What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-25 compared with 2021-02-26 · 214 added, 322 removed, 934 unchanged (36% of the section changed)

13 unchanged sentences

Management assessed the effectiveness of Federated Hermes' internal control over financial reporting as of December 31, 2021, 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, 2021, Federated Hermes' internal controls over financial reporting were effective.

24 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Valuation of Indefinite-Lived Intangible Assets

Description of the Matter

At December 31, 2020, the Company had $397.9 million in indefinite-lived intangible assets, excluding goodwill, consisting of $343.5 million of rights to manage fund assets and $54.4 million of trade names.

As described in Note 1(j) to the consolidated financial statements, indefinite-lived intangible assets are tested at the accounting unit level for impairment annually, or when indicators of a potential impairment exist, to determine whether it is more likely than not that the accounting unit is impaired.

In addition, management reconsiders on a quarterly basis whether events or circumstances indicate that a change in the useful life may have occurred.

At December 31, 2021, the Company had $203.4 million of indefinite-lived intangible assets related to the rights to manage fund assets acquired in connection with the 2018 Hermes Fund Managers Limited (HFML) acquisition (HFML indefinite-lived intangible asset).

As described in Note 1(j) to the consolidated financial statements, indefinite-lived intangible assets are tested for impairment at the accounting unit level annually, or when indicators of potential impairment exist, to determine whether it is more likely than not that the accounting unit is impaired.

If the Company's carrying value 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.

Auditing the Company's annual impairment test of the indefinite-lived intangible assets, which included the reconsideration of the estimated useful lives, was complex and judgmental due to the significant estimation uncertainty in determining the fair value of the indefinite-lived intangible assets.

The significant assumptions used to estimate the fair value of the indefinite-lived intangible assets included discount rates and certain assumptions that form the basis of the forecasted results, such as projected revenue growth rates, projected pre-tax profit margins and additionally, in the case of the trade name, the royalty rate.

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.

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 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 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 Acquisition of HCL

Description of the Matter

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 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 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 HFML Redeemable Noncontrolling Interest

Description of the Matter

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 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.

Auditing the Company's annual impairment test of the HFML indefinite-lived intangible asset was complex and judgmental due to the significant estimation uncertainty in determining the fair value of this accounting unit.

The significant assumptions used to estimate the fair value of the HFML indefinite-lived intangible asset 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.

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 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 HFML that would result from changes in the significant assumptions.

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

Our audit procedures to test the estimated fair value of the Company's HFML indefinite-lived intangible asset included, among others evaluating management's significant assumptions described above and testing the completeness and accuracy of the underlying data.

With the assistance of our valuation specialists, we evaluated the reasonableness of the Company's valuation methodology and significant assumptions.

Our procedures included, among others, evaluating the selection of the discount rate by comparing the selected discount rate to the Company's weighted average cost of capital, testing the objective source information underlying the determination of the discount rate, and comparing management's discount rate to an independently developed range.

We also compared the significant assumptions to current industry, market and economic data, historical results and other relevant information.

We evaluated management's ability to accurately project revenues and pre-tax profit margins by comparing actual results to management’s historical forecasts.

Additionally, we performed sensitivity analyses of certain significant assumptions described above to evaluate the changes in the fair value of the HFML indefinite-lived intangible asset that would result from reasonably expected changes in the significant assumptions.

/s/ Ernst & Young LLP

8 unchanged sentences

(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, 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, 2021 and 2020, 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, 2021, and the related notes and our report dated February 25, 2022 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

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.

40 unchanged sentences

TEMPORARY EQUITY

Redeemable Noncontrolling Interest in Subsidiaries 236,987 212,086

Redeemable Noncontrolling Interests in Subsidiaries 63,202 236,987

PERMANENT EQUITY

55 unchanged sentences

Foreign Currency Translation Gain (Loss) 1,191 15,420 14,368

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

Reclassification Adjustment Related to Equity Securities 0 0 ( 29 )

