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Prudential Financial 2001 Annual Report - page 55 / 172

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Prudential Financial, Inc.

Adjusted Operating Income 2001 to 2000 Annual Comparison. The Private Client Group segment reported a pre-tax loss of $239 million, on an adjusted operating income basis, for 2001 compared to adjusted operating income of $237 million for 2000. The $476 million decline came primarily from a $433 million decrease from our domestic securities brokerage operations, which reported a loss of $243 million for 2001 compared to adjusted operating income of $190 million in 2000. These operations were adversely affected in 2001 by a decline in individual investor transaction volume and margin loan balances, which resulted in decreased commission and net interest revenues. These revenue declines were coupled with increased costs of recruiting and retaining Financial Advisors, including increased expenses relating to recruiting and retention incentives extended to some recently recruited experienced Financial Advisors. Additionally, we incurred costs of $65 million in 2001 from employee terminations associated with staff reductions, as well as branch closings and facilities consolidations. The remaining $43 million decrease in the segment’s adjusted operating income came from our consumer banking operations, which benefited in 2000 from the sale of a major portion of the consumer bank’s credit card receivables. The Private Client Group segment had a loss of $79 million, on an adjusted operating income basis, for the fourth quarter of 2001.

2000 to 1999 Annual Comparison. Adjusted operating income increased $13 million, or 6%, from 1999 to 2000. Adjusted operating income from our consumer banking operations increased $27 million, primarily as a result of the sale of a major portion of the consumer bank’s credit card receivables in 2000. Adjusted operating income from our domestic securities brokerage operations decreased $14 million, from $204 million in 1999 to $190 million in 2000.

Revenues The following table sets forth the Private Client Group segment’s revenues, as shown in the table above under “—Operating Results,” by source for the periods indicated.

2001

2000

1999

$1,155 684 134

(in millions) $1,561 748 159

$1,554 571 168

Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

Total non-interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,973 243

2,468 299

2,293 269

Total revenues, net of interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,216

$2,767

$2,562

2001 to 2000 Annual Comparison. Total revenues, net of interest expense, as shown in the table above under “—Operating Results,” decreased $551 million, or 20%, from 2000 to 2001. The decrease came primarily from a $498 million decline in revenues from our domestic securities brokerage operations, from $2.675 billion in 2000 to $2.177 billion in 2001.

Commission revenues decreased $406 million, or 26%, from 2000 to 2001. The decrease came primarily from a $375 million decline in commissions from over-the-counter and listed equity securities transactions. Commission revenues were negatively affected in 2001 by less active securities markets and reduced retail transaction volume, and benefited in 2000 from exceptionally active over-the-counter equity markets and related retail transaction volume in the first four months of the year. Commission revenues accounted for 59% of total segment non-interest revenues for 2001. Accordingly, we expect that a continuation of the level of securities market activity experienced in 2001, or a further downtrend in this activity, would continue to have a negative impact on our revenues and on the segment’s adjusted operating income, partially offset by planned expense reductions.

Fee revenues, which include asset management and account service fees, declined $64 million, or 9%, from 2000 to 2001. The decline came from a decrease in revenues from wrap-fee products, reflecting competitive pricing pressures as well as the negative impact of market value declines. The negative impact of market value declines on wrap-fee and managed account assets under management essentially offset the impact of new assets gathered in these accounts. Additionally, the negative impact of market value declines on clients’ mutual funds, on which a portion of our fees are based, contributed to the decline in fee revenues. Fee revenues accounted for 35% of total non-interest revenues of the domestic securities operations in 2001, compared to 31% in 2000, reflecting actions we have taken to increase the contribution of recurring revenues. These actions included enhanced marketing of fee- based products and compensation incentives to Financial Advisors for sales of these products, as well as emphasis on financial planning in recruiting and training of Financial Advisors.

Prudential Financial 2001 Annual Report

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