8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

 Date of report (Date of earliest event reported):  August 11, 2008

HALLMARK FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
(State or Other Jurisdictionof Incorporation)
001-11252	87-0447375
(Commission File Number)	(IRS Employer Identification No.)
777 Main Street, Suite 1000, Fort Worth, Texas	76102
(Address of Principal Executive Offices)	(Zip Code)
817-348-1600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On August 11, 2008, the Registrant issued a press release announcing its financial results for the quarter ended June 30, 2008. A copy of the Registrant’s press release is attached as Exhibit 99.1 to this Current Report.

Item 9.01 Financial Statements and Exhibits

(c) Exhibits.

99.1 Press release dated August 11, 2008

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

	HALLMARK FINANCIAL SERVICES, INC.
Date:  August 12, 2008	By:	/s/ Jeffrey R. Passmore
		Jeffrey R. Passmore, Chief Accounting Officer
		Title

EX-99.1

FOR IMMEDIATE RELEASE

HALLMARK FINANCIAL SERVICES, INC.

ANNOUNCES SECOND QUARTER 2008 EARNINGS RESULTS

FORT WORTH, Texas, (August 11, 2008) - Hallmark Financial Services, Inc. (NASDAQ: HALL) today reported net income of $7.2 million for the second quarter of 2008, an 18% decrease from the $8.8 million reported for the second quarter of 2007. Year to date, Hallmark reported net income of $14.3 million, representing a 3% increase over the $13.8 million reported for the first six months of 2007. On a fully diluted basis, net income was $0.34 per share and $0.68 per share for the second quarter and six months ended June 30, 2008, as compared to $0.42 per share and $0.66 per share for the similar periods of 2007. Total revenues were $71.7 million and $142.9 million for the second quarter and first six months of 2008, representing 4% and 8% increases from the $68.7 million and $132.7 million reported for the similar periods of 2007.

Mark J. Morrison, President and Chief Executive Officer, said, “Overall, the results for the quarter were solid and the operating margins in our core books of business have proven to be resilient in this soft market cycle. However, the general economic and insurance market conditions have provided ongoing challenges. Nonetheless, we continue to maintain discipline in our underwriting and pricing practices. We see little or no long term benefit to chasing underpriced business for the sake of near term top line growth. Our strategy of increasing our retention of the business produced within the commercial specialty area has helped to bolster revenue and partially offset the soft market conditions. We also believe that our continued selective expansion into new states will yield long term benefits by positioning us to attract new business within the broader footprint when market pricing returns to more rational levels.”

Mark E. Schwarz, Executive Chairman of Hallmark, stated, “Our net combined ratio of 90%, annualized return on average equity of 15% and cash flow from operations of over $17 million for the second quarter demonstrate the results of our underwriting discipline and focus on the bottom-line. Solid investment performance has also contributed to a 16% increase in book value per share since the end of the second quarter of 2007. Our long term focus is to continue to improve the financial value and operational capacity of the Company as measured through intrinsic value per share. While this will not necessarily occur evenly over discrete quarterly intervals, we are nonetheless pleased with the continued progress made during the second quarter of 2008.”

	Three Months Ended
	June 30,
	2008			2007			% Change
	($ in thousands)
Gross premiums written	$	63,115		$	66,577			-5	%
Net premiums written		60,788			62,296			-2	%
Net premiums earned		59,443			55,310			7	%
Commission and fee income		6,669			8,159			-18	%
Investment income, net of expenses		3,957			3,047			30	%
Realized gain		232			828			-72	%
Total revenues		71,663			68,736			4	%
Net income		7,201			8,815			-18	%
Common EPS - basic	$	0.35		$	0.42			-17	%
Common EPS - diluted	$	0.34		$	0.42			-19	%
Annualized return on average equity		15.3	%		22.0	%		-30	%
Book value per share	$	9.20		$	7.91			16	%
Cash flow from operations	$	17,361		$	25,632			-32	%