Temporary Equity

10 unchanged sentences

Balance at January 1, 2019 9,000 100,803,382 8,702,074

Adoption of New Accounting Pronouncements 0 0 0

Net Income 0 0 0

Net Income (Loss) 0 0 0

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

3 unchanged sentences

Dividends Declared 0 0 0

Distributions to Noncontrolling Interest in Subsidiaries 0 0 0

Distributions to Noncontrolling Interests in Subsidiaries 0 0 0

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

Net Income (Loss) 0 0 0

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

3 unchanged sentences

Dividends Declared 0 0 0

Distributions to Noncontrolling Interest in Subsidiaries 0 0 0

Business Acquisition 0 0 0

Distributions to Noncontrolling Interests in Subsidiaries 0 0 0

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

1 unchanged sentence

Balance at December 31, 2020 9,000 99,331,443 10,174,013

Net Income 0 0 0

Net Income (Loss) 0 0 0

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

3 unchanged sentences

Dividends Declared 0 0 0

Distributions to Noncontrolling Interest in Subsidiaries 0 0 0

Distributions to Noncontrolling Interests in Subsidiaries 0 0 0

Acquisition of Additional Equity of HFML 0 0 0

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

51 unchanged sentences

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Amortization of Deferred Sales Commissions 1,369 2,077 2,967

Depreciation and Other Amortization 30,010 29,932 27,999

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Cash Paid for Property and Equipment ( 10,421 ) ( 13,500 ) ( 15,045 )

Other Investing Activities 0 0 211

Net Cash Provided (Used) by Investing Activities 10,816 ( 24,823 ) ( 94,683 )

4 unchanged sentences

Contributions from Noncontrolling Interests in Subsidiaries 107,635 20,985 9,356

Proceeds from Shareholders for Share-Based Compensation 1,455 1,431 1,444

Payments to Acquire Additional Equity in HFML ( 165,886 ) 0 0

Proceeds from New Borrowings 295,650 100,000 8,800

50 unchanged sentences

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.

29 unchanged sentences

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.

Financial information for certain entities, whose primary purpose is to collect and distribute carried interest paid by foreign

private equity and infrastructure funds, is not available timely and is therefore consolidated on a one quarter lag, adjusted for any known material carried interest revenue and compensation transactions occurring through the balance sheet date.

Consolidation of Voting Rights Entities

30 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 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.

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.

10 unchanged sentences

(5) tax rates;

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

(6) discount rates;

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

(j) Goodwill and Intangible Assets

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

Federated Hermes tests goodwill for impairment at least annually on June 30 or when indicators of potential impairment exist.

Goodwill is evaluated at the reporting unit level.

8 unchanged sentences

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

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

Federated Hermes has identified 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.

9 unchanged sentences

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 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.

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.

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(1) collateralization, (2) remaining lease term and (3) the type of ROU asset.

(n) Equity Method Investments

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 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 equal to the difference is recorded in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income.

(o) Loss Contingencies

(n) Loss Contingencies

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.

3 unchanged sentences

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

(o) Noncontrolling Interests

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.

These noncontrolling interests are deemed to represent temporary equity and are classified as Redeemable Noncontrolling Interests 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 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.

In the case of HFML, the noncontrolling interests primarily represent equity which is subject to put and call rights under a long-term incentive plan and award agreements with current and former employees, 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.

The noncontrolling interests 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:

7 unchanged sentences

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

(q) Treasury Stock

(p) Treasury Stock

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

3 unchanged sentences

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)

(q) 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.

(s) Foreign Currency Translation

(r) Foreign Currency Translation

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.

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.

Foreign currency transaction gains and losses are reflected in Operating Expenses – Other on the Consolidated Statements of Income.

(t) Share-Based Compensation

(s) Share-Based Compensation

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

8 unchanged sentences

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 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

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 Interests in Subsidiaries in the Consolidated Balance Sheets.

(t) Advertising Costs

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

(u) Income Taxes

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.

4 unchanged sentences

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.

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.

1 unchanged sentence

As of December 31, 2021, the unrecognized deferred tax liability associated with these subsidiaries is $ 9.1 million.

(w) Earnings Per Share

(v) Earnings Per Share

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

2 unchanged sentences

In addition to the amounts excluded from the basic earnings per share calculation, net income available to unvested shareholders of a nonpublic consolidated subsidiary is excluded from the computation of diluted earnings per share.

(x) Business Segments

(w) 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 Hermes' Chief Executive Officer (CEO), who is the chief operating decision maker, in deciding how to allocate resources and assess performance.

1 unchanged sentence

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

(2) Recent Accounting Pronouncements

Recently Adopted Accounting Guidance

(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.

