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

FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND

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

The new fiscal year is off to a fine start—total return on net asset value1 for the first fiscal quarter2 was +4.3%. Over the same period total return based on income plus change in the Fund’s market price was +11.7%.

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.

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

Sincerely,

 

LOGO   LOGO

Donald F. Crumrine

Chairman

 

Robert M. Ettinger

President

March 28, 2013  

 

 

 

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.


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OVERVIEW

February 28, 2013 (Unaudited)

 

Fund Statistics       
Net Asset Value   $ 11.33   
Market Price   $ 12.56   
Premium     10.86
Yield on Market Price     6.97
Common Stock Shares Outstanding     12,246,004   

 

Moody’s Ratings   % of Net Assets†  
A     0.9%   
BBB     58.7%   
BB     31.8%   
Below “BB”     3.7%   
Not Rated*     3.6%   
Below Investment Grade**     24.8%   

 

* Does not include net other assets and liabilities of 1.3%.
** 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     4.4%   
MetLife     4.3%   
HSBC PLC     4.3%   
Goldman Sachs Group     4.0%   
Banco Santander, S.A.     3.8%   
Wells Fargo & Company     3.6%   
Barclays Bank PLC     3.1%   
XL Group PLC     2.8%   
Axis Capital Holdings Ltd     2.5%   
Enbridge Energy Partners     2.5%   
 
     % of Net Assets***†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     49%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     31%   

 

*** 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.

 

2


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — 89.0%

      
        
        Banking — 35.2%               
 

Astoria Financial:

      
$ 2,750,000     

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

     $ 2,838,685 (1)(2)   
 

Banco Bilbao Vizcaya Argentaria, S.A.:

      
$ 1,375,000     

BBVA International Preferred, 5.919%

       1,161,875 **(1)(2)(3)   
 

Banco Santander, S.A.:

      
  280,123     

Banco Santander, 10.50% Pfd., Series 10

       7,891,765 **(1)(3)   
 

Bank of America:

      
  10,000     

Bank of America Corporation, 8.20% Pfd.

       255,300  
  125,765     

Bank of America Corporation, 8.625% Pfd.

       3,207,008 *(1)   
  2,500     

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

       63,750     
  20,000     

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

       505,000     
 

Barclays Bank PLC:

      
$ 2,750,000     

Barclays Bank PLC, 6.278%

       2,696,554 **(1)(2)(3)   
  56,000     

Barclays Bank PLC, 7.10% Pfd.

       1,419,600 **(3)   
  4,700     

Barclays Bank PLC, 7.75% Pfd., Series 4

       119,239 **(3)   
  90,000     

Barclays Bank PLC, 8.125% Pfd., Series 5

       2,289,600 **(1)(3)   
 

BNP Paribas:

      
$ 1,750,000     

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

       1,824,375 **(1)(2)(3)   
 

Citigroup:

      
$ 2,750,000     

Citigroup, Inc., 8.40%, Series E

       3,089,925  
  13,000     

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

       330,282     
 

CoBank ACB:

      
  10,000     

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

       1,067,500  
 

Colonial BancGroup:

      
$ 4,500,000     

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

       6,750 (4)(5)††   
 

Cullen/Frost Bankers:

      
  20,000     

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

       496,250  
 

FBOP Corp:

      
  4,500     

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

       2,250 *(4)(5)††   
 

Fifth Third Bancorp:

      
$ 700,000     

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

       703,500 (1)   
 

First Horizon:

      
  750     

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

       554,531 *(1)   
$ 500,000     

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

       491,250     
  1     

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

       1,100,625     
 

First Niagara Financial Group:

      
  104,000     

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

       3,052,660 *(1)   

 

3


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

      
        
        Banking — (Continued)               
 

First Republic Bank:

      
  29,050     

First Republic Bank, 6.70% Pfd.

     $ 796,914  
 

Goldman Sachs Group:

      
  22,500     

Goldman Sachs, 5.95% Pfd.

