erated 言 Federated Hermes, Inc. Analyst Update Data as of March 31, 2022 1 22-10050 Forward-looking information | --- | --- | |-----------------------------------------------------------------------------------------------------|-------| | | | | This presentation is provided as of the date on the cover. Certain statements in this presentation, | | Analyst Update, March 31, 2022 2 Analyst Update, March 31, 2022 Federated Hermes Investment considerations Federated Hermes offers world-class active management a ...

[FORM 10-K FILING INFORMATION](index=1&type=section&id=Form%2010-K) [Form 10-K Filing Details](index=1&type=section&id=Form%2010-K%20Filing%20Details) Federated Hermes, Inc.'s 2021 Form 10-K filing details, including registrant information and SEC issuer classifications - Federated Hermes, Inc. filed its Annual Report on Form 10-K for the fiscal year ended **December 31, 2021**[2](index=2&type=chunk) - The company is registered under the trading symbol **FHI** on the New York Stock Exchange[2](index=2&type=chunk) - Federated Hermes, Inc. is classified as a **well-known seasoned issuer** and a **large accelerated filer**[2](index=2&type=chunk) - The aggregate market value of Class B common stock held by non-affiliates as of June 30, 2021, was approximately **$3.1 billion**[2](index=2&type=chunk) [Documents Incorporated by Reference](index=1&type=section&id=Documents%20Incorporated%20by%20Reference) Part III of this Form 10-K incorporates information by reference from the registrant's 2022 Information Statement - Part III of the Form 10-K incorporates information from the registrant's **2022 Information Statement**[4](index=4&type=chunk) [Table of Contents](index=3&type=section&id=Table%20of%20Contents) [Table of Contents Overview](index=3&type=section&id=Table%20of%20Contents%20Overview) This section outlines the Form 10-K's structure, covering business, risk factors, financial condition, and corporate governance - The table of contents lists key sections including 'Item 1 Business', 'Item 1A Risk Factors', and 'Item 8 Financial Statements and Supplementary Data'[6](index=6&type=chunk) [FORWARD-LOOKING STATEMENTS](index=4&type=section&id=FORWARD-LOOKING%20STATEMENTS) [Forward-Looking Statements Disclaimer](index=4&type=section&id=Forward-Looking%20Statements%20Disclaimer) This section cautions that forward-looking statements in the Form 10-K involve risks and uncertainties, potentially causing material differences in actual results - Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially[7](index=7&type=chunk) - Key areas include management's assessments on asset flows, revenue, expenses, fee waivers, ESG integration, and regulatory developments[7](index=7&type=chunk) - Market conditions, including changes in asset flows and business mix, may significantly impact Federated Hermes' business, potentially leading to revenue decline and increased fee waivers[7](index=7&type=chunk) - No assurance can be given as to future results, with further details in Item 1A - Risk Factors[7](index=7&type=chunk) [Part I](index=5&type=section&id=Part%20I) [ITEM 1 – BUSINESS](index=5&type=section&id=ITEM%201%20%E2%80%93%20BUSINESS) [General Business Overview](index=5&type=section&id=General) Federated Hermes, Inc. is a leading U.S. investment manager, managing **$668.9 billion** in assets as of **December 31, 2021**, primarily through investment advisory fees - Federated Hermes, Inc. is a leading U.S. investment manager, with operations dating back to **1955**[11](index=11&type=chunk) Assets Under Management (AUM) as of December 31, 2021 | Metric | Amount (Billions) | | :----- | :---------------- | | Total AUM | $668.9 | - The company operates in one segment: investment management, serving **168 Federated Hermes Funds** and Separate Accounts[12](index=12&type=chunk)[13](index=13&type=chunk) - Principal revenue source is investment advisory fees, primarily based on **Assets Under Management (AUM)**[12](index=12&type=chunk) [Assets Under Management (AUM)](index=6&type=section&id=Assets%20Under%20Management) Total managed assets grew **8%** to **$668.9 billion** by **December 31, 2021**, with average managed assets up **3%**, impacting operating income due to asset mix Total Managed Assets by Asset Class (in millions) | dollars in millions | As of 2021 December 31 | 2020 | 2021 vs. 2020 | | :------------------ | :--------------------- | :--- | :------------ | | Equity | $96,716 | $91,788 | 5 % | | Fixed-Income | 97,550 | 84,277 | 16 | | Alternative / Private Markets | 22,920 | 19,084 | 20 | | Multi-Asset | 3,780 | 3,948 | (4) | | Total Long-Term Assets | 220,966 | 199,097 | 11 | | Money Market | 447,907 | 420,333 | 7 | | Total Managed Assets | $668,873 | $619,430 | 8 % | Average Managed Assets by Asset Class (in millions) | dollars in millions | Year Ended December 31, 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | | :------------------ | :--------------------------- | :--- | :--- | :------------ | :------------ | | Equity | $98,040 | $80,591 | $81,212 | 22 % | (1)% | | Fixed-Income | 91,564 | 74,403 | 65,375 | 23 | 14 | | Alternative / Private Markets | 20,754 | 18,206 | 17,896 | 14 | 2 | | Multi-Asset | 3,879 | 3,813 | 4,192 | 2 | (9) | | Total Long-Term Assets | 214,237 | 177,013 | 168,675 | 21 | 5 | | Money Market | 418,562 | 436,895 | 340,505 | (4) | 28 | | Total Average Managed Assets | $632,799 | $613,908 | $509,180 | 3 % | 21 % | - Advisory fees are generally higher for **equity and multi-asset products** compared to fixed-income and money market products, with Federated Hermes Funds typically earning more than Separate Accounts[23](index=23&type=chunk) [Revenue](index=7&type=section&id=Revenue) Total revenue decreased **10%** in 2021, primarily due to increased Voluntary Yield-related Fee Waivers and lower money market revenue Revenue from Investment Advisory, Administrative, and Other Service Fees (in thousands) | dollars in thousands | Year 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | | :------------------- | :-------- | :--- | :--- | :------------ | :------------ | | Investment Advisory Fees, net | $915,984 | $1,011,467 | $907,605 | (9)% | 11 % | | Administrative Service Fees, net | 306,639 | 318,152 | 245,887 | (4) | 29 | | Other Service Fees, net | 77,824 | 118,649 | 173,402 | (34) | (32) | | Total Revenue | $1,300,447 | $1,448,268 | $1,326,894 | (10)% | 9 % | - The decrease in total revenue in 2021 was primarily driven by a **$307.3 million** increase in Voluntary Yield-related Fee Waivers and a **$38.1 million** decrease in money market revenue[356](index=356&type=chunk) - Increases in equity and fixed-income revenue, by **$127.6 million** and **$46.6 million** respectively, partially offset the overall revenue decline[356](index=356&type=chunk) [Investment Products and Strategies](index=7&type=section&id=Investment%20Products%20and%20Strategies) Federated Hermes offers diverse investment products across multiple asset classes, managing **$447.9 billion** in money market assets and integrating ESG factors - Federated Hermes offers a wide range of products: money market, equity, fixed-income, alternative/private markets, and multi-asset investments[25](index=25&type=chunk) - As of **December 31, 2021**, Federated Hermes managed **$447.9 billion** in money market assets, making it one of the largest U.S. managers[26](index=26&type=chunk) - The company's investment process integrates fundamental research, credit analysis, **ESG strategies**, quantitative models, and disciplined portfolio construction[30](index=30&type=chunk) AUM by Investment Product Category (as of December 31, 2021) | Category | AUM (Billions) | | :------- | :------------- | | Money Market | $447.9 | | Equity | $96.7 | | Fixed-Income | $97.6 | | Alternative/Private Markets | $22.9 | | Multi-Asset | $3.8 | [Distribution Channels and Product Markets](index=8&type=section&id=Distribution%20Channels%20and%20Product%20Markets) Federated Hermes distributes products to over **11,000 institutions** via a sales force, with **62%** of managed assets in the U.S. financial intermediary market - Federated Hermes' distribution strategy targets over **11,000 institutions and intermediaries**, utilizing a sales force of over **230 representatives**[33](index=33&type=chunk) Managed Assets by Market (as of December 31, 2021) | Market | Percentage of