The amendments in this update replace the incurred loss impairment methodology with a current expected credit loss (CECL) model.

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

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):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.

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

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):

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).

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).

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

(2) Equity Acquisition and Business Combination

2021 Acquisition of HFML Noncontrolling Interests

On August 31, 2021, Federated Hermes completed the 2021 Acquisition of HFML Noncontrolling Interests to acquire 29.5 % noncontrolling interests in HFML from BTPS for £ 116.5 million ($ 160.2 million) pursuant to the terms of a certain Put and Call Option Deed, dated July 2, 2018 (the Option Deed), between BTPS and Federated Hermes (2021 Acquisition of HFML Noncontrolling Interests).

Because Federated Hermes had previously acquired a 60 % controlling interest in HFML from BTPS as of July 1, 2018 with the 2018 HFML Acquisition, the 2021 Acquisition of HFML Noncontrolling Interests was accounted for as an acquisition of additional equity.

The difference between the carrying value of the BTPS noncontrolling interests and the purchase price was reclassified from temporary equity to permanent equity.

The remaining approximate 10 % of the equity interests of HFML is held in an employee benefit trust for the benefit of certain members of HFML's management and other key employees under a long-term incentive plan established in connection with the 2018 HFML Acquisition.

Pursuant to the Option Deed, Federated Hermes and BTPS agreed upon a third-party valuation company, which determined the fair value of HFML for purposes of the Option Deed.

The Option Deed provided that the consideration to be paid for BTPS' remaining interest in HFML would be based on BTPS' equity proportion of the fair value of HFML as determined in accordance with the terms of the Option Deed.

Federated Hermes paid the purchase price by using a combination of cash on hand and borrowings under its corporate credit facility.

Upon completion of the 2021 Acquisition of HFML Noncontrolling Interests, BTPS no longer has any ownership interest in HFML nor any representation on HFML's board of directors.

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).

On March 5, 2020, Federated Hermes acquired, effective as of March 1, 2020, 100 percent ownership of HGPE Capital Limited (HCL Acquisition) 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.

As a result of the HCL Acquisition, Federated Hermes gained control of Hermes GPE LLP (HGPE) (collectively with HGPE Capital Limited, HCL).

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

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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.

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

Prior to March 1, 2020, Federated Hermes accounted for its partial ownership interest in HGPE (through its ownership of HFML) 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 this equity interest in HGPE using primarily the discounted cash flow methodology under the income approach.

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

In the first quarter 2020, 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:

The accounting for this acquisition was finalized in the first quarter 2021.

During the first quarter 2021, Federated Hermes recorded adjustments that primarily resulted from the consolidation of certain foreign subsidiaries not previously consolidated.

The provisional amounts recognized for certain acquired assets and incurred liabilities were adjusted by $ 25.8 million and $ 17.2 million, respectively, with the net offset of $ 8.6 million recorded to the related redeemable noncontrolling interests in subsidiaries.

This adjustment reflected facts and circumstances that existed as of the acquisition date.

As a result of the consolidation of these subsidiaries, Federated Hermes recorded revenue of $ 6.9 million offset by $ 6.9 million of Compensation and Related expense, which represented the income and expense that would have been recorded had these

entities been consolidated on March 1, 2020.

There was no change to net income or earnings per share for the three-month period ended March 31, 2021 as a result of these adjustments.

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

(in millions)

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Liabilities Acquired ( 44.1 )

Fair Value of Redeemable Noncontrolling Interest in Subsidiary 4

Fair Value of Redeemable Noncontrolling Interests in Subsidiaries 4

Total Purchase Price Consideration $ 20.4

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

(3) Revenue from Contracts with Customers

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(in thousands) 2021 2020 2019

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

Equity $ 677,917 $ 551,028 $ 533,749

Money market 239,318 570,815 529,340

Fixed-income 237,702 193,649 179,102

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Total Revenue $ 1,300,447 $ 1,448,268 $ 1,326,894

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.

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

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

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A portion of this revenue relates to a performance obligation that has been satisfied in a prior period.

