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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-25 · 154 added, 181 removed, 370 unchanged (48% of the section changed)

1 unchanged sentence

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1- Business, Item 1A - Risk Factors and Item 8 - Financial Statements and Supplementary Data.

Federated Hermes is one of the largest investment managers in the U.S.

with $668.9 billion in managed assets as of December 31, 2021.

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

Federated Hermes is a global leader in active, responsible investing with $668.9 billion in managed assets as of December 31, 2022.

The majority of Federated Hermes’ revenue is derived from advising Federated Hermes Funds and Separate Accounts in domestic and international public and private markets.

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

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

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

Generally, managed assets in Federated Hermes' investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement.

Fee rates for Federated Hermes' services generally vary by asset and service type and may vary based on changes in asset levels.

Generally, advisory fees charged for services provided to equity and multi-asset products and strategies are higher than advisory fees charged to fixed-income and alternative/private markets products and strategies, which in turn are higher than advisory fees charged to money market products and strategies.

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

Generally, managed assets in Federated Hermes’ public market investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement, while managed assets in Federated Hermes private market investment products and strategies are subject to restrictions and withdrawals.

Fee rates for Federated Hermes’ services generally vary by asset and service type and can vary based on changes in asset levels.

Generally, advisory fees charged for services provided to multi-asset and equity products and strategies are higher than advisory fees charged to alternative/private markets and fixed-income products and strategies, which in turn are higher than advisory fees charged to money market products and strategies.

Likewise, Federated Hermes Funds typically have higher advisory fees than Separate Accounts.

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

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

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

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

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

These payments are generally calculated as a percentage of net assets attributable to the applicable financial intermediary and represent the vast majority of Distribution expense on the Consolidated Statements of Income.

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Business Developments

Intangible Asset Impairment

A $31.5 million non-cash impairment of an intangible asset associated with the 2018 acquisition of FHL was recorded in Intangible Asset Related expense on the Consolidated Statements of Income as of December 31, 2022.

See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Note (9) to the Consolidated Financial Statements for additional information.

Business Combination

Effective October 1, 2022, Federated Hermes completed the acquisition of substantially all of the assets of C.W.

Henderson and

Associates, Inc.

(CWH), a Chicago-based registered investment advisor specializing in the management of tax-exempt

municipal securities (CWH Acquisition).

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

Unsecured Senior Notes

On March 17, 2022, Federated Hermes entered into a Note Purchase Agreement (Note Purchase Agreement) by and among Federated Hermes and the purchasers of certain unsecured senior notes in the aggregate amount of $350 million ($350 million Notes), at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and September in each year of the agreement.

T he entire principal amount of the $350 million Notes will become due March 17, 2032, subject to certain prepayment requirements under limited conditions.

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

Equity Acquisition

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

On March 14, 2022, Federated Hermes completed a tender offer resulting in the acquisition of the remaining approximately 10% noncontrolling interests in FHL from a trustee of a non-U.S.

domiciled employee benefit trust established for the benefit of certain members of FHL’s management, a non-U.S.

resident former FHL employee and other non-U.S.

resident key FHL employees under a long-term incentive plan established in connection with the 2018 acquisition of FHL (2022 Acquisition of FHL Noncontrolling Interests).

As a result of the 2022 Acquisition of FHL Noncontrolling Interests, FHL became an indirect, wholly-owned subsidiary of Federated Hermes.

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

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

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

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

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

These impacts continue, to varying degrees, in 2022.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

based on the foregoing.

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

employees will be consistent with applicable government requirements.

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

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

and UK employees.

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

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

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

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

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

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

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

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

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

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

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

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

Travel reservations remain below pre-Pandemic levels.

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

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

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

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

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

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

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

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

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

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

Federated Hermes continues to actively monitor the ongoing Pandemic and resulting developments and their potential impact on Federated Hermes’ employees and Financial Condition.

The Pandemic adversely impacted the global economy, contributed to significant volatility in financial markets and impacted the workforce and recruiting practices.

Over the course of the Pandemic, many jurisdictions instituted quarantines, imposed limitations on travel, and restricted access to offices and public venues, some of which are ongoing or could reoccur, and many businesses implemented similar precautionary measures.

Such measures, as well as the general uncertainty surrounding the containment and impact of the Pandemic, created significant disruption in economic activity.

Throughout the Pandemic, there has not been a significant disruption of Federated Hermes’ business processes, allowing it to remain fully operational and to continue to provide services to its customers.