Managed Assets | | :----- | :--------------------------- | | U.S. financial intermediary | 62% | | U.S. institutional | 26% | | International | 12% | - The U.S. financial intermediary market includes over **7,500 broker/dealers, banks, and RIAs**, serving retail investors[35](index=35&type=chunk) - International distribution focuses on Europe, the Middle East, Canada, Latin America, and Asia Pacific regions[37](index=37&type=chunk) [Competition](index=8&type=section&id=Competition) The investment management industry is highly competitive across product types, driven by performance and fees, with Federated Hermes launching its first ETFs in late 2021 - The investment management business is highly competitive across all product types, including mutual funds, ETFs, SMAs, and institutional accounts[39](index=39&type=chunk) - Competition is influenced by investment performance, objectives, yields, total returns, fees, advertising, investor confidence, and relationships with intermediaries[41](index=41&type=chunk) - Federated Hermes launched its first two fixed-income **ETFs** in mid-December **2021**[40](index=40&type=chunk) [Regulatory Matters](index=8&type=section&id=Regulatory%20Matters) Federated Hermes operates in a highly regulated environment, facing evolving domestic and international laws, money market fund reforms, and ESG disclosures - Federated Hermes and its business are subject to extensive regulation by federal securities laws (1933 Act, 1934 Act, 1940 Act, Advisers Act), state laws, and foreign regulations[42](index=42&type=chunk) - Regulatory developments can lead to shifts in product structures, asset flows and mix, customer relationships, and increased operating expenses[95](index=95&type=chunk) - The company dedicates significant internal and external resources to monitor, analyze, and address regulatory responses and developments[96](index=96&type=chunk)[97](index=97&type=chunk) [Current Regulatory Environment - Domestic](index=10&type=section&id=Current%20Regulatory%20Environment%20-%20Domestic) The U.S. regulatory environment in 2021-2022 saw increased SEC rulemaking and enforcement, focusing on money market fund reforms and ESG disclosures - The SEC advanced rulemaking initiatives in **2021**, including proposed rules on money market fund reforms, share repurchase disclosure, securities lending, and insider trading[44](index=44&type=chunk) - The SEC's proposed money market fund reforms include increasing minimum liquidity requirements (**25% daily, 50% weekly**), removing liquidity fees and redemption gates, requiring **swing pricing** for institutional prime and municipal funds, and enhancing reporting[53](index=53&type=chunk) - Federated Hermes opposes **swing pricing** and increased liquidity requirements for money market funds, believing they create uncertainty and negatively impact yields[56](index=56&type=chunk) - U.S. regulators, including the SEC and DOL, are increasing focus on **ESG-related disclosures**, climate change risks, and human capital management[59](index=59&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) - The DOL proposed a new **ESG/Proxy Voting Rule**, which Federated Hermes generally supported but suggested modifications[67](index=67&type=chunk)[69](index=69&type=chunk) - Other proposed rules include cybersecurity risk management, enhanced regulation of private fund advisors, shortened securities settlement cycles (**T+1**), and amendments to share repurchase disclosures[73](index=73&type=chunk)[74](index=74&type=chunk)[75](index=75&type=chunk)[81](index=81&type=chunk) [Current Regulatory Environment - International](index=20&type=section&id=Current%20Regulatory%20Environment%20-%20International) International regulations are shaped by Brexit and global financial stability efforts, focusing on UK post-Brexit framework, EU sustainable finance, and money market fund reforms - The UK's post-Brexit regulatory framework is evolving, with HM Treasury and the FCA proposing reforms to adapt financial services regulation and introduce an **Overseas Fund Regime (OFR)**[108](index=108&type=chunk)[111](index=111&type=chunk) - EU regulators are advancing sustainable finance initiatives, including the **Sustainable Finance Disclosure Regulation (SFDR)** and **Taxonomy Regulation**, requiring enhanced ESG disclosures[116](index=116&type=chunk)[117](index=117&type=chunk) - Global bodies like IOSCO and FSB are proposing money market fund reforms, including **swing pricing**, capital buffers, and revised liquidity requirements, in response to March 2020 market turmoil[131](index=131&type=chunk)[139](index=139&type=chunk) - Federated Hermes opposes **swing pricing** and increased liquidity requirements for money market funds in international markets, advocating for jurisdiction-specific approaches and retaining stable-NAV funds[141](index=141&type=chunk)[144](index=144&type=chunk) - The phase-out of **LIBOR** and transition to alternative reference rates (e.g., **SOFR, SONIA**) is a significant international regulatory focus, requiring renegotiation of financial agreements[168](index=168&type=chunk)[169](index=169&type=chunk) - The potential for a **Financial Transactions Tax (FTT)** in the EU or UK remains a concern, which management believes would be detrimental to Federated Hermes' business[162](index=162&type=chunk)[173](index=173&type=chunk) [Human Capital Resource Management](index=32&type=section&id=Human%20Capital%20Resource%20Management) Federated Hermes employs **1,968** globally, focusing on attracting and retaining talent through competitive compensation, benefits, development, and diversity initiatives - As of **December 31, 2021**, Federated Hermes had **1,968 employees** globally, with major concentrations in Pittsburgh (**1,185**) and London (**527**)[176](index=176&type=chunk) - The company's ability to attract, retain, and motivate skilled professionals is critical for its competitive position and future success[178](index=178&type=chunk) - **Diversity and inclusion** are key strategic pillars, with initiatives focused on driving diversity, creating inclusion, expanding outreach, and ensuring program sustainability[195](index=195&type=chunk) - Approximately **40%** of Federated Hermes' employees are women, and in the U.S., **7%** are minorities[193](index=193&type=chunk) [Competitive Compensation](index=33&type=section&id=Competitive%20Compensation) Compensation programs attract and incentivize talent through competitive cash, equity, and long-term incentives, with pay mix varying by employee category - Compensation programs aim to reward individual contribution and align employee interests with business strategy, values, and objectives[179](index=179&type=chunk) - U.S. compensation includes salary, bonus, and long-term incentives, while UK compensation is based on fixed and variable components[180](index=180&type=chunk)[181](index=181&type=chunk) - Sales employees have a variable compensation heavy pay mix, Investment Management employees' bonuses consider **1-5 year** investment product performance, and Administrative employees are more fixed-pay weighted[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) - Total compensation expense for **2021** was **$532.5 million**, including salary, bonus, and stock-based compensation[190](index=190&type=chunk) [Benefits](index=34&type=section&id=Benefits) Federated Hermes offers comprehensive benefits supporting employee health, work-life balance, and career development, including flexible work and parental leave - Benefit offerings include medical/dental, employee assistance, disability, paid time off, retirement programs, flexible work, education assistance, and paid parental leave[191](index=191&type=chunk) - Resources were introduced to support employees' physical and emotional health during the Pandemic[191](index=191&type=chunk) [Employee Development](index=34&type=section&id=Employee%20Development) The company supports professional development through training and mentoring, covering technical, leadership, and management skills for succession planning - Employee development is supported through training programs and mentoring initiatives, covering technical, professional, leadership, and management skills[192](index=192&type=chunk) - Training curriculums include courses on securities markets, compliance, sales skills, customer