       564,806  
$ 2,255,000     

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

       2,368,248 (1)(2)   
 

HSBC PLC:

      
$ 1,000,000     

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

       1,402,500 (1)(3)   
  127,500     

HSBC Holdings PLC, 8.00% Pfd., Series 2

       3,544,691 **(1)(3)   
$ 120,000     

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

       122,400     
  99,850     

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

       2,574,263 *(1)   
 

ING Groep NV:

      
  30,000     

ING Groep NV, 7.05% Pfd.

       760,845 **(3)   
  21,700     

ING Groep NV, 7.20% Pfd.

       549,932 **(3)   
  32,500     

ING Groep NV, 7.375% Pfd.

       828,425 **(3)   
  14,300     

ING Groep NV, 8.50% Pfd.

       370,656 **(3)   
 

JPMorgan Chase:

      
$ 3,550,000     

JPMorgan Chase & Company, 7.90%, Series 1

       4,113,289 *(1)   
 

KeyCorp:

      
  1,000     

KeyCorp, 7.75% Pfd., Series A

       127,313  
 

Lloyds Banking Group PLC:

      
$ 450,000     

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

       408,375 **(3)   
 

M&T Bank Corp:

      
$ 1,750,000     

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

       1,838,632 *(1)   
 

Morgan Stanley:

  

 
  30,000     

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

       761,250     
  4,500     

Morgan Stanley Capital Trust VII, 6.60% Pfd.

       113,895     
 

PNC Financial Services:

  

 
  85,070     

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

       2,209,481 *(1)   
$ 200,000     

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

       203,516     
 

Sovereign Bancorp:

      
  2,600     

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

       3,395,272     
 

Wells Fargo:

  

 
  3,085     

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

       3,912,937 *(1)   
  123,500     

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

       3,589,219 *(1)   
 

Zions Bancorporation:

  

 
  85,200     

Zions Bancorporation, 7.90% Pfd., Series F

       2,449,500  
  30,000     

Zions Bancorporation, 9.50% Pfd., Series C

       775,500  

 

 

   

 

         72,950,133     
      

 

 

   

 

4


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

      
        
       

Financial Services — 1.5%

        
 

Credit Suisse Group:

  

 
$ 1,260,000     

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

     $ 1,343,475 (3)   
  6,000     

Credit Suisse Guernsey, 7.90% Pfd.

       153,563 **(3)   
 

General Electric Capital Corp:

      
$ 200,000     

General Electric Capital Corp., 7.125%, Series A

       231,366  
 

HSBC PLC:

      
  50,000     

HSBC Finance Corporation, 6.36% Pfd., Series B

       1,281,575 *(1)   

 

 

   

 

         3,009,979     
      

 

 

   
       

Insurance — 25.4%

        
 

Ace Ltd.:

      
$ 1,200,000     

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

       1,749,000 (1)(2)(3)   
 

Aon Corporation:

      
$ 375,000     

AON Corp, 8.205% 01/01/27

       481,842     
 

Arch Capital Group:

      
  81,925     

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

       2,252,323 **(1)(3)   
 

AXA SA:

  

 
$ 2,800,000     

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

       2,800,000 **(1)(2)(3)   
$ 500,000     

AXA SA, 8.60% 12/15/30

       644,542 (3)   
 

Axis Capital:

      
  187,000     

Axis Capital Holdings, 6.875% Pfd., Series C

       5,195,141 **(1)(3)   
 

Delphi Financial:

      
  90,000     

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

       2,258,442 (1)(2)   
 

Endurance Specialty Holdings:

      
  25,000     

Endurance Specialty Holdings, 7.50% Pfd.

       671,813 **(3)   
 

Everest Re Group:

      
$ 4,350,000     

Everest Re Holdings, 6.60% 05/15/37

       4,453,313 (1)(2)   
 

Liberty Mutual Group:

      
$ 4,600,000     

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

       7,049,500     
 

Lincoln National Corp:

      
$ 175,000     

Lincoln National Corporation, 7.00% 05/17/66

       178,938     
 

MetLife:

  

 
$ 2,454,000     

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

       3,785,295 (1)(2)   
$ 448,000     

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

       557,760 (1)(2)   
$ 3,325,000     

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

       4,605,125 (1)(2)   
 

PartnerRe Ltd.:

      
  35,535     

PartnerRe Ltd., 7.250% Pfd., Series E

       988,939 **(1)(3)   

 

5


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

        

 

Preferred Securities — (Continued)

      
       

Insurance — (Continued)

              
 

Principal Financial:

      
  21,000     

Principal Financial Group, 5.563% Pfd., Series A

     $ 2,094,750 *(1)   
  75,000     

Principal Financial Group, 6.518% Pfd., Series B

       2,048,438 *(1)   
 

Prudential Financial:

      
$ 300,000     

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

       313,500     
 

QBE Capital Funding:

      
$ 1,020,000     

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

       1,067,549 (1)(3)   
 

Renaissancere Holdings:

      
  20,065     

Renaissancere Holdings Ltd., 6.60% Pfd.

       510,052 **(3)   
 

StanCorp Financial Group:

      
$ 1,910,000     

StanCorp Financial Group, 6.90% 06/01/67

       1,943,425 (1)(2)   
 

The Travelers Companies:

      
$ 960,400     

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

       1,249,443 (1)(2)   
 

XL Group PLC:

      
$ 5,900,000     

XL Capital Ltd., 6.50%, Series E

       5,782,000 (1)(2)(3)   

 

 

   

 

         52,681,130     
      

 

 

   
       

Utilities — 17.6%

        
 

Alabama Power:

      
  7,460     

Alabama Power Company, 6.45% Pfd.

       213,776 *(1)   
 

Baltimore Gas & Electric:

  

 
  6,579     

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

       677,226 *(1)   
  2,500     

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

       255,625  
 

Commonwealth Edison:

      
$ 2,350,000     

COMED Financing III, 6.35% 03/15/33

       2,467,500 (1)   
 

Constellation Energy:

      
  8,000     

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

       207,200     
 

Dominion Resources:

      
$ 3,000,000     

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

       3,332,616 (1)(2)   
 

Energy Future Competitive Holdings Corp:

      
$ 636,000     

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

       159,000 (4)   
 

Entergy Arkansas:

      
  50,000     

Entergy Arkansas, Inc., 6.45% Pfd.

       1,273,440  
 

Entergy Louisiana:

      
  16,500     

Entergy Louisiana, Inc., 6.95% Pfd.

       1,653,094  
 

Entergy Mississippi:

      
  80,000     

Entergy Mississippi, Inc., 6.25% Pfd.

       2,020,000  
 

Georgia Power:

      
  16,937     

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

       1,895,357 *(1)   

 

6


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

       
         
       

Utilities — (Continued)

               
 

Gulf Power:

       
  15,035     

Gulf Power Company, 6.00% Pfd., Series 1

     $ 1,535,338 *(1)    
 

Indianapolis Power & Light:

       
  25,000     

Indianapolis Power & Light Company, 5.65% Pfd.

       2,514,063 *(1)    
 

Interstate Power & Light:

       
  137,756     

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

       3,465,431   
 

Nextera Energy:

  

  
$ 2,100,000     

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

       2,249,094 (1)(2)    
$ 1,000,000     

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

       1,131,094 (1)(2)    
 

PECO Energy:

       
$ 1,500,000     

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

       1,583,946 (1)(2)    
 

PPL Corp:

       
$ 1,250,000     

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

       1,329,306 (1)    
 

Puget Energy:

       
$ 4,155,000     

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

       4,538,577 (1)(2)    
 

Southern California Edison:

       
  32,544     

Southern California Edison, 6.50% Pfd., Series D

       3,457,800 *(1)    
 

Virginia Electric & Power:

       
  3,000     

Virginia Electric & Power Company, $6.98 Pfd.

       298,781   
 

Wisconsin Public Service:

       
  3,000     

Wisconsin Public Service Corporation, 6.88% Pfd.