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

3 Primarily includes shareholder service fees and stewardship services revenue.

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

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Total Revenue $ 1,300,447 $ 1,448,268 $ 1,326,894

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

1 Primarily includes stewardship services revenue.

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:

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(in thousands)

2022 $ 11,404

2025 and Thereafter 553

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(a) Revenue Concentration by Asset Class

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

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

2021 2020 2019

Money Market Assets 40 % 40 % 37 %

Equity Assets 52 % 38 % 40 %

Money Market Assets 19 % 40 % 40 %

Fixed-Income Assets 18 % 13 % 14 %

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.

The change in the relative proportion of Federated Hermes' revenue attributable to equity and fixed-income assets in 2021, as compared to the same period in 2020, was primarily the result of decreased money market revenue and higher average equity and fixed-income assets in 2021.

The change in the relative proportion of Federated Hermes' revenue attributable to money market assets in 2021, as compared to the same period in 2020, was primarily the result of an increase in Voluntary Yield-related Fee Waivers.

See section below entitled Low Short-Term Interest Rates.

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 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.

Beginning in the first quarter 2020, Federated Hermes began to implement Voluntary Yield-related Fee Waivers 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, 2021, Voluntary Yield-related Fee Waivers totaled $ 420.3 million.

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.

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 Hermes' revenue concentration by investment strategy/fund over the last three years:

2020 2019 2018

Federated Hermes Government Obligations Fund

See Management's Discussion and Analysis - 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 Fund Strategy

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

2021 2020 2019

Federated Hermes Kaufmann Mid-Cap Growth strategy 1

Federated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund II 11 % 9 % 9 %

Federated Hermes Strategic Value Dividend strategy 1

Federated Hermes Government Obligations Fund

5 % 13 % 10 %

1 Strategy includes Federated Hermes Funds.

1 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.

A significant and prolonged decline in the AUM in these funds 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 these funds.

Approximately 3 %, 7 % and 11 % of Federated Hermes' total revenue for 2021, 2020 and 2019, 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.

The decrease in 2021 was primarily due to an increase in Voluntary Yield-related Fee Waivers.

Continued Voluntary Yield-related Fee Waivers or a negative change in Federated Hermes' relationship with this intermediary may 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.

(5) Consolidation

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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.

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

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

In the ordinary course of business, Federated Hermes may implement fee waivers for various Federated Hermes Funds for competitive reasons (such as Voluntary Yield-related Fee Waivers or to maintain certain fund ratios/yields), to meet regulatory requirements or to meet contractual requirements (collectively, Fee Waivers).

For the years ended December 31, 2021, 2020 and 2019, Fee Waivers totaled $ 917.9 million, $ 675.3 million and $ 427.3 million, respectively, of which $ 775.6 million, $ 537.8 million and $ 311.6 million, respectively, related to money market funds which meet the scope exception of the consolidation guidance.

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 Hermes is required to report these types of capital contributions to U.S.

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

Under current money market 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 material contributions for the year ended December 31, 2021.

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

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(a) Consolidated Voting Rights Entities

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.

Although most of the Federated Hermes Funds meet the definition of a VRE, Federated Hermes consolidates VREs only 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 Interests in Subsidiaries.

(b) Consolidated Variable Interest Entities

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:

As of December 31, 2021 and 2020, Federated Hermes was deemed to be the primary beneficiary of, and therefore consolidated, certain entities as a result of its controlling financial interest.

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

(in millions) 2021 2020

Cash and Cash Equivalents $ 3.0 $ 0.2

Investments—Consolidated Investment Companies 35.9 12.1

Other Assets 0.1 0.1

Long-Term Investments 13.8 0.0

Liabilities 1.4 0.1

Redeemable Noncontrolling Interest in Subsidiaries 0.0 9.3

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.

Redeemable Noncontrolling Interests in Subsidiaries 33.3 0.0

Federated Hermes' Net Interest in VIEs $ 18.1 $ 12.3

Federated Hermes' net interest in the consolidated VIEs represents the value of Federated Hermes' economic ownership interest in that VIE.

During the year ended December 31, 2021, as a result of the HCL Acquisition, Federated Hermes consolidated certain VIEs not previously consolidated.

See Note (2) for additional information.

In addition, Federated Hermes consolidated a Federated Hermes Fund VIE in which it was the primary beneficiary.

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

During the quarter ended December 31, 2021, Federated Hermes liquidated its investment in one consolidated VIE in which it was the only remaining shareholder.

Accordingly, Federated Hermes redeemed $ 5.0 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 was no impact to the Consolidated Statements of Income as a result of this liquidation.