		Six Months Ended
		June 30,
	2008			2007			% Change
		($ in thousands)
Gross premiums written	$	127,352		$	131,235			-3	%
Net premiums written		122,693			123,067			0	%
Net premiums earned		118,359			106,958			11	%
Commission and fee income		13,153			16,064			-18	%
Investment income, net of expenses		7,582			6,037			26	%
Realized gain		1,091			881			24	%
Total revenues		142,856			132,694			8	%
Net income		14,253			13,785			3	%
Common EPS - basic	$	0.69		$	0.66			5	%
Common EPS - diluted	$	0.68		$	0.66			3	%
Annualized return on average equity		15.4	%		17.5	%		-12	%
Book value per share	$	9.20		$	7.91			16	%
Cash flow from operations	$	29,749		$	44,594			-33	%

During the three and six months ended June 30, 2008, Hallmark’s total revenues were $71.7 and $142.9 million, representing a 4% and 8% increase over the $68.7 million and $132.7 in total revenues for the same periods of 2007. Increased earned premium due to increased retention of business produced by the Specialty Commercial Segment and increased production by the Personal Segment were the primary causes of the increases in revenue. Standard Commercial Segment revenues increased $2.2 million, or 11% and 5%, during the three and six months ended June 30, 2008 as compared to the same periods during 2007, due primarily to increased contingent commissions related to favorable loss development on prior accident years. Specialty Commercial Segment revenues decreased $1.0 million and increased $3.0 million, during the three months and six months ended June 30, 2008 as compared to the same periods of 2007, due to lower commission income primarily as a result of the continued shift from a third-party agency model to an underwriting model, partially offset by increased net premiums earned as a result of the increased retention of business. Revenues from our Personal Segment increased $1.8 million and $3.8 million, or 12% and 13%, during the three and six months ended June 30, 2008 as compared to the same periods during 2007, due largely to geographic expansion into new states. Corporate revenue of $1.0 million remained relatively unchanged for the second quarter of 2008 as compared to the same period in 2007. Corporate revenue increased $1.2 million for the six months ended June 30, 2008 due primarily to increased recognized gains on our investment portfolio of $0.2 million and increased investment income of $1.0 million due to changes in capital allocation.

We reported net income of $7.2 million and $14.3 million for the three and six months ended June 30, 2008, which was $1.6 million lower and $0.5 million higher than the $8.8 million and $13.8 million reported for the same periods in 2007. The decrease in net income for the three months was primarily attributable to favorable loss development on prior accident years during the second quarter of 2008 of $0.3 million as compared to $1.9 million for the same period during 2007. The year to date increase in net income was primarily attributable to a lower effective tax rate from a higher amount of tax exempt bonds in our investment portfolio in 2008 than we held in 2007. Year to date 2008 pre-tax income increased $0.1 million to $20.7 million from the prior year. Increased revenue was partially offset by increased incurred loss and loss adjustment expense of $8.6 million, increased interest expense of $0.8 million from our issuance of trust preferred securities in the third quarter of 2007 and increased operating expense of $0.6 million.

Hallmark's net loss ratio was 60.6% for the second quarter of 2008 as compared to 55.5% for the second quarter of 2007. For the year to date, Hallmark’s net loss ratio was 60.4% as compared to 58.8% for the same period the prior year. Hallmark's net expense ratio was 29.2% for the second quarter of 2008 as compared to 27.9% for the second quarter of 2007. For the year to date, Hallmark’s net expense ratio was 29.1% as compared to 28.1% for the same period the prior year. Hallmark maintained a profitable net combined ratio of 89.8% for the second quarter of 2008 and 89.5% for the year to date as compared to 83.4% and 86.9% for the same periods in the prior year.

Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance, personal insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our general aviation business which is written on a national basis. The Company is headquartered in Fort Worth, Texas and its common stock is presently listed on NASDAQ under the symbol "HALL."

Forward-looking statements in this Release are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Act of 1995. Investors are cautioned that actual results may differ substantially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, continued acceptance of the Company’s products and services in the marketplace, competitive factors, interest rate trends, the availability of financing, underwriting loss experience and other risks detailed from time to time in the Company’s periodic report filings with the Securities and Exchange Commission.