As of December 31, 2022, while Federated Hermes’ stock price has fluctuated amidst the volatility in stock prices on major exchanges (particularly at the beginning of the Pandemic), and Federated Hermes’ business operations have had to adapt to a remote and current hybrid working environment, the Pandemic has not materially affected Federated Hermes’ Financial Condition (as defined below) except to the extent that the net Voluntary Yield-related Fee Waivers resulting from the near-zero interest rate environment that existed throughout 2021 and into the second quarter 2022 were attributable to the Pandemic.

With the increase in short-term interest rates beginning in March 2022, net Voluntary Yield-related Fee Waivers were greatly diminished in the second quarter 2022 and ceased early in the third quarter 2022.

See “Low Short-Term Interest Rates” below for additional information on Voluntary Yield-related Fee Waivers.

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

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

The aggregate extent to which the Pandemic, including existing and new variants, and its related impact on the global economy and financial markets, affects Federated Hermes’ Financial Condition, will depend on future developments that are highly uncertain and cannot be predicted, including any residual effects of the Pandemic, the emergence and spread of variants, any prevalence of severe, unconstrained and/or escalating rates of infection in certain countries and regions, the availability, adoption and efficacy of

treatments and vaccines, and future actions taken by governmental authorities, central banks and other third parties in response to such events.

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%.

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

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

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

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

These waivers had 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.

In response to global economic activity and elevated inflation levels, the FOMC raised the federal funds target rate multiple times in 2022 and in February 2023.

The range is currently 4.50% - 4.75% as of the February 1, 2023 FOMC meeting.

These rate increases eliminated the net negative pre-tax impact of the Voluntary Yield-related Fee Waivers in the second half of 2022.

For the year ended December 31, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 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 in 2021.

These fee waivers were partially offset by related reductions in distribution expenses of $66.5 million, such that the net negative pre-tax impact to Federated Hermes was $18.8 million.

For the year ended December 31, 2021, Voluntary Yield-related Fee Waivers totaled $420.3 million.

These fee waivers were partially offset by related reductions in distribution expenses of $98.4 million, such that the net negative pre-tax impact to Federated Hermes was $14.6 million in 2020.

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

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

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

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

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

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

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

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.

Current Regulatory Environment

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Federated Hermes and its products, such as t he Federated Hermes Funds, and strategies are subject to:

federal securities laws, principally the 1933 Act, the 1934 Act, the 1940 Act and the Advisers Act;

various federal securities laws, such as the 1933 Act, 1934 Act, 1940 Act, and Advisers Act;

state laws regarding securities fraud and registration;

regulations or other rules promulgated by various regulatory authorities, self-regulatory organizations or exchanges;

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

regulations or other rules promulgated by various regulatory authorities, or other authorities.

Various laws and regulations that have or are expected to be re-examined, modified, or reversed, or that become effective, and any new proposed laws, rules, regulations and directives or consultations (collectively, both domestically and internationally, as applicable, Regulatory Developments) continue to impact the investment management industry generally, and will continue to impact, to various degrees, Federated Hermes’ Financial Condition.

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

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Total Average Managed Assets $ 632,633 $ 632,799 $ 613,908 0 % 3 %

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

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

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

Changes in Equity Fund and Separate Account Assets

8 unchanged sentences

Market Gains and (Losses) 2

(10,417) 4,850

Ending Assets $ 43,342 $ 57,036

4 unchanged sentences

Net Sales (Redemptions) 3

(3,282) (5,040)

Net Exchanges (28) 403

Acquisitions/(Dispositions) 0 (71)

Impact of Foreign Exchange 1

Market Gains and (Losses) 2

(1,481) 5,657

Ending Assets $ 38,181 $ 39,680

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Market Gains and (Losses) 2

(11,898) 10,507

Ending Assets $ 81,523 $ 96,716

1 Reflects the impact of translating non-U.S.

dollar denominated AUM into U.S.

dollars for reporting purposes.

1 Reflects the impact of translating non-USD denominated AUM into USD for reporting purposes.

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

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Ending Assets $ 86,743 $ 97,550

1 Reflects the impact of translating non-U.S.

dollar denominated AUM into U.S.

dollars for reporting purposes.

