FEDERATED HERMES, INC. 10-K

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING Federated Hermes, Inc.'s (including its consolidated subsidiaries, Federated Hermes) management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements in this annual report. These consolidated financial statements and notes have been prepared in conformity with U.S. generally accepted accounting principles from accounting records which management believes fairly and accurately reflect Federated Hermes' operations and financial position. The consolidated financial statements include amounts based on management's best estimates and judgments considering currently available information and management's view of current conditions and circumstances. Management is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to provide reasonable assurance of the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the effectiveness of Federated 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). Based on this assessment, management concluded that, as of December 31, 2021, Federated Hermes' internal controls over financial reporting were effective. Ernst & Young LLP, independent registered public accounting firm, has audited the consolidated financial statements included in this annual report and has audited the effectiveness of the internal control over financial reporting. Federated Hermes, Inc. /s/ J. Christopher Donahue /s/ Thomas R. Donahue J. Christopher Donahue Thomas R. Donahue President and Chief Executive Officer Chief Financial Officer February 25, 2022 71 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Federated Hermes, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Federated Hermes, Inc. (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 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 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, 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 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 impairment testing process for indefinite-lived intangible assets, including controls over management's review of the significant assumptions described above. 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 We have served as the Company's auditor since 1996. Pittsburgh, Pennsylvania February 25, 2022 72 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Federated Hermes, Inc. Opinion on Internal Control Over Financial Reporting We have audited Federated Hermes, Inc.'s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Federated Hermes, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. 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. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania February 25, 2022 73 CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31, 2021 2020 ASSETS Current Assets Cash and Cash Equivalents $ 233,327 $ 301,819 Investments—Consolidated Investment Companies 105,542 91,359 Investments—Affiliates and Other 87,805 45,593 Receivables, net of reserve of $ 21 and $ 16 , respectively 65,317 64,857 Receivables—Affiliates 30,956 41,107 Prepaid Expenses 29,322 22,130 Other Current Assets 7,178 8,478 Total Current Assets 559,447 575,343 Long-Term Assets Goodwill 798,871 800,267 Intangible Assets, net 471,209 481,753 Property and Equipment, net 46,965 52,610 Right-of-Use Assets, net 108,306 122,078 Other Long-Term Assets 33,389 28,788 Total Long-Term Assets 1,458,740 1,485,496 Total Assets $ 2,018,187 $ 2,060,839 LIABILITIES Current Liabilities Accounts Payable and Accrued Expenses $ 64,019 $ 61,736 Accrued Compensation and Benefits 162,203 170,646 Lease Liabilities 17,447 15,845 Other Current Liabilities 27,038 17,219 Total Current Liabilities 270,707 265,446 Long-Term Liabilities Long-Term Debt 223,350 75,000 Long-Term Deferred Tax Liability, net 205,206 187,937 Long-Term Lease Liabilities 105,270 121,922 Other Long-Term Liabilities 36,435 36,550 Total Long-Term Liabilities 570,261 421,409 Total Liabilities 840,968 686,855 Commitments and Contingencies (Note (20)) TEMPORARY EQUITY Redeemable Noncontrolling Interests in Subsidiaries 63,202 236,987 PERMANENT EQUITY Federated Hermes, Inc. Shareholders' Equity Common Stock: Class A, No Par Value, 20,000 Shares Authorized, 9,000 Shares Issued and Outstanding 189 189 Class B, No Par Value, 900,000,000 Shares Authorized, 109,505,456 Shares Issued 448,929 418,669 Retained Earnings 1,187,001 1,027,699 Treasury Stock, at Cost, 16,094,488 and 10,174,013 Shares Class B Common Stock, respectively ( 538,464 ) ( 324,731 ) Accumulated Other Comprehensive Income (Loss), net of tax 16,362 15,171 Total Permanent Equity 1,114,017 1,136,997 Total Liabilities, Temporary Equity and Permanent Equity $ 2,018,187 $ 2,060,839 (The accompanying notes are an integral part of these Consolidated Financial Statements.) 74 CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data) Years Ended December 31, 2021 2020 2019 Revenue Investment Advisory Fees, net—Affiliates $ 656,958 $ 769,836 $ 685,849 Investment Advisory Fees, net—Other 259,026 241,631 221,756 Administrative Service Fees, net—Affiliates 306,639 318,152 245,887 Other Service Fees, net—Affiliates 61,326 103,862 161,421 Other Service Fees, net—Other 16,498 14,787 11,981 Total Revenue 1,300,447 1,448,268 1,326,894 Operating Expenses Compensation and Related 532,492 503,400 442,147 Distribution 160,884 318,343 340,663 Systems and Communications 75,429 64,698 52,988 Professional Service Fees 60,331 55,123 43,714 Office and Occupancy 44,573 38,975 44,926 Advertising and Promotional 21,600 15,834 17,774 Travel and Related 5,337 4,566 16,645 Other 33,529 29,178 20,110 Total Operating Expenses 934,175 1,030,117 978,967 Operating Income 366,272 418,151 347,927 Nonoperating Income (Expenses) Investment Income, net 3,171 4,119 4,450 Gain (Loss) on Securities, net 9,532 18,067 4,966 Debt Expense ( 1,785 ) ( 2,678 ) ( 5,037 ) Other, net ( 900 ) 8,398 12,965 Total Nonoperating Income (Expenses), net 10,018 27,906 17,344 Income Before Income Taxes 376,290 446,057 365,271 Income Tax Provision 103,982 110,035 88,146 Net Income Including the Noncontrolling Interests in Subsidiaries 272,308 336,022 277,125 Less: Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries 2,015 9,658 4,786 Net Income $ 270,293 $ 326,364 $ 272,339 Amounts Attributable to Federated Hermes, Inc. Earnings Per Common Share—Basic $ 2.77 $ 3.25 $ 2.69 Earnings Per Common Share—Diluted $ 2.75 $ 3.23 $ 2.69 Cash Dividends Per Share $ 1.08 $ 2.08 $ 1.08 (The accompanying notes are an integral part of these Consolidated Financial Statements.) 75 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands) Years Ended December 31, 2021 2020 2019 Net Income Including the Noncontrolling Interests in Subsidiaries $ 272,308 $ 336,022 $ 277,125 Other Comprehensive Income (Loss), net of tax Permanent Equity Foreign Currency Translation Gain (Loss) 1,191 15,420 14,368 Temporary Equity Foreign Currency Translation Gain (Loss) ( 7,443 ) 6,593 6,907 Other Comprehensive Income (Loss), net of tax ( 6,252 ) 22,013 21,275 Comprehensive Income Including the Noncontrolling Interests in Subsidiaries 266,056 358,035 298,400 Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interest in Subsidiaries ( 5,428 ) 16,251 11,693 Comprehensive Income Attributable to Federated Hermes, Inc. $ 271,484 $ 341,784 $ 286,707 (The accompanying notes are an integral part of these Consolidated Financial Statements.) 76 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (dollars in thousands) Shares Class A Class B Treasury Balance at January 1, 2019 9,000 100,803,382 8,702,074 Net Income (Loss) 0 0 0 Other Comprehensive Income (Loss), net of tax 0 0 0 Subscriptions – Redeemable Noncontrolling Interest Holders 0 0 0 Consolidation/(Deconsolidation) 0 0 0 Stock Award Activity 0 941,074 ( 941,074 ) Dividends Declared 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 (Loss) 0 0 0 Other Comprehensive Income (Loss), net of tax 0 0 0 Subscriptions – Redeemable Noncontrolling Interest Holders 0 0 0 Consolidation/(Deconsolidation) 0 0 0 Stock Award Activity 0 1,141,331 ( 1,141,331 ) Dividends Declared 0 0 0 Distributions to Noncontrolling Interests in Subsidiaries 0 0 0 Change in Estimated Redemption Value of Redeemable Noncontrolling Interests 0 0 0 Purchase of Treasury Stock 0 ( 2,940,267 ) 2,940,267 Balance at December 31, 2020 9,000 99,331,443 10,174,013 Net Income (Loss) 0 0 0 Other Comprehensive Income (Loss), net of tax 0 0 0 Subscriptions – Redeemable Noncontrolling Interest Holders 0 0 0 Consolidation/(Deconsolidation) 0 0 0 Stock Award Activity 0 1,225,363 ( 1,225,363 ) Dividends Declared 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 Purchase of Treasury Stock 0 ( 7,145,838 ) 7,145,838 Balance at December 31, 2021 9,000 93,410,968 16,094,488 (The accompanying notes are an integral part of these Consolidated Financial Statements.) 