Schedule II - Condensed Financial Information of Registrant (Parent Company Only)

12 Months Ended

Dec. 31, 2011

Schedule II - Condensed Financial Information of Registrant (Parent Company Only)

Schedule II – Condensed Financial Information of Registrant (Parent Company Only)

HALLMARK FINANCIAL SERVICES, INC.

BALANCE SHEETS

December 31, 2011 and 2010

(In thousands)

	2011			2010
ASSETS
Cash and cash equivalents	$	3,309		$	10,983
Investment in subsidiaries		289,429			299,711
Deferred federal income taxes		387			173
Other assets		3,536			3,821
	$	296,661		$	314,688
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable	$	60,752		$	59,502
Current federal income tax payable		3,017			7,855
Accounts payable and other accrued expenses		16,765			11,568
		80,534			78,925
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2011 and in 2010		3,757			3,757
Capital in excess of par value		122,487			121,815
Retained earnings		94,995			105,816
Accumulated other comprehensive income		6,446			9,637
Treasury stock (1,609,374 shares in 2011 and 748,662 in 2010), at cost		(11,558	)		(5,262	)
Total stockholders’ equity		216,127			235,763
Total liabilities and stockholders’ equity	$	296,661		$	314,688

See accompanying report of independent registered public accounting firm.

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

For the years ended December 31, 2011, 2010 and 2009

(In thousands)

	2011			2010			2009
Investment loss, net of expenses	$	(194	)	$	(119	)	$	(166	)
Net realized gain		-			41			313
Management fee income		7,288			6,071			7,127
Other income		-			5			-
		7,094			5,998			7,274
Operating expenses		7,851			6,885			8,190
Interest expense		4,631			4,598			4,572
Amortization of intangible assets		42			150			379
		12,524			11,633			13,141
Loss before equity in undistributed (loss) earnings of subsidiaries and income tax benefit		(5,430	)		(5,635	)		(5,867	)
Income tax benefit		(1,669	)		(1,608	)		(1,609	)
Loss before equity in undistributed (loss) earnings of subsidiaries		(3,761	)		(4,027	)		(4,258	)
Equity in undistributed share of (loss) earnings in subsidiaries		(7,060	)		11,361			28,833
Net (loss) income	$	(10,821	)	$	7,334		$	24,575
Comprehensive (loss) income	$	(14,012	)	$	8,382		$	51,261

See accompanying report of independent registered public accounting firm.

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2011, 2010 and 2009

(In thousands)

	2011			2010			2009
Cash flows from operating activities:
Net (loss) income	$	(10,821	)	$	7,334		$	24,575
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Depreciation and amortization expense		276			223			448
Deferred income tax (benefit) expense		(215	)		(12	)		112
Undistributed share of loss (earnings) of subsidiaries		7,060			(11,361	)		(28,833	)
Realized loss		-			(41	)		(313	)
Change in current federal income tax payable		(4,838	)		(700	)		5,138
Change in all other liabilities		5,047			4,092			2,557
Change in all other assets		1,074			838			2,406
Net cash (used in) provided by operating activities		(2,417	)		373			6,090
Cash flows from investing activities:
Purchases of property and equipment		(205	)		(28	)		(22	)
Purchase of fixed maturity and equity securities		-			(989	)		(10,957	)
Maturities and redemptions of investment securities		-			1,956			12,651
Net cash (used in) provided by investing activities		(205	)		939			1,672
Cash flows from financing activities:
Proceeds from exercise of employee stock options		99			25			115
Purchase of treasury shares		(6,401	)		-			(5,250	)
Net borrowings (repayments) of note payable		1,250			-			(318	)
Net cash (used in) provided by financing activities		(5,052	)		25			(5,453	)
(Decrease) increase in cash and cash equivalents		(7,674	)		1,337			2,309
Cash and cash equivalents at beginning of year		10,983			9,646			7,337
Cash and cash equivalents at end of year	$	3,309		$	10,983		$	9,646
Supplemental cash flow information:
Interest paid	$	(4,620	)	$	(4,594	)	$	(4,612	)
Income taxes (paid) recovered	$	(3,383	)	$	895		$	6,860