1 Reflects the impact of translating non-USD denominated AUM into USD for reporting purposes.

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

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Beginning Assets $ 14,788 $ 12,100

$ 12,100 $ 11,389

Sales 2,562 3,699

4 unchanged sentences

Impact of Foreign Exchange 1

(1,463) (162)

Market Gains and (Losses) 2

4 unchanged sentences

Net Sales (Redemptions) 3

Acquisitions/(Dispositions) 0 452

Impact of Foreign Exchange 1

3 unchanged sentences

Beginning Assets $ 22,920 $ 19,084

$ 19,084 $ 18,102

Redemptions 3

4 unchanged sentences

Impact of Foreign Exchange 1

(2,317) (254)

Market Gains and (Losses) 2

Ending Assets $ 20,802 $ 22,920

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

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

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

2 Reflects the impact of translating non-U.S.

dollar denominated AUM into U.S.

dollars for reporting purposes.

1 Reflects the impact of translating non-USD denominated AUM into USD for reporting purposes.

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

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

3 Reflects the impact of translating non-U.S.

dollar denominated AUM into U.S.

dollars for reporting purposes.

3 Reflects the impact of translating non-USD denominated AUM into USD for reporting purposes.

Changes in Total Long-Term Assets

2 unchanged sentences

Beginning Assets $ 135,294 $ 123,713

$ 123,713 $ 107,724

Sales 34,002 49,125

4 unchanged sentences

Impact of Foreign Exchange 1

(2,624) (774)

Market Gains and (Losses) 2

(15,452) 7,394

Ending Assets $ 102,423 $ 135,294

8 unchanged sentences

Impact of Foreign Exchange 1

(1,635) (710)

Market Gains and (Losses) 2

(4,072) 6,431

Ending Assets $ 89,634 $ 85,672

2 unchanged sentences

56,077 69,579

69,579 60,827

Redemptions 3

1 unchanged sentence

Net Sales (Redemptions) 3

(8,536) 8,968

Net Exchanges (114) 0

5 unchanged sentences

Ending Assets $ 192,057 $ 220,966

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

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

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

2 Reflects the impact of translating non-U.S.

dollar denominated AUM into U.S.

dollars for reporting purposes.

1 Reflects the impact of translating non-USD denominated AUM into USD for reporting purposes.

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

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

Average managed assets increased 3% for 2021 as compared to 2020.

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

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

Average managed assets remained flat for 2022 as compared to 2021.

Period-end managed assets remained flat at December 31, 2022 as compared to December 31, 2021, with an increase in money market assets, partially offset by decreases in equity and fixed-income assets.

Total average money market assets increased 3% for 2022 compared to 2021.

Period-end money market assets increased 6% at December 31, 2022 as compared to December 31, 2021.

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

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

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

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

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

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

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

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

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

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

Average equity assets decreased 14% for 2022 as compared to 2021.

Period-end equity assets decreased 16% at December 31, 2022 as compared to December 31, 2021 primarily due to market depreciation.

Average fixed-income assets decreased 2% for 2022 as compared to 2021.

Period-end fixed-income assets decreased 11% at December 31, 2022 as compared to December 31, 2021 primarily due to market depreciation and net redemptions, partially offset by assets acquired in connection with the CWH Acquisition.

Average alternative/private markets assets increased 5% for 2022 as compared to 2021.

Period-end alternative/private markets assets decreased 9% at December 31, 2022 as compared to December 31, 2021 primarily due to foreign exchange rate fluctuations.

Moderating inflation and expectations that the FOMC can soon end interest rate increases rallied risk assets in the fourth quarter 2022, easing the sting of a volatile year for most equity and fixed-income asset classes.

In December, the FOMC pared the magnitude of its federal funds target rate increases to 50 basis points from 75 basis points the prior four meetings, though the target range still rose 425 basis points to 4.25% - 4.50% in nine months in 2022, the most aggressive tightening cycle since the early 1980s.

Policymakers also signaled the pace of target rate increases would ease further and eventually end in 2023.

Futures markets went a step further and began pricing rate cuts as early as fall 2023.

Recession risks rose toward the end of the fourth quarter 2022 amid broadening economic deterioration.

Various gauges of manufacturing and services activity contracted, housing remained mired in a deep slump, business investment slowed, and both consumer spending and job growth decelerated.

For all of 2022, the S&P 500 Index and the Nasdaq Composite posted total returns of -19.4% and -33.1%, respectively, their worst years since 2008, while the Dow Jones Industrial Average returned -8.8%.