77 Federated Hermes, Inc. Shareholders' Equity Common Stock Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss), Net of Tax Total Permanent Equity Redeemable Noncontrolling Interests in Subsidiaries/ Temporary Equity $ 367,252 $ 791,823 $ ( 287,337 ) $ ( 14,617 ) $ 857,121 $ 182,513 0 272,339 0 0 272,339 4,786 0 0 0 14,368 14,368 6,907 0 0 0 0 0 9,356 0 0 0 0 0 454 24,958 ( 20,614 ) 22,045 0 26,389 7,888 0 ( 109,049 ) 0 0 ( 109,049 ) 0 0 0 0 0 0 ( 3,580 ) 0 0 0 0 0 ( 386 ) 0 ( 4,148 ) 0 0 ( 4,148 ) 4,148 0 0 ( 15,740 ) 0 ( 15,740 ) 0 $ 392,210 $ 930,351 $ ( 281,032 ) $ ( 249 ) $ 1,041,280 $ 212,086 0 326,364 0 0 326,364 9,658 0 0 0 15,420 15,420 6,593 0 0 0 0 0 20,985 0 0 0 0 0 ( 3,424 ) 26,648 ( 22,751 ) 24,206 0 28,103 8,786 0 ( 207,744 ) 0 0 ( 207,744 ) 0 0 0 0 0 0 ( 16,218 ) 0 1,479 0 0 1,479 ( 1,479 ) 0 0 ( 67,905 ) 0 ( 67,905 ) 0 $ 418,858 $ 1,027,699 $ ( 324,731 ) $ 15,171 $ 1,136,997 $ 236,987 0 270,293 0 0 270,293 2,015 0 0 0 1,191 1,191 ( 7,443 ) 0 0 0 0 0 998,965 0 0 0 0 0 ( 985,248 ) 30,260 ( 24,518 ) 25,995 0 31,737 9,410 0 ( 105,729 ) 0 0 ( 105,729 ) 0 0 0 0 0 0 ( 4,926 ) 0 0 0 0 0 ( 167,302 ) 0 19,256 0 0 19,256 ( 19,256 ) 0 0 ( 239,728 ) 0 ( 239,728 ) 0 $ 449,118 $ 1,187,001 $ ( 538,464 ) $ 16,362 $ 1,114,017 $ 63,202 78 CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Years Ended December 31, 2021 2020 2019 Operating Activities Net Income Including the Noncontrolling Interests in Subsidiaries $ 272,308 $ 336,022 $ 277,125 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Other Amortization 30,010 29,932 27,999 Share-Based Compensation Expense 30,294 26,669 25,057 Subsidiary Share-Based Compensation Expense 9,411 8,786 7,888 (Gain) Loss on Disposal of Assets ( 6,964 ) 1,382 ( 1,085 ) Provision (Benefit) for Deferred Income Taxes 19,033 18,169 7,452 Net Unrealized (Gain) Loss on Investments ( 1,965 ) ( 19,403 ) ( 6,915 ) Net Sales (Purchases) of Investments—Consolidated Investment Companies ( 179,419 ) ( 12,978 ) ( 26,434 ) Consolidation/(Deconsolidation) of Investment Companies 10,379 ( 3,051 ) 0 Other Changes in Assets and Liabilities: (Increase) Decrease in Receivables, net 6,662 11,654 ( 7,250 ) (Increase) Decrease in Prepaid Expenses and Other Assets 10,275 ( 33,588 ) 7,411 Increase (Decrease) in Accounts Payable and Accrued Expenses ( 6,365 ) 695 30,912 Increase (Decrease) in Other Liabilities ( 23,276 ) 8,952 ( 7,220 ) Net Cash Provided (Used) by Operating Activities 170,383 373,241 334,940 Investing Activities Purchases of Investments—Affiliates and Other ( 9,429 ) ( 25,513 ) ( 103,445 ) Cash Paid for Business Acquisitions, net of Cash Acquired 0 2,697 785 Cash Paid for Asset Acquisitions ( 5,324 ) 0 ( 58,046 ) Proceeds from Redemptions of Investments—Affiliates and Other 35,990 11,493 81,068 Cash Paid for Property and Equipment ( 10,421 ) ( 13,500 ) ( 15,045 ) Net Cash Provided (Used) by Investing Activities 10,816 ( 24,823 ) ( 94,683 ) Financing Activities Dividends Paid ( 105,764 ) ( 207,765 ) ( 109,147 ) Purchases of Treasury Stock ( 228,349 ) ( 66,759 ) ( 15,740 ) Distributions to Noncontrolling Interests in Subsidiaries ( 4,926 ) ( 16,218 ) ( 3,580 ) Contributions from Noncontrolling Interests in Subsidiaries 107,635 20,985 9,356 Payments to Acquire Additional Equity in HFML ( 165,886 ) 0 0 Proceeds from New Borrowings 295,650 100,000 8,800 Payments on Debt ( 147,300 ) ( 125,000 ) ( 43,800 ) Other Financing Activities ( 532 ) ( 379 ) 1,431 Net Cash Provided (Used) by Financing Activities ( 249,472 ) ( 295,136 ) ( 152,680 ) Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents ( 2,311 ) 5,842 4,508 Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents ( 70,584 ) 59,124 92,085 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period 308,635 249,511 157,426 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period 238,051 308,635 249,511 Less: Restricted Cash Recorded in Other Current Assets 4,419 6,455 0 Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets 305 361 337 Cash and Cash Equivalents $ 233,327 $ 301,819 $ 249,174 Supplemental Disclosure of Cash Flow Information Cash paid during the year for: Income taxes $ 91,925 $ 98,730 $ 72,612 Interest $ 1,133 $ 2,393 $ 4,606 (The accompanying notes are an integral part of these Consolidated Financial Statements.) 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (December 31, 2021, 2020 and 2019) (1) Summary of Significant Accounting Policies (a) Nature of Operations Federated Hermes provides investment advisory, administrative, distribution and other services to the Federated Hermes Funds and Separate Accounts in both domestic and international markets. In addition, Federated Hermes markets and provides stewardship and real estate development services to various domestic and international companies. For presentation purposes in the Consolidated Financial Statements, the Federated Hermes Funds are considered to be affiliates of Federated Hermes. The majority of Federated Hermes' revenue is derived from investment advisory services provided to the Federated Hermes Funds and Separate Accounts through various subsidiaries pursuant to investment advisory contracts. These advisory subsidiaries are registered as investment advisors under the Advisers Act or operate in similar capacities under applicable jurisdictional law. U.S.-domiciled Federated Hermes Funds are generally distributed by a wholly-owned subsidiary registered as a broker/dealer under the 1934 Act and under applicable state laws. Non-U.S.-domiciled Federated Hermes Funds are generally distributed by subsidiaries and third-party distribution firms which are registered under applicable jurisdictional law. Federated Hermes' investment products are distributed within the U.S. financial intermediary, U.S. institutional and international markets. (b) Basis of Presentation The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates, and such differences may be material to the Consolidated Financial Statements. (c) Reclassification of Prior Period Financial Statements Certain items previously reported have been reclassified to conform to the current year's presentation. (d) Revenue Recognition All of Federated Hermes' revenue is earned from contracts with customers, which are generally terminable upon no more than 60 days' notice. Revenue is measured as the consideration to which Federated Hermes expects to be entitled in exchange for providing its services. This amount may be reduced by Fee Waivers. See Note (5) for information about current period Fee Waivers. Revenue from providing investment advisory, administrative and the majority of other services is recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. For these revenue streams, control is transferred over time as the customer simultaneously consumes the benefit of the service as it is provided. Federated Hermes utilizes a time-based measure of progress for which each day is a distinct service period over the life of the contract. Investment advisory, administrative and certain other service fees are generally calculated as a percentage of average net assets of the investment portfolios managed by Federated Hermes. Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated Hermes' control, including investor activity and market volatility, and is recognized as these uncertainties are resolved. Certain other service fees are earned on fixed-rate contracts which are recorded over the life of the contract as services are performed. See Note (3) for information about expected future revenue. For certain revenue, primarily related to distribution and performance fees, including carried interest, Federated Hermes may recognize revenue in the current period that pertains to performance obligations satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved. For the distribution performance obligation, control is transferred to the customer at the point in time of investor subscription and/or redemption. Measurement of distribution revenue is based on contractual fee rates and the fair value of AUM over the time period the investor remains in the fund. The revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated Hermes' control, including investor activity and preferences and market volatility, and is recognized as these uncertainties are resolved. 80 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 began in prior periods. Because each fee arrangement is unique, contracts are evaluated on an individual basis for each reporting period. Performance fees are forms of variable consideration which are recognized only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, which involves significant judgement. Potential constraints impacting the amount of variable consideration recognized include factors outside of management's influence, such as market conditions and situations where the contract has a large number and broad range of possible amounts and, in the case of carried interest, certain clawback provisions which may require the return of previously received carried interest based on future fund performance. Federated Hermes records a contract liability for deferred carried interest to the extent it receives cash prior to meeting the revenue recognition criteria. The fair value of AUM managed by Federated Hermes is primarily determined using quoted market prices, independent third-party pricing services and broker/dealer price quotes or the NAV Practical Expedient. In limited circumstances, a quotation or price determination is not readily available from an independent pricing source. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the Federated Hermes Funds. For the periods presented, an immaterial amount of AUM was priced in this manner. For Separate Accounts that are not registered investment companies under the 1940 Act, the fair value of portfolio investments is primarily determined as specified in applicable customer agreements, including in agreements between the customer and the customer's third-party custodian. For Separate Accounts that are registered investment companies under the 1940 Act (e.g., sub-advised mutual funds), the fair value of portfolio investments is determined based on a prescribed valuation process approved by the board of directors/trustees of the sub-advised fund. Federated Hermes has contractual arrangements with third parties to provide certain fund-related services. Management considers whether Federated Hermes is acting as the principal service provider or as an agent to determine whether its revenue should be recorded based on the gross amount received from the funds or net of Federated Hermes' payments to third-party service providers. Federated Hermes is considered a principal service provider if it controls the service that is transferred to the customer. Alternatively, it would be considered an agent when it does not control the service, but rather arranges for the service to be provided by another party. Generally, the less the customer is directly involved with or participates in making decisions regarding the ultimate third-party service provider, the more supportive the facts are that Federated Hermes is acting as the principal in these transactions and should therefore report revenues on a gross basis. All of Federated Hermes' revenue is recorded gross of payments made to third parties. Management judgments are used when reviewing newly-created contracts and/or materially-modified contracts to determine whether: (1) Federated Hermes is the principal or agent; (2) a contract has multiple performance obligations when Federated Hermes is paid a single fee; and (3) two or more contracts should be combined. A change in the conclusion of whether Federated Hermes is the principal or agent would result in a change in the revenue being recorded gross or net of payments made to third parties. Different conclusions for the remaining two judgments may change the line items to which revenue is being recorded. (e) Principles of Consolidation Federated Hermes performs an analysis for each Federated Hermes Fund or other entity in which Federated Hermes holds a financial interest to determine if it is a VIE or VRE. Factors considered in this analysis include, but are not limited to, whether (1) it is a legal entity, (2) a scope exception applies, (3) a variable interest exists and (4) shareholders have the power to direct the activities that most significantly impact the economic performance, as well as the equity ownership, and any related party or de facto agent implications of Federated Hermes' involvement with the entity. Entities that are determined to be VIEs are consolidated if Federated Hermes is deemed to be the primary beneficiary. Entities that are determined to be VREs are generally consolidated if Federated Hermes holds the majority voting interest. Federated Hermes' conclusion to consolidate a Federated Hermes Fund may vary from period to period, most commonly as a result of changes in its percentage interest in the entity. All intercompany accounts and transactions have been eliminated. Consolidation of Variable Interest Entities Federated 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 81 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 Federated Hermes has a controlling financial interest in a VRE if it can exert control over the financial and operating policies of the VRE, which generally occurs when Federated Hermes holds the majority voting interest (i.e., greater than 50% of the voting equity interest). (f) Cash and Cash Equivalents Cash and Cash Equivalents consist of investments in money market funds and deposits with banks. Cash equivalents are highly liquid investments that are readily convertible to cash with original maturities of 90 days or less at the date of acquisition. (g) Investments Federated Hermes' investments are categorized as Investments—Consolidated Investment Companies or Investments—Affiliates and Other on the Consolidated Balance Sheets. Investments—Consolidated Investment Companies represent securities held by Federated Hermes as a result of consolidating certain Federated Hermes Funds. Investments—Affiliates and Other represent Federated Hermes' investments in fluctuating-value Federated Hermes Funds and investments held in Separate Accounts for which Federated Hermes owns the underlying debt and equity securities. All investments are carried at fair value with unrealized gains or losses on these securities recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income. Realized gains and losses on these securities are computed on a specific-identification basis and recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income. The fair value of Federated Hermes' investments is generally based on quoted market prices in active markets for identical instruments. If quoted market prices are not available, fair value is generally based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. In the absence of observable market data inputs and/or value drivers, internally generated valuation techniques may be utilized in which one or more significant inputs or significant value drivers are unobservable in the market place. See Note (7) for additional information regarding the fair value of investments held as of December 31, 2021 and 2020. (h) Derivatives and Hedging Instruments From time to time, Federated Hermes may consolidate an investment product that holds freestanding derivative financial instruments for trading purposes. Federated Hermes reports such derivative instruments at fair value and records the changes in fair value in Gain (Loss) on Securities, net on the Consolidated Statements of Income. From time to time, Federated Hermes may also enter into derivative financial instruments to hedge against the risk of movement in foreign exchange rates. Federated Hermes records all derivative financial instruments as either assets or liabilities on its Consolidated Balance Sheets and measures these instruments at fair value. Federated Hermes has not designated any derivative financial instrument as a hedging instrument for accounting purposes. In 2021, the gain or loss on these derivative instruments is recognized in Operating Expenses – Other on the Consolidated Statements of Income. (i) Asset Acquisitions and Business Combinations Federated Hermes performs an analysis to determine whether a transaction should be accounted for as an asset acquisition or a business combination. A transaction that does not meet the definition of a business under U.S. GAAP is accounted for as an asset acquisition. Asset acquisitions are accounted for using a cost accumulation and allocation method where the cost of the transaction is allocated on a relative fair value basis to the qualifying assets acquired and liabilities assumed on the acquisition date. The cost of the transaction includes both the consideration transferred to the seller and any direct transaction costs incurred. The primary asset acquired in previous asset acquisitions has been the rights to manage fund assets. The rights to manage fund assets is an intangible asset valued using the excess earnings method, under the income approach, which estimates fair value by quantifying the amount of discounted cash flows generated by the asset. No goodwill is recognized in an asset acquisition. A transaction that meets the definition of a business is accounted for as a business combination under the acquisition method of accounting. The consideration transferred to the seller in a business combination is measured at fair value and calculated as the 82 sum of the acquisition date fair values of the assets transferred by Federated Hermes, the liabilities incurred by Federated Hermes from the seller and any equity interests issued by Federated Hermes. Direct transaction costs are expensed as incurred in a business combination. Results of operations of an acquired business are included in Federated Hermes' results from the date of acquisition. Rights to manage fund assets and trade names acquired in a business combination are recorded at fair value. The fair value of the rights to manage fund assets is determined using the excess earnings method, under the income approach. The fair value of the trade names is determined using the relief from royalty method, under the income approach. Each method considers various factors to project future cash flows expected to be generated from the asset. After the fair values of all separately identifiable assets and liabilities have been estimated, goodwill is recorded to the extent that the consideration paid exceeds the sum of the fair values of the separately identifiable acquired assets, net of assumed liabilities. For both asset acquisitions and business combinations, the significant assumptions used in the valuation of the intangible assets acquired typically include: (1) the asset's estimated useful life; (2) projected AUM; (3) projected revenue growth rates; (4) projected pre-tax profit margins; (5) tax rates; (6) discount rates; and (7) in the case of a trade name valuation, a royalty rate. (j) Goodwill and Intangible Assets Intangible assets consist primarily of rights to manage fund assets and trade names acquired in connection with various asset acquisitions and business combinations. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. 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 on June 30 or when indicators of potential impairment exist. Goodwill is evaluated at the reporting unit level. Federated Hermes has determined that it has a single reporting unit consistent with its single operating segment based on the management of Federated Hermes' operations as a single business: investment management. Federated Hermes uses a qualitative approach to test for potential impairment of goodwill. If, after considering various factors, management determines that it is more likely than not that goodwill is impaired, a quantitative goodwill impairment test is performed which compares the fair value of its reporting unit, including consideration of Federated Hermes' market capitalization, with its carrying amount. If the carrying amount of its reporting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. Federated Hermes has determined that certain acquired assets, primarily certain rights to manage fund assets and trade names, have indefinite useful lives. In reaching this conclusion, management considered the acquired assets' legal, regulatory and agreed-upon provisions, the highest and best use of the asset, the level of cost and effort required in agreed-upon renewals, and the effects of obsolescence, demand, competition and other economic factors that could impact the assets' fair value. The fair value of the rights to manage fund assets is determined using the excess earnings method, under the income approach. The fair value of the trade name is determined using the relief from royalty method, under the income approach. 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. Rather, it is subject to reconsideration and may change depending on the facts and circumstances. On a quarterly basis, indefinite-lived intangible assets are reviewed for potential changes in useful life. In addition, an annual impairment test is performed at the accounting unit level, or when indicators of a potential impairment exist. Management may use a qualitative or quantitative approach which requires the weighting of positive and negative evidence collected through the consideration of various factors to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired. In 2021, management used a quantitative approach for two units of account and a qualitative approach for the remaining unit of account. Management considers macroeconomic and entity-specific factors, including the asset's estimated useful life, projected AUM, projected revenue growth rates, projected pre-tax profit margins, tax rates, discount rates and, in the case of a trade name valuation, a royalty rate. If Federated Hermes' carrying amount of its accounting unit exceeds its fair value, an impairment loss would be recognized in an amount equal to the excess of the carrying value over the fair value. Federated Hermes amortizes finite-lived identifiable intangible assets on a straight-line basis over their estimated useful lives. Management periodically evaluates the remaining useful lives and carrying values of the intangible assets to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of a potential impairment monitored by management include a significant decline in the level of managed assets, changes to contractual provisions underlying certain intangible assets and significant reductions in underlying operating cash flows. Should there be an indication of a change in the useful life or impairment in value of the finite-lived intangible assets, Federated 83 Hermes compares the carrying value of the asset to the projected undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to its fair value determined using discounted cash flows. Federated Hermes writes-off the cost and accumulated amortization balances for all fully amortized intangible assets. (k) Property and Equipment Property and equipment are initially recorded at cost and are depreciated using the straight-line method over their estimated useful lives ranging from 1 to 15 years. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or their respective lease terms. Depreciation and amortization expense is recorded in Office and Occupancy on the Consolidated Statements of Income. As property and equipment are taken out of service, the cost and related accumulated depreciation and amortization are removed. The write-off of any residual net book value is reflected as a loss in Operating Expenses – Other on the Consolidated Statements of Income. On an annual basis, management reviews the remaining useful lives and carrying values of property and equipment to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of impairment monitored by management include a decrease in the market price of the asset, an accumulation of costs significantly in excess of the amount originally expected in the acquisition or development of the asset, historical and projected cash flows associated with the asset and an expectation that the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Should there be an indication of a change in the useful life or an impairment in value, Federated Hermes compares the carrying value of the asset to the probability-weighted undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether an impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value which is determined based on prices of similar assets if available or discounted cash flows. Impairment adjustments are recognized in Operating Expenses – Other on the Consolidated Statements of Income. (l) Costs of Computer Software Developed or Obtained for Internal Use Certain internal and external costs incurred in connection with developing or obtaining software for internal use, including software licenses in a cloud computing arrangement, are capitalized in accordance with the applicable accounting guidance relating to Intangibles - Goodwill and Other - Internal-Use Software. These capitalized costs are included in Property and Equipment, net on the Consolidated Balance Sheets and are amortized using the straight-line method over the estimated useful life of the software, typically four years , or over the term of the software license. These assets are subject to the impairment test used for property and equipment described above. Certain internal and external costs incurred in connection with implementation costs related to a software hosting arrangement that is a service contract are capitalized in accordance with the applicable accounting guidance relating to Intangibles - Goodwill and Other - Internal-Use Software. These capitalized costs are included in Prepaid Expenses and Other Long-Term Assets on the Consolidated Balance Sheets and are amortized using the straight-line method over the term of the software license. (m) Leases Federated Hermes classifies leases as either operating or financing, and records a right-of-use (ROU) asset and a lease liability on the Consolidated Balance Sheets. The lease liability is initially measured at the present value of the unpaid lease payments remaining at the lease commencement date. The ROU asset is initially measured as the lease liability, adjusted for lease payments made prior to the lease commencement date and lease incentives received. ROU assets are reviewed for impairment when events or circumstances indicate that the carrying amount may not be recoverable. In determining the present value of the lease liability, a lessee must use the interest rate implicit in the lease or, if that rate is not readily determinable, its incremental borrowing rate (IBR). All leases for the periods presented are classified as operating leases. Management has made the following accounting policy elections: (1) not to separate lease components from non-lease components for all asset classes and (2) to apply the short-term lease exception, which does not require the capitalization of leases with terms of 12 months or less. Rent expense is recorded on a straight-line basis over the lease term, beginning on the earlier of the effective date of the lease or the date Federated Hermes obtains control of the asset. The lease term may include options to extend the lease when they are reasonably certain of being exercised. Management judgments are used when reviewing new and/or materially-modified contracts to determine (1) whether the contract is, or contains, a lease, and (2) the IBR. Management was unable to determine the rates implicit in Federated Hermes' leases based on the information available at the commencement date, therefore, management calculated an IBR for each lease. 