are bolstering consumer balance sheets and trimming foreclosure losses. These favorable credit developments should continue to benefit preferred securities.

While prices have fallen, market conditions for preferred securities remain healthy. Higher interest rates and wider spreads have resulted in a material slowdown in issuer redemptions. For the year, redemptions are still running ahead of new supply, with the preferred-securities market shrinking more than $10 billion, but the pace of redemptions slowed significantly this past quarter—with the Fund seeing approximately 90% of its redemptions this fiscal year occurring during the first half. This recent slowdown in issuer redemptions has been welcome news on the income side of the equation, as the Fund is able to keep more of the higher-coupon preferred securities longer than we expected earlier in the year.

After a long wait, we now have largely final rules on the regulatory treatment of preferred securities issued by banks, foreign and domestic. Crafted in response to the financial crisis, new legislation and regulations shift loss burdens towards investors and away from taxpayers (government support). Under the new rules, banks will have an incentive to replace “debt-like” preferred securities with ones that have more characteristics of equity (deeper subordination, non-cumulative dividends, and no maturity date). The new rules include various implementation schedules, depending on the jurisdiction, with most being fully implemented within the next 3-8 years.

To conform to the new rules, we estimate U.S. banks will need to issue an additional $60 billion or more of new preferred stock. That is certainly a big number compared to $73 billion of currently outstanding bank preferred stock. While we think issuance will be manageable and spread out over several years, it will influence preferred securities’ prices when it happens. We are also likely to see more contingent capital issued in the coming years, as issuers look to fill different buckets of loss-absorbing capital required under the new rules. This market has so far been limited in size and breadth, but it is likely to grow and is part of the ongoing evolution of the broader subordinated capital market.

Looking ahead, moderate economic growth should provide a constructive environment for preferred-securities investors. We anticipate that economic growth will be fast enough to facilitate continued improvement in corporate and household balance sheets and better loan performance, while being slow enough to restrain inflation and keep monetary policy accommodative for some time. Spreads on preferred securities should recover as fears of further rapid increases in long-term interest rates recede and investors refocus on steadily improving credit conditions. Volatility is likely to remain elevated over the coming months, but we believe the preferred-securities market has priced in a good amount of risk related to the end of quantitative easing.

As always, we encourage you to visit the Fund’s website www.preferredincome.com.

Sincerely,

 

LOGO   LOGO

Donald F. Crumrine

Chairman

  

Robert M. Ettinger

President

September 30, 2013  

 

2

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2013 (Unaudited)

 

Fund Statistics  
Net Asset Value   $ 10.69   
Market Price   $ 10.09   

Discount

     5.61 % 
Yield on Market Price     8.68 % 
Common Stock Shares Outstanding     12,298,870   

 

 

Moody’s Ratings   % of Net Assets†  
A     0.9%   
BBB     58.8%   
BB     31.2%   
Below "BB"     3.4%   
Not Rated*     4.1%   
Below Investment Grade**     23.9%   

 

* Does not include net other assets and liabilities of 1.6%.
** 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†  
HSBC PLC     4.7%   
Liberty Mutual Group     4.4%   
MetLife     4.2%   
Goldman Sachs Group     3.9%   
Banco Santander, S.A.     3.7%   
Wells Fargo & Company     3.5%   
Barclays Bank PLC     3.1%   
XL Group PLC     2.8%   
Unum Group     2.6%   
Enbridge Energy Partners     2.5%   
 
% of Net Assets***†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     47%   
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 Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — 90.2%

    
     
       

Banking — 35.4%

            
  15,000     

Astoria Financial Corp., 6.50% Pfd., Series C

   $ 350,587 *   
 

Banco Bilbao Vizcaya Argentaria, S.A.:

    
$ 1,375,000     

BBVA International Preferred, 5.919%

     1,230,625 **(1)(2)(3)   
 

Banco Santander, S.A.:

    
  280,123     

Banco Santander, 10.50% Pfd., Series 10

     7,541,611 **(1)(3)   
 

Bank of America:

    
$ 1,200,000     

Bank of America Corporation, 8.125%

     1,331,992 *(1)   
  2,500     

Countrywide Capital IV, 6.75% Pfd. 04/01/33

     62,656     
  23,000     

Countrywide Capital V, 7.00% Pfd. 11/01/36

     577,358     
 

Barclays Bank PLC:

    
$ 2,750,000     

Barclays Bank PLC, 6.278%

     2,496,101 **(1)(2)(3)   
  56,000     

Barclays Bank PLC, 7.10% Pfd.