There were no other consolidations or deconsolidations of VIEs during the year ended December 31, 2021.

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' involvement with certain Federated Hermes Funds that are deemed to be VIEs includes serving as 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.

At December 31, 2021 and 2020, Federated Hermes' maximum risk of loss related to investments in variable interests in non-consolidated VIEs was $ 170.6 million and $ 106.0 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 $ 8.0 billion and $ 9.1 billion at December 31, 2021 and 2020, respectively.

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(6) Investments

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).

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)).

At December 31, 2021 and 2020, Federated Hermes held investments in non-consolidated fluctuating-value Federated Hermes Funds of $ 77.6 million and $ 36.0 million, respectively, primarily in mutual funds which invest in equity securities and held investments in Separate Accounts of $ 10.2 million and $ 9.6 million at December 31, 2021 and 2020, 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, 2021 and 2020, were primarily composed of domestic debt securities ($ 5.2 million for both periods) and stocks of large domestic and foreign companies ($ 3.4 million and $ 3.1 million, respectively).

Federated Hermes consolidates certain Federated Hermes Funds into its Consolidated Financial Statements as a result of its controlling financial interest in these Federated Hermes Funds (see Note (5)).

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 investments held by consolidated Federated Hermes Funds as of December 31, 2021 and 2020, were primarily composed of domestic and foreign debt securities ($ 65.2 million and $ 48.6 million, respectively), stocks of large domestic and foreign companies ($ 28.5 million and $ 35.2 million, respectively) and stocks of small and mid-sized domestic and foreign companies ($ 7.4 million and $ 6.4 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:

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Investments—Consolidated Investment Companies

Unrealized Gains (Losses) $ 13,862 $ 4,759 $ ( 3,142 )

Net Unrealized Gains (Losses) $ 642 $ 13,862 $ 4,759

Net Realized Gains (Losses) 1

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Investments—Affiliates and Other

Unrealized Gains (Losses) 5,541 2,156 ( 1,180 )

Net Unrealized Gains (Losses) 1,323 5,541 2,156

Net Realized Gains (Losses) 1

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

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.

1 Amounts primarily consist of restricted cash and security deposits as of December 31, 2021 and restricted cash, security deposits and a derivative asset as of December 31, 2020.

2 Amounts primarily consist of acquisition-related future contingent consideration liabilities and a derivative liability as of December 31, 2021 and acquisition-related future contingent consideration liabilities as of December 31, 2020.

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

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Balance at December 31, 2020

New Acquisitions 1

Changes in Fair Value 1,051

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Balance at December 31, 2021

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

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(8) Derivatives

During the third quarter of 2021, Federated Hermes entered into a foreign currency forward transaction in order to hedge against foreign exchange rate fluctuations associated with the payment for the 2021 Acquisition of HFML Noncontrolling Interests.

The forward was not designated as a hedging instrument for accounting purposes.

The forward transaction settled in the third quarter of 2021 and Federated Hermes recorded $ 1.3 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 this derivative.

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.

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As of December 31, 2021, this subsidiary held foreign currency forward derivative instruments with a combined notional amount of £ 69.6 million and expiration dates ranging from March 2022 through September 2022.

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.

Federated Hermes recorded $ 1.6 million in Other Current Liabilities on the Consolidated Balance Sheets, which represented the fair value of these derivative instruments as of December 31, 2021.

As of December 31, 2020, HFML 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.

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.

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 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.

(9) Intangible Assets

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Indefinite-lived intangible assets are recorded in Intangible Assets, net on the Consolidated Balance Sheets and include rights to manage fund assets ($ 347.8 million and $ 343.5 million at December 31, 2021 and 2020, respectively) and trade names ($ 53.1 million and $ 53.6 million at December 31, 2021 and 2020, respectively).

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.

The increase in indefinite-lived intangible assets at December 31, 2021 as compared to December 31, 2020 is primarily due to $ 5.3 million of intangible assets recorded in connection with an asset purchase during 2021, partially offset by a $ 2.6 million decrease in the value of intangible assets denominated in a foreign currency as a result of foreign exchange rate fluctuations.

(b) Finite-lived intangible assets

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Carrying Value $ 70,286 $ 84,669

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.

The decrease in finite-lived intangible assets at December 31, 2021 as compared to December 31, 2020 primarily relates to amortization expense.

Amortization expense for finite-lived intangible assets was $ 13.8 million, $ 13.8 million and $ 7.5 million in 2021, 2020 and 2019, respectively, and was recorded as operating expense in Other expense on the Consolidated Statements of Income.

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2022 $ 13,347

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.

Goodwill at December 31, 2021 decreased $ 1.4 million from December 31, 2020 primarily as a result of foreign exchange rate fluctuations on goodwill denominated in a foreign currency.

(10) Property and Equipment

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Depreciation expense was $ 15.4 million, $ 16.0 million and $ 16.5 million for the years ended December 31, 2021, 2020 and 2019, respectively, and was recorded in Office and Occupancy expense on the Consolidated Statements of Income.

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 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.

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.

The interest on the borrowings from the revolving credit facility is calculated at the monthly London Interbank Offering Rate (LIBOR) plus a spread unless a base rate option is elected.

The borrowings under the revolving credit facility may include up to $ 50 million for which interest is calculated at the daily LIBOR plus a spread unless a base rate option is elected (Swing Line).

The Credit Agreement provides for a replacement reference interest rate index upon the eventual discontinuation of LIBOR, which can be either the term Secured Overnight Financing Rate (SOFR) plus a spread or daily simple SOFR plus a spread, each having a benchmark adjustment applied based on its historical relationship to LIBOR, or another alternative interest rate index (selected by the administrative agent and Federated Hermes) plus a spread.

The Credit Agreement, which expires on July 30, 2026, has no principal payment schedule, but instead requires that any outstanding principal be repaid by the expiration date.

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.

During 2021, Federated Hermes borrowed $ 295.7 million and repaid $ 147.3 million from the revolving credit facility under the Credit Agreement and Prior Credit Agreement.

As of December 31, 2021 and 2020, the amounts outstanding under the revolving credit facility were $ 223.4 million and $ 75.0 million, respectively, and were recorded as Long-Term Debt on the Consolidated Balance Sheets.

The interest rate was 1.161 % and 1.277 % as of December 31, 2021 and 2020, respectively, which was calculated at LIBOR plus a spread.

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

The commitment fee under the Credit Agreement is 0.10 % per annum on the daily unused portion of each Lender's commitment.

As of December 31, 2021, Federated Hermes has $ 126.6 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.

The Credit Agreement, similar to the Prior 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 Hermes was in compliance with all covenants at and during the year ended December 31, 2021.

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.

See the Liquidity and Capital Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (unaudited) 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.

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 Credit Agreement also requires certain subsidiaries to enter into a Second Amended and Restated Continuing Agreement of Guaranty and Suretyship to guarantee payment of all obligations incurred through the Credit Agreement.

The Credit Agreement also requires certain subsidiaries to enter into a Third Amended and Restated Continuing Agreement of Guaranty and Suretyship to guarantee payment of all obligations incurred through the Credit Agreement.

(12) Employee Benefit Plans

(a) 401(k) Plan

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.

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 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 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.

During 2020, 10,278 shares were purchased by employees in this plan and, as of December 31, 2020, a total of 212,113 shares were purchased by employees in this plan on the open market since its inception in 1998.

The total expense for these plans recognized in Compensation and Related expense amounted to $ 14.4 million, $ 13.4 million and $ 12.3 million for 2021, 2020 and 2019, respectively.

(13) Share-Based Compensation

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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.

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.

As of December 31, 2021, 1.3 million shares are available under the Plan.

On December 15, 2021, the compensation committee and board of directors of Federated Hermes approved, subject to the consent of the holder of its Class A common stock (Class A Shareholder), amendments to the Plan, including to increase the number of shares of Federated Hermes' Class B common stock authorized under the Plan by 5.5 million shares from 30.6 million shares to 36.1 million shares.

The Class A Shareholder was the only shareholder of Federated Hermes entitled to approve the amendments to the Plan.

See Note (22) for additional information on the approval of the Plan.

Share-based compensation expense was $ 30.3 million, $ 26.7 million and $ 25.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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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.

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

For an award with a ten-year vesting period, the restrictions on the vested portion of the award typically lapse on the award's fifth- and tenth-year anniversaries.