Overseas, a warm winter, reopening China and diminished impacts from Russia’s war on Ukraine brightened economic sentiment in 2022’s waning weeks, lifting the markets in what still was a tough year, with the MSCI World ex USA and MSCI All Country World ex USA indexes returning a respective -16.6% and -18.3% for all of 2022.

Although money market and liquidity products benefited, rising rates created challenges for fixed-income markets over the course of 2022, with the Bloomberg US Aggregate Bond Index returning -13.0%, the worst year in its history.

For an explanation of the changes in managed assets at December 31, 2021 compared to December 31, 2020 and changes in average managed assets for 2021 as compared to 2020, see Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2021, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset Highlights.

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For an explanation of changes for 2021 as compared to 2020, see Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2021, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.

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

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

Revenue increased $145.4 million in 2022 as compared to 2021 primarily due to a decrease of $335.0 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact).

This increase in revenue was partially offset by (1) a decrease in equity revenue of $147.9 million due to lower average equity assets, (2) a decrease in fixed-income revenue of $28.6 million due to a change in the mix of average assets and (3) a decrease in performance fees of $7.7 million.

Federated Hermes’ ratio of revenue to average managed assets for 2022 was 0.23% as compared to 0.20% for 2021.

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

The increase in the rate was primarily due to the increase in revenue from lower Voluntary Yield-related Fee Waivers, partially offset by a decrease in revenue from lower average equity assets during 2022 as compared to 2021.

Operating Expenses.

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

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

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

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

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

Total operating expenses for 2022 increased $174.8 million compared to 2021.

Distribution expense increased $153.7 million primarily related to a decrease of $210.6 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact).

This increase in Distribution expense was partially offset by (1) changes in the mix of average money market assets ($19.0 million), (2) lower average equity assets ($16.7 million) and (3) a decrease in competitive payments ($15.5 million).

Compensation and Related expense decreased $19.8 million primarily driven by the decrease in the average USD/GBP exchange rate for 2022 as compared to 2021.

Intangible Asset Related expense increased $30.2 million primarily due to the intangible asset impairment.

See Note (9) to the Consolidated Financial Statements for additional information on this impairment.

Nonoperating Income (Expenses).

Nonoperating Income (Expenses), net, decreased $40.6 million in 2022 as compared to 2021.

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

The decrease is primarily due to a $38.2 million decrease in Gain (Loss) on Securities, net due primarily to a decrease in the market value of investments in 2022 as compared to an increase in the market value of investments in 2021 and a decrease of $9.3 million from higher debt expense primarily due to the Note Purchase Agreement entered into in 2022.

These decreases were partially offset by an increase in yield on investments of $5.8 million due to rising interest rates.

Income Taxes.

The income tax provision for 2022 and 2021 was $71.7 million and $104.0 million, respectively.

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

The provision for 2022 decreased $32.3 million as compared to 2021 primarily as a result of (1) lower income before income taxes ($18.2 million) and (2) a $14.5 million increase to deferred tax expense recorded in 2021 associated with the change in the UK tax rate from 19% to 25% effective April 1, 2023.

The effective tax rate was 23.4% for 2022 and 27.6% for 2021.

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The change in liquid assets is discussed below.

At December 31, 2021, Federated Hermes' liquid assets included investments in certain money market and fluctuating-value Federated Hermes Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks.

At December 31, 2022, Federated Hermes’ liquid assets included investments in certain money market and fluctuating-value Federated Hermes Funds that can have direct and/or indirect exposures to international sovereign debt and currency risks.

Federated Hermes continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European countries (such as the UK in light of Brexit), China and certain other countries subject to economic sanctions.

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Net cash provided by operating activities totaled $323.9 million for 2022 as compared to $170.4 million for 2021.

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

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

Cash Provided by Investing Activities.

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

The increase of $153.5 million was primarily due to (1) a net decrease of $159.2 million in cash paid for trading securities for the year ended December 31, 2022 as compared to 2021, (2) an increase in cash received related to the $145.4 million increase in revenue previously discussed, (3) a decrease of $7.8 million in cash paid for incentive compensation for the year ended December 31, 2022 as compared to 2021 and (4) a decrease of $6.3 million in cash paid for taxes for the year ended December 31, 2022 as compared to 2021.

These increases in cash were partially offset by (1) an increase in cash paid related to the $153.7 million increase in Distribution expense previously discussed and (2) an increase of $6.1 million in cash paid for interest for the year ended December 31, 2022 as compared to 2021 primarily related to the $350 million Notes issued in March 2022.