     1,393,280 **(3)   
  4,700     

Barclays Bank PLC, 7.75% Pfd., Series 4

     117,970 **(3)   
  90,000     

Barclays Bank PLC, 8.125% Pfd., Series 5

     2,272,500 **(1)(3)   
$ 1,750,000     

BNP Paribas, 7.195%, 144A****

     1,736,875 **(1)(2)(3)   
 

Citigroup:

    
$ 2,750,000     

Citigroup, Inc., 8.40%, Series E

     3,027,932 *   
  17,125     

Citigroup Capital XIII, 7.875% Pfd.

     470,403     
 

CoBank ACB:

    
  10,000     

CoBank ACB, 6.125% Pfd., Series G, 144A****

     942,813 *   
  10,000     

CoBank ACB, 6.25% Pfd., 144A****

     1,022,188 *   
$ 4,500,000     

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

     6,750 (4)(5)††   
  13,300     

Cullen/Frost Bankers, Inc., 5.375% Pfd., Series A

     291,955 *   
 

Fifth Third Bancorp:

    
$ 700,000     

Fifth Third Capital Trust IV, 6.50% 04/15/37

     697,375 (1)   
 

First Horizon:

    
  750     

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

     552,422 *(1)   
$ 500,000     

First Tennessee Capital II, 6.30% 04/15/34, Series B

     488,750     
  1     

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

     1,100,625     
  104,000     

First Niagara Financial Group, Inc., 8.625% Pfd.

     2,895,755 *(1)   
  29,050     

First Republic Bank, 6.70% Pfd.

     709,474 *   
 

Goldman Sachs Group:

    
  22,500     

Goldman Sachs, 5.95% Pfd., Series I

     513,986 *   
  12,500     

Goldman Sachs, 6.20% Pfd., Series B

     305,079 *   
$ 1,750,000     

Goldman Sachs, Capital I, 6.345% 02/15/34

     1,679,416 (1)(2)   
 

HSBC PLC:

    
$ 1,500,000     

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

     2,124,375 (1)(3)   
  127,500     

HSBC Holdings PLC, 8.00% Pfd., Series 2

     3,462,428 **(1)(3)   

 

4

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
     
       

Banking — (Continued)

            
$ 120,000     

HSBC USA Capital Trust I, 7.808% 12/15/26, 144A****

   $ 122,400     
$ 91,000     

HSBC USA Capital Trust II, 8.38% 05/15/27, 144A****

     92,477     
  96,149     

HSBC USA, Inc., 6.50% Pfd., Series H

     2,394,716 *(1)   
 

ING Groep NV:

    
  30,000     

ING Groep NV, 7.05% Pfd.

     740,175 **(3)   
  21,700     

ING Groep NV, 7.20% Pfd.

     540,384 **(3)   
  42,500     

ING Groep NV, 7.375% Pfd.

     1,074,400 **(3)   
  14,300     

ING Groep NV, 8.50% Pfd.

     364,936 **(3)   
 

JPMorgan Chase:

    
$ 300,000     

JPMorgan Chase & Company, 6.00%, Series R

     286,500 *   
$ 3,750,000     

JPMorgan Chase & Company, 7.90%, Series 1

     4,138,425 *(1)   
  400     

KeyCorp, 7.75% Pfd., Series A

     50,350 *   
$ 450,000     

Lloyds Banking Group PLC, 6.657%, 144A****

     411,750 **(3)   
$ 1,750,000     

M&T Bank Corporation, 6.875%, 144A****

     1,776,868 *(1)   
 

Morgan Stanley:

    
  30,000     

Morgan Stanley Capital Trust VI, 6.60% Pfd. 02/01/46

     746,250     
  50,000     

PNC Financial Services, 6.125% Pfd., Series P

     1,274,125 *(1)   
$ 1,775,000     

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

     2,311,107 (1)(3)   
 

Royal Bank of Scotland:

    
  7,500     

Royal Bank of Scotland Group PLC, 6.40%, Pfd., Series M

     152,700 **(3)   
  15,000     

Royal Bank of Scotland Group PLC, 6.60%, Pfd., Series S

     312,450 **(3)   
  37,500     

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

     860,250 **(3)   
 

Sovereign Bancorp:

    
  2,600     

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

     3,368,404     
  10,000     

Texas Capital Bancshares Inc., 6.50% Pfd., Series A

     227,015 *   
  17,500     

US Bancorp, 6.50%, Pfd.

     457,735 *   
 

Wells Fargo:

    
  3,085     

Wells Fargo & Company, 7.50% Pfd., Series L

     3,494,534 *(1)   
  123,500     

Wells Fargo & Company, 8.00% Pfd., Series J

     3,512,525 *(1)   
 

Zions Bancorporation:

    
$ 1,000,000     

Zions Bancorporation, 7.20%, Series J

     997,500 *(1)   
  85,200     

Zions Bancorporation, 7.90% Pfd., Series F

     2,365,578 *(1)   

 

 

    

 

      71,476,835     
   

 

 

    
       

Financial Services — 1.8%

          
 

Credit Suisse Group:

    
$ 1,260,000     

Claudius, Ltd. - Credit Suisse AG, 7.875%, Series B, 144A****

     1,346,624 (3)   
$ 950,000     

General Electric Capital Corp., 7.125%, Series A

     1,049,073 *   

 

5

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
     
       

Financial Services — (Continued)

            
 

HSBC PLC:

    
  55,000     

HSBC Finance Corporation, 6.36% Pfd., Series B

   $ 1,292,088 *(1)   

 

 

    

 

      3,687,785     
   

 

 

    
       

Insurance — 25.5%

          
 

Ace Ltd.:

    
$ 1,200,000     

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

     1,689,000 (1)(2)(3)   
$ 375,000     

Aon Corporation, 8.205% 01/01/27

     460,591     
  100,175     

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

     2,426,118 **(1)(3)   
 

AXA SA:

    
$ 2,800,000     

AXA SA, 6.379%, 144A****

     2,744,000 **(1)(2)(3)   
$ 500,000     

AXA SA, 8.60% 12/15/30

     593,750 (3)   
  187,000     

Axis Capital Holdings, 6.875% Pfd., Series C

     4,534,750 **(1)(3)   
  90,000     

Delphi Financial Group, 7.376% Pfd. 05/15/37

     2,252,817 (1)(2)   
  27,250     

Endurance Specialty Holdings, 7.50% Pfd.

     682,108 **(3)   
$ 4,350,000     

Everest Re Holdings, 6.60% 05/15/37

     4,339,125 (1)(2)   
$ 4,600,000     

Liberty Mutual Group, 10.75% 06/15/58, 144A****

     6,831,000 (1)   
$ 175,000     

Lincoln National Corporation, 7.00% 05/17/66

     178,500     
 

MetLife:

    
$ 2,454,000     

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

     3,644,190 (1)(2)   
$ 448,000     

MetLife Capital Trust IV, 7.875% 12/15/37, 144A****

     510,720 (1)(2)   
$ 3,325,000     

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

     4,322,500 (1)(2)   
  35,535     

PartnerRe Ltd., 7.250% Pfd., Series E

     899,036 **(1)(3)   
  75,000     

Principal Financial Group, 6.518% Pfd., Series B

     1,880,438 *(1)   
$ 300,000     

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

     282,000     
 

QBE Insurance:

    
$ 1,020,000     

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

     1,077,692 (1)(3)   
$ 1,910,000     

StanCorp Financial Group, 6.90% 06/01/67

     1,914,775 (1)(2)   
 

The Travelers Companies:

    
$ 960,400     

USF&G Capital, 8.312% 07/01/46, 144A****

     1,199,078 (1)(2)   
 

Unum Group:

    
$ 2,750,000     

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

     3,050,894 (1)(2)   
  8,300     

W.R. Berkley Corporation, 5.625% Pfd.

