What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-02-21 · 554 added, 439 removed, 702 unchanged (59% of the section changed)

1 unchanged sentence

MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING

Federated Hermes, Inc.'s (including its consolidated subsidiaries, Federated) management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements in this annual report.

Federated Hermes, Inc.'s (including its consolidated subsidiaries, Federated Hermes) management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements in this annual report.

These consolidated financial statements and notes have been prepared in conformity with U.S.

generally accepted accounting principles from accounting records which management believes fairly and accurately reflect Federated's operations and financial position.

generally accepted accounting principles from accounting records which management believes fairly and accurately reflect Federated Hermes' operations and financial position.

The consolidated financial statements include amounts based on management's best estimates and judgments considering currently available information and management's view of current conditions and circumstances.

6 unchanged sentences

Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the effectiveness of Federated's internal control over financial reporting as of December 31, 2019 , in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).

Based on this assessment, management concluded that, as of December 31, 2019 , Federated's internal controls over financial reporting were effective.

Management assessed the effectiveness of Federated Hermes' internal control over financial reporting as of December 31, 2020, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).

The scope of management's assessment of the effectiveness of its disclosure controls and procedures did not include the internal controls over financial reporting at HCL, which was acquired effective March 1, 2020.

HCL represented approximately 2% of both Federated Hermes' total and net assets as of December 31, 2020 and approximately 2% of both Federated Hermes' total revenue and net income for the year ended December 31, 2020.

This exclusion is consistent with the SEC Staff's guidance that an assessment of a recently acquired business may be omitted from the scope of management's assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition.

Based on this assessment, management concluded that, as of December 31, 2020, Federated Hermes' internal controls over financial reporting were effective.

Ernst & Young LLP, independent registered public accounting firm, has audited the consolidated financial statements included in this annual report and has audited the effectiveness of the internal control over financial reporting.

Federated Hermes, Inc.

Christopher Donahue

/s/ Thomas R.

Christopher Donahue

President and Chief Executive Officer

Chief Financial Officer

Christopher Donahue /s/ Thomas R.

Christopher Donahue Thomas R.

President and Chief Executive Officer Chief Financial Officer

February 26, 2021

31 unchanged sentences

These significant assumptions are forward-looking and could be materially affected by future economic and market conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's impairment testing process for indefinite-lived intangible assets, including controls over management's review of the estimated useful lives and the significant assumptions described above.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's impairment testing process for indefinite-lived intangible assets, including controls over management's review of the estimated useful lives and the significant assumptions described above.

Our audit procedures to test the estimated fair value of the Company's indefinite-lived intangible assets included, among others, involving our valuation specialists to assist in assessing the fair value methodologies utilized, evaluating management's significant assumptions described above, and testing the completeness and accuracy of the underlying data.

For example, we compared significant assumptions to current industry, market and economic trends, historical results and other relevant factors.

For example, we compared significant assumptions to current industry, market and economic data, historical results and other relevant information.

We also assessed other factors, such as changes to legal, regulatory or contractual provisions impacting the useful lives of the indefinite-lived intangible assets.

Additionally, for each accounting unit of indefinite-lived intangible assets, we involved our valuation specialists to assist in evaluating the discount rates, which included comparison of the selected discount rate to the Company's weighted average cost of capital and the risk associated with the projected cash flows, and the royalty rate, which included assessing comparable royalty rates and determining the reasonableness of the selected rate.

Additionally, for two of the three accounting units of indefinite-lived intangible assets, we involved our valuation specialists to assist in evaluating the discount rates, which included comparison of the selected discount rate to the Company's weighted average cost of capital and the risk associated with the projected cash flows, and the royalty rate, which included assessing comparable royalty rates and determining the reasonableness of the selected rate.

We assessed the accuracy of the Company's historical projected cash flows and performed sensitivity analyses of certain significant assumptions described above to evaluate the changes in the fair value of the indefinite-lived intangible assets that would result from changes in the significant assumptions.

In addition, we assessed the adequacy of the disclosures in the consolidated financial statements.

Accounting for the Asset Acquisition

Accounting for the Acquisition of HCL

Description of the Matter

On November 18, 2019, the Company completed the acquisition of certain components of the PNC Capital Advisors LLC investment management business for a total acquisition cost of $58.0 million.

As described in Note 10(a) to the consolidated financial statements, the transaction was accounted for as an asset acquisition, as substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset, which consisted of the rights to manage fund assets.

Auditing the Company's accounting for the asset acquisition was complex due to the significant judgment involved in determining whether the transaction should be accounted for as an asset acquisition or a business combination, and determining the useful life and the fair value of the acquired rights to manage fund assets.

Evaluating whether a set of acquired assets and activities constitutes an asset acquisition required judgment to determine whether substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset, while the determination of the useful life of the acquired rights to manage fund assets was judgmental due to considerations over the legal, regulatory or contractual provisions of the rights.

There was significant estimation uncertainty in determining the fair value of the rights to manage fund assets primarily due to the sensitivity of the estimated fair value to the significant assumptions used in the excess earnings method, under the income approach, which included the discount rate and certain assumptions that form the basis of the forecasted results, such as projected revenue growth rates and projected pre-tax profit margins.

During 2020, the Company completed the acquisition of HGPE Capital Limited (HCL) for $20.4 million.

The transaction was accounted for as a business combination.

As more fully described in Note 3 to the consolidated financial statements, as a result of the acquisition, the Company gained a controlling ownership interest in Hermes GPE LLP (HGPE), which prior to the transaction was accounted for under the equity method of accounting.

Given the equity-method investment relationship with HGPE, the previously held interest was revalued, resulting in a remeasurement gain of $7.5 million.

Auditing the Company's accounting for its acquisition of HCL was complex due to the significant estimation required by management to determine the acquisition-date fair value of the previously held interest in HGPE and the fair value of the indefinite-lived intangible related to acquired rights to manage fund assets.

Determining the fair value of the previously held interest in HGPE required judgment to assess the fair value methodology utilized and the related significant assumptions, such as future cash flows and the weighted average cost of capital.

There was significant estimation uncertainty in determining the fair value of the rights to manage fund assets primarily due to the sensitivity of certain assumptions such as weighted average cost of capital, projected revenue growth rates and projected pre-tax profit margins.

These significant assumptions are forward-looking and could be materially affected by future economic and market conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's accounting over the asset acquisition process, including controls over management's review of the useful life of the acquired rights and the significant assumptions described above.

Our audit procedures to evaluate whether the transaction should be accounted for as an asset acquisition or a business combination involved, among others, assessing whether the Company's acquired rights to manage fund assets represented substantially all of the fair value of the gross assets acquired.

Our audit procedures to test the estimated fair value of the Company's acquired rights to manage fund assets included, among others, involving our valuation specialists to assist in assessing the fair value methodology utilized, evaluating management's significant assumptions described above, and testing the completeness and accuracy of the underlying data.

Specifically, we compared the significant assumptions to current and historical industry, market and economic trends.

We also evaluated the reasonableness of management's assessment of the useful life of the acquired rights with respect to the factors described above.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s business combinations process, including controls over management’s review of the significant assumptions described above and determination of fair value methods utilized.

Our audit procedures to test the estimated fair values of the previously held interest in HGPE and the acquired rights to manage fund assets included, among others, involving our valuation specialists to assist in assessing the fair value methodology utilized, evaluating management’s significant assumptions described above, and testing the completeness and accuracy of the underlying data.

Specifically, we compared the significant assumptions to current and historical industry, market and economic data.

Additionally, we involved our valuation specialists to assist in evaluating the discount rate, which included comparison to the Company’s weighted average cost of capital and the risk associated with the projected cash flows.

We performed sensitivity

analyses of certain significant assumptions described above to evaluate the changes in the fair value of the acquired rights to manage fund assets that would result from changes in the significant assumptions.

We performed sensitivity analyses of certain significant assumptions described above to evaluate the changes in the fair value of the previously held interest in HGPE and acquired rights to manage fund assets that would result from changes in the significant assumptions.

In addition, we assessed the adequacy of the disclosures in the consolidated financial statements.

Valuation of Hermes Redeemable Noncontrolling Interest

Valuation of HFML Redeemable Noncontrolling Interest

Description of the Matter

At December 31, 2019, the redeemable noncontrolling interest in Hermes Fund Managers Limited (Hermes), a nonpublic company, was $192.2 million.

As further described in Note 1(p) and Note 3 to the consolidated financial statements, the redeemable noncontrolling interest in Hermes represents temporary equity which is subject to put and call options that are exercisable by the respective parties at future predetermined dates, subject to certain contingencies, at the then-current fair value.

As further described in Note 1(p) to the consolidated financial statements, the carrying value of the redeemable noncontrolling interest in Hermes is adjusted on a quarterly basis to the higher of the current book value or current redemption value (fair value).

At December 31, 2020, the redeemable noncontrolling interest in Hermes Fund Managers Limited (HFML), a nonpublic company, was $212.7 million.

As further described in Note 1(p) to the consolidated financial statements, the redeemable noncontrolling interest in HFML represents temporary equity, which is subject to put and call options that are exercisable by the respective parties at future predetermined dates at the then-current fair value.

The carrying value of the redeemable noncontrolling interest in HFML is adjusted on a quarterly basis to the higher of the current carrying value or current redemption value (fair value).

The Company estimates the current redemption value through equally weighting the results of the discounted cash flow fair value methodology under the income approach, the guideline public company methodology under the market approach and the guideline public transaction methodology under the market approach.

Auditing the Company's measurement of the current redemption value of the redeemable noncontrolling interest in Hermes was complex and judgmental because the inputs to the discounted cash flow fair value calculation involved subjective assumptions with significant estimation uncertainty.

The significant estimation uncertainty was primarily due to the sensitivity of the current redemption value to the discount rate and certain other underlying significant assumptions about future performance used in the discounted cash flow fair value method, such as projected revenue growth rates and projected pre-tax profit margins.

Auditing the Company's measurement of the current redemption value of the redeemable noncontrolling interest in HFML was complex and judgmental because the inputs to the discounted cash flow fair value calculation involved subjective assumptions with significant estimation uncertainty.

The significant estimation uncertainty was primarily due to the sensitivity of the current redemption value to the discount rate and certain other underlying significant assumptions such as projected revenue growth rates and projected pre-tax profit margins.

These significant assumptions are forward-looking and could be materially affected by future economic and market conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's measurement of the current redemption value of the redeemable noncontrolling interest in Hermes, including controls over management's review of the significant assumptions described above.

To test the current redemption value of the redeemable noncontrolling interest in Hermes, our audit procedures included, among others, involving our valuation specialists to assist in assessing the use of the discounted cash flow methodology in the Company's fair value measurement, evaluating management's significant assumptions described above and testing the completeness and accuracy of the underlying data.

For example, we evaluated the reasonableness of the projected revenue growth rates and the projected pre-tax profit margins by comparing these significant assumptions to current industry, market and economic trends, to the historical results of Hermes and to other relevant factors.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's measurement of the current redemption value of the redeemable noncontrolling interest in HFML, including controls over management's review of the significant assumptions described above.

To test the current redemption value of the redeemable noncontrolling interest in HFML, our audit procedures included, among others, involving our valuation specialists to assist in assessing the use of the discounted cash flow methodology in the Company's fair value measurement, evaluating management's significant assumptions described above and testing the completeness and accuracy of the underlying data.

For example, we evaluated the reasonableness of the projected revenue growth rates and the projected pre-tax profit margins by comparing these significant assumptions to current industry, market and economic data, to the historical results of HFML and to other relevant information.

We also assessed the historical accuracy of the Company's projected cash flows.

Additionally, we involved our valuation specialists to assist in evaluating the discount rate, which included comparison of the selected discount rate to the entity's weighted average cost of capital and the risk associated with the projected cash flows.

We also performed sensitivity analyses of certain significant assumptions described above to evaluate the changes in the fair value of the redeemable noncontrolling interest in Hermes that would result from changes in the significant assumptions.

We also performed sensitivity analyses of certain significant assumptions described above to evaluate the changes in the fair value of the redeemable noncontrolling interest in HFML that would result from changes in the significant assumptions.

In addition, we assessed the adequacy of the disclosures in the consolidated financial statements.

9 unchanged sentences

(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

As indicated in the accompanying Management's Assessment of Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of HGPE Capital Limited, which is included in the 2020 consolidated financial statements of the Company and constituted 2% of both total and net assets, as of December 31, 2020 and 2% of both revenues and net income, for the year then ended.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of HGPE Capital Limited.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 26, 2021 expressed an unqualified opinion thereon.

11 unchanged sentences

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

6 unchanged sentences

(dollars in thousands)

December 31, 2020 2019

Current Assets

3 unchanged sentences

Receivables, net of reserve of $ 16 and $ 14 , respectively

64,857 64,492

Receivables—Affiliates 41,107 37,589

3 unchanged sentences

Long-Term Assets

Goodwill 800,267 774,534

Intangible Assets, net 481,753 446,228

3 unchanged sentences

Total Long-Term Assets 1,485,496 1,418,847

Total Assets $ 2,060,839 $ 1,880,131

Current Liabilities

20 unchanged sentences

Class B, No Par Value, 900,000,000 Shares Authorized, 109,505,456 Shares Issued

418,669 392,021

Retained Earnings 1,027,699 930,351

Treasury Stock, at Cost, 10,174,013 and 8,375,077 Shares Class B Common Stock, respectively

( 324,731 ) ( 281,032 )

Accumulated Other Comprehensive Income (Loss), net of tax 15,171 ( 249 )

13 unchanged sentences

Compensation and Related 503,400 442,147 354,765

Distribution 318,343 340,663 287,580

Systems and Communications 64,698 52,988 39,925

Office and Occupancy

Professional Service Fees 55,123 43,714 42,903

Office and Occupancy 38,975 44,926 34,622

Advertising and Promotional 15,834 17,774 16,141

Travel and Related 4,566 16,645 15,594

Other 29,178 20,110 13,867

Total Operating Expenses 1,030,117 978,967 805,397

3 unchanged sentences

Gain (Loss) on Securities, net 18,067 4,966 ( 4,357 )

Debt Expense ( 2,678 ) ( 5,037 ) ( 5,885 )

Other, net 8,398 12,965 ( 29,849 )

Total Nonoperating Income (Expenses), net 27,906 17,344 ( 34,106 )

3 unchanged sentences

Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries 9,658 4,786 2,002

Net Income $ 326,364 $ 272,339 $ 220,297

Amounts Attributable to Federated Hermes, Inc.

Earnings Per Common Share—Basic and Diluted

Earnings Per Common Share—Basic $ 3.25 $ 2.69 $ 2.18

Earnings Per Common Share—Diluted $ 3.23 $ 2.69 $ 2.18

Cash Dividends Per Share $ 2.08 $ 1.08 $ 1.06

8 unchanged sentences

Reclassification Adjustment Related to Foreign Currency Items 0 0 ( 191 )

Unrealized Gain (Loss) on Equity Securities

Reclassification Adjustment Related to Equity Securities 0 0 ( 29 )

4 unchanged sentences

Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interest in Subsidiaries 16,251 11,693 ( 4,007 )

Comprehensive Income (Loss) Attributable to Nonredeemable Noncontrolling Interest in Subsidiary

Comprehensive Income Attributable to Federated Hermes, Inc.

$ 341,784 $ 286,707 $ 206,470

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

1 unchanged sentence

(dollars in thousands)

Class A Class B Treasury

Balance at January 1, 2018 9,000 101,100,453 8,405,003

Adoption of New Accounting Pronouncements 0 0 0

Net Income 0 0 0

Other Comprehensive Income (Loss), net of tax 0 0 0

4 unchanged sentences

Distributions to Noncontrolling Interest in Subsidiaries 0 0 0

Business Acquisition 0 0 0

Purchase of Treasury Stock 0 ( 1,205,790 ) 1,205,790

Balance at December 31, 2018 9,000 100,803,382 8,702,074

Adoption of New Accounting Pronouncements

Net Income 0 0 0

Other Comprehensive Income (Loss), net of tax 0 0 0

5 unchanged sentences

Business Acquisition 0 0 0

Change in Estimated Redemption Value of Redeemable Noncontrolling Interests 0 0 0

Purchase of Treasury Stock 0 ( 614,077 ) 614,077

Balance at December 31, 2019 9,000 101,130,379 8,375,077

Net Income 0 0 0

Other Comprehensive Income (Loss), net of tax 0 0 0

4 unchanged sentences

Distributions to Noncontrolling Interest in Subsidiaries 0 0 0

Business Acquisition

Change in Estimated Redemption Value of Redeemable Noncontrolling Interests 0 0 0

4 unchanged sentences

Shareholders' Equity

Treasury Stock

Common Stock Retained

Earnings Treasury Stock Accumulated

Comprehensive

Shareholders'

Nonredeemable

Noncontrolling

Income (Loss),

Net of Tax Total

Equity Redeemable

Noncontrolling

Subsidiaries/

$ 343,378 $ 697,359 $ ( 278,732 ) $ ( 790 ) $ 761,215 $ 30,163

0 125 0 ( 254 ) ( 129 ) 0

0 220,297 0 0 220,297 2,002

0 0 0 ( 13,573 ) ( 13,573 ) ( 6,009 )

0 0 0 0 0 2,801

0 0 0 0 0 ( 1,751 )

23,874 ( 19,051 ) 20,495 0 25,318 4,239

0 ( 106,907 ) 0 0 ( 106,907 ) 0

0 0 0 0 0 ( 18,492 )

0 0 0 0 0 169,560

0 0 ( 29,100 ) 0 ( 29,100 ) 0

$ 367,252 $ 791,823 $ ( 287,337 ) $ ( 14,617 ) $ 857,121 $ 182,513

0 272,339 0 0 272,339 4,786

0 0 0 14,368 14,368 6,907

0 0 0 0 0 9,356

0 0 0 0 0 454

24,958 ( 20,614 ) 22,045 0 26,389 7,888

0 ( 109,049 ) 0 0 ( 109,049 ) 0

0 0 0 0 0 ( 3,580 )

0 0 0 0 0 ( 386 )

0 ( 4,148 ) 0 0 ( 4,148 ) 4,148

0 0 ( 15,740 ) 0 ( 15,740 ) 0

$ 392,210 $ 930,351 $ ( 281,032 ) $ ( 249 ) $ 1,041,280 $ 212,086

0 326,364 0 0 326,364 9,658

0 0 0 15,420 15,420 6,593

0 0 0 0 0 20,985

0 0 0 0 0 ( 3,424 )

26,648 ( 22,751 ) 24,206 0 28,103 8,786

0 ( 207,744 ) 0 0 ( 207,744 ) 0

0 0 0 0 0 ( 16,218 )

0 1,479 0 0 1,479 ( 1,479 )

0 0 ( 67,905 ) 0 ( 67,905 ) 0

$ 418,858 $ 1,027,699 $ ( 324,731 ) $ 15,171 $ 1,136,997 $ 236,987

CONSOLIDATED STATEMENTS OF CASH FLOWS

12 unchanged sentences

Net Sales (Purchases) of Investments—Consolidated Investment Companies ( 12,978 ) ( 26,434 ) 16,696

Consolidation/(Deconsolidation) of Investment Companies ( 3,051 ) 0 0

Other Changes in Assets and Liabilities:

26 unchanged sentences

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period 308,635 249,511 157,426

Restricted Cash Recorded in Other Current Assets 6,455 0 0

Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets 361 337 594

2 unchanged sentences

Cash paid during the year for:

$ 98,730 $ 72,612 $ 61,573

$ 2,393 $ 4,606 $ 5,320

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

3 unchanged sentences

(a) Nature of Operations

Federated provides investment advisory, administrative, distribution and other services to the Federated Funds and Separate Accounts in both domestic and international markets, as well as stewardship services to various companies.

For presentation purposes in the Consolidated Financial Statements, the Federated Funds are considered to be affiliates of Federated.

The majority of Federated's revenue is derived from investment advisory services provided to the Federated Funds and Separate Accounts through various subsidiaries pursuant to investment advisory contracts.

Federated Hermes provides investment advisory, administrative, distribution and other services to the Federated Hermes Funds and Separate Accounts in both domestic and international markets.

In addition, Federated Hermes markets and provides stewardship and real estate development services to various domestic and international companies.

For presentation purposes in the Consolidated Financial Statements, the Federated Hermes Funds are considered to be affiliates of Federated Hermes.

The majority of Federated Hermes' revenue is derived from investment advisory services provided to the Federated Hermes Funds and Separate Accounts through various subsidiaries pursuant to investment advisory contracts.

These advisory subsidiaries are registered as investment advisors under the Advisers Act or operate in similar capacities under applicable jurisdictional law.

U.S.-domiciled Federated Funds are generally distributed by a wholly owned subsidiary registered as a broker/dealer under the 1934 Act and under applicable state laws.

Non-U.S.-domiciled Federated Funds are generally distributed by subsidiaries and third-party distribution firms which are registered under applicable jurisdictional law.

Federated's investment products are distributed within the U.S.

U.S.-domiciled Federated Hermes Funds are generally distributed by a wholly-owned subsidiary registered as a broker/dealer under the 1934 Act and under applicable state laws.

Non-U.S.-domiciled Federated Hermes Funds are generally distributed by subsidiaries and third-party distribution firms which are registered under applicable jurisdictional law.

Federated Hermes' investment products are distributed within the U.S.

financial intermediary, U.S.

7 unchanged sentences

(d) Revenue Recognition

All of Federated's revenue is earned from contracts with customers, which are generally terminable upon no more than 60 days ' notice.

Revenue is measured as the consideration to which Federated expects to be entitled in exchange for providing its services.

All of Federated Hermes' revenue is earned from contracts with customers, which are generally terminable upon no more than 60 days' notice.

Revenue is measured as the consideration to which Federated Hermes expects to be entitled in exchange for providing its services.

This amount may be reduced by Fee Waivers.

2 unchanged sentences

For these revenue streams, control is transferred over time as the customer simultaneously consumes the benefit of the service as it is provided.

Federated utilizes a time-based measure of progress for which each day is a distinct service period over the life of the contract.

Investment advisory, administrative and certain other service fees are generally calculated as a percentage of average net assets of the investment portfolios managed by Federated.

Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated's control, including investor activity and market volatility, and is recognized as these uncertainties are resolved.

Federated Hermes utilizes a time-based measure of progress for which each day is a distinct service period over the life of the contract.

Investment advisory, administrative and certain other service fees are generally calculated as a percentage of average net assets of the investment portfolios managed by Federated Hermes.

Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated Hermes' control, including investor activity and market volatility, and is recognized as these uncertainties are resolved.

Certain other service fees are earned on fixed-rate contracts which are recorded over the life of the contract as services are performed.

See Note (4) for information about expected future revenue.

For the distribution performance obligation, control is transferred to the customer at a point in time upon investor subscription and/or redemption.

Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated's control, including investor activity and preferences and market volatility, and is recognized as these uncertainties are resolved.

For certain revenue, primarily related to distribution and performance fees, Federated may recognize revenue in the current period that pertains to performance obligations satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved.

The fair value of the investment portfolios managed by Federated is primarily determined using quoted market prices, independent third-party pricing services and broker/dealer price quotes or the NAV Practical Expedient .

For certain revenue, primarily related to distribution and performance fees, including carried interest, Federated Hermes may recognize revenue in the current period that pertains to performance obligations satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved.

For the distribution performance obligation, control is transferred to the customer at the point in time of investor subscription and/or redemption.

Measurement of distribution revenue is based on contractual fee rates and the fair value of AUM over the time period the investor remains in the fund.

The revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated Hermes' control, including investor activity and preferences and market volatility, and is recognized as these uncertainties are resolved.

Performance fees, including carried interest, are received from certain Federated Hermes Funds and Separate Accounts and are dependent upon meeting certain performance hurdles which typically arise from investment management services that begin in prior periods.

Because each fee arrangement is unique, contracts are evaluated on an individual basis for each reporting period.

Performance fees are forms of variable consideration which are recognized only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, which involves significant judgement.

Potential constraints impacting the amount of variable consideration recognized include factors outside of management's influence, such as market conditions and situations where the contract has a large number and broad range of possible amounts and, in the case of carried interest, certain clawback provisions which may require the return of previously received carried interest based on future fund performance.

Federated Hermes records a contract liability for deferred carried interest to the extent it receives cash prior to meeting the revenue recognition criteria.

The fair value of AUM managed by Federated Hermes is primarily determined using quoted market prices, independent third-party pricing services and broker/dealer price quotes or the NAV Practical Expedient.

In limited circumstances, a quotation or price determination is not readily available from an independent pricing source.

In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the Federated Funds .

In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the Federated Hermes Funds.

For the periods presented, an immaterial amount of AUM was priced in this manner.

For Separate Accounts that are not registered investment companies under the 1940 Act , the fair value of portfolio investments is primarily

determined as specified in applicable customer agreements, including in agreements between the customer and the customer's third-party custodian.

For Separate Accounts that are not registered investment companies under the 1940 Act, the fair value of portfolio investments is primarily determined as specified in applicable customer agreements, including in agreements between the customer and the customer's third-party custodian.

For Separate Accounts that are registered investment companies under the 1940 Act (e.g., sub-advised mutual funds), the fair value of portfolio investments is determined based on a prescribed valuation process approved by the board of directors/trustees of the sub-advised fund.

Federated has contractual arrangements with third parties to provide certain fund-related services.

Management considers whether Federated is acting as the principal service provider or as an agent to determine whether its revenue should be recorded based on the gross amount received from the funds or net of Federated's payments to third-party service providers.

Federated is considered a principal service provider if it controls the service that is transferred to the customer.

Federated Hermes has contractual arrangements with third parties to provide certain fund-related services.

Management considers whether Federated Hermes is acting as the principal service provider or as an agent to determine whether its revenue should be recorded based on the gross amount received from the funds or net of Federated Hermes' payments to third-party service providers.

Federated Hermes is considered a principal service provider if it controls the service that is transferred to the customer.

Alternatively, it would be considered an agent when it does not control the service, but rather arranges for the service to be provided by another party.

Generally, the less the customer is directly involved with or participates in making decisions regarding the ultimate third-party service provider, the more supportive the facts are that Federated is acting as the principal in these transactions and should therefore report revenues on a gross basis.

All of Federated's revenue is recorded gross of payments made to third parties.

Generally, the less the customer is directly involved with or participates in making decisions regarding the ultimate third-party service provider, the more supportive the facts are that Federated Hermes is acting as the principal in these transactions and should therefore report revenues on a gross basis.

All of Federated Hermes' revenue is recorded gross of payments made to third parties.

Management judgments are used when reviewing newly-created contracts and/or materially-modified contracts to determine whether:

(1) Federated is the principal or agent;

(2) a contract has multiple performance obligations when Federated is paid a single fee;

(1) Federated Hermes is the principal or agent;

(2) a contract has multiple performance obligations when Federated Hermes is paid a single fee;

and (3) two or more contracts should be combined.

A change in the conclusion of whether Federated is the principal or agent would result in a change in the revenue being recorded gross or net of payments made to third parties.

A change in the conclusion of whether Federated Hermes is the principal or agent would result in a change in the revenue being recorded gross or net of payments made to third parties.

Different conclusions for the remaining two judgments may change the line items to which revenue is being recorded.

There are no significant judgments that would impact the timing of revenue recognition.

(e) Principles of Consolidation

Federated performs an analysis for each Federated Fund or other entity in which Federated holds a financial interest to determine if it is a VIE or voting rights entity ( VRE ).

Factors considered in this analysis include, but are not limited to, whether (1) it is a legal entity, (2) a scope exception applies, (3) a variable interest exists and (4) shareholders have the power to direct the activities that most significantly impact the economic performance, as well as the equity ownership, and any related party or de facto agent implications of Federated's involvement with the entity.

Entities that are determined to be VIE s are consolidated if Federated is deemed to be the primary beneficiary.

Entities that are determined to be VREs are generally consolidated if Federated holds the majority voting interest.

Federated's conclusion to consolidate a Federated Fund may vary from period to period, most commonly as a result of changes in its percentage interest in the entity.

Federated Hermes performs an analysis for each Federated Hermes Fund or other entity in which Federated Hermes holds a financial interest to determine if it is a VIE or VRE.

Entities that are determined to be VIEs are consolidated if Federated Hermes is deemed to be the primary beneficiary.

Entities that are determined to be VREs are generally consolidated if Federated Hermes holds the majority voting interest.

Federated Hermes' conclusion to consolidate a Federated Hermes Fund may vary from period to period, most commonly as a result of changes in its percentage interest in the entity.

All intercompany accounts and transactions have been eliminated.

Consolidation of Variable Interest Entities

Federated has a controlling financial interest in a VIE and is, therefore, deemed to be the primary beneficiary of a VIE if it has (1) the power to direct the activities of a VIE that most significantly impact the VIE 's economic performance and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE .

Federated Hermes has a controlling financial interest in a VIE and is, therefore, deemed to be the primary beneficiary of a VIE if it has (1) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Consolidation of Voting Rights Entities

Federated has a controlling financial interest in a VRE if it can exert control over the financial and operating policies of the VRE , which generally occurs when Federated holds the majority voting interest (i.e., greater than 50% of the voting equity interest).

Federated Hermes has a controlling financial interest in a VRE if it can exert control over the financial and operating policies of the VRE, which generally occurs when Federated Hermes holds the majority voting interest (i.e., greater than 50% of the voting equity interest).

(f) Cash and Cash Equivalents

2 unchanged sentences

(g) Investments

Federated's investments are categorized as Investments—Consolidated Investment Companies or Investments—Affiliates and Other on the Consolidated Balance Sheets .

Investments—Consolidated Investment Companies represent securities held by Federated as a result of consolidating certain Federated Funds .

Investments—Affiliates and Other represent Federated's investments in fluctuating-value Federated Funds and investments held in Separate Accounts for which Federated owns the underlying debt and equity securities.

Federated Hermes' investments are categorized as Investments—Consolidated Investment Companies or Investments—Affiliates and Other on the Consolidated Balance Sheets.

Investments—Consolidated Investment Companies represent securities held by Federated Hermes as a result of consolidating certain Federated Hermes Funds.

Investments—Affiliates and Other represent Federated Hermes' investments in fluctuating-value Federated Hermes Funds and investments held in Separate Accounts for which Federated Hermes owns the underlying debt and equity securities.

All investments are carried at fair value with unrealized gains or losses on these securities recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income.

Realized gains and losses on these securities are computed on a specific-identification basis and recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income.

The fair value of Federated's investments is generally based on quoted market prices in active markets for identical instruments.

The fair value of Federated Hermes' investments is generally based on quoted market prices in active markets for identical instruments.

If quoted market prices are not available, fair value is generally based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

2 unchanged sentences

(h) Derivatives and Hedging Instruments

From time to time, Federated may consolidate an investment product that holds freestanding derivative financial instruments for trading purposes.

Federated reports such derivative instruments at fair value and records the changes in fair value in Gain (Loss) on Securities, net on the Consolidated Statements of Income .

From time to time, Federated may also enter into derivative financial instruments to hedge against the risk of movement in foreign exchange rates.

Federated records all derivative financial instruments as either assets or liabilities on its Consolidated Balance Sheets and measures these instruments at fair value.

Federated has not designated any derivative financial instrument as a hedging instrument for accounting purposes.

From time to time, Federated Hermes may consolidate an investment product that holds freestanding derivative financial instruments for trading purposes.

Federated Hermes reports such derivative instruments at fair value and records the changes in fair value in Gain (Loss) on Securities, net on the Consolidated Statements of Income.

From time to time, Federated Hermes may also enter into derivative financial instruments to hedge against the risk of movement in foreign exchange rates.

Federated Hermes records all derivative financial instruments as either assets or liabilities on its Consolidated Balance Sheets and measures these instruments at fair value.

Federated Hermes has not designated any derivative financial instrument as a hedging instrument for accounting purposes.

In 2020, the gain or loss on these derivative instruments is recognized in Operating Expenses – Other on the Consolidated Statements of Income.

(i) Asset Acquisitions and Business Combinations

Federated performs an analysis to determine whether a transaction should be accounted for as an asset acquisition or a business combination.

Federated Hermes performs an analysis to determine whether a transaction should be accounted for as an asset acquisition or a business combination.

A transaction that does not meet the definition of a business under U.S.

6 unchanged sentences

A transaction that meets the definition of a business is accounted for as a business combination under the acquisition method of accounting.

The consideration transferred to the seller in a business combination is measured at fair value and calculated as the sum of the acquisition date fair values of the assets transferred by Federated, the liabilities incurred by Federated to the acquirer and any equity interests issued by Federated.

Direct transaction costs are expensed as incurred in a business combination.

Results of operations of an acquired business are included in Federated's results from the date of acquisition.

The consideration transferred to the seller in a business combination is measured at fair value and calculated as the sum of the acquisition date fair values of the assets transferred by Federated Hermes, the liabilities incurred by Federated Hermes from the seller and any equity interests issued by Federated Hermes.

Direct transaction costs are expensed as incurred

in a business combination.

Results of operations of an acquired business are included in Federated Hermes' results from the date of acquisition.

Rights to manage fund assets and trade names acquired in a business combination are recorded at fair value.

14 unchanged sentences

Certain portions of goodwill and intangible assets are denominated in foreign currency and, as such, include the effects of foreign currency fluctuations.

Federated tests goodwill for impairment at least annually or when indicators of potential impairment exist.

Federated Hermes tests goodwill for impairment at least annually or when indicators of potential impairment exist.

Goodwill is evaluated at the reporting unit level.

Federated has determined that it has a single reporting unit consistent with its single operating segment based on the management of Federated's operations as a single business:

Federated Hermes has determined that it has a single reporting unit consistent with its single operating segment based on the management of Federated Hermes' operations as a single business:

investment management.

Federated uses a qualitative approach to test for potential impairment of goodwill.

If, after considering various factors, management determines that it is more likely than not that goodwill is impaired, a quantitative goodwill impairment test is performed which

compares the fair value of its reporting unit, including consideration of Federated's market capitalization, with its carrying amount.

Federated Hermes uses a qualitative approach to test for potential impairment of goodwill.

If, after considering various factors, management determines that it is more likely than not that goodwill is impaired, a quantitative goodwill impairment test is performed which compares the fair value of its reporting unit, including consideration of Federated Hermes' market capitalization, with its carrying amount.

If the carrying amount of its reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit.

Federated has determined that certain acquired assets, primarily certain rights to manage fund assets and trade names, have indefinite useful lives.

Federated Hermes has determined that certain acquired assets, primarily certain rights to manage fund assets and trade names, have indefinite useful lives.

In reaching this conclusion, management considered the acquired assets' legal, regulatory and agreed-upon provisions, the highest and best use of the asset, the level of cost and effort required in agreed-upon renewals, and the effects of obsolescence, demand, competition and other economic factors that could impact the assets' fair value.

1 unchanged sentence

The fair value of the trade name is determined using the relief from royalty method, under the income approach.

Federated has aggregated multiple indefinite-lived assets into three units of accounting for purposes of indefinite-lived intangible impairment testing.

Federated Hermes has aggregated multiple indefinite-lived assets into three units of accounting for purposes of indefinite-lived intangible impairment testing.

The determination to group indefinite-lived intangible assets into three units of accounting is not a one-time evaluation.

3 unchanged sentences

Management may use a qualitative or quantitative approach which requires the weighting of positive and negative evidence collected through the consideration of various factors to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired.

In 2019, management used a quantitative approach.

In 2020, management used a quantitative approach for two units of account and a qualitative approach for the remaining unit of account.

Management considers macroeconomic and entity-specific factors, including the asset's estimated useful life, projected AUM, projected revenue growth rates, projected pre-tax profit margins, tax rates, discount rates and, in the case of a trade name valuation, a royalty rate.

If Federated's carrying amount of its accounting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to the excess of the carrying value over the fair value.

Federated amortizes finite-lived identifiable intangible assets on a straight-line basis over their estimated useful lives.

If Federated Hermes' carrying amount of its accounting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to the excess of the carrying value over the fair value.

Federated Hermes amortizes finite-lived identifiable intangible assets on a straight-line basis over their estimated useful lives.

Management periodically evaluates the remaining useful lives and carrying values of the intangible assets to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred.

Indicators of a potential impairment monitored by management include a significant decline in the level of managed assets, changes to contractual provisions underlying certain intangible assets and significant reductions in underlying operating cash flows.

Should there be an indication of a change in the useful life or impairment in value of the finite-lived intangible assets, Federated compares the carrying value of the asset to the projected undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether impairment has occurred.

If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to its fair value determined using discounted cash flows.

Federated writes-off the cost and accumulated amortization balances for all fully amortized intangible assets.

Should there be an indication of a change in the useful life or impairment in value of the finite-lived intangible assets, Federated Hermes compares the carrying value of the asset to the projected undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether impairment has occurred.

If the carrying value of the asset

exceeds the undiscounted cash flows, the asset is written down to its fair value determined using discounted cash flows.

Federated Hermes writes-off the cost and accumulated amortization balances for all fully amortized intangible assets.

(k) Property and Equipment

4 unchanged sentences

The write-off of any residual net book value is reflected as a loss in Operating Expenses – Other on the Consolidated Statements of Income.

Management reviews the remaining useful lives and carrying values of property and equipment to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred.

On an annual basis, management reviews the remaining useful lives and carrying values of property and equipment to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred.

Indicators of impairment monitored by management include a decrease in the market price of the asset, an accumulation of costs significantly in excess of the amount originally expected in the acquisition or development of the asset, historical and projected cash flows associated with the asset and an expectation that the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

Should there be an indication of a change in the useful life or an impairment in value, Federated compares the carrying value of the asset to the probability-weighted undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether an impairment has occurred.

Should there be an indication of a change in the useful life or an impairment in value, Federated Hermes compares the carrying value of the asset to the probability-weighted undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether an impairment has occurred.

If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value which is determined based on prices of similar assets if available or discounted cash flows.

1 unchanged sentence

(l) Costs of Computer Software Developed or Obtained for Internal Use

Certain internal and external costs incurred in connection with developing or obtaining software for internal use, including software licenses in a cloud computing arrangement, are capitalized in accordance with the applicable accounting guidance

relating to Intangibles - Goodwill and Other - Internal-Use Software.

These capitalized costs are included in Property and Equipment, net on the Consolidated Balance Sheets and are amortized using the straight-line method over the estimated useful life of the software, typically four years , or over the term of the software license.

These assets are subject to the impairment test used for property and equipment described above.

Prior to the adoption of the new lease guidance effective January 1, 2019, Federated classified leases as either capital or operating.

All leases for the periods presented prior to January 1, 2019 were classified as operating leases.

Rent expense under noncancelable operating leases with scheduled rent increases or rent holidays was accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement.

The amount of the excess of straight-line rent expense over scheduled payments was recorded as a deferred liability.

The liability was then reduced when scheduled payments were in excess of the straight-line rent expense.

Build-out allowances and other such lease incentives were recorded as deferred credits, and were amortized on a straight-line basis as a reduction of rent expense beginning in the period they were deemed to have been earned, which generally coincided with the effective date of the lease.

The current portion of remaining deferred lease costs and unamortized build-out allowances was included in Other Current Liabilities and the long-term portion was included in Other Long-Term Liabilities on the Consolidated Balance Sheets as of and prior to December 31, 2018.

Following the adoption of the new lease guidance effective January 1, 2019, Federated classifies leases as either operating or financing, and records a ROU asset and a lease liability on the Consolidated Balance Sheets.

Certain internal and external costs incurred in connection with implementation costs related to a software hosting arrangement that is a service contract are capitalized in accordance with the applicable accounting guidance relating to Intangibles - Goodwill and Other - Internal-Use Software.

These capitalized costs are included in Prepaid Expenses and Other Long-Term Assets on the Consolidated Balance Sheets and are amortized using the straight-line method over the term of the software license.

Federated Hermes classifies leases as either operating or financing, and records a right-of-use (ROU) asset and a lease liability on the Consolidated Balance Sheets.

The lease liability is initially measured at the present value of the unpaid lease payments remaining at the lease commencement date.

5 unchanged sentences

(1) not to separate lease components from non-lease components for all asset classes and (2) to apply the short-term lease exception, which does not require the capitalization of leases with terms of 12 months or less.

Rent expense is recorded on a straight-line basis over the lease term, beginning on the earlier of the effective date of the lease or the date Federated obtains control of the asset.

Rent expense is recorded on a straight-line basis over the lease term, beginning on the earlier of the effective date of the lease or the date Federated Hermes obtains control of the asset.

The lease term may include options to extend the lease when they are reasonably certain of being exercised.

Management judgments are used when reviewing new and/or materially-modified contracts to determine (1) whether the contract is, or contains, a lease, and (2) the IBR.

Management was unable to determine the rates implicit in Federated's leases based on the information available at the commencement date, therefore, management calculated an IBR for each lease.

Management was unable to determine the rates implicit in Federated Hermes' leases based on the information available at the commencement date, therefore, management calculated an IBR for each lease.

In order to calculate the IBR, management began with readily observable unsecured rates, and adjusted for the following assumptions:

1 unchanged sentence

(n) Equity Method Investments

The equity method of accounting is used to account for equity investments in which Federated does not control the investee and is not the primary beneficiary of a VIE, but has the ability to exercise significant influence over the financial and operating policies of the investee.

Significant influence is generally considered to exist when Federated's ownership interest is between 20% and 50%.

The equity method of accounting is used to account for equity investments in which Federated Hermes does not control the investee and is not the primary beneficiary of a VIE, but has the ability to exercise significant influence over the financial and operating policies of the investee.

Significant influence is generally considered to exist when Federated Hermes' ownership interest is between 20% and 50%.

Equity method investments are initially recorded at cost in Other Long-Term Assets on the Consolidated Balance Sheets.

Federated's proportionate share of the investee's net income or loss is recorded in Other, net - Nonoperating Income (Expenses) on the Consolidated Statements of Income .

Federated Hermes' proportionate share of the investee's net income or loss is recorded in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income.

The investments are reviewed for impairment if events or changes in circumstance indicate that the carrying amount exceeds its fair value.

If the carrying amount of an investment exceeds fair value and the decline in fair value is deemed to be other-than-temporary, the equity method investment will be adjusted to fair value and an impairment loss recorded equal to the difference.

(o) Loss Contingencies

Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings, if any, when it is probable that a loss has been incurred and the costs can be reasonably estimated.

Federated Hermes accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings, if any, when it is probable that a loss has been incurred and the costs can be reasonably estimated.

Accruals are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter.

Significant differences could exist between the actual cost required to investigate, litigate and/or settle a claim or the ultimate outcome of a lawsuit, claim or proceeding and management's estimate.

These differences could have a material impact on Federated's results of operations, financial position and/or cash flows.

Recoveries of losses are recognized on the

Consolidated Statements of Income when receipt is deemed probable, or when final approval is received by the insurance carrier.

These differences could have a material impact on Federated Hermes' results of operations, financial position and/or cash flows.

Recoveries of losses are recognized on the Consolidated Statements of Income when receipt is deemed probable, or when final approval is received by the insurance carrier.

(p) Noncontrolling Interests

To the extent Federated's interest in a consolidated entity represents less than 100% of the entity's equity, Federated recognizes noncontrolling interests in subsidiaries.

To the extent Federated Hermes' interest in a consolidated entity represents less than 100% of the entity's equity, Federated Hermes recognizes noncontrolling interests in subsidiaries.

These noncontrolling interests are deemed to represent temporary equity and are classified as Redeemable Noncontrolling Interest in Subsidiaries in the mezzanine section of the Consolidated Balance Sheets.

In the case of consolidated investment companies, the noncontrolling interests represent equity which is redeemable or convertible for cash at the option of the equity holder.

In the case of Hermes, the noncontrolling interest represents equity which is subject to the terms of a Put and Call Option Deed, redeemable at the option of either the noncontrolling party or Federated at future predetermined dates, and therefore, not entirely within Federated's control .

The subsidiary's net income or loss and related dividends are allocated to Federated and the noncontrolling interest holder based on their relative ownership percentages.

In the case of HFML, the noncontrolling interest primarily represents equity which is subject to the terms of a Put and Call Option Deed, redeemable at the option of either the noncontrolling party or Federated Hermes at future predetermined dates, and therefore, not entirely within Federated Hermes' control.

The subsidiary's net income or loss and related dividends are allocated to Federated Hermes and the noncontrolling interest holder based on their relative ownership percentages.

The noncontrolling interest carrying value is adjusted on a quarterly basis to the higher of the carrying value or current redemption value (fair value), as of the balance sheet date, through a corresponding adjustment to retained earnings.

Management may use an independent valuation expert to assist in estimating the current redemption value (fair value) using three methodologies:

(1) the discounted cash flow methodology under the income approach, (2) the guideline public company methodology under the market approach and (3) the guideline public transaction methodology under the market approach.

(1) the discounted cash flow methodology under the income approach;

(2) the guideline public company methodology under the market approach and (3) the guideline public transaction methodology under the market approach.

The estimated current redemption value is derived from equally weighting the result of each of the three methodologies.

5 unchanged sentences

(q) Treasury Stock

Federated accounts for acquisitions of treasury stock at cost and reports total treasury stock held as a deduction from Federated Hermes, Inc.

Federated Hermes accounts for acquisitions of treasury stock at cost and reports total treasury stock held as a deduction from Federated Hermes, Inc.

shareholders' equity on the Consolidated Balance Sheets.

At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a specific-identification basis.

Additional Paid-in Capital from Treasury Stock Transactions is increased as Federated reissues treasury stock for more than the cost of the shares.

If Federated issues treasury stock for less than its cost, Additional Paid-in Capital from Treasury Stock Transactions is reduced to no less than zero and any further required reductions are recorded to Retained Earnings on the Consolidated Balance Sheets .

Additional Paid-in Capital from Treasury Stock Transactions is increased as Federated Hermes reissues treasury stock for more than the cost of the shares.

If Federated Hermes issues treasury stock for less than its cost, Additional Paid-in Capital from Treasury Stock Transactions is reduced to no less than zero and any further required reductions are recorded to Retained Earnings on the Consolidated Balance Sheets.

(r) Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss), net of tax is reported on the Consolidated Balance Sheets and the Consolidated Statements of Changes in Equity and includes unrealized gains and losses on foreign currency translation adjustments.

Prior to January 1, 2018, Accumulated Other Comprehensive Income (Loss), net of tax included unrealized gains and losses on equity securities available for sale.

Following the adoption of the new financial instruments guidance effective January 1, 2018, unrealized gains and losses on these securities are recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income .

(s) Foreign Currency Translation

The balance sheets of certain foreign subsidiaries of Federated, certain consolidated foreign-denominated investment products and all other foreign-denominated cash or investment balances are translated at the current exchange rate as of the end of the reporting period and the related income or loss is translated at the average exchange rate in effect during the period.

The balance sheets of certain foreign subsidiaries of Federated Hermes, certain consolidated foreign-denominated investment products and all other foreign-denominated cash or investment balances are translated at the current exchange rate as of the end of the reporting period and the related income or loss is translated at the average exchange rate in effect during the period.

Net exchange gains and losses resulting from these translations are excluded from income and are recorded in Accumulated Other Comprehensive Income (Loss), net of tax on the Consolidated Balance Sheets.

1 unchanged sentence

(t) Share-Based Compensation

Federated issues shares for share-based awards from treasury stock.

Federated recognizes compensation costs based on grant-date fair value for all share-based awards.

For restricted stock awards, the grant-date fair value of the award is calculated as the difference between the closing fair value of Federated's Class B common stock on the date of grant and the purchase price paid by the employee, if any.

Federated's awards are generally subject to graded vesting schedules.

Federated Hermes issues shares for share-based awards from treasury stock.

Federated Hermes recognizes compensation costs based on grant-date fair value for all share-based awards.

For restricted stock awards, the grant-date fair value of the award is calculated as the difference between the closing fair value of Federated Hermes' Class B common stock on the date of grant and the purchase price paid by the employee, if any.

Federated Hermes' awards are generally subject to graded vesting schedules.

Compensation and Related expense is generally recognized on a straight-line basis over the requisite service period of the award and is adjusted for actual forfeitures as they occur.

For awards with provisions that allow for accelerated vesting upon retirement, Federated recognizes

expense over the shorter of the vesting period or the period between grant date and the date on which the employee meets the minimum required age for retirement.

For awards with provisions that allow for accelerated vesting upon retirement, Federated Hermes recognizes expense over the shorter of the vesting period or the period between grant date and the date on which the employee meets the minimum required age for retirement.

Compensation and Related expense also includes dividends paid on forfeited awards.

Excess tax benefits and deficiencies (including tax benefits from dividends paid on unvested restricted stock awards) are recognized in the Income Tax Provision in the Consolidated Statements of Income.

Effective July 2, 2018, Federated established a non-public subsidiary share-based compensation plan for certain employees of that subsidiary .

The subsidiary grants equity awards in the form of restricted nonpublic subsidiary stock to certain members of the subsidiary's management and other key employees.

Effective July 2, 2018, Federated Hermes established a non-public subsidiary share-based compensation plan for certain employees of one of its subsidiaries.

The subsidiary grants equity awards in the form of restricte d nonpublic subsidiary stock to certain members of the subsidiary's management and other key employees.

The grant date fair value of the awards is recognized as Compensation and Related expense in the Consolidated Statements of Income on a straight-line basis over the requisite service period of the awards and is adjusted for actual forfeitures as they occur, with a corresponding adjustment to Redeemable Noncontrolling Interest in Subsidiaries in the Consolidated Balance Sheets.

As a result of the grant of the equity awards in a nonpublic consolidated subsidiary, the shares are not included in the attribution of the subsidiary's income and losses to noncontrolling interest holders until the awards vest.

Therefore, Federated initially recognized the fair value of 33 percent of Hermes as Redeemable Noncontrolling Interest in Subsidiaries on the Consolidated Balance Sheets .

Therefore, Federated Hermes initially recognized the fair value of 33 percent of HFML as Redeemable Noncontrolling Interest in Subsidiaries on the Consolidated Balance Sheets.

The attribution of the subsidiary's income and loss is recognized in Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries on the Consolidated Statements of Income and is expected to fluctuate as the these awards vest and put/call options are exercised.

(u) Advertising Costs

Federated generally expenses the cost of all advertising and promotional activities as incurred.

Federated Hermes generally expenses the cost of all advertising and promotional activities as incurred.

Certain printed matter, however, such as sales brochures, are accounted for as prepaid supplies and are included in Other Current Assets on the Consolidated Balance Sheets until they are distributed or are no longer expected to be used, at which time their costs are expensed.

(v) Income Taxes

Federated accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Federated Hermes accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Federated recognizes a valuation allowance if, based on the weight of available evidence regarding future taxable income, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Federated has elected to account for taxes related to temporary basis differences expected to reverse as Global Intangible Low-Taxed Income ( GILTI ) as tax expense in the period incurred, rather than factoring it into the measurement of deferred taxes.

Federated Hermes recognizes a valuation allowance if, based on the weight of available evidence regarding future taxable income, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Following its review, management has determined that the investment in certain non-U.S.

subsidiaries will be reinvested for an indefinite period of time.

Federated Hermes has the ability and the intent to do this.

In addition, under the various directives and

protocols in the jurisdictions where these entities are located, management believes that any dividend from these non-U.S.

subsidiaries would not be subject to a withholding tax.

Additionally, Federated Hermes has elected to account for taxes related to temporary basis differences expected to reverse as Global Intangible Low-Taxed Income (GILTI) as tax expense in the period incurred, rather than factoring it into the measurement of deferred taxes.

As of December 31, 2020, the unrecognized deferred tax liability associated with these subsidiaries is $ 8.2 million.

(w) Earnings Per Share

Basic and diluted earnings per share are calculated under the two-class method.

Pursuant to the two-class method, unvested restricted shares of Federated's Class B common stock with nonforfeitable rights to dividends are considered participating securities and are required to be considered in the computation of earnings per share.

Pursuant to the two-class method, unvested restricted shares of Federated Hermes' Class B common stock with nonforfeitable rights to dividends are considered participating securities and are required to be considered in the computation of earnings per share.

These unvested restricted shares, as well as the related dividends paid and their proportionate share of undistributed earnings, if any, are excluded from the computation of basic earnings per share.

1 unchanged sentence

(x) Business Segments

Business or operating segments are defined as a component of an enterprise that engages in activities from which it may earn revenue and incur expenses for which discrete financial information is available and is regularly evaluated by Federated's Chief Executive Officer ( CEO ), who is the chief operating decision maker, in deciding how to allocate resources and assess performance.

Federated operates in one operating segment, the investment management business , which is primarily conducted within the U.S.

Federated's CEO utilizes a consolidated approach to assess performance and allocate resources.

Business or operating segments are defined as a component of an enterprise that engages in activities from which it may earn revenue and incur expenses for which discrete financial information is available and is regularly evaluated by Federated Hermes' Chief Executive Officer (CEO), who is the chief operating decision maker, in deciding how to allocate resources and assess performance.

Federated Hermes operates in one operating segment, the investment management business, which is primarily conducted within the U.S.

Federated Hermes' CEO utilizes a consolidated approach to assess performance and allocate resources.

(2) Recent Accounting Pronouncements

Recently Adopted Accounting Guidance

On February 25, 2016, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) 2016-02, Leases ( Topic 842 ).

Its core principle is that a lessee should recognize the assets and liabilities that arise from leases on the balance sheet, while retaining a distinction between financing and operating leases.

In the third quarter of 2018, the FASB issued ASU 2018-10, which provides improvements to narrow aspects of the guidance and ASU 2018-11, which provides an optional alternative transition method to initially apply the new leases standard at the adoption date (collectively, with ASU 2016-02, Topic 842).

Effective January 1, 2019, Federated adopted Topic 842 using the alternative transition method, which did not require the restatement of prior years.

In connection with the adoption of Topic 842, management has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

Management did not elect the hindsight practical expedient to determine the lease term.

Upon adoption, Federated recorded $ 133.7 million as a lease liability and, after the reclassification of certain lease-related liabilities into the ROU asset, $ 112.2 million as a ROU asset on the Consolidated Balance Sheets , which consists primarily of Federated's operating real estate leases.

The adoption did not have a material impact on Federated's results of operations or cash flows.

(b) Goodwill Impairment

During the second quarter of 2019, Federated adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment, effective January 1, 2019.

Under this ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.

However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Additionally, the ASU retains the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

The ASU required the prospective adoption method.

The adoption did not have an impact to Federated's Consolidated Financial Statements.

Recently Issued Accounting Guidance Not Yet Adopted

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

(a) Credit Losses

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

1 unchanged sentence

CECL requires an entity to estimate lifetime expected credit losses based on relevant information about historical events, current conditions and reasonable and supportable forecasts.

The update is effective for Federated on January 1, 2020.

The update requires the modified retrospective adoption method.

The adoption will not have a material impact to Federated's Consolidated Financial Statements.

(d) Fair Value Measurement

Federated Hermes adopted Topic 326 on January 1, 2020 using the modified retrospective adoption method.

The adoption did not have a material impact on Federated Hermes' Consolidated Financial Statements.

(b) Fair Value Measurement

On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

1 unchanged sentence

The amendments in this update remove, modify or add disclosure requirements for fair value measurements to improve the effectiveness of disclosures.

The update is effective for Federated on January 1, 2020, and requires either the prospective or retrospective adoption method, depending on the amendment.

The adoption will not have a material impact to Federated's Consolidated Financial Statements.

(e) Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

Federated Hermes adopted Topic 820 on January 1, 2020 using either the prospective or retrospective adoption method, depending on the amendment.

The adoption did not have a material impact on Federated Hermes' Consolidated Financial Statements.

On August 29, 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

1 unchanged sentence

The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

The update is effective for Federated on January 1, 2020, and allows for either the prospective or retrospective adoption method.

Management plans to elect the prospective adoption approach, which does not require the restatement of prior years.

The adoption will not have a material impact to Federated's Consolidated Financial Statements.

Federated Hermes adopted this guidance on January 1, 2020 using the prospective adoption method, which did not require the restatement of prior years.

The adoption did not have a material impact on Federated Hermes' Consolidated Financial Statements.

(3) Business Combinations

On July 2, 2018, Federated completed, effective as of July 1, 2018 , the Hermes Acquisition .

The addition of London-based Hermes provides the opportunity to further accelerate Federated's growth in markets outside of the U.S.

BT Pension Scheme ( BTPS ) retained a 29.5 percent interest in Hermes and contributed the remaining 10.5 percent interest into an Employee Benefit Trust for the benefit of certain members of Hermes ' management and other key employees under a long-term incentive plan.

Federated paid $ 343.5 million (which consists of $ 344.3 million paid in 2018 offset by $ 0.8 million returned in the second quarter of 2019).

Federated funded the transaction through a combination of cash and an $ 18.0 million drawdown from its existing revolving credit facility (see Note (12) for additional information).

Federated and BTPS entered into a Put and Call Option Deed pursuant to which Federated has a call option to acquire BTPS ' remaining 29.5 percent interest in Hermes at fair value and BTPS has a put option to sell its remaining interest in Hermes to Federated at fair value, after the third, fourth or fifth anniversaries, and subject to certain contingencies, the sixth anniversary, of the date of the purchase agreement.

Federated does not consider BTPS ' 29.5 percent noncontrolling interest in Hermes to be permanent equity, due to it being redeemable at the option of either BTPS or Federated and, therefore, not entirely within Federated's control .

Federated expensed $ 13.3 million in transaction costs directly attributable to the Hermes Acquisition in 2018, primarily recorded in Professional Service Fees on the Consolidated Statements of Income .

The transaction costs exclude a $ 29.0 million derivative loss (see Note (9) for additional information) and a $ 1.7 million foreign exchange gain recognized in 2018 as a result of holding British pound sterling immediately prior to the Hermes Acquisition .

Federated performed a valuation of the fair market value of the Hermes Acquisition .

Provisional amounts must be finalized within a one-year measurement period.

During the second quarter 2019, provisional amounts recognized for certain Intangible Assets and Other Long-Term Assets were adjusted to reflect facts and circumstances that existed as of the acquisition date.

The adjustments were primarily the result of changes to the forecast revenue allocated to certain acquired assets based on review of actual fund and separate account revenue rates.

Intangible Assets and Other Long-Term Assets increased $ 43.8 million and $ 5.0 million , respectively.

Primarily as a result of these adjustments, the Long-Term Deferred Tax Liability increased by $ 8.2 million and Goodwill decreased by $ 41.8 million .

There was no material change to the Consolidated Statements of Income for the year ended December 31, 2019 as a result of these adjustments.

The following table summarizes the final purchase price allocation determined as of the purchase date:

HCL Acquisition

On March 5, 2020, Federated Hermes acquired, effective as of March 1, 2020, 100 percent ownership of HGPE Capital Limited for £ 15.9 million ($ 20.4 million).

The principal activity of HGPE Capital Limited is that of a holding company for an infrastructure and private equity investment management business.

As a result, Federated Hermes gained control of HGPE.

The addition of London-based HCL provides the opportunity to further accelerate and broaden Federated Hermes' global growth.

The HCL Acquisition included upfront cash payments that totaled £ 11.2 million ($ 14.3 million).

The transaction also includes contingent purchase price payments payable through December 2024 that were deposited into escrow.

The maximum contingent purchase price payments total £ 3.5 million ($ 4.5 million as of March 1, 2020), which represents the payment of certain future carried interest, recorded in Other Long-Term Liabilities.

Prior to March 1, 2020, Federated Hermes accounted for its partial ownership interest in HGPE as an equity-method investment recorded in Other Long-Term Assets on the Consolidated Balance Sheets.

Management used an independent valuation expert to assist in estimating the fair value of the equity interest in HGPE using primarily the discounted cash flow methodology under the income approach.

The acquisition-date fair value of the previous equity interest was $ 34.5 million.

Federated Hermes recognized a gain of $ 7.5 million as a result of remeasuring the prior equity interest in HGPE held before the business combination and the consolidation of HGPE.

This gain is included in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income.

Federated Hermes performed a valuation of the fair market value of acquired assets and assumed liabilities of the HCL Acquisition.

The accounting for this acquisition was substantially complete as of December 31, 2020, with the exception of certain items related to revenue recognition and consolidation.

Preliminary results of the valuation are reflected in the Consolidated Financial Statements as of December 31, 2020.

The final acquisition accounting may reflect adjustments to this preliminary valuation, however such adjustments are not expected to be material.

The accounting for this acquisition will be finalized as new information is obtained about facts and circumstances that existed on March 1, 2020.

The following table summarizes the preliminary purchase price allocation determined as of the purchase date:

(in millions)

3 unchanged sentences

Other Long-Term Assets 9.8

Long-Term Deferred Tax Liability, net

Liabilities Acquired ( 26.9 )

1 unchanged sentence

Total Purchase Price Consideration $ 20.4

Includes $ 31.9 million of receivables, all of which has been collected.

The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled workforce of Hermes.

1 Includes $ 4.6 million of accounts receivable.

2 The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled workforce of HGPE.

In this instance, goodwill is not deductible for tax purposes.

Includes $ 71.6 million for customer relationships with a weighted-average useful life of 8.5 years , $ 198.5 million for indefinite-lived rights to manage fund assets and $ 49.9 million for an indefinite-lived trade name, all of which are recorded in Intangible Assets, net on the Consolidated Balance Sheets .

Includes $ 11.2 million of Property and Equipment, net .

Includes $ 130.3 million related to Accrued Compensation and Benefits .

The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business enterprise value.

The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018 effective date of the Hermes Acquisition.

For the year ended December 31, 2019 , Hermes earned revenue of $ 198.3 million and net income of $ 10.4 million (which excludes acquisition-related intangible amortization and amounts attributable to the noncontrolling interests).

For the six months ended December 31, 2018 , Hermes earned revenue of $ 100.8 million and net

income of $ 9.6 million (which excludes acquisition-related intangible amortization and amounts attributable to the noncontrolling interests).

The following table summarizes unaudited pro forma financial information assuming the Hermes Acquisition occurred at the beginning of the year presented.

This pro forma financial information is for informational purposes only and is not indicative of actual results that would have occurred had the Hermes Acquisition been completed on the assumed date and it is not indicative of future results.

In addition, the following pro forma financial information does not reflect the realization of any cost savings (nor does management expect to realize any cost savings) or other synergies from the Hermes Acquisition .

The pro forma results include adjustments for the effect of acquisition-related expenses (including compensation and related expense, income tax expense and amortization related to newly acquired intangibles) as well as adjustments to conform to Federated's U.S.

GAAP accounting policies.

(in millions)

Excludes a $ 29.0 million loss on foreign currency forward transactions entered into in order to hedge against foreign exchange rate fluctuations associated with the payment for the Hermes Acquisition .

3 Includes $ 20.3 million for rights to manage fund assets for private equity funds with a weighted-average useful life of 9.0 years and $ 6.9 million for rights to manage fund assets for infrastructure funds with a weighted-average useful life of 11.0 years, all of which are recorded in Intangible Assets, net on the Consolidated Balance Sheets.

4 The fair value of the noncontrolling interest was determined utilizing primarily the discounted cash flow methodology under the income approach.

The financial results of HCL have been included in Federated Hermes' Consolidated Financial Statements from the March 1, 2020 effective date of the HCL Acquisition.

For the year ended December 31, 2020, HCL earned revenue of $ 33.6 million and net income of $ 5.3 million (which includes acquisition-related intangible amortization and does not take into consideration the adjustments attributable to the noncontrolling interests).

MEPC Acquisition

Effective January 1, 2020, Federated Hermes acquired MEPC Limited (MEPC) for £ 9.9 million ($ 13.1 million).

MEPC provides real estate development services in the UK.

The MEPC acquisition included upfront cash payments of £ 4.4 million ($ 5.9 million) and deferred consideration and contingent purchase price payments totaling £ 5.5 million ($ 7.2 million), which

were recorded in Other Current Liabilities.

As of the date of the MEPC acquisition, Federated Hermes primarily recorded intangible assets of $ 7.3 million and goodwill of $ 1.7 million.

(4) Revenue from Contracts with Customers

The following table presents Federated's revenue disaggregated by asset class:

The following table presents Federated Hermes' revenue disaggregated by asset class:

(in thousands) 2020 2019 2018

Money Market $ 570,815 $ 529,340 $ 414,746

Equity 551,028 533,749 470,436

Fixed-Income 193,649 179,102 180,152

132,776 84,703 70,343

Total Revenue $ 1,448,268 $ 1,326,894 $ 1,135,677

Includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), Multi-Asset and, beginning in the third quarter of 2018, stewardship services revenue.

The following table presents Federated's revenue disaggregated by performance obligation:

1 Primarily includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), multi-asset and, beginning in the third quarter of 2018, stewardship services revenue.

The following table presents Federated Hermes' revenue disaggregated by performance obligation:

(in thousands) 2020 2019 2018

Asset Management 1

$ 1,011,467 $ 907,605 $ 773,418

Administrative Services 318,152 245,887 199,269

Distribution 2

92,922 151,106 146,595

25,727 22,296 16,395

Total Revenue $ 1,448,268 $ 1,326,894 $ 1,135,677

3 unchanged sentences

3 Includes shareholder service fees and, beginning in the third quarter of 2018, stewardship services revenue.

The following table presents Federated's revenue disaggregated by product type:

The following table presents Federated Hermes' revenue disaggregated by product type:

(in thousands) 2020 2019 2018

Federated Funds

Federated Hermes Funds $ 1,191,851 $ 1,093,157 $ 942,037

Separate Accounts 241,631 221,756 187,585

14,786 11,981 6,055

Total Revenue $ 1,448,268 $ 1,326,894 $ 1,135,677

Includes stewardship services revenue beginning in the third quarter of 2018.

Federated is not required to disclose certain estimates of revenue expected to be recorded in future periods as a result of applying the following exemptions:

1 Primarily includes stewardship services revenue beginning in the third quarter of 2018.

For nearly all revenue, Federated Hermes is not required to disclose certain estimates of revenue expected to be recorded in future periods as a result of applying the following exemptions:

(1) contract terms are short-term in nature (i.e., expected duration of one year or less due to termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.

Federated expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services performance obligations at December 31, 2019 .

Generally, contracts are billed in arrears on a quarterly basis and have a three year duration, after which the customer can terminate the agreement with a three to twelve month notice.

Based on existing contracts and the exchange rates as of December 31, 2019 , Federated may recognize future fixed revenue from stewardship services as presented in the following table:

Federated Hermes expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services and real estate development performance obligations at December 31, 2020.

Generally, contracts are billed in arrears on a quarterly basis and have a three year duration, after which the customer can terminate the agreement with notice, generally from three to twelve months .

Based on existing contracts and the exchange rates as of December 31, 2020, Federated Hermes may recognize future fixed revenue from these services as presented in the following table:

(in thousands)

2 unchanged sentences

(5) Concentration Risk

The following information summarizes Federated's revenue concentrations.

See additional information on the risks related to such concentrations in Item 1A - Risk Factors .

The following information summarizes Federated Hermes' revenue concentrations.

See additional information on the risks related to such concentrations in Item 1A - Risk Factors (unaudited).

(a) Revenue Concentration by Asset Class

The following table presents Federated's revenue concentration by asset class over the last three years:

Equity Assets

The following table presents Federated Hermes' revenue concentration by asset class over the last three years:

2020 2019 2018

Money Market Assets 40 % 40 % 37 %

Equity Assets 38 % 40 % 41 %

Fixed-Income Assets 13 % 14 % 16 %

The change in the relative proportion of Federated's revenue attributable to money market assets in 2019 , as compared to the same period in 2018 , was primarily the result of higher average money market assets in 2019.

The change in the relative proportion of Federated's revenue attributable to equity assets in 2018 , as compared to the same period in 2017 , was primarily the result of higher average equity assets mostly as a result of the Hermes Acquisition .

Because the Hermes Acquisition was primarily comprised of equity assets and alternative/private markets assets, the relative proportion of Federated's revenue attributable to money market assets decreased in 2018 as compared to 2017 .

Furthermore, Federated's revenue attributable to money market assets decreased as a result of a change in the mix of average money market assets.

The change in the relative proportion of Federated Hermes' revenue attributable to equity and fixed-income assets in 2020, as compared to the same period in 2019, was primarily the result of a lower proportion of average equity and fixed-income assets to total average assets in 2020 and an increase in revenue from alternative/private market assets.

The change in the relative proportion of Federated Hermes' revenue attributable to money market assets in 2019, as compared to the same period in 2018, was primarily the result of higher average money market assets in 2019.

Low Short-Term Interest Rates

In March 2020, in response to disrupted economic activity as a result of Covid-19, FOMC decreased the federal funds target rate range to 0% - 0.25%.

The federal funds target rate drives short-term interest rates.

As a result of the near-zero interest-rate environment, the gross yield earned by certain money market funds is not sufficient to cover all of the fund's operating expenses.

Beginning in the first quarter 2020, Federated Hermes began to waive fees in order for certain money market funds to maintain positive or zero net yields.

These Voluntary Yield-related Fee Waivers have been partially offset by related reductions in distribution expense as a result of Federated Hermes' mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers.

For the year ended December 31, 2020, Voluntary Yield-related Fee Waivers totaled $ 113.0 million.

These fee waivers were partially offset by related reductions in distribution expenses of $ 98.4 million, such that the net negative pre-tax impact to Federated Hermes was $ 14.6 million.

See Management's Discussion and Analysis under the caption Business Developments - Low Short-Term Interest Rates for additional information on management's expectations regarding Voluntary Yield-related Fee Waivers (unaudited).

(b) Revenue Concentration by Investment Strategy/Fund

The following table presents Federated's revenue concentration by investment strategy/fund over the last three years:

Federated Strategic Value Dividend strategy 1

Federated Government Obligations Fund

Federated Kaufmann Mid-Cap Growth strategy 2

Strategy includes Federated Funds and Separate Accounts .

Strategy includes Federated Funds .

A significant and prolonged decline in the AUM in these strategies/fund could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with the Federated Funds managed in accordance with these strategies.

The following table presents Federated Hermes' revenue concentration by investment strategy/fund over the last three years:

2020 2019 2018

Federated Hermes Government Obligations Fund

13 % 10 % 9 %

Federated Hermes Kaufmann Mid-Cap Growth strategy 1

Federated Hermes Strategic Value Dividend strategy 2

8 % 11 % 15 %

1 Strategy includes Federated Hermes Funds.

2 Strategy includes Federated Hermes Funds and Separate Accounts.

A significant and prolonged decline in the AUM in these strategies/fund could have a material adverse effect on Federated Hermes' future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with the Federated Hermes Funds managed in accordance with these funds or strategies.

Approximately 11 % , 13 % and 16 % of Federated's total revenue for 2019 , 2018 and 2017 , respectively, was derived from services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary.

Significant negative changes in Federated's relationship with this intermediary could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with this intermediary.

Approximately 7 %, 11 % and 13 % of Federated Hermes' total revenue for 2020, 2019 and 2018, respectively, was derived from services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary.

Significant negative changes in Federated Hermes' relationship with this intermediary could have a material adverse effect on Federated Hermes' future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with this intermediary.

(6) Consolidation

The Consolidated Financial Statements include the accounts of Federated, certain Federated Funds and other entities in which Federated holds a controlling financial interest.

Federated is involved with various entities in the normal course of business that may be deemed to be VRE s or VIEs.

From time to time, Federated invests in Federated Funds for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history.

Federated's investment in, and/or receivables from, these Federated Funds represents its maximum exposure to loss.

The assets of each consolidated Federated Fund are restricted for use by the respective Federated Fund .

Generally, neither creditors of, nor equity investors in, the Federated Funds have any recourse to Federated's general credit.

Given that the entities follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated.

Receivables from all Federated Funds for advisory and other services totaled $ 37.6 million and $ 35.0 million at December 31, 2019 and 2018 , respectively.

In the ordinary course of business, Federated may implement Fee Waivers for various Federated Funds for competitive, regulatory or contractual reasons.

The Consolidated Financial Statements include the accounts of Federated Hermes, certain Federated Hermes Funds and other entities in which Federated Hermes holds a controlling financial interest.

Federated Hermes is involved with various entities in the normal course of business that may be deemed to be VREs or VIEs.

From time to time, Federated Hermes invests in Federated Hermes Funds for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history.

Federated Hermes' investment in, and/or receivables from, these Federated Hermes Funds represents its maximum exposure to loss.

The assets of each consolidated Federated Hermes Fund are restricted for use by the respective Federated Hermes Fund.

Generally, neither creditors of, nor equity investors in, the Federated Hermes Funds have any recourse to Federated Hermes' general credit.

Given that the entities follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated Hermes.

Receivables from all Federated Hermes Funds for advisory and other services totaled $ 41.1 million and $ 37.6 million at December 31, 2020 and 2019, respectively.

In the ordinary course of business, Federated Hermes may implement Fee Waivers for various Federated Hermes Funds for competitive, regulatory or contractual reasons.

For the years ended December 31, 2020, 2019 and 2018, Fee Waivers totaled $ 675.3 million, $ 427.3 million and $ 358.2 million, respectively, of which $ 537.8 million, $ 311.6 million and $ 242.9 million, respectively, related to money market funds which meet the scope exception of the consolidation guidance.

Like other sponsors of investment companies, Federated in the ordinary course of business may make capital contributions to certain money market Federated Funds in connection with the reorganization of such funds into certain affiliated money market Federated Funds or in connection with the liquidation of a money market Federated Fund .

Like other sponsors of investment companies, Federated Hermes in the ordinary course of business may make capital contributions to certain money market Federated Hermes Funds in connection with the reorganization of such funds into certain affiliated money market Federated Hermes Funds or in connection with the liquidation of a money market Federated Hermes Fund.

In these instances, such capital contributions typically are intended to either offset realized losses or other permanent impairments to a fund's NAV, increase the market-based NAV per share of the fund's portfolio that is being reorganized to equal the market-based NAV per share of the acquiring fund or to bear a portion of expenses relating to a fund liquidation.

Under current money fund regulations and SEC guidance, Federated is required to report these types of capital contributions to U.S.

Under current money fund regulations and SEC guidance, Federated Hermes is required to report these types of capital contributions to U.S.

money market mutual funds to the SEC as financial support to the investment company that is being reorganized or liquidated.

There were no contributions for the years ended December 31, 2019 and 2018 , and no material contributions for the year ended December 31, 2017 .

In accordance with Federated's consolidation accounting policy, Federated first determines whether the entity being evaluated is a VRE or a VIE.

Once this determination is made, Federated proceeds with its evaluation of whether to consolidate the entity.

There were no contributions for the years ended December 31, 2020, 2019 and 2018.

In accordance with Federated Hermes' consolidation accounting policy, Federated Hermes first determines whether the entity being evaluated is a VRE or a VIE.

Once this determination is made, Federated Hermes proceeds with its evaluation of whether to consolidate the entity.

The disclosures below represent the results of such evaluations as of December 31, 2020 and 2019.

(a) Consolidated Voting Rights Entities

Most of the Federated Funds meet the definition of a VRE.

Federated consolidates VREs when it is deemed to have control.

Consolidated VREs are reported on Federated's Consolidated Balance Sheets primarily in Investments—Consolidated Investment Companies and Redeemable Noncontrolling Interest in Subsidiaries .

Most of the Federated Hermes Funds meet the definition of a VRE.

Federated Hermes consolidates VREs when it is deemed to have control.

Consolidated VREs are reported on Federated Hermes' Consolidated Balance Sheets primarily in Investments—Consolidated Investment Companies and Redeemable Noncontrolling Interest in Subsidiaries.

(b) Consolidated Variable Interest Entities

As of December 31, 2019 and 2018 , Federated was deemed to be the primary beneficiary of, and therefore consolidated, certain Federated Funds as a result of its controlling financial interest.

The following table presents the balances related to the consolidated Federated Fund VIEs that were included on the Consolidated Balance Sheets as well as Federated's net interest in the consolidated Federated Fund VIEs at December 31:

As of December 31, 2020 and 2019, Federated Hermes was deemed to be the primary beneficiary of, and therefore consolidated, certain Federated Hermes Funds as a result of its controlling financial interest.

The following table presents the balances related to the consolidated Federated Hermes Fund VIEs that were included on the Consolidated Balance Sheets as well as Federated Hermes' net interest in the consolidated Federated Hermes Fund VIEs at December 31:

(in millions) 2020 2019

Investments—Consolidated Investment Companies $ 12.1 $ 13.3

Other Assets 0.3 0.3

Liabilities 0.1 0.1

Redeemable Noncontrolling Interest in Subsidiaries 0.0 9.3

Federated's Net Interest in Federated Fund VIEs

Federated's net interest in the consolidated Federated Fund VIEs represents the value of Federated's economic ownership interest in these Federated Funds .

During the year ended December 31, 2019 , Federated liquidated its investment in one consolidated VIE in which it was the only remaining shareholder.

Accordingly, Federated redeemed $ 6.2 million from Investments—Consolidated Investment Companies on the Consolidated Balance Sheets as of the date of the liquidation.

There was no impact to the Consolidated Statements of Income as a result of this liquidation.

Federated Hermes' Net Interest in Federated Hermes Fund VIEs $ 12.3 $ 4.2

Federated Hermes' net interest in the consolidated Federated Hermes Fund VIEs represents the value of Federated Hermes' economic ownership interest in these Federated Hermes Funds.

During the year ended December 31, 2020, Federated Hermes liquidated its investment in one consolidated VIE in which it was the only remaining shareholder.

Accordingly, Federated Hermes redeemed $ 6.0 million from Investments—Consolidated Investment Companies on the Consolidated Balance Sheets as of the date of the liquidation.

There was no impact to the

Consolidated Statements of Income as a result of this liquidation.

During the year ended December 31, 2020, Federated Hermes consolidated two additional Federated Hermes Fund VIEs as a result of being the only investor in these funds.

There was no impact to the Consolidated Statements of Income as a result of these consolidations.

There were no other consolidations or deconsolidations of VIEs during the year ended December 31, 2020.

Federated's involvement with certain Federated Funds that are deemed to be VIEs includes serving as the investment manager, or at times, holding a minority interest or both.

Federated's variable interest is not deemed to absorb losses or receive benefits that could potentially be significant to the VIE.

Therefore, Federated is not the primary beneficiary of these VIEs and has not consolidated these entities.

At December 31, 2019 , Federated's variable interest in non-consolidated VIEs was $ 111.9 million (primarily recorded in Cash and Cash Equivalents on the Consolidated Balance Sheets) and was entirely related to Federated Funds.

AUM for these non-consolidated Federated Funds totaled $ 9.6 billion at December 31, 2019.

At December 31, 2018 , Federated did not have a variable interest in a non-consolidated VIE.

Of the Receivables—Affiliates at December 31, 2019 and December 31, 2018 , $ 15.4 million and $ 16.2 million , respectively, related to non-consolidated VIEs and represented Federated's maximum risk of loss from non-consolidated VIE receivables.

Federated Hermes' involvement with certain Federated Hermes Funds that are deemed to be VIEs includes serving as the investment manager, or at times, holding a minority interest or both.

Federated Hermes' variable interest is not deemed to absorb losses or receive benefits that could potentially be significant to the VIE.

Therefore, Federated Hermes is not the primary beneficiary of these VIEs and has not consolidated these entities.

At December 31, 2020 and 2019, Federated Hermes' variable interest in non-consolidated VIEs was $ 106.0 million and $ 111.9 million, respectively, (primarily recorded in Cash and Cash Equivalents on the Consolidated Balance Sheets) and was entirely related to Federated Hermes Funds.

AUM for these non-consolidated Federated Hermes Funds totaled $ 9.1 billion and $ 9.6 billion at December 31, 2020 and 2019, respectively.

Of the Receivables—Affiliates at December 31, 2020 and 2019, $ 0.4 million and $ 1.1 million, respectively, related to non-consolidated VIEs and represented Federated Hermes' maximum risk of loss from non-consolidated VIE receivables.

(7) Investments

At December 31, 2019 and 2018 , Federated held investments in fluctuating-value Federated Funds of $ 20.1 million and $ 4.1 million , respectively, primarily in mutual funds which invest in equity securities.

Federated held investments in Separate Accounts of $ 6.8 million at both December 31, 2019 and 2018 , that were included in Investments—Affiliates and Other on the Consolidated Balance Sheets .

Federated's investments held in Separate Accounts as of December 31, 2019 and 2018 , were primarily composed of stocks of large U.S.

and international companies ( $ 3.0 million and $ 2.7 million , respectively) and domestic debt securities ( $ 2.6 million and $ 3.5 million , respectively).

Federated consolidates certain Federated Funds into its Consolidated Financial Statements as a result of Federated's controlling financial interest in these Federated Funds (see Note (6) ).

All investments held by these consolidated Federated Funds were included in Investments—Consolidated Investment Companies on Federated's Consolidated Balance Sheets .

Federated's investments held by consolidated Federated Funds as of December 31, 2019 and 2018 , were primarily composed of domestic and foreign debt securities ( $ 38.9 million and $ 20.9 million , respectively) and stocks of large U.S.

At December 31, 2020 and 2019, Federated Hermes held investments in fluctuating-value Federated Hermes Funds of $ 36.0 million and $ 20.1 million, respectively, primarily in mutual funds which invest in equity securities and held investments in Separate Accounts of $ 9.6 million and $ 6.8 million at December 31, 2020 and 2019, respectively, that were included in Investments—Affiliates and Other on the Consolidated Balance Sheets.

Federated Hermes' investments held in Separate Accounts as of December 31, 2020 and 2019, were primarily composed of domestic debt securities ($ 5.2 million and $ 2.6 million, respectively) and stocks of large U.S.

and international companies ($ 3.1 million and $ 3.0 million, respectively).

The following table presents gains and losses recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income in connection with Federated's investments:

Federated Hermes consolidates certain Federated Hermes Funds into its Consolidated Financial Statements as a result of Federated Hermes' controlling financial interest in these Federated Hermes Funds (see Note (6)).

All investments held by these consolidated Federated Hermes Funds were included in Investments—Consolidated Investment Companies on Federated Hermes' Consolidated Balance Sheets.

Federated Hermes' investments held by consolidated Federated Hermes Funds as of December 31, 2020 and 2019, were primarily composed of domestic and foreign debt securities ($ 48.6 million and $ 38.9 million, respectively), stocks of large U.S.

and international companies ($ 35.2 million and $ 22.6 million, respectively) and stocks of small and mid-sized U.S.

and international companies ($ 6.4 million and $ 2.8 million, respectively).

The following table presents gains and losses recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income in connection with Federated Hermes' investments:

(in thousands) 2020 2019 2018

2 unchanged sentences

Net Realized Gains (Losses) 1

( 1,352 ) ( 1,243 ) ( 374 )

Net Gains (Losses) on Investments—Consolidated Investment Companies 12,510 3,516 ( 3,516 )

2 unchanged sentences

Net Realized Gains (Losses) 1

16 ( 706 ) 339

Net Gains (Losses) on Investments—Affiliates and Other 5,557 1,450 ( 841 )

10 unchanged sentences

and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-

the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.

Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active markets.

2 unchanged sentences

(a) Fair Value Measurements on a Recurring Basis

The following table presents fair value measurements for classes of Federated's financial assets and liabilities measured at fair value on a recurring basis at December 31:

(in thousands)

The following table presents fair value measurements for classes of Federated Hermes' financial assets and liabilities measured at fair value on a recurring basis at December 31:

(in thousands) Level 1 Level 2 Level 3 Total

Financial Assets

1 unchanged sentence

Investments—Consolidated Investment Companies 13,622 77,737 0 91,359

Equity Securities

Debt Securities

Investments—Affiliates and Other 40,010 5,247 336 45,593

Equity Securities

Debt Securities

9,188 5,143 0 14,331

Total Financial Assets $ 364,639 $ 88,127 $ 336 $ 453,102

Total Financial Liabilities 2

$ 0 $ 89 $ 12,896 $ 12,985

Financial Assets

1 unchanged sentence

Investments—Consolidated Investment Companies 7,245 57,281 0 64,526

Equity Securities

Debt Securities

Investments—Affiliates and Other 23,667 2,945 323 26,935

Equity Securities

Debt Securities

2,901 3,177 0 6,078

Total Financial Assets $ 282,987 $ 63,403 $ 323 $ 346,713

Total Financial Liabilities 2

Amounts primarily consist of a derivative asset and security deposits.

Amounts primarily consist of acquisition-related future contingent consideration liabilities and derivative liabilities.

$ 6 $ 0 $ 2,081 $ 2,087

1 Amounts primarily consist of restricted cash, security deposits and a derivative asset as of December 31, 2020 and a derivative asset and security deposits for December 31, 2019.

2 Amounts primarily consist of acquisition-related future contingent consideration liabilities.

The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis.

Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at December 31, 2019 or 2018 .

Federated Hermes did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at December 31, 2020 or 2019.

Cash and Cash Equivalents

2 unchanged sentences

Cash investments in publicly available money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.

Investments—Consolidated Investment Companies—Equity Securities

Investments—Consolidated Investment Companies—Equity Securities represent equity securities held by consolidated Federated Funds .

For publicly traded equity securities available in an active market, the fair value of these securities is

classified as Level 1 when the fair value is based on quoted market prices.

The fair value of certain equity securities traded principally in foreign markets and held by consolidated Federated Funds are determined by a third-party pricing service (Level 2).

Investments—Consolidated Investment Companies—Debt Securities

Investments—Consolidated Investment Companies—Debt Securities primarily represent domestic and foreign bonds held by consolidated Federated Funds .

The fair value of these securities may include observable market data such as valuations provided by independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions (Level 2).

Investments—Affiliates and Other—Equity Securities

Investments—Affiliates and Other—Equity Securities primarily represent equity investments in fluctuating-value Federated Funds , as well as investments held in Separate Accounts .

For publicly traded equity securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices.

For investments in fluctuating-value Federated Funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.

The fair value of certain equity securities traded principally in foreign markets are determined by third-party pricing services (Level 2).

Investments—Affiliates and Other—Debt Securities

Investments—Affiliates and Other—Debt Securities primarily represent domestic bonds held in Separate Accounts.

Other Financial Assets

For an investment in a mutual fund that is not publicly available but for which the NAV is calculated monthly and for which there are redemption restrictions, the security is valued using NAV as a practical expedient and is excluded from the fair value hierarchy.

As of December 31, 2019 , this investment was $ 3.7 million and was recorded in Other Long-Term Assets .

Investments—Consolidated Investment Companies

Investments—Consolidated Investment Companies represent securities held by consolidated Federated Hermes Funds.

For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices.

The fair value of certain securities held by consolidated Federated Hermes Funds are determined by third-party pricing services which utilize observable market inputs of comparable investments (Level 2).

Investments—Affiliates and Other

Investments—Affiliates and Other primarily represent investments in fluctuating-value Federated Hermes Funds, as well as investments held in Separate Accounts.

For investments in fluctuating-value Federated Hermes Funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.

For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices.

The fair value of certain securities are determined by third-party pricing services which utilize observable market inputs of comparable investments (Level 2).

Acquisition-related future contingent consideration liabilities

From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes may be required to make future consideration payments if certain contingencies are met.

In connection with certain business combinations, Federated Hermes records a liability representing the estimated fair value of future consideration payments as of the acquisition date.

The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded in earnings.

As of December 31, 2020, acquisition-related future consideration liabilities of $ 12.9 million were primarily related to business combinations made in the first quarter of 2020 and were recorded in Other Current Liabilities ($ 8.4 million) and Other Long-Term Liabilities ($ 4.5 million) on the Consolidated Balance Sheets.

Management estimated the fair value of future consideration payments based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3).

The following table presents a reconciliation of the beginning and ending balances for Federated Hermes' liability for future consideration payments related to these business combinations/asset acquisitions:

(in thousands)

Balance at December 31, 2019

New Acquisitions 1

Changes in Fair Value 4,448

Contingent Consideration Payments ( 1,834 )

Balance at December 31, 2020

1 Represents the fair value of the contingent payment liability recorded in connection with new acquisitions accounted for as business combinations.

Investments using Practical Expedients

For investments in mutual funds that are not publicly available but for which the NAV is calculated monthly and for which there are redemption restrictions, the investments are valued using NAV as a practical expedient and are excluded from the fair value hierarchy.

As of December 31, 2020 and December 31, 2019, these investments totaled $ 6.9 million and $ 3.7 million, respectively, and were recorded in Other Long-Term Assets.

(b) Fair Value Measurements on a Nonrecurring Basis

Federated did not hold any assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2019 .

Federated Hermes did not hold any assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2020.

The fair value of Federated's debt is estimated by management using observable market data (Level 2).

The fair value of Federated Hermes' debt is estimated by management using observable market data (Level 2).

Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.

(9) Derivatives

Hermes, a British Pound Sterling-denominated, majority-owned subsidiary of Federated , enters into foreign currency forward transaction s in order to hedge against foreign exchange rate fluctuations in the U.S.

HFML, a British Pound Sterling-denominated, majority-owned subsidiary of Federated Hermes, enters into foreign currency forward transactions in order to hedge against foreign exchange rate fluctuations in the U.S.

None of the forwards have been designated as hedging instruments for accounting purposes.

As of December 31, 2020, this subsidiary held foreign currency forward derivative instruments with a combined notional amount of £ 47.3 million and expiration dates ranging from March 2021 through September 2021.

As a result of the change in fair value of these derivative instruments, Federated recorded $ 3.1 million in Receivables on the Consolidated Balance Sheets as of December 31, 2019 .

Federated Hermes recorded $ 5.1 million in Receivables on the Consolidated Balance Sheets, which represented the fair value of these derivative instruments as of December 31, 2020.

As of December 31, 2019, this subsidiary held foreign currency forward derivative instruments with a combined notional amount of £ 53.0 million and expiration dates ranging from March 2020 through September 2020.

As of December 31, 2018 , Federated recorded $ 3.8 million in Other Current Liabilities on the Consolidated Balance Sheets as a result of the change in fair value of these derivative instruments.

In 2018, Federated entered into two foreign currency forward transactions in order to hedge against foreign exchange rate fluctuations associated with the payment for the Hermes Acquisition.

Federated Hermes recorded $ 3.1 million in Receivables on the Consolidated Balance Sheets, which represented the fair value of these derivative instruments as of December 31, 2019.

In 2018, Federated Hermes entered into two foreign currency forward transactions in order to hedge against foreign exchange rate fluctuations associated with the payment for the HFML Acquisition.

Neither forward was designated as a hedging instrument for accounting purposes.

Federated recorded $ 29.0 million as nonoperating expense in Other, net on the Consolidated Statements of Income as a result of the change in fair value of these derivatives in 2018.

Federated recorded $ 29 million of expense in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income as a result of the change in fair value of these derivatives in 2018.

(10) Intangible Assets

1 unchanged sentence

Indefinite-lived intangible assets are recorded in Intangible Assets, net on the Consolidated Balance Sheets and include rights to manage fund assets ($ 343.5 million and $ 335.2 million at December 31, 2020 and 2019, respectively) and trade names ($ 53.6 million and $ 52.0 million at December 31, 2020 and 2019, respectively).

On November 18, 2019, Federated completed the acquisition of certain components of the PNC Capital Advisors LLC investment management business .

As a result, Federated recorded $ 58.0 million of indefinite-lived rights to manage fund assets .

The transaction was accounted for as an asset acquisition as substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset.

The remaining increase in indefinite-lived rights to manage fund assets during 2019 primarily related to a final purchase price adjustment of $ 65.8 million related to the Hermes Acquisition (see Note (3) for additional information).

The increase in indefinite-lived intangible assets at December 31, 2020 as compared to December 31, 2019 primarily relates to an increase of $ 7.9 million as a result of foreign exchange rate fluctuations on intangible assets denominated in a foreign currency.

(b) Finite-lived intangible assets

Finite-lived intangible assets represent customer relationships and consist of the following at December 31:

Finite-lived intangible assets primarily represent customer relationships and consist of the following at December 31:

(in thousands) 2020 2019

Cost $ 111,041 $ 71,853

Accumulated Amortization ( 26,372 ) ( 12,856 )

Carrying Value $ 84,669 $ 58,997

The decrease in the cost of the finite-lived intangible assets at December 31, 2019 as compared to December 31, 2018 primarily relates to a final purchase price adjustment related to the finite-lived customer relationship asset acquired in connection with the Hermes Acquisition .

See Note (3) for additional information.

The increase in finite-lived intangible assets at December 31, 2020 as compared to December 31, 2019 primarily relates to $ 27.6 million of intangible assets recorded in connection with the HCL Acquisition and $ 7.3 million in connection with the MEPC acquisition (see Note (3) ).

In addition, the value of finite-lived intangible assets denominated in a foreign currency increased $ 3.1 million as a result of foreign exchange rate fluctuations, partially offset by amortization expense.

Amortization expense for finite-lived intangible assets was $ 13.8 million, $ 7.5 million and $ 6.2 million in 2020, 2019 and 2018, respectively, and was recorded as operating expense in Other expense on the Consolidated Statements of Income.

Expected aggregate annual amortization expense for finite-lived intangible assets in each of the five succeeding years assuming no new acquisitions or impairments will be $ 8.6 million .

Expected aggregate annual amortization expense for finite-lived intangible assets in each of the five succeeding years assuming no new acquisitions or impairments is shown in the table below:

(in thousands)

2021 $ 13,656

2025 $ 12,412

Goodwill at December 31, 2020 increased $ 25.7 million from December 31, 2019 primarily due to $ 19.1 million of goodwill recorded in connection with the HCL Acquisition and $ 1.7 million related to the MEPC acquisition.

In addition, the value of goodwill denominated in a foreign currency increased $ 4.9 million as a result of foreign exchange rate fluctuations.

(11) Property and Equipment

Property and equipment consisted of the following at December 31:

(in thousands)

Estimated Useful Life

Computer Software and Hardware

Leasehold Improvements

Up to term of lease

Transportation Equipment

Office Furniture and Equipment

(in thousands) Estimated Useful Life 2020 2019

Computer Software and Hardware 1 to 7 years $ 94,662 $ 87,443

Leasehold Improvements Up to term of lease 39,546 35,348

Transportation Equipment 12 years 17,851 17,851

Office Furniture and Equipment 4 to 15 years 6,868 5,849

Total Cost 158,927 146,491

Accumulated Depreciation ( 106,317 ) ( 94,766 )

1 unchanged sentence

Depreciation expense was $ 16.0 million, $ 16.5 million and $ 12.9 million for the years ended December 31, 2020, 2019 and 2018, respectively, and was recorded in Office and Occupancy expense on the Consolidated Statements of Income.

On June 5, 2017 , Federated entered into the Credit Agreement , which consists of a $ 375 million revolving credit facility with an additional $ 200 million available via an optional increase (or accordion) feature.

On June 5, 2017, Federated Hermes entered into the Credit Agreement, which consists of a $ 375 million revolving credit facility with an additional $ 200 million available via an optional increase (or accordion) feature.

The interest on the revolving credit facility is calculated at the monthly LIBOR plus a spread.

The borrowings under the revolving credit facility may include up to $ 25 million for which interest is calculated at the daily LIBOR plus a spread (Swing Line).

On July 1, 2018, Federated entered into an amendment to the Credit Agreement to add certain definitions and to amend certain negative covenants relating to indebtedness, guarantees, and restrictions on dividends, related to the Hermes Acquisition .

On July 1, 2018, Federated Hermes entered into an amendment to the Credit Agreement to add certain definitions and to amend certain negative covenants relating to indebtedness, guarantees, and restrictions on dividends, related to the HFML Acquisition.

This amendment contains other customary conditions, representations, warranties and covenants.

The Credit Agreement, which expires on June 5, 2022, has no principal payment schedule, but instead requires that any outstanding principal be repaid by the expiration date.

Federated, however, may elect to make discretionary principal payments.

Federated Hermes, however, may elect to make discretionary principal payments.

During 2020, Federated Hermes borrowed $ 100 million from the revolving credit facility for general corporate purposes and repaid $ 125 million.

As of December 31, 2020 and 2019, the amounts outstanding under the revolving credit facility were $ 75 million and $ 100 million, respectively, and were recorded as Long-Term Debt on the Consolidated Balance Sheets.

1 unchanged sentence

The commitment fee under the Credit Agreement currently is 0.125 % per annum on the daily unused portion of each Lender's commitment.

As of December 31, 2019 , Federated has $ 275 million available for borrowings.

As of December 31, 2020, Federated Hermes has $ 300 million available for borrowings under the revolving credit facility and an additional $ 200 million available via its optional accordion feature.

The Credit Agreement includes representations and warranties, affirmative and negative financial covenants, including an interest coverage ratio covenant and a leverage ratio covenant, reporting requirements and other non-financial covenants.

Federated was in compliance with all covenants at and during the year ended December 31, 2019 (see the Liquidity and Capital Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information).

Federated Hermes was in compliance with all covenants at and during the year ended December 31, 2020.

See the Liquidity and Capital Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.

The Credit Agreement also has certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace periods.

3 unchanged sentences

(a) 401(k) Plan

Federated offers defined contribution plans to its employees.

Federated Hermes offers defined contribution plans to its employees.

Its 401(k) plan covers domestic employees.

Under the 401(k) plan, employees can make salary deferral contributions at a rate of 1 % to 50 % of their annual compensation (as defined in the 401(k) plan), subject to Internal Revenue Code (IRC) limitations.

Prior to January 1, 2018, Federated's matching contribution was 100 % of the first 2 % of compensation contributed by an employee and 50 % of the next 4 % for a total possible match of 4 % , subject to IRC compensation limits.

For 2018, Federated's matching contribution was 100 % of the first 3 % of compensation contributed by an employee and 50 % of the next 3 % for a total possible match of 4.5 % , subject to IRC compensation limits.

Effective January 1, 2019, Federated's matching contribution is 100 % of the first 4 % of compensation contributed by an employee and 50 % of the next 2 % for a total possible match of 5 % , subject to IRC limitations.

For 2018, Federated Hermes' matching contribution was 100 % of the first 3 % of compensation contributed by an employee and 50 % of the next 3 % for a total possible match of 4.5 %, subject to IRC compensation limits.

Effective January 1, 2019, Federated Hermes' matching contribution is

100 % of the first 4 % of compensation contributed by an employee and 50 % of the next 2 % for a total possible match of 5 %, subject to IRC compensation limits.

Forfeitures of unvested matching contributions are used to offset future matching contributions.

Matching contributions to the 401(k) plan recognized in Compensation and Related expense amounted to $ 6.8 million, $ 6.6 million and $ 5.7 million for 2020, 2019 and 2018, respectively.

Vesting in Federated's matching contributions commences once a participant in the 401(k) plan has worked at least 1,000 hours per year for two years .

Upon completion of this initial service, 20 % of Federated's contribution included in a participant's account vests and 20 % vests for each of the following four years if the participant works at least 1,000 hours per year.

Vesting in Federated Hermes' matching contributions commences once a participant in the 401(k) plan has worked at least 1,000 hours per year for two years .

Upon completion of this initial service, 20 % of Federated Hermes' contribution included in a participant's account vests and 20 % vests for each of the following four years if the participant works at least 1,000 hours per year.

Employees are immediately vested in their 401(k) salary deferral contributions.

(b) Employee Stock Purchase Plan

Federated offers an employee stock purchase plan that allows employees to purchase a maximum of 750,000 shares of Class B common stock.

Employees may contribute up to 10 % of their salary to purchase shares of Federated's Class B common stock on a quarterly basis at the market price.

Federated Hermes offers an employee stock purchase plan that allows employees to purchase a maximum of 750,000 shares of Class B common stock.

Employees may contribute up to 10 % of their salary to purchase shares of Federated Hermes' Class B common stock on a quarterly basis at the market price.

The shares purchased under this plan may be newly issued shares, treasury shares or shares purchased on the open market.

2 unchanged sentences

(a) Restricted Stock

Federated's long-term stock-incentive compensation is provided under the Stock Incentive Plan ( the Plan ), as amended and subsequently approved by shareholders from time to time.

Share-based awards are granted to reward Federated's employees and non-management directors who have contributed to the success of Federated and to provide incentive to increase their efforts on behalf of Federated.

Federated Hermes' long-term stock-incentive compensation is provided under the Stock Incentive Plan (the Plan), as amended and subsequently approved by shareholders from time to time.

Share-based awards are granted to reward Federated Hermes' employees and non-management directors who have contributed to the success of Federated Hermes and to provide incentive to increase their efforts on behalf of Federated Hermes.

Since the Plan's inception, a total of 30.6 million shares of Class B common stock have been authorized for granting share-based awards in the form of restricted stock, stock options or other share-based awards.

3 unchanged sentences

At December 31, 2020, the maximum remaining unrecognized compensation expense related to share-based awards approximated $ 76 million which is expected to be recognized over a weighted-average period of approximately 6 years.

Federated's restricted stock awards represent shares of Federated Class B common stock that may be sold by the awardee only once the restrictions lapse, as dictated by the terms of the award.

Federated Hermes' restricted stock awards represent shares of Federated Hermes Class B common stock that may be sold by the awardee only once restrictions lapse, as dictated by the terms of the award.

The awards are generally subject to graded vesting schedules that vary in length from three to 10 years with a portion of the award vesting each year, as dictated by the terms of the award.

3 unchanged sentences

The following table summarizes activity of non-vested restricted stock awards for the year ended December 31, 2020:

Shares Weighted-

Average Grant-

1 unchanged sentence

Non-vested at January 1, 2020 3,781,195 $ 26.47

1,134,581 25.98

Vested ( 899,117 ) 27.28

Forfeited ( 55,267 ) 24.49

Non-vested at December 31, 2020 3,961,392 $ 26.17

During 2019 , Federated awarded 498,324 shares of restricted Class B common stock in connection with a bonus program in which certain key employees received a portion of their bonus in the form of restricted stock under the Plan .

This restricted stock, which was granted on the bonus payment date and issued out of treasury, generally vests over a three -year period.

Also during 2019 , Federated awarded 430,000 shares of restricted Class B common stock to certain key employees.

These restricted stock awards generally vest over a ten -year period.

Federated awarded 928,324 shares of restricted Class B common stock with a weighted-average grant-date fair value of $ 30.10 to employees during 2019 ;

1 During 2020, Federated Hermes awarded 649,581 shares of restricted Class B common stock in connection with a bonus program in which certain key employees received a portion of their bonus in the form of restricted stock under the Plan.

This bonus restricted stock, which was granted on the bonus payment date and issued out of treasury, generally vests over a three-year period.

Also during 2020, Federated Hermes awarded 485,000 shares of restricted Class B common stock to certain key employees.

These periodic restricted stock awards generally vest over a ten-year period.

Federated Hermes awarded 1,134,581 shares of restricted Class B common stock with a weighted-average grant-date fair value of $ 25.98 to employees during 2020;

awarded 928,324 shares of restricted Class B common stock with a weighted-average grant-date fair value of $ 30.10 to employees during 2019;

2 unchanged sentences

(b) Subsidiary Stock Plan

Effective July 2, 2018, Federated established a non-public subsidiary share-based compensation plan for certain employees of that subsidiary .

Effective July 2, 2018, Federated Hermes established a non-public subsidiary share-based compensation plan for certain employees of one of its subsidiaries.

These awards, which are subject to continued-service vesting requirements, vest over a period of three to five years .

At various predetermined dates, but no earlier than 9 months after vesting, award holders have a right to exercise a put option to sell shares to Federated at fair value and Federated has a right to exercise a call option to acquire shares at fair value.

Federated recognized compensation expense for this plan of $ 7.9 million and $ 4.2 million in Compensation and Related expense on the Consolidated Statements of Income for the years ended December 31, 2019 and 2018 , respectively.

At various predetermined dates, but no earlier than 9 months after vesting, award holders have a right to exercise a put option to sell shares to Federated Hermes at fair value and Federated Hermes has a right to exercise a call option to acquire shares at fair value.

Federated Hermes recognized compensation expense for this plan of $ 8.8 million, $ 7.9 million and $ 4.2 million in Compensation and Related expense on the Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018, respectively.

At December 31, 2020, the remaining unrecognized compensation expense related to these plan awards approximated $ 25 million which is expected to be recognized over a weighted-average period of approximately 3 years.

(15) Common Stock

The Class A common stockholder has the entire voting rights of Federated;

however, without the consent of the majority of the holders of Class B common stock, the Class A common stockholder cannot alter Federated's structure, dispose of all or substantially all of its assets, amend its Articles of Incorporation or Bylaws to adversely affect the Class B common stockholders, or liquidate or dissolve Federated.

The Class A common stockholder has the entire voting rights of Federated Hermes;

however, without the consent of the majority of the holders of Class B common stock, the Class A common stockholder cannot alter Federated Hermes' structure, dispose of all or substantially all of its assets, amend its Articles of Incorporation or Bylaws to adversely affect the Class B common stockholders, or liquidate or dissolve Federated Hermes.

With respect to dividends, distributions and liquidation rights, the Class A common stock and Class B common stock have equal preferences and rights.

(a) Dividends

Cash dividends of $ 109.1 million , $ 106.9 million and $ 101.5 million were paid in 2019 , 2018 and 2017 , respectively, to holders of Federated common stock.

Cash dividends of $ 207.8 million, $ 109.1 million and $ 106.9 million were paid in 2020, 2019 and 2018, respectively, to holders of Federated Hermes common stock.

Of the amount paid in 2020, $ 99.3 million represented a $ 1.00 per share special dividend paid in the fourth quarter.

All dividends were considered ordinary dividends for tax purposes.

1 unchanged sentence

In October 2016, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy back of up to 4 million shares of Class B common stock.

No other programs existed as of December 31, 2019 .

This program was fulfilled in March 2020.

In March 2020, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy back of up to 500 thousand shares of Class B common stock.

This program was fulfilled in May 2020.

In April 2020, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy back of up to 3.5 million shares of Class B common stock.

No other program existed as of December 31, 2020.

The program authorizes executive management to determine the timing and the amount of shares for each purchase.

The repurchased stock is to be held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities, unless Federated's board of directors subsequently determines to retire the repurchased stock and restore the shares to authorized but unissued status (rather than holding the shares in treasury).

During the year ended December 31, 2019 , Federated repurchased 614 thousand shares of its Class B common stock for $ 15.7 million , most of which were repurchased in the open market.

At December 31, 2019 , 547 thousand shares remained available to be purchased under this buyback program.

The repurchased stock is to be held in treasury for employee

share-based compensation plans, potential acquisitions and other corporate activities, unless Federated Hermes' board of directors subsequently determines to retire the repurchased stock and restore the shares to authorized but unissued status (rather than holding the shares in treasury).

During the year ended December 31, 2020, Federated Hermes repurchased 2.9 million shares of its Class B common stock for $ 67.9 million ($ 1.1 million of which was accrued in Other Current Liabilities as of December 31, 2020), most of which were repurchased in the open market.

At December 31, 2020, 1.7 million shares remained available to be repurchased under this buyback program.

(16) Income Taxes

Federated files a consolidated federal income tax return.

Federated Hermes files a consolidated federal income tax return.

Financial statement tax expense is determined under the liability method.

1 unchanged sentence

(in thousands) 2020 2019 2018

Federal $ 76,936 $ 67,745 $ 54,447

State 11,759 10,158 7,359

Foreign 3,171 2,791 ( 188 )

Total Current 91,866 80,694 61,618

Federal 9,991 6,395 7,616

State 2,365 1,427 1,750

Foreign 5,813 ( 370 ) 2,891

Total Deferred 18,169 7,452 12,257

Total $ 110,035 $ 88,146 $ 73,875

The reconciliation between the statutory income tax rate and the effective tax rate consisted of the following for the years ended December 31:

2020 2019 2018

Expected Federal Statutory Income Tax Rate 21.0 % 21.0 % 21.0 %

1 unchanged sentence

State and Local Income Taxes, net of Federal Benefit 2.4 2.4 2.4

Foreign Income Taxes 0.8 ( 0.1 ) 0.1

Non-Deductible Executive Compensation 0.8 0.9 1.1

Federal Rate Adjustment to Deferred Taxes 1

Other ( 0.3 ) ( 0.1 ) 0.3

Effective Tax Rate 24.7 % 24.1 % 24.9 %

Represents the impact of revaluing the net deferred tax liability due to the enactment of the Tax Act , and includes the federal tax benefit of any state and local deferred taxes.

The effective tax rate for 2018 increased to 24.9 % as compared to 2017's rate of 16.2 % primarily due to the 2017 recording of a $ 70.4 million reduction in Federated's net deferred tax liability due to the Tax Act , partially offset by the reduction of the federal statutory income tax rate to a flat 21.0 % effective January 1, 2018.

The effective tax rate for 2020 increased to 24.7 % as compared to 2019's rate of 24.1 % prim arily due to an increase in foreign deferred tax expense in connection with the revaluation of net foreign deferred tax liabilities resulting from the UK's decision not to reduce its corporate tax rate from 19% to 17%.

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities consisted of the following at December 31:

2 unchanged sentences

Tax Net Operating Loss Carryforwards $ 74,274 $ 71,724

Lease liability 30,931 27,889

Compensation related 18,033 15,994

Other 871 699

Total Deferred Tax Assets 124,109 116,306

3 unchanged sentences

Intangible Assets $ 211,127 $ 191,595

Right-of-use asset 28,981 25,691

Property and equipment 5,121 5,493

Other 5,728 1,119

Total Gross Deferred Tax Liability $ 250,957 $ 223,898

Net Deferred Tax Liability $ 187,937 $ 165,382

Long-Term Deferred Tax Liability, net at December 31, 2019 increased $ 17.2 million from December 31, 2018 primarily due to an increase in intangible assets (see Note (10) for additional information) and the resulting tax amortization deduction being in excess of book amortization.

At December 31, 2019 , Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $ 71.7 million .

Long-Term Deferred Tax Liability, net at December 31, 2020 increased $ 22.6 million from December 31, 2019 primarily due to certain tax amortization deductions being in excess of book amortization and an increase in intangible assets associated with first quarter 2020 acquisitions (see Note (10) for additional information).

At December 31, 2020, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $ 74.3 million.

The state net operating losses will expire through 2040, while most foreign net operating losses do not expire.

A valuation allowance has been recognized for $ 51.6 million (or 100 %) of the deferred tax asset for state tax net operating losses, and for $ 9.5 million (or 42 %) of the deferred tax asset for foreign tax net operating losses.

The valuation allowances were recorded due to management's belief that it is more likely than not that Federated will not realize the full benefit of these net operating losses.

The valuation allowances were recorded due to management's belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses.

For the deferred tax asset, net of valuation allowance related to foreign net operating losses, management believes that it is more likely than not that it will realize the benefit of these net operating losses based on projections of future taxable income for the entities to which these relate.

At December 31, 2018 , Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $ 74.2 million .

At December 31, 2019, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $ 71.7 million.

The state net operating losses will expire through 2039, while most foreign net operating losses do not expire.

A valuation allowance has been recognized for $ 49.4 million (or 100 %) of the deferred tax asset for state tax net operating losses, and for $ 8.4 million (or 38 %) of the deferred tax asset for foreign tax net operating losses.

The valuation allowances were recorded due to management's belief that it is more likely than not that Federated will not realize the full benefit of these net operating losses.

The valuation allowances were recorded due to management's belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses.

Federated's remaining deferred tax assets as of December 31, 2019 and 2018 primarily related to compensation-related expenses that have been recognized for book purposes but are not yet deductible for tax purposes.

Management believes that it is more likely than not that Federated will receive the full benefit of these deferred tax assets due to the expectation that Federated will generate taxable income well in excess of these amounts in the years they become deductible.

Federated and its subsidiaries file annual income tax returns in the U.S.

Federated Hermes' remaining deferred tax assets as of December 31, 2020 and 2019 primarily related to compensation-related expenses that have been recognized for book purposes but are not yet deductible for tax purposes.

Management believes that it is more likely than not that Federated Hermes will receive the full benefit of these deferred tax assets due to the expectation that Federated Hermes will generate taxable income well in excess of these amounts in the years they become deductible.

Federated Hermes and its subsidiaries file annual income tax returns in the U.S.

federal jurisdiction, various U.S.

3 unchanged sentences

(17) Earnings Per Share Attributable to Federated Hermes, Inc.

The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Federated for the years ended December 31:

The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Federated Hermes for the years ended December 31:

(in thousands, except per share data) 2020 2019 2018

Net Income Attributable to Federated Hermes, Inc.

$ 326,364 $ 272,339 $ 220,297

Total Net Income Available to Participating Unvested Restricted Shareholders 1

Total Net Income Attributable to Federated Common Stock - Basic 1

( 12,794 ) ( 10,234 ) ( 8,555 )

Total Net Income Attributable to Federated Hermes Common Stock - Basic

$ 313,570 $ 262,105 $ 211,742

Total Net Income Available to Unvested Restricted Shareholders of a Nonpublic Consolidated Subsidiary

Total Net Income Attributable to Federated Common Stock - Diluted 1

Basic Weighted-Average Federated Common Stock 3

Dilutive Potential Shares from Stock Options

Diluted Weighted-Average Federated Common Stock 3

( 2,439 ) ( 872 ) ( 794 )

Total Net Income Attributable to Federated Hermes Common Stock - Diluted

$ 311,131 $ 261,233 $ 210,948

Basic and Diluted Weighted-Average Federated Hermes Common Stock 2

96,419 97,259 96,949

Earnings Per Share

Net Income Attributable to Federated Common Stock - Basic and Diluted 3,4

2017 includes a $ 70.4 million reduction to the income tax provision resulting from the revaluation of the net deferred tax liability due to the enactment of the Tax Act , thereby increasing net income.

Includes dividends paid on unvested restricted Federated Class B Common shares and their proportionate share of undistributed earnings attributable to Federated shareholders.

Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of computing earnings per share.

2017 includes a $ 0.69 increase to earnings per share resulting from the revaluation of the net deferred tax liability due to the enactment of the Tax Act .

Federated has material operating leases related to its corporate headquarters in Pittsburgh, Pennsylvania.

Net Income Attributable to Federated Hermes Common Stock - Basic 2

$ 3.25 $ 2.69 $ 2.18

Net Income Attributable to Federated Hermes Common Stock - Diluted 2

$ 3.23 $ 2.69 $ 2.18

1 Includes dividends paid on unvested restricted Federated Hermes Class B Common shares and their proportionate share of undistributed earnings attributable to Federated Hermes shareholders.

2 Federated Hermes Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of computing earnings per share.

Federated Hermes has material operating leases related to its corporate headquarters in Pittsburgh, Pennsylvania.

These leases expire in 2030 and have renewal options for additional periods through 2040.

These leases include provisions for leasehold improvement incentives, rent escalation and certain penalties for early termination.

In addition, Federated has various other operating lease agreements primarily for additional facilities.

In addition, Federated Hermes has various other operating lease agreements primarily for additional facilities.

These leases are noncancelable and expire on various dates through the year 2030.

1 unchanged sentence

The value of the ROU assets and lease liabilities recognized do not include the consideration of any renewal options, as they are not yet reasonably certain to be exercised.

During the years ended December 31, 2019 , 2018 , and 2017 , Federated recorded $ 17.7 million , $ 14.7 million and $ 13.8 million , respectively, in operating lease costs to Office and Occupancy expense on the Consolidated Statements of Income.

During the years ended December 31, 2020, 2019, and 2018, Federated Hermes recorded $ 13.0 million, $ 17.7 million and $ 14.7 million, respectively, in operating lease costs to Office and Occupancy expense on the Consolidated Statements of Income.

The following table reconciles future minimum undiscounted payments to the operating lease liabilities recorded on the Consolidated Balance Sheets as of December 31, 2020:

10 unchanged sentences

(19) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc.

The components of Accumulated Other Comprehensive Income (Loss), net of tax attributable to Federated shareholders are as follows:

(in thousands)

Unrealized Gain (Loss) on Equity Securities 1

Foreign Currency

The components of Accumulated Other Comprehensive Income (Loss), net of tax attributable to Federated Hermes shareholders are as follows:

(in thousands) Unrealized Gain (Loss) on Equity Securities Foreign Currency

Gain (Loss) Total

Balance at December 31, 2017 $ 29 $ ( 819 ) $ ( 790 )

Other Comprehensive Income (Loss) Before Reclassifications and Tax

0 ( 13,607 ) ( 13,607 )

Reclassification Adjustment, before tax 1

( 80 ) ( 242 ) ( 322 )

Net Current-Period Other Comprehensive Income (Loss) ( 29 ) ( 13,798 ) ( 13,827 )

1 unchanged sentence

Other Comprehensive Income (Loss) Before Reclassifications and Tax

Reclassification Adjustment, before tax 2

0 14,368 14,368

Net Current-Period Other Comprehensive Income (Loss) 0 14,368 14,368

3 unchanged sentences

Balance at December 31, 2020 $ 0 $ 15,171 $ 15,171

Other than described in note two below, amounts reclassified from Accumulated Other Comprehensive Income (Loss), net of tax were recorded in Gain (Loss) on Securities, net on the Consolidated Statements of Income.

Amount represents the reclassification from Accumulated Other Comprehensive Income (Loss), net of tax to Retained Earnings on the Consolidated Balance Sheets as a result of the adoption of new accounting guidance in 2018.

1 Amount primarily represents the reclassification from Accumulated Other Comprehensive Income (Loss), net of tax to Retained Earnings on the Consolidated Balance Sheets as a result of the adoption of new accounting guidance in 2018.

(20) Redeemable Noncontrolling Interest in Subsidiaries

The following table presents the changes in Redeemable Noncontrolling Interest in Subsidiaries:

(in thousands)

Consolidated Investment Companies

(in thousands) Consolidated Investment Companies HFML

Balance at January 1, 2018 $ 30,163 $ 0 $ 30,163

Net Income (Loss) ( 1,095 ) 3,097 2,002

Other Comprehensive Income (Loss), net of tax 0 ( 6,009 ) ( 6,009 )

Subscriptions—Redeemable Noncontrolling Interest Holders 2,801 0 2,801

Consolidation/(Deconsolidation) ( 1,751 ) 0 ( 1,751 )

Stock Award Activity 0 4,239 4,239

Distributions to Noncontrolling Interest in Subsidiaries ( 18,492 ) 0 ( 18,492 )

Business Acquisition 0 169,560 169,560

Balance at December 31, 2018 $ 11,626 $ 170,887 $ 182,513

6 unchanged sentences

Business Acquisition 0 ( 386 ) ( 386 )

Change in Estimated Redemption Value of Redeemable Noncontrolling Interests 0 4,148 4,148

Balance at December 31, 2019 $ 19,872 $ 192,214 $ 212,086

5 unchanged sentences

Distributions to Noncontrolling Interest in Subsidiaries ( 16,218 ) 0 ( 16,218 )

Business Acquisition

Change in Estimated Redemption Value of Redeemable Noncontrolling Interests 0 ( 1,479 ) ( 1,479 )

Balance at December 31, 2020 $ 24,246 $ 212,741 $ 236,987

During 2019, the Hermes Redeemable Noncontrolling Interest in Subsidiaries carrying value was adjusted by $ 4.1 million to the current redemption value, assuming the Hermes noncontrolling interest was redeemable at the balance sheet date.

During 2020, the HFML Redeemable Noncontrolling Interest in Subsidiaries carrying value was adjusted by $ 1.5 million to the curre nt redemption value, assuming the HFML noncontrolling interest was redeemable at the balance sheet date.

The noncontrolling interest was adjusted through a corresponding adjustment to retained earnings.

1 unchanged sentence

(a) Contractual

Federated is obligated to make certain future payments under various agreements to which it is a party.

The following table summarizes minimum noncancelable payments contractually due under Federated's significant service contracts:

From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes is obligated to make certain future payments under various agreements to which it is a party.

The following table summarizes minimum noncancelable payments contractually due under Federated Hermes' significant service contracts:

Payments due in

(in millions)

(in millions) 2021 2022 2023 2024 2025 2025 Total

Purchase Obligations 1

$ 33.3 $ 10.8 $ 6.6 $ 4.1 $ 2.8 $ 5.8 $ 63.4

Other Obligations 2.5 0.5 0.2 0.0 0.0 0.0 3.2

Federated is a party to various contracts pursuant to which it receives certain services, including services for marketing and information technology, access to various fund-related information systems and research databases, trade order transmission and recovery services as well as other services.

Total $ 35.8 $ 11.3 $ 6.8 $ 4.1 $ 2.8 $ 5.8 $ 66.6

1 Federated Hermes is a party to various contracts pursuant to which it receives certain services, including services for marketing and information technology, access to various fund-related information systems and research databases, trade order transmission and recovery services as well as other services.

These contracts contain certain minimum noncancelable payments, cancellation provisions and renewal terms.

1 unchanged sentence

Costs for such services are expensed as incurred.

(b) Guarantees and Indemnifications

On an intercompany basis, various subsidiaries of Federated guarantee certain financial obligations of Federated Hermes, Inc., and Federated Hermes, Inc.

guarantees certain financial and performance-related obligations of various wholly owned

subsidiaries.

In addition, in the normal course of business, Federated has entered into contracts that provide a variety of indemnifications.

Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated, under which Federated agrees to hold the other party harmless against losses arising out of the contract, provided the other party's actions are not deemed to have breached an agreed upon standard of care.

In each of these circumstances, payment by Federated is contingent on the other party making a claim for indemnity, subject to Federated's right to challenge the claim.

Further, Federated's obligations under these agreements may be limited in terms of time and/or amount.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of Federated's obligations and the unique facts and circumstances involved in each particular agreement.

(b) Contingencies

Federated Hermes previously recorded as revenue certain carried interest from certain funds subject to clawback provisions (Carried Interest).

As of December 31, 2020, approximately $ 12 million of Carried Interest is subject to clawback.

As a result of the significant impact of Covid-19 on certain markets, beginning in the first quarter of 2020, management concluded it was probable that the market value of the assets held by these funds would be reduced at the December 31, 2020 valuation date, which could result in a portion or all of this Carried Interest being repaid in 2021.

As of December 31, 2020, management estimated that a clawback of approximately $ 1 million will occur based on the current estimated valuation of the assets held by these funds and has recorded a liability for this amount at December 31, 2020.

Final third-party valuations of the funds as of December 31, 2020 are anticipated to be completed in the first quarter of 2021 and may result in a material change in the valuation of the assets held by these funds and the resulting clawback of Carried Interest.

On an intercompany basis, various subsidiaries of Federated Hermes guarantee certain financial obligations of Federated Hermes, Inc., and Federated Hermes, Inc.

guarantees certain financial and performance-related obligations of various wholly-owned subsidiaries.

In addition, in the normal course of business, Federated Hermes has entered into contracts that provide a variety of indemnifications.

Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated Hermes, under which Federated Hermes agrees to hold the other party harmless against losses arising out of the contract, provided the other party's actions are not deemed to have breached an agreed upon standard of care.

In each of these circumstances, payment by Federated Hermes is contingent on the other party making a claim for indemnity, subject to Federated Hermes' right to challenge the claim.

Further, Federated Hermes' obligations under these agreements may be limited in terms of time and/or amount.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of Federated Hermes' obligations and the unique facts and circumstances involved in each particular agreement.

As of December 31, 2020, management does not believe that a material loss related to any of these matters is reasonably possible.

Like other companies, Federated has claims asserted and threatened against it in the ordinary course of business.

As of December 31, 2019 , Federated does not believe that a material loss related to these claims is reasonably possible.

(d) Legal Proceedings

Like other companies, Federated Hermes has claims asserted and threatened against it in the ordinary course of business.

As of December 31, 2020, Federated Hermes does not believe that a material loss related to these claims is reasonably possible.

(22) Segment and Geographic Information

Federated operates in one operating segment, the investment management business .

Federated's revenues from U.S.

Federated Hermes operates in one operating segment, the investment management business.

Federated Hermes' revenues from U.S.

operations were as follows for the years ended December 31:

(in thousands) 2020 2019 2018

$ 1,168,018 $ 1,098,975 $ 1,005,948

280,250 227,919 129,729

Total Revenue $ 1,448,268 $ 1,326,894 $ 1,135,677

1 unchanged sentence

domiciled subsidiaries, primarily in the UK.

Federated's Right-of-Use Assets, net and Property and Equipment, net for U.S.

operations was as follows at December 31:

Federated Hermes' Right-of-Use Assets, net and Property and Equipment, net for U.S.

operations were as follows at December 31:

(in thousands) 2020 2019

$ 118,912 $ 129,322

55,776 22,917

Total Right-of-Use Assets, net and Property and Equipment, net 1

Amounts for 2019 include Right-of-Use Assets recorded in connection with the adoption of Topic 842 .

$ 174,688 $ 152,239

1 This represents net assets of non-U.S.

3 unchanged sentences

The dividend was payable to shareholders of record as of February 5, 2021, resulting in $ 26.8 million being paid on February 12, 2021.

Effective January 31, 2020, Federated changed its name to Federated Hermes, Inc.

In addition, Federated changed its NYSE ticker symbol to FHI and shares of Federated stock began trading on the NYSE under the new ticker symbol on February 3, 2020.

(24) Supplementary Quarterly Financial Data (Unaudited)

(in thousands, except per share data, for the quarters ended)

(in thousands, except per share data, for the quarters ended) March 31 June 30 September 30 December 31

$ 359,183 $ 360,712 $ 364,455 $ 363,918

Operating Income 1

$ 92,744 $ 97,251 $ 113,381 $ 114,775

Net Income Including the Noncontrolling Interests in Subsidiaries

$ 63,265 $ 84,801 $ 86,684 $ 101,272

Amounts Attributable to Federated Hermes, Inc.

Earnings Per Common Share – Basic and Diluted

$ 64,178 $ 81,196 $ 85,822 $ 95,168

Earnings Per Common Share – Basic

$ 0.63 $ 0.81 $ 0.86 $ 0.94

Earnings Per Common Share – Diluted

$ 0.63 $ 0.80 $ 0.85 $ 0.93

$ 307,050 $ 321,479 $ 340,340 $ 358,025

Operating Income

$ 70,889 $ 84,940 $ 89,307 $ 102,791

Net Income Including the Noncontrolling Interests in Subsidiaries

$ 54,611 $ 63,840 $ 73,585 $ 85,089

Amounts Attributable to Federated Hermes, Inc.

$ 54,546 $ 62,724 $ 72,962 $ 82,107

Earnings Per Common Share – Basic and Diluted

The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018 effective date of the acquisition.

The quarter ended June 30, 2018 includes a $ 29.0 million loss related to two derivative financial instruments associated with the Hermes Acquisition (see Note (9) for additional information).

$ 0.54 $ 0.62 $ 0.72 $ 0.81

1 During the first, second, third and fourth quarters of 2020, Voluntary Yield-related Fee Waivers totaled $ 0.4 million, $ 19.7 million, $ 36.8 million and $ 56.1 million, respectively.

These fee waivers were partially offset by related reductions in distribution expenses of $ 0.3 million, $ 17.7 million, $ 33.0 million and $ 47.4 million, respectively, such that the net negative pre-tax impact to Federated Hermes was $ 0.1 million, $ 2.0 million, $ 3.8 million and $ 8.7 million, respectively.

ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data