84 In order to calculate the IBR, management began with readily observable unsecured rates, and adjusted for the following assumptions: (1) collateralization, (2) remaining lease term and (3) the type of ROU asset. (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. Accruals are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Significant differences could exist between the actual cost required to investigate, litigate and/or settle a claim or the ultimate outcome of a lawsuit, claim or proceeding and management's estimate. These differences could have a material impact on Federated Hermes' results of operations, financial position and/or cash flows. Recoveries of losses are recognized on the Consolidated Statements of Income when receipt is deemed probable, or when final approval is received by the insurance carrier. (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 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 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 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: (1) the discounted cash flow methodology under the income approach; (2) the guideline public company methodology under the market approach and (3) the guideline public transaction methodology under the market approach. The estimated current redemption value is derived from equally weighting the result of each of the three methodologies. The estimation of the current redemption value includes significant assumptions concerning: (1) projected AUM; (2) projected revenue growth rates; (3) projected pre-tax profit margins; (4) tax rates and (5) discount rates. (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. shareholders' equity on the Consolidated Balance Sheets. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a specific-identification basis. Additional Paid-in Capital from Treasury Stock Transactions is increased as Federated Hermes reissues treasury stock for more than the cost of the shares. If Federated Hermes issues treasury stock for less than its cost, Additional Paid-in Capital from Treasury Stock Transactions is reduced to no less than zero and any further required reductions are recorded to Retained Earnings on the Consolidated Balance Sheets. (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. (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 85 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. (s) Share-Based Compensation Federated Hermes issues shares for share-based awards from treasury stock. Federated Hermes recognizes compensation costs based on grant-date fair value for all share-based awards. For restricted stock awards, the grant-date fair value of the award is calculated as the difference between the closing fair value of Federated Hermes' Class B common stock on the date of grant and the purchase price paid by the employee, if any. Federated Hermes' awards are generally subject to graded vesting schedules. Compensation and Related expense is generally recognized on a straight-line basis over the requisite service period of the award and is adjusted for actual forfeitures as they occur. For awards with provisions that allow for accelerated vesting upon retirement, Federated Hermes recognizes expense over the shorter of the vesting period or the period between grant date and the date on which the employee meets the minimum required age for retirement. Compensation and Related expense also includes dividends paid on forfeited awards. Excess tax benefits and deficiencies (including tax benefits from dividends paid on unvested restricted stock awards) are recognized in the Income Tax Provision in the Consolidated Statements of Income. Effective July 2, 2018, Federated Hermes established a non-public subsidiary share-based compensation plan for certain employees of one of its subsidiaries. The subsidiary grants equity awards in the form of restricte d nonpublic subsidiary stock to certain members of the subsidiary's management and other key employees. The grant date fair value of the awards is recognized as Compensation and Related expense in the Consolidated Statements of Income on a straight-line basis over the requisite service period of the awards and is adjusted for actual forfeitures as they occur, with a corresponding adjustment to Redeemable Noncontrolling 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. (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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Federated Hermes recognizes a valuation allowance if, based on the weight of available evidence regarding future taxable income, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Following its review, management has determined that the investment in certain non-U.S. subsidiaries will be reinvested for an indefinite period of time. Federated Hermes has the ability and the intent to do this. In addition, under the various directives and protocols in the jurisdictions where these entities are located, management believes that any dividend from these non-U.S. subsidiaries would not be subject to a withholding tax. Additionally, Federated Hermes has elected to account for taxes related to temporary basis differences expected to reverse as Global Intangible Low-Taxed Income (GILTI) as tax expense in the period incurred, rather than factoring it into the measurement of deferred taxes. As of December 31, 2021, the unrecognized deferred tax liability associated with these subsidiaries is $ 9.1 million. (v) Earnings Per Share Basic and diluted earnings per share are calculated under the two-class method. Pursuant to the two-class method, unvested restricted shares of Federated Hermes' Class B common stock with nonforfeitable rights to dividends are considered participating securities and are required to be considered in the computation of earnings per share. These unvested restricted shares, as well as the related dividends paid and their proportionate share of undistributed earnings, if any, are excluded from the computation of basic earnings per share. 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. 86 (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. Federated Hermes operates in one operating segment, the investment management business, which is primarily conducted within the U.S. Federated Hermes' CEO utilizes a consolidated approach to assess performance and allocate resources. (2) 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 (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 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. The HCL Acquisition included upfront cash payments that totaled £ 11.2 million ($ 14.3 million). The transaction also includes contingent purchase price payments payable through December 2024 that were deposited into escrow. The maximum contingent purchase price payments, 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 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 87 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) Cash and Cash Equivalents $ 32.7 Other Current Assets 1 11.8 Goodwill 2 19.1 Intangible Assets 3 27.6 Other Long-Term Assets 16.4 Less: Liabilities Acquired ( 44.1 ) Less: Fair Value of Redeemable Noncontrolling Interests in Subsidiaries 4 ( 43.1 ) Total Purchase Price Consideration $ 20.4 1 Includes $ 5.0 million of accounts receivable. 2 The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled workforce of HGPE. In this instance, goodwill is not deductible for tax purposes. 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 interests was determined utilizing primarily the discounted cash flow methodology under the income approach. (3) Revenue from Contracts with Customers The following table presents Federated Hermes' revenue disaggregated by asset class: (in thousands) 2021 2020 2019 Equity $ 677,917 $ 551,028 $ 533,749 Money market 239,318 570,815 529,340 Fixed-income 237,702 193,649 179,102 Other 1 145,510 132,776 84,703 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 stewardship services revenue. The following table presents Federated Hermes' revenue disaggregated by performance obligation: (in thousands) 2021 2020 2019 Asset Management 1 $ 915,984 $ 1,011,467 $ 907,605 Administrative Services 306,639 318,152 245,887 Distribution 2 49,600 92,922 151,106 Other 3 28,224 25,727 22,296 Total Revenue $ 1,300,447 $ 1,448,268 $ 1,326,894 1 The performance obligation may include administrative, distribution and other services recorded as a single asset management fee under Topic 606, as it is part of a unitary fee arrangement with a single performance obligation. 2 The performance obligation is satisfied at a point in time. A portion of this revenue relates to a performance obligation that has been satisfied in a prior period. 