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

12 Months Ended

Dec. 31, 2017

Parent Company [Member]

Condensed Financial Information of Parent Company Only Disclosure

HALLMARK FINANCIAL SERVICES, INC.

BALANCE SHEETS

December 31, 2017 and 2016

(In thousands)

	2017		2016
ASSETS
Debt securities, available-for-sale, at fair value (amortized cost: $150 in 2017)	$	150	$	-
Cash and cash equivalents		12,194		9,034
Investment in subsidiaries		344,496		363,078
Deferred federal income taxes		493		333
Federal income tax recoverable		3,914		2,756
Other assets		3,571		3,878
Total assets	$	364,818	$	379,079
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Revolving credit facility payable	$	30,000	$	30,000
Subordinated debt securities (less unamortized debt issuance cost of $949 in 2017 and $1,001 in 2016)		55,753		55,701
Accounts payable and other accrued expenses		27,947		27,642
Total liabilities		113,700		113,343
Stockholders’ equity:
Common stock, $.18 par value, authorized 33,333,333 shares; issued 20,872,831 shares in 2017 and in 2016		3,757		3,757
Additional paid-in capital		123,180		123,166
Retained earnings		136,474		148,027
Accumulated other comprehensive income		12,234		10,371
Treasury stock (2,703,803 shares in 2017 and 2,260,849 in 2016), at cost		(24,527)		(19,585)
Total stockholders’ equity		251,118		265,736
Total liabilities and stockholders’ equity	$	364,818	$	379,079

See accompanying report of independent registered public accounting firm.

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF OPERATIONS

For the years ended December 31, 2017, 2016 and 2015

(In thousands)

	2017		2016		2015
Investment income, net of expenses	$	210	$	70	$	120
Dividend income from subsidiaries		11,375		10,500		8,000
Net realized losses		(759)		-		-
Management fee income		11,896		10,711		10,053
Total revenues		22,722		21,281		18,173
Operating expenses		10,265		9,878		10,222
Interest expense		4,512		4,549		3,906
Total expenses		14,777		14,427		14,128
Income before equity in undistributed earnings (loss) of subsidiaries and income tax benefit		7,945		6,854		4,045
Income tax benefit		(947)		(1,315)		(1,273)
Income before equity in undistributed earnings (loss) of subsidiaries		8,892		8,169		5,318
Equity in undistributed share of (loss) earnings in subsidiaries		(20,445)		(1,643)		16,545
Net (loss) income	$	(11,553)	$	6,526	$	21,863
Comprehensive (loss) income	$	(9,690)	$	9,479	$	11,480

See accompanying report of independent registered public accounting firm.

HALLMARK FINANCIAL SERVICES, INC.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2017, 2016 and 2015

(In thousands)

	2017		2016		2015
Cash flows from operating activities:
Net (loss) income	$	(11,553)	$	6,526	$	21,863
Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities:
Depreciation and amortization expense		367		148		65
Deferred income tax (benefit) expense		(160)		609		(195)
Net realized losses		759		-		-
Undistributed share of loss (earnings) of subsidiaries		20,445		1,643		(16,545)
Change in current federal income tax (recoverable) payable		(1,158)		(2,828)		8
Change in all other liabilities		306		1,228		(7,080)
Change in all other assets		632		814		188
Net cash provided by (used in) operating activities		9,638		8,140		(1,696)
Cash flows from investing activities:
Purchases of property and equipment		(97)		(1,469)		(159)
Purchase of investment securities		(1,304)		-		-
Capital contribution to subsidiaries		-		-		(30,000)
Net cash used in investing activities		(1,401)		(1,469)		(30,159)
Cash flows from financing activities:
Proceeds from exercise of employee stock options		231		466		658
Purchase of treasury shares		(5,308)		(6,117)		(2,532)
Activity under revolving credit facility, net		-		-		30,000
Payment of debt issuance costs		-		-		(96)
Net cash (used in) provided by financing activities		(5,077)		(5,651)		28,030
Increase (decrease) in cash and cash equivalents		3,160		1,020		(3,825)
Cash and cash equivalents at beginning of year		9,034		8,014		11,839
Cash and cash equivalents at end of year	$	12,194	$	9,034	$	8,014
Supplemental cash flow information:
Interest paid	$	4,506	$	4,287	$	3,906
Income taxes paid (recovered)	$	372	$	904	$	(1,086)

See accompanying report of independent registered public accounting firm