HALLMARK FINANCIAL SERVICES, INC.

BALANCE SHEETS

December 31, 2016 and 2015

(In thousands)



	2016		2015
ASSETS
Cash and cash equivalents	$	9,034	$	8,014
Investment in subsidiaries		363,078		361,769
Deferred federal income taxes		333		942
Federal income tax recoverable		2,756		-
Other assets		3,878		3,435
Total assets	$	379,079	$	374,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable	$	30,000	$	30,000
Subordinated debt securities (less unamortized debt issuance cost of $1,001 in 2016 and $1,053 in 2015)		55,701		55,649
Current federal income tax payable		-		72
Accounts payable and other accrued expenses		27,642		26,413

Total liabilities		113,343		112,134

Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2016 and in 2015		3,757		3,757
Additional paid-in capital		123,166		123,480
Retained earnings		148,027		141,501
Accumulated other comprehensive income		10,371		7,418
Treasury stock (2,260,849 shares in 2016 and 1,775,512 in 2015), at cost		(19,585)		(14,130)

Total stockholders’ equity		265,736		262,026

Total liabilities and stockholders’ equity	$	379,079	$	374,160

See accompanying report of independent registered public accounting firm.

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF OPERATIONS

For the years ended December 31, 2016, 2015 and 2014

(In thousands)



	2016		2015		2014
Investment income, net of expenses	$	70	$	120	$	133
Dividend income from subsidiaries		10,500		8,000		8,000
Management fee income		10,711		10,053		9,614
Total revenues		21,281		18,173		17,747

Operating expenses		9,878		10,222		9,759
Interest expense		4,549		3,906		4,576

Total expenses		14,427		14,128		14,335

Income before equity in undistributed earnings (loss) of subsidiaries and income tax benefit		6,854		4,045		3,412

Income tax benefit		(1,315)		(1,273)		(1,623)

Income before equity in undistributed earnings (loss) of subsidiaries		8,169		5,318		5,035
Equity in undistributed share of (loss) earnings in subsidiaries		(1,643)		16,545		8,394

Net income	$	6,526	$	21,863	$	13,429

Comprehensive income	$	9,479	$	11,480	$	14,347

See accompanying report of independent registered public accounting firm.

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2016, 2015 and 2014

(In thousands)



	2016		2015		2014
Cash flows from operating activities:
Net income	$	6,526	$	21,863	$	13,429

Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization expense		148		65		68
Deferred income tax expense (benefit)		609		(195)		183
Undistributed share of loss (earnings) of subsidiaries		1,643		(16,545)		(8,394)
Change in current federal income tax (recoverable) payable		(2,828)		8		(3,290)
Change in all other liabilities		1,228		(7,080)		4,134
Change in all other assets		814		188		(184)

Net cash provided by (used in) operating activities		8,140		(1,696)		5,946

Cash flows from investing activities:
Purchases of property and equipment, net		(1,469)		(159)		(47)
Capital contribution to subsidiaries		-		(30,000)		-

Net cash used in investing activities		(1,469)		(30,159)		(47)

Cash flows from financing activities:
Proceeds from exercise of employee stock options		466		658		1,155
Purchase of treasury shares		(6,117)		(2,532)		(1,805)
Activity under revolving credit facility, net		-		30,000		(1,473)
Payment of debt issuance costs		-		(96)		-
Net cash (used in) provided by financing activities		(5,651)		28,030		(2,123)

Increase (decrease) in cash and cash equivalents		1,020		(3,825)		3,776
Cash and cash equivalents at beginning of year		8,014		11,839		8,063
Cash and cash equivalents at end of year	$	9,034	$	8,014	$	11,839

Supplemental cash flow information:
Interest paid	$	4,287	$	3,906	$	4,576

Income taxes paid (recovered)	$	904	$	(1,086)	$	1,481

See accompanying report of independent registered public accounting firm.