3 Primarily includes shareholder service fees and stewardship services revenue. 88 The following table presents Federated Hermes' revenue disaggregated by product type: (in thousands) 2021 2020 2019 Federated Hermes Funds $ 1,024,922 $ 1,191,851 $ 1,093,157 Separate Accounts 259,026 241,631 221,756 Other 1 16,499 14,786 11,981 Total Revenue $ 1,300,447 $ 1,448,268 $ 1,326,894 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: (1) contract terms are short-term in nature (i.e., expected duration of one year or less due to termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods. Federated Hermes expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services and real estate development performance obligations at December 31, 2021. Generally, contracts are billed in arrears on a quarterly basis and have a three-year duration, after which the customer can terminate the agreement with notice, generally from three to twelve months . Based on existing contracts and the exchange rates as of December 31, 2021, Federated Hermes may recognize future fixed revenue from these services as presented in the following table: (in thousands) 2022 $ 11,404 2023 4,714 2024 2,365 2025 and Thereafter 553 Total Remaining Unsatisfied Performance Obligations $ 19,036 (4) Concentration Risk The following information summarizes Federated Hermes' revenue concentrations. See additional information on the risks related to such concentrations in Item 1A - Risk Factors (unaudited). (a) Revenue Concentration by Asset Class The following table presents Federated Hermes' significant revenue concentration by asset class over the last three years: 2021 2020 2019 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 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 the Pandemic, FOMC decreased the federal funds target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. As a result of the near-zero interest-rate environment, the gross yield earned by certain money market funds is not sufficient to cover all of the fund's operating expenses. Beginning in the first quarter 2020, Federated Hermes began to implement Voluntary Yield-related Fee Waivers in order for certain money market funds to maintain positive or zero net yields. These Voluntary Yield-related Fee 89 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 - 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 Fund and Federated Hermes Kaufmann Fund II 11 % 9 % 9 % Federated Hermes Strategic Value Dividend strategy 1 9 % 8 % 11 % Federated Hermes Government Obligations Fund 5 % 13 % 10 % 1 Strategy includes Federated Hermes Funds and Separate Accounts. 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. (c) Revenue Concentration by Intermediary 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. 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 The Consolidated Financial Statements include the accounts of Federated Hermes, certain Federated Hermes Funds and other entities in which Federated Hermes holds a controlling financial interest. Federated Hermes is involved with various entities in the normal course of business that may be deemed to be VREs or VIEs. From time to time, Federated Hermes invests in Federated Hermes Funds for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history. Federated Hermes' investment in, and/or receivables from, these Federated Hermes Funds represents its maximum exposure to loss. The assets of each consolidated Federated Hermes Fund are restricted for use by 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 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 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. 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 90 liquidation. 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. In accordance with Federated Hermes' consolidation accounting policy, Federated Hermes first determines whether the entity being evaluated is a VRE or a VIE. Once this determination is made, Federated Hermes proceeds with its evaluation of whether to consolidate the entity. The disclosures below represent the results of such evaluations as of December 31, 2021 and 2020. (a) Consolidated Voting Rights Entities 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, 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 Less: Liabilities 1.4 0.1 Less: 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. There were no other consolidations or deconsolidations of VIEs during the year ended December 31, 2021. (c) Non-Consolidated Variable Interest Entities 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, 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. Of the Receivables—Affiliates at December 31, 2021 and 2020, $ 0.7 million and $ 0.4 million, respectively, related to non-consolidated VIEs and represented Federated Hermes' maximum risk of loss from non-consolidated VIE receivables. 91 (6) Investments 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. 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: (in thousands) 2021 2020 2019 Investments—Consolidated Investment Companies Net Unrealized Gains (Losses) $ 642 $ 13,862 $ 4,759 Net Realized Gains (Losses) 1 1,609 ( 1,352 ) ( 1,243 ) Net Gains (Losses) on Investments—Consolidated Investment Companies 2,251 12,510 3,516 Investments—Affiliates and Other Net Unrealized Gains (Losses) 1,323 5,541 2,156 Net Realized Gains (Losses) 1 5,958 16 ( 706 ) Net Gains (Losses) on Investments—Affiliates and Other 7,281 5,557 1,450 Gain (Loss) on Securities, net $ 9,532 $ 18,067 $ 4,966 1 Realized gains and losses are computed on a specific-identification basis. (7) Fair Value Measurements Fair value is the price that would be received to sell an asset or the price that would be paid to transfer a liability as of the measurement date. A fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The levels are: Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities that are traded in an active exchange market, including shares of mutual funds. Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs. Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active markets. NAV Practical Expedient – Investments that calculate NAV per share (or its equivalent) as a practical expedient. These investments have been excluded from the fair value hierarchy. 92 (a) Fair Value Measurements on a Recurring Basis The following table presents fair value measurements for classes of Federated Hermes' financial assets and liabilities measured at fair value on a recurring basis at December 31: (in thousands) Level 1 Level 2 Level 3 Total 2021 Financial Assets Cash and Cash Equivalents $ 233,327 $ 0 $ 0 $ 233,327 Investments—Consolidated Investment Companies 38,799 66,743 0 105,542 Investments—Affiliates and Other 82,594 5,165 46 87,805 Other 1 7,105 0 0 7,105 Total Financial Assets $ 361,825 $ 71,908 $ 46 $ 433,779 Total Financial Liabilities 2 $ 0 $ 1,644 $ 11,652 $ 13,296 2020 Financial Assets Cash and Cash Equivalents $ 301,819 $ 0 $ 0 $ 301,819 Investments—Consolidated Investment Companies 13,622 77,737 0 91,359 Investments—Affiliates and Other 40,010 5,247 336 45,593 Other 1 9,188 5,143 0 14,331 Total Financial Assets $ 364,639 $ 88,127 $ 336 $ 453,102 Total Financial Liabilities 2 $ 0 $ 89 $ 12,896 $ 12,985 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. Federated Hermes did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at December 31, 2021 or 2020. Cash and Cash Equivalents Cash and Cash Equivalents include deposits with banks and investments in money market funds. Investments in money market funds totaled $ 183.4 million and $ 244.3 million at December 31, 2021 and 2020, respectively. Cash investments in publicly available money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. Investments—Consolidated Investment Companies Investments—Consolidated Investment Companies represent securities held by consolidated Federated Hermes Funds. For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. The fair value of certain securities held by consolidated Federated Hermes Funds are determined by third-party pricing services which utilize observable market inputs of comparable investments (Level 2). Investments—Affiliates and Other Investments—Affiliates and Other primarily represent investments in fluctuating-value Federated Hermes Funds, as well as investments held in Separate Accounts. For investments in fluctuating-value Federated Hermes Funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. The fair value of certain securities are determined by third-party pricing services which utilize observable market inputs of comparable investments (Level 2). 