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3,961,392 $ 26.17

1,218,613 30.07

Vested ( 957,840 ) 26.01

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Non-vested at December 31, 2021

4,173,082 $ 27.33

1 During 2021, Federated Hermes awarded 726,613 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.

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

In addition, Federated Hermes awarded 492,000 shares of restricted Class B common stock under this same Plan that generally vests over a ten-year period.

Federated Hermes awarded 1,218,613 shares of restricted Class B common stock with a weighted-average grant-date fair value of $ 30.07 to employees during 2021;

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At December 31, 2021, the remaining unrecognized compensation expense related to these plan awards approximated $ 16 million which is expected to be recognized over a weighted-average period of approximately 2 years.

See Note (22) for information on a tender offer.

(14) Common Stock

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.

The Class A Shareholder 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 Shareholder 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.

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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.

This program was fulfilled in May 2021.

In April and December 2021, the board of directors authorized share repurchase programs with no stated expiration dates that allow the repurchase of up to 4 million and 7.5 million shares, respectively, of Class B common stock.

The April 2021 program was fulfilled in December 2021.

No other program existed as of December 31, 2021.

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 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.

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, 2021, Federated Hermes repurchased 7.1 million shares of its Class B common stock for $ 239.7 million ($ 12.5 million of which was accrued in Other Current Liabilities as of December 31, 2021), nearly all of which were repurchased in the open market.

At December 31, 2021, 6.1 million shares remained available to be repurchased under this share repurchase program.

(15) Income Taxes

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Effective Tax Rate 27.6 % 24.7 % 24.1 %

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 effective tax rate for 2021 increased to 27.6 % as compared to the effective tax rate for 2020 of 24.7 % prim arily due to an increase in foreign deferred tax expense in connection with the revaluation of net foreign deferred tax liabilities resulting from recent UK legislation that increases the UK corporate income tax rate from 19% to 25% effective April 1, 2023.

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:

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Net Deferred Tax Liability $ 205,206 $ 187,937

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).

Long-Term Deferred Tax Liability, net at December 31, 2021 increased $ 17.3 million from December 31, 2020 primarily due to recent UK legislation that increases the UK corporate income tax rate from 19% to 25% effective April 1, 2023.

At December 31, 2021, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $ 71.5 million.

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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.

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.

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.

Federated Hermes' remaining deferred tax assets as of December 31, 2021 and 2020 primarily related to lease liabilities reported pursuant to ASC 842 and 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.

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Therefore, there were no material changes during 2021, and no reasonable possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months.

Federated Hermes' U.S.

federal tax returns for tax years 2018 to 2021 remain open to examination, while filings in its major state tax jurisdictions from tax years 2017 to 2021 generally remain open to examination.

(16) Earnings Per Share Attributable to Federated Hermes, Inc.

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$ 2.75 $ 3.23 $ 2.69

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.

1 Includes dividends paid on unvested restricted Federated Hermes Class B common stock 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.

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(18) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc.

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

Accumulated Other Comprehensive Income (Loss), net of tax attributable to Federated Hermes shareholders resulted from foreign currency translation gain (loss):

(in thousands)

Balance at December 31, 2018 $ ( 14,617 )

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 )

Other Comprehensive Income (Loss)

Balance at December 31, 2019 $ ( 249 )

Other Comprehensive Income (Loss) Before Reclassifications and Tax

0 14,368 14,368

Net Current-Period Other Comprehensive Income (Loss) 0 14,368 14,368

Other Comprehensive Income (Loss)

Balance at December 31, 2020 $ 15,171

Other Comprehensive Income (Loss) Before Reclassifications and Tax 0 15,420 15,420

Net Current-Period Other Comprehensive Income (Loss) 0 15,420 15,420

Other Comprehensive Income (Loss)

Balance at December 31, 2021 $ 16,362

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 HFML

(19) Redeemable Noncontrolling Interests in Subsidiaries

The following table presents the changes in Redeemable Noncontrolling Interests in Subsidiaries:

(in thousands) Consolidated Investment Companies HFML and other entities

Balance at January 1, 2019 $ 11,626 $ 170,887 $ 182,513

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Stock Award Activity 0 7,888 7,888

Distributions to Noncontrolling Interest in Subsidiaries ( 18,492 ) 0 ( 18,492 )

Distributions to Noncontrolling Interests in Subsidiaries ( 3,580 ) 0 ( 3,580 )

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

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Stock Award Activity 0 8,786 8,786

Distributions to Noncontrolling Interest in Subsidiaries ( 3,580 ) 0 ( 3,580 )

Business Acquisition 0 ( 386 ) ( 386 )

Distributions to Noncontrolling Interests in Subsidiaries ( 16,218 ) 0 ( 16,218 )

Change in Estimated Redemption Value of Redeemable Noncontrolling Interests 0 ( 1,479 ) ( 1,479 )

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Stock Award Activity 0 9,410 9,410

Distributions to Noncontrolling Interest in Subsidiaries ( 16,218 ) 0 ( 16,218 )

Distributions to Noncontrolling Interests in Subsidiaries ( 3,017 ) ( 1,909 ) ( 4,926 )

Acquisition of Additional Equity of HFML 0 ( 167,302 ) ( 167,302 )

Change in Estimated Redemption Value of Redeemable Noncontrolling Interests 0 ( 19,256 ) ( 19,256 )

Balance at December 31, 2021 $ 24,659 $ 38,543 $ 63,202

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.

The activity in 2021 includes $ 892.1 million of contributions from noncontrolling interests in subsidiaries as a result of a purchase-in-kind investment into a previously consolidated VRE.

This was a noncash transaction and was therefore excluded from the Consolidated Statements of Cash Flows.

During 2021, 2020 and 2019, the HFML Redeemable Noncontrolling Interests in Subsidiaries carrying value was adjusted by $ 19.3 million, $ 1.5 million and $ 4.1 million, respectively, to the curre nt redemption value, assuming the HFML noncontrolling interests was redeemable at the balance sheet date.

The noncontrolling interests was adjusted through a corresponding adjustment to retained earnings.

(20) Commitments and Contingencies

(a) Contractual

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) 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

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.

The contracts require payments through the year 2027.

Costs for such services are expensed as incurred.

From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes is obligated to make future payments under various agreements to which it is a party.

See Note (7) for additional information regarding these payments.

(b) Contingencies

Federated Hermes previously recorded as revenue certain carried interest from certain funds subject to clawback provisions (Carried Interest).

Federated Hermes previously recorded as revenue certain carried interest, subject to clawback provisions, from certain funds (Carried Interest).

As of December 31, 2021, approximately $ 11 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.

As a result of the impact of the Pandemic on certain markets during 2021, management concluded it was reasonably possible that the market value of the assets held by these funds could be reduced at future valuation dates, which could result in a portion or all of this Carried Interest being repaid.

As of December 31, 2021, management estimates that clawbacks will not occur based on the current valuation of the assets held by these funds.

Future reductions in the valuation of the assets held by these funds may result in a clawback of a portion or all of this Carried Interest.

On an intercompany basis, various subsidiaries of Federated Hermes guarantee certain financial obligations of Federated Hermes, Inc., and Federated Hermes, Inc.

On an intercompany basis, various subsidiaries of Federated Hermes guarantee certain financial obligations of Federated Hermes, Inc., and of other consolidated subsidiaries, and Federated Hermes, Inc.

guarantees certain financial and performance-related obligations of various wholly owned subsidiaries.

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(22) Subsequent Events

On January 7, 2022, the Class A Shareholder signed and delivered a unanimous written consent in lieu of a special meeting of shareholders to approve the amendments to the Plan described in Note (13).

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.

(24) Supplementary Quarterly Financial Data (Unaudited)

(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.

$ 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

$ 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.

On February 7, 2022, Federated Hermes commenced a tender offer to acquire the remaining approximately 10 % interest in HFML not owned by Federated Hermes by issuing awards of restricted Class B common stock under the Plan in exchange for the beneficial interests in shares of HFML held by certain HFML employees pursuant to the Subsidiary Stock Plan, and treasury shares (outside the Plan) in exchange for the beneficial interests in shares of HFML held by a former employee of HFML and the trustee of an employee benefit trust created in connection with the Subsidiary Stock Plan at the time of the 2018 HFML Acquisition.

The tender offer is scheduled to expire on March 11, 2022 and be consummated on March 14, 2022 unless extended by Federated Hermes in its sole discretion.

Federated Hermes estimates that approximately 1.5 million shares of Federated Hermes Class B common stock will be exchanged for the beneficial interests in shares of HFML.

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