Flaherty & Crumrine Preferred Income Opportunity Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number            811-06495                                  

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

 

(Exact name of registrant as specified in charter)

301 E. Colorado Boulevard, Suite 720

Pasadena, CA 91101

(Address of principal executive offices) (Zip code)

R. Eric Chadwick

Flaherty & Crumrine Incorporated

301 E. Colorado Boulevard, Suite 720

Pasadena, CA 91101

(Name and address of agent for service)

Registrant’s telephone number, including area code:       626-795-7300            

Date of fiscal year end:   November 30         

Date of reporting period:   February 28, 2015

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.

FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND

To the Shareholders of Flaherty & Crumrine Preferred Income Opportunity Fund (“PFO”):

Your Fund is off to a fine start in fiscal 2015—during the first fiscal quarter1, total return on net asset value2 was +2.3%, while total return on market price came in at +6.9%. The value of the investment portfolio increased modestly during the quarter, so much of the NAV return was comprised of interest and dividends earned on portfolio holdings.

Economic conditions in the U.S. remain the envy of most developed economies (faint praise indeed!). We expect gross domestic product (adjusted for inflation) to grow between 2.5% and 3.0% in 2015, up a bit from last year’s 2.4%. Inflationary expectations are low, reflecting falling energy and commodity prices, along with recent appreciation in the U.S. dollar. The outlook for interest rates in the U.S. has not changed—we expect the Federal Reserve to boost short-term interest rates by 0.25% sometime between June and September; subsequent increases, however, should be gradual. Intermediate and long-term interest rates, while likely to edge up over time, should remain substantially lower than what we would normally associate with 2.5-3.0% real GDP growth.

In contrast, many Euro-zone economies are struggling, and growth has slowed in Japan, as well as in China and many other developing countries. Around the globe, elevated geopolitical tensions are hampering economic activity. As evidence, interest rates are actually negative in a number of “safe” economies. In increasing numbers, foreign investors seeking better returns are making investments in U.S. markets. These moves help explain strength in the U.S. dollar and domestic fixed-income and equity markets.

By most measures, conditions in the preferred securities market remain healthy. Fundamental credit conditions are stable or improving, with loan delinquencies and defaults trending down across almost all loan categories. Income-oriented investors have increasingly turned to the preferred-securities space seeking alternatives to lower-yielding securities. New issue volumes, though less robust than last year, are well above historical norms. We expect preferred securities issuance to remain elevated throughout 2015, as issuers work toward future regulatory capital requirements and take advantage of low interest rates to reduce overall capital expense. We continue to be constructive on the preferred market, as demand shows little sign of abating.

The Fund’s investment portfolio did not change materially over the quarter. During 2014, we had reduced the portfolio’s exposure to foreign issuers as we saw better opportunities in the U.S. We also had increased holdings in fixed-to-floating preferred securities (coupons are fixed for an initial period, typically five or ten years, and then float with interest rates). We believe this increase provides some principal protection should intermediate- and long-term interest rates rise, while offering some price upside should credit spreads narrow. Putting it all together, the portfolio’s current construction is in-line with our views on the market.

 

 

 

1  December 1, 2014—February 28, 2015
2  Following the methodology required by the SEC, total return assumes dividend reinvestment and includes income and principal change, plus the impact of the Fund’s leverage and expenses.

We encourage you to visit the Fund’s website, www.preferredincome.com for timely and important information.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team:

R. Eric Chadwick

Donald F. Crumrine

Robert M. Ettinger

Bradford S. Stone

March 31, 2015

 

2

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OVERVIEW

February 28, 2015 (Unaudited)

 

 

Fund Statistics  
Net Asset Value   $ 11.63   
Market Price   $ 12.30   
Premium     5.76 % 
Yield on Market Price     7.12 % 
Common Stock Shares Outstanding     12,349,855   

 

Moody’s Ratings*   % of Net Assets†
A     1.6%   
BBB     57.6%   
BB     30.5%   
Below “BB”     3.2%   
Not Rated**     5.9%   
Below Investment Grade***  

 

 

 

26.0%

 

  

 

* 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 1.2%.
*** 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†  

JPMorgan Chase

     4.9%   

HSBC PLC

     4.7%   

Liberty Mutual Group

     4.7%   

MetLife

     4.6%   
Wells Fargo & Company     4.1%   

Fifth Third Bancorp

     3.6%   

M&T Bank Corporation

     3.3%   

Citigroup

     3.2%   

PNC Financial Services Group

     3.1%   
Morgan Stanley     2.6%   
 

 

% of Net Assets****†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     60%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     48%   

 

**** This does not reflect year-end results or actual tax categorization of Fund distributions. These percentages can, and do, change, perhaps significantly, depending on market conditions. Investors should consult their tax advisor regarding their personal situation.
† Net Assets includes assets attributable to the use of leverage.

