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Financial Data and Key Metrics Changes - Federated Hermes reported record assets under management (AUM) of $715 billion, with money market assets reaching $525 billion, indicating solid asset growth in Q3 2023 [4][18] - Total revenue for Q3 decreased by $30.6 million from the prior quarter, primarily due to lower carried interest and performance fees, which were $14.9 million compared to $39.4 million in Q2 [20] - Operating expenses decreased by $33.6 million from the prior quarter, attributed to lower compensation related to carried interest and performance fees [21] Business Line Data and Key Metrics Changes - Equity assets decreased by $5.7 billion to $77.3 billion due to market losses and net redemptions, with Q3 net redemptions of $2.4 billion [5] - Fixed income separate accounts reached a record high of $47.2 billion, with net sales of $3.8 billion driven by institutional mandates [14] - Money market mutual fund assets were at $385 billion, contributing to the overall money market assets of $525 billion [18] Market Data and Key Metrics Changes - The money market mutual fund market share increased to approximately 7.3% at the end of Q3, up from 7.2% at the end of Q2 [12] - Fixed income funds had net redemptions of about $684 million, while fixed income SMAs had record gross and net sales of $572 million and $320 million, respectively [8][9] Company Strategy and Development Direction - The company is focused on expanding its fixed income and private market strategies, with expected additions totaling about $3.1 billion in fixed income and $1.5 billion in private market strategies [11] - Federated Hermes is actively pursuing inorganic growth opportunities, with a strong appetite for acquisitions, particularly in the alternative markets and private equity sectors [42][86] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand for money market funds as interest rates peak, anticipating increased institutional flows [27][30] - The company remains cautious about predicting future performance due to uncertainties in the market and the economic environment [84] Other Important Information - The company has initiated a new $5 million share buyback program, marking its 16th buyback initiative [43] - Cash and investments at the end of Q3 totaled $554 million, with $486 million available [22] Q&A Session Summary Question: Outlook for money market assets in the context of rates - Management expects institutional flows to increase as rates peak, with retail side performing well due to attractive yields [27][30] Question: Why not do more stock repurchases given available cash? - Management indicated a willingness to repurchase shares but emphasized the need for strategic timing [41][43] Question: Are investors over-indexed to cash? - Management noted uncertainty among retail clients, suggesting they may hold more cash than expected, but lacked specific statistics [49] Question: Timing of unfunded pipeline and investor profile - Management indicated that discussions with investors are challenging, but core shareholders remain optimistic due to solid yields [78] Question: Forward thoughts on G&A expenses - Management expects G&A expenses to remain stable, with potential increases tied to asset growth [81]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________________________________________________________________________ FORM 10-Q _______________________________________________________________________________________ (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________________________________________________________________________ FORM 10-Q _______________________________________________________________________________________ (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1 ...

[Part I. Financial Information](index=5&type=section&id=Part%20I.%20Financial%20Information) This section presents the unaudited consolidated financial statements and management's analysis for Q1 2023 [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents Federated Hermes' unaudited consolidated financial statements and detailed notes for Q1 2023 [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) This section provides the consolidated balance sheets of Federated Hermes, Inc. as of March 31, 2023, and December 31, 2022 | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $1,998,979 | $2,020,479 | $(21,500) | | Total Liabilities | $852,768 | $912,966 | $(60,198) | | Total Permanent Equity | $1,106,703 | $1,045,692 | $61,011 | [Consolidated Statements of Income](index=7&type=section&id=Consolidated%20Statements%20of%20Income) This section presents the consolidated statements of income for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Total Revenue | $382,189 | $324,764 | $57,425 | | Operating Income | $85,166 | $83,949 | $1,217 | | Net Income | $69,601 | $55,863 | $13,738 | | Earnings Per Common Share—Basic and Diluted | $0.78 | $0.61 | $0.17 | [Consolidated Statements of Comprehensive Income](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section details the consolidated statements of comprehensive income for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Comprehensive Income Attributable to Federated Hermes, Inc. | $79,221 | $38,729 | $40,492 | [Consolidated Statements of Changes in Equity](index=9&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Equity) This section outlines the consolidated statements of changes in equity as of March 31, 2023, and December 31, 2022 | Metric | Balance at March 31, 2023 (in thousands) | Balance at December 31, 2022 (in thousands) | | :----------------------------------- | :------------------------------------- | :-------------------------------------- | | Total Permanent Equity | $1,106,703 | $1,045,692 | | Redeemable Noncontrolling Interests in Subsidiaries | $39,508 | $61,821 | | Net Income (Loss) for Q1 2023 | $69,601 | N/A | | Dividends Declared for Q1 2023 | $(24,145) | N/A | [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents the consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Cash Provided (Used) by Operating Activities | $5,420 | $(19,247) | | Net Cash Provided (Used) by Investing Activities | $1,838 | $(2,540) | | Net Cash Provided (Used) by Financing Activities | $(22,016) | $54,861 | [Notes to the Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed explanatory notes supporting the consolidated financial statements for the quarter ended March 31, 2023 [(1) Basis of Presentation](index=11&type=section&id=%281%29%20Basis%20of%20Presentation) This note describes the basis of presentation for the interim consolidated financial statements, prepared under U.S. GAAP - The interim consolidated financial statements are prepared in accordance with U.S. GAAP, reflecting all normal recurring adjustments necessary for a fair presentation of results[17](index=17&type=chunk) - Management is required to make estimates and assumptions that affect reported amounts, and actual results may differ materially[18](index=18&type=chunk) [(2) Significant Accounting Policies](index=11&type=section&id=%282%29%20Significant%20Accounting%20Policies) This note refers to the annual report for a comprehensive listing of Federated Hermes' significant accounting policies - For a listing of significant accounting policies, refer to Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2022[20](index=20&type=chunk) [(3) Business Combination](index=11&type=section&id=%283%29%20Business%20Combination) This note details the acquisition of C.W. Henderson and Associates, Inc. and its preliminary purchase price allocation - Federated Hermes completed the acquisition of C.W. Henderson and Associates, Inc. (CWH) on October 1, 2022, for an upfront cash payment of **$28.1 million**, with potential contingent payments up to **$17.6 million** over five years based on net revenue growth[21](index=21&type=chunk) Preliminary Purchase Price Allocation (in millions) | Item | Amount | | :-------------------------------- | :----- | | Right-of-Use Asset | $0.8 | | Intangible Assets (customer relationships, trade name) | $15.4 | | Goodwill | $16.4 | | Less: Lease Liability Assumed | $0.8 | | Less: Fair Value of Contingent Consideration | $3.7 | | **Total Upfront Purchase Price Consideration** | **$28.1** | - The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities and the assembled workforce of CWH, and is deductible for tax purposes[23](index=23&type=chunk) [(4) Revenue from Contracts with Customers](index=12&type=section&id=%284%29%20Revenue%20from%20Contracts%20with%20Customers) This note disaggregates revenue by asset class and performance obligation, and outlines future fixed revenue from contracts Revenue Disaggregated by Asset Class (Three Months Ended March 31, in thousands) | Asset Class | 2023 | 2022 | | :------------------------ | :------- | :------- | | Money market | $179,536 | $86,290 | | Equity | $124,653 | $146,856 | | Fixed-income | $47,890 | $57,874 | | Other | $30,110 | $33,744 | | **Total Revenue** | **$382,189** | **$324,764** | Revenue Disaggregated by Performance Obligation (Three Months Ended March 31, in thousands) | Performance Obligation | 2023 | 2022 | | :----------------------- | :------- | :------- | | Asset Management | $263,982 | $232,994 | | Administrative Services | $79,180 | $73,507 | | Distribution | $32,877 | $11,077 | | Other | $6,150 | $7,186 | | **Total Revenue** | **$382,189** | **$324,764** | Future Fixed Revenue from Unsatisfied Performance Obligations (in thousands) | Period | Amount | | :-------------------------------- | :------- | | Remainder of 2023 | $7,791 | | 2024 | $3,823 | | 2025 | $1,236 | | 2026 and Thereafter | $372 | | **Total Remaining Unsatisfied Performance Obligations** | **$13,222** | [(5) Concentration Risk](index=13&type=section&id=%285%29%20Concentration%20Risk) This note details revenue concentration by asset class and significant clients, highlighting changes in money market revenue Revenue Concentration by Asset Class (Three Months Ended March 31) | Asset Class | 2023 | 2022 | | :------------------ | :--- | :--- | | Money Market Assets | 47 % | 27 % | | Equity Assets | 33 % | 45 % | | Fixed-Income Assets | 13 % | 18 % | - The increase in money market revenue concentration in Q1 2023 was primarily due to a decrease in Voluntary Yield-related Fee Waivers[30](index=30&type=chunk)[31](index=31&type=chunk) - There were no Voluntary Yield-related Fee Waivers during Q1 2023, compared to **$75.8 million** in Q1 2022 (net negative pre-tax impact of **$18.3 million**)[33](index=33&type=chunk) - Approximately **13%** of total revenue for Q1 2023 (vs. **5%** for Q1 2022) was derived from services provided to The Bank of New York Mellon Corporation[37](index=37&type=chunk) [(6) Consolidation](index=14&type=section&id=%286%29%20Consolidation) This note provides details on total fee waivers and the company's maximum risk of loss from non-consolidated VIEs - Total Fee Waivers for Q1 2023 were **$125.2 million**, with **$96.1 million** related to money market funds, compared to **$198.5 million** in Q1 2022, with **$164.8 million** related to money market funds[39](index=39&type=chunk) - Federated Hermes' maximum risk of loss related to investments in non-consolidated Variable Interest Entities (VIEs) was **$68.7 million** at March 31, 2023, down from **$101.7 million** at December 31, 2022[45](index=45&type=chunk) [(7) Investments](index=15&type=section&id=%287%29%20Investments) This note presents the net gain or loss on securities from consolidated investment companies and affiliates Gain (Loss) on Securities, net (Three Months Ended March 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :------- | :-------- | | Investments—Consolidated Investment Companies | $2,980 | $(5,650) | | Investments—Affiliates and Other | $2,512 | $(6,045) | | **Gain (Loss) on Securities, net** | **$5,492** | **$(11,695)** | [(8) Fair Value Measurements](index=16&type=section&id=%288%29%20Fair%20Value%20Measurements) This note details the fair value measurements of financial assets and liabilities, including contingent consideration Fair Value Measurements of Financial Assets (in thousands) | Category | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Total Financial Assets | $498,103 | $528,761 | | Total Financial Liabilities | $7,831 | $8,470 | - Acquisition-related future contingent consideration liabilities, primarily from the CWH Acquisition and 2020 business