Hallmark Reports Increased Revenues

May 16, 2006

Fort Worth-based Hallmark Financial Services Inc. reported operating results for the first quarter of fiscal 2006, indicating higher net income for the quarter ended March 31, 2006, compared to the same period last year.

The company brought in $2.4 million in Q1 2006, as compared to $1.8 million for the same period in 2005.

During the first quarter of fiscal 2006, Hallmark recorded a $1.1 million interest expense from amortization attributable to the deemed discount on convertible promissory notes issued in January 2006. In the absence of this non-cash expense, net income for the three months ended March 31, 2006 would have been $3.1 million, representing a 72.5 percent increase over the similar period of fiscal 2005. The increased net income reflected a 155.2 percent year-to-year increase in total revenues to $44.5 million for the quarter ended March 31, 2006 from $17.4 million for the quarter ended March 31, 2005.

First quarter 2006 net income was $0.02 per common stockholder diluted share, as compared to $0.04 per common stockholder diluted share for the same period in 2005. The decrease in diluted earnings per share to common stockholders was due to the combined impact of issuing 50.0 million shares in a stockholders rights offering in the second quarter of 2005 and allocating a portion of net income to the holders of convertible notes in the first quarter of 2006.

“I am pleased to report another quarter of strong operating results,” stated Mark E. Schwarz, chairman and chief executive officer. “The moves we made last year to retain our commercial business and the acquisitions made this year have positioned us for continued growth and success.”

“The increase in total revenues for the quarter ended March 31, 2006, as compared to the same period in 2005, was primarily attributable to the acquisitions of Texas General Agency Inc. and Aerospace Holding LLC in January of 2006. In addition, total revenues were positively impacted by the retention in American Hallmark Insurance Company of commercial business written by Hallmark General Agency, Inc. that was previously produced for a third party insurer,” stated Mark J. Morrison, president and chief financial officer. “The increase in net income for the quarter ended March 31, 2006 versus the same period in 2005 was primarily attributable to our retention of the Hallmark General Agency commercial business and the quarterly results of Texas General Agency.”

Hallmark Financial Services engages primarily in sale of property and casualty insurance products. The company’s business involves marketing and underwriting commercial insurance in Texas, New Mexico, Idaho, Oregon, Montana and Washington; marketing and underwriting non-standard personal automobile insurance in Texas, New Mexico and Arizona; marketing of general aviation insurance in 44 states; claims administration; and other insurance related services.

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