 

3

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS

February 28, 2015 (Unaudited)

 

 

Shares/$ Par        

    Value    

 

Preferred Securities — 93.8%

    
       

Banking — 47.1%

            
  15,000     

Astoria Financial Corp., 6.50%, Series C

   $ 382,237 *   
 

Bank of America Corporation:

    
$ 2,540,000     

8.00%, Series K

     2,723,642 *   
$ 920,000     

8.125%, Series M

     994,750 *(1)   
 

Barclays Bank PLC:

    
  56,000     

7.10%, Series 3

     1,467,200 **(3)   
  4,700     

7.75%, Series 4

     123,751 **(3)   
  78,300     

8.125%, Series 5

     2,085,129 **(1)(3)   
 

Citigroup, Inc.:

    
  81,200     

6.875%, Series K

     2,183,671 *(1)   
  74,694     

7.125%, Series J

     2,053,525 *   
$ 2,299,000     

8.40%, Series E

     2,640,976 *   
  26,716     

City National Corporation, 6.75%, Series D

     766,749 *   
 

CoBank ACB:

    
  18,100     

6.125%, Series G, 144A****

     1,721,198 *   
  10,000     

6.25%, Series F, 144A****

     1,030,938 *(1)   
$ 4,500,000     

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

     6,750 (4)(5)††   
  13,300     

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

     331,336 *   
  274,600     

Fifth Third Bancorp, 6.625%, Series I

     7,631,821 *(1)   
 

First Horizon:

    
  750     

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

     547,078 *(1)   
$ 500,000     

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

     485,000     
  1     

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

     1,302,500     
  104,000     

First Niagara Financial Group, Inc., 8.625%, Series B

     2,834,260 *(1)   
  29,050     

First Republic Bank, 6.70%, Series A

     771,350 *(1)   
 

Goldman Sachs Group:

    
$ 195,000     

5.70%, Series L

     202,069 *   
  6,499     

5.95%, Series I

     164,701 *   
  50,000     

6.375%, Series K

     1,313,500 *   
 

HSBC PLC:

    
$ 800,000     

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

     1,210,000 (1)(3)   
  150,000     

HSBC Holdings PLC, 8.00%, Series 2

     3,958,875 **(1)(3)   
$ 120,000     

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

     121,018     
$ 91,000     

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

     92,219     
  130,000     

HSBC USA, Inc., 6.50%, Series H

     3,342,625 *(1)   
 

ING Groep NV:

    
  30,000     

7.05%

     770,175 **(3)   
  21,700     

7.20%

     559,263 **(3)   
  42,500     

7.375%

     1,104,150 **(3)   

 

4

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2015 (Unaudited)

 

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
       

Banking — (Continued)

            
 

JPMorgan Chase & Company:

    
$ 300,000     

6.00%, Series R

   $ 307,312 *   
  60,900     

6.70%, Series T

     1,622,985 *(1)   
$ 4,167,000     

6.75%, Series S

     4,519,862 *(1)   
$ 3,750,000     

7.90%, Series I

     4,054,687 *(1)   
$ 450,000     

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

     507,375 **(3)   
 

M&T Bank Corporation:

    
$ 2,240,000     

6.450%, Series E

     2,430,400 *   
$ 4,393,000     

6.875%, Series D, 144A****

     4,524,790 *(1)   
 

Morgan Stanley:

    
  123,000     

6.875%, Series F

     3,335,760 *   
  77,200     

7.125%, Series E

     2,179,549 *(1)   
  236,500     

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

     6,719,556 *(1)   
$ 1,775,000     

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

     2,301,398 (1)(3)   
  35,000     

Regions Financial Corporation, 6.375%, Series B

     890,838 *   
 

Royal Bank of Scotland Group PLC:

    
  7,500     

6.40%, Series M

     187,875 **(3)   
  15,000     

6.60%, Series S

     380,250 **(3)   
  99,500     

7.25%, Series T

     2,550,185 **(1)(3)   
 

Sovereign Bancorp:

    
  2,600     

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

     3,479,970     
  83,700     

State Street Corporation, 5.90%, Series D

     2,240,021 *(1)   
  10,000     

Texas Capital Bancshares Inc., 6.50%, Series A

     249,625 *   
  35,000     

US Bancorp, 6.50%, Series F

     1,049,038 *   
 

Wells Fargo & Company:

    
  56,200     

5.85%, Series Q

     1,456,845 *   
$ 1,750,000     

5.875%, Series U

     1,846,250 *   
  34,400     

6.625%, Series R

     958,728 *   
$ 939,000     

7.98%, Series K

     1,030,552 *   
  123,500     

8.00%, Series J

     3,576,869 *(1)   
 

Zions Bancorporation:

    
$ 1,000,000     

7.20%, Series J

     1,065,000 *(1)   
  85,200     

7.90%, Series F

     2,372,820 *(1)   

 

 

    
      100,760,996     
   

 

 

    

 

5

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2015 (Unaudited)

 

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
       

Financial Services — 1.2%

            
$ 950,000     

General Electric Capital Corp., 7.125%, Series A

   $ 1,122,187 *(1)   
 

HSBC PLC:

    
  55,000     

HSBC Finance Corporation, 6.36%, Series B

     1,392,188 *(1)   

 

 

    
      2,514,375     
   

 

 

    
       

Insurance — 23.7%

            
 

Ace Ltd.:

    
$ 1,200,000     

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

     1,794,000 (1)(2)(3)   
  80,000     

Allstate Corp., 6.625%, Series E

     2,179,400 *(1)   
$ 375,000     

Aon Corporation, 8.205% 01/01/27

     491,088 (1)(2)   
  105,000     

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

     2,916,112 **(1)(3)   
 

AXA SA:

    
$ 1,453,000     

6.379%, 144A****

     1,625,179 **(1)(2)(3)   
$ 500,000     

8.60% 12/15/30

     695,199 (3)   
  187,000     

Axis Capital Holdings Ltd., 6.875%, Series C

     5,126,137 **(1)(3)   
  95,000     

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

     2,377,974 (1)   
  27,250     

Endurance Specialty Holdings, 7.50%, Series B

     722,738 **(3)   
$ 3,265,000     

Everest Re Holdings, 6.60% 05/15/37

     3,379,275 (1)(2)   
  10,000     

Hartford Financial Services Group, Inc., 7.875%

     303,525     
$ 4,943,000     

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

     7,636,935 (1)   
 

MetLife:

    
$ 2,704,000     

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

     4,526,496 (1)(2)   
$ 350,000     

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

     450,625 (1)   
$ 3,350,000     

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

     4,924,500 (1)(2)   
  24,000     

PartnerRe Ltd., 7.25%, Series E

     644,700 **(1)(3)   
  65,800     

Principal Financial Group, 6.518%, Series B

     1,697,147 *(1)   
$ 241,000     

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

     256,062     
 

QBE Insurance:

    
$ 1,020,000     

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

     1,128,524 (1)(3)   
 

RenaissanceRe Holdings:

    
  10,800     

Renaissancere Holdings Ltd, 6.08%, Series C

     271,080 **(3)   
 

Unum Group:

    
$ 2,750,000     

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

     3,274,172 (1)(2)   
 

XL Group PLC:

    
$ 4,750,000     

XL Capital Ltd., 6.50%, Series E

     4,191,875 (1)(3)   

 

 

    
      50,612,743     
   

 

 

    

 

6

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2015 (Unaudited)

 

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
       

Utilities — 14.4%

            
  7,460     

Alabama Power Company, 6.45%

   $ 206,549 *(1)   
 

Baltimore Gas & Electric Company:

    
  6,579     

6.70%, Series 1993

     667,563 *(1)   
  2,500     

7.125%, Series 1993

     253,984 *   
 

Commonwealth Edison:

    
$ 2,350,000     

COMED Financing III, 6.35% 03/15/33

     2,427,214 (1)(2)   
$ 2,700,000     

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

     2,800,710 (1)(2)   
  22,500     

Entergy Louisiana, Inc., 6.95%

     2,251,406 *   
  80,000     

Entergy Mississippi, Inc., 6.25%

     2,005,000 *   
  16,937     

Georgia Power Company, 6.50%, Series 2007A

     1,818,082 *(1)   
  15,035     

Gulf Power Company, 6.00%, Series 1

     1,502,263 *(1)   
  24,000     

Indianapolis Power & Light Company, 5.65%

     2,334,751 *(1)   
  48,000     

Integrys Energy Group, Inc., 6.00%

     1,312,920 (1)(2)   
 

Nextera Energy:

    
$ 1,600,000     

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

     1,600,803 (1)(2)   
$ 750,000     

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

     791,699 (1)(2)   
 

PECO Energy:

    
$ 1,500,000     

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

     1,809,000 (1)(2)   
 

PPL Corp:

    
  35,000     

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

     890,488 (1)   
$ 1,250,000     

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

     1,234,961 (1)(2)   
$ 3,350,000     

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

     3,412,812 (1)(2)   
  31,000     

Southern California Edison, 6.50%, Series D

     3,240,470 *(1)   
  3,000     

Wisconsin Public Service Corporation, 6.88%

     304,969 *   

 

 

    
      30,865,644     
   

 

 

    
       

Energy — 2.3%

            
$ 4,498,000     

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

     4,857,840 (1)(2)   

 

 

    
      4,857,840     
   

 

 

    
       

Real Estate Investment Trust (REIT) — 3.7%

            
  30,206     

Kimco Realty Corporation, 6.90%, Series H

     786,564     
 

National Retail Properties, Inc.:

    
  40,000     

5.70%, Series E

     1,016,900 (1)   
  19,460     

6.625%, Series D

     513,793     

 

7

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2015 (Unaudited)

 

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

    
       

Real Estate Investment Trust (REIT) — (Continued)

            
 

PS Business Parks, Inc.:

    
  8,243     

5.70%, Series V

   $ 205,519     
  40,000     

6.45%, Series S

     1,062,900 (1)(2)   
  7,500     

6.875%, Series R

     194,400     
  13,000     

Public Storage, 6.375%, Series Y

     351,683     
  110,329     

Realty Income Corporation, 6.625%, Series F

     2,951,301 (1)(2)   
  32,285     

Regency Centers Corporation, 6.625%, Series 6

     855,956     

 

 

    
      7,939,016     
   

 

 

    
       

Miscellaneous Industries — 1.4%

            
  32,700     

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

     3,032,925 *   

 

 

    
      3,032,925     
   

 

 

    
 

Total Preferred Securities
(Cost $188,256,649)

     200,583,539     
   

 

 

    

 

Corporate Debt Securities — 5.0%

    
       

Banking — 2.7%

            
$ 2,500,000     

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

     3,343,832 (1)(2)   
  75,000     

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

     1,856,438 (1)(2)   
  20,000     

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

     542,450     

 

 

    
      5,742,720     
   

 

 

    
       

Financial Services — 0.3%

            
  20,082     

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

     525,195     
  5,048     

Raymond James Financial, 6.90% 03/15/42

     139,287     

 

 

    
      664,482     
   

 

 

    
       

Insurance — 1.1%

            
$ 1,850,000     

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

     2,398,279 (1)(2)   

 

 

    
      2,398,279     
   

 

 

    
       

Energy — 0.6%

            
$ 904,000     

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

     1,255,196 (1)   

 

 

    
      1,255,196     
   

 

 

    

 

8

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2015 (Unaudited)

 

 

Shares/$ Par               

    Value    

 

Corporate Debt Securities — (Continued)

       
       

Communication — 0.3%

                     
  24,200     

Qwest Corporation, 7.375% 06/01/51

  

   $ 642,087     

 

 

    
         642,087     
      

 

 

    
 

Total Corporate Debt Securities
(Cost $8,613,293)

   

     10,702,764     
      

 

 

    

 

Common Stock — 0.0%

       
       

Insurance — 0.0%

                     
  17,821     

WMI Holdings Corporation, 144A****

  

     45,444 *†   

 

 

    
         45,444     
      

 

 

    
 

Total Common Stock
(Cost $900,000)

   

     45,444     
      

 

 

    

 

Money Market Fund — 0.3%

                     
 

BlackRock Liquidity Funds:

       
  501,374     

T-Fund, Institutional Class

  

     501,374     

 

 

    
 

Total Money Market Fund
(Cost $501,374)

   

     501,374     
      

 

 

    

 

Total Investments (Cost $198,271,316***)

      99.1 %      211,833,121     

 

Other Assets And Liabilities (Net)

      0.9 %      1,958,689     
    

 

 

    

 

 

    

 

Total Managed Assets

      100.0 %‡    $ 213,791,810     
    

 

 

    

 

 

    

 

Loan Principal Balance

  

     (70,200,000 )   
      

 

 

    

 

Total Net Assets Available To Common Stock

  

   $ 143,591,810     
      

 

 

    

 

9

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2015 (Unaudited)

 

 

 

* Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At February 28, 2015, these securities amounted to $38,087,645 or 17.8% 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 $134,536,644 at February 28, 2015.

(2) 

All or a portion of this security has been rehypothecated. The total value of such securities was $47,740,050 at February 28, 2015.

(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 February 28, 2015.

(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.

 

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, 2014 through February 28, 2015 (Unaudited)

 

 

     Value  

OPERATIONS:

   

Net investment income

    $ 2,610,257   

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

      145,769   

Change in net unrealized appreciation/(depreciation) of investments

      560,851   
  

 

 

  

Net increase in net assets resulting from operations

      3,316,877   

DISTRIBUTIONS:

   

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

      (2,703,113 ) 
  

 

 

  

Total Distributions to Common Stock Shareholders

      (2,703,113 ) 

FUND SHARE TRANSACTIONS:

   

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

      240,705   
  

 

 

  

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

      240,705   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

   

 

 

  

FOR THE PERIOD

    $ 854,469   
  

 

 

  
          

NET ASSETS AVAILABLE TO COMMON STOCK:

   

Beginning of period

    $ 142,737,341   

Net increase in net assets during the period

      854,469   
  

 

 

  

End of period

    $ 143,591,810   
  

 

 

  

 

(1) 

These tables summarize the three months ended February 28, 2015 and should be read in conjunction with the Fund’s audited financial statements, including notes to financial statements, in its Annual Report dated November 30, 2014.

(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, 2014 through February 28, 2015 (Unaudited)

For a Common Stock share outstanding throughout the period

 

 

PER SHARE OPERATING PERFORMANCE:

   

Net asset value, beginning of period

    $ 11.58   
  

 

 

  

INVESTMENT OPERATIONS:

   

Net investment income

      0.21   

Net realized and unrealized gain/(loss) on investments

      0.06   
  

 

 

  

Total from investment operations

      0.27   
  

 

 

  

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

   

From net investment income

      (0.22 ) 
  

 

 

  

Total distributions to Common Stock Shareholders

      (0.22 ) 
  

 

 

  

Net asset value, end of period

    $ 11.63   
  

 

 

  

Market value, end of period

    $ 12.30   
  

 

 

  

Common Stock shares outstanding, end of period

      12,349,855   
  

 

 

  

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

      7.42 %* 

Operating expenses including interest expense

      1.90 %* 

        Operating expenses excluding interest expense

      1.41 %* 

SUPPLEMENTAL DATA: ††

   

Portfolio turnover rate

      1 %** 

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

    $ 213,792   

Ratio of operating expenses including interest expense to total managed assets

      1.27 %* 

Ratio of operating expenses excluding interest expense to total managed assets

      0.94 %* 

 

 

(1) 

These tables summarize the three months ended February 28, 2015 and should be read in conjunction with the Fund’s audited financial statements, including notes to financial statements, in its Annual Report dated November 30, 2014.

* 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, 2014

    $ 0.0730       $ 11.54       $ 11.55       $ 11.54   

January 30, 2015

      0.0730         11.64         12.26         11.65   

February 27, 2015

      0.0730         11.63         12.30         11.69   

 

(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, 2015, the aggregate cost of securities for federal income tax purposes was $202,822,749, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $18,702,323 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $9,691,951.

 

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.

 

14

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

A summary of the inputs used to value the Fund’s investments as of February 28, 2015 is as follows:

 

     Total
Value at
February 28, 2015		      Level 1
Quoted
Price		      Level 2
Significant
Observable
Inputs		      Level 3
Significant
Unobservable
Inputs		  

Preferred Securities

            

Banking

    $ 100,760,996       $ 80,232,161       $ 20,522,085       $ 6,750   

Financial Services

      2,514,375         2,514,375         —         —   

Insurance

      50,612,743         35,847,332         14,765,411         —   

Utilities

      30,865,644         8,631,581         22,234,063         —   

Energy

      4,857,840         4,857,840         —         —   

Real Estate Investment Trust (REIT)

      7,939,016         7,939,016         —         —   

Miscellaneous Industries

      3,032,925         —         3,032,925         —   

Corporate Debt Securities

            

Banking

      5,742,720         2,398,888         3,343,832         —   

Financial Services

      664,482         664,482         —         —   

Insurance

      2,398,279         —         2,398,279         —   

Energy

      1,255,196         —         1,255,196         —   

Communication

      642,087         642,087         —         —   

Common Stock

            

Insurance

      45,444         45,444         —         —   

Money Market Fund

      501,374         501,374         —         —   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total Investments

    $ 211,833,121       $ 144,274,580       $ 67,551,791       $ 6,750   
  

 

 

     

 

 

     

 

 

     

 

 

  

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 that are approved by the Board of Directors and are 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.

 

15

 

Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

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 11/30/14

    $  6,750       $  6,750   

Accrued discounts/premiums

      —         —   

Realized gain/(loss)

      —         —   

Change in unrealized appreciation/(depreciation)

      —         —   

Purchases

      —         —   

Sales

      —         —   

Transfer in

      —         —   

Transfer out

      —         —   

Balance as of 02/28/15

    $ 6,750       $ 6,750   

For the three months ended February 28, 2015, 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.

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 02/28/15		      Valuation Technique      Unobservable Input    Input Range (Wgt Avg)

Preferred Securities

            

Banking

    $ 6,750         Bankruptcy recovery       Credit/Structure-specific
recovery		    0.00% - 0.50% (0.15%)

The significant unobservable inputs used in the fair value measurement technique for bankruptcy recovery are based on recovery analysis that is specific to the security being valued, including the level of subordination and structural features of the security, and the current status of any bankruptcy or liquidation proceedings. Observable market trades in bankruptcy claims are utilized by management, when available, to assess the appropriateness of valuations, although the frequency of trading depends on the specific credit and seniority of the claim. Expected recoveries in bankruptcy by security type and industry do not tend to deviate much from historical recovery rates, which are very low (sometimes zero) for preferred securities and more moderate for senior debt. Significant changes in these inputs would result in a significantly higher or lower fair value measurement.

 

16

 

Directors

Donald F. Crumrine, CFA

Chairman of the Board

David Gale Morgan Gust Karen H. Hogan Robert F. Wulf, CFA

Officers

Donald F. Crumrine, CFA

Chief Executive Officer

Robert M. Ettinger, CFA

President

R. Eric Chadwick, CFA

Chief Financial Officer,

Vice President and Treasurer

Chad C. Conwell

Chief Compliance Officer,

Vice President and Secretary

Bradford S. Stone

Vice President and

Assistant Treasurer

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

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 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 Income Opportunity Fund Incorporated for their information. It is not a Prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report.

LOGO     

Quarterly

Report

February 28, 2015

www.preferredincome.com

 

Item 2. Controls and Procedures.

 

  (a)

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

  (b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3. Exhibits.

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant)     Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
By (Signature and Title)*

/s/ R. Eric Chadwick

R. Eric Chadwick, Chief Executive Officer and President

(principal executive officer)
Date     April 22, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

By (Signature and Title)*

/s/ R. Eric Chadwick

R. Eric Chadwick, Chief Executive Officer and President

(principal executive officer)
Date     April 22, 2015
By (Signature and Title)*

/s/ Bradford S. Stone

Bradford S. Stone, Chief Financial Officer, Treasurer and Vice President

(principal financial officer)
Date     April 22, 2015

 

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