combinations, totaled **$7.8 million** at March 31, 2023, valued using an income approach with unobservable market data inputs (Level 3)[59](index=59&type=chunk) [(9) Derivatives](index=18&type=section&id=%289%29%20Derivatives) This note describes Federated Hermes Limited's use of foreign currency forward transactions to hedge exchange rate risk - Federated Hermes Limited (FHL) uses foreign currency forward transactions to hedge against foreign exchange rate fluctuations in USD[63](index=63&type=chunk) Foreign Currency Forwards | Metric | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Fair Value (in millions) | $3.5 | $0.5 | | Notional Amount (in millions) | £74.2 | £67.3 | [(10) Intangible Assets, including Goodwill](index=18&type=section&id=%2810%29%20Intangible%20Assets%2C%20including%20Goodwill) This note explains changes in intangible assets and goodwill, primarily due to foreign exchange rate fluctuations and amortization - Intangible Assets, net increased by **$1.8 million** from December 31, 2022, primarily due to a **$5.0 million** increase from foreign exchange rate fluctuations, partially offset by **$3.3 million** in amortization expense[65](index=65&type=chunk) - Goodwill increased by **$2.5 million** from December 31, 2022, primarily due to foreign exchange rate fluctuations on foreign currency denominated goodwill[66](index=66&type=chunk) [(11) Debt](index=20&type=section&id=%2811%29%20Debt) This note details Federated Hermes' outstanding unsecured senior notes and revolving credit facility, confirming covenant compliance - Federated Hermes has **$347.6 million** in unsecured senior notes outstanding as of March 31, 2023, with a fixed interest rate of **3.29%** per annum, due March 17, 2032[67](index=67&type=chunk) - The company has a **$350 million** revolving credit facility with an additional **$200 million** accordion feature; no outstanding borrowings as of March 31, 2023[71](index=71&type=chunk)[73](index=73&type=chunk) - Federated Hermes was in compliance with all debt covenants at and during the period ended March 31, 2023[69](index=69&type=chunk)[74](index=74&type=chunk) [(12) Share-Based Compensation](index=22&type=section&id=%2812%29%20Share-Based%20Compensation) This note describes the share-based compensation awarded during Q1 2023, primarily restricted Class B common stock - During Q1 2023, Federated Hermes awarded **375,796 shares** of restricted Class B common stock, primarily as part of a bonus program, generally vesting over a three-year period[76](index=76&type=chunk) [(13) Equity](index=22&type=section&id=%2813%29%20Equity) This note details share repurchase activity and changes in Class B shares and treasury shares during the period - Federated Hermes repurchased approximately **0.1 million shares** of Class B common stock for **$4.7 million** during Q1 2023 under a program authorizing up to **5.0 million shares**[78](index=78&type=chunk) - As of March 31, 2023, approximately **4.6 million shares** remain available for repurchase under the program[78](index=78&type=chunk) Class B Shares and Treasury Shares Activity (Three Months Ended March 31) | Metric | 2023 | 2022 | | :-------------------- | :----------- | :----------- | | Class B Shares - Beginning Balance | 89,275,935 | 93,410,968 | | Class B Shares - Ending Balance | 89,519,139 | 92,063,593 | | Treasury Shares - Beginning Balance | 10,229,521 | 16,094,488 | | Treasury Shares - Ending Balance | 9,986,317 | 17,441,863 | [(14) Earnings Per Share Attributable to Federated Hermes, Inc. Shareholders](index=23&type=section&id=%2814%29%20Earnings%20Per%20Share%20Attributable%20to%20Federated%20Hermes%2C%20Inc.%20Shareholders) This note provides a breakdown of earnings per common share attributable to Federated Hermes, Inc. shareholders Earnings Per Common Share (Three Months Ended March 31, in thousands, except per share data) | Metric | 2023 | 2022 | | :-------------------------------------------------- | :------- | :------- | | Net Income Attributable to Federated Hermes, Inc. | $69,601 | $55,863 | | Total Net Income Attributable to Federated Hermes Common Stock - Basic and Diluted | $66,092 | $53,420 | | Basic and Diluted Weighted-Average Federated Hermes Common Stock | 84,875 | 88,270 | | Earnings Per Share | $0.78 | $0.61 | [(15) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders](index=23&type=section&id=%2815%29%20Accumulated%20Other%20Comprehensive%20Income%20%28Loss%29%20Attributable%20to%20Federated%20Hermes%2C%20Inc.%20Shareholders) This note details changes in accumulated other comprehensive income (loss), primarily due to foreign currency translation Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Balance | $(36,056) | $(45,676) | | Other Comprehensive Income (Loss) (Q1 2023) | $9,620 | N/A | - The change in Accumulated Other Comprehensive Income (Loss) was primarily due to foreign currency translation gain of **$9.6 million** in Q1 2023[84](index=84&type=chunk) [(16) Redeemable Noncontrolling Interests in Subsidiaries](index=25&type=section&id=%2816%29%20Redeemable%20Noncontrolling%20Interests%20in%20Subsidiaries) This note outlines changes in redeemable noncontrolling interests in subsidiaries, primarily driven by deconsolidation activities Changes in Redeemable Noncontrolling Interests in Subsidiaries (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------------------------------- | :------------- | :---------------- | | Balance | $39,508 | $61,821 | | Net Income (Loss) | $1,865 | N/A | | Other Comprehensive Income (Loss), net of tax | $232 | N/A | | Subscriptions—Redeemable Noncontrolling Interest Holders | $12,776 | N/A | | Consolidation/(Deconsolidation) | $(33,962) | N/A | | Distributions to Noncontrolling Interests in Subsidiaries | $(3,224) | N/A | - The decrease in redeemable noncontrolling interests was primarily due to deconsolidation activities[85](index=85&type=chunk) [(17) Commitments and Contingencies](index=25&type=section&id=%2817%29%20Commitments%20and%20Contingencies) This note addresses an administrative error's financial impact and management's assessment of legal proceedings - An administrative error related to unregistered shares of a Federated Hermes tender fund resulted in a probable cost of **$19.6 million**, recorded in Accounts Payable and Accrued Expenses[89](index=89&type=chunk) - A corresponding insurance reimbursement of **$17.1 million** is expected, resulting in a net **$2.5 million** impact to Operating Expenses—Other[89](index=89&type=chunk) - Management does not believe a material loss related to legal proceedings, guarantees, or indemnifications is reasonably possible as of March 31, 2023[87](index=87&type=chunk)[88](index=88&type=chunk) [(18) Subsequent Events](index=26&type=section&id=%2818%29%20Subsequent%20Events) This note discloses a dividend declaration by Federated Hermes' board of directors subsequent to the reporting period - On April 27, 2023, Federated Hermes' board of directors declared a **$0.28 per share** dividend, payable on May 15, 2023[90](index=90&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Federated Hermes' financial condition, operations, and business developments for Q1 2023 [General](index=27&type=section&id=General) This section provides an overview of Federated Hermes as a global leader in active, responsible investing and its revenue sources - Federated Hermes is a global leader in active, responsible investing with **$701.0 billion** in managed assets as of March 31, 2023[93](index=93&type=chunk) - Revenue is primarily derived from investment advisory, administrative, distribution, and other fund-related services, generally calculated as a percentage of average net assets[93](index=93&type=chunk)[94](index=94&type=chunk) - Advisory fees for multi-asset and equity products are generally higher than those for alternative/private markets, fixed-income, and money market products[94](index=94&type=chunk) [Business Developments](index=28&type=section&id=Business%20Developments) This section discusses the impact of the Pandemic, interest rate changes, regulatory environment, and new tax reforms - The Pandemic has not materially affected Federated Hermes' financial condition during Q1 2023, but a prolonged period of economic distress could exacerbate risks[97](index=97&type=chunk) - There were no Voluntary Yield-related Fee Waivers in Q1 2023, compared to **$75.8 million** in Q1 2022, due to FOMC interest rate increases (currently **4.75% - 5.00%**)[98](index=98&type=chunk)[99](index=99&type=chunk) - The SEC's robust rulemaking initiatives are expected to increase in 2023, focusing on areas like money market fund reform, climate change disclosure, cybersecurity, and investment advisor custody rules[102](index=102&type=chunk)[103](index=103&type=chunk)[127](index=127&type=chunk) - Federated Hermes opposes swing pricing for money market funds, advocating for discretionary liquidity fees and the use of a reverse distribution mechanism (RDM) in negative rate environments[105](index=105&type=chunk)[108](index=108&type=chunk) - UK and EU regulators are also increasing their pace of regulation, with the UK aiming to rationalize EU legislation post-Brexit and both regions focusing on sustainable finance (SFDR, greenwashing) and the LIBOR transition[135](index=135&type=chunk)[137](index=137&type=chunk)[145](index=145&type=chunk)[160](index=160&type=chunk) - New tax reforms include a **15%** minimum corporate tax and a **1%** tax on corporate share repurchases, applicable from 2023[134](index=134&type=chunk) [Asset Highlights](index=46&type=section&id=Asset%20Highlights) This section provides an overview of managed assets at period-end and average managed assets, disaggregated by asset class Managed Assets at Period End (in millions) | Asset Class | March 31, 2023 | March 31, 2022 | Percent Change | | :-------------------------- | :------------- | :------------- | :------------- | | Equity | $83,629 | $91,676 | (9)% | | Fixed-Income | $87,461 | $92,146 | (5)% | | Alternative / Private Markets | $21,174 | $23,109 | (8)% | | Multi-Asset | $2,973 | $3,555 | (16)% | | Total Long-Term Assets | $195,237 | $210,486 | (7)% | | Money Market | $505,800 | $420,596 | 20% | | **Total Managed Assets** | **$701,037** | **$631,082** | **11%** | Average Managed Assets (Three Months Ended March 31, in millions) | Asset Class | 2023 | 2022 | Percent Change | | :-------------------------- | :------- | :------- | :------------- | | Equity | $84,155 | $92,034 | (9)% | | Fixed-Income | $88,209 | $95,475 | (8)% | | Alternative / Private Markets | $20,938 | $22,848 | (8)% | | Multi-Asset | $3,012 | $3,621 | (17)% | | Total Long-Term Assets | $196,314 | $213,978 | (8)% | | Money Market | $483,083 | $433,254 | 12% | | **Total Average Managed Assets** | **$679,397** | **$647,232** | **5%** | - Money market assets saw significant growth, increasing **20%** YoY at period-end and **12%** YoY on average, while long-term assets generally decreased[171](index=171&type=chunk)[172](index=172&type=chunk)[189](index=189&type=chunk) - Market performance in Q1 2023: S&P 500 Index returned **7.50%**, and Bloomberg US Aggregate Bond Index returned **2.96%**[191](index=191&type=chunk) [Results of Operations](index=54&type=section&id=Results%20of%20Operations) This section analyzes the changes in revenue, operating expenses, nonoperating income, and net income for Q1 2023 - Revenue increased by **$57.4 million** in Q1 2023 YoY, primarily due to the elimination of **$75.8 million** in Voluntary Yield-related Fee Waivers and a **$14.3 million** increase from higher money market average assets, partially offset by a **$37.0 million** decrease from lower average long-term assets[192](index=192&type=chunk) - Total Operating Expenses increased by **$56.2 million** in Q1 2023 YoY, mainly driven by a **$44.8 million** increase in Distribution expense related to the elimination of Voluntary Yield-related Fee Waivers[194](index=194&type=chunk) - Nonoperating Income (Expenses), net, increased by **$19.1 million** in Q1 2023 YoY, primarily due to a **$17.2 million** increase in Gain (Loss) on Securities, net, reflecting improved market values[195](index=195&type=chunk) - Net Income Attributable to Federated Hermes, Inc. increased by **$13.7 million** in Q1 2023 YoY, leading to a **$0.17** increase in diluted EPS, with **$0.02** attributed to share repurchases[197](index=197&type=chunk) [Liquidity and Capital Resources](index=54&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses Federated Hermes' liquid assets, cash flow activities, debt structure, and overall liquidity position - Liquid assets, net of noncontrolling interests, totaled **$563.6 million** at March 31, 2023, a slight increase from **$559.5 million** at December 31, 2022[198](index=198&type=chunk) - Net cash provided by operating activities was **$5.4 million** in Q1 2023, a significant improvement from net cash used of **$19.2 million** in Q1 2022[201](index=201&type=chunk) - Net cash used by financing activities was **$22.0 million** in Q1 2023, primarily due to **$24.1 million** in dividends paid and **$6.6 million** in treasury stock purchases, partially offset by **$12.8 million** in contributions from noncontrolling interests[203](index=203&type=chunk) - Federated Hermes maintains **$347.6 million** in unsecured senior notes and has a **$350 million** revolving credit facility with no outstanding borrowings, remaining in compliance with all debt covenants[204](index=204&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk) - Management believes existing liquid assets, cash flow from operations, and borrowing capacity provide sufficient liquidity for short-term and long-term cash needs[211](index=211&type=chunk) [Financial Position](index=56&type=section&id=Financial%20Position) This section highlights key changes in Federated Hermes' financial position, including investments and accrued expenses - Investments—Consolidated Investment Companies decreased by **$25.1 million**, mainly due to the deconsolidation of a VIE[213](index=213&type=chunk) - Accounts Payable and Accrued Expenses increased by **$21.5 million** due to a **$19.6 million** accrual for an administrative error related to unregistered shares[215](index=215&type=chunk) - Accrued Compensation and Benefits decreased by **$80.7 million**, primarily due to the payment of 2022 annual incentive compensation[216](index=216&type=chunk) [Legal Proceedings](index=56&type=section&id=Legal%20Proceedings) This section refers to Note (17) for details on legal proceedings, indicating no material loss is reasonably possible - Information regarding legal proceedings is contained in Note (17) to the Consolidated Financial Statements, indicating no material loss is reasonably possible[217](index=217&type=chunk)[88](index=88&type=chunk) [Critical Accounting Policies](index=56&type=section&id=Critical%20Accounting%20Policies) This section discusses critical accounting policies, particularly those involving significant judgment like intangible assets - The indefinite-lived intangible assets policy, including Goodwill and Intangible Assets, involves a high degree of judgment and complexity[219](index=219&type=chunk) - A discounted cash flow analysis for the FHL right to manage public fund assets showed the estimated fair value exceeding the carrying value by less than **5%**, with risk of future impairment[221](index=221&type=chunk)[222](index=222&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=57&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section confirms no material changes to Federated Hermes' market risk exposures as of March 31, 2023 - No material changes to market risk exposures were identified as of March 31, 2023, compared to the previous annual report[223](index=223&type=chunk) [Item 4. Controls and Procedures](index=57&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded Federated Hermes' disclosure controls and procedures were effective with no material changes in Q1 2023 - Federated Hermes' disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023[226](index=226&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[226](index=226&type=chunk) [Part II. Other Information](index=57&type=section&id=Part%20II.%20Other%20Information) This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings](index=57&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note (17) for legal proceedings, confirming no material loss is reasonably possible - Information on legal proceedings is provided in Note (17) to the Consolidated Financial Statements[225](index=225&type=chunk) [Item 1A. Risk Factors](index=57&type=section&id=Item%201A.%20Risk%20Factors) This section confirms no material changes to the risk factors disclosed in the previous annual report - No material changes to the risk factors included in Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2022[226](index=226&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=58&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's share repurchase program, including Q1 2023 activity and remaining authorization Stock Repurchases (Q1 2023) | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :------ | :------------------------------- | :--------------------------- | | January | 0 | $0.00 | | February | 50,000 | $38.80 | | March | 82,592 | $33.92 | | **Total** | **132,592** | **$35.76** | - As of March 31, 2023, **4,602,415 shares** remain available for repurchase under the program authorized in June 2022[228](index=228&type=chunk) [Item 5. Other Information](index=58&type=section&id=Item%205.%20Other%20Information) This section reports on the Annual Meeting of Shareholders and approved changes to independent director compensation - Six individuals were elected to the Board of Directors at the Annual Meeting of Shareholders on April 27, 2023[231](index=231&type=chunk) - The Board of Directors approved increasing the annual base fee for independent directors from **$53,000** to **$55,000** and the annual grant of unrestricted Class B Common Stock from **2,350** to **2,400 shares**, effective July 2023[232](index=232&type=chunk) [Item 6. Exhibits](index=59&type=section&id=Item%206.%20Exhibits) This section lists the required exhibits filed with the Form 10-Q, including certifications and interactive data files - The report includes various exhibits such as the Cover Page Interactive Data File, Federated Hermes Co-Investment Scheme Rules 2023, and certifications from the CEO and CFO[233](index=233&type=chunk) [Signatures](index=60&type=section&id=Signatures) This section contains the certifying signatures of the President and CEO, and the CFO, dated May 2, 2023 - The report was signed by J. Christopher Donahue, President and Chief Executive Officer, and Thomas R. Donahue, Chief Financial Officer, on May 2, 2023[236](index=236&type=chunk)

Federated Hermes, Inc. (NYSE:FHI) Q1 2023 Earnings Conference Call April 28, 2023 9:00 AM ET Company Participants Ray Hanley - President, Federated Investors Management Company Chris Donahue - President and CEO Tom Donahue - VP, CFO and Treasurer Debbie Cunningham - CIO of Money Markets Saker Nusseibeh - CEO, Federated Hermes Limited Conference Call Participants Ken Worthington - JPMorgan Patrick Davitt - Autonomous Research Daniel Fannon - Jefferies Kenneth Lee - RBC Capital Markets John Dunn - Evercore IS ...

Part I [Item 1 Business](index=5&type=section&id=Item%201%20Business) Federated Hermes is a global investment manager with **$668.9 billion AUM**, focusing on active, responsible investing across diverse asset classes, driven by advisory fees, and operating in a highly competitive and regulated environment [General Overview](index=5&type=section&id=General) Federated Hermes is a global leader in active, responsible investing, managing **$668.9 billion in assets under management (AUM)** as of December 31, 2022, operating solely in investment management[14](index=14&type=chunk)[15](index=15&type=chunk) - The company integrates proprietary insights from fundamental environmental, social, and governance (ESG) factors and engagement research into nearly all its investment strategies[14](index=14&type=chunk) - Principal revenue is investment advisory fees, primarily based on AUM of investment products and strategies, with domestic and foreign advisory subsidiaries registered under relevant regulations[15](index=15&type=chunk) [Assets Under Management (AUM)](index=6&type=section&id=Assets%20Under%20Management) This section details Federated Hermes' assets under management by asset class at period end and average over time Managed Assets at Period End (December 31, 2022 vs. 2021) | $ in millions | As of December 31, 2022 | As of December 31, 2021 | 2022 vs. 2021 Change (%) | | :-------------------- | :---------------------- | :---------------------- | :----------------------- | | Equity | $81,523 | $96,716 | (16)% | | Fixed-Income | $86,743 | $97,550 | (11)% | | Alternative / Private Markets | $20,802 | $22,920 | (9)% | | Multi-Asset | $2,989 | $3,780 | (21)% | | Total Long-Term Assets | $192,057 | $220,966 | (13)% | | Money Market | $476,844 | $447,907 | 6% | | Total Managed Assets | $668,901 | $668,873 | 0% | Average Managed Assets (2022 vs. 2021 vs. 2020) | $ in millions | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | 2022 vs. 2021 Change (%) | 2021 vs. 2020 Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :----------------------- | :----------------------- | | Equity | $84,793 | $98,040 | $80,591 | (14)% | 22% | | Fixed-Income | $89,776 | $91,564 | $74,403 | (2)% | 23% | | Alternative / Private Markets | $21,799 | $20,754 | $18,206 | 5% | 14% | | Multi-Asset | $3,273 | $3,879 | $3,813 | (16)% | 2% | | Total Long-Term Assets | $199,641 | $214,237 | $177,013 | (7)% | 21% | | Money Market | $432,992 | $418,562 | $436,895 | 3% | (4)% | | Total Average Managed Assets | $632,633 | $632,799 | $613,908 | 0% | 3% | - Changes in average asset mix directly impact operating income, as advisory fees vary by asset class and product type, with multi-asset and equity products generally having **higher fees** than money market products[21](index=21&type=chunk) [Revenue](index=7&type=section&id=Revenue) This section presents Federated Hermes' total revenue and its components over three years Revenue ($ in thousands) | $ in thousands | 2022 | 2021 | 2020 | 2022 vs. 2021 Change (%) | 2021 vs. 2020 Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :----------------------- | :----------------------- | | Investment Advisory Fees, net | $1,011,631 | $915,984 | $1,011,467 | 10% | (9)% | | Administrative Service Fees, net | $294,557 | $306,639 | $318,152 | (4)% | (4)% | | Other Service Fees, net | $139,626 | $77,824 | $118,649 | 79% | (34)% | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | 11% | (10)% | [Investment Products and Strategies](index=7&type=section&id=Investment%20Products%20and%20Strategies) Federated Hermes offers a diverse range of investment products and strategies, integrating fundamental research and ESG factors - Federated Hermes offers a diverse range of products including money market (**$476.8 billion AUM**), equity (**$81.5 billion AUM**), fixed-income (**$86.7 billion AUM**), alternative/private markets (**$20.8 billion AUM**), and multi-asset (**$3.0 billion AUM**) as of December 31, 2022[24](index=24&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk)[28](index=28&type=chunk) - The investment process integrates fundamental research, credit analysis, ESG factors, quantitative models, and disciplined portfolio construction[29](index=29&type=chunk) [Distribution Channels and Product Markets](index=7&type=section&id=Distribution%20Channels%20and%20Product%20Markets) Federated Hermes distributes products globally through various channels, with a significant portion of managed assets in the U.S. financial intermediary market - Federated Hermes distributes products and services to over **11,000 institutions and intermediaries globally**, utilizing a sales force of over **200 representatives**[31](index=31&type=chunk) Market Segment Percentage of Managed Assets (as of Dec 31, 2022) | Market Segment | Percentage of Managed Assets (%) | | :-------------------------- | :------------------------------- | | U.S. financial intermediary | 63% | | U.S. institutional | 28% | | International | 9% | - Managed assets in the U.S. financial intermediary market primarily consist of money market (**$317.9 billion**) and equity (**$55.1 billion**) assets[33](index=33&type=chunk) - International managed assets include significant equity (**$23.5 billion**) and alternative/private markets (**$19.4 billion**) assets[35](index=35&type=chunk) [Competition](index=8&type=section&id=Competition) The investment management industry is highly competitive, with Federated Hermes competing against numerous funds and financial institutions based on performance, fees, and ESG commitments - The investment management business is highly