Cash Used by Investing Activities.

In 2022, net cash used by investing activities was $32.4 million which primarily represented $28.1 million related to the initial closing payment for the CWH Acquisition (see Note (2) to the Consolidated Financial Statements) and $22.6 million paid for purchases of Investments—Affiliates and Other, partially offset by $22.8 million in cash received from redemptions of Investments—Affiliates and Other.

Cash Used by Financing Activities.

In 2022, net cash used by financing activities was $168.5 million.

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

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

Of this amount, Federated Hermes paid (1) $361.7 million in connection with its debt obligations, (2) $218.1 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase programs (see Note (14) to the Consolidated Financial Statements for additional information) and (3) $97.9 million or $1.08 per share in dividends to holders of its common shares.

This activity was partially offset by (1) $488.3 million of new borrowings, including amounts borrowed under Federated Hermes’ revolving credit facility and the proceeds from the $350 million Notes issued in March 2022 and (2) $55.2 million of contributions from noncontrolling interests in subsidiaries.

On March 17, 2022, pursuant to a Note Purchase Agreement, Federated Hermes issued unsecured senior notes in the aggregate amount of $350 million at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and September in each year of the agreement.

The entire principal amount of the $350 million Notes will become due March 17, 2032.

Citigroup Global Markets Inc.

and PNC Capital Markets LLC acted as lead placement agents in relation to the $350 million Notes and certain subsidiaries of Federated Hermes are guarantors of the obligations owed under the Note Purchase Agreement.

As of December 31, 2022, the outstanding balance of the $350 million Notes was $347.6 million, net of unamortized issuance costs in the amount of $2.4 million, and was recorded in Long-Term Debt on the Consolidated Balance Sheets.

The proceeds were or will be used to supplement cash flow from operations, to fund share repurchases and potential acquisitions, to pay down debt outstanding under the Credit Agreement and for other general corporate purposes.

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

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 original proceeds were used for general corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases.

The original proceeds were used for general corporate purposes including cash payments related to acquisitions, dividends, investments and

share repurchases.

As of December 31, 2022, Federated Hermes has $350 million available to borrow under the Credit Agreement.

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

The Credit Agreement includes an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions.

Both the Note Purchase Agreement and the Credit Agreement include an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions.

Federated Hermes was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the year ended December 31, 2022.

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A leverage ratio of no more than 3 to 1 is required and, as of December 31, 2022, Federated Hermes’ leverage ratio was 0.79 to 1.

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.

Both the Note Purchase Agreement and the Credit Agreement have 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.

Cash dividends of $97.9 million, $105.8 million and $207.8 million were paid in 2022, 2021 and 2020, 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.

Of the amount paid in 2020, $99.3 million represented a $1.00 per share special dividend.

All dividends were considered ordinary dividends for tax purposes.

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Long-Term Debt Obligations.

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

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

The entire principal amount of the $350 million Notes will become due no later than March 17, 2032.

The interest rate is fixed at 3.29% per annum, payable semiannually.

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

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

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

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

Operating Lease Obligations.

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Future Cash Needs.

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

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

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

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

Any number of factors can cause Federated Hermes’ future cash needs to increase.

On January 26, 2023, the board of directors declared a $0.27 per share dividend.

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

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

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

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

Investments—Consolidated Investment Companies at December 31, 2022 increased $2.9 million from December 31, 2021 primarily due to an increase of (1) $17.6 million related to the consolidation of a variable interest entity (VIE) and a voting rights entity (VRE) and (2) $16.2 million in net purchases in existing consolidated funds in 2022.

These increases were partially offset by a decrease of (1) $15.9 million related to the deconsolidation of VREs and (2) $15.0 million of net depreciation on existing consolidated funds in 2022.

Investments—Affiliates and Other at December 31, 2022 decreased $11.3 million from December 31, 2021 primarily due to (1) $14.2 million in net depreciation and (2) a decrease of $4.7 million related to the consolidation of a VIE and a VRE which reclassified Federated Hermes' investments into Investments—Consolidated Investment Companies.

These decreases were partially offset by an increase of $10.2 million related to the deconsolidation of a VRE in 2022 which reclassified Federated Hermes’ investment into Investments—Affiliates and Other.

Goodwill at December 31, 2022 increased $1.5 million from December 31, 2021 primarily as a result of the CWH Acquisition ($16.4 million), partially offset by a $14.8 million decrease related to foreign exchange rate fluctuations on goodwill denominated in a foreign currency.