service, well-being, remote working, and diversity[192](index=192&type=chunk) [Diversity and Inclusion](index=34&type=section&id=Diversity%20and%20Inclusion) Federated Hermes is committed to enhancing workforce diversity and inclusion through Employee Resource Business Groups and internship programs - The diversity and inclusion strategy is built on four pillars: driving diversity, creating inclusion, expanding outreach, and ensuring program sustainability[195](index=195&type=chunk) - Initiatives include a **Women in Investing Employee Resource Business Group**, an internship program for underrepresented students, and a University Ambassador Program[196](index=196&type=chunk) - The Board and executive management sponsor diversity and inclusion initiatives, with the Compensation Committee receiving regular updates[197](index=197&type=chunk) [Information about our Executive Officers](index=36&type=section&id=Information%20about%20our%20Executive%20Officers) This section lists Federated Hermes, Inc.'s executive officers, their positions, ages, and brief biographies Executive Officers of Federated Hermes, Inc. | Name | Position | Age | | :-------------------- | :------------------------------------------------------------------------------------------------------------------- | :-- | | J. Christopher Donahue | President, Chief Executive Officer, Chairman and Director of Federated Hermes, Inc. | 72 | | Gordon J. Ceresino | Vice Chairman of Federated Hermes, Inc., Chairman, Director and President of Federated International Securities Corp. and Vice Chairman of Federated MDTA, LLC | 64 | | Thomas R. Donahue | Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc. and President of FII Holdings, Inc. | 63 | | Dolores D. Dudiak | Vice President, Director of Human Resources of Federated Hermes, Inc. | 63 | | John B. Fisher | Vice President and Director of Federated Hermes, Inc. and President and Chief Executive Officer of Federated Advisory Companies* | 65 | | Peter J. Germain | Executive Vice President, Chief Legal Officer and Secretary of Federated Hermes, Inc. | 62 | | Richard A. Novak | Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes, Inc. | 58 | | Saker A. Nusseibeh | Chief Executive Officer, Hermes Fund Managers Limited | 60 | | Paul A. Uhlman | Vice President of Federated Hermes, Inc. and President of Federated Securities Corp. | 55 | | Stephen P. Van Meter | Vice President and Chief Compliance Officer of Federated Hermes, Inc. | 46 | - J. Christopher Donahue serves as President, CEO, Chairman, and Director, with Thomas R. Donahue as Vice President, Treasurer, CFO, and Director[202](index=202&type=chunk)[204](index=204&type=chunk) - Saker A. Nusseibeh is the CEO of Hermes Fund Managers Limited, a majority-owned subsidiary[210](index=210&type=chunk) [Available Information](index=37&type=section&id=Available%20Information) Federated Hermes provides its annual, quarterly, and current reports, along with other SEC filings, free on its website - Federated Hermes provides its annual, quarterly, and current reports (10-K, 10-Q, 8-K) and other SEC filings on its website, **www.FederatedHermes.com**, free of charge[213](index=213&type=chunk) [Other Information](index=37&type=section&id=Other%20Information) This section clarifies that all references to Notes to the Consolidated Financial Statements refer to Item 8, and cross-references are incorporated - References to Notes to the Consolidated Financial Statements in this 10-K refer to those in **Item 8**[214](index=214&type=chunk) - All cross-references between Items in this 10-K are considered incorporated into the Item containing the cross-reference[215](index=215&type=chunk) [ITEM 1A – RISK FACTORS](index=38&type=section&id=ITEM%201A%20%E2%80%93%20RISK%20FACTORS) [Specific Risk Factors](index=38&type=section&id=Specific%20Risk%20Factors) This section details risks specific to Federated Hermes' investment management business, including revenue concentration, money market NAV stability, and corporate structure - A significant portion of Federated Hermes' total AUM or revenue can be concentrated in specific products, strategies, asset classes, or customers, posing a risk if these decline[218](index=218&type=chunk) - The company may provide financial support to its sponsored investment products, which could impact its capital and financial condition[219](index=219&type=chunk) - Money market funds, which contribute approximately **19%** of total revenue, face risks in maintaining a stable **NAV**, especially institutional prime or municipal funds with fluctuating NAVs[220](index=220&type=chunk)[221](index=221&type=chunk) - The investment management business is highly competitive, with factors like investment performance, fees, and service quality influencing sales, and increased competition potentially leading to fee reductions[223](index=223&type=chunk) - Changes in distribution channels, such as intermediary relationships or fee arrangements, can adversely affect profitability[226](index=226&type=chunk) - Federated Hermes' dual-class common stock structure (Class A with voting power, Class B non-voting) allows the Donahue family to control the company, potentially leading to exclusion from certain financial indexes[243](index=243&type=chunk)[245](index=245&type=chunk) [Risks Related to Federated Hermes' Investment Management Business](index=38&type=section&id=Risks%20Related%20to%20Federated%20Hermes'%20Investment%20Management%20Business) Risks include revenue concentration, financial support for products, money market NAV stability, intense competition, and impacts from poor investment performance - A significant portion of Federated Hermes' total AUM or revenue can be attributable to one or more products, strategies, asset classes, or customers, posing a risk if these decline[218](index=218&type=chunk) - Federated Hermes may provide financial support to its sponsored investment products, utilizing capital and potentially incurring losses[219](index=219&type=chunk) - Money market funds, representing approximately **19%** of **2021** revenue, face risks in maintaining a stable **NAV**, with potential for significant redemptions and reputational harm if NAV declines[220](index=220&type=chunk) - The investment management business is highly competitive, with competition based on performance, fees, and service quality, potentially requiring fee reductions[223](index=223&type=chunk) - A substantial majority of revenues are from investment advisory agreements terminable on **60 days' notice** or requiring annual renewal, posing a risk if not renewed or terminated[231](index=231&type=chunk) - Impairment risk exists for intangible assets (goodwill, rights to manage fund assets) totaling **$1.3 billion**, which could be affected by reduced revenue streams or lower managed assets[230](index=230&type=chunk) [Risks Related to Interest Rates and Investment Performance](index=41&type=section&id=Risks%20Related%20to%20Interest%20Rates%20and%20Investment%20Performance) Federated Hermes faces significant risks from interest rate fluctuations and investment performance, impacting net income through fee waivers and potential AUM declines - Low short-term interest rates (near **0%** in **March 2020**) led to Voluntary Yield-related Fee Waivers to maintain positive or zero net yields in money market funds[235](index=235&type=chunk) Voluntary Yield-related Fee Waivers and Net Pre-Tax Impact | Year | Voluntary Yield-related Fee Waivers | Related Reductions in Distribution Expenses | Net Negative Pre-Tax Impact | | :--- | :---------------------------------- | :------------------------------------------ | :-------------------------- | | 2021 | $420.3 million | $277.1 million | $143.2 million | - Rising interest rates could adversely affect revenue by causing investors to shift from money market products to direct investments and reducing the fair value of securities[241](index=241&type=chunk) - Poor investment performance, or failure to meet objectives, can lead to decreased AUM, increased redemptions, and failure to earn performance fees, materially impacting financial condition[242](index=242&type=chunk) - Performance can be affected by climate, social, environmental, governance, and geopolitical changes, as well as market conditions like volatility and illiquidity[242](index=242&type=chunk) [Risk Related to Federated Hermes' Corporate Structure](index=42&type=section&id=Risk%20Related%20to%20Federated%20Hermes'%20Corporate%20Structure) Federated Hermes' 'controlled company' status, due to Donahue family's Class A stock ownership, exempts it from certain NYSE governance rules and may affect its stock price - Federated Hermes is a '**controlled company**' under NYSE rules, with all Class A common stock (voting power) held by the Donahue family's trust[243](index=243&type=chunk) - This status exempts the company from NYSE requirements for a majority of independent directors and an independent nominating/corporate governance committee[245](index=245&type=chunk) - The dual-class structure could lead to exclusion from certain financial indexes, potentially decreasing investments in Class B common stock and adversely affecting its stock price[245](index=245&type=chunk) [General Risk Factors](index=43&type=section&id=General%20Risk%20Factors) This section outlines broader risks including economic downturns, regulatory changes, operational failures, cybersecurity threats, and human capital management challenges - Economic or market downturns (domestic or international) can cause volatility, illiquidity, and adversely affect investment supply, product profitability, and investor confidence[246](index=246&type=chunk) - Federated Hermes is subject to extensive and evolving regulation, with non-compliance or changes in laws potentially leading to lost business, fines, and increased operating expenses[251](index=251&type=chunk)[256](index=256&type=chunk) - Operational risks include improper transaction execution, inadequate technology, poor performance by service providers, and business disruptions, which can materially affect financial condition[267](index=267&type=chunk)[269](index=269&type=chunk) - Cybersecurity risks are significant, with daily incidents potentially leading to data loss, operational disruption, increased costs, litigation, and reputational damage[271](index=271&type=chunk)[275](index=275&type=chunk) - The ability to recruit and retain key personnel is critical, with increased competition and employee turnover posing a risk to growth and success[280](index=280&type=chunk) - Unpredictable events like the Pandemic, natural disasters, or geopolitical tensions can cause business disruptions, market volatility, and negatively impact AUM, revenue, and earnings[285](index=285&type=chunk)[289](index=289&type=chunk) [Economic and Market Risks](index=43&type=section&id=Economic%20and%20Market%20Risks) Economic and market downturns, driven by interest rates and geopolitical tensions, pose risks to investment supply, profitability, and investor confidence - Economic or market downturns, disruptions, or other conditions (domestic or international) can cause volatility, illiquidity, and adversely affect investment supply, product profitability, demand, and investor confidence[246](index=246&type=chunk) - Factors contributing to these conditions include changes in interest rates, commodity markets, currency values, inflation/deflation, and geopolitical tensions[246](index=246&type=chunk) - Federated Hermes' liquid assets have exposure to international sovereign debt and currency risks, and its financial condition can be adversely affected by the creditworthiness of other financial industry participants[247](index=247&type=chunk) - Extreme circumstances like crises can lead to significant net redemptions, severe liquidity issues, and declines in AUM value and returns[248](index=248&type=chunk) - Reliance on third-party service providers for custody, depository, and accounting services introduces risk of service interruption or failure[250](index=250&type=chunk) - The company's ability to raise additional capital or obtain necessary liquidity for its funds is subject to market conditions and creditworthiness, with potential material adverse effects if unsuccessful[251](index=251&type=chunk) [Regulatory and Legal Risks](index=44&type=section&id=Regulatory%20and%20Legal%20Risks) Federated Hermes faces extensive regulatory and legal risks from evolving laws, potentially increasing operating expenses and impacting product structures - Federated Hermes is subject to extensive regulation by federal securities laws, state laws, and foreign regulatory authorities, with frequent amendments and new rules[251](index=251&type=chunk)[252](index=252&type=chunk) - Potential designation as a '**systemically important financial institution**' by FSOC or FSB could subject Federated Hermes or its products to additional banking regulation and oversight[255](index=255&type=chunk) - Increased compliance risk and operating expenses arise from business growth, expansion into new markets, and increased use of **ESG data** and investment techniques[256](index=256&type=chunk) - Failure to comply with legal and regulatory requirements can result in lost business, fines, penalties, reputational damage, and changes in regulator relationships[256](index=256&type=chunk) - Regulatory developments can lead to product line-up changes, reduced intermediary offerings, changes in fees, asset flows, and operating profits[256](index=256&type=chunk) - Changes in tax laws, such as the **UK corporate tax rate increase** or proposed financial transactions taxes, can adversely impact financial condition and net income[260](index=260&type=chunk) - Litigation, investigations, and other claims, both regulatory and business-related, are inherent risks, with unpredictable outcomes that could materially affect financial condition and reputation[261](index=261&type=chunk) - Risks related to auditor independence exist, where activities of the Accounting Firm could render it ineligible, potentially requiring re-audits and impacting SEC filings and registration statements[264](index=264&type=chunk)[266](index=266&type=chunk) [Operations-Related Risks](index=47&type=section&id=Operations-Related%20Risks) Operational risks include improper transaction execution, inadequate technology, and human error, exacerbated by cybersecurity threats and remote work environments - Operational risks include improper execution of transactions, inadequate technology, poor performance by internal or third-party resources, and failures in governance or internal controls[267](index=267&type=chunk) - Systems and technology risks arise from software malfunctions, business changes, data imprecision, and obsolescence, potentially impairing performance or causing non-availability[270](index=270&type=chunk) - **Cybersecurity risks** are significant, with daily incidents (phishing, malware, unauthorized access) threatening confidential information, operational capacity, and compliance[271](index=271&type=chunk)[272](index=272&type=chunk) - Remote and hybrid work environments, necessitated by the Pandemic, have increased the risk of cyber incidents due to expanded attack surfaces[271](index=271&type=chunk) - Cyber incidents can lead to lost revenues, financial losses, increased costs (compliance, remediation), litigation, reputational damage, and impact stock price[275](index=275&type=chunk) - Despite mitigation efforts like firewalls, system monitoring, and employee training, there's no guarantee of full success against evolving cyber threats[276](index=276&type=chunk) [Other General Risks](index=50&type=section&id=Other%20General%20Risks) Other general risks include human capital management, acquisition uncertainties, reputational harm, unpredictable events, and the LIBOR transition - Recruiting and retaining key personnel is highly competitive, with the Pandemic and remote work increasing employee stress, turnover, and competition for talent[280](index=280&type=chunk) - The company's acquisition strategy faces risks in finding suitable candidates, securing capital, and successfully integrating acquired businesses[281](index=281&type=chunk) - Reputational harm can arise from regulatory proceedings, litigation, economic downturns, errors in public reports, misconduct allegations, cyber incidents, or failure to meet ESG commitments[282](index=282&type=chunk)[284](index=284&type=chunk) - Unpredictable events (natural disasters, pandemics, war, climate change) can cause business disruptions, supply chain issues, market volatility, and increased costs[285](index=285&type=chunk) - The **COVID-19 Pandemic** has caused travel bans, supply chain disruptions, economic uncertainty, market volatility, and increased fee waivers due to low interest rates[289](index=289&type=chunk)[290](index=290&type=chunk) - The phase-out of **LIBOR** and transition to alternative rates (**SOFR, SONIA**) can cause renegotiation of financial transactions, alter accounting, and lead to increased volatility and illiquidity[287](index=287&type=chunk) [ITEM 1B – UNRESOLVED STAFF COMMENTS](index=53&type=section&id=ITEM%201B%20%E2%80%93%20UNRESOLVED%20STAFF%20COMMENTS) [Unresolved Staff Comments](index=53&type=section&id=Unresolved%20Staff%20Comments) This section confirms no unresolved comments from the SEC staff regarding the company's previous filings - There are no unresolved staff comments[292](index=292&type=chunk) [ITEM 2 – PROPERTIES](index=53&type=section&id=ITEM%202%20%E2%80%93%20PROPERTIES) [Properties Overview](index=53&type=section&id=Properties%20Overview) Federated Hermes' primary property is approximately **259,000 square feet** of leased corporate headquarters in Pittsburgh, Pennsylvania - Federated Hermes has material operating leases for its corporate headquarters in Pittsburgh, Pennsylvania[293](index=293&type=chunk) - The leased space is approximately **259,000 square feet** and is used for its investment management business[293](index=293&type=chunk) [ITEM 3 – LEGAL PROCEEDINGS](index=53&type=section&id=ITEM%203%20%E2%80%93%20LEGAL%20PROCEEDINGS) [Legal Proceedings Overview](index=53&type=section&id=Legal%20Proceedings%20Overview) 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[294](index=294&type=chunk) [ITEM 4 – MINE SAFETY DISCLOSURES](index=53&type=section&id=ITEM%204%20%E2%80%93%20MINE%20SAFETY%20DISCLOSURES) [Mine Safety Disclosures](index=53&type=section&id=Mine%20Safety%20Disclosures) This item is not applicable to Federated Hermes, Inc - This item is not applicable[295](index=295&type=chunk) [Part II](index=53&type=section&id=Part%20II) [ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=53&type=section&id=ITEM%205%20%E2%80%93%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY,%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) [Common Stock Market and Shareholder Matters](index=53&type=section&id=Common%20Stock%20Market%20and%20Shareholder%20Matters) Federated Hermes' Class B common stock trades on the NYSE under **FHI**, with **22,021** Class B shareholders and **4,054,119** shares repurchased in Q4 2021 - Federated Hermes' Class B common stock is traded on the NYSE under the symbol **FHI**[297](index=297&type=chunk) - As of **February 11, 2022**, there was **1** beneficial shareholder of Class A common stock and **22,021** of Class B common stock[298](index=298&type=chunk) Stock Repurchases in Q4 2021 | Month | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Shares that May Yet Be Purchased Under the Plans or Programs | | :-------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :----------------------------------------------------------- | | October | 130,700 | $31.39 | 125,000 | 2,486,755 | | November | 1,246,784 | $34.84 | 1,245,720 | 1,241,035 | | December | 2,676,635 | $36.48 | 2,676,035 | 6,065,000 | | Total | 4,054,119 | $35.81 | 4,046,755 | 6,065,000 | - In April and December **2021**, the board authorized share repurchase programs for up to **4.0 million** and **7.5 million** shares, respectively[299](index=299&type=chunk) [Stock Performance Graph](index=54&type=section&id=Stock%20Performance%20Graph) This section presents a five-year stock performance graph comparing Class B common stock against the S&P MidCap 400 and S&P 1500 Asset Management indexes - The performance graph compares Federated Hermes' Class B common stock total shareholder return to the **S&P MidCap 400 Index** and the **S&P 1500 Asset Management & Custody Banks Index**[302](index=302&type=chunk) - The comparison is for the **five-year period** ended **December 31, 2021**, assuming a **$100** investment on **December 31, 2016**[302](index=302&type=chunk) Five-Year Total Shareholder Return (Indexed to $100) | Index | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | :--------- | | Federated Hermes | $132.26 | $101.39 | $128.83 | $123.95 | $166.94 | | S&P MidCap 400 Index | $116.24 | $103.36 | $130.44 | $148.26 | $184.97 | | S&P 1500 Asset Management & Custody Banks Index | $129.40 | $96.88 | $122.30 | $142.12 | $191.61 | [ITEM 6 – [RESERVED]](index=54&type=section&id=ITEM%206%20%E2%80%93%20%5BRESERVED%5D) [Reserved](index=54&type=section&id=Reserved) This item is reserved and contains no information [ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=55&type=section&id=ITEM%207%20%E2%80%93%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) [General Discussion](index=55&type=section&id=General) This section overviews Federated Hermes' financial condition, highlighting its **$668.9 billion** managed assets, revenue from advisory fees, and key operating expenses - Federated Hermes is a major U.S. investment manager with **$668.9 billion** in managed assets as of **December 31, 2021**[306](index=306&type=chunk) - Revenue is primarily from investment advisory, administrative, and other fund-related services, calculated as a percentage of average net assets[307](index=307&type=chunk) - Advisory fees are generally higher for **equity and multi-asset products** compared to fixed-income and money market products[307](index=307&type=chunk) - Significant operating expenses include Compensation and Related expense and Distribution expense[308](index=308&type=chunk) - Management's key performance indicators include **AUM**, gross and net product sales, total revenue, and net income[309](index=309&type=chunk) [Business Developments](index=56&type=section&id=Business%20Developments) Key 2021 business developments included the HFML acquisition and the ongoing COVID-19 Pandemic impact, leading to economic uncertainty and fee waivers - Federated Hermes completed the acquisition of the remaining **29.5%** noncontrolling interests in Hermes Fund Managers Limited (**HFML**) on **August 31, 2021**[311](index=311&type=chunk) - The **COVID-19 Pandemic** continued to cause economic uncertainty and market volatility in **2022**, despite global vaccination efforts and economic reopening[312](index=312&type=chunk)[314](index=314&type=chunk) - Federated Hermes implemented remote and hybrid working arrangements, with a structured return-to-office plan for U.S. employees beginning in **April 2021**[316](index=316&type=chunk) - Low short-term interest rates led to Voluntary Yield-related Fee Waivers totaling **$420.3 million** in **2021**, with a net negative pre-tax impact of **$143.2 million**[331](index=331&type=chunk) - Management expects the net negative pre-tax impact from fee waivers to be approximately **$22 million** in **Q1 2022**, reducing by approximately **90%** in **Q2 2022** assuming a 25 basis point interest rate increase in March 2022[332](index=332&type=chunk) [Asset Highlights](index=59&type=section&id=AssetHighlights) This section details Federated Hermes' managed assets, with total AUM up **8%** and average AUM up **3%** in 2021, impacting revenue due to asset mix Managed Assets at Period End (in millions) as of December 31 | in millions as of December 31, | 2021 | 2020 | 2021 vs. 2020 | | :----------------------------- | :--- | :--- | :------------ | | By Asset Class | | | | | Equity | $96,716 | $91,788 | 5 % | | Fixed-Income | 97,550 | 84,277 | 16 | | Alternative / Private Markets | 22,920 | 19,084 | 20 | | Multi-Asset | 3,780 | 3,948 | (4) | | Total Long-Term Assets | 220,966 | 199,097 | 11 | | Money Market | 447,907 | 420,333 | 7 | | Total Managed Assets | $668,873 | $619,430 | 8 % | | By Product Type | | | | | Funds: | | | | | Equity | $57,036 | $54,312 | 5 % | | Fixed-Income | 59,862 | 53,557 | 12 | | Alternative / Private Markets | 14,788 | 12,100 | 22 | | Multi-Asset | 3,608 | 3,744 | (4) | | Total Long-Term Assets | 135,294 | 123,713 | 9 | | Money Market | 312,834 | 301,855 | 4 | | Total Fund Assets | 448,128 | 425,568 | 5 | | Separate Accounts: | | | | | Equity | 39,680 | 37,476 | 6 | | Fixed-Income | 37,688 | 30,720 | 23 | | Alternative / Private Markets | 8,132 | 6,984 | 16 | | Multi-Asset | 172 | 204 | (16) | | Total Long-Term Assets | 85,672 | 75,384 | 14 | | Money Market | 135,073 | 118,478 | 14 | | Total