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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 175 added, 244 removed, 376 unchanged (53% of the section changed)

4 unchanged sentences

The majority of Federated Hermes' revenue is derived from advising Federated Hermes Funds and Separate Accounts in both domestic and international markets.

Federated Hermes also derives revenue from providing administrative and other fund-related services (including distribution and shareholder servicing) and stewardship and real estate development services.

For additional information on Federated Hermes' markets, see Item 1 - Business under the caption Distribution Channels and Product Markets.

Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based fees that are generally calculated as a percentage of the average net assets of managed investment portfolios.

Federated Hermes also derives revenue from providing administrative and other fund-related services (including distribution and shareholder servicing) as well as stewardship and real estate development services.

For additional information on Federated Hermes' markets, see Item 1 - Business - Distribution Channels and Product Markets.

Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based and are generally calculated as a percentage of the average net assets of managed investment portfolios.

Federated Hermes' revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets.

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Similarly, revenue is also dependent upon the relative composition of average AUM across both asset and product types.

Federated Hermes may implement Fee Waivers for competitive reasons such as to maintain certain fund expense ratios, to maintain positive or zero net yields, to meet regulatory requirements or to meet contractual requirements.

Federated Hermes may implement Fee Waivers for competitive reasons such as Voluntary Yield-related Fee Waivers, to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements.

Since Federated Hermes' products are largely distributed and serviced through financial intermediaries, Federated Hermes pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products and strategies.

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Federated Hermes' growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by Fee Waivers.

Fees for mutual fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds.

Fees for mutual fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds and, as required by law, fund shareholders.

Management believes that meaningful indicators of Federated Hermes' financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.

Business Developments

Covid-19 Pandemic

The outbreak of the Covid-19 respiratory disease was first detected in China in late 2019 and spread internationally in 2020.

Covid-19 has resulted in travel bans, closing of borders, changes to the ways in which healthcare workers prepare and deliver services, enhanced monitoring and increased health screenings/testing, increased data analytics, efforts to develop effective vaccines and identify effective therapeutics, enhanced disinfection and contamination procedures, stay-at-home orders, quarantines, cancellations and disruptions to supply chains, workflow operations and customer activity, as well as general concern and uncertainty.

Covid-19 also has resulted in economic uncertainty, market volatility, trading halts, market illiquidity and declining and variable stock prices, among other effects.

See Item 1A - Risk Factors under the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19) for additional information regarding the impacts, and potential impacts, resulting from Covid-19.

Policymakers responded to certain apparent and acute economic and market consequences with monetary and fiscal policy actions.

Regulators have taken actions focused on facilitating market function and preserving market integrity, as well as providing guidance and relief to market participants affected by Covid-19.

S ee Item 1 - Business under the caption Regulatory Matters for additional information regarding the monetary and fiscal policy actions taken by governmental authorities.

While vaccines have been developed and are beginning to be disseminated in various countries, economic, market, regulatory and other uncertainty persists.

As national, state/provincial and local governments have begun to lessen or remove requirements for staying-at-home, quarantining, and travel, as well as other Covid-19 imposed restrictions, a new variant of Covid-19 was first identified in the UK, and later in the U.S., a second variant was identified in South Africa and a third variant was identified in Brazil.

These variants are reportedly more contagious and potentially more deadly than the initial strain.

Certain jurisdictions (particularly in the U.S.

and the UK) also have seen a spike in the number of diagnosed Covid-19 cases and hospitalizations.

These new variants and spikes have resulted in the re-imposition of certain Covid-19 restrictions, although in many cases not to the extent of those initially imposed.

As a result, while certain governments are taking action to open economies, economic uncertainty and market volatility has continued, but in many cases not to the degree initially seen in late first quarter and early second quarter 2020.

Federated Hermes has not instituted its business continuity plans in its U.S.

Equity Acquisition

On August 31, 2021, Federated completed the 2021 Acquisition of HFML Noncontrolling Interests.

See Note (2) to the Consolidated Financial Statements for additional information.

The outbreak of the Covid-19 respiratory disease was first detected in China in late 2019, spread globally in 2020, and continues to spread in 2022.

The Pandemic initially resulted in travel bans, closing of borders, changes to the ways in which healthcare workers prepare and deliver services, enhanced monitoring and increased health screenings/testing, and increased data analytics.

In addition, the Pandemic resulted in the development of effective vaccines without harmful side effects and identification of effective therapeutics, enhanced disinfection and contamination procedures, stay-at-home orders, quarantines, cancellations and disruptions to supply chains, workflow, operations and customer activity, as well as general concern and uncertainty.

The Pandemic also initially resulted in economic uncertainty, market volatility, trading halts, market illiquidity and declining and variable stock prices, among other effects.

These impacts continue, to varying degrees, in 2022.

See Item 1A - Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic) for additional information regarding the impacts, and potential impacts, resulting from the Pandemic.

Policymakers responded to certain apparent and acute economic and market consequences with multiple monetary and fiscal policy actions.

Regulators pursued and, to a lesser degree, have continued actions focused on facilitating market function and preserving market integrity, as well as providing guidance and relief to market participants affected by the Pandemic.

See Item 1 - Business - Regulatory Matters - Current Regulatory Environment sections for additional information regarding the monetary and fiscal policy actions taken by governmental authorities.

As of December 31, 2021, economies of various countries have rebounded from the global economic shutdown that began in the late first quarter and early second quarter 2020.

With the world vaccination rate of people receiving at least one dose of a vaccine at over 58%, and vaccination rates nearing or exceeding 60% or greater in several jurisdictions, including the United States and the United Kingdom, economies in many jurisdictions have reopened as national, state/provincial, and local governments have removed or lessened travel restrictions and requirements for staying-at-home and quarantining, as well as other Pandemic-imposed restrictions.

Spikes of coronavirus cases, however, continue to occur in certain jurisdictions.

These spikes are reportedly being driven by more contagious variants of the initial strain of the coronavirus, including the Delta and Omicron variants.

Breakthrough infections of vaccinated individuals are also prevalent in many jurisdictions.

These variants, spikes and breakthrough infections have resulted in certain jurisdictions continuing or re-imposing certain travel and other restrictions, although in many cases not to the same degree as initially imposed.

As a result, while many governments have taken action to open economies, economic, market, regulatory and other uncertainty persists as a result of the Pandemic.

While economic uncertainty and market volatility have continued, in many cases it is not to the degree initially seen late in the first quarter and early in the second quarter 2020.

Federated Hermes has not implemented its business continuity plans in its U.S.

offices as there has not been a significant disruption of its business processes, allowing it to remain fully operational and to continue to provide services to its customers.

Federated Hermes' London office, which includes the international business of Federated Hermes, did implement its business continuity plans on March 20, 2020 to support the transition to a remote working environment per the advice of the UK's government and regulators.