Intangible Assets, net at December 31, 2022 decreased $62.1 million from December 31, 2021 primarily due to (1) a $34.4 million decrease in the value of intangible assets denominated in a foreign currency as a result of foreign exchange rate fluctuations, (2) a $31.5 million impairment charge and (3) $12.5 million of amortization expense.

These decreases were partially offset by a $16.2 million increase in intangibles primarily related to the CWH Acquisition.

Right-of-Use Assets, net at December 31, 2022 decreased $15.4 million from December 31, 2021 due primarily to annual amortization and Long-Term Lease Liabilities at December 31, 2022 decreased $18.5 million from December 31, 2021 primarily due to payments made on leases during 2022.

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

Accrued Compensation and Benefits at December 31, 2022 decreased $12.4 million from December 31, 2021 primarily due to the 2021 accrued annual incentive compensation being paid in the first quarter 2022 ($123.4 million), partially offset by 2022 incentive compensation accruals recorded at December 31, 2022 ($113.5 million).

Long-Term Deferred Tax Liability, net at December 31, 2022 decreased $24.8 million from December 31, 2021 primarily due to a $7.9 million reduction in the foreign deferred tax liability associated with the impairment of an intangible asset, an increase in foreign deferred tax assets of $6.4 million and a $6.0 million decrease related to foreign exchange rate fluctuations on deferred tax assets and liabilities denominated in a foreign currency.

In July 2022, Federated Hermes’ board of directors authorized the retirement of 10 million treasury shares which restored these shares to authorized but unissued status.

Federated Hermes recorded a $313.8 million reduction to Treasury Stock, at cost using the specific-identification method and a $42.7 million reduction to Class B common stock, at cost using the average cost method.

The difference was recorded as a reduction to Retained Earnings and Additional Paid-In Capital from Treasury Stock Transactions.

There was no impact to total equity as a result of this non-cash transaction.

Variable Interest Entities

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

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

Federated Hermes determined that it was the primary beneficiary of certain Federated Hermes Fund VIEs and, as a result, consolidated the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements.

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In general, management’s estimates are based on historical experience, information from third-party professionals and various other assumptions that are believed to be reasonable under the facts and circumstances.

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

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

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

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

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

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

An impairment could have a material adverse effect on Federated Hermes’ Financial Condition.

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

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

(1) HFML rights to manage fund assets;

(2) HFML trade name;

(1) FHL right to manage public fund assets;

(2) FHL trade name;

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

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Management considers macroeconomic and entity-specific factors, including 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.

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

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

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

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

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

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

The key assumptions in the discounted cash flow

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

The uncertainty caused by the Pandemic resulted in management determining that an indicator of potential impairment existed beginning in the first quarter 2020 for the FHL right to manage public fund assets which totaled £150.3 million acquired in connection with the 2018 FHL acquisition.

Management used an income-based approach to valuation, the discounted cash flow method, in valuing the asset.

This method resulted in no impairment for the first three quarters of 2022 since the estimated fair value of this intangible asset exceeded the carrying value.

The discounted cash flow analysis prepared as of September 30, 2022 resulted in the estimated fair value exceeding the carrying value by less than 10%.

As a result of continued increases in market interest rates and a decrease in near-term projected cash flows, a discounted cash flow analysis was prepared as of December 31, 2022 and resulted in a non-cash impairment charge of $31.5 million driven by changes in projected cash flows and a higher discount rate as compared to the prior quarter.

After the impairment, the FHL right to manage public fund assets totaled £124.4 million ($150.4 million).

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

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

As of December 31, 2022, assuming all other assumptions remain static, an increase or decrease of 10% in projected revenue growth rates would result in a corresponding change to estimated fair value of approximately 8%.

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

An increase or decrease of 10% in pre-tax profit margins would result in a

corresponding change to estimated fair value of approximately 12%.

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

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

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

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

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

Any market volatility and other events related to geopolitical, Pandemic-related or other unexpected events could further reduce the AUM, revenues and earnings associated with this intangible asset and can result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which can result in an impairment.

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

The impairment charge was recorded in Operating Expenses - Intangible Asset Related expense on the Consolidated Statements of Income.

After the impairment charge, Federated Hermes had $343.2 million in indefinite-lived intangible assets recorded on its Consolidated Balance Sheets as of December 31, 2022.

No impairment charges were recorded during the years ended December 31, 2021 or 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis