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Prudential Financial 2001 Annual Report - page 56 / 172

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56 / 172

Prudential Financial, Inc.

Other revenues decreased $25 million, or 16%, from 2000 to 2001, primarily due to the sale of a major portion of the consumer bank’s credit card receivables in 2000.

Net interest revenues decreased $56 million, or 19%, from 2000 to 2001, primarily as a result of a decrease in average customer margin lending balances of our domestic securities brokerage operations, related to the reduced level of individual investor activity. Average customer margin lending balances were $4.30 billion in 2001 compared to $6.54 billion in 2000 and amounted to $3.40 billion at December 31, 2001. Increased investment income on greater attributed capital partially offset the impact of lower average customer margin lending balances.

The number of domestic retail Financial Advisors was 5,383 at December 31, 2001, a decrease of 9% from 5,906 at December 31, 2000. Approximately 90% of the decline came from Financial Advisors with less than 4 years’ industry experience with us, and reflected a decrease in our recruiting of inexperienced Financial Advisors to be trained by us. In response to recruiting efforts by our competitors, we introduced an aggressive recruiting effort targeting experienced Financial Advisors, including recruiting and retention incentives, and, as discussed above, an equity-market-linked voluntary long-term deferred compensation plan to seek to enhance our Financial Advisor recruitment and retention efforts.

Assets under management and client assets decreased $21 billion to $251 billion at December 31, 2001 from $272 billion at December 31, 2000, primarily as a result of overall market value declines.

2000 to 1999 Annual Comparison. Total revenues, net of interest expense, increased $205 million, or 8%, from 1999 to 2000. The increase came primarily from our domestic securities brokerage operations, which recorded an increase of $202 million, or 8%, from $2.473 billion in 1999 to $2.675 billion in 2000.

Commission revenues increased slightly in 2000 from 1999, as increases of $17 million from mutual funds and $13 million from equity securities transactions were partially offset by a decline in commissions from fixed income products and commodity transactions. While commission revenues from our securities brokerage operations benefited from active over-the-counter equity markets and increased transaction volume during the first four months of the year, commission revenues declined slightly during the May through December period of 2000 versus the same period of 1999, reflecting less active securities markets and reduced transaction volume.

Fee revenues, comprised of asset management and account service fees, increased $177 million, or 31%, from 1999 to 2000. This increase resulted primarily from a $5.2 billion increase in wrap-fee and managed account assets under management to $31.9 billion at December 31, 2000 from $26.7 billion a year earlier.

Net interest revenues increased $30 million, or 11%, from 1999 to 2000. Substantially all of the increase came from our domestic securities brokerage operations, primarily from higher average customer margin lending balances, which increased from $5.06 billion in 1999 to $6.54 billion in 2000. Partially offsetting the increase in average customer margin lending balances was a decrease in the spread earned on these balances, reflecting competitive pressures on the rates charged to clients who buy securities on margin.

The number of domestic Financial Advisors was 5,906 at December 31, 2000, a decrease of 3% from 6,072 a year earlier.

Assets under management and client assets decreased $16 billion to $272 billion at December 31, 2000 from $288 billion a year earlier, primarily as a result of overall market value declines.

Non-Interest Expenses 2001 to 2000 Annual Comparison. Total non-interest expenses, as shown in the table above under “—Operating Results,” decreased $75 million from 2000 to 2001. Employee compensation and benefits at our domestic securities brokerage operation decreased due to the lower level of revenues and earnings in 2001, but the decrease was not proportional to the revenue decline largely due to the recruiting and retention incentives as described above as well as $41 million in employee termination costs associated with staff reductions in 2001. These recruiting and retention incentives will continue to be applicable and to adversely affect expense levels in future periods. The decrease in employee compensation and benefits was further offset by $24 million of costs we incurred to consolidate and close several retail branch and other locations during 2001.

2000 to 1999 Annual Comparison. Total non-interest expenses increased $192 million, or 8%, from 1999 to 2000. The increase came primarily from employee compensation and benefits at our retail securities brokerage operations, which increased by $108 million, or 8%, due to higher commissions paid to Financial Advisors on higher fee and commission revenues, and higher incentive and other compensation, as well as higher costs to recruit and retain

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Growing and Protecting Your Wealth

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