     178,191     
 

XL Group PLC:

    
$ 5,900,000     

XL Capital Ltd., 6.50%, Series E

     5,737,750 (1)(2)(3)   

 

 

    

 

      51,429,023     
   

 

 

    

 

6

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
     
       

Utilities — 16.5%

            
  7,460     

Alabama Power Company, 6.45% Pfd.

   $ 193,960 *(1)   
 

Baltimore Gas & Electric:

    
  6,579     

Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993

     672,086 *(1)   
  2,500     

Baltimore Gas & Electric Company, 7.125% Pfd., Series 1993

     253,828 *   
 

Commonwealth Edison:

    
$ 2,350,000     

COMED Financing III, 6.35% 03/15/33

     2,232,500 (1)(2)   
$ 3,000,000     

Dominion Resources, Inc., 7.50% 06/30/66

     3,242,063 (1)(2)   
 

Energy Future Competitive Holdings Corp:

    
$ 636,000     

TXU Electric Capital V, 8.175% 01/30/37

     155,820 (4)   
  58,000     

Entergy Arkansas, Inc., 6.45% Pfd.

     1,439,125 *   
  16,500     

Entergy Louisiana, Inc., 6.95% Pfd.

     1,656,704 *   
  80,000     

Entergy Mississippi, Inc., 6.25% Pfd.

     1,945,000 *   
  16,937     

Georgia Power Company, 6.50% Pfd., Series 2007A

     1,730,750 *(1)   
  15,035     

Gulf Power Company, 6.00% Pfd., Series 1

     1,514,691 *(1)   
  25,000     

Indianapolis Power & Light Company, 5.65% Pfd.

     2,538,283 *(1)   
  38,000     

Integrys Energy Group, Inc., 6.00% Pfd.

     933,375     
 

Nextera Energy:

    
$ 1,600,000     

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

     1,685,403 (1)(2)   
$ 1,000,000     

FPL Group Capital, Inc., 7.30% 09/01/67, Series D

     1,100,957 (1)(2)   
 

PECO Energy:

    
$ 1,500,000     

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

     1,487,412 (1)(2)   
 

PPL Corp:

    
  65,000     

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

     1,495,000 (1)(2)   
$ 1,250,000     

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

     1,294,770 (1)(2)   
$ 3,350,000     

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

     3,540,015 (1)(2)   
  32,544     

Southern California Edison, 6.50% Pfd., Series D

     3,443,562 *(1)   
  3,000     

Virginia Electric & Power Company, $6.98 Pfd.

     305,438 *   
  3,000     

Wisconsin Public Service Corporation, 6.88% Pfd.

     303,563 *   

 

 

    

 

      33,164,305     
   

 

 

    
       

Energy — 6.0%

          
$ 4,498,000     

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

     5,038,750 (1)(2)   
$ 3,875,000     

Enterprise Products Partners, 8.375% 08/01/66, Series A

     4,313,742 (1)(2)   
  3,000     

Kinder Morgan GP, Inc., 4.188%(6), Pfd., 144A****

     2,753,625 *   

 

 

    

 

      12,106,117     
   

 

 

    

 

7

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
     
       

Real Estate Investment Trust (REIT) — 2.6%

            
 

Duke Realty Corp.:

    
  4,000     

Duke Realty Corp, 6.50% Pfd., Series K

   $ 94,250     
  3,500     

Duke Realty Corp, 6.60% Pfd., Series L

     83,125     
  11,075     

Kimco Realty Corporation, 6.90% Pfd., Series H

     280,087     
  30,000     

National Retail Properties, Inc., 5.70% Pfd., Series E

     613,545     
 

PS Business Parks:

    
  8,243     

PS Business Parks, Inc., 5.70% Pfd., Series V

     173,845     
  40,000     

PS Business Parks, Inc., 6.45% Pfd., Series S

     932,060 (1)   
  7,500     

PS Business Parks, Inc., 6.875% Pfd., Series R

     185,325     
  115,000     

Realty Income Corp, 6.625% Pfd., Series F

     2,776,100 (1)(2)   

 

 

    

 

      5,138,337     
   

 

 

    
       

Miscellaneous Industries — 2.4%

            
  32,700     

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

     2,924,606 *   
  10,000     

Stanley Black & Decker, Inc., 5.75% Pfd. 07/25/52

     229,375 (1)(2)   
$ 1,950,000     

Textron Financial Corporation, 6.00% 02/15/67, 144A****

     1,740,375     

 

 

    

 

      4,894,356     
   

 

 

    
 

Total Preferred Securities
(Cost $172,132,138)

     181,896,758     
   

 

 

    

 

Corporate Debt Securities — 8.2%

    
       

Banking — 4.8%

            
$ 5,100,000     

Goldman Sachs Group, Inc., 6.75% 10/01/37, Sub Notes

     5,279,071 (1)(2)   
$ 2,500,000     

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

     2,706,923 (1)(2)   
  75,000     

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

     1,689,848     

 

 

    

 

      9,675,842     
   

 

 

    
       

Financial Services — 0.3%

            
  19,230     

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

     452,318     
  5,900     

Raymond James Financial, 6.90% 03/15/42

     151,527     

 

 

    

 

      603,845     
   

 

 

    
       

Insurance — 2.1%

            
$ 1,850,000     

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

     1,954,107 (1)(2)   
 

Unum Group:

    
$ 2,000,000     

UnumProvident Corporation, 7.25% 03/15/28

     2,276,940 (1)(2)   

 

 

    

 

      4,231,047     
   

 

 

    

 

8

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Corporate Debt Securities — (Continued)

    
     
       

Energy — 0.9%

            
$ 1,474,000     

Energy Transfer Partners LP, 8.25%, 11/15/2029, 144A****

   $ 1,807,815 (1)(2)   

 

 

    

 

      1,807,815     
   

 

 

    
       

Real Estate Investment Trust (REIT) — 0.1%

          
  10,750     

CommonWealth REIT, 7.50% 11/15/19

     224,261     

 

 

    

 

      224,261     
   

 

 

    
 

Total Corporate Debt Securities
(Cost $14,687,354)

     16,542,810     
   

 

 

    

 

Common Stock — 0.1%

    
       

Insurance — 0.0%

            
  17,821     

WMI Holdings Corporation, 144A****

     18,177 *†   

 

 

    

 

      18,177     
   

 

 

    
       

Utilities — 0.1%

            
  8,940     

Exelon Corporation

     272,581 *   

 

 

    

 

      272,581     
   

 

 

    
 

Total Common Stock
(Cost $1,279,370)

     290,758     
   

 

 

    

 

Money Market Fund — 0.3%

            
 

BlackRock Liquidity Funds:

    
  560,980     

T-Fund

     560,980     

 

 

    

 

 

Total Money Market Fund
(Cost $560,980)

     560,980     
   

 

 

    
    

Total Investments (Cost $188,659,842***)

     98.8%        199,291,306   

Other Assets And Liabilities (Net)

     1.2%        2,384,566   
  

 

 

    

 

 

  

Total Managed Assets

          100.0% ‡    $ 201,675,872   
  

 

 

    

 

 

  

Loan Principal Balance

  

     (70,200,000 ) 
    

 

 

  

Total Net Assets Available To Common Stock

  

   $ 131,475,872   
    

 

 

  

 

9

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (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, 2013, these securities amounted to $44,799,373 or 22.2% 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 $135,377,444 at August 31, 2013.

(2)

All or a portion of this security has been rehypothecated. The total value of such securities was $66,078,635 at August 31, 2013.

(3)

Foreign Issuer.

(4)

Illiquid.

(5)

Valued at fair value as determined in good faith by or under the direction of the Board of Directors as of August 31, 2013.

(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.

 

        ABBREVIATIONS:
Pfd.     —   Preferred Securities
REIT     —   Real Estate Investment Trust

 

10

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

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

For the period from December 1, 2012 through August 31, 2013 (Unaudited)

 

 

     Value  

OPERATIONS:

   

Net investment income

    $ 8,448,223   

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

      (1,639,913 ) 

Change in net unrealized appreciation/depreciation of investments

      (3,509,218 ) 
  

 

 

  

Net increase in net assets resulting from operations

      3,299,092   

DISTRIBUTIONS:

   

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

      (9,482,243 ) 
  

 

 

  

Total Distributions to Common Stock Shareholders

      (9,482,243 ) 

FUND SHARE TRANSACTIONS:

   

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

      1,068,602   
  

 

 

  

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

      1,068,602   

NET DECREASE IN NET ASSETS AVAILABLE TO

   

 

 

  

COMMON STOCK FOR THE PERIOD

    $ (5,114,549 ) 
  

 

 

  
          

NET ASSETS AVAILABLE TO COMMON STOCK:

   

Beginning of period

    $ 136,590,421   

Net decrease in net assets during the period

      (5,114,549 ) 
  

 

 

  

End of period

    $ 131,475,872   
  

 

 

  

 

(1)

These tables summarize the nine months ended August 31, 2013 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2012.

(2)

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

 

11

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2012 through August 31, 2013 (Unaudited)

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

   

Net asset value, beginning of period

    $ 11.19   
  

 

 

  

INVESTMENT OPERATIONS:

   

Net investment income

      0.69   

Net realized and unrealized gain/(loss) on investments

      (0.42 ) 
  

 

 

  

Total from investment operations

      0.27   
  

 

 

  

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

   

From net investment income

      (0.77 ) 
  

 

 

  

Total distributions to Common Stock Shareholders

      (0.77 ) 
  

 

 

  

Net asset value, end of period

    $ 10.69   
  

 

 

  

Market value, end of period

    $ 10.09   
  

 

 

  

Common Stock shares outstanding, end of period

      12,298,870   
  

 

 

  

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

      8.17 %* 

Operating expenses including interest expense

      1.90 %* 

Operating expenses excluding interest expense

      1.37 %* 
        

SUPPLEMENTAL DATA:††

   

Portfolio turnover rate

      21 %** 

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

    $ 201,676   

Ratio of operating expenses including interest expense to total managed assets

      1.27 %* 

Ratio of operating expenses excluding interest expense to total managed assets

      0.91 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2013 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2012.

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

 

12

 

Flaherty & Crumrine Preferred Income Opportunity 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, 2012

    $ 0.1895       $ 11.13       $ 11.22       $ 11.13   

January 31, 2013

      0.0730         11.30         12.14         11.53   

February 28, 2013

      0.0730         11.33         12.56         11.93   

March 28, 2013

      0.0730         11.38         12.26         11.65   

April 30, 2013

      0.0730         11.54         12.61         11.98   

May 31, 2013

      0.0730         11.45         11.52         11.45   

June 28, 2013

      0.0730         10.97         10.97         10.97   

July 31, 2013

      0.0730         10.94         10.79         10.81   

August 30, 2013

      0.0730         10.69         10.09         10.12   

 

(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 Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2013, the aggregate cost of securities for federal income tax purposes was $188,695,061, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $17,999,057 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $7,402,812.

 

2. Additional Accounting Standards

Fair Value Measurements: The Fund has performed an analysis of all existing investments and derivative instruments 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. A summary of the inputs used to value the Fund’s investments as of August 31, 2013 is as follows:

 

     Total
Value at
August 31, 2013		      Level 1
Quoted
Price		      Level 2
Significant
Observable
Inputs		      Level 3
Significant
Unobservable
Inputs		  

Preferred Securities

            

Banking

    $ 71,476,835       $ 48,078,623       $ 23,391,462       $ 6,750   

Financial Services

      3,687,785         2,341,161         1,346,624         —   

Insurance

      51,429,023         32,107,301         19,321,722         —   

Utilities

      33,164,305         9,751,568         23,412,737         —   

Energy

      12,106,117         9,352,492         2,753,625         —   

Real Estate Investment Trust (REIT)

      5,138,337         5,138,337         —         —   

Miscellaneous Industries

      4,894,356         229,375         4,664,981         —   

Corporate Debt Securities

      16,542,810         7,797,025         8,745,785         —   

Common Stock

            

Insurance

      18,177         18,177         —         —   

Utilities

      272,581         272,581         —         —   

Money Market Fund

      560,980         560,980         —         —   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Investments

    $ 199,291,306       $ 115,647,620       $ 83,636,936       $ 6,750   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

14

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

During the reporting period, there were no transfers into Level 1 from Level 2. During the reporting period, securities with an aggregate market value of $2,759,063 were transferred into Level 2 from Level 1. The securities were transferred because of a reduction in the amount of observable market data, resulting from: a decrease in market activity for the securities, reduced availability of quoted prices for the securities, or de-listing of securities from a national securities exchange that resulted in a material decrease in activity.

The fair values of the Fund’s investments are generally based on market information and quotes received from brokers or independent pricing services—approved by the Board and 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 participant in the markets.

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.

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 11/30/12

    $ 9,000      $ 9,000   

Accrued discounts/premiums

      —        —   

Realized gain/(loss)

      (4,462,500 )      (4,462,500 ) 

Change in unrealized appreciation/(depreciation)

      4,460,250        4,460,250   

Purchases

      —        —   

Sales

      —        —   

Transfer in

      —        —   

Transfer out

      —        —   

Balance as of 08/31/13

    $ 6,750      $ 6,750   

For the nine months ended August 31, 2013, 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.

 

15

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

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 08/31/13		     Valuation Technique   Unobservable Input   Input Range (Wgt Avg)

Preferred Securities

        

    Banking

   $ 6,750      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

Donald F. Crumrine, CFA

Chairman of the Board

David Gale

Morgan Gust

Karen H. Hogan

Robert F. Wulf, CFA

Officers

Donald F. Crumrine, CFA

Chief Executive Officer

Robert M. Ettinger, CFA

President

R. Eric Chadwick, CFA

Chief Financial Officer,

Vice President and Treasurer

Chad C. Conwell

Chief Compliance Officer,

Vice President and Secretary

Bradford S. Stone

Vice President and

Assistant Treasurer

Laurie C. Lodolo

Assistant Compliance Officer,

Assistant Treasurer and

Assistant Secretary

Linda M. Puchalski

Assistant Treasurer

Investment Adviser

Flaherty & Crumrine Incorporated

e-mail: flaherty@pfdincome.com

Questions concerning your shares of Flaherty & Crumrine Preferred Income Opportunity 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 Investment Servicing (US) Inc.

P.O. Box 358035

Pittsburgh, PA 15252-8035

1-866-351-7446

This report is sent to shareholders of Flaherty & Crumrine Preferred Income Opportunity 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.

 

LOGO

 

Quarterly

Report

August 31, 2013

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 Opportunity 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     10/22/2013                                                                                                                

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     10/22/2013                                                                                                                

By (Signature and Title)*      /s/ R. Eric Chadwick                                                              

R. Eric Chadwick, Chief Financial Officer, Treasurer and Vice

President

(principal financial officer)

Date     10/22/2013                                                                                                                

 

* 

Print the name and title of each signing officer under his or her signature.