Separate Account Assets | 220,745 | 193,862 | 14 | | Total Managed Assets | $668,873 | $619,430 | 8 % | Average Managed Assets (in millions) for the years ended December 31 | in millions for the years ended December 31, | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | | :------------------------------------------- | :--- | :--- | :--- | :------------ | :------------ | | By Asset Class | | | | | | | Equity | $98,040 | $80,591 | $81,212 | 22 % | (1)% | | Fixed-Income | 91,564 | 74,403 | 65,375 | 23 | 14 | | Alternative / Private Markets | 20,754 | 18,206 | 17,896 | 14 | 2 | | Multi-Asset | 3,879 | 3,813 | 4,192 | 2 | (9) | | Total Long-Term Assets | 214,237 | 177,013 | 168,675 | 21 | 5 | | Money Market | 418,562 | 436,895 | 340,505 | (4) | 28 | | Total Average Managed Assets | $632,799 | $613,908 | $509,180 | 3 % | 21 % | | By Product Type | | | | | | | Funds: | | | | | | | Equity | $58,426 | $45,585 | $42,712 | 28 % | 7 % | | Fixed-Income | 58,095 | 46,899 | 41,938 | 24 | 12 | | Alternative / Private Markets | 13,266 | 11,424 | 11,317 | 16 | 1 | | Multi-Asset | 3,696 | 3,622 | 4,003 | 2 | (10) | | Total Long-Term Assets | 133,483 | 107,530 | 99,970 | 24 | 8 | | Money Market | 293,644 | 324,490 | 238,876 | (10) | 36 | | Total Average Fund Assets | 427,127 | 432,020 | 338,846 | (1) | 27 | | Separate Accounts: | | | | | | | Equity | 39,614 | 35,006 | 38,500 | 13 | (9) | | Fixed-Income | 33,469 | 27,504 | 23,437 | 22 | 17 | | Alternative / Private Markets | 7,488 | 6,782 | 6,579 | 10 | 3 | | Multi-Asset | 183 | 191 | 189 | (4) | 1 | | Total Long-Term Assets | 80,754 | 69,483 | 68,705 | 16 | 1 | | Money Market | 124,918 | 112,405 | 101,629 | 11 | 11 | | Total Average Separate Account Assets | 205,672 | 181,888 | 170,334 | 13 | 7 | | Total Average Managed Assets | $632,799 | $613,908 | $509,180 | 3 % | 21 % | - Average managed assets increased **3%** in **2021** compared to **2020**, while period-end managed assets increased **8%** primarily due to money market and fixed-income assets[350](index=350&type=chunk) - The U.S. economy and equity markets saw significant growth in **2021**, with the **S&P 500** rising **26.9%**, **Dow Jones 18.7%**, and **Nasdaq Composite 21.4%** respectively[351](index=351&type=chunk) [Changes in Equity Fund and Separate Account Assets](index=61&type=section&id=Changes%20in%20Equity%20Fund%20and%20Separate%20Account%20Assets) Equity Fund assets increased **5%** to **$57,036 million** in 2021 due to market gains, while Separate Account assets grew **6%** to **$39,680 million** Changes in Equity Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $54,312 | $48,112 | | Sales | 14,265 | 14,457 | | Redemptions | (15,915) | (15,675) | | Net Sales (Redemptions) | (1,650) | (1,218) | | Market Gains and (Losses) | 4,850 | 6,973 | | Ending Assets | $57,036 | $54,312 | Changes in Equity Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $37,476 | $40,899 | | Sales | 7,564 | 6,006 | | Redemptions | (10,846) | (11,046) | | Net Sales (Redemptions) | (3,282) | (5,040) | | Market Gains and (Losses) | 5,657 | 1,008 | | Ending Assets | $39,680 | $37,476 | - Total Equity assets increased to **$96,716 million** in **2021** from **$91,788 million** in **2020**, primarily due to **$10,507 million** in market gains, despite $4,932 million in net redemptions[339](index=339&type=chunk) [Changes in Fixed-Income Fund and Separate Account Assets](index=62&type=section&id=Changes%20in%20Fixed-Income%20Fund%20and%20Separate%20Account%20Assets) Fixed-Income Fund assets increased **12%** to **$59,862 million** in 2021 due to **$5,960 million** in net sales, with Separate Accounts up **23%** to **$37,688 million** Changes in Fixed-Income Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $53,557 | $44,223 | | Sales | 30,862 | 29,453 | | Redemptions | (24,902) | (22,564) | | Net Sales (Redemptions) | 5,960 | 6,889 | | Market Gains and (Losses) | 451 | 2,332 | | Ending Assets | $59,862 | $53,557 | Changes in Fixed-Income Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $30,720 | $24,800 | | Sales | 11,764 | 7,830 | | Redemptions | (4,842) | (3,574) | | Net Sales (Redemptions) | 6,922 | 4,256 | | Market Gains and (Losses) | 137 | 1,603 | | Ending Assets | $37,688 | $30,720 | - Total Fixed-Income assets increased to **$97,550 million** in **2021** from **$84,277 million** in **2020**, primarily due to **$12,882 million** in net sales[341](index=341&type=chunk) [Changes in Alternative / Private Markets Fund and Separate Account Assets](index=63&type=section&id=Changes%20in%20Alternative%20/%20Private%20Markets%20Fund%20and%20Separate%20Account%20Assets) Alternative / Private Markets Fund assets increased **22%** to **$14,788 million** in 2021, driven by net sales and market gains, with Separate Accounts up **16%** to **$8,132 million** Changes in Alternative / Private Markets Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $12,100 | $11,389 | | Sales | 3,699 | 2,277 | | Redemptions | (2,657) | (2,047) | | Net Sales (Redemptions) | 1,042 | 230 | | Market Gains and (Losses) | 1,729 | 85 | | Ending Assets | $14,788 | $12,100 | Changes in Alternative / Private Markets Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $6,984 | $6,713 | | Sales | 1,124 | 563 | | Redemptions | (513) | (568) | | Net Sales (Redemptions) | 611 | (5) | | Market Gains and (Losses) | 629 | (391) | | Ending Assets | $8,132 | $6,984 | - Total Alternative / Private Markets assets increased to **$22,920 million** in **2021** from **$19,084 million** in **2020**, driven by **$1,653 million** in net sales and **$2,358 million** in market gains[343](index=343&type=chunk) [Changes in Multi-Asset Fund and Separate Account Assets](index=64&type=section&id=Changes%20in%20Multi-Asset%20Fund%20and%20Separate%20Account%20Assets) Multi-Asset Fund assets decreased **4%** to **$3,608 million** in 2021 due to net redemptions, while Separate Account assets declined **16%** to **$172 million** Changes in Multi-Asset Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $3,744 | $4,000 | | Sales | 299 | 214 | | Redemptions | (894) | (688) | | Net Sales (Redemptions) | (595) | (474) | | Market Gains and (Losses) | 364 | 237 | | Ending Assets | $3,608 | $3,744 | Changes in Multi-Asset Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $204 | $199 | | Sales | 2 | 27 | | Redemptions | (42) | (36) | | Net Sales (Redemptions) | (40) | (9) | | Market Gains and (Losses) | 8 | 14 | | Ending Assets | $172 | $204 | - Total Multi-Asset assets decreased to **$3,780 million** in **2021** from **$3,948 million** in **2020**, primarily due to **$635 million** in net redemptions, partially offset by $372 million in market gains[345](index=345&type=chunk) [Changes in Total Long-Term Assets](index=65&type=section&id=Changes%20in%20Total%20Long-Term%20Assets) Total Long-Term Fund Assets increased **9%** to **$135,294 million** in 2021, driven by net sales and market gains, with Separate Accounts up **14%** to **$85,672 million** Changes in Total Long-Term Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $123,713 | $107,724 | | Sales | 49,125 | 46,401 | | Redemptions | (44,368) | (40,974) | | Net Sales (Redemptions) | 4,757 | 5,427 | | Market Gains and (Losses) | 7,394 | 9,627 | | Ending Assets | $135,294 | $123,713 | Changes in Total Long-Term Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $75,384 | $72,611 | | Sales | 20,454 | 14,426 | | Redemptions | (16,243) | (15,224) | | Net Sales (Redemptions) | 4,211 | (798) | | Market Gains and (Losses) | 6,431 | 2,234 | | Ending Assets | $85,672 | $75,384 | - Total Long-Term Assets increased to **$220,966 million** in **2021** from **$199,097 million** in **2020**, driven by **$8,968 million** in net sales and **$13,825 million** in market gains[347](index=347&type=chunk) [Results of Operations](index=67&type=section&id=Results%20of%20Operations) Total revenue decreased in 2021 due to fee waivers, while operating expenses declined, leading to a **$56.1 million** decrease in net income and lower diluted EPS - Total revenue decreased by **$147.8 million** in **2021** compared to **2020**, mainly due to a **$307.3 million** increase in Voluntary Yield-related Fee Waivers and a $38.1 million decrease in money market revenue[356](index=356&type=chunk) - Operating expenses decreased by **$95.9 million** in **2021**, driven by a **$157.5 million** decrease in distribution expense (due to fee waivers), partially offset by a **$29.1 million** increase in compensation and related expense[358](index=358&type=chunk) - Nonoperating Income (Expenses), net, decreased by **$17.9 million**, primarily due to a smaller increase in market value of investments and a one-time gain in **2020**[359](index=359&type=chunk) - Net income attributable to Federated Hermes, Inc. decreased by **$56.1 million** in **2021**, leading to a **$0.48** decrease in diluted earnings per share[361](index=361&type=chunk) Key Financial Performance Indicators (in thousands, except per share data) | Metric | 2021 | 2020 | 2019 | | :------------------------------------------------------------------- | :--- | :--- | :--- | | Total Revenue | $1,300,447 | $1,448,268 | $1,326,894 | | Operating Income | 366,272 | 418,151 | 347,927 | | Net Income | $270,293 | $326,364 | $272,339 | | Earnings Per Common Share—Diluted | $2.75 | $3.23 | $2.69 | [Liquidity and Capital Resources](index=68&type=section&id=Liquidity%20and%20Capital%20Resources) Liquid assets increased to **$492.7 million** at **December 31, 2021**, while operating cash flow decreased, and financing activities increased due to share repurchases and acquisitions - Liquid assets, net of noncontrolling interests, totaled **$492.7 million** at **December 31, 2021**, up from **$432.5 million** in **2020**[363](index=363&type=chunk) - Net cash provided by operating activities decreased by **$202.8 million** to **$170.4 million** in **2021**, primarily due to increased cash paid for trading securities and decreased cash received from revenue[365](index=365&type=chunk) - Net cash used by financing activities was **$249.5 million** in **2021**, driven by **$228.3 million** for share repurchases, **$165.9 million** for HFML equity acquisition, and **$147.3 million** for debt payments[367](index=367&type=chunk) - Federated Hermes entered into a new **$350 million** revolving credit facility (Fourth Amended and Restated Credit Agreement) expiring **July 30, 2026**, with **$126.6 million** available as of **December 31, 2021**[368](index=368&type=chunk)[374](index=374&type=chunk) - The company was in compliance with all debt covenants, including an interest coverage ratio of **359 to 1** and a leverage ratio of **0.51 to 1**, as of **December 31, 2021**[369](index=369&type=chunk) - Cash dividends of **$105.8 million** were paid in **2021** (**$1.08 per share**)[371](index=371&type=chunk) - Future cash needs include funding acquisitions, distribution, compensation, dividends, debt repayment, and new product development[377](index=377&type=chunk) [Financial Position](index=69&type=section&id=Financial%20Position) This section highlights changes in assets and liabilities, including increased investments, decreased ROU assets, and increased deferred tax liability due to UK tax rate change - Investments—Consolidated Investment Companies increased by **$14.2 million**, primarily due to consolidation of certain entities[381](index=381&type=chunk) - Investments—Affiliates and Other increased by **$42.2 million**, mainly due to reclassification from deconsolidation of two VREs[382](index=382&type=chunk) - Right-of-Use Assets, net, decreased by **$13.8 million** due to annual amortization[384](index=384&type=chunk) - Long-Term Deferred Tax Liability, net, increased by **$17.3 million**, primarily from the revaluation of foreign net deferred tax liability due to the **UK tax rate change (19% to 25% effective April 1, 2023)**[385](index=385&type=chunk) [Variable Interest Entities (VIEs)](index=70&type=section&id=Variable%20Interest%20Entities) Federated Hermes consolidates VIEs where it is the primary beneficiary, with a maximum risk of loss of **$170.6 million** from non-consolidated VIEs at **December 31, 2021** - Federated Hermes consolidates **VIEs** where it is the primary beneficiary, meaning it has power to direct activities and obligation to absorb losses or right to receive benefits[386](index=386&type=chunk) - The maximum risk of loss related to investments in non-consolidated VIEs was **$170.6 million** at **December 31, 2021**, primarily from Federated Hermes Funds[537](index=537&type=chunk) [Critical Accounting Policies](index=70&type=section&id=Critical%20Accounting%20Policies) Financial statements are prepared under U.S. GAAP, with critical accounting policies involving indefinite-lived intangible assets and annual impairment tests - Financial statements are prepared in accordance with **U.S. GAAP**, requiring management estimates and assumptions[387](index=387&type=chunk) - The indefinite-lived intangible assets policy, particularly rights to manage fund assets, involves a high degree of judgment and complexity[388](index=388&type=chunk) - Annual impairment tests for indefinite-lived intangible assets are performed, considering projected AUM, revenue growth, profit margins, tax rates, and discount rates[390](index=390&type=chunk) - The Pandemic's uncertainty led to potential impairment indicators for HFML rights to manage fund assets throughout **2021**, with estimated fair value exceeding carrying value by less than **10%**[391](index=391&type=chunk) - As of **December 31, 2021**, Federated Hermes had **$400.9 million** in indefinite-lived intangible assets, with no impairments recorded in **2021, 2020, or 2019**[394](index=394&type=chunk) [ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=71&type=section&id=ITEM%207A%20%E2%80%93%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) [Market Risk Disclosures](index=71&type=section&id=Market%20Risk%20Disclosures) Federated Hermes is exposed to interest-rate, credit, price, and foreign exchange risks, managed through diversification, with hypothetical fluctuations impacting financial condition - Federated Hermes is exposed to **interest-rate risk, credit risk, price risk, and foreign exchange risk** from its investments and revenue model[395](index=395&type=chunk) - A hypothetical **300-basis-point** fluctuation in interest rates would not materially affect financial condition or results of operations for certain investments[396](index=396&type=chunk) - A hypothetical **300-basis-point** fluctuation in credit spreads could impact financial condition by approximately **$13 million**[396](index=396&type=chunk) - A hypothetical **20%** fluctuation in the fair value of equity investments could impact financial condition by approximately **$16 million**[398](index=398&type=chunk) - A hypothetical **20%** fluctuation in foreign currency exchange rates could impact financial condition by approximately **$12 million** for non-U.S. dollar holdings and **$11 million** for hedged revenue[400](index=400&type=chunk)[401](index=401&type=chunk) - Changes in the market value of managed assets directly impact revenue; a **20%** decline in average AUM would result in a corresponding **20%** decline in revenue[402](index=402&type=chunk) [ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=73&type=section&id=ITEM%208%20%E2%80%93%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) [Management's Assessment of Internal Control Over Financial Reporting](index=73&type=section&id=MANAGEMENT'S%20ASSESSMENT%20OF%20INTERNAL%20CONTROL%20OVER%20FINANCIAL%20REPORTING) Management concluded that Federated Hermes' internal control over financial reporting was effective as of **December 31, 2021**, as audited by Ernst & Young LLP - Management is responsible for establishing and maintaining adequate internal control over financial reporting[405](index=405&type=chunk) - As of **December 31, 2021**, management concluded that Federated Hermes' internal controls over financial reporting were effective, based on the **COSO 2013 framework**[406](index=406&type=chunk) - Ernst & Young LLP audited the effectiveness of internal control over financial reporting and expressed an **unqualified opinion**[406](index=406&type=chunk)[411](index=411&type=chunk) [Report of Independent Registered Public Accounting Firm](index=74&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Ernst & Young LLP issued an unqualified opinion on financial statements and internal controls, highlighting indefinite-lived intangible asset valuation as a critical audit matter - Ernst & Young LLP issued an **unqualified opinion** on the consolidated financial statements for the three years ended **December 31, 2021**[410](index=410&type=chunk) - An **unqualified opinion** was also issued on the effectiveness of the company's internal control over financial reporting as of **December 31, 2021**[411](index=411&type=chunk)[422](index=422&type=chunk) - The critical audit matter was the valuation of indefinite-lived intangible assets, specifically the HFML rights to manage fund assets (**$203.4 million** at **December 31, 2021**), due to significant estimation uncertainty in fair value determination[415](index=415&type=chunk) - Audit procedures included evaluating management's assumptions (discount rate, revenue growth, profit margins) and performing sensitivity analyses[418](index=418&type=chunk) [Consolidated Balance Sheets](index=78&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) The Consolidated Balance Sheets present Federated Hermes' financial position as of **December 31, 2021**, with total assets decreasing from **$2.06 billion** in 2020 to **$2.02 billion** Consolidated Balance Sheets (dollars in thousands) | (dollars in thousands) December 31, | 2021 | 2020 | | :---------------------------------- | :--- | :--- | | ASSETS | | | | Current Assets | | | | Cash and Cash Equivalents | 233,327 | 301,819 | | Investments—Consolidated Investment Companies | 105,542 | 91,359 | | Investments—Affiliates and Other | 87,805 | 45,593 | | Receivables, net | 65,317 | 64,857 | | Receivables—Affiliates | 30,956 | 41,107 | | Prepaid Expenses | 29,322 | 22,130 | | Other Current Assets | 7,178 | 8,478 | | Total Current Assets | 559,447 | 575,343 | | Long-Term Assets | | | | Goodwill | 798,871 | 800,267 | | Intangible Assets, net | 471,209 | 481,753 | | Property and Equipment, net | 46,965 | 52,610 | | Right-of-Use Assets, net | 108,306 | 122,078 | | Other Long-Term Assets | 33,389 | 28,788 | | Total Long-Term Assets | 1,458,740 | 1,485,496 | | Total Assets | $2,018,187 | $2,060,839 | | LIABILITIES | | | | Current Liabilities | | | | Accounts Payable and Accrued Expenses | 64,019 | 61,736 | | Accrued Compensation and Benefits | 162,203 | 170,646 | | Lease Liabilities | 17,447 | 15,845 | | Other Current Liabilities | 27,038 | 17,219 | | Total Current Liabilities | 270,707 | 265,446 | | Long-Term Liabilities | | | | Long-Term Debt | 223,350 | 75,000 | | Long-Term Deferred Tax Liability, net | 205,206 | 187,937 | | Long-Term Lease Liabilities | 105,270 | 121,922 | | Other Long-Term Liabilities | 36,435 | 36,550 | | Total Long-Term Liabilities | 570,261 | 421,409 | | Total Liabilities | 840,968 | 686,855 | | TEMPORARY EQUITY | | | | Redeemable Noncontrolling Interests in Subsidiaries | 63,202 | 236,987 | | PERMANENT EQUITY | | | | Federated Hermes, Inc. Shareholders' Equity | | | | Common Stock: | | | | Class A, No Par Value | 189 | 189 | | Class B, No Par Value | 448,929 | 418,669 | | Retained Earnings | 1,187,001 | 1,027,699 | | Treasury Stock, at Cost | (538,464) | (324,731) | | Accumulated Other Comprehensive Income (Loss), net of tax | 16,362 | 15,171 | | Total Permanent Equity | 1,114,017 | 1,136,997 | | Total Liabilities, Temporary Equity and Permanent Equity | $2,018,187 | $2,060,839 | [Consolidated Statements of Income](index=79&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20INCOME) The Consolidated Statements of Income show total revenue decreased **10%** in 2021, with operating income and net income declining, and diluted EPS at **$2.75** Consolidated Statements of Income (dollars in thousands, except per share data) | (dollars in thousands, except per share data) Years Ended December 31, | 2021 | 2020 | 2019 | | :------------------------------------------------------------------- | :--- | :--- | :--- | | Revenue | | | | | Investment Advisory Fees, net—Affiliates | $656,958 | $769,836 | $685,849 | | Investment Advisory Fees, net—Other | 259,026 | 241,631 | 221,756 | | Administrative Service Fees, net—Affiliates | 306,639 | 318,152 | 245,887 | | Other Service Fees, net—Affiliates | 61,326 | 103,862 | 161,421 | | Other Service Fees, net—Other | 16,498 | 14,787 | 11,981 | | Total Revenue | 1,300,447 | 1,448,268 | 1,326,894 | | Operating Expenses | | | | | Compensation and Related | 532,492 | 503,400 | 442,147 | | Distribution | 160,884 | 318,343 | 340,663 | | Systems and Communications | 75,429 | 64,698 | 52,988 | | Professional Service Fees | 60,331 | 55,123 | 43,714 | | Office and Occupancy | 44,573 | 38,975 | 44,926 | | Advertising and Promotional | 21,600 | 15,834 | 17,774 | | Travel and Related |

Financial Data and Key Metrics Changes - Federated Hermes ended 2021 with record long-term assets under management of $221 billion, including $98 billion in fixed income and $23 billion in alternative private markets [4] - Gross sales of long-term strategies reached nearly $70 billion, a 14% increase from 2020, while net sales nearly doubled to just under $9 billion [5] - Total revenue for Q4 was down 2% from the prior quarter due to lower average equity assets and higher money market fund waivers [24] Business Line Data and Key Metrics Changes - In equities, fund flows were negative in Q4 with outflows of about $1.7 billion, but positive net sales were seen in 18 equity strategies [6][7] - Fixed income net sales in Q4 were just under $500 million, driven by high yield and multisector strategies, despite some fund redemptions [10] - Alternative private markets saw net sales of over $200 million, with significant contributions from unconstrained credit and private equity [14][15] Market Data and Key Metrics Changes - Money market assets increased by about $34 billion in Q4, benefiting from seasonal trends and ongoing liquidity growth [17] - The market share of money market mutual funds rose to 7.4% at the end of the year, up from 7.2% in Q3 [18] - Managed assets totaled approximately $651 billion, with $436 billion in money markets and $90 billion in equities [23] Company Strategy and Development Direction - The company is focusing on providing clients with research and thought leadership on asset classes that perform well in inflationary periods, emphasizing dividend income and value strategies [7][8] - Plans for growth include launching additional ETF offerings and expanding the private markets business [12][31] - The company aims to continue investing for growth while managing the realities of inflation [31] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the recovery of fee waivers and anticipated a significant decrease in negative impacts from waivers following Fed rate hikes [26][27] - The company expects to see a similar pattern of initial outflows followed by growth in money market funds as rates rise [52][84] - Management highlighted the importance of the EOS advisory business in enhancing brand value and client relationships [70][72] Other Important Information - Cash and investments at the end of 2021 were $427 million, with $145 million used for stock repurchases [32] - The company is considering long-term debt financing of approximately $300 million to support share repurchases and acquisitions [33] Q&A Session Summary Question: Fee waiver guidance assumptions - Management clarified that the asset level used for guidance was as of January 21st, with expectations of a steepening yield curve [35][36] Question: Confidence in rapid waiver recovery - Management explained that various factors, including asset composition and market dynamics, influence waiver recovery timelines [41] Question: Outflows from short and ultrashort bond funds - Management noted that NAV declines in certain products led to outflows, despite expectations for increased interest in these funds in a rising rate environment [45][46] Question: Impact of swing pricing on institutional prime funds - Management expressed concerns about the implications of swing pricing, emphasizing that it could lead to significant client dissatisfaction [42][87] Question: Demand for money market fund products - Management indicated that historical patterns suggest initial outflows followed by growth in money market funds as rates rise [52][84] Question: Capital allocation priorities - Management confirmed ongoing share repurchases and the exploration of long-term financing options to support growth initiatives [57][58]

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 March 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF ...