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

FLAHERTY & CRUMRINE PREFERRED SECURITIES INCOME FUND

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

The new fiscal year is off to a fine start—total return on net asset value1 for the first fiscal quarter2 was +4.7%. Over the same period total return based on income plus change in the Fund’s market price was +5.0%.

With signs of economic improvement trickling in, prices on intermediate and long-term US Treasury bonds fell as much as five percent in the quarter. In contrast, prices on many preferred securities rose. Conditions in the market for preferred securities have been, and remain, positive; credit quality continues to improve, investor demand is high, and the market is shrinking.

Once again redemptions of preferred securities outpaced issuance. Since December 1, 2012, redemptions3 totaled $30.1 billion. Over the same period, $16.8 billion of new preferred securities were brought to market. During the past four months, the preferred securities market has shrunk by $13.3 billion, or 3.7%.

It’s instructive to break these numbers down between bank and non-bank securities. Since December 1, 2012, redemptions of bank preferred securities have totaled $17.6 billion, or 44% of total preferred redemptions. Since mid-March, however, bank calls have spiked and comprise over 70% of total redemptions. The pace quickened immediately after regulators announced results from their annual review of capital at large banks. So far, banks have been slow to replace preferred capital—new bank issues have totaled a paltry $3.9 billion since December 1st of last year.

For non-bank companies the decision to call or issue is driven primarily by economics. In the current low interest rate environment, it is often possible for issuers to achieve substantial savings by refinancing. While banks are concerned about expense reduction as well, their decisions about redemption or issuance have been driven mainly by regulatory requirements. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress in 2010, mandated new standards for the amount and form of bank capital. Under the Act, trust preferred securities are being phased out of the calculation of Tier 1 capital. New capital will be either traditional equity or non-cumulative perpetual preferred stock.

As we’ve discussed in the past, the wave of refinancing negatively impacts income earned from Fund investments. The current combination of high-yielding portfolio assets and low cost of Fund leverage won’t last forever; we attempt to set distribution rates that reflect this situation.

Since our last letter, there have been three related changes to the Fund: a new name, a new shareholder servicing agent and a new website address at www.preferredincome.com. We are pleased to welcome Destra Capital Investments LLC (“Destra Capital”) as the new shareholder servicing agent. In addition, the Fund changed its name to “Flaherty & Crumrine Preferred Securities Income Fund Incorporated”. We emphasize that Flaherty & Crumrine is still the investment adviser and there has been no change in investment strategies or style.

 

 

 

1 

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

2 

December 1, 2012—February 28, 2013

3 

Announced or implemented.


As always, we encourage you to visit the Fund’s website for important information.

Sincerely,

 

LOGO   LOGO

Donald F. Crumrine

Chairman

 

Robert M. Ettinger

President

March 28, 2013  

 

2


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OVERVIEW

February 28, 2013 (Unaudited)

 

Fund Statistics       
Net Asset Value   $ 19.33   
Market Price   $ 20.23   
Premium     4.66
Yield on Market Price     8.07
Common Stock Shares Outstanding     43,365,995   

 

Moody’s Ratings   % of Net Assets†  
A     2.2%   
BBB     58.1%   
BB     32.0%   
Below “BB”     2.2%   
Not Rated*     3.7%   
Below Investment Grade**     22.7%   

 

* Does not include net other assets and liabilities of 1.8%.
** 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%   
Banco Santander, S.A.     4.6%   
MetLife     4.3%   
HSBC PLC     3.8%   
Goldman Sachs Group     3.4%   
Barclays Bank PLC     3.1%   
Wells Fargo & Company     3.1%   
JPMorgan Chase     3.0%   
Axis Capital Holdings Ltd     2.9%   
XL Group PLC     2.8%   
 

% of Net Assets***†

 
Holdings Generating Qualified Dividend Income (QDI) for Individuals     41%   
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD)     23%   

 

*** 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

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — 88.5%

   
       

Banking — 34.6%

           
 

Astoria Financial:

   
$   17,750,000     

Astoria Capital Trust I, 9.75% 11/01/29, Series B

  $ 18,322,437 (1)(2)   
 

Banco Bilbao Vizcaya Argentaria, S.A.:

   
$ 8,490,000     

BBVA International Preferred, 5.919%

    7,174,050 **(1)(3)   
 

Banco Santander, S.A.:

   
  2,046,320     

Banco Santander, 10.50% Pfd., Series 10

    57,649,950 **(1)(3)   
 

Bank of America:

   
  581,966     

Bank of America Corporation, 8.625% Pfd.

    14,840,133 *(1)   
  15,000     

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

    382,500     
  129,025     

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

    3,257,881     
 

Barclays Bank PLC:

   
$ 14,750,000     

Barclays Bank PLC, 6.278%

    14,463,334 **(1)(2)(3)   
  340,600     

Barclays Bank PLC, 7.10% Pfd.

    8,634,210 **(3)   
  23,000     

Barclays Bank PLC, 7.75% Pfd., Series 4

    583,510 **(3)   
  600,000     

Barclays Bank PLC, 8.125% Pfd., Series 5

    15,264,000 **(1)(3)   
 

BB&T Corp:

   
  28,000     

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

    716,520 *(1)   
 

BNP Paribas:

   
$ 13,500,000     

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

    14,073,750 **(1)(2)(3)   
 

Citigroup:

   
  42,000     

Citigroup Capital VII, 7.125% Pfd. 07/31/31

    1,067,065     
  341,100     

Citigroup Capital XIII, 7.875% Pfd. 10/30/40

    9,689,389 (1)(2)   
 

CoBank ACB:

   
  60,000     

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

    6,405,000  
 

Colonial BancGroup:

   
$ 35,100,000     

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

    52,650 (4)(5)††   
 

Cullen/Frost Bankers:

   
  61,850     

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

    1,534,653  
 

FBOP Corp:

   
  28,800     

FBOP Corporation, Adj. Rate Pfd., 144A****

    14,400 *(4)(5)††   
 

Fifth Third Bancorp:

   
$ 8,785,000     

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

    8,828,925 (1)(2)   
 

First Horizon:

   
  3,730     

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

    2,757,869  
  8     

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

    8,805,000     
 

First Niagara Financial Group:

   
  642,800     

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

    18,867,787 *(1)   

 

4


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

   

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

     
 

First Republic Bank:

   
  99,000     

First Republic Bank, 6.70% Pfd.

  $ 2,715,818  
 

Goldman Sachs Group:

   
$ 14,223,700     

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

    14,938,028 (1)(2)   
 

HSBC PLC:

   
$ 7,000,000     

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

    9,817,500 (1)(2)(3)   
  714,400     

HSBC Holdings PLC, 8.00% Pfd., Series 2

    19,861,392 **(1)(3)   
$ 850,000     

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

    867,000     
$ 580,000     

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

    592,330 (1)   
  361,426     

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

    9,318,032 *(1)   
 

ING Groep NV:

   
  105,000     

ING Groep NV, 6.375% Pfd.

    2,588,250 **(3)   
  125,000     

ING Groep NV, 7.05% Pfd.

    3,170,188 **(3)   
  116,054     

ING Groep NV, 7.20% Pfd.

    2,941,099 **(3)   
  130,953     

ING Groep NV, 7.375% Pfd.

    3,337,992 **(1)(3)   
  91,328     

ING Groep NV, 8.50% Pfd.

    2,367,222 **(3)   
 

JPMorgan Chase:

   
  56,600     

JPMorgan Chase & Company, 5.50% Pfd.

    1,416,698  
$ 31,305,000     

JPMorgan Chase & Company, 7.90%, Series 1

    36,272,258 *(1)   
 

KeyCorp:

   
  5,000     

KeyCorp, 7.75% Pfd., Series A

    636,563  
 

Lloyds Banking Group PLC:

   
$ 17,800,000     

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

    16,153,500 **(1)(3)   
 

M&T Bank Corp:

   
$ 11,000,000     

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

    11,557,117 *(1)   
 

Morgan Stanley:

   
  40,000     

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

    1,015,000     
  31,269     

Morgan Stanley Capital Trust VII, 6.60% Pfd.

    791,418     
 

PNC Financial Services:

   
  164,520     

PNC Financial Services, 6.6285%(6) Adj. Rate Pfd., Series L

    4,272,996 *(1)   
$ 500,000     

PNC Preferred Funding Trust III, 8.70%, 144A****

    508,791     
 

Regions Financial:

   
  60     

Union Planters Preferred Funding, 7.75% Pfd., Series A, 144A****

    6,054,375     
 

Sovereign Bancorp:

   
$ 1,000,000     

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

    1,042,500     
  8,641     

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

    11,284,057     
 

Wells Fargo:

   
  15,518     

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

    19,682,643 *(1)   
  646,500     

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

    18,788,906 *(1)   

 

5


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

           
 

Zions Bancorporation:

   
  519,842     

Zions Bancorporation, 7.90% Pfd., Series F

  $ 14,945,458  
  150,000     

Zions Bancorporation, 9.50% Pfd., Series C

    3,877,500  

 

 

   
      434,199,644     
   

 

 

   
       

Financial Services — 2.0%

           
 

Ameriprise Financial:

   
$ 400,000     

Ameriprise Financial, Inc., 7.518% 06/01/66

    448,400 (1)(2)   
 

Credit Suisse Group:

   
$ 8,274,000     

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

    8,822,153 (3)   
  15,000     

Credit Suisse Guernsey, 7.90% Pfd.

    383,907 **(3)   
 

General Electric Capital Corp:

   
$ 1,000,000     

GE Capital Trust I, 6.375% 11/15/67

    1,056,250     
$ 5,500,000     

General Electric Capital Corp., 7.125%, Series A

    6,362,576  
 

HSBC PLC:

   
  305,000     

HSBC Finance Corporation, 6.36% Pfd., Series B

    7,817,608 *(1)   

 

 

   
      24,890,894     
   

 

 

   
       

Insurance — 26.9%

           
 

Ace Ltd.:

   
$ 4,566,000     

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

    6,654,945 (1)(2)(3)   
 

Aon Corporation:

   
$ 1,053,000     

AON Corp, 8.205% 01/01/27

    1,353,012     
 

Arch Capital Group:

   
  370,550     

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

    10,187,346 **(1)(3)   
 

AXA SA:

   
$ 7,005,000     

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

    7,005,000 **(1)(2)(3)   
$ 1,200,000     

AXA SA, 8.60% 12/15/30

    1,546,900 (3)   
 

Axis Capital:

   
  1,289,142     

Axis Capital Holdings, 6.875% Pfd., Series C

    35,814,298 **(1)(3)   
 

Delphi Financial:

   
  560,250     

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

    14,058,801 (1)   
 

Endurance Specialty Holdings:

   
  75,002     

Endurance Specialty Holdings, 7.50% Pfd.

    2,015,491 **(3)   
 

Everest Re Group:

   
$ 22,619,000     

Everest Re Holdings, 6.60% 05/15/37

    23,156,201 (1)(2)   
 

GWL&A Financial:

   
$ 4,650,000     

Great West Life & Annuity Insurance, 7.153% 05/16/46, 144A****

    4,824,375 (1)(2)   

 

6


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Insurance — (Continued)

           
 

Liberty Mutual Group:

   
$ 35,418,000     

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

  $ 54,278,085 (1)(2)   
 

Lincoln National Corp:

   
$ 2,065,000     

Lincoln National Corporation, 7.00% 05/17/66

    2,111,462 (1)   
 

MetLife:

   
$ 16,312,000     

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

    25,161,260 (1)(2)   
$ 3,472,000     

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

    4,322,640 (1)(2)   
$ 17,240,000     

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

    23,877,400 (1)(2)   
 

PartnerRe Ltd.:

   
  150,299     

PartnerRe Ltd., 7.250% Pfd., Series E

    4,182,821 **(1)(3)   
 

Principal Financial:

   
  74,500     

Principal Financial Group, 5.563% Pfd., Series A

    7,431,375 *(1)   
  410,000     

Principal Financial Group, 6.518% Pfd., Series B

    11,198,125 *(1)   
 

Prudential Financial:

   
$ 6,100,000     

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

    6,374,500 (1)   
$ 3,900,000     

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

    4,138,875     
 

QBE Capital Funding:

   
$ 11,340,000     

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

    11,868,637 (1)(2)(3)   
 

Renaissancere Holdings:

   
  58,273     

Renaissancere Holdings Ltd, 6.60% Pfd.

    1,481,300 **(3)   
 

StanCorp Financial Group:

   
$ 12,621,000     

StanCorp Financial Group, 6.90% 06/01/67

    12,841,867 (1)(2)   
 

The Travelers Companies:

   
$ 6,727,500     

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

    8,752,215 (1)(2)   
$ 13,000,000     

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

    16,759,665 (1)(2)   
 

Unum Group:

   
  37,000     

Corts Provident Financing Trust I, 8.50% Pfd.

