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

FLAHERTY & CRUMRINE PREFERRED SECURITIES INCOME FUND

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

Your Fund performed well during its third fiscal quarter1, delivering +3.5% total return on net asset value2. For the first nine months of fiscal 2014, the Fund’s return on NAV was an impressive +15.9%. While third quarter market performance was -2.1%, year-to-date market performance was +17.1% at August 31st.

U.S. economic growth appears to be running around 3% currently, after averaging just 1.3% in 2014’s first half. Job growth is up, unemployment is down and inflation remains low. The Fed is not filling its monetary punch bowl as quickly as before, but, while it’s always hard to predict what the Fed will do, it probably won’t start to raise short-term interest rates until mid-2015 or later. In contrast, economic growth abroad has slowed, with most developed countries trailing the U.S. recovery and monetary policy in many of those countries is easing further.

Although long-term interest rates in the U.S. will probably rise modestly over coming quarters, we think any upward movement will be limited by moderate GDP growth and strong investor demand for yield. Credit conditions continue to improve for most issuers of preferred securities, as earnings remain healthy and companies continue to build capital. With this backdrop, we believe prospective returns remain attractive for long-term investors.

The Fund’s portfolio benefited from small declines in intermediate and long-term interest rates during the quarter, as well as on-going demand for higher yields of preferred securities. Supply of new issues remains steady—a key measure of market health. From December 2013 through September 2014, U.S. and foreign companies issued 103 new securities in the United States, raising just under $64 billion. Over the same period, issuers redeemed 67 preferred securities totaling $25 billion.

New issue supply was dominated by banks tailoring their capital to meet new regulatory requirements. Large U.S. banks (those deemed to be a systemically important financial institution, or “SIFI”) have issued traditional non-cumulative perpetual preferred stock. Non-U.S. SIFI banks are utilizing a preferred stock variation termed Contingent Convertible Securities, or CoCos. As you know from prior letters, the Fund has not yet purchased any CoCos, but we continue to evaluate them as potential investments.

With foreign economies lagging recovery in the U.S. and foreign banks issuing securities we have not yet been inclined to buy, the portion of the portfolio invested in foreign securities has drifted lower this fiscal year. Through September 30th, this portion declined from 27.3% of the portfolio to 18.7%. We anticipate this rate could fall further through more issuer redemptions.

As we discussed last quarter, another portfolio trend is a continued shift to “fixed-to-float” securities. These have coupons that are fixed for an initial period, typically five or ten years. Afterwards, coupons float based on a formula set at issuance. Prices on floating rate issues typically are less sensitive to changes in benchmark interest rates; this effect has spilled over to fixed-to-float preferred securities as well. If long-term

 

 

 

1  June 1, 2014—August 31, 2014
2  Following 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.


interest rates begin to rise, as we expect they will eventually, these securities should tend to outperform

issues with fixed-for-life coupons, all other things being equal. This fiscal year through September 30th, the portion of the portfolio in this structure increased from 47.9% to 54.5%. We continue to look for opportunities to add fixed-to-float holdings. Although these issues yield a bit less than many fixed-for-life securities, and thus may reduce portfolio income at the margin, we believe owning fixed-to-float securities is prudent and consistent with our interest-rate outlook.

As always, we encourage you to visit the Fund’s website, www.preferredincome.com, for current information on preferred-securities markets, the Fund and the broader economy.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team:

R. Eric Chadwick

Donald F. Crumrine

Robert M. Ettinger

Bradford S. Stone

October 1, 2014

 

2


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2014 (Unaudited)

 

Fund Statistics       
Net Asset Value   $ 19.88   
Market Price   $ 19.28   
Discount     3.02
Yield on Market Price     8.46
Common Stock Shares Outstanding     43,534,859   

 

Moody’s Ratings*   % of Net Assets†  
A     3.9%   
BBB     56.3%   
BB     31.4%   
Below “BB”     2.2%   
Not Rated**     5.2%   
Below Investment Grade***     19.7%   

 

* 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 1.0%.
*** 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†  
Liberty Mutual Group     5.5%   
JPMorgan Chase     4.7%   
MetLife     4.4%   
Banco Santander, S.A.     4.1%   
HSBC PLC     3.9%   
M&T Bank Corporation     3.7%   
Wells Fargo & Company     3.6%   

Fifth Third Bancorp

    3.5%   
Axis Capital Holdings Ltd     2.9%   
XL Group PLC     2.7%   
 

% of Net Assets***†

 
Holdings Generating Qualified Dividend Income (QDI) for Individuals     55%   
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD)     38%   

 

*** 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 Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — 93.9%

   
       

Banking — 43.8%

           
  4,500     

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

  $ 110,391  
  2,046,320     

Banco Santander, 10.50% Pfd., Series 10

    52,593,493 **(3)   
 

Barclays Bank PLC:

   
  390,600     

Barclays Bank PLC, 7.10% Pfd.

    10,026,702 **(3)   
  23,000     

Barclays Bank PLC, 7.75% Pfd., Series 4

    593,860 **(3)   
  522,100     

Barclays Bank PLC, 8.125% Pfd., Series 5

    13,532,832 **(1)(3)   
  48,000     

BB&T Corporation, 5.625% Pfd., Series E

    1,153,032 *(1)   
 

Citigroup:

   
  631,500     

Citigroup, Inc., 6.875% Pfd., Series K

    17,096,284 *(1)(2)   
  526,657     

Citigroup, Inc., 7.125% Pfd., Series J

    14,662,131 *(1)(2)   
  56,900     

City National Corporation, 6.75% Pfd., Series D

    1,594,338  
 

CoBank ACB:

   
  53,520     

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

    4,892,065  
  60,000     

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

    6,245,628 *(1)   
$ 35,100,000     

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

    52,650 (4)(5)††   
  38,100     

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

    928,687  
  1,667,391     

Fifth Third Bancorp, 6.625% Pfd., Series I

    45,772,384 *(1)(2)   
 

First Horizon:

   
  3,730     

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

    2,763,347  
  8     

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

    10,820,000     
  642,800     

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

    18,295,052 *(1)   
  99,000     

First Republic Bank, 6.70% Pfd.

    2,598,998 *(1)   
 

Goldman Sachs Group:

   
$ 390,000     

Goldman Sachs, 5.70%, Series L

    404,585  
  100,000     

Goldman Sachs, 6.375% Pfd., Series K

    2,599,000  
 

HSBC PLC:

   
$ 4,400,000     

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

    6,622,000 (1)(2)(3)   
  776,000     

HSBC Holdings PLC, 8.00% Pfd., Series 2

    20,876,340 **(1)(3)   
$ 850,000     

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

    860,497     
$ 580,000     

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

    587,723 (1)(2)   
  516,426     

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

    13,201,140 *(1)   
 

ING Groep NV:

   
  355,000     

ING Groep NV, 6.375% Pfd.

    9,002,800 **(3)   
  125,000     

ING Groep NV, 7.05% Pfd.

    3,212,688 **(3)   
  116,054     

ING Groep NV, 7.20% Pfd.

    2,994,367 **(3)   
  230,000     

ING Groep NV, 7.375% Pfd.

    5,968,500 **(1)(3)   

 

4


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

           
 

JPMorgan Chase:

   
  56,600     

JPMorgan Chase & Company, 5.50% Pfd.

  $ 1,309,724  
$ 5,450,000     

JPMorgan Chase & Company, 6.00%, Series R

    5,616,225 *(1)   
  198,000     

JPMorgan Chase & Company, 6.70% Pfd., Series T

    5,110,380 *(1)(2)   
$ 11,789,000     

JPMorgan Chase & Company, 6.75%, Series S

    12,717,384 *(1)(2)   
$ 32,000,000     

JPMorgan Chase & Company, 7.90%, Series I

    35,560,000 *(1)   
$ 17,800,000     

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

    19,535,500 **(1)(2)(3)   
 

M&T Bank Corporation:

   
$ 16,750,000     

M&T Bank Corporation, 6.450%, Series E

    18,090,000 *(1)   
$ 29,323,000     

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

    30,083,844 *(1)(2)   
 

Morgan Stanley:

   
$ 1,400,000     

Morgan Stanley, 5.45%, Series H

    1,426,250  
  193,400     

Morgan Stanley, 6.875% Pfd., Series F

    5,223,734 *(1)(2)   
  298,300     

Morgan Stanley, 7.125% Pfd., Series E

    8,340,915 *(1)(2)   
  1,007,360     

PNC Financial Services Group, Inc., 6.125% Pfd., Series P

    27,922,810 *(1)   
$ 7,885,000     

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

    10,467,338 (1)(3)   
  27,213     

Regions Financial Corporation, 6.375% Pfd., Series B

    689,850  
 

Royal Bank of Scotland:

   
  12,500     

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

    311,125 **(3)   
  25,000     

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

    625,750 **(3)   
  309,500     

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

    7,947,960 **(1)(3)   
 

Sovereign Bancorp:

   
$ 1,000,000     

Sovereign Capital Trust VI, 7.908% 06/13/36

    1,072,228     
  8,641     

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

    11,607,317     
  454,500     

State Street Corporation, 5.90% Pfd., Series D

    11,854,496 *(1)   
  107,166     

SunTrust Banks, Inc., 5.875% Pfd.

    2,558,588  
  216,000     

US Bancorp, 6.50% Pfd., Series F

    6,311,844  
 

Wells Fargo:

   
  339,095     

Wells Fargo & Company, 5.85% Pfd.

    8,858,857  
  402,925     

Wells Fargo & Company, 6.625% Pfd., Series R

    11,338,310  
$ 6,314,000     

Wells Fargo & Company, 7.98%, Series K

    7,166,390  
  646,500     

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

    19,071,750 *(1)   
 

Zions Bancorporation:

   
  20,000     

Zions Bancorporation, 6.30% Pfd., Series G

    518,750  
$ 9,000,000     

Zions Bancorporation, 7.20%, Series J

    9,537,300 *(1)(2)   
  519,842     

Zions Bancorporation, 7.90% Pfd., Series F

    14,555,576 *(1)   

 

 

   
      565,491,709     
   

 

 

   

 

5


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Financial Services — 1.3%

           
$ 7,900,000     

General Electric Capital Corp., 7.125%, Series A

  $ 9,326,400 *(1)   
 

HSBC PLC:

   
  315,808     

HSBC Finance Corporation, 6.36% Pfd., Series B

    7,939,887 *(1)   

 

 

   
      17,266,287     
   

 

 

   
       

Insurance — 26.2%

           
 

Ace Ltd.:

   
$ 4,566,000     

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

    6,734,850 (1)(2)(3)   
  200,000     

Allstate Corp., 6.625% Pfd., Series E

    5,240,300  
$ 1,053,000     

Aon Corporation, 8.205% 01/01/27

    1,355,500 (1)   
  615,000     

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

    16,551,187 **(1)(3)   
  71,206     

Aspen Insurance Holdings Ltd., 5.95% Pfd.

    1,843,523 **(3)   
 

AXA SA:

   
$ 3,315,000     

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

    3,613,350 **(1)(2)(3)   
$ 2,750,000     

AXA SA, 8.60% 12/15/30

    3,724,545 (3)   
  1,375,718     

Axis Capital Holdings Ltd., 6.875% Pfd., Series C

    37,230,368 **(1)(3)   
  560,250     

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

    14,041,266 (1)(2)   
  140,902     

Endurance Specialty Holdings, 7.50% Pfd., Series B

    3,707,484 **(3)   
$ 20,869,000     

Everest Re Holdings, 6.60% 05/15/37

    22,042,881 (1)(2)   
$ 35,418,000     

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

    55,252,080 (1)(2)   
 

MetLife:

   
$ 16,612,000     

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

    26,994,500 (1)(2)   
$ 2,250,000     

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

    2,885,625 (1)(2)   
$ 18,250,000     

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

    26,599,375 (1)(2)   
  150,299     

PartnerRe Ltd., 7.25% Pfd., Series E

    4,035,528 **(1)(3)   
  438,500     

Principal Financial Group, 6.518% Pfd., Series B

    11,428,406 *(1)   
 

Prudential Financial:

   
$ 4,906,000     

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

    5,286,215 (1)(2)   
$ 3,900,000     

Prudential Financial, Inc., 5.875% 09/15/42

    4,199,910 (1)(2)   
 

QBE Insurance:

   
$ 12,140,000     

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

    13,219,926 (1)(3)   
 

The Travelers Companies:

   
$ 4,877,500     

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

    6,703,651 (1)(2)   
$ 9,000,000     

USF&G Capital I, 8.50% 12/15/45, 144A****

    12,451,104 (1)(2)   
 

Unum Group:

   
$ 15,240,000     

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

    17,977,394 (1)(2)   

 

6


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Insurance — (Continued)

           
 

XL Group PLC:

   
$ 36,150,000     

XL Capital Ltd., 6.50%, Series E

  $ 35,020,312 (1)(3)   

 

 

   
      338,139,280     
   

 

 

   
       

Utilities — 15.3%

           
  56,025     

Alabama Power Company, 6.45% Pfd.

    1,505,672 *(1)   
 

Baltimore Gas & Electric:

   
  10,000     

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

    1,015,625 *(1)   
  15,000     

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

    1,524,844  
 

Commonwealth Edison:

   
$ 15,828,000     

COMED Financing III, 6.35% 03/15/33

    16,342,410 (1)(2)   
$ 13,662,000     

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

    14,816,439 (1)(2)   
  279,975     

Entergy Arkansas, Inc., 6.45% Pfd.

    7,113,129 *(1)   
  110,000     

Entergy Louisiana, Inc., 6.95% Pfd.

    11,017,193 *(1)   
  164,400     

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

    17,955,571 *(1)   
  98,800     

Indianapolis Power & Light Company, 5.65% Pfd.

    10,361,650  
  225,000     

Integrys Energy Group, Inc., 6.00% Pfd.

    5,927,063 (1)(2)   
 

Nextera Energy:

   
$ 16,970,000     

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

    17,362,754 (1)(2)   
$ 3,100,000     

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

    3,427,819 (1)(2)   
 

PECO Energy:

   
$ 2,386,000     

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

    2,857,106 (1)(2)   
$ 22,900,000     

PECO Energy Capital Trust IV, 5.75% 06/15/33

    22,777,256 (1)(2)   
 

PPL Corp:

   
$ 17,680,000     

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

    18,042,210 (1)(2)   
$ 23,500,000     

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

    24,732,669 (1)(2)   
  197,500     

Southern California Edison, 6.50% Pfd., Series D

    20,990,557 *(1)   

 

 

   
      197,769,967     
   

 

 

   
       

Energy — 2.7%

           
$ 2,510,000     

DCP Midstream LLC, 5.85% 05/21/43, 144A****

    2,447,250     
$ 28,500,000     

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

    32,205,000 (1)(2)   

 

 

   
      34,652,250     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 3.8%

           
 

Duke Realty Corp.:

   
  87,533     

Duke Realty Corp, 6.50% Pfd., Series K

    2,202,549     
  99,063     

Duke Realty Corp, 6.60% Pfd., Series L

    2,492,059     

 

7


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Real Estate Investment Trust (REIT) — (Continued)

           
  27,745     

Equity CommonWealth, 7.25% Pfd., Series E

  $ 704,723     
 

Kimco Realty Corporation:

   
  7,000     

Kimco Realty Corporation, 5.50% Pfd., Series J

    163,800     
  261,000     

Kimco Realty Corporation, 6.90% Pfd., Series H

    6,879,960 (1)(2)   
 

National Retail Properties:

   
  263,818     

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

    6,224,469 (1)(2)   
  49,884     

National Retail Properties, Inc., 6.625% Pfd., Series D

    1,321,053     
 

PS Business Parks:

   
  22,000     

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

    526,515     
  30,000     

PS Business Parks, Inc., 5.75% Pfd., Series U

    718,200     
  55,000     

PS Business Parks, Inc., 6.00% Pfd., Series T

    1,365,650     
  241,391     

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

    6,199,524 (1)(2)   
  105,000     

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

    2,751,000 (1)(2)   
  592,130     

Realty Income Corporation, 6.625% Pfd., Series F

    15,561,176 (1)(2)   
  28,057     

Regency Centers Corporation, 6.625% Pfd., Series 6

    752,559     
  33,506     

Weingarten Realty Investors, 6.50% Pfd., Series F

    857,502     

 

 

   
      48,720,739     
   

 

 

   
       

Miscellaneous Industries — 0.8%

           
  105,400     

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

    9,571,638  
  48,000     

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

    1,203,000 (1)(2)   

 

 

   
      10,774,638     
   

 

 

   
 

Total Preferred Securities
(Cost $1,150,128,523)

    1,212,814,870     
   

 

 

   

 

Corporate Debt Securities — 4.7%

       

Banking — 1.7%

           
$ 13,952,000     

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

    17,966,674 (1)(2)   
  123,800     

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

    3,040,838     
  28,000     

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

    749,000     

 

 

   
      21,756,512     
   

 

 

   
       

Financial Services — 0.3%

           
  122,439     

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

    3,128,500 (1)(2)   
  4,726,012     

Lehman Brothers, Guaranteed Note, Variable Rate, 5.843% 12/16/16, 144A****

    426,286 (4)(5)††   

 

8


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

 

Corporate Debt Securities — (Continued)

  

       

Financial Services — (Continued)

               
  30,586     

Raymond James Financial, 6.90% 03/15/42

  $ 830,792 (1)(2)   

 

 

   
      4,385,578     
   

 

 

   
       

Insurance — 1.3%

               
$ 13,500,000     

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

    16,338,591 (1)(2)   

 

 

   
      16,338,591     
   

 

 

   
       

Energy — 0.7%

               
$ 6,717,000     

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

    9,613,478 (1)   

 

 

   
      9,613,478     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 0.1%

               
  40,000     

Equity CommonWealth, 7.50% 11/15/19

    822,400     

 

 

   
      822,400     
   

 

 

   
       

Communication — 0.3%

               
  161,060     

Qwest Corporation, 7.375% 06/01/51

    4,212,122     

 

 

   
      4,212,122     
   

 

 

   
       

Miscellaneous Industries — 0.3%

               
 

Pulte Group Inc.:

   
$ 3,550,000     

Pulte Homes, Inc., 7.875% 06/15/32

    4,020,375 (1)(2)   

 

 

   
      4,020,375     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $48,923,765)

    61,149,056     
   

 

 

   

 

Common Stock — 0.2%

  

       

Banking — 0.1%

               
  54,740     

CIT Group, Inc.

    2,625,330        *   

 

 

   
      2,625,330     
   

 

 

   
       

Insurance — 0.1%

               
  240,577     

WMI Holdings Corporation, 144A****

    661,587 *†   

 

 

   
      661,587     
   

 

 

   
 

Total Common Stock
(Cost $23,031,471)

    3,286,917     
   

 

 

   

 

9


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

Money Market Fund — 0.1%

 

BlackRock Liquidity Funds:

   
  747,635     

T-Fund, Institutional Class

  $ 747,635     

 

 

   
 

Total Money Market Fund
(Cost $747,635)

    747,635     
   

 

 

   

Total Investments (Cost $1,222,831,394***)

     98.9%        1,277,998,478   

Other Assets And Liabilities (Net)

     1.1%        13,741,143   
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡    $ 1,291,739,621   
  

 

 

   

 

 

 

Loan Principal Balance

  

    (426,375,000
    

 

 

 

Total Net Assets Available To Common Stock

  

  $ 865,364,621   
    

 

 

 

 

* 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, 2014, these securities amounted to $254,708,372 or 19.7% 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 $751,747,065 at August 31, 2014.

(2)

All or a portion of this security has been rehypothecated. The total value of such securities was $396,953,722 at August 31, 2014.

(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, 2014.

(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 Securities Income Fund Incorporated

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

For the period from December 1, 2013 through August 31, 2014 (Unaudited)

 

     Value  

OPERATIONS:

  

Net investment income

   $ 53,090,753   

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

     29,434,124   

Change in net unrealized appreciation/(depreciation) of investments

     39,575,616   
  

 

 

 

Net increase in net assets resulting from operations

     122,100,493   

DISTRIBUTIONS:

  

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

     (55,156,728
  

 

 

 

Total Distributions to Common Stock Shareholders

     (55,156,728

FUND SHARE TRANSACTIONS:

  

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

     1,172,932   
  

 

 

 

Net increase in net assets available to Common Stock resulting from Fund Share Transactions

     1,172,932   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 68,116,697   
  

 

 

 
          

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 797,247,924   

Net increase in net assets during the period

     68,116,697   
  

 

 

 

End of period

   $ 865,364,621   
  

 

 

 

 

(1)

These tables summarize the nine months ended August 31, 2014 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2013.

(2) 

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

 

 

11


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2013 through August 31, 2014 (Unaudited)

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 18.34   
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     1.22   

Net realized and unrealized gain/(loss) on investments

     1.59   
  

 

 

 

Total from investment operations

     2.81   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (1.27
  

 

 

 

Total distributions to Common Stock Shareholders

     (1.27
  

 

 

 

Net asset value, end of period

   $ 19.88   
  

 

 

 

Market value, end of period

   $ 19.28   
  

 

 

 

Common Stock shares outstanding, end of period

     43,534,859   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     8.52 %* 

Operating expenses including interest expense

     1.39 %* 

        Operating expenses excluding interest expense

     0.88 %* 

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     19 %** 

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

   $ 1,291,740   

Ratio of operating expenses including interest expense to total managed assets

     0.92 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.59 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2014 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2013.

* 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 Securities 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, 2013

   $ 0.1800       $ 18.08       $ 17.50       $ 17.75   

January 31, 2014

     0.1360         18.40         17.92         18.02   

February 28, 2014

     0.1360         18.74         18.49         18.69   

March 31, 2014

     0.1360         18.97         19.23         18.97   

April 30, 2014

     0.1360         19.22         19.89         19.22   

May 30, 2014

     0.1360         19.61         20.12         19.61   

June 30, 2014

     0.1360         19.72         19.60         19.67   

July 31, 2014

     0.1360         19.66         19.00         18.82   

August 29, 2014

     0.1360         19.88         19.28         19.37   

 

(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 Securities Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2014, the aggregate cost of securities for federal income tax purposes was $1,254,844,974, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $111,102,338 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $87,948,834.

 

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. A summary of the inputs used to value the Fund’s investments as of August 31, 2014 is as follows:

 

     Total
Value at
August 31, 2014
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 565,491,709       $ 469,879,772       $ 95,559,287       $ 52,650   

Financial Services

     17,266,287         17,266,287                   

Insurance

     338,139,280         236,274,813         101,864,467           

Utilities

     197,769,967         59,576,285         138,193,682           

Energy

     34,652,250         32,205,000         2,447,250           

Real Estate Investment Trust (REIT)

     48,720,739         48,720,739                   

Miscellaneous Industries

     10,774,638         1,203,000         9,571,638           

Corporate Debt Securities

           

Banking

     21,756,512         3,789,838         17,966,674           

Financial Services

     4,385,578         3,959,292                 426,286   

Insurance

     16,338,591                 16,338,591           

Energy

     9,613,478                 9,613,478           

Real Estate Investment Trust (REIT)

     822,400         822,400                   

Miscellaneous Industries

     4,020,375                 4,020,375           

Communication

     4,212,122         4,212,122                   

 

14


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

     Total
Value at
August 31, 2014
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Common Stock

           

Banking

   $ 2,625,330       $ 2,625,330       $       $   

Insurance

     661,587         661,587                   

Money Market Fund

     747,635         747,635                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 1,277,998,478       $ 881,944,100       $ 395,575,442       $ 478,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

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—approved by the Board of Directors 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 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.

The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:

 

          Preferred
Securities
    Corporate Debt
Securities
 
     Total Investments     Banking     Financial Services  

Balance as of 11/30/13

  $ 535,696      $ 52,650      $ 483,046   

Accrued discounts/premiums

                    

Realized gain/(loss)

                    

Change in unrealized appreciation/(depreciation)

    (56,760            (56,760

Purchases

                    

Sales

                    

Transfer in

                    

Transfer out

                    

Balance as of 08/31/14

  $ 478,936      $ 52,650      $ 426,286   

For the nine months ended August 31, 2014 total change in unrealized gain/(loss) on Level 3 securities still held at period-end and included in the change in net assets was $(56,760).

 

15


 

Flaherty & Crumrine Preferred Securities Income 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 08/31/14
    Valuation Technique   Unobservable Input   Input Range (Wgt Avg)

Preferred Securities

       

Banking

  $ 52,650      Bankruptcy recovery   Credit/Structure-specific
recovery
  0.00% - 0.50% (0.15%)

Corporate Debt

       

Securities

    426,286      Bankruptcy recovery   Credit/Structure-specific
recovery
  7% - 11% (9%)

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


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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

Roger 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

Servicing Agent

Destra Capital Investments LLC

1-877-855-3434

Questions concerning your shares of Flaherty & Crumrine Preferred Securities 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 —

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 Securities 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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Quarterly Report

 

August 31, 2014

 

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