Hallmark Financial Services, Inc. Second Quarter 2006 Earnings Results

FORT WORTH, Texas, Aug. 14  /PRNewswire-FirstCall/ -- Hallmark Financial Services, Inc. (NYSE:HAF) today reported operating results for the second quarter of fiscal 2006.  During the three months ended June 30, 2006, total revenues of the Company were $47.2 million, representing a 165.3% increase over the $17.8 million in total revenues for the second quarter of 2005. During the six months ended June 30, 2006, total revenues of the Company were $91.7 million, representing a 160.3% increase over the $35.2 million in total revenues for the first half of 2005.  The increases in total revenues for the three and six months ended June 30, 2006 were primarily attributable to the acquisitions of new operating units in the first quarter of 2006 and the retention of business that was previously retained by third parties.

The Company reported a net loss of $2.8 million and $0.4 million for the three and six months ended June 30, 2006, respectively, compared to net income of $2.0 million and $3.8 million in the same periods in the prior year.  On a diluted per share basis, net loss was $0.18 and $0.03 for the three and six months ended June 30, 2006, respectively, compared to net income per diluted share of $0.20 and $0.44 for the same periods in 2005.

During the three and six months ended June 30, 2006, the Company recorded $8.5 million and $9.6 million, respectively, of interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January, 2006.  The principal and accrued interest on the convertible notes was converted to approximately 3.3 million shares of common stock during the second quarter of 2006 and the balance of the deemed discount is now fully amortized.  In the absence of this non-cash expense, net income for the three and six months ended June 30, 2006 would have been $2.5 million and $5.7 million, respectively, representing a 25.7% and 47.9% increase over the $2.0 million and $3.8 million in net income for the similar periods of 2005.

"I am pleased by the significant growth in our revenues and the robust increases in our operating results for the second quarter and year to date," stated Mark E. Schwarz, Executive Chairman.  "I believe that we are well positioned for continued success in our specialty and niche property and casualty insurance markets," Mr. Schwarz continued.

"We are now reaping the benefits of the strategic plans we began implementing last year," stated Mark J. Morrison, President and Chief Executive Officer.  "Our successful 2005 capital plan paved the way for the accretive acquisitions and increased retention of profitable business which are now fueling our success.  We look forward to retaining additional premium as we continue to integrate these acquisitions into our operations," Mr. Morrison concluded.

Hallmark Financial Services, Inc. is an insurance holding company which, through its subsidiaries, engages in the sale of property and casualty insurance products to businesses and individuals.  The Company's business involves marketing, distributing, underwriting and servicing commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana, Louisiana, Oklahoma and Washington; marketing, distributing, underwriting and servicing non- standard personal automobile insurance in Texas, New Mexico, Arizona, Oklahoma and Idaho; marketing, distributing, underwriting and servicing general aviation insurance in 48 states; and providing other insurance related services.  The Company is headquartered in Fort Worth, Texas and its common stock is listed on the American Stock Exchange under the symbol "HAF".

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
   http://www.hallmarkgrp.com/



            Hallmark Financial Services, Inc. and Subsidiaries
                  Consolidated Statements of Operations
                               (Unaudited)
                ($ in thousands, except per share amounts)

                                 Three Months Ended      Six Months Ended
                                      June 30                 June 30
                                   2006       2005        2006      2005

  Gross premiums written         $47,876     $8,839      $95,611   $19,473
  Ceded premiums written          (2,484)       ---       (4,440)      ---
    Net premiums written          45,392      8,839       91,171    19,473
    Change in unearned premiums  (11,133)       824      (28,478)      230
    Net premiums earned           34,259      9,663       62,693    19,703

  Investment income, net of
   expenses                        2,236        451        4,593       862
  Realized loss                   (1,283)       (41)      (1,366)      (41)
  Finance charges                  1,216        509        1,903     1,049
  Commission and fees             10,016      5,628       22,280    10,440
  Processing and service fees        727      1,570        1,584     3,204
  Other income                        16          5           20        13

    Total revenues                47,187     17,785       91,707    35,230

  Losses and loss adjustment
   expenses                       20,199      5,515       36,889    11,541
  Other operating costs and
   expenses                       20,027      9,150       41,053    17,855
  Interest expense                 1,662        102        3,247       105
  Interest expense from
   amortization of discount
   on convertible notes            8,508        ---        9,625       ---
  Amortization of intangible
   asset                             573          7        1,146        14

    Total expenses                50,969     14,774       91,960    29,515

  Income (loss) before tax        (3,782)     3,011         (253)    5,715

  Income tax expense (benefit)      (940)     1,007          163     1,896

  Net income (loss)              $(2,842)    $2,004        $(416)   $3,819

  Common stockholders net
   income (loss) per share:
      Basic                       $(0.18)     $0.20       $(0.03)    $0.45
      Diluted                     $(0.18)     $0.20       $(0.03)    $0.44





The following is a reconciliation of net income without interest expense from amortization of discount on convertible notes to reported results (in thousands).  Management believes this reconciliation provides useful supplemental information in evaluating the operating results of our business. This disclosure should not be viewed as a substitute for net loss determined in accordance with GAAP:

                                             Three Months      Six Months
                                                Ended            Ended
                                               June 30,         June 30,
                                                 2006             2006

  Income excluding interest expense
   from amortization of discount,
   net of tax                                   $2,520          $5,650

  Interest expense from amortization of
   discount                                      8,508           9,625
  Less related tax effect                       (3,146)         (3,559)
                                                 5,362           6,066

  Net loss                                     ($2,842)          ($416)


DATASOURCE: Hallmark Financial Services, Inc.



CONTACT:  Mark J. Morrison, President and Chief Executive Officer of

Hallmark Financial Services, Inc., [phone]



Web site:  http://www.hallmarkgrp.com/ 

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