93 Acquisition-related future contingent consideration liabilities From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes may be required to make future consideration payments if certain contingencies are met. In connection with certain business combinations, Federated Hermes records a liability representing the estimated fair value of future consideration payments as of the acquisition date. The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded in earnings. As of December 31, 2021, acquisition-related future consideration liabilities of $ 11.7 million were primarily related to business combinations made in the first quarter of 2020 and were recorded in Other Current Liabilities ($ 7.2 million) and Other Long-Term Liabilities ($ 4.5 million) on the Consolidated Balance Sheets. Management estimated the fair value of future consideration payments based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3). The following table presents a reconciliation of the beginning and ending balances for Federated Hermes' liability for future consideration payments related to these business combinations/asset acquisitions: (in thousands) Balance at December 31, 2020 $ 12,896 Changes in Fair Value 1,051 Contingent Consideration Payments ( 2,295 ) Balance at December 31, 2021 $ 11,652 Investments using Practical Expedients For investments in mutual funds that are not publicly available but for which the NAV is calculated monthly and for which there are redemption restrictions, the investments are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. As of December 31, 2021 and December 31, 2020, these investments totaled $ 17.5 million and $ 6.9 million, respectively, and were recorded in Other Long-Term Assets. (b) Fair Value Measurements on a Nonrecurring Basis Federated Hermes did not hold any assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2021. (c) Fair Value Measurements of Other Financial Instruments The fair value of Federated Hermes' debt is estimated by management using observable market data (Level 2). Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value. (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. Dollar. None of the forwards have been designated as hedging instruments for accounting purposes. 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 $ 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. 94 (9) Intangible Assets (a) Indefinite-lived intangible assets 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, 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 Finite-lived intangible assets primarily represent customer relationships and consist of the following at December 31: (in thousands) 2021 2020 Cost $ 109,904 $ 111,041 Accumulated Amortization ( 39,618 ) ( 26,372 ) Carrying Value $ 70,286 $ 84,669 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. Expected aggregate annual amortization expense for finite-lived intangible assets in each of the five succeeding years assuming no new acquisitions or impairments is shown in the table below: (in thousands) 2022 $ 13,347 2023 13,314 2024 12,366 2025 12,285 2026 8,275 (c) Goodwill 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 Property and equipment consisted of the following at December 31: (in thousands) Estimated Useful Life 2021 2020 Computer Software and Hardware 1 to 7 years $ 94,230 $ 94,662 Leasehold Improvements Up to term of lease 41,826 39,546 Transportation Equipment 14 years 17,851 17,851 Office Furniture and Equipment 4 to 15 years 6,682 6,868 Total Cost 160,589 158,927 Accumulated Depreciation ( 113,624 ) ( 106,317 ) Property and Equipment, net $ 46,965 $ 52,610 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. 95 (11) Debt 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 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 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, 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 (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 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 Federated Hermes offers defined contribution plans to its employees. 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 (a) Restricted Stock Federated Hermes' long-term stock-incentive compensation is provided under the Stock Incentive Plan (the Plan), as amended and subsequently approved by shareholders from time to time. Share-based awards are granted to reward Federated Hermes' employees and non-management directors who have contributed to the success of Federated Hermes and to provide incentive to increase their efforts on behalf of Federated Hermes. Since the Plan's inception, a total of 30.6 million shares of Class B 96 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. The associated tax benefits recorded in connection with share-based compensation expense were $ 7.1 million, $ 6.4 million and $ 6.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, the maximum remaining unrecognized compensation expense related to share-based awards approximated $ 81.5 million which is expected to be recognized over a weighted-average period of approximately 6 years. 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 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. Certain restricted stock awards granted pursuant to a key employee bonus program have a three-year graded vesting schedule with restrictions lapsing at each vesting date. During these restriction periods, the recipient receives dividends on all shares awarded, regardless of their vesting status. The following table summarizes activity of non-vested restricted stock awards for the year ended December 31, 2021: Restricted Shares Weighted- Average Grant- Date Fair Value Non-vested at January 1, 2021 3,961,392 $ 26.17 Granted 1 1,218,613 30.07 Vested ( 957,840 ) 26.01 Forfeited ( 49,083 ) 26.65 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 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; awarded 1,134,581 shares of restricted Class B common stock with a weighted-average grant-date fair value of $ 25.98 to employees during 2020; and awarded 928,324 shares of restricted Class B common stock with a weighted-average grant-date fair value of $ 30.10 to employees during 2019. The total fair value of restricted stock vested during 2021, 2020 and 2019 was $ 29.9 million, $ 23.2 million and $ 28.4 million, respectively. (b) Subsidiary Stock Plan Effective July 2, 2018, Federated Hermes established a non-public subsidiary share-based compensation plan for certain employees of one of its subsidiaries. These awards, which are subject to continued-service vesting requirements, vest over a period of three to five years . At various predetermined dates, but no earlier than 9 months after vesting, award holders have a right to exercise a put option to sell shares to Federated Hermes at fair value and Federated Hermes has a right to exercise a call option to acquire shares at fair value. Federated Hermes recognized compensation expense for this plan of $ 9.4 million, $ 8.8 million and $ 7.9 million in Compensation and Related expense on the Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019, respectively. 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. 97 (14) Common Stock 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. (a) Dividends Cash dividends of $ 105.8 million, $ 207.8 million and $ 109.1 million were paid in 2021, 2020 and 2019, respectively, to holders of Federated Hermes common stock. Of the amount paid in 2020, $ 99.3 million represented a $ 1.00 per share special dividend paid in the fourth quarter. All dividends were considered ordinary dividends for tax purposes. (b) Treasury Stock In October 2016, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy back of up to 4 million shares of Class B common stock. This program was fulfilled in March 2020. In March 2020, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy back of up to 500 thousand shares of Class B common stock. This program was fulfilled in May 2020. In April 2020, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy back of up to 3.5 million shares of Class B common stock. 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, 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 Federated Hermes files a consolidated federal income tax return. Financial statement tax expense is determined under the liability method. Income Tax Provision consisted of the following expense/(benefit) components for the years ended December 31: (in thousands) 2021 2020 2019 Current: Federal $ 73,351 $ 76,936 $ 67,745 State 8,628 11,759 10,158 Foreign 2,970 3,171 2,791 Total Current 84,949 91,866 80,694 Deferred: Federal 3,457 9,991 6,395 State 1,421 2,365 1,427 Foreign 14,155 5,813 ( 370 ) Total Deferred 19,033 18,169 7,452 Total $ 103,982 $ 110,035 $ 88,146 98 The reconciliation between the statutory income tax rate and the effective tax rate consisted of the following for the years ended December 31: 2021 2020 2019 Expected Federal Statutory Income Tax Rate 21.0 % 21.0 % 21.0 % Increase/(Decrease): State and Local Income Taxes, net of Federal Benefit 1.9 2.4 2.4 Foreign Income Taxes 3.6 0.8 ( 0.1 ) Non-Deductible Executive Compensation 1.2 0.8 0.9 Other ( 0.1 ) ( 0.3 ) ( 0.1 ) Effective Tax Rate 27.6 % 24.7 % 24.1 % 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: (in thousands) 2021 2020 Deferred Tax Assets Tax Net Operating Loss Carryforwards $ 71,492 $ 74,274 Lease liability 28,160 30,931 Compensation related 21,457 18,033 Other 1,125 871 Total Deferred Tax Assets 122,234 124,109 Valuation Allowance ( 59,250 ) ( 61,089 ) Total Deferred Tax Asset, net of Valuation Allowance $ 62,984 $ 63,020 Deferred Tax Liabilities Intangible Assets $ 232,702 $ 211,127 Right-of-use asset 25,854 28,981 Property and equipment 3,783 5,121 Other 5,851 5,728 Total Gross Deferred Tax Liability $ 268,190 $ 250,957 Net Deferred Tax Liability $ 205,206 $ 187,937 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. The state net operating losses will expire through 2041, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $ 49.5 million (or 99 %) of the deferred tax asset for state tax net operating losses, and for $ 9.8 million (or 45 %) of the deferred tax asset for foreign tax net operating losses. The valuation allowances were recorded due to management's belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses. For the deferred tax asset, net of valuation allowance related to foreign net operating losses, management believes that it is more likely than not that it will realize the benefit of these net operating losses based on projections of future taxable income for the entities to which these relate. At December 31, 2020, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $ 74.3 million. The state net operating losses will expire through 2040, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $ 51.6 million (or 100 %) of the deferred tax asset for state tax net operating losses, and for $ 9.5 million (or 42 %) of the deferred tax asset for foreign tax net operating losses. The valuation allowances were recorded due to management's belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses. For the deferred tax asset, net of 99 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. Federated Hermes and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in certain foreign jurisdictions. Based upon its review of these filings, there were no material unrecognized tax benefits as of December 31, 2021 or 2020. 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. Shareholders The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Federated Hermes for the years ended December 31: (in thousands, except per share data) 2021 2020 2019 Numerator Net Income Attributable to Federated Hermes, Inc. $ 270,293 $ 326,364 $ 272,339 Less: Total Net Income Available to Participating Unvested Restricted Shareholders 1 ( 11,277 ) ( 12,794 ) ( 10,234 ) Total Net Income Attributable to Federated Hermes Common Stock - Basic $ 259,016 $ 313,570 $ 262,105 Less: Total Net Income Available to Unvested Restricted Shareholders of a Nonpublic Consolidated Subsidiary ( 1,580 ) ( 2,439 ) ( 872 ) Total Net Income Attributable to Federated Hermes Common Stock - Diluted $ 257,436 $ 311,131 $ 261,233 Denominator Basic and Diluted Weighted-Average Federated Hermes Common Stock 2 93,597 96,419 97,259 Earnings Per Share Net Income Attributable to Federated Hermes Common Stock - Basic 2 $ 2.77 $ 3.25 $ 2.69 Net Income Attributable to Federated Hermes Common Stock - Diluted 2 $ 2.75 $ 3.23 $ 2.69 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. (17) Leases Federated Hermes has material operating leases related to its corporate headquarters in Pittsburgh, Pennsylvania. These leases expire in 2030 and have renewal options for additional periods through 2040. These leases include provisions for leasehold improvement incentives, rent escalation and certain penalties for early termination. In addition, Federated Hermes has various other operating lease agreements primarily for additional facilities. These leases are noncancelable and expire on various dates through the year 2030. Most leases include renewal options for additional rental periods that would end on various dates through 2037 and, in certain cases, escalation clauses. The value of the ROU assets and lease liabilities recognized do not include the consideration of any renewal options, as they are not yet reasonably certain to be exercised. During the years ended December 31, 2021, 2020, and 2019, Federated Hermes recorded $ 19.0 million, $ 13.0 million and $ 17.7 million, respectively, in operating lease costs to Office and Occupancy expense on the Consolidated Statements of Income. 100 The following table reconciles future minimum undiscounted payments to the operating lease liabilities recorded on the Consolidated Balance Sheets as of December 31, 2021: (in millions) 2022 $ 20.9 2023 20.5 2024 19.2 2025 14.5 2026 13.2 2027 and Thereafter 49.7 Total Undiscounted Lease Payments $ 138.0 Present Value Adjustment 1 ( 15.3 ) Net Operating Lease Liabilities $ 122.7 1 Calculated using the IBR for each lease. The following information relates to the operating leases recorded on the Consolidated Balance Sheets as of December 31, 2021: Weighted-average remaining lease term (in years) 7.8 Weighted-average discount rate (IBR) 3.03 % Year-to-date cash paid for the amounts included in the measurement of lease liabilities (in millions) $ 19.9 (18) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders 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) 14,368 Balance at December 31, 2019 $ ( 249 ) Other Comprehensive Income (Loss) 15,420 Balance at December 31, 2020 $ 15,171 Other Comprehensive Income (Loss) 1,191 Balance at December 31, 2021 $ 16,362 101 (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 Total Balance at January 1, 2019 $ 11,626 $ 170,887 $ 182,513 Net Income (Loss) 2,016 2,770 4,786 Other Comprehensive Income (Loss), net of tax 0 6,907 6,907 Subscriptions—Redeemable Noncontrolling Interest Holders 9,356 0 9,356 Consolidation/(Deconsolidation) 454 0 454 Stock Award Activity 0 7,888 7,888 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 Net Income (Loss) 3,626 6,032 9,658 Other Comprehensive Income (Loss), net of tax 0 6,593 6,593 Subscriptions—Redeemable Noncontrolling Interest Holders 20,985 0 20,985 Consolidation/(Deconsolidation) ( 4,019 ) 595 ( 3,424 ) Stock Award Activity 0 8,786 8,786 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 ) Balance at December 31, 2020 $ 24,246 $ 212,741 $ 236,987 Net Income (Loss) 304 1,711 2,015 Other Comprehensive Income (Loss), net of tax 0 ( 7,443 ) ( 7,443 ) Subscriptions—Redeemable Noncontrolling Interest Holders 997,556 1,409 998,965 Consolidation/(Deconsolidation) ( 994,430 ) 9,182 ( 985,248 ) Stock Award Activity 0 9,410 9,410 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 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. 102 (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 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, 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 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. (c) Guarantees and Indemnifications 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. In addition, in the normal course of business, Federated Hermes has entered into contracts that provide a variety of indemnifications. Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated Hermes, under which Federated Hermes agrees to hold the other party harmless against losses arising out of the contract, provided the other party's actions are not deemed to have breached an agreed-upon standard of care. In each of these circumstances, payment by Federated Hermes is contingent on the other party making a claim for indemnity, subject to Federated Hermes' right to challenge the claim. Further, Federated Hermes' obligations under these agreements may be limited in terms of time and/or amount. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of Federated Hermes' obligations and the unique facts and circumstances involved in each particular agreement. As of December 31, 2021, management does not believe that a material loss related to any of these matters is reasonably possible. (d) Legal Proceedings Like other companies, Federated Hermes has claims asserted and threatened against it in the ordinary course of business. As of December 31, 2021, Federated Hermes does not believe that a material loss related to these claims is reasonably possible. (21) Segment and Geographic Information Federated Hermes operates in one operating segment, the investment management business. Federated Hermes' revenues from U.S. and non-U.S. operations were as follows for the years ended December 31: (in thousands) 2021 2020 2019 U.S. $ 953,620 $ 1,168,018 $ 1,098,975 Non-U.S. 1 346,827 280,250 227,919 Total Revenue $ 1,300,447 $ 1,448,268 $ 1,326,894 1 This represents revenue earned by non-U.S. domiciled subsidiaries, primarily in the UK. Federated Hermes' Right-of-Use Assets, net and Property and Equipment, net for U.S. and non-U.S. operations were as follows at December 31: (in thousands) 2021 2020 U.S. $ 105,558 $ 118,912 Non-U.S. 1 49,713 55,776 Total Right-of-Use Assets, net and Property and Equipment, net 1 $ 155,271 $ 174,688 1 This represents net assets of non-U.S. domiciled subsidiaries, primarily in the UK. 103 (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. 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. 104 ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.