       304,219   

 

 

    

 

         36,562,483      
      

 

 

    
       

Energy — 6.0%

               
 

Enbridge Energy Partners:

       
$ 4,498,000     

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

       5,087,656 (1)(2)    
 

Enterprise Products Partners:

       
$ 4,150,000     

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

       4,744,936 (1)(2)    
 

Kinder Morgan:

       
  3,000     

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

       2,545,500   

 

 

    

 

         12,378,092      
      

 

 

    
       

Real Estate Investment Trust (REIT) — 0.8%

               
 

Duke Realty Corp:

       
  4,000     

Duke Realty Corp, 6.50% Pfd.

       100,970      
  3,500     

Duke Realty Corp, 6.60% Pfd.

       89,360      
 

Kimco Realty Corp:

       
  11,075     

Kimco Realty Corporation, 6.90% Pfd.

       297,696      

 

7


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

 

Preferred Securities — (Continued)

       
         
       

Real Estate Investment Trust (REIT) — (Continued)

               
 

PS Business Parks:

       
  40,000     

PS Business Parks, Inc., 6.45% Pfd.

     $ 1,063,752      
  7,500     

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

       199,875      

 

 

    

 

         1,751,653      
      

 

 

    
       

Miscellaneous Industries — 2.5%

               
 

Ocean Spray Cranberries:

       
  32,700     

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

       3,013,511   
 

Stanley Black & Decker:

       
  12,251     

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

       320,137 (1)(2)    
 

Textron, Inc.:

       
$ 1,950,000     

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

       1,794,000      

 

 

    

 

         5,127,648      
      

 

 

    
 

Total Preferred Securities
(Cost $171,668,686)

       184,461,118      
      

 

 

    

 

Corporate Debt Securities — 9.6%

       
       

Banking — 5.2%

               
 

Goldman Sachs Group:

       
$ 4,625,300     

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

       5,260,923 (1)(2)    
 

Morgan Stanley:

       
$ 1,000,000     

Morgan Stanley, 6.375% 07/24/42

       1,226,032 (1)(2)    
 

Regions Financial:

       
$ 2,500,000     

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

       2,787,500 (1)(2)    
 

Texas Capital Bancshares:

       
  59,000     

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

       1,489,750      

 

 

    

 

         10,764,205      
      

 

 

    
       

Financial Services — 0.3%

               
 

Affiliated Managers Group:

       
  19,230     

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

       504,047      
 

Raymond James Financial:

       
  5,900     

Raymond James Financial, 6.90% 03/15/42

       164,684      

 

 

    

 

         668,731      
      

 

 

    

 

8


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

 

Corporate Debt Securities — (Continued)

       
         
       

Insurance — 2.2%

               
 

Liberty Mutual Group:

       
$ 1,850,000     

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

     $ 2,049,637 (1)(2)    
 

Unum Group:

       
$ 2,000,000     

UnumProvident Corporation, 7.25% 03/15/28

       2,432,642 (1)(2)    

 

 

    

 

         4,482,279      
      

 

 

    
       

Utilities — 0.9%

               
 

Energy Transfer Equity:

       
$ 1,474,000     

Southern Union Company, 8.25% 11/15/29

       1,887,703 (1)(2)    

 

 

    

 

         1,887,703      
      

 

 

    
       

Energy — 0.9%

               
 

Nexen, Inc.:

       
  72,995     

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

       1,847,686 (3)    

 

 

    

 

         1,847,686      
      

 

 

    
       

Real Estate Investment Trust (REIT) — 0.1%

               
 

CommonWealth REIT:

       
  10,750     

CommonWealth REIT, 7.50% 11/15/19

       229,636      

 

 

    

 

         229,636      
      

 

 

    
 

Total Corporate Debt Securities
(Cost $16,385,687)

       19,880,240      
      

 

 

    

 

Common Stock — 0.1%

       
       

Insurance — 0.0%

  

    
 

WMI Holdings Corporation:

       
  17,821     

WMI Holdings Corporation, 144A****

       13,900 *†    

 

 

    

 

         13,900      
      

 

 

    
       

Utilities — 0.1%

               
 

Exelon Corp:

       
  8,940     

Exelon Corporation

       277,051   

 

 

    

 

         277,051      
      

 

 

    
 