For further information, please contact:

Mark J. Morrison, President and Chief Executive Officer at 817.348.1600

www.hallmarkgrp.com

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Balance Sheets

($ in thousands)

	June 30			December 31
ASSETS	2008			2007
	(unaudited)
Investments:
Debt securites, available-for-sale, at fair value	$	164,137		$	248,069
Equity securites, available-for-sale, at fair value		51,694			15,166
Short-Term investments, available-for-sale, at fair value		121,440			2,625
Total investments		337,271			265,860
Cash and cash equivalents		33,599			145,884
Restricted cash and cash equivalents		11,588			16,043
Premiums receivable		47,090			46,026
Accounts receivable		5,257			5,219
Receivable for securities		200			27,395
Prepaid reinsurance premiums		682			274
Reinsurance recoverable		3,791			4,952
Deferred policy acquisition costs		20,652			19,757
Excess of cost over fair value of net assets acquired		30,025			30,025
Intangible assets		22,634			23,781
Current federal income tax recoverable		724			-
Deferred federal income taxes		2,413			275
Prepaid expenses		1,212			1,240
Other assets		21,402			19,583
Total assets	$	538,540		$	606,314
LIABILITES AND STOCKHOLDERS' EQUITY
Liabilites:
Notes payable	$	60,592			60,814
Structured settlements		-			10,000
Reserves for unpaid losses and loss adjustment expenses		144,374			125,338
Unearned premiums		107,369			102,998
Unearned revenue		2,253			2,949
Accrued agent profit sharing		1,335			2,844
Accrued ceding commission payable		12,189			12,099
Pension liability		1,432			1,669
Current federal income tax		-			630
Payable for securities		3,401			91,401
Accounts payable and other accrued expenses		14,150			16,385
Total liabilities		347,095			427,127
Commitments and Contingencies
Stockholders' equity:
Common stock, $.18 par value (authorized 33,333,333 shares in 2008 and 2007;
issued 20,816,782 in 2008 and 20,776,080 shares in 2007)		3,747			3,740
Capital in excess of par value		119,369			118,459
Retained earnings		73,162			58,909
Accumulated other comprehensive loss		(4,756	)		(1,844	)
Treasury stock, at cost (7,828 shares in 2008 and 2007)		(77	)		(77	)
Total stockholders' equity		191,445			179,187
	$	538,540		$	606,314

Hallmark Financial Services, Inc. and Subsidiaries

Consolidated Statements of Operation

(Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2008			2007			2008			2007
Gross premiums written	$	63,115		$	66,577		$	127,352		$	131,235
Ceded premiums written		(2,327	)		(4,281	)		(4,659	)		(8,168	)
Net premiums written		60,788			62,296			122,693			123,067
Change in unearned premiums		(1,345	)		(6,986	)		(4,334	)		(16,109	)
Net premiums earned		59,443			55,310			118,359			106,958
Investment income, net of expenses		3,957			3,047			7,582			6,037
Realized gain		232			828			1,091			881
Finance charges		1,323			1,185			2,587			2,271
Commission and fees		6,669			8,159			13,153			16,064
Processing and service fees		36			203			78			475
Other income		3			4			6			8
Total revenues		71,663			68,736			142,856			132,694
Losses and loss adjustment expenses		36,029			30,712			71,533			62,897
Other operating expenses		23,608			23,723			47,073			46,424
Interest expense		1,186			796			2,371			1,582
Amortization of intangible asset		573			573			1,146			1,146
Total expenses		61,396			55,804			122,123			112,049
Income before tax		10,267			12,932			20,733			20,645
Income tax expense		3,066			4,117			6,480			6,860
Net income	$	7,201		$	8,815		$	14,253		$	13,785
Common stockholders net income per share:
Basic	$	0.35		$	0.42		$	0.69		$	0.66
Diluted	$	0.34		$	0.42		$	0.68		$	0.66

Hallmark Financial Services, Inc.

Consolidated Segment Data

	Three Months Ended June 30, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium (1)	$	21,624		$	35,986		$	14,153		$	-		$	71,763
Gross premiums written		21,624			27,338			14,153			-			63,115
Ceded premiums written		(1,382	)		(945	)		-			-			(2,327	)
Net premiums written		20,242			26,393			14,153			-			60,788
Change in unearned premiums		36			(2,395	)		1,014			-			(1,345	)
Net premiums earned		20,278			23,998			15,167			-			59,443
Total revenues		22,157			31,988			16,498			1,020			71,663
Losses and loss adjustment expenses		11,669			13,976			10,384			-			36,029
Pre-tax income (loss)		3,984			6,265			1,913			(1,895	)		10,267
Net loss ratio (2)		57.5	%		58.2	%		68.5	%					60.6	%
Net expense ratio (2)		27.3	%		30.7	%		21.6	%					29.2	%
Net combined ratio (2)		84.8	%		88.9	%		90.1	%					89.8	%

		Three Months Ended June 30, 2007
		Standard			Specialty
		Commercial			Commercial			Personal
		Segment			Segment			Segment			Corporate			Consolidated
Produced premium (1)	$	24,751		$	40,956		$	13,298		$	-		$	79,005
Gross premiums written		24,740			28,540			13,297			-			66,577
Ceded premiums written		(2,804	)		(1,477	)		-			-			(4,281	)
Net premiums written		21,936			27,063			13,297			-			62,296
Change in unearned premiums		(1,731	)		(5,474	)		219			-			(6,986	)
Net premiums earned		20,205			21,589			13,516			-			55,310
Total revenues		20,003			32,978			14,696			1,059			68,736
Losses and loss adjustment expenses		11,267			10,635			8,813			(3	)		30,712
Pre-tax income (loss)		2,664			9,441			2,176			(1,349	)		12,932
Net loss ratio (2)		55.8	%		49.3	%		65.2	%					55.5	%
Net expense ratio (2)		27.0	%		32.0	%		22.8	%					27.9	%
Net combined ratio (2)		82.8	%		81.3	%		88.0	%					83.4	%

¹ Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by our operations. We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or retained by third party insurance carriers where we receive commission revenue.

² Net loss ratio is calculated as total net losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. Net expense ratio is calculated as total underwriting expenses of our insurance company subsidiaries, including allocated overhead expenses and offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.

Hallmark Financial Services, Inc.

Consolidated Segment Data

	Six Months Ended June 30, 2008
	Standard			Specialty
	Commercial			Commercial			Personal
	Segment			Segment			Segment			Corporate			Consolidated
Produced premium (1)		43,373			68,006			31,880			-			143,259
Gross premiums written		43,373			52,099			31,880			-			127,352
Ceded premiums written		(2,746	)		(1,913	)		-			-			(4,659	)
Net premiums written		40,627			50,186			31,880			-			122,693
Change in unearned premiums		440			(2,550	)		(2,224	)					(4,334	)
Net premiums earned		41,067			47,636			29,656			-			118,359
Total revenues		43,986			64,075			32,224			2,571			142,856
Losses and loss adjustment expenses		22,979			28,979			19,575			-			71,533
Pre-tax income (loss)		7,865			11,558			4,503			(3,193	)		20,733
Net loss ratio (2)		56.0	%		60.8	%		66.0	%					60.4	%
Net expense ratio (2)		27.3	%		30.7	%		22.0	%					29.1	%
Net combined ratio (2)		83.3	%		91.5	%		88.0	%					89.5	%

	Six Months Ended June 30, 2007
	Standard		Specialty
	Commercial		Commercial		Personal
	Segment		Segment		Segment		Corporate		Consolidated
Produced premium (1)	48,301		80,313		28,374		-		156,988
Gross premiums written	48,221		54,641		28,373		-		131,235
Ceded premiums written	(5,439	)	(2,729	)	-		-		(8,168	)
Net premiums written	42,782		51,912		28,373		-		123,067
Change in unearned premiums	(2,655	)	(11,230	)	(2,224	)	-		(16,109	)
Net premiums earned	40,127		40,682		26,149		-		106,958
Total revenues	41,770		61,076		28,469		1,379		132,694
Losses and loss adjustment expenses	24,108		21,716		17,080		(7	)	62,897
Pre-tax income (loss)	5,423		14,127		4,294		(3,199	)	20,645
Net loss ratio (2)	60.1	%	53.4	%	65.3	%			58.8	%
Net expense ratio (2)	27.5	%	31.8	%	23.2	%			28.1	%
Net combined ratio (2)	87.6	%	85.2	%	88.5	%			86.9	%

¹ Produced premium is a non-GAAP measurement that management uses to track total controlled premium produced by our operations. We believe this is a useful tool for users of our financial statements to measure our premium production whether retained by our insurance company subsidiaries or retained by third party insurance carriers where we receive commission revenue.

² Net loss ratio is calculated as total net losses and loss adjustment expenses divided by net premiums earned, each determined in accordance with GAAP. Net expense ratio is calculated as total underwriting expenses of our insurance company subsidiaries, including allocated overhead expenses and offset by agency fee income, divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.