Federated Hermes designated an internal task force (which continues to meet regularly) to address events related to Covid-19 that have impacted or that can impact Federated Hermes' business.

Federated Hermes also implemented a number of other prudent steps to provide for the safety of our employees, to seek to ensure the resiliency of Federated Hermes' business and to keep our customers informed through the related market volatility.

For example, Federated Hermes is complying with the requirements applicable to Federated Hermes under relevant Federal and state government orders, as well as the requirements applicable to Federated Hermes under the CDC's and state health departments' guidance and enhanced disinfection and decontamination procedures.

These steps continue to be implemented, reviewed and, in certain cases, revised or enhanced.

Technology investments in laptops for employees, expanded internet bandwidth, and new video conferencing and collaboration software have allowed Federated Hermes to remain fully operational while implementing remote working arrangements, supporting physical distancing, and continuing to deliver Federated Hermes' investment products and services to customers, while at the same time taking steps to safeguard the health and safety of employees.

Federated Hermes' London office did activate its business continuity plans on March 20, 2020 to support the transition to a remote working environment per the advice of the UK's government and regulators.

Federated Hermes designated an internal task force (which meets as necessary) to address events related to the Pandemic that have impacted or that can potentially impact Federated Hermes' business.

Federated Hermes has supported its employees by moving initially to remote, and then hybrid, working arrangements.

With input and guidance from senior management and the internal task force, increased vaccinations, and the removal of Pandemic-related restrictions, beginning in April 2021, Federated Hermes encouraged (but did not require) its employees to begin to return to working from its U.S.

Beginning on July 6, 2021, Federated Hermes implemented a structured return to office plan that requires most of its U.S.

employees to work from Federated Hermes' offices at least two days a week, or at least three days every other week, depending on their work location and office or work station configuration.

employees have been asked to work from the office for at least three days a week beginning on March 1, 2022.

Managers also have the flexibility to alter work arrangements to address individual employee circumstances.

In the UK, from February 1, 2022, all full-time employees have been asked to be in the office for at least two days a week through February 28, 2022, and, thereafter, all full-time employees have been asked to be in the office for at least three days a week.

Part-time employees have been asked to prorate their time in the office according to days worked

based on the foregoing.

Any structured return to office plans for Federated Hermes' non-U.S.

employees will be consistent with applicable government requirements.

Federated Hermes intends its remote and hybrid working arrangements to allow employees the flexibility to work from home or in the office, while continuing to support the operation of Federated Hermes' business and meet business needs.

Federated Hermes continues to monitor the ongoing Pandemic situation (as described in more detail below) and will continue to assess its return to office plans for U.S.

and UK employees.

Federated Hermes has developed and implemented a series of return to office protocols intended to assure employees that it is taking the safety and well-being of its employees seriously as return to office plans are implemented.

Federated Hermes continues to review and, in certain cases, revise or enhance these protocols to provide for the safety of its employees, to seek to ensure the resiliency of Federated Hermes' business and to keep its customers informed.

Among other actions, Federated Hermes has taken the following steps:

• As a result of a travel advisory issued by the CDC, the company instituted a travel ban to certain countries, including those designated as high risk by the CDC on February 27, 2020.

Federated Hermes now recommends to employees that they follow national, state/provincial, local and CDC recommendations for self-quarantining and testing after travel.

• No commercial air travel occurred in the second quarter of 2020.

Limited hotel and car rental reservations resumed in June 2020 and continued throughout the remaining months of 2020.

Limited commercial air travel re-commenced in the third quarter of 2020.

Commercial air travel in the fourth quarter of 2020 was also minimal.

• While Federated Hermes' U.S.

offices remain open, and limited, physically distanced, in-person meetings have begun to occur more frequently, remote working arrangements continue to be implemented for much of our global workforce with approximately 95 percent of Federated Hermes' employees working from home successfully.

Federated Hermes has increased usage and reliance on virtual meeting tools and prioritized the deployment of additional equipment and technology to provide enhanced remote-work options.

• Federated Hermes Fund Board meetings held in August and November 2020 were held in person as well as via teleconference allowing those who preferred to participate remotely to do so.

Federated Hermes held the May 2020 Federated Hermes Fund Board meetings, via teleconference, rather than in person.

Federated Hermes had previously held its April 2020 annual shareholder meeting via teleconference and plans to hold its April 2021 annual shareholder meeting in the same manner.

Offshore fund and subsidiary board meetings are being held via telephone or video conference.

• Federated Hermes has continued to on-board new hires, shipping necessary equipment to them and conducting training remotely.

• Federated Hermes investment professionals and strategists are frequently publishing fresh content to the Insights section of Federated Hermes' website offering customers unique perspectives during these difficult markets.

Federated Hermes is also prepared to continue to implement a variety of other strategies to ensure the resiliency of our business.

Examples include transferring processes to alternate personnel, prioritizing technology resources to service critical processing, and leveraging service providers and counterparties for the most efficient delivery of services.

In addition to the implementation of advanced cleaning protocols and other measures, Federated Hermes has made provisions for hand sanitizer stations and is encouraging everyone to take standard precautions such as physically distancing, washing their hands with soap and water, wearing face masks, avoiding shaking hands and staying home if sick.

Federated Hermes is evaluating options and considering details of its plans for when and how to bring more employees back to our offices.

For example, Federated Hermes developed and implemented a series of return to the office protocols intended to assure employees that Federated Hermes is taking the safety and well-being of our employees seriously as more employees begin to return to the office.

The company plans to take a measured approach that involves implementing procedures aimed at safeguarding employee health while continuing to provide a high level of client service.

Federated Hermes expects those procedures and related timelines to vary by location in order to meet local regulatory guidelines and support community health practices.

As of December 31, 2020, Federated Hermes has advised its employees that it is delaying a significant return to the office for U.S.

employees until mid- to late-April 2021.

In the UK, in accordance with government guidance, Federated Hermes' London office remains open only for those employees who are unable to work from home and will continue to be limited until government guidance is updated.

Federated Hermes continues to monitor the ongoing global health situation through contact with the CDC, the SEC, the World Health Organization and the Securities Industry and Financial Markets Association (SIFMA), a financial services industry trade association, among others.

As of December 31, 2020, while Federated Hermes' stock price has fluctuated and been lower than it was at the beginning of 2020 prior to Covid-19 amidst the volatility in stock prices on major exchanges, and Federated Hermes' business operations have had to adapt to a remote working environment, Covid-19 has not materially affected Federated Hermes' financial condition or cash flows.

See Item 1A - Risk Factors under the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19) for information regarding the risks to Federated Hermes presented by Covid-19.

• Federated Hermes made technology investments, including laptops for employees, expanded internet bandwidth, video conferencing and collaboration software, and added video equipment.

Federated Hermes also has increased usage and reliance on virtual meeting tools and prioritized the deployment of additional equipment and technology.

These actions have allowed Federated Hermes to remain fully operational with minimal disruptions, support a remote and current hybrid working environment and continue to deliver Federated Hermes' investment products and services to customers.

• Federated Hermes continues to undertake to comply with any remaining requirements applicable to Federated Hermes under relevant Federal, state, and local government orders or laws, as well as remaining requirements applicable to Federated Hermes under the Center for Disease Control and Prevention's (CDC) and state health departments' guidance and cleaning procedures.

• In addition to maintaining enhanced cleaning protocols and other measures, Federated Hermes continues to make available hand sanitizer stations and disinfectant wipes for employees in the office, and encourage employees to take standard precautions such as washing their hands with soap and water and staying home if sick.

• As a result of a travel advisory issued by the CDC, the company instituted a travel ban on February 27, 2020 to certain countries, including those designated as high risk by the CDC.

Federated Hermes now recommends that employees follow national, state/provincial, local and CDC requirements or recommendations when traveling, as well as specific venue requirements when planning or attending conferences or other events.

Planning activity for conferences and events scheduled for the fourth quarter 2021 and for 2022 increased in the second half of 2021 over the first half of 2021.

Fourth quarter 2021 travel reservations were down from the third quarter 2021 peak during the Pandemic, although fourth quarter 2021 was the second most active quarter since the first quarter of 2020.

Travel reservations remain below pre-Pandemic levels.

• Federated Hermes Fund Board meetings, Federated Hermes corporate Board meetings, and offshore fund and subsidiary Board meetings, are being held in person as well as via teleconference allowing those who prefer to participate remotely to do so.

• Federated Hermes has continued to on-board new hires, providing necessary equipment to them and conducting training remotely when necessary.

• Federated Hermes has introduced a range of resources to provide employees with information and support to remain physically and emotionally healthy during the Pandemic.

• Federated Hermes investment professionals and strategists continue to publish fresh content to the Insights section of Federated Hermes' website, offering their unique perspectives to investors.

Federated Hermes continues to take a measured approach that involves implementing procedures aimed at safeguarding employee health while maintaining a high level of customer service.

Federated Hermes expects those procedures and related timelines to vary by location in order to endeavor to meet local regulatory requirements and support community health practices.

Federated Hermes is also prepared to continue to implement a variety of other strategies to ensure the resiliency of its business.

Federated Hermes continues to monitor the ongoing global health situation through resources provided by, or contact with, the CDC, the SEC, the World Health Organization and the Securities Industry and Financial Markets Association (SIFMA), a financial services industry trade association, among others.

As of December 31, 2021, while Federated Hermes' stock price has fluctuated amidst the volatility in stock prices on major exchanges, and Federated Hermes' business operations have had to adapt to a remote and current hybrid working environment, the Pandemic has not materially affected Federated Hermes' financial condition or cash flows except to the extent that the increased net Voluntary Yield-related Fee Waivers discussed below resulting from the near-zero interest rate environment can be attributed to the Pandemic.

A further prolonged period of economic and financial distress and volatility as a result of the Pandemic could exacerbate human resource capital management, economic, market and other risks, and could impact, including in a material way, Federated Hermes' Financial Condition.

See Item 1A - Risk Factors - General Risk Factors – Economic and Market Risks and General Risk Factors - Other General Risks - Recruiting and Retaining Key Personnel (Human Capital Resource Management Risk) and Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic) for additional information.

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%.

In March 2020, in response to disrupted economic activity as a result of the Pandemic, 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 implement Voluntary Yield-related Fee Waivers.

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.

Beginning in the first quarter 2020, Federated Hermes has implemented Voluntary Yield-related Fee Waivers.

These 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, 2021, Voluntary Yield-related Fee Waivers totaled $420.3 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.

Assuming asset levels and mix remain constant and based on recent and expected market conditions, including potential additional government measures to further stimulate the economy, Voluntary Yield-related Fee Waivers for the first quarter of 2021 may result in a negative pre-tax impact on income of approximately $14 million.

While the level of these fee waivers is impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money

market fund portfolios would likely reduce the negative pre-tax impact of these fee waivers.

The actual amount of future Voluntary Yield-related Fee Waivers and the resulting negative impact of these fee waivers could vary significantly from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, changes in yields on instruments available for purchase by the money market funds, changes due to the level of government measures to further stimulate the economy which could result in the issuance of additional Treasury debt instruments, actions by the FOMC, the U.S.

Department of Treasury, the SEC, FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in customer relationships, changes in money market product structures and offerings, demand for competing products, changes in distribution models, changes in the distribution fee arrangements with third parties, Federated Hermes' willingness to continue the Voluntary Yield-related Fee Waivers and changes in the extent to which the impact of these fee waivers is shared by any one or more third parties.

These fee waivers were partially offset by related reductions in distribution expenses of $277.1 million, such that the net negative pre-tax impact to Federated Hermes was $143.2 million in 2021.

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 in 2020.

Short-term interest rates remained near historic lows during the fourth quarter of 2021 as technical factors at the front end of the yield curve kept yields on short-term government securities—including repurchase agreements and Treasury bills—just above zero.

Market expectations are that the FOMC will raise interest rates multiple times in 2022, starting in March.

Higher yields in 2022 will lower the impact of Voluntary Yield-related Fee Waivers.

The net negative impact on pre-tax income from Voluntary Yield-related Fee Waivers in the first quarter 2022 may result in a net negative pre-tax impact on income of approximately $22 million.

Assuming an increase in interest rates of 25 basis points by the FOMC in March 2022, the first quarter 2022 estimated $22 million of net negative impact on pre-tax income from Voluntary Yield-related Fee Waivers is expected to be reduced by approximately 90% for the second quarter 2022.

The actual amount of future Voluntary Yield-related Fee Waivers and the resulting negative impact of these fee waivers could vary, including in a material way, from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, changes in yields on instruments available for purchase by the money market funds, including changes due to the level of government measures to further stimulate the economy which could result in the issuance of additional Treasury debt instruments, actions by the FOMC, the U.S.

Department of Treasury, the SEC, the FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in customer relationships, changes in money market product structures and offerings, demand for competing products, changes in distribution models, changes in the distribution fee arrangements with third parties, Federated Hermes' willingness to continue the Voluntary Yield-related Fee Waivers and changes in the extent to which the impact of these fee waivers is shared by any one or more third parties.

Current Regulatory Environment

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and foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities.

See Item 1 - Business under the caption Regulatory Matters and Item 1A - Risk Factors under the caption General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.

See Item 1 - Business - Regulatory Matters and Item 1A - Risk Factors - General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.

Asset Highlights

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Total Managed Assets $ 668,873 $ 619,430 8 %

1 The balance at December 31, 2019 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

See Note (3) to the Consolidated Financial Statements for additional information.

Average Managed Assets

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Total Average Managed Assets $ 632,799 $ 613,908 $ 509,180 3 % 21 %

1 The average for the year ended December 31, 2019 includes $8.2 billion of average fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

1 The average balance for the year ended December 31, 2019 includes $8.2 billion of average fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

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Net Exchanges (362) (64)

Acquisitions 0 2,191

Acquisitions/(Dispositions) 408 0

Impact of Foreign Exchange 1

21 unchanged sentences

Impact of Foreign Exchange 1

(1,096) 1,195

Market Gains and (Losses) 2

13 unchanged sentences

Net Exchanges (33) (16)

Acquisitions 0 450

Acquisitions/(Dispositions) 17 0

Impact of Foreign Exchange 1

17 unchanged sentences

Net Sales (Redemptions) 3

12,882 11,145

Net Exchanges (81) (15)

8 unchanged sentences

3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

4 For one fixed-income Separate Account, Sales, Redemptions, Net Sales (Redemptions) and Market Gains and (Losses) were previously incorrectly reported for the quarters ended March 31, 2020 and June 30, 2020.

Total assets were reported correctly and are not impacted.

The nine months ended September 30, 2020 included corrections that increased Redemptions by $390 million and decreased Sales by $1.1 billion, with the offset increasing Market Gains and (Losses) by $1.5 billion.

Changes in Alternative / Private Markets Fund and Separate Account Assets

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Beginning Assets 1

$ 12,100 $ 11,389

Sales 3,699 2,277

2 unchanged sentences

Net Exchanges (2) (4)

Acquisitions/(Dispositions) 81 0

Impact of Foreign Exchange 2

5 unchanged sentences

Net Sales (Redemptions) 4

Acquisitions 452 0

Acquisitions/(Dispositions) 0 452

Impact of Foreign Exchange 2

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Beginning Assets 1

$ 19,084 $ 18,102

Redemptions 4

2 unchanged sentences

Net Exchanges (2) (4)

Acquisitions 452 0

Acquisitions/(Dispositions) 81 452

Impact of Foreign Exchange 2

1 unchanged sentence

Ending Assets $ 22,920 $ 19,084

1 The balance at December 31, 2019 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

1 The beginning assets at December 31, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

13 unchanged sentences

Net Exchanges 41 (19)

Acquisitions 0 11

Acquisitions/(Dispositions) 54 0

Market Gains and (Losses) 1

13 unchanged sentences

Net Exchanges 42 (20)

Acquisitions 0 11

Acquisitions/(Dispositions) 54 0

Impact of Foreign Exchange 3

10 unchanged sentences

Beginning Assets 1

$ 123,713 $ 107,724

Sales 49,125 46,401

2 unchanged sentences

Net Exchanges (356) (103)

Acquisitions 0 2,652

Acquisitions/(Dispositions) 560 0

Impact of Foreign Exchange 2

7 unchanged sentences

Net Sales (Redemptions) 4

(798) (3,104)

Net Exchanges 356 (6)

6 unchanged sentences

$ 199,097 $ 180,335

69,579 60,827

Redemptions 4

1 unchanged sentence

Net Sales (Redemptions) 4

4,629 (3,268)

Net Exchanges 0 (109)

1 unchanged sentence

Impact of Foreign Exchange 2

(1,484) 2,001

Market Gains and (Losses) 3

1 unchanged sentence

Ending Assets $ 220,966 $ 199,097

1 The balance at December 31, 2019 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

1 The beginning assets at December 31, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

5 unchanged sentences

4 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

5 For one fixed-income Separate Account, Sales, Redemptions, Net Sales (Redemptions) and Market Gains and (Losses) were previously incorrectly reported for the quarters ended March 31, 2020 and June 30, 2020.

Total assets were reported correctly and are not impacted.

Changes in Federated Hermes' average asset mix year-over-year across both asset classes and product types have a direct impact on Federated Hermes' operating income.

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Other 0 % 0 % 0 % 1 % 1 % 1 %

Total managed assets represent the balance of AUM at a point in time.

By contrast, total average managed assets represent the average balance of AUM during a period of time.

Total managed assets represent the balance of AUM at a point in time, while total average managed assets represent the average balance of AUM during a period of time.

Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.

1 unchanged sentence

Period-end managed assets increased 8% at December 31, 2021 as compared to December 31, 2020 primarily due to an increase in money market assets and, to a lesser extent, an increase in fixed-income assets.

Total average money market assets increased 28% for 2020 compared to 2019.

Total average money market assets decreased 4% for 2021 compared to 2020.

Period-end money market assets increased 7% at December 31, 2021 as compared to December 31, 2020.

Average equity assets decreased 1% for 2020 as compared to 2019.

Average equity assets increased 22% for 2021 as compared to 2020.

Period-end equity assets increased 5% at December 31, 2021 as compared to December 31, 2020 primarily due to market appreciation, partially offset by net redemptions.

Average fixed-income assets increased 23% for 2021 as compared to 2020.

Period-end fixed-income assets increased 22% at December 31, 2020 as compared to December 31, 2019, primarily due to net sales and market appreciation.

Even though 2020 was a presidential election year, market activity was dominated by the Covid-19 pandemic.

Its near simultaneous arrival around the world in the first quarter of 2020 pushed the global economy into recession, spurring a steep sell-off in risk assets, pushing the equity markets into a bear market at the fastest pace in history and challenging credit markets as investors flocked to U.S.

Treasuries and cash.

The Fed and Congress responded with unprecedented monetary and fiscal stimulus, actions mirrored by policymakers the world over, helping to stem the economic slide and boost risk assets on expectations for stronger economic growth and earnings.

By year's end, the domestic equity markets were setting new highs, with the technology-laden Nasdaq Composite Index returning 44.92% for the year ended December 31, 2020, the S&P 500 rising 18.40% and the Dow Jones Industrial Average climbing 9.72%.

In fixed-income, the 10-year Treasury yield plunged 128 basis points in the first quarter on pandemic worries before settling into a narrow trading range through summer and fall before drifting higher to end 2020 at 0.92%, a percentage point below where it started the year.

After the FOMC dropped its federal funds target range in March to 0-0.25%,

short-term rates remained anchored at historic lows on the central bank's pledge to hold benchmark rates near zero-bound through at least 2022 or until average inflation hits and holds at 2%.

For an explanation of the changes in managed assets at December 31, 2019 compared to December 31, 2018 and changes in average managed assets for 2019 as compared to 2018, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2019, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Asset Highlights.

Period-end fixed-income assets increased 16% at December 31, 2021 as compared to December 31, 2020 primarily due to net sales.

In the U.S., a vibrant job market, wage and income gains, rising capital expenditures and robust consumer spending overwhelmed the impact of a lingering Pandemic, driving economic growth and the equity markets higher.

For the year, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite rose 26.9%, 18.7% and 21.4%, respectively, with the S&P ssetting 70 record highs during the year, the most since 1995.

Overseas, where Pandemic-related restrictions created more havoc, economic and equity performance was less enthusiastic but still positive, with the MSCI World ex USA rising 10.1% on the year and the MSCI All Country World ex USA gaining 5.5% in 2021.

In the fixed-income markets, the combination of inflation at multi-decade highs and a Federal Reserve pivoting toward tightening earlier than had been expected in 2022 sent yields rising across the Treasury curve, with the biggest increases on the short-to-intermediate end.

For example, yields rose by 65 basis points on the 10-year Treasury to close 2021 at 1.51% and by 79 basis points on the 3-year Treasury to end the year at

Lower-quality segments of the credit market performed better, bolstered by strong corporate balance sheets and increasing corporate earnings.

For an explanation of the changes in managed assets at December 31, 2020 compared to December 31, 2019 and changes in average managed assets for 2020 as compared to 2019, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Highlights.

Results of Operations

For an explanation of changes for 2019 as compared to 2018, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2019, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Results of Operations.

Revenue increased $121.4 million in 2020 as compared to 2019 primarily due to (1) an increase in money market revenue of $41.5 million primarily due to higher average money market assets (includes a decrease in revenue related to $113.0 million in Voluntary Yield-related Fee Waivers) (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact), (2) an increase in alternative/private market revenue of $33.0 million primarily due to the revenue of a previously nonconsolidated entity being recorded in operating revenue beginning in March 2020, (3) an increase in equity revenue of $18.6 million due to a change in the mix of average assets, (4) an increase in fixed-income revenue of $16.8 million due to higher average assets and (5) an increase in performance fees of $15.6 million.

For an explanation of changes for 2020 as compared to 2019, see Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.

Revenue decreased $147.8 million in 2021 as compared to 2020 primarily due to an increase of $307.3 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact) and a decrease in money market revenue of $38.1 million primarily due to lower average money market assets.

These decreases were partially offset by an increase in equity and fixed-income revenue of $127.6 million and $46.6 million, respectively, due to higher average assets, an increase of $11.0 million as a result of the consolidation of certain variable interest entities (VIE) not previously consolidated prior to 2021 related to the HCL Acquisition (see Note (2) to the Consolidated Financial Statements) and an increase in alternative/private market revenue of $7.3 million due to the revenue of a previously nonconsolidated entity being recorded to operating revenue beginning in March 2020.

Federated Hermes' ratio of revenue to average managed assets for 2021 was 0.20% as compared to 0.23% for 2020.

The decrease in the rate was primarily due to the reduction of revenue from Voluntary Yield-related Fee Waivers and the result of a lower proportion of revenue earned on average equity assets during 2020 as compared to 2019.

The decrease in the rate was primarily due to the reduction of revenue from higher Voluntary Yield-related Fee Waivers, partially offset by a higher proportion of revenue earned on average equity assets during 2021 as compared to 2020.

Operating Expenses.

Total operating expenses for 2020 increased $51.2 million compared to 2019.

Compensation and Related expense increased $61.3 million in 2020 as compared to 2019 primarily related to (1) an increase in incentive compensation of $28.2 million driven primarily by sales efforts and investment management performance and (2) a $23.7 million increase due to the activity related to first quarter 2020 acquisitions being included in the Consolidated Financial Statements.

Distribution expense decreased $22.3 million primarily related to $98.4 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact), partially offset by an increase in distribution expense of $80.2 million due to higher average money market fund assets.

Systems and Communications expense increased $11.7 million in 2020 compared to 2019 primarily related to $7.3 million due to increased market data services.

Professional Service Fees expense increased $11.4 million primarily due to technology-related projects.

Travel and Related expenses decreased $12.1 million due to decreased travel during the year as a result of Covid-19.

Total operating expenses for 2021 decreased $95.9 million compared to 2020.

Distribution expense decreased $157.5 million primarily related to an increase of $178.7 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact), partially offset by an increase of $19.5 million in competitive payments.

Compensation and Related expense increased $29.1 million driven by (1) an increase of $13.6 million due to the increase in the average GBP/USD exchange rate for 2021 as compared to 2020, (2) an increase of $11.0 million as a result of the consolidation of certain VIEs not previously consolidated prior to 2021 related to the HCL Acquisition (see Note (2) to the Consolidated Financial Statements), (3) an increase of $6.6 million related to an increase in staff and compensation rates and (4) an increase of $5.4 million related to the compensation expenses of a previously nonconsolidated entity being recorded to Compensation and Related expense beginning in March 2020.

These increases in Compensation and Related expenses were partially offset by a decrease of $14.7 million in incentive compensation primarily due to decreased sales and investment performance.

Systems and Communications expense increased $10.7 million due primarily to technology-related projects.

Nonoperating Income (Expenses).

Nonoperating Income (Expenses), net, increased $10.6 million in 2020 as compared to 2019.

The increase is primarily due to (1) an increase of $13.1 million to Gain (Loss) on Securities, net due primarily to an increase in the market value of investments, and (2) a $7.5 million gain recorded in Nonoperating Income (Expenses) - Other, net from a fair value adjustment to the equity investment of a previously nonconsolidated entity recorded in the first quarter of 2020.

These increases were partially offset by a decrease of $10.6 million related to the income of this previously nonconsolidated entity no longer being recorded in Nonoperating Income (Expenses) - Other, net beginning in March 2020.

Nonoperating Income (Expenses), net, decreased $17.9 million in 2021 as compared to 2020.

The decrease is primarily due to an $8.5 million decrease in Gain (Loss) on Securities, net due primarily to a smaller increase in the market value of investments in 2021 as compared to 2020 and a $7.5 million gain from a fair value adjustment to an equity investment of a previously nonconsolidated entity recorded in Nonoperating Income (Expenses) - Other, net in 2020.

Income Taxes.

The income tax provision for 2021 and 2020 was $104.0 million and $110.0 million, respectively.

The provision for 2020 increased $21.9 million as compared to 2019 primarily due to higher income before income taxes as a result of the changes in revenues, operating expenses and nonoperating income (expenses) noted above.

The provision for 2021 decreased $6.0 million as compared to 2020 primarily due to a decrease in pre-tax book income less non-taxable, non-controlling interests ($15.2 million), partially offset by the net increase in deferred taxes associated with the change in the UK tax rate in 2020 from 17% to 19% and in 2021 from 19% to 25% effective April 1, 2023 ($11.1 million).

The effective tax rate was 27.6% for 2021 and 24.7% for 2020.

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Net Income Attributable to Federated Hermes, Inc.

Net income increased $54.0 million in 2020 as compared to 2019 primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted above.

Diluted earnings per share for 2020 increased $0.54 as compared to 2019 primarily due to increased net income.

Net income decreased $56.1 million in 2021 as compared to 2020 primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted above.

Diluted earnings per share for 2021 decreased $0.48 as compared to 2020 primarily due to decreased net income ($0.57), partially offset by a decrease in shares outstanding due to share repurchases ($0.09).

Liquidity and Capital Resources

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Federated Hermes' experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis.

Further, regarding international exposure, certain money market funds (representing approximately $231 million), that meet the requirement of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated Hermes' credit analysis process.

Further, regarding international exposure, certain money market funds (representing approximately $173 million in AUM) that meet the requirements of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated Hermes' credit analysis process.

Cash Provided by Operating Activities.

Net cash provided by operating activities totaled $170.4 million for 2021 as compared to $373.2 million for 2020.

The increase of $38.3 million was primarily due to (1) an increase in cash received related to the $121.4 million increase in revenue previously discussed less $11.8 million in accrued performance fees at December 31, 2020, (2) a decrease in cash paid related to the $22.3 million decrease in Distribution expense previously discussed and (3) a decrease of $13.5 million in cash paid for trading securities as compared to 2019.

These increases were partially offset by (1) an increase of $30.7 million in cash paid for incentive compensation for the year ended December 31, 2020 as compared to 2019, (2) an increase of $26.1 million in cash paid for taxes primarily due to higher taxable income for the year ended December 31, 2020 as compared to 2019 and (3) an increase in cash paid related to the $23.7 million increase in compensation expense related to first quarter 2020 acquisitions.

Cash Used by Investing Activities.

In 2020, net cash used by investing activities was $24.8 million which primarily represented $25.5 million paid for purchases of Investments—Affiliates and Other and $13.5 million paid for property and equipment, partially offset by $11.5 million in cash received from redemptions of Investments—Affiliates and Other.

The decrease of $202.8 million was primarily due to (1) a net increase of $166.4 million in cash paid for trading securities in 2021 as compared to 2020, (2) a decrease in cash received related to the $147.8 million decrease in revenue previously discussed and (3) an increase of $23.1 million in cash paid for incentive compensation for the year ended December 31, 2021 as compared to 2020.

These decreases were partially offset by a decrease in cash paid related to the $157.5 million decrease in Distribution expense previously discussed.

Cash Provided by Investing Activities.

In 2021, net cash provided by investing activities was $10.8 million which primarily represented $36.0 million in cash received from redemptions of Investments—Affiliates and Other, partially offset by $10.4 million paid for property and equipment, $9.4 million paid for purchases of Investments—Affiliates and Other and $5.3 million paid for an asset purchase during 2021.

Cash Used by Financing Activities.

In 2021, net cash used by financing activities was $249.5 million.

Of this amount, Federated Hermes paid $207.8 million or $2.08 per share in dividends to holders of its common shares, paid $125.0 million in connection with its debt obligations and paid $66.8 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase program (see Note (15) to the Consolidated Financial Statements for additional information).

This activity was partially offset by $100.0 million borrowed from Federated Hermes' revolving credit facility.

In 2017, Federated Hermes entered into an unsecured Third Amended and Restated Credit Agreement by and among Federated Hermes, certain of its subsidiaries as guarantors party thereto, a syndicate of ten banks as Lenders party thereto, PNC Bank, National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc., as joint lead arranger, Citibank, N.A.

as syndication agent, and TD Bank, N.A.

as documentation agent (Credit Agreement).

Of this amount, Federated Hermes paid $228.3 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase programs (see Note (14) to the Consolidated Financial Statements for additional information), paid $165.9 million to acquire additional equity of HFML (see Note (2) to the Consolidated Financial Statements), paid $147.3 million in connection with its debt obligations and paid $105.8 million or $1.08 per share in dividends to holders of its common shares.

This activity was partially offset by $295.7 million borrowed from Federated Hermes' revolving credit facility and $107.6 million of contributions from noncontrolling interests in subsidiaries.

On July 30, 2021, Federated Hermes entered into an unsecured Fourth Amended and Restated Credit Agreement by and among Federated Hermes, certain of its subsidiaries as guarantors party thereto, a syndicate of eleven banks as Lenders party thereto, PNC Bank, National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc., as joint lead arranger, Citibank, N.A.

as syndication agent, and Toronto-Dominion Bank, New York Branch as documentation agent (Credit Agreement).

The Credit Agreement amended and restated Federated Hermes' Third Amended and Restated Credit Agreement, which was dated June 5, 2017 and scheduled to mature on June 5, 2022 (Prior Credit Agreement).

The Credit Agreement consists of a $350 million revolving credit facility with an additional $200 million available via an optional increase (or accordion) feature.

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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.

The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.

The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice

of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.

Cash dividends of $105.8 million, $207.8 million and $109.1 million were paid in 2021, 2020 and 2019 respectively, to holders of Federated Hermes common stock.

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All dividends were considered ordinary dividends for tax purposes.

Future Cash Needs.

In addition to the contractual obligations described below, management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, developing and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and equipment (including technology).

Any number of factors may cause Federated Hermes' future cash needs to increase.

As a result of the highly regulated nature of the investment management business, management anticipates that aggregate expenditures for compliance and investment management personnel, compliance systems and technology and related professional and consulting fees may continue to increase.

On January 28, 2021, the board of directors declared a $0.27 per share dividend.

The dividend was payable to shareholders of record as of February 5, 2021, resulting in $26.8 million being paid on February 12, 2021.

After evaluating Federated Hermes' existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under the Credit Agreement and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet its present and reasonably foreseeable cash needs.

Financial Position

The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations.

This discussion excludes certain material fluctuations primarily due to the HCL Acquisition.

See Note (3) to the Consolidated Financial Statements for additional information.

Investments—Consolidated Investment Companies at December 31, 2020 increased $26.8 million from December 31, 2019 primarily due to (1) an increase of $15.2 million due to the consolidation of two variable interest entities (VIE) and a voting rights entity (VRE) during 2020, (2) an increase of $15.0 million related to net purchases in existing consolidated products and (3) an increase of $12.6 million of market appreciation for existing consolidated products, partially offset by a $16.0 million decrease related to the deconsolidation of a VRE and the liquidation of a VIE during the first half of 2020.

Investments—Affiliates and Other at December 31, 2020 increased $18.7 million from December 31, 2019 primarily due to net purchases of $9.0 million, an increase of $5.9 million of market appreciation and the deconsolidation of a VRE in the first half of 2020 which reclassified Federated Hermes' investment of $2.5 million into Investments—Affiliates and Other.

Right-of-Use Assets, net at December 31, 2020 increased $21.6 million from December 31, 2019 and Long-Term Lease Liabilities at December 31, 2020 increased $14.4 million from December 31, 2019 primarily due to a new lease for office space in London.

Accrued Compensation and Benefits at December 31, 2020 increased $33.2 million from December 31, 2019 primarily due to 2020 incentive compensation accruals recorded at December 31, 2020 ($134.5 million), partially offset by the 2019 accrued annual incentive compensation being paid in the first quarter of 2020 ($107.0 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 ($7.9 million) and an increase in intangible assets associated with first quarter 2020 acquisitions ($5.5 million).

Off-Balance Sheet Arrangements

As of December 31, 2020 and 2019, Federated Hermes did not have any material off-balance sheet arrangements.

Contractual Obligations.

The following table presents, as of December 31, 2020, Federated Hermes' significant minimum noncancelable contractual obligations by payment date.

The payments represent amounts contractually due to the recipient and do not include any carrying value adjustments.

Further discussion of the nature of each obligation is included below the table.

Payments Due in

in millions 2021 2022-2023 2024-2025 After 2025 Total

Long-Term Debt Obligations

$ 0.0 $ 75.0 $ 0.0 $ 0.0 $ 75.0

Operating Lease Obligations

19.8 40.5 33.6 63.1 157.0

Purchase Obligations

33.3 17.4 6.9 5.8 63.4

Other Obligations

2.5 0.7 0.0 0.0 3.2

Total $ 55.6 $ 133.6 $ 40.5 $ 68.9 $ 298.6

As of December 31, 2021, Federated Hermes has material future cash requirements from contractual and other obligations relating primarily to long-term debt and operating lease obligations.

Further discussion of the nature of each obligation is included below.

Long-Term Debt Obligations.

Outstanding principal is to be paid no later than the expiration date of the Credit Agreement.

Amount includes principal only.

The interest is variable, based on LIBOR plus a 100 basis point spread, in accordance with the Credit Agreement.

Assuming management's current plan for repayment of the Credit Agreement and LIBOR as of December 31, 2020, Federated Hermes' interest payments are estimated to be $0.8 million and $0.2 million for 2021 and 2022, respectively.

Any changes in future cash needs can impact the projected repayment schedule.

As such, management's repayment plan is subject to change at management's discretion, which may impact the estimated interest payments.

See Note (11) to the Consolidated Financial Statements for additional information.

Federated Hermes continues to monitor the debt financing market, and may pursue longer term financing arrangements to supplement its cash flow from operations to fund share repurchases, potential acquisitions, the full or partial repayment of existing debt and for other general corporate purposes.

Based upon market conditions and other factors, Federated Hermes is considering longer-term (e.g.

ten-year) financing of approximately $300 million during 2022.

Operating Lease Obligations.

See Note (17) to the Consolidated Financial Statements for additional information.

Purchase Obligati ons.

Purchase Obligations.

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.

The contracts require payments through the year 2027.

Costs for such services are expensed as incurred.

As of December 31, 2021, Federated Hermes had purchase obligations of approximately $42 million payable within 12 months and an additional $44 million thereafter.

Future Cash Needs.

In addition to the contractual obligations described above, management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, developing and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and equipment (including technology).

Any number of factors may cause Federated Hermes' future cash needs to increase.

On January 27, 2022, the board of directors declared a $0.27 per share dividend.

The dividend was payable to shareholders of record as of February 8, 2022, resulting in $25.0 million being paid on February 15, 2022.

Financial Position

Investments—Consolidated Investment Companies at December 31, 2021 increased $14.2 million from December 31, 2020 primarily due to an increase of $90.7 million related to the consolidation of three voting rights entities (VRE) and a VIE in 2021, partially offset by a $77.9 million decrease due to the deconsolidation of four VREs and one VIE during 2021.

Investments—Affiliates and Other at December 31, 2021 increased $42.2 million from December 31, 2020 primarily due to the deconsolidation of two VREs in 2021 which reclassified Federated Hermes' investment of $42.2 million into Investments—Affiliates and Other.

Right-of-Use Assets, net at December 31, 2021 decreased $13.8 million from December 31, 2020 due primarily to annual amortization and Long-Term Lease Liabilities at December 31, 2021 decreased $16.7 million from December 31, 2020 primarily due to payments made on leases during 2021.

Long-Term Deferred Tax Liability, net at December 31, 2021 increased $17.3 million from December 31, 2020 primarily due to the revaluation of the foreign net deferred tax liability associated with the change in the UK tax rate from 19% to 25% effective April 1, 2023.

Variable Interest Entities

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See Note (5) to the Consolidated Financial Statements for more information.

Recent Accounting Pronouncements

For a complete list of new accounting standards applicable to Federated Hermes, see Note (2) to the Consolidated Financial Statements.

Critical Accounting Policies

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Actual results may differ from those estimates made by management and those differences may be material.

Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that its policies regarding accounting for asset acquisitions and business combinations, goodwill and intangible assets and HFML redeemable noncontrolling interest involves a higher degree of judgment and complexity.

Asset Acquisitions and Business Combinations.

Federated Hermes performs an analysis to determine whether a transaction meets the definition of a business under U.S.

When determining whether a set of assets and activities constitute a business, management considers whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets.

If this threshold is met, these assets and activities do not meet the definition of a business and the transaction is accounted for as an asset acquisition.

If not met, management then evaluates whether these assets and activities meet the requirement of a business including, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.

If these assets and activities do not meet these requirements, the transaction is accounted for as an asset acquisition.

A transaction that does not meet the definition of a business is accounted for as an asset acquisition.

Asset acquisitions are accounted for using a cost accumulation and allocation method where the cost of the transaction is allocated on a relative fair value basis to the qualifying assets acquired and liabilities assumed on the acquisition date.

The cost of the transaction includes both the consideration transferred to the seller and any direct transaction costs incurred.

The primary asset acquired in previous asset acquisitions has been the rights to manage fund assets.

The rights to manage fund assets is an intangible asset valued using the excess earnings method, under the income approach, which estimates fair value by quantifying the amount of discounted cash flows generated by the asset.

No goodwill is recognized in an asset acquisition.

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 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.

The fair value of the rights to manage fund assets is determined using the excess earnings method, under the income approach.

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

Each method considers various factors to project future cash flows expected to be generated from the asset.

After the fair values of all separately identifiable assets and liabilities have been estimated, goodwill is recorded to the extent that the consideration paid exceeds the sum of the fair values of the separately identifiable acquired assets, net of assumed liabilities.

For both asset acquisitions and business combinations, the significant assumptions used in the valuation of the intangible assets acquired typically include:

(1) the asset's estimated useful life;

(2) projected AUM;

(3) projected revenue growth rates;(4) projected pre-tax profit margins;

(5) tax rates;

(6) discount rates and (7) in the case of a trade name valuation, a royalty rate.

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.

Management estimates a rate of change for underlying managed assets based on a combination of an estimated rate of market appreciation or depreciation and an estimated net redemption or sales rate.

Expected revenue per managed asset and incremental operating expenses of the acquired asset are generally based on agreed-upon terms, average market participant data and historical experience.

The assumptions for tax rates are based on current and projected rates.

The discount rates are estimated at the current market rate of return.

The royalty rate is estimated after consideration of comparable third-party royalty rate licensing agreements, pre-tax profit margins and the age and importance of the trade name.

Given the complexity and judgment involved in accounting for asset acquisitions and business combinations, management may utilize the services of an independent valuation expert to assist in this process.

Goodwill and Intangible Assets.

The process of determining the amount of goodwill and the fair value of identifiable intangible assets at the date of acquisition requires significant management estimates and judgment.

If subsequent changes in these assumptions differ significantly from those used in the initial valuation, the goodwill and/or intangible asset amounts recorded in the financial statements could be subject to possible impairment.

In addition, finite-lived intangible assets could require an acceleration in amortization expense.

These adjustments could have a material adverse effect on Federated Hermes' business, results of operations and financial condition.

Goodwill is reviewed for impairment annually as of June 30, or when indicators of a potential impairment exist.

Federated Hermes has a single reporting unit, consistent with Federated Hermes' single operating segment, to which all goodwill has been assigned.

Federated Hermes first performs a qualitative analysis and considers various factors including macroeconomic and entity-specific considerations, industry and market conditions, and overall financial performance.

A quantitative impairment

test is performed if there are indications that it is more likely than not that the fair value of the reporting unit is less than its carrying value.

At December 31, 2020, Federated Hermes had $800.3 million in goodwill recorded on its Consolidated Balance Sheets.

No impairments were recorded during the years ended December 31, 2020, 2019 or 2018.

Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that indefinite-lived intangible assets included in its Goodwill and Intangible Assets policy involves a higher degree of judgment and complexity.

The process of determining the fair value of identifiable indefinite-lived intangible assets at the date of acquisition requires significant management estimates and judgment.

If subsequent changes in these assumptions differ significantly from those used in the initial valuation, the indefinite-lived intangible asset amounts recorded in the financial statements could be subject to possible impairment.

An impairment could have a material adverse effect on Federated Hermes' business, results of operations and financial condition.

Indefinite-lived intangible assets are reviewed for impairment at the accounting unit level annually as of October 1, or when indicators of a potential impairment exist.

Federated Hermes has combined certain indefinite-lived assets into three distinct units of accounting for impairment testing purposes.

The factors considered in determining the asset grouping include, among others, the highest and best use of the assets and the inseparable nature of the cash flows.

Such asset grouping determination is reconsidered annually and may change depending on the facts and circumstances.

Federated Hermes' current indefinite-lived intangible assets' units of accounting are:

(1) HFML rights to manage fund assets;

(2) HFML trade name;

and (3) all other rights to manage fund assets.

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.

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Indicators of a possible change in useful life monitored by management generally include changes in the expected use of the asset, a significant decline in the level of managed assets, changes to legal, regulatory or contractual provisions of the rights to manage fund assets, the effects of obsolescence, demand, competition and other economic factors that could impact the funds' projected performance and existence, and significant reductions in underlying operating cash flows.

The continued uncertainty caused by Covid-19 resulted in management determining that an indicator of potential impairment existed as of each quarter end in 2020 for certain indefinite-lived intangible assets totaling £150.3 million ($205.5 million as of December 31, 2020) acquired in connection with the 2018 HFML Acquisition.

A discounted cash flow analysis resulted in no impairment as of each quarter end for 2020 since the estimated fair value of these intangible assets exceeded the carrying value.

An additional discounted cash flow analysis prepared as of December 31, 2020 resulted in the estimated fair value exceeding the carrying value by approximately 8%.

The key assumptions in the discounted cash flow analysis include revenue growth rates, pre-tax profit margins and the discount rate applied to the projected cash flows.

The continued uncertainty caused by the Pandemic resulted in management determining that an indicator of potential impairment existed as of each quarter end in 2021 for the HFML rights to manage fund assets totaling £150.3 million ($203.4 million as of December 31, 2021) acquired in connection with the 2018 HFML Acquisition.

A discounted cash flow analysis resulted in no impairment for the first three quarters of 2021 since the estimated fair value of these intangible assets exceeded the carrying value by less than 10% each quarter.

The discounted cash flow analysis prepared as of December 31, 2021 resulted in the estimated fair value exceeding the carrying value by less than 10%.

The key assumptions in the discounted cash flow

analysis include revenue growth rates, pre-tax profit margins and the discount rate applied to the projected cash flows.

The risk of future impairment increases with a decrease in projected cash flows and/or an increase in the discount rate.

As of December 31, 2020, an increase or decrease of 10% in projected revenue growth rates would result in a corresponding change to estimated fair value of approximately 7%.

As of December 31, 2021, assuming all other assumptions remain static, an increase or decrease of 10% in projected revenue growth rates would result in a corresponding change to estimated fair value of approximately 6%.

An increase or decrease of 10% in pre-tax profit margins would result in a corresponding change to estimated fair value of approximately 12%.

An increase or decrease in the discount rate of 25 basis points would result in an inverse change to estimated fair value of approximately 3%.

The market volatility and other events related to Covid-19 could further reduce the AUM, revenues and earnings associated with these intangible assets and may result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which may result in an impairment.

For additional information on risks related to Covid-19, see Part I, Item 1A - Risk Factors under the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19).

Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.

Finite-lived intangible assets are reviewed for impairment at least annually, or when indicators of a potential impairment exist.

If actual changes in the underlying managed assets or other conditions indicate that it is more likely than not that the asset is impaired, or if the estimated useful life is reduced, management estimates the fair value of the intangible asset using an income approach where future cash flows are discounted.

Impairment is indicated when the carrying value of the intangible asset exceeds its fair value.

At December 31, 2020, Federated Hermes had $481.8 million in intangible assets recorded on its Consolidated Balance Sheets.

The market volatility and other events related to the Pandemic could further reduce the AUM, revenues and earnings associated with these intangible assets and may result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which may result in an impairment.

For additional information on risks related to the Pandemic, see Item 1A - Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic).

At December 31, 2021, Federated Hermes had $400.9 million in indefinite-lived intangible assets recorded on its Consolidated Balance Sheets.

No impairments were recorded during the years ended December 31, 2021, 2020 or 2019.

HFML Redeemable Noncontrolling Interest.

The HFML 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 Hermes at future predetermined dates and, therefore, not entirely within Federated Hermes' control.

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

The HFML redeemable 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.

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

The estimation of the current redemption value includes significant assumptions concerning:

(1) projected AUM;

(2) projected

revenue growth rates;

(3) projected pre-tax profit margins;

(4) tax rates and (5) discount rates.

Management estimates a rate of change for underlying managed assets based on a combination of an estimated rate of market appreciation or depreciation and an estimated net redemption or sales rate.

Expected revenue per managed asset and incremental operating expenses of the acquired asset are generally based on agreed-upon terms, average market participant data and historical experience.

The assumptions for tax rates are based on current and projected rates.

The discount rate is estimated at the current market rate of return.

At December 31, 2020, Federated Hermes had $212.7 million in Redeemable Noncontrolling Interest in Subsidiaries related to HFML recorded on its Consolidated Balance Sheets.

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 7. Management’s Discussion and Analysis