    1,073,000 (1)(2)   
 

WR Berkley Capital:

   
  6,200     

WR Berkley Capital Trust II, 6.75% Pfd. 07/26/45

    158,791     
 

XL Group PLC:

   
$ 36,150,000     

XL Capital Ltd., 6.50%, Series E

    35,427,000 (1)(2)(3)   

 

 

   
      338,055,387     
   

 

 

   
       

Utilities — 17.4%

           
 

Alabama Power:

   
  56,025     

Alabama Power Company, 6.45% Pfd.

    1,605,469 *(1)   
 

Baltimore Gas & Electric:

   
  10,000     

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

    1,029,375 *(1)   
  15,000     

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

    1,533,750  

 

7


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Utilities — (Continued)

           
 

Commonwealth Edison:

   
$ 15,828,000     

COMED Financing III, 6.35% 03/15/33

  $ 16,619,400 (1)(2)   
 

Constellation Energy:

   
  169,800     

Constellation Energy Group, 8.625% Pfd. 06/15/63, Series A

    4,397,820 (1)(2)   
 

Dominion Resources:

   
$ 15,262,000     

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

    16,954,128 (1)(2)   
 

Duke Energy Corp:

   
  80,000     

Duke Energy Corp, 5.125% Pfd.

    2,010,000     
 

Entergy Arkansas:

   
  294,975     

Entergy Arkansas, Inc., 6.45% Pfd.

    7,512,659 *(1)   
 

Entergy Louisiana:

   
  108,000     

Entergy Louisiana, Inc., 6.95% Pfd.

    10,820,250 *(1)   
 

Georgia Power:

   
  164,400     

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

    18,397,396 *(1)   
 

Indianapolis Power & Light:

   
  98,800     

Indianapolis Power & Light Company, 5.65% Pfd.

    9,935,575  
 

Interstate Power & Light:

   
  343,606     

Interstate Power & Light Company, 8.375% Pfd., Series B

    8,643,856  
 

Nextera Energy:

   
$ 16,970,000     

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

    18,174,819 (1)(2)   
$ 4,000,000     

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

    4,524,376 (1)(2)   
 

PECO Energy:

   
$ 2,386,000     

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

    2,519,530 (1)(2)   
$ 22,900,000     

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

    23,015,553 (1)(2)   
 

PPL Corp:

   
$ 17,680,000     

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

    18,801,708 (1)   
 

Puget Energy:

   
$ 28,015,000     

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

    30,601,261 (1)(2)   
 

Southern California Edison:

   
  204,350     

Southern California Edison, 6.50% Pfd., Series D

    21,712,188 *(1)   

 

 

   
      218,809,113     
   

 

 

   
       

Energy — 4.6%

           
 

Enbridge Energy Partners:

   
$ 28,500,000     

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

    32,236,150 (1)(2)   
 

Enterprise Products Partners:

   
$ 365,000     

Enterprise Products Partners, 7.00% 06/01/67

    392,695 (1)   
$ 21,396,000     

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

    24,463,288 (1)(2)   

 

 

   
      57,092,133     
   

 

 

   

 

8


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Real Estate Investment Trust (REIT) — 1.2%

           
 

CommonWealth REIT:

   
  27,745     

CommonWealth REIT, 7.25% Pfd.

  $ 706,429     
 

Duke Realty Corp:

   
  21,133     

Duke Realty Corp, 6.50% Pfd.

    533,450     
  99,063     

Duke Realty Corp, 6.60% Pfd.

    2,529,207     
 

Kimco Realty Corp:

   
  75,000     

Kimco Realty Corporation, 6.90% Pfd.

    2,016,000     
 

PS Business Parks:

   
  241,391     

PS Business Parks, Inc., 6.45% Pfd.

    6,419,504     
  105,000     

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

    2,798,250     

 

 

   
      15,002,840     
   

 

 

   
       

Miscellaneous Industries — 1.8%

           
 

Ocean Spray Cranberries:

   
  105,400     

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

    9,713,274  
 

Stanley Black & Decker:

   
  100,881     

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

    2,636,172 (1)(2)   
 

Textron, Inc.:

   
$ 11,700,000     

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

    10,764,000     

 

 

   
      23,113,446     
   

 

 

   
 

Total Preferred Securities
(Cost $1,055,848,126)

    1,111,163,457     
   

 

 

   

 

Corporate Debt Securities — 9.4%

   
       

Banking — 4.9%

           
 

First Niagara Financial Group:

   
$ 1,200,000     

First Niagara Financial Group, Inc., 7.25% 12/15/21, Sub Notes

    1,437,368     
 

Goldman Sachs Group:

   
$ 24,902,000     

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

    28,324,108 (1)(2)   
 

Morgan Stanley:

   
$ 10,395,000     

Morgan Stanley, 6.375% 07/24/42

    12,744,603 (1)(2)   
 

Regions Financial:

   
$ 13,952,000     

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

    15,556,480 (1)   
 

Texas Capital Bancshares:

   
  123,500     

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

    3,118,375     

 

 

   
      61,180,934     
   

 

 

   

 

9


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Corporate Debt Securities — (Continued)

   
       

Financial Services — 0.4%

           
 

Affiliated Managers Group:

   
  115,875     

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

  $ 3,037,258 (1)(2)   
 

Lehman Brothers:

   
$ 4,726,012     

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

    649,165 (4)(5)††   
 

Raymond James Financial:

   
  35,750     

Raymond James Financial, 6.90% 03/15/42

    997,872 (1)(2)   

 

 

   
      4,684,295     
   

 

 

   
       

Insurance — 1.4%

           
 

Liberty Mutual Group:

   
$ 13,500,000     

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

    14,956,812 (1)(2)   
 

Unum Group:

   
$ 2,500,000     

UnumProvident Corporation, 7.25% 03/15/28

    3,040,802 (1)(2)   

 

 

   
      17,997,614     
   

 

 

   
       

Utilities — 1.1%

           
 

Energy Transfer Equity:

   
$ 10,812,000     

Southern Union Company, 8.25% 11/15/29

    13,846,572 (1)(2)   

 

 

   
      13,846,572     
   

 

 

   
       

Energy — 1.1%

           
 

Nexen, Inc.:

   
  527,537     

Nexen, Inc., 7.35% 11/01/43

    13,353,280 (3)   

 

 

   
      13,353,280     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 0.1%

           
 

CommonWealth REIT:

   
  40,000     

CommonWealth REIT, 7.50% 11/15/19

    854,460     

 

 

   
      854,460     
   

 

 

   
       

Miscellaneous Industries — 0.4%

           
 

Pulte Group Inc.:

   
  58,240     

Pulte Homes, Inc., 7.375% 06/01/46

    1,474,200 (1)(2)   
$ 3,550,000     

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

    3,931,625 (1)   

 

 

   
      5,405,825     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $99,725,193)

    117,322,980     
   

 

 

   

 

10


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

     

 

Common Stock — 0.3%

   
       

Banking — 0.2%

           
 

CIT Group:

   
  54,740     

CIT Group, Inc.

  $ 2,291,416 *†   

 

 

   
      2,291,416     
   

 

 

   
       

Insurance — 0.0%

           
 

WMI Holdings Corporation:

   
  240,577     

WMI Holdings Corporation, 144A****

    187,650 *†   

 

 

   
      187,650     
   

 

 

   
       

Utilities — 0.1%

           
 

Exelon Corp:

   
  44,930     

Exelon Corporation

    1,392,381  

 

 

   
      1,392,381     
   

 

 

   
 

Total Common Stock
(Cost $24,935,332)

    3,871,447     
   

 

 

   

 

Money Market Fund — 0.1%

           
 

BlackRock Liquidity Funds:

   
  1,779,566     

T-Fund

    1,779,566     

 

 

   
 

Total Money Market Fund
(Cost $1,779,566)

    1,779,566     
   

 

 

   

Total Investments (Cost $1,182,288,217***)

     98.3%        1,234,137,450     

Other Assets And Liabilities (Net)

     1.7%        21,051,198     
  

 

 

   

 

 

   

 

Total Managed Assets

     100.0% ‡    $ 1,255,188,648     
  

 

 

   

 

 

   

 

Loan Principal Balance

  

    (416,975,000  
    

 

 

   

Total Net Assets Available To Common Stock

  

  $ 838,213,648     
    

 

 

   

 

 

* 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, 2013, these securities amounted to $265,724,410 or 21.2% of total managed assets.

 

11


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

(1)

All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $728,629,370 at February 28, 2013.

(2)

All or a portion of this security has been rehypothecated. The total value of such securities was $397,313,891 at February 28, 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 February 28, 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:

Corts

    Corporate-Backed Trust Securities

Pfd.

    Preferred Securities

REIT

    Real Estate Investment Trust

 

12


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

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

For the period from December 1, 2012 through February 28, 2013 (Unaudited)

 

     Value  

OPERATIONS:

  

Net investment income

   $ 17,771,157   

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

     (1,184,832

Change in net unrealized appreciation/depreciation of investments

     21,554,561   
  

 

 

 

Net increase in net assets resulting from operations

     38,140,886   

DISTRIBUTIONS:

  

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

     (22,749,696
  

 

 

 

Total Distributions to Common Stock Shareholders

     (22,749,696

FUND SHARE TRANSACTIONS:

  

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

     1,509,593   
  

 

 

 

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

     1,509,593   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 16,900,783   
  

 

 

 
          

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 821,312,865   

Net increase in net assets during the period

     16,900,783   
  

 

 

 

End of period

   $ 838,213,648   
  

 

 

 

 

(1) 

These tables summarize the three months ended February 28, 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.

 

 

13


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2012 through February 28, 2013 (Unaudited)

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 18.97   
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.41   

Net realized and unrealized gain/(loss) on investments

     0.48   
  

 

 

 

Total from investment operations

     0.89   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.53
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.53
  

 

 

 

Net asset value, end of period

   $ 19.33   
  

 

 

 

Market value, end of period

   $ 20.23   
  

 

 

 

Common Stock shares outstanding, end of period

     43,365,995   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     8.68 %* 

Operating expenses including interest expense

     1.53 %* 

        Operating expenses excluding interest expense

     0.99 %*   

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     6 %** 

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

   $ 1,255,189   

Ratio of operating expenses including interest expense to total managed assets

     1.02 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.66 %* 

 

 

(1) 

These tables summarize the three months ended February 28, 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.

 

14


 

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, 2012

   $ 0.2530       $ 18.96       $ 19.55       $ 18.96   

January 31, 2013

     0.1360         19.24         20.37         19.35   

February 28, 2013

     0.1360         19.33         20.23         19.33   

 

(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.

 

15


 

Flaherty & Crumrine Preferred Securities Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. Aggregate Information for Federal Income Tax Purposes

At February 28, 2013, the aggregate cost of securities for federal income tax purposes was $1,188,977,813, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $134,190,574 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $89,030,937.

 

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 February 28, 2013 is as follows:

 

     Total
Value at
February 28, 2013
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 434,199,644       $ 334,481,234       $ 99,651,360       $ 67,050   

Financial Services

     24,890,894         14,564,091         10,326,803           

Insurance

     338,055,387         221,802,394         116,252,993           

Utilities

     218,809,113         73,506,707         145,302,406           

Energy

     57,092,133         56,699,438         392,695           

Real Estate Investment Trust (REIT)

     15,002,840         15,002,840                   

Miscellaneous Industries

     23,113,446         2,636,172         20,477,274           

Corporate Debt Securities

     117,322,980         63,904,156         52,769,659         649,165   

Common Stock

           

Banking

     2,291,416         2,291,416                   

Insurance

     187,650         187,650                   

Utilities

     1,392,381         1,392,381                   

Money Market Fund

     1,779,566         1,779,566                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 1,234,137,450       $ 788,248,045       $ 445,173,190       $ 716,215   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


 

Flaherty & Crumrine Preferred Securities Income 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 $6,045,000 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     Financial
Services
    Corporate Debt
Securities
 

Balance as of 11/30/12

  $ 8,136,116      $ 67,050      $ 7,541,170      $ 527,896   

Accrued discounts/premiums

                           

Realized gain/(loss)

                           

Change in unrealized appreciation/(depreciation)

    121,269                      121,269   

Purchases

                           

Sales

    (7,541,170            (7,541,170       

Transfer in

                           

Transfer out

                           

Balance as of 2/28/13

  $ 716,215      $ 67,050      $      $ 649,165   

For the three months ended February 28, 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 $121,269.

 

17


 

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 2/28/13
    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%)   
    14,400      Bankruptcy recovery   Credit/Structure-specific
recovery
    0.00% - 0.50% (0.05%)   

Corporate Debt

       

Securities

    649,165      Bankruptcy recovery   Credit/Structure-specific
recovery
    10% - 20% (13%)   

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.

 

18


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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

Linda M. Puchalski

Assistant Treasurer

Investment Adviser

Flaherty & Crumrine Incorporated

e-mail: flaherty@pfdincome.com

Servicing Agent

Destra Capital Investments LLC

1-866-233-4001

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 Investment Servicing

P.O. Box 358035

Pittsburgh, PA 15252-8035

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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February 28, 2013

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