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

       290,951      
      

 

 

    

 

9


 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2013 (Unaudited)

 

Shares/$ Par           

    Value    

 

Money Market Fund — 0.3%

                 
 

BlackRock Liquidity Funds:

         
  561,250     

T-Fund

     $ 561,250        

 

 

      

 

 

Total Money Market Fund
(Cost $561,250)

       561,250        
      

 

 

      

Total Investments (Cost $189,894,993***)

    99.0%        205,193,559     

Other Assets And Liabilities (Net)

    1.0%        2,001,684     
    

 

 

   

 

 

   

 

Total Managed Assets

    100.0% ‡    $ 207,195,243     
    

 

 

   

 

 

   

 

Loan Principal Balance

  

    (68,500,000  
      

 

 

   

 

Total Net Assets Available To Common Stock

  

  $ 138,695,243     
      

 

 

   

 

 

* 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 $40,016,126 or 19.3% 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 $129,884,228 at February 28, 2013.

(2) 

All or a portion of this security has been rehypothecated. The total value of such securities was $65,408,877 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:

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 February 28, 2013 (Unaudited)

 

     Value  

OPERATIONS:

  

Net investment income

   $ 2,774,908   

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

     1,821,028   

Change in net unrealized appreciation/depreciation of investments

     1,157,884   
  

 

 

 

Net increase in net assets resulting from operations

     5,753,820   

DISTRIBUTIONS:

  

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

     (4,102,707
  

 

 

 

Total Distributions to Common Stock Shareholders

     (4,102,707

FUND SHARE TRANSACTIONS:

  

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

     453,709   
  

 

 

 

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

     453,709   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 2,104,822   
  

 

 

 
  
          

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 136,590,421   

Net increase in net assets during the period

     2,104,822   
  

 

 

 

End of period

   $ 138,695,243   
  

 

 

 
  

 

(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.

 

11


 

Flaherty & Crumrine Preferred Income Opportunity 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

   $ 11.19   
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.23   

Net realized and unrealized gain/(loss) on investments

     0.25   
  

 

 

 

Total from investment operations

     0.48   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.34
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.34
  

 

 

 

Net asset value, end of period

   $ 11.33   
  

 

 

 

Market value, end of period

   $ 12.56   
  

 

 

 

Common Stock shares outstanding, end of period

     12,246,004   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     8.17 %* 

Operating expenses including interest expense

     1.92 %* 

Operating expenses excluding interest expense

     1.37 %* 
        

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     8 %** 

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

   $ 207,195   

Ratio of operating expenses including interest expense to total managed assets

     1.28 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.92 %* 

 

 

(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.

 

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   

 

(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 February 28, 2013, the aggregate cost of securities for federal income tax purposes was $189,930,212, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $25,950,536 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $10,687,189.

 

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

   $ 72,950,133       $ 52,977,868       $ 19,963,265       $ 9,000   

Financial Services

     3,009,979         1,666,504         1,343,475           

Insurance

     52,681,130         33,938,824         18,742,306           

Utilities

     36,562,483         11,714,741         24,847,742           

Energy

     12,378,092         9,832,592         2,545,500           

Real Estate Investment Trust (REIT)

     1,751,653         1,751,653                   

Miscellaneous Industries

     5,127,648         320,137         4,807,511           

Corporate Debt Securities

     19,880,240         10,722,758         9,157,482           

Common Stock

           

Insurance

     13,900         13,900                   

Utilities

     277,051         277,051                   

Money Market Fund

     561,250         561,250                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 205,193,559       $ 123,777,278       $ 81,407,281       $ 9,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 $1,067,500 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)

               

Change in unrealized appreciation/(depreciation)

               

Purchases

               

Sales

               

Transfer in

               

Transfer out

               

Balance as of 2/28/13

   $ 9,000       $ 9,000   

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 $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 2/28/13
    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%)
    2,250      Bankruptcy recovery   Credit/Structure-specific
recovery
  0.00% - 0.50% (0.05%)

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

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

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.

 

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Quarterly

Report

February 28, 2013

www.preferredincome.com