competitive, with Federated Hermes competing against over **7,000 mutual funds** and **2,800 ETFs**, as well as other financial institutions[37](index=37&type=chunk) - Competition is driven by investment performance, fees, service quality, ESG commitments, and relationships with intermediaries[39](index=39&type=chunk) - Federated Hermes launched its first ETFs in December 2021 (fixed-income) and November 2022 (dividend income equity) to compete in this evolving market[38](index=38&type=chunk) [Regulatory Matters](index=8&type=section&id=Regulatory%20Matters) This section outlines the extensive and evolving domestic and international regulatory landscape impacting Federated Hermes' operations [Current Regulatory Environment - Domestic](index=9&type=section&id=Current%20Regulatory%20Environment%20-%20Domestic) The domestic regulatory environment saw increased activity in 2022, with the SEC proposing and finalizing numerous rules impacting the investment management industry, including money market fund reform, climate change disclosure, and cybersecurity - The SEC's Fall 2022 Unified Agenda identified **52 rulemaking initiatives**, with **21 final rules** and **13 proposed rules** expected by April 2023, covering areas like money market fund reform, climate change disclosure, and cybersecurity[41](index=41&type=chunk) - Federated Hermes opposes swing pricing for institutional prime money market funds, advocating for discretionary fees and gates, and supports a Reverse Distribution Mechanism (RDM) in negative interest rate environments for government money market funds[45](index=45&type=chunk)[46](index=46&type=chunk) - The DOL issued a new rule on 'Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights' (New DOL ESG/Proxy Voting Rule) in November 2022, clarifying that fiduciaries can evaluate economic effects of climate change and other ESG factors[57](index=57&type=chunk)[58](index=58&type=chunk) - New tax reforms from the Inflation Reduction Act of 2022 include a **15% minimum corporate tax** and a **1% tax on corporate share repurchases**, effective 2023[69](index=69&type=chunk) [Current Regulatory Environment - International](index=17&type=section&id=Current%20Regulatory%20Environment%20-%20International) International regulatory activity, particularly in the EU and UK, also increased in 2022, with a focus on sustainable finance (SFDR, Taxonomy Regulation), ESG disclosures, and money market fund reforms - EU and UK regulators are actively addressing sustainable finance, with the SFDR and Taxonomy Regulation establishing frameworks for ESG disclosures and product classification (Article 6, 8, 9 funds)[81](index=81&type=chunk) - Brexit continues to cause regulatory divergence between the UK and EU, impacting product distribution and increasing compliance burdens, with the Brexit Freedoms Bill and FSM Bill aiming to establish a new UK-specific regulatory regime[73](index=73&type=chunk)[75](index=75&type=chunk)[77](index=77&type=chunk) - The transition from LIBOR is nearly complete, with USD LIBOR publication ceasing after June 30, 2023, requiring renegotiation or re-pricing of financial transactions to alternative rates like SOFR[99](index=99&type=chunk)[101](index=101&type=chunk) - The Digital Operational Resilience Act (DORA) in the EU, effective January 17, 2025, sets uniform requirements for the security of network and information systems in the financial sector, with the UK also planning similar legislation[87](index=87&type=chunk) [Human Capital Resource Management](index=28&type=section&id=Human%20Capital%20Resource%20Management) Federated Hermes prioritizes human capital management, with a global workforce, competitive compensation, and a commitment to diversity and inclusion - As of December 31, 2022, Federated Hermes had **1,961 employees globally**, with a significant presence in Pittsburgh, London, and New York[111](index=111&type=chunk) - The company's compensation programs are designed to be competitive, rewarding individual contributions and aligning employee interests with business strategy, including a mix of salary, bonus, and long-term incentives[113](index=113&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk) - Federated Hermes is committed to diversity and inclusion, with approximately **40% women employees globally** and various programs to advance diversity in recruitment, onboarding, and training[124](index=124&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk) [Information about our Executive Officers](index=31&type=section&id=Information%20about%20our%20Executive%20Officers) This section lists the key executive officers of Federated Hermes, Inc. and their respective ages Executive Officers | Name | Position | Age | | :------------------- | :----------------------------------------------------------------------- | :-- | | J. Christopher Donahue | President, Chief Executive Officer, Chairman and Director of Federated Hermes, Inc. | 73 | | Gordon J. Ceresino | Vice Chairman of Federated Hermes, Inc. | 65 | | Thomas R. Donahue | Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc. | 64 | | Dolores D. Dudiak | Vice President, Director of Human Resources of Federated Hermes, Inc. | 64 | | John B. Fisher | Vice President and Director of Federated Hermes, Inc. and President and Chief Executive Officer of Federated Advisory Companies | 66 | | Peter J. Germain | Executive Vice President, Chief Legal Officer and Secretary of Federated Hermes, Inc. | 63 | | Richard A. Novak | Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes, Inc. | 59 | | Saker A. Nusseibeh | Chief Executive Officer, Federated Hermes Limited | 61 | | Paul A. Uhlman | Vice President of Federated Hermes, Inc. and President of Federated Securities Corp. | 56 | | Stephen P. Van Meter | Vice President and Chief Compliance Officer of Federated Hermes, Inc. | 47 | [Available Information](index=32&type=section&id=Available%20Information) Federated Hermes provides public access to its SEC filings and reports on its corporate website - Federated Hermes makes its annual, quarterly, and current reports, along with other SEC filings, available free of charge on its website, www.FederatedHermes.com[143](index=143&type=chunk) [Item 1A Risk Factors](index=32&type=section&id=Item%201A%20Risk%20Factors) Federated Hermes faces a wide array of inherent risks in the investment management business, including specific risks related to its operations and general economic, market, regulatory, legal, and operational risks [Specific Risk Factors](index=33&type=section&id=Specific%20Risk%20Factors) This section outlines specific risks, including revenue concentration in money market assets, intense competition, AUM fluctuations, and the company's "controlled company" status - A significant portion of Federated Hermes' revenue (approximately **40% in 2022**) is attributable to money market assets, making it vulnerable to declines in AUM or inability to maintain stable NAVs[146](index=146&type=chunk)[148](index=148&type=chunk) - The investment management business is highly competitive, with factors like investment performance, fees, and ESG commitments influencing sales; competitive pressures can lead to fee reductions[150](index=150&type=chunk) - Declines in AUM or shifts in asset mix (e.g., from higher-fee equity to lower-fee money market products) can materially affect revenue and profitability[155](index=155&type=chunk) - The company's Class A common stock is held by a trust for the Donahue family, making Federated Hermes a 'controlled company' and exempting it from certain NYSE corporate governance requirements, which could affect its stock price[167](index=167&type=chunk) [General Risk Factors](index=38&type=section&id=General%20Risk%20Factors) This section covers general risks such as economic downturns, evolving regulations, operational vulnerabilities, and human capital management challenges - Economic and market downturns, including geopolitical tensions like the Russia-Ukraine conflict, can cause volatility, illiquidity, and adverse effects on asset values, investor confidence, and supply of investments[168](index=168&type=chunk)[169](index=169&type=chunk) - Extensive and evolving domestic and foreign regulations, including potential designation as a systemically important financial institution, increase compliance costs and risks, potentially impacting product offerings and profitability[176](index=176&type=chunk)[179](index=179&type=chunk)[181](index=181&type=chunk) - Operational risks, including inadequate technology, human error, and cybersecurity incidents, can lead to business disruptions, data loss, financial losses, and reputational damage[190](index=190&type=chunk)[193](index=193&type=chunk)[195](index=195&type=chunk) - The ability to attract and retain key personnel is critical, with increased competition and remote work arrangements posing human capital resource management risks[200](index=200&type=chunk)[201](index=201&type=chunk) [Item 1B Unresolved Staff Comments](index=47&type=section&id=Item%201B%20Unresolved%20Staff%20Comments) There are no unresolved staff comments - No unresolved staff comments were reported[210](index=210&type=chunk) [Item 2 Properties](index=47&type=section&id=Item%202%20Properties) Federated Hermes' primary property consists of approximately **259,000 square feet** of leased corporate headquarters space in Pittsburgh, Pennsylvania, used for its investment management business - Federated Hermes' material operating leases relate to its corporate headquarters in Pittsburgh, Pennsylvania, occupying approximately **259,000 square feet**[211](index=211&type=chunk) [Item 3 Legal Proceedings](index=47&type=section&id=Item%203%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference from Note (20) to the Consolidated Financial Statements - Information on legal proceedings is included in Note (20) to the Consolidated Financial Statements[212](index=212&type=chunk) [Item 4 Mine Safety Disclosures](index=47&type=section&id=Item%204%20Mine%20Safety%20Disclosures) This item is not applicable to Federated Hermes - Mine Safety Disclosures are not applicable to the registrant[213](index=213&type=chunk) Part II [Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=47&type=section&id=Item%205%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Federated Hermes' Class B common stock trades on the NYSE under the symbol FHI, with **27,091 beneficial shareholders** as of January 27, 2023, and the company actively repurchased shares under its program - Federated Hermes' Class B common stock is traded on the NYSE under the symbol **FHI**[215](index=215&type=chunk) - As of January 27, 2023, there were **27,091 beneficial shareholders** of Class B common stock[216](index=216&type=chunk) Stock Repurchases (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :------- | :------------------------------- | :--------------------------- | :-------------------------------------------------------- | :----------------------------------------------------------------------------- | | October | 9,397 | $0.00 | 0 | 4,957,415 | | November | 115,735 | $10.75 | 35,000 | 4,922,415 | | December | 202,000 | $35.52 | 200,000 | 4,722,415 | | Total | 327,132 | $25.74 | 235,000 | 4,722,415 | - A share repurchase program authorized in June 2022 allows for the repurchase of up to **5.0 million shares** of Class B common stock, with **4.7 million shares** remaining available as of December 31, 2022[217](index=217&type=chunk)[475](index=475&type=chunk) [Item 6 [Reserved]](index=48&type=section&id=Item%206%20%5BReserved%5D) This item is reserved and contains no information [Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations](index=49&type=section&id=Item%207%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's Discussion and Analysis provides an overview of Federated Hermes' financial performance and condition, highlighting key business developments, asset trends, and operational results [General](index=50&type=section&id=General) Federated Hermes' revenue is primarily derived from investment advisory, administrative, and other fund-related services, calculated as a percentage of average net assets - Federated Hermes' revenue is primarily derived from investment advisory, administrative, and other fund-related services, calculated as a percentage of average net assets[223](index=223&type=chunk)[224](index=224&type=chunk) - Fee rates vary by asset and service type, with multi-asset and equity products generally yielding **higher advisory fees** than money market and fixed-income products[224](index=224&type=chunk) - Key financial performance indicators include AUM, gross and net product sales, total revenue, and net income[226](index=226&type=chunk) [Business Developments](index=51&type=section&id=Business%20Developments) This section highlights key business developments in 2022, including an intangible asset impairment, the CWH acquisition, issuance of senior notes, and the FHL equity acquisition - A **$31.5 million non-cash impairment** of an intangible asset related to the 2018 FHL acquisition was recorded as of December 31, 2022[227](index=227&type=chunk) - Federated Hermes acquired C.W. Henderson and Associates, Inc. (CWH) on October 1, 2022, specializing in tax-exempt municipal securities, for an upfront cash payment of **$28.1 million** and potential contingent payments[228](index=228&type=chunk)[397](index=397&type=chunk) - On March 17, 2022, Federated Hermes issued **$350 million in unsecured senior notes** at a fixed interest rate of **3.29%** per annum, due March 17, 2032[229](index=229&type=chunk)[453](index=453&type=chunk) - The company acquired the remaining **10% noncontrolling interests in FHL** on March 14, 2022, making FHL an indirect, wholly-owned subsidiary[230](index=230&type=chunk)[400](index=400&type=chunk) - Voluntary Yield-related Fee Waivers, which totaled **$85.3 million in 2022** (net negative pre-tax impact of **$18.8 million**), were eliminated in the second half of 2022 due to rising short-term interest rates[233](index=233&type=chunk)[234](index=234&type=chunk) [Asset Highlights](index=53&type=section&id=Asset%20Highlights) This section provides a detailed overview of Federated Hermes' managed assets at period end and average managed assets over three years Managed Assets at Period End (December 31, 2022 vs. 2021) | $ in millions | 2022 | 2021 | 2022 vs. 2021 Change (%) | | :-------------------- | :-------- | :-------- | :----------------------- | | Equity | $81,523 | $96,716 | (16)% | | Fixed-Income | $86,743 | $97,550 | (11)% | | Alternative / Private Markets | $20,802 | $22,920 | (9)% | | Multi-Asset | $2,989 | $3,780 | (21)% | | Total Long-Term Assets | $192,057 | $220,966 | (13)% | | Money Market | $476,844 | $447,907 | 6% | | Total Managed Assets | $668,901 | $668,873 | 0% | Average Managed Assets (2022 vs. 2021 vs. 2020) | $ in millions | 2022 | 2021 | 2020 | 2022 vs. 2021 Change (%) | 2021 vs. 2020 Change (%) | | :-------------------- | :-------- | :-------- | :-------- | :----------------------- | :----------------------- | | Equity | $84,793 | $98,040 | $80,591 | (14)% | 22% | | Fixed-Income | $89,776 | $91,564 | $74,403 | (2)% | 23% | | Alternative / Private Markets | $21,799 | $20,754 | $18,206 | 5% | 14% | | Multi-Asset | $3,273 | $3,879 | $3,813 | (16)% | 2% | | Total Long-Term Assets | $199,641 | $214,237 | $177,013 | (7)% | 21% | | Money Market | $432,992 | $418,562 | $436,895 | 3% | (4)% | | Total Average Managed Assets | $632,633 | $632,799 | $613,908 | 0% | 3% | - Average managed assets remained flat in 2022 compared to 2021, with money market assets increasing by **3%** while equity assets decreased by **14%** and fixed-income assets by **2%**[255](index=255&type=chunk) - Market depreciation significantly impacted equity and fixed-income assets in 2022, with the S&P 500 Index returning **-19.4%** and the Bloomberg US Aggregate Bond Index returning **-13.0%**[255](index=255&type=chunk)[259](index=259&type=chunk) [Results of Operations](index=62&type=section&id=Results%20of%20Operations) This section analyzes Federated Hermes' financial performance, highlighting changes in revenue, operating expenses, nonoperating income, and net income - Total revenue increased by **$145.4 million** in 2022 compared to 2021, primarily due to a **$335.0 million decrease** in Voluntary Yield-related Fee Waivers, partially offset by lower equity and fixed-income revenue[262](index=262&type=chunk) - Total operating expenses increased by **$174.8 million** in 2022, mainly driven by a **$153.7 million increase** in Distribution expense (due to reduced fee waivers) and a **$30.2 million increase** in Intangible Asset Related expense due to impairment[264](index=264&type=chunk) - Nonoperating Income (Expenses), net, decreased by **$40.6 million**, primarily due to a **$38.2 million decrease** in Gain (Loss) on Securities, net, and higher debt expense[265](index=265&type=chunk) - Net income attributable to Federated Hermes, Inc. decreased by **$30.8 million** in 2022, resulting in diluted EPS of **$2.65**, down from **$2.75 in 2021**[267](index=267&type=chunk)[337](index=337&type=chunk) [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) Federated Hermes maintained strong liquidity and capital resources in 2022, with increased operating cash flow, strategic acquisitions, and new debt issuance - Liquid assets, net of noncontrolling interests, totaled **$559.5 million** at December 31, 2022, up from **$492.7 million** at December 31, 2021[268](index=268&type=chunk) - Net cash provided by operating activities increased to **$323.9 million** in 2022 from **$170.4 million** in 2021, driven by decreased cash paid for trading securities and increased cash from revenue[270](index=270&type=chunk) - Net cash used by investing activities was **$32.4 million** in 2022, primarily for the CWH Acquisition and purchases of investments[271](index=271&type=chunk) - Net cash used by financing activities was **$168.5 million** in 2022, including debt payments, share repurchases, and dividends, partially offset by new borrowings[272](index=272&type=chunk) - Federated Hermes issued **$350 million in unsecured senior notes** in March 2022 and has a **$350 million revolving credit facility**, maintaining compliance with all debt covenants (interest coverage ratio of **42:1** and leverage ratio of **0.79:1**)[273](index=273&type=chunk)[274](index=274&type=chunk)[276](index=276&type=chunk) [Financial Position](index=65&type=section&id=Financial%20Position) This section details changes in Federated Hermes' financial position, including goodwill, intangible assets, deferred tax liabilities, and treasury stock activity - Goodwill increased by **$1.5 million** to **$800.4 million** at December 31, 2022, primarily due to the CWH Acquisition, partially offset by foreign exchange fluctuations[288](index=288&type=chunk)[336](index=336&type=chunk) - Intangible Assets, net, decreased by **$62.1 million** to **$409.2 million**, mainly due to a **$31.5 million impairment charge** and foreign exchange rate fluctuations[289](index=289&type=chunk)[336](index=336&type=chunk) - Long-Term Deferred Tax Liability, net, decreased by **$24.8 million**, influenced by a reduction in foreign deferred tax liability from an intangible asset impairment and foreign exchange rate fluctuations[292](index=292&type=chunk)[479](index=479&type=chunk) - In July 2022, Federated Hermes retired **10 million treasury shares**, reducing Treasury Stock by **$313.8 million** and Class B common stock by **$42.7 million**, with no impact on total equity[293](index=293&type=chunk)[476](index=476&type=chunk) [Variable Interest Entities](index=66&type=section&id=Variable%20Interest%20Entities) Federated Hermes consolidates certain Federated Hermes Fund VIEs where it is deemed the primary beneficiary, reflecting their assets, liabilities, and operations in its financial statements - Federated Hermes consolidates certain Federated Hermes Fund VIEs where it is deemed the primary beneficiary, reflecting their assets, liabilities, and operations in its financial statements[295](index=295&type=chunk) [Critical Accounting Policies](index=66&type=section&id=Critical%20Accounting%20Policies) This section highlights critical accounting policies, particularly the valuation of indefinite-lived intangible assets, which involves significant management estimates and judgment - The valuation of indefinite-lived intangible assets, particularly the FHL right to manage public fund assets, involves significant management estimates and judgment, including projected AUM, revenue growth, profit margins, and discount rates[298](index=298&type=chunk)[299](index=299&type=chunk) - A **$31.5 million non-cash impairment charge** was recorded for the FHL right to manage public fund assets as of December 31, 2022, driven by increased market interest rates and decreased near-term projected cash flows[300](index=300&type=chunk) - Sensitivity analysis indicates that a **10% change in projected revenue growth rates** would result in an **8% change in estimated fair value**, and a **25 basis point change in the discount rate** would result in a **3% inverse change**[300](index=300&type=chunk) [Item 7A Quantitative and Qualitative Disclosures about Market Risk](index=65&type=section&id=Item%207A%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Federated Hermes is exposed to various market risks, including interest-rate, credit, price, and foreign exchange risks, which are continuously identified, assessed, and managed - Federated Hermes is exposed to interest-rate risk from debt securities and fixed-income funds, with a hypothetical **300-basis-point fluctuation** in interest rates or credit spreads potentially impacting financial condition by approximately **$10 million**[304](index=304&type=chunk) - Price risk from equity Federated Hermes Funds and Separate Accounts (**$55.4 million investment**) could impact results by approximately **$11 million** with a hypothetical **20% fair value fluctuation**[305](index=305&type=chunk) - Foreign exchange risk from non-USD securities and operating cash accounts could impact results by approximately **$10-11 million** with a hypothetical **20% fluctuation** in exchange rates[306](index=306&type=chunk)[307](index=307&type=chunk) - Nearly all revenue is based on AUM, meaning a **20% decline in average AUM** would result in a corresponding **20% decline in revenue**, with a potentially greater or lesser impact on net income due to varying expense proportionality[309](index=309&type=chunk) [Item 8 Financial Statements and Supplementary Data](index=67&type=section&id=Item%208%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Federated Hermes' audited consolidated financial statements for the years ended December 31, 2022, 2021, and 2020, along with management's assessment of internal controls and notes to the financial statements [Management's Assessment of Internal Control Over Financial Reporting](index=69&type=section&id=Management's%20Assessment%20of%20Internal%20Control%20Over%20Financial%20Reporting) Management concluded that Federated Hermes' internal controls over financial reporting were effective as of December 31, 2022 - Management concluded that Federated Hermes' internal controls over financial reporting were **effective** as of December 31, 2022, based on the COSO 2013 framework[312](index=312&type=chunk) [Report of Independent Registered Public Accounting Firm](index=70&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Ernst & Young LLP issued an unqualified opinion on Federated Hermes' consolidated financial statements and the effectiveness of internal control over financial reporting - Ernst & Young LLP issued an **unqualified opinion** on Federated Hermes' consolidated financial statements for the period ended December 31, 2022, and on the effectiveness of internal control over financial reporting[316](index=316&type=chunk)[317](index=317&type=chunk) - A critical audit matter identified was the valuation of the indefinite-lived intangible asset related to the FHL acquisition, due to significant estimation uncertainty in determining fair value, particularly regarding the discount rate and projected cash flows[321](index=321&type=chunk) [Consolidated Balance Sheets](index=74&type=section&id=Consolidated%20Balance%20Sheets) This section presents Federated Hermes' consolidated balance sheets for December 31, 2022, and 2021 Consolidated Balance Sheets (Selected Items, in thousands) | Item | December 31, 2022 | December 31, 2021 | | :------------------------------------ | :---------------- | :---------------- | | Total Current Assets | $651,031 | $559,447 | | Goodwill | $800,417 | $798,871 | | Intangible Assets, net | $409,157 | $471,209 | | Total Assets | $2,020,479 | $2,018,187 | | Total Current Liabilities | $257,413 | $270,707 | | Long-Term Debt | $347,581 | $223,350 | | Total Liabilities | $912,966 | $840,968 | | Total Permanent Equity | $1,045,692 | $1,114,017 | [Consolidated Statements of Income](index=75&type=section&id=Consolidated%20Statements%20of%20Income) This section presents Federated Hermes' consolidated statements of income for the years ended December 31, 2022, 2021, and 2020 Consolidated Statements of Income (Selected Items, in thousands) | Item | 2022 | 2021 | 2020 | | :------------------------------------ | :---------- | :---------- | :---------- | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | | Total Operating Expenses | $1,109,018 | $934,175 | $1,030,117 | | Operating Income | $336,796 | $366,272 | $418,151 | | Income Before Income Taxes | $306,222 | $376,290 | $446,057 | | Net Income Attributable to Federated Hermes, Inc. | $239,496 | $270,293 | $326,364 | | Diluted Earnings Per Common Share | $2.65 | $2.75 | $3.23 | [Consolidated Statements of Comprehensive Income](index=76&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents Federated Hermes' consolidated statements of comprehensive income for the years ended December 31, 2022, 2021, and 2020 Consolidated Statements of Comprehensive Income (in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :--------- | :--------- | :--------- | | Net Income Including the Noncontrolling Interests in Subsidiaries | $234,564 | $272,308 | $336,022 | | Other Comprehensive Income (Loss), net of tax | $(64,367) | $(6,252) | $22,013 | | Comprehensive Income Attributable to Federated Hermes, Inc. | $177,458 | $271,484 | $341,784 | [Consolidated Statements of Changes in Equity](index=77&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Equity) This section outlines the changes in Federated Hermes' total permanent equity for the years ended December 31, 2022, 2021, and 2020 - Total Permanent Equity decreased from **$1,114,017 thousand in 2021** to **$1,045,692 thousand in 2022**[339](index=339&type=chunk)[341](index=341&type=chunk) - Key changes in equity for 2022 included net income of **$239,496 thousand**, other comprehensive loss of **$62,038 thousand** (primarily foreign currency translation), and significant treasury stock activity including repurchases and retirement of **10 million shares**[339](index=339&type=chunk)[341](index=341&type=chunk) [Consolidated Statements of Cash Flows](index=79&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents Federated Hermes' consolidated statements of cash flows for the years ended December 31, 2022, 2021, and 2020 Consolidated Statements of Cash Flows (Selected Items, in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :--------- | :--------- | :--------- | | Net Cash Provided (Used) by Operating Activities | $323,948 | $170,383 | $373,241 | | Net Cash Provided (Used) by Investing Activities | $(32,357) | $10,816 | $(24,823) | | Net Cash Provided (Used) by Financing Activities | $(168,513) | $(249,472) | $(295,136) | | Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents | $102,904 | $(70,584) | $59,124 | | Cash and Cash Equivalents (End of Period) | $336,782 | $233,327 | $301,819 | [Notes to the Consolidated Financial Statements](index=80&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed disclosures on Federated Hermes' significant accounting policies, business combinations, revenue recognition, concentration risks, investments, fair value measurements, derivatives, intangible assets, property and equipment, debt, employee benefits, share-based compensation, common stock, income taxes, earnings per share, leases, and commitments and contingencies [(1) Summary of Significant Accounting Policies](index=80&type=section&id=(1)%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines Federated Hermes' significant accounting policies, including revenue recognition, consolidation principles, investment valuation, and accounting for goodwill and intangible assets - Revenue from investment advisory, administrative, and most other services is recognized over time as the customer simultaneously consumes the benefit, with variable consideration recognized as uncertainties are resolved[349](index=349&type=chunk) - Federated Hermes consolidates entities where it has a controlling financial interest, either as a primary beneficiary of a VIE or by holding a majority voting interest in a VRE[355](index=355&type=chunk)[356](index=356&type=chunk)[358](index=358&type=chunk) - Goodwill and indefinite-lived intangible assets are tested for impairment annually or when indicators exist, using qualitative or quantitative approaches, with fair value determined by methods like the excess earnings method[371](index=371&type=chunk)[372](index=372&type=chunk) - Leases are classified as operating or financing, with a right-of-use (ROU) asset and lease liability recorded on the balance sheet, measured at the present value of unpaid lease payments[379](index=379&type=chunk) [(2) Business Combination and Equity Acquisition](index=88&type=section&id=(2)%20Business%20Combination%20and%20Equity%20Acquisition) This note details the CWH Acquisition on October 1, 2022, and the acquisition of the remaining **10% noncontrolling interests in FHL** on March 14, 2022 - Federated Hermes acquired C.W. Henderson and Associates, Inc. (CWH) on October 1, 2022, for an upfront cash payment of **$28.1 million**, with potential contingent payments up to **$17.6 million** over five years[397](index=397&type=chunk) Preliminary Purchase Price Allocation for CWH Acquisition (in millions) | Item | Amount | | :--------------------------------- | :----- | | Right-of-Use Asset | $0.8 | | Intangible Assets | $15.4 | | Goodwill | $16.4 | | Less: Lease Liability Assumed | $0.8 | | Less: Fair Value of Contingent Consideration | $3.7 | | Total Upfront Purchase Price Consideration | $28.1 | - On March 14, 2022, Federated Hermes acquired the remaining **10% noncontrolling interests in FHL**, making it a wholly-owned subsidiary, through an exchange of FHL shares for Federated Hermes Class B common stock valued at **$47.5 million**[400](index=400&type=chunk)[401](index=401&type=chunk) [(3) Revenue from Contracts with Customers](index=89&type=section&id=(3)%20Revenue%20from%20Contracts%20with%20Customers) This note disaggregates Federated Hermes' revenue by asset class, performance obligation, and product type for 2020-2022, and outlines expected future fixed revenue Revenue Disaggregated by Asset Class (in thousands) | Asset Class | 2022 | 2021 | 2020 | | :---------- | :---------- | :---------- | :---------- | | Money market | $575,261 | $239,318 | $570,815 | | Equity | $526,957 | $677,917 | $551,028 | | Fixed-income | $206,794 | $237,702 | $193,649 | | Other | $136,802 | $145,510 | $132,776 | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | Revenue Disaggregated by Performance Obligation (in thousands) | Performance Obligation | 2022 | 2021 | 2020 | | :--------------------- | :---------- | :---------- | :---------- | | Asset Management | $1,011,631 | $915,984 | $1,011,467 | | Administrative Services | $294,557 | $306,639 | $318,152 | | Distribution | $112,356 | $49,600 | $92,922 | | Other | $27,270 | $28,224 | $25,727 | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | Revenue Disaggregated by Product Type (in thousands) | Product Type | 2022 | 2021 | 2020 | | :------------------ | :---------- | :---------- | :---------- | | Federated Hermes Funds | $1,188,933 | $1,024,922 | $1,191,851 | | Separate Accounts | $238,638 | $259,026 | $241,631 | | Other | $18,243 | $16,499 | $14,786 |\ | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | Expected Future Fixed Revenue from Unsatisfied Performance Obligations (in thousands) | Year | Amount | | :------------------ | :---------- | | 2023 | $9,566 | | 2024 | $3,258 | | 2025 | $1,131 | | 2026 and Thereafter | $307 | | Total | $14,262 | [(4) Concentration Risk](index=90&type=section&id=(4)%20Concentration%20Risk) This note highlights Federated Hermes' significant revenue concentration in money market assets and specific fund strategies, as well as reliance on a single intermediary Revenue Concentration by Asset Class (%) | Asset Class | 2022 | 2021 | 2020 | | :------------------ | :--- | :--- | :--- | | Money Market Assets | 40% | 19% | 40% | | Equity Assets | 36% | 52% | 38% | | Fixed-Income Assets | 14% | 18% | 13% | - The increase in money market revenue concentration in 2022 was primarily due to a decrease in Voluntary Yield-related Fee Waivers[408](index=408&type=chunk) Revenue Concentration by Investment Fund Strategy (%) | Investment Fund Strategy | 2022 | 2021 | 2020 | | :---------------------------------------- | :--- | :--- | :--- | | Federated Government Obligations Fund | 12% | 5% | 13% | | Federated Strategic Value Dividend strategy | 10% | 9% | 8% | | Federated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund II | 7% | 11% | 9% | - Approximately **11% of Federated Hermes' total revenue in 2022** was derived from services provided to one intermediary, The Bank of New York Mellon Corporation[413](index=413&type=chunk) [(5) Consolidation](index=91&type=section&id=(5)%20Consolidation) This note explains Federated Hermes' consolidation of certain funds and entities where it holds a controlling financial interest, and details fee waivers and maximum risk of loss from non-consolidated VIEs - Federated Hermes consolidates VREs and VIEs where it has a controlling financial interest, with assets of consolidated funds restricted for their own use[415](index=415&type=chunk)[419](index=419&type=chunk) Federated Hermes' Net Interest in Consolidated VIEs (in millions) | Item | 2022 | 2021 | | :---------------------------------------- | :---- | :---- | | Cash and Cash Equivalents | $8.0 | $3.0 | | Investments—Consolidated Investment Companies | $50.1 | $35.9 | | Other Assets | $0.7 | $0.1 | | Other Long-Term Assets | $13.4 | $13.8 | | Less: Liabilities | $5.7 | $1.4 | | Less: Accumulated Other Comprehensive Income (Loss), net of tax | $1.2 | $0.0 | | Less: Redeemable Noncontrolling Interests in Subsidiaries | $49.5 | $33.3 | | Federated Hermes' Net Interest in VIEs | $15.8 | $18.1 | - Fee Waivers, including Voluntary Yield-related Fee Waivers, totaled **$563.2 million in 2022**, with **$440.7 million** related to money market funds[416](index=416&type=chunk) - The maximum risk of loss related to investments in non-consolidated VIEs was **$101.7 million** at December 31, 2022, primarily from Federated Hermes Funds[424](index=424&type=chunk) [(6) Investments](index=92&type=section&id=(6)%20Investments) This note details Federated Hermes' investments in non-consolidated and consolidated funds, and reports net gains and losses on securities - As of December 31, 2022, Federated Hermes held **$67.0 million** in non-consolidated fluctuating-value Federated Hermes Funds and **$9.5 million** in Separate Accounts, primarily in domestic debt and equity securities[425](index=425&type=chunk) - Investments held by consolidated Federated Hermes Funds totaled **$108.4 million** at December 31, 2022, predominantly in domestic and foreign debt and equity securities[426](index=426&type=chunk)[427](index=427&type=chunk) Gain (Loss) on Securities, net (in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------- | :---------- | :-------- | :-------- | | Net Gains (Losses) on Investments—Consolidated Investment Companies | $(15,229) | $2,251 | $12,510 | | Net Gains (Losses) on Investments—Affiliates and Other | $(13,467) | $7,281 | $5,557 | | Gain (Loss) on Securities, net | $(28,696) | $9,532 | $18,067 | [(7) Fair Value Measurements](index=93&type=section&id=(7)%20Fair%20Value%20Measurements) This note provides fair value measurements for financial assets and liabilities, categorized into Level 1, Level 2, and Level 3, and details acquisition-related contingent consideration Fair Value Measurements of Financial Assets (in thousands) | Item | Level 1 | Level 2 | Level 3 | Total | | :------------------------------------ | :---------- | :--------- | :------ | :-------- | | Cash and Cash Equivalents | $336,782 | $0 | $0 | $336,782 | | Investments—Consolidated Investment Companies | $49,119 | $59,329 | $0 | $108,448 | | Investments—Affiliates and Other | $71,369 | $5,130 | $25 | $76,524 | | Other | $6,538 | $469 | $0 | $7,007 | | Total Financial Assets | $463,808 | $64,928 | $25 | $528,761 | Fair Value Measurements of Financial Liabilities (in thousands) | Item | Level 1 | Level 2 | Level 3 | Total | | :------------------------ | :------ | :------ | :-------- | :-------- | | Total Financial Liabilities | $27 | $4 | $8,439 | $8,470 | - Acquisition-related future contingent consideration liabilities, primarily from the CWH Acquisition and 2020 business combinations, totaled **$8.4 million** at December 31, 2022, and are classified as Level 3[439](index=439&type=chunk) - Investments valued using NAV as a practical expedient, excluded from the fair value hierarchy, totaled **$18.3 million** at December 31, 2022[441](index=441&type=chunk) [(8) Derivatives](index=96&type=section&id=(8)%20Derivatives) This note describes FHL's use of foreign currency forward transactions to hedge foreign exchange rate fluctuations and the resulting realized losses - FHL uses foreign currency forward transactions to hedge foreign exchange rate fluctuations, with a combined notional amount of **£67.3 million** as of December 31, 2022[444](index=444&type=chunk) - Federated Hermes recorded **$0.5 million** in Other Current Assets for the fair value of these derivatives at December 31, 2022[444](index=444&type=chunk) - A **$15.4 million realized loss** from foreign currency forward transactions was recorded in 2022, compared to a **$4.5 million realized gain in 2021**[446](index=446&type=chunk) [(9) Intangible Assets](index=97&type=section&id=(9)%20Intangible%20Assets) This note details changes in indefinite-lived and finite-lived intangible assets, including a **$31.5 million impairment charge** on the FHL right to manage public fund assets, and the increase in goodwill - Indefinite-lived intangible assets totaled **$343.2 million** at December 31, 2022, down from **$400.9 million in 2021**, primarily due to a **$31.5 million impairment charge** and **$27.2 million** from foreign exchange fluctuations[447](index=447&type=chunk)[302](index=302&type=chunk) - The **$31.5 million non-cash impairment charge** on the FHL right to manage public fund assets was driven by increased market interest rates and decreased near-term projected cash flows[448](index=448&type=chunk) - Finite-lived intangible assets, primarily customer relationships, had a carrying value of **$65.9 million** at December 31, 2022, with amortization expense of **$12.5 million in 2022**[449](index=449&type=chunk)[450](index=450&type=chunk) - Goodwill increased by **$1.5 million** to **$800.4 million**, mainly due to the CWH Acquisition, partially offset by foreign exchange rate fluctuations[451](index=451&type=chunk)[336](index=336&type=chunk) [(10) Property and Equipment](index=98&type=section&id=(10)%20Property%20and%20Equipment) This note provides a breakdown of Federated Hermes' property and equipment, net, and associated depreciation expense Property and Equipment, net (in thousands) | Item | 2022 | 2021 | | :-------------------------- | :---------- | :---------- | | Computer Software and Hardware | $89,367 | $94,230 | | Leasehold Improvements | $40,243 | $41,826 | | Transportation Equipment | $17,851 | $17,851 | | Office Furniture and Equipment | $7,922 | $6,682 | | Total Cost | $155,383 | $160,589 | | Accumulated Depreciation | $(119,640) | $(113,624) | | Property and Equipment, net | $35,743 | $46,965 | - Depreciation expense for property and equipment was **$15.1 million in 2022**[452](index=452&type=chunk) [(11) Debt](index=98&type=section&id=(11)%20Debt) This note details Federated Hermes' debt, including the issuance of **$350 million in unsecured senior notes** and its revolving credit facility, confirming compliance with all debt covenants - On March 17, 2022, Federated Hermes issued **$350 million in unsecured senior notes** at a fixed interest rate of **3.29%** per annum, due March 17, 2032, with an outstanding balance of **$347.6 million** at year-end[453](index=453&type=chunk) - The company has a **$350 million revolving credit facility**, expiring July 30, 2026, with no outstanding borrowings as of December 31, 2022[458](index=458&type=chunk)[461](index=461&type=chunk) - Federated Hermes was in compliance with all debt covenants, including an interest coverage ratio of **42:1** (required 4:1) and a leverage ratio of **0.79:1** (required no more than 3:1)[455](index=455&type=chunk)[462](index=462&type=chunk)[276](index=276&type=chunk) [(12) Employee Benefit Plans](index=99&type=section&id=(12)%20Employee%20Benefit%20Plans) Federated Hermes offers defined contribution plans to its employees, with a total expense of **$13.9 million** recognized in 2022 - Total expense for employee defined contribution plans was **$13.9 million in 2022**[463](index=463&type=chunk) [(13) Share-Based Compensation](index=99&type=section&id=(13)%20Share-Based%20Compensation) This note details Federated Hermes' share-based compensation plan, including restricted stock awards granted and the total compensation expense recognized - Share-based compensation expense was **$34.8 million in 2022**, with a maximum remaining unrecognized expense of approximately **$95.2 million** expected over six years[465](index=465&type=chunk) Non-Vested Restricted Stock Awards Activity (2022) | Item | Restricted Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :---------------- | :------------------------------------- | | Non-vested at January 1, 2022 | 3,940,510 | $27.24 | | Granted | 2,314,542 | $32.89 | | Vested | (1,604,254) | $28.56 | | Forfeited | (114,040) | $31.23 | | Non-vested at December 31, 2022 | 4,536,758 | $29.54 | - In 2022, **2,314,542 shares of restricted Class B common stock** were awarded, including **1,345,999** under the UK Sub-Plan and **494,043** as bonus restricted stock[468](index=468&type=chunk) - The acquisition of FHL noncontrolling interests in March 2022 involved granting **1,183,066 restricted Federated Hermes Class B common stock shares** to FHL employees[472](index=472&type=chunk) [(14) Common Stock](index=100&type=section&id=(14)%20Common%20Stock) This note describes Federated Hermes' Class A and Class B common stock, cash dividends paid, share repurchase activity, and the retirement of treasury shares - Class A common stock holds entire voting rights, while Class B common stock is non-voting, but both have equal preferences for dividends and liquidation rights[473](index=473&type=chunk) - Cash dividends of **$97.9 million** were paid to common stockholders in 2022[474](index=474&type=chunk) - In 2022, Federated Hermes repurchased **6.5 million Class B common shares** for **$207.4 million**, with **4.7 million shares** remaining available under the current repurchase program[475](index=475&type=chunk) - **10 million treasury shares** were retired in July 2022, resulting in a **$313.8 million reduction** to Treasury Stock and a **$42.7 million reduction** to Class B common stock, with no impact on total equity[476](index=476&type=chunk) [(15) Income Taxes](index=101&type=section&id=(15)%20Income%20Taxes) This note details Federated Hermes' income tax provision, effective tax rate reconciliation, and deferred tax assets and liabilities Income Tax Provision (in thousands) | Item | 2022 | 2021 | 2020 | | :------------ | :-------- | :-------- | :-------- | | Total Current | $90,376 | $84,949 | $91,866 | | Total Deferred | $(18,718) | $19,033 | $18,169 | | Total | $71,658 | $103,982 | $110,035 | Effective Tax Rate Reconciliation (%) | Item | 2022 | 2021 | 2020 | | :-------------------------------------- | :---- | :---- | :---- | | Expected Federal Statutory Income Tax Rate | 21.0% | 21.0% | 21.0% | | State and Local Income Taxes, net of Federal Benefit | 2.9% | 1.9% | 2.4% | | Foreign Income Taxes | (1.8)%| 3.6% | 0.8% | | Non-Deductible Executive Compensation | 1.2% | 1.2% | 0.8% | | Other | 0.1% | (0.1)%| (0.3)%| | Effective Tax Rate | 23.4% | 27.6% | 24.7% | - The effective tax rate decreased to **23.4% in 2022** from **27.6% in 2021**, primarily due to an increase in foreign deferred tax expense in 2021 related to the UK corporate income tax rate change from **19% to 25%** effective April 1, 2023[478](index=478&type=chunk) - At December 31, 2022, deferred tax assets, net of valuation allowance, totaled **$66.7 million**, primarily from state and foreign net operating loss carryforwards and lease liabilities[479](index=479&type=chunk)[480](index=480&type=chunk)[482](index=482&type=chunk) [(16) Earnings Per Share Attributable to Federated Hermes, Inc. Shareholders](index=104&type=section&id=(16)%20Earnings%20Per%20Share%20Attributable%20to%20Federated%20Hermes,%20Inc.%20Shareholders) This note presents the computation of basic and diluted earnings per share (EPS) using the two-class method for Federated Hermes, Inc. shareholders Earnings Per Share Computation (in thousands, except per share data) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :-------- | :-------- | :-------- | | Net Income Attributable to Federated Hermes, Inc. | $239,496 | $270,293 | $326,364 | | Total Net Income Attributable to Federated Hermes Common Stock - Basic | $227,668 | $259,435 | $313,849 | | Total Net Income Attributable to Federated Hermes Common Stock - Diluted | $227,668 | $257,855 | $311,410 | | Basic Weighted-Average Federated Hermes Common Stock | 85,762 | 93,754 | 96,503 | | Diluted Weighted-Average Federated Hermes Common Stock | 85,766 | 93,771 | 96,503 | | Earnings Per Common Share—Basic | $2.65 | $2.77 | $3.25 | | Earnings Per Common Share—Diluted | $2.65 | $2.75 | $3.23 | [(17) Leases](index=104&type=section&id=(17)%20Leases) This note details Federated Hermes' material operating leases, including costs, future minimum payments, weighted-average remaining lease term, and discount rate - Federated Hermes' material operating leases, primarily for its corporate headquarters, expire in 2030 with renewal options through 2040[486](index=486&type=chunk) - Operating lease costs totaled **$19.0 million in 2022**[487](index=487&type=chunk) Future Minimum Undiscounted Operating Lease Payments (in millions) | Year | Amount | | :------------------ | :----- | | 2023 | $21.4 | | 2024 | $19.5 | | 2025 | $14.8 | | 2026 | $13.2 | | 2027 | $12.9 | | 2028 and Thereafter | $35.3 | | Total | $117.1 | - The weighted-average remaining lease term is **6.9 years**, and the weighted-average discount rate (IBR) is **3.1%**[489](index=489&type=chunk) [(18) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders](index=105&type=section&id=(18)%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)%20Attributable%20to%20Federated%20Hermes,%20Inc.%20Shareholders) This note details the changes in Accumulated Other Comprehensive Income (Loss), net of tax, attributable to Federated Hermes shareholders, primarily due to foreign currency translation Accumulated Other Comprehensive Income (Loss), net of tax (in thousands) | Item | Amount | | :------------------------------------ | :---------- | | Balance at December 31, 2019 | $(249) | | Other Comprehensive Income (Loss) 2020 | $15,420 | | Balance at December 31, 2020 | $15,171 | | Other Comprehensive Income (Loss) 2021 | $1,191 | | Balance at December 31, 2021 | $16,362 | | Other Comprehensive Income (Loss) 2022 | $(62,038) | | Balance at December 31, 2022 | $(45,676) | - The significant change in 2022 was a foreign currency translation loss of **$62.0 million**[490](index=490&type=chunk) [(19) Redeemable Noncontrolling Interests in Subsidiaries](index=106&type=section&id=(19)%20Redeemable%20Noncontrolling%20Interests%20in%20Subsidiaries) This note details the changes in Redeemable Noncontrolling Interests in Subsidiaries, including net income, contributions, distributions, and the acquisition of additional equity in FHL Changes in Redeemable Noncontrolling Interests in Subsidiaries (in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :--------- | :--------- | :--------- | | Balance at January 1 | $63,202 | $236,987 | $212,086 | | Net Income (Loss) | $(4,932) | $2,015 | $9,658 | | Other Comprehensive Income (Loss), net of tax | $(2,329) | $(7,443) | $6,593 | | Subscriptions—Redeemable Noncontrolling Interest Holders | $55,171 | $998,965 | $20,985 | | Consolidation/(Deconsolidation) | $(435) | $(985,248) | $(3,424) | | Stock Award Activity | $707 | $9,410 | $8,786 | | Distributions to Noncontrolling Interests in Subsidiaries | $(25,979) | $(4,926) | $(16,218) | | Acquisition of Additional Equity of FHL | $(37,805) | $(167,302) | $0 |\ | Change in Estimated Redemption Value of Redeemable Noncontrolling Interests in FHL | $14,221 | $(19,256) | $(1,479) | | Balance at December 31 | $61,821 | $63,202 | $236,987 | - The FHL Redeemable Noncontrolling Interests carrying value was adjusted by **$14.2 million** in 2022 to reflect its current redemption value[492](index=492&type=chunk) [(20) Commitments and Contingencies](index=107&type=section&id=(20)%20Commitments%20and%20Contingencies) This note outlines Federated Hermes' contractual obligations, intercompany guarantees, and indemnifications, with management assessing no material loss as reasonably possible - Federated Hermes has contractual obligations for future payments related to business combinations and asset acquisitions[493](index=493&type=chunk) - The company provides intercompany guarantees and indemnifications, but management does not believe a material loss is reasonably possible as of December 31, 2022[494](index=494&type=chunk) - No material loss related to legal proceedings is deemed reasonably possible as of December 31, 2022[495](index=495&type=chunk) [(21) Segment and Geographic Information](index=107&type=section&id=(21)%20Segment%20and%20Geographic%20Information) This note confirms Federated Hermes operates in a single operating segment (investment management) and provides revenue and asset breakdowns by geographic operation - Federated Hermes operates in one operating segment: the investment management business[496](index=496&type=chunk) Revenue by Geographic Operation (in thousands) | Region | 2022 | 2021 | 2020 | | :------- | :----------

Financial Data and Key Metrics Changes - The company ended 2022 with record total assets under management of $669 billion, driven by a growth of $35.6 billion in money market assets in Q4, reaching a record high of $477 billion at year-end [27] - Total revenue for Q4 decreased by $7.2 million or about 2% from the prior quarter, primarily due to lower average long-term assets and lower performance fees, partially offset by higher average money market assets [32] - The effective tax rate was lower in Q4, primarily related to a one-time recognition of a capital loss for tax purposes [15] Business Line Data and Key Metrics Changes - In equities, assets increased by about $7 billion to $81.5 billion due to market gains, FX impact, and net positive sales in separate accounts, despite net fund redemptions [8] - Fixed income assets increased by about $1.3 billion in Q4 to $86.7 billion, with net redemptions from funds of $2.6 billion and separate accounts of $1.3 billion [4] - The company reported Q4 net sales of about $652 million in its flagship Core Plus strategy total return bond, benefiting from a long-term performance record [4] Market Data and Key Metrics Changes - The money market mutual fund market share, including sub-advised funds, was about 7.7% at the end of 2022, up from about 7.4% at the end of Q3 2022 [12] - For the first three weeks of Q1, combined equity and SMAs had net positive sales of $328 million, with 23 equity funds showing positive net sales [9] - Fixed income funds and SMAs had net positive sales of $466 million led by total return bond and SDG engagement high yield credit [10] Company Strategy and Development Direction - The company continues to market its private equity structures, with PEC 5 raising about $400 million and Horizon Private Equity Fund having commitments of over $1 billion [5] - The focus for equity strategies in 2023 is on those that have performed well in inflationary times, including dividend income, international, emerging markets, and value [28] - The company is investing in a dedicated sales force to enhance distribution capabilities in private markets [23] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future growth potential, particularly in private equity and direct lending, despite recent challenges in public markets [61] - The company anticipates that higher short-term rates will benefit money market funds over time, especially compared to deposit rates [12] - Management noted that the impairment charge was due to changes in projected cash flows and a higher discount rate, reflecting a cautious outlook on certain assets [14][59] Other Important Information - The impairment charge represented about 6% of the total acquisition price from the 2018 Hermes Fund Managers Limited acquisition [14] - The company expects compensation and related expenses could be $13 million higher than Q4, primarily due to seasonally higher expenses for stock compensation and payroll taxes [15] - Cash and investments at the end of 2022 were $522 million, with about $466 million available for use [34] Q&A Session Summary Question: What is the trajectory for non-comp expenses? - Management expects non-comp expenses to increase due to inflation and price increases across various categories [36] Question: Can you provide details on the Hermes impairment? - The impairment was due to cash flow downgrades and changes in market conditions, with a focus on future growth opportunities [40][41] Question: How is the company thinking about cash levels and capital allocation? - The company has seen cash grow significantly and is considering various options for capital allocation, including potential buybacks and investments in growth [44][66] Question: What drove the outflows in ultrashort fixed income? - Outflows were attributed to rising interest rates and a broad-based exit from various investor segments [47] Question: Is there an expectation of a surge into money fund flows from deposits? - Management believes that significant flows into money market funds will occur when interest rates plateau and begin to decline [74]

Financial Performance - Federated Hermes reported a net income attributable to the company of $69.5 million for the three months ended September 30, 2022, compared to $71.4 million for the same period in 2021, representing a decrease of 2.5%[95]. - The total net income attributable to Federated Hermes common stock on a diluted basis was $65.8 million for the three months ended September 30, 2022, compared to $67.9 million for the same period in 2021[95]. - Net income (loss) was $(1,266) thousand for the period ending March 31, 2022[98]. - For the quarter ending June 30, 2022, net income (loss) was $(1,905) thousand, reflecting a decrease from the previous quarter[98]. - Net income attributable to Federated Hermes decreased by $18.7 million for the nine-month period ended September 30, 2022, compared to the same period in 2021[267]. - Diluted earnings per share for the nine-month period ended September 30, 2022 decreased by $0.02, primarily due to decreased net income[267]. Shareholder Returns - The company declared a dividend of $0.27 per share to shareholders, payable on November 15, 2022[106]. - During the nine months ended September 30, 2022, Federated Hermes repurchased approximately 6.1 million shares of its Class B common stock for $199 million[90]. - The company awarded 509,043 shares of restricted Class B common stock during the nine months ended September 30, 2022, primarily as part of a bonus program for key employees[88]. Debt and Liquidity - As of September 30, 2022, the outstanding amount under the revolving credit facility was $50 million, down from $223.4 million as of December 31, 2021, indicating a significant reduction in debt[84]. - The company has $300 million available for borrowings under the revolving credit facility and an additional $200 million via an optional accordion feature as of September 30, 2022[84]. - The interest rate on borrowings from the revolving credit facility was 1.354% as of September 30, 2022, compared to 1.161% as of December 31, 2021[84]. - Liquid assets totaled $508.2 million as of September 30, 2022, an increase from $492.7 million at December 31, 2021[268]. - Net cash provided by operating activities was $191.5 million for the nine months ended September 30, 2022, compared to $101.0 million for the same period in 2021[270]. - Cash used by financing activities was $90.0 million during the nine-month period ended September 30, 2022, primarily due to $311.7 million of debt payments and $211.2 million of treasury stock purchases[273]. - Federated Hermes issued unsecured senior Notes totaling $350.0 million at a fixed interest rate of 3.29% per annum, with the entire principal amount due on March 17, 2032[274]. - As of September 30, 2022, Federated Hermes' interest coverage ratio was 57 to 1, significantly above the required minimum of 4 to 1[276]. Asset Management - As of September 30, 2022, Federated Hermes managed assets totaling $624.4 billion[109]. - Total managed assets decreased by 2% to $624,427 million from $634,120 million year-over-year[233]. - Long-term assets declined by 17% to $183,133 million compared to $220,407 million in the previous year[233]. - Equity fund assets fell by 30% to $40,633 million from $58,218 million year-over-year[237]. - Fixed-income fund assets decreased by 25% to $44,896 million compared to $60,262 million in the previous year[237]. - Money market assets increased by 7% to $441,294 million from $413,713 million year-over-year[233]. - Total fund assets decreased by 4% to $410,852 million compared to $428,608 million in the previous year[235]. - Separate account assets increased by 4% to $213,575 million from $205,512 million year-over-year[233]. - Fixed-Income Funds experienced a net outflow of $2,102 million in the three months ended September 30, 2022, compared to a net inflow of $1,686 million in the same period of 2021[241]. - Alternative/Private Markets Funds reported a net outflow of $298 million for the three months ended September 30, 2022, compared to a net inflow of $646 million in the same period of 2021[245]. Regulatory Environment - The SEC plans to issue final rules on 16 proposed rules by October 2022, impacting the regulatory environment for Federated Hermes[122]. - The SEC's proposed money market fund reforms aim to enhance liquidity requirements and improve resilience against rapid redemptions[123]. - Federated Hermes submitted comment letters opposing several SEC proposals regarding money market fund reforms, emphasizing the importance of these funds for over 50 million retail investors[129]. - The ongoing regulatory developments are expected to continue impacting Federated Hermes' business and financial condition[121]. - The SEC adopted a final rule requiring open-end management investment companies to transmit concise annual and semi-annual reports directly to shareholders, effective from October 26, 2022[151]. - The SEC's "pay versus performance" requirement mandates registrants to disclose how executive compensation relates to financial performance for fiscal years ending on or after December 16, 2022[157]. - The DOL's new fiduciary rule will clarify the evaluation of ESG factors in investment decisions, focusing on material risk-return factors[148]. - The SEC has begun enforcement actions based on ESG disclosures not aligning with actual investment processes, highlighting increased scrutiny on compliance in this area[165]. - The FCA confirmed new rules to enhance oversight of authorized representatives, requiring improved risk assessment and monitoring[201]. - The FCA's new "Consumer Duty" aims to set higher standards for consumer protection, with implementation deadlines extending to July 31, 2024[208]. Market Conditions - The Dow Jones Industrial Average returned -6.7% for the third quarter, while the S&P returned -5.3% and the Nasdaq Composite returned -4.1%[255]. - The impact of the Pandemic and geopolitical events, such as Russia's invasion of Ukraine, is being closely monitored for their effects on asset flows and financial conditions[226]. - The federal funds target rate was raised to a range of 3.00% - 3.25% as of September 2022, eliminating the net negative pre-tax impact of the Voluntary Yield-related Fee Waivers[117]. - The Pandemic has not materially affected Federated Hermes' Financial Condition, except for the impact of near-zero interest rates leading to fee waivers[116]. - Federated Hermes believes money market funds have demonstrated resiliency during the Pandemic, indicating their robustness as investment products[192].

Federated Hermes, Inc. (NYSE:FHI) Q3 2022 Earnings Conference Call October 28, 2022 9:00 AM ET Company Participants Ray Hanley - President Chris Donahue - President & Chief Executive Officer Tom Donahue - Vice President, Chief Financial Officer & Treasurer Debbie Cunningham - Executive Vice President & Chief Investment Officer of Money Markets Saker Nusseibeh - Chief Executive Officer & Executive Board Director Conference Call Participants Patrick Davitt - Autonomous Research Dan Fannon - Jefferies Ken Wort ...