| Nevada                          |   | 87-0447375          |
|---------------------------------|--------|---------------------|
|                            |   |                |
| (State or other jurisdiction of |   | (I.R.S. Employer    |
| Incorporation or organization)  |   | Identification No.) |

| 777 Main Street, Suite 1000, Fort Worth, Texas |         | 76102      |
|------------------------------------------------|--------------|------------|
|                                           |         |       |
| (Address of principal executive offices)       |    | (Zip Code) |

----

|                                                                                                                                                    |    | Page Number |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------|
|                                                                                                                                                    |         |             |
| Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010                                                                         |         | 3                |
|                                                                                                                                                    |         |             |
| Consolidated Statements of Operations (unaudited) for the three months    ended March 31, 2011 and March 31, 2010                   |         | 4                |
|                                                                                                                                                    |         |             |
| Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited) for the three months ended March 31, 2011 and March 31, 2010 |         | 5                |
|                                                                                                                                                    |         |             |
| Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2011 and March 31, 2010                                          |         | 6                |
|                                                                                                                                                    |         |             |
| Notes to Consolidated Financial Statements (unaudited)                                                                                                  |         | 7                |

----

|                                                                                                            |   | March 31 |    |   | December 31 |   |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------|---------|--------|------------------|--------|
|                                                                                                            |   | 2011          |    |   | 2010             |   |
|                                                                                                            |   | (unaudited)   |    |   |             |   |
| ASSETS                                                                                                          |   |          |    |   |             |   |   |
|                                                                                                            |   |          |    |   |             |   |   |
| Investments:                                                                                                    |   |          |    |   |             |   |   |
| Debt securities, available-for-sale, at fair value (cost: $379,287 in 2011 and $383,530 in 2010)                |   | $             | 382,665 |   |             | $      | 388,399 |   |
| Equity securities, available-for-sale, at fair value (cost: $33,754 in 2011 and $32,469 in 2010)                |   |          | 44,673  |   |             |   | 44,042 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Total investments                                                                                               |   |          | 427,338 |   |             |   | 432,441 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Cash and cash equivalents                                                                                       |   |          | 44,699  |   |             |   | 60,519 |   |
| Restricted cash                                                                                                 |   |          | 2,790   |   |             |   | 5,277 |   |
| Ceded unearned premiums                                                                                         |   |          | 22,144  |   |             |   | 25,504 |   |
| Premiums receivable                                                                                             |   |          | 55,646  |   |             |   | 47,337 |   |
| Accounts receivable                                                                                             |   |          | 7,053   |   |             |   | 7,051 |   |
| Receivable for securities                                                                                       |   |          | 10,407  |   |             |   | 2,215 |   |
| Reinsurance recoverable                                                                                         |   |          | 43,875  |   |             |   | 39,505 |   |
| Deferred policy acquisition costs                                                                               |   |          | 22,943  |   |             |   | 21,679 |   |
| Goodwill                                                                                                        |   |          | 43,564  |   |             |   | 43,564 |   |
| Intangible assets, net                                                                                          |   |          | 29,344  |   |             |   | 30,241 |   |
| Federal income tax recoverable                                                                                  |   |          | 3,966   |   |             |   | 4,093 |   |
| Prepaid expenses                                                                                                |   |          | 2,135   |   |             |   | 1,987 |   |
| Other assets                                                                                                    |   |          | 16,013  |   |             |   | 15,207 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Total assets                                                                                                    |   | $             | 731,917 |   |             | $      | 736,620 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                            |   |          |    |   |             |   |   |   |
| Liabilities:                                                                                                    |   |          |    |   |             |   |   |   |
| Note payable                                                                                                    |   | $             | 2,800   |   |             | $      | 2,800 |   |
| Subordinated debt securities                                                                                    |   |          | 56,702  |   |             |   | 56,702 |   |
| Reserves for unpaid losses and loss adjustment expenses                                                         |   |          | 268,734 |   |             |   | 251,677 |   |
| Unearned premiums                                                                                               |   |          | 143,726 |   |             |   | 140,965 |   |
| Unearned revenue                                                                                                |   |          | 109     |   |             |   | 116 |   |
| Reinsurance balances payable                                                                                    |   |          | 800     |   |             |   | 3,122 |   |
| Accrued agent profit sharing                                                                                    |   |          | 674     |   |             |   | 1,301 |   |
| Accrued ceding commission payable                                                                               |   |          | 4,231   |   |             |   | 4,231 |   |
| Pension liability                                                                                               |   |          | 2,744   |   |             |   | 2,833 |   |
| Payable for securities                                                                                          |   |          | 9,343   |   |             |   | 2,493 |   |
| Payable for acquisition                                                                                         |   |          | -       |   |             |   | 14,000 |   |
| Deferred federal income taxes, net                                                                              |   |          | 2,280   |   |             |   | 3,471 |   |
| Accounts payable and other accrued expenses                                                                     |   |          | 15,031  |   |             |   | 15,786 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Total liabilities                                                                                               |   |          | 507,174 |   |             |   | 499,497 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Commitments and Contingencies (Note 18)                                                                         |   |          |    |   |             |   |   |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Redeemable non-controlling interest                                                                             |   |          | 1,377   |   |             |   | 1,360 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Stockholders' equity:                                                                                           |   |          |    |   |             |   |   |   |
| Common stock, $.18 par value, authorized 33,333,333 shares in 2011 and 2010; issued 20,872,831 in 2011 and 2010 |   |          | 3,757   |   |             |   | 3,757 |   |
| Additional paid-in capital                                                                                      |   |          | 122,074 |   |             |   | 121,815 |   |
| Retained earnings                                                                                               |   |          | 94,590  |   |             |   | 105,816 |   |
| Accumulated other comprehensive income                                                                          |   |          | 8,207   |   |             |   | 9,637 |   |
| Treasury stock (748,662 shares in 2011 and 2010), at cost                                                       |   |          | (5,262  | )      |             |   | (5,262 | ) |
|                                                                                                            |   |          |    |   |             |   |   |   |
| Total stockholders' equity                                                                                      |   |          | 223,366 |   |             |   | 235,763 |   |
|                                                                                                            |   |          |    |   |             |   |   |   |
|                                                                                                            |   | $             | 731,917 |   |             | $      | 736,620 |   |

----

|                                                                                               |   | Three Months Ended |    |
|----------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                               |   | March 31                     |    |
|                                                                                               |   | 2011                         |    |   | 2010 |   |
|                                                                                               |   |                         |    |   |   |   |
| Gross premiums written                                                                             |   | $                            | 89,712  |   |   | $ | 81,859 |   |
| Ceded premiums written                                                                             |   |                         | (13,478 | ) |   |   | (9,064 | ) |
| Net premiums written                                                                               |   |                         | 76,234  |   |   |   | 72,795 |   |
| Change in unearned premiums                                                                        |   |                         | (6,121  | ) |   |   | (5,780 | ) |
| Net premiums earned                                                                                |   |                         | 70,113  |   |   |   | 67,015 |   |
|                                                                                               |   |                         |    |   |   |   |   |   |
| Investment income, net of expenses                                                                 |   |                         | 4,007   |   |   |   | 3,201 |   |
| Net realized gains                                                                                 |   |                         | 1,119   |   |   |   | 3,803 |   |
| Finance charges                                                                                    |   |                         | 1,740   |   |   |   | 1,643 |   |
| Commission and fees                                                                                |   |                         | 415     |   |   |   | 151 |   |
| Other income                                                                                       |   |                         | 14      |   |   |   | 10 |   |
|                                                                                               |   |                         |    |   |   |   |   |   |
| Total revenues                                                                                     |   |                         | 77,408  |   |   |   | 75,823 |   |
|                                                                                               |   |                         |    |   |   |   |   |   |
| Losses and loss adjustment expenses                                                                |   |                         | 63,785  |   |   |   | 43,098 |   |
| Other operating expenses                                                                           |   |                         | 23,173  |   |   |   | 21,482 |   |
| Interest expense                                                                                   |   |                         | 1,158   |   |   |   | 1,146 |   |
| Amortization of intangible assets                                                                  |   |                         | 897     |   |   |   | 916 |   |
|                                                                                               |   |                         |    |   |   |   |   |   |
| Total expenses                                                                                     |   |                         | 89,013  |   |   |   | 66,642 |   |
|                                                                                               |   |                         |    |   |   |   |   |   |
| (Loss) income before tax                                                                           |   |                         | (11,605 | ) |   |   | 9,181 |   |
| Income tax (benefit) expense                                                                       |   |                         | (393    | ) |   |   | 2,890 |   |
| Net (loss) income                                                                                  |   |                         | (11,212 | ) |   |   | 6,291 |   |
| Less: Net income attributable to non-controlling  interest                               |   |                         | 14      |   |   |   | 5 |   |
|                                                                                               |   |                         |    |   |   |   |   |   |
| Net (loss) income attributable to Hallmark Financial Services, Inc.                                |   | $                            | (11,226 | ) |   | $ | 6,286 |   |
|                                                                                               |   |                         |    |   |   |   |   |   |
| Net (loss) income per share attributable to Hallmark Financial Services, Inc. common stockholders: |   |                         |    |   |   |   |   |   |
| Basic                                                                                              |   | $                            | (0.56   | ) |   | $ | 0.31 |   |
| Diluted                                                                                            |   | $                            | (0.56   | ) |   | $ | 0.31 |   |

----

|                                                                |   | Three Months Ended |    |
|---------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                |   | March 31,               |    |
|                                                                |   | 2011                         |    |   | 2010 |   |
|                                                                |   |                         |    |   |   |   |
| Common Stock                                                        |   |                         |    |   |   |   |
| Balance, beginning of period                                        |   | $                            | 3,757   |   |   | $ | 3,757 |   |
| Issuance of common stock upon option exercises                      |   |                         | -       |   |   |   | - |   |
| Balance, end of period                                              |   |                         | 3,757   |   |   |   | 3,757 |   |
|                                                                |   |                         |    |   |   |   |   |   |
| Additional Paid-In Capital                                          |   |                         |    |   |   |   |   |   |
| Balance, beginning of period                                        |   |                         | 121,815 |   |   |   | 121,016 |   |
| Accretion of redeemable noncontrolling interest                     |   |                         | (3      | ) |   |   | (78 | ) |
| Equity based compensation                                           |   |                         | 262     |   |   |   | 298 |   |
| Exercise of stock options                                           |   |                         | -       |   |   |   | (40 | ) |
|                                                                |   |                         |    |   |   |   |   |   |
| Balance, end of period                                              |   |                         | 122,074 |   |   |   | 121,196 |   |
|                                                                |   |                         |    |   |   |   |   |   |
| Retained Earnings                                                   |   |                         |    |   |   |   |   |   |
| Balance, beginning of period                                        |   |                         | 105,816 |   |   |   | 98,482 |   |
| Net (loss) income attributable to Hallmark Financial Services, Inc. |   |                         | (11,226 | ) |   |   | 6,286 |   |
|                                                                |   |                         |    |   |   |   |   |   |
| Balance, end of period                                              |   |                         | 94,590  |   |   |   | 104,768 |   |
|                                                                |   |                         |    |   |   |   |   |   |
| Accumulated Other Comprehensive Income                              |   |                         |    |   |   |   |   |   |
| Balance, beginning of period                                        |   |                         | 9,637   |   |   |   | 8,589 |   |
| Additional minimum pension liability, net of tax                    |   |                         | 46      |   |   |   | 36 |   |
| Net unrealized holding (losses) gains arising during period         |   |                         | (357    | ) |   |   | 6,261 |   |
| Reclassification adjustment for losses included in net income       |   |                         | (1,119  | ) |   |   | (3,803 | ) |
|                                                                |   |                         |    |   |   |   |   |   |
| Balance, end of period                                              |   |                         | 8,207   |   |   |   | 11,083 |   |
|                                                                |   |                         |    |   |   |   |   |   |
| Treasury Stock                                                      |   |                         |    |   |   |   |   |   |
| Balance, beginning of period                                        |   |                         | (5,262  | ) |   |   | (5,327 | ) |
| Issuance of treasury stock upon option exercises                    |   |                         | -       |   |   |   | 59 |   |
| Balance, end of period                                              |   |                         | (5,262  | ) |   |   | (5,268 | ) |
|                                                                |   |                         |    |   |   |   |   |   |
| Total Stockholders' Equity                                          |   | $                            | 223,366 |   |   | $ | 235,536 |   |
|                                                                |   |                         |    |   |   |   |   |   |
| Net (loss) income                                                   |   | $                            | (11,212 | ) |   | $ | 6,291 |   |
| Additional minimum pension liablilty, net of tax                    |   |                         | 46      |   |   |   | 36 |   |
| Net unrealized holding (losses) gains arising during period         |   |                         | (357    | ) |   |   | 6,261 |   |
| Reclassification adjustment for gains included in net income        |   |                         | (1,119  | ) |   |   | (3,803 | ) |
| Comprehensive (loss) income                                         |   |                         | (12,642 | ) |   |   | 8,785 |   |
| Less: Comprehensive income attributable to non-controlling interest |   |                         | 14      |   |   |   | 5 |   |
| Comprehensive (loss) income attributable to                         |   |                         |    |   |   |   |   |   |
| Hallmark Financial Services, Inc.                                   |   | $                            | (12,656 | ) |   | $ | 8,780 |   |

----

|                                                                                                          |   | Three Months Ended |    |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                          |   | March 31                     |    |
|                                                                                                          |   | 2011                         |    |   | 2010 |   |
| Cash flows from operating activities:                                                                         |   |                         |    |   |   |   |
| Net (loss) income                                                                                             |   | $                            | (11,212 | ) |   | $ | 6,291 |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Adjustments to reconcile net (loss) income to cash (used) provided by operating activities:                   |   |                         |    |   |   |   |   |   |
| Depreciation and amortization expense                                                                         |   |                         | 1,224   |   |   |   | 1,155 |   |
| Deferred federal income taxes                                                                                 |   |                         | (548    | ) |   |   | 89 |   |
| Realized gains on investments                                                                                 |   |                         | (1,119  | ) |   |   | (3,803 | ) |
| Change in ceded unearned premiums                                                                             |   |                         | 3,360   |   |   |   | (1,299 | ) |
| Change in premiums receivable                                                                                 |   |                         | (8,309  | ) |   |   | (6,804 | ) |
| Change in accounts receivable                                                                                 |   |                         | (3      | ) |   |   | 2,724 |   |
| Change in deferred policy acquisition costs                                                                   |   |                         | (1,264  | ) |   |   | (1,406 | ) |
| Change in unpaid losses and loss adjustment expenses                                                          |   |                         | 17,057  |   |   |   | 11,884 |   |
| Change in unearned premiums                                                                                   |   |                         | 2,761   |   |   |   | 7,078 |   |
| Change in unearned revenue                                                                                    |   |                         | (7      | ) |   |   | (11 | ) |
| Change in accrued agent profit sharing                                                                        |   |                         | (627    | ) |   |   | (1,178 | ) |
| Change in reinsurance recoverable                                                                             |   |                         | (4,370  | ) |   |   | (991 | ) |
| Change in reinsurance payable                                                                                 |   |                         | (2,322  | ) |   |   | (2,568 | ) |
| Change in current federal income tax recoverable/payable                                                      |   |                         | 127     |   |   |   | 1,322 |   |
| Change in accrued ceding commission payable                                                                   |   |                         | -       |   |   |   | (4,367 | ) |
| Change in all other liabilities                                                                               |   |                         | (844    | ) |   |   | (2,772 | ) |
| Change in all other assets                                                                                    |   |                         | 116     |   |   |   | 2,863 |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Net cash (used) provided by operating activities                                                              |   |                         | (5,980  | ) |   |   | 8,207 |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Cash flows from investing activities:                                                                         |   |                         |    |   |   |   |   |   |
| Purchases of property and equipment                                                                           |   |                         | (667    | ) |   |   | (268 | ) |
| Net transfers from (into) restricted cash                                                                     |   |                         | 2,487   |   |   |   | (2,047 | ) |
| Payment for acquisition of subsidiaries                                                                       |   |                         | (14,000 | ) |   |   | - |   |
| Purchases of investment securities                                                                            |   |                         | (72,172 | ) |   |   | (51,965 | ) |
| Maturities, sales and redemptions of investment securities                                                    |   |                         | 74,512  |   |   |   | 44,484 |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Net cash used in investing activities                                                                         |   |                         | (9,840  | ) |   |   | (9,796 | ) |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Cash flows from financing activities:                                                                         |   |                         |    |   |   |   |   |   |
| Proceeds from exercise of employee stock options                                                              |   |                         | -       |   |   |   | 19 |   |
| Distribution to non-controlling interest                                                                      |   |                         | -       |   |   |   | (144 | ) |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Net cash used in financing activities                                                                         |   |                         | -       |   |   |   | (125 | ) |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Decrease in cash and cash equivalents                                                                         |   |                         | (15,820 | ) |   |   | (1,714 | ) |
| Cash and cash equivalents at beginning of period                                                              |   |                         | 60,519  |   |   |   | 112,270 |   |
| Cash and cash equivalents at end of period                                                                    |   | $                            | 44,699  |   |   | $ | 110,556 |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Supplemental cash flow information:                                                                           |   |                         |    |   |   |   |   |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Interest paid                                                                                                 |   | $                            | 1,152   |   |   | $ | 1,151 |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Income taxes paid                                                                                             |   | $                            | 28      |   |   | $ | 1,479 |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Supplemental schedule of non-cash investing activities:                                                       |   |                         |    |   |   |   |   |   |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Change in receivable for securities related to investment disposals that settled after the balance sheet date |   | $                            | (8,191  | ) |   | $ | (2,655 | ) |
|                                                                                                          |   |                         |    |   |   |   |   |   |
| Change in payable for securities related to investment purchases that settled after the balance sheet date    |   | $                            | 6,850   |   |   | $ | 6,982 |   |

----

----

----

----

----

----

|   | · | Level 1: quoted prices in active markets for identical assets; |
|--------|--------|----------------------------------------------------------------|

|   | · | Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, inputs of identical assets for less active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Level 3: inputs to the valuation methodology that are unobservable for the asset or liability. |
|--------|--------|------------------------------------------------------------------------------------------------|

----

|                                                        |   | Quoted Prices in   |   |   | Other      |   |    |         |   |   |   |   |
|-------------------------------------------------------------|--------|------------------------------|--------|--------|------------|--------|---------|--------------|--------|--------|--------|--------|
|                                                        |   | Active Markets for |   |   | Observable |   |    | Unobservable |   |   |   |   |
|                                                        |   | Identical Assets        |   |   | Inputs     |   |    | Inputs       |   |   |   |   |
|                                                        |   | (Level 1)                    |   |   | (Level 2)  |   |    | (Level 3)    |   |   | Total  |   |
|                                                        |   |                         |   |   |       |   |    |         |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government |   | $                            | -      |   |       | $      | 23,150  |         |   | $      | -      |   |   | $ | 23,150 |   |
| Corporate bonds                                             |   |                         | -      |   |       |   | 80,161  |         |   |   | -      |   |   |   | 80,161 |   |
| Collateralized corporate bank loans                         |   |                         | -      |   |       |   | 101,340 |         |   |   | 1,373  |   |   |   | 102,713 |   |
| Municipal bonds                                             |   |                         | -      |   |       |   | 155,396 |         |   |   | 20,515 |   |   |   | 175,911 |   |
| Mortgage-backed                                             |   |                         | -      |   |       |   | 730     |         |   |   | -      |   |   |   | 730 |   |
| Total debt securities                                       |   |                         | -      |   |       |   | 360,777 |         |   |   | 21,888 |   |   |   | 382,665 |   |
|                                                        |   |                         |   |   |       |   |    |         |   |   |   |   |   |   |   |   |
| Financial services                                          |   |                         | 19,054 |   |       |   | -       |         |   |   | -      |   |   |   | 19,054 |   |
| All other                                                   |   |                         | 25,619 |   |       |   | -       |         |   |   | -      |   |   |   | 25,619 |   |
| Total equity securities                                     |   |                         | 44,673 |   |       |   | -       |         |   |   | -      |   |   |   | 44,673 |   |
|                                                        |   |                         |   |   |       |   |    |         |   |   |   |   |   |   |   |   |
| Total debt and equity securities                            |   | $                            | 44,673 |   |       | $      | 360,777 |         |   | $      | 21,888 |   |   | $ | 427,338 |   |

----

| Beginning balance as of January 1, 2011                |   | $      | 21,981  |   |
|--------------------------------------------------------|--------|--------|---------|--------|
|                                                   |   |   |    |   |
| Settlements                                            |   |   | (41     | )      |
| Total realized/unrealized gains included in net income |   |   | -       |   |
| Net losses included in other comprehensive income      |   |   | (52     | )      |
| Transfers into Level 3                                 |   |   | -       |   |
| Transfers out of Level 3                     |   |   |  - |   |
| Ending balance as of March 31, 2011                    |   | $      | 21,888  |   |

----

|                                                        |   | Three Months Ended |   |
|-------------------------------------------------------------|--------|------------------------------|--------|
|                                                        |   | March 31                     |   |
|                                                        |   | 2011                         |   |   | 2010 |   |
|                                                        |   |                         |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government |   | $                            | 14     |   |   | $ | - |   |
| Corporate bonds                                             |   |                         | -      |   |   |   | 2,078 |   |
| Collateralized corporate bank loans                         |   |                         | 434    |   |   |   | 1,216 |   |
| Municipal bonds                                             |   |                         | (67    | ) |   |   | (96 | ) |
| Equity securities-financial services                        |   |                         | 738    |   |   |   | 566 |   |
| Equity securities-all other                                 |   |                         | -      |   |   |   | 39 |   |
| Gain on investments                                         |   |                         | 1,119  |   |   |   | 3,803 |   |
| Other-than-temporary impairments                            |   |                         | -      |   |   |   | - |   |
| Net realized gains                                          |   | $                            | 1,119  |   |   | $ | 3,803 |   |

----

|                                                        |   |      |    |   | Gross      |   |   | Gross      |   |   |   |   |
|-------------------------------------------------------------|--------|-----------|---------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|                                                        |   | Amortized |    |   | Unrealized |   |   | Unrealized |   |   | Fair   |   |
|                                                        |   | Cost      |    |   | Gains      |   |   | Losses     |   |   | Value  |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |
| As of March 31, 2011                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government |   | $         | 23,124  |   |       | $      | 34     |       |   | $      | (8     | )      |   | $ | 23,150 |   |
| Corporate bonds                                             |   |      | 77,466  |   |       |   | 3,464  |       |   |   | (769   | )      |   |   | 80,161 |   |
| Collateralized corporate bank loans                         |   |      | 101,921 |   |       |   | 894    |       |   |   | (102   | )      |   |   | 102,713 |   |
| Municipal bonds                                             |   |      | 176,087 |   |       |   | 2,111  |       |   |   | (2,287 | )      |   |   | 175,911 |   |
| Mortgage-backed                                             |   |      | 689     |   |       |   | 41     |       |   |   | -      |   |   |   | 730 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total debt securities                                       |   |      | 379,287 |   |       |   | 6,544  |       |   |   | (3,166 | )      |   |   | 382,665 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Financial services                                          |   |      | 14,121  |   |       |   | 5,141  |       |   |   | (208   | )      |   |   | 19,054 |   |
| All other                                                   |   |      | 19,633  |   |       |   | 6,195  |       |   |   | (209   | )      |   |   | 25,619 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total equity securities                                     |   |      | 33,754  |   |       |   | 11,336 |       |   |   | (417   | )      |   |   | 44,673 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total debt and equity securities                            |   | $         | 413,041 |   |       | $      | 17,880 |       |   | $      | (3,583 | )      |   | $ | 427,338 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| As of December 31, 2010                                     |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government |   | $         | 39,767  |   |       | $      | 36     |       |   | $      | -      |   |   | $ | 39,803 |   |
| Corporate bonds                                             |   |      | 82,956  |   |       |   | 3,465  |       |   |   | (844   | )      |   |   | 85,577 |   |
| Collateralized corporate bank loans                         |   |      | 106,723 |   |       |   | 1,685  |       |   |   | (95    | )      |   |   | 108,313 |   |
| Municipal bonds                                             |   |      | 153,334 |   |       |   | 2,421  |       |   |   | (1,842 | )      |   |   | 153,913 |   |
| Mortgage-backed                                             |   |      | 750     |   |       |   | 43     |       |   |   | -      |   |   |   | 793 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total debt securities                                       |   |      | 383,530 |   |       |   | 7,650  |       |   |   | (2,781 | )      |   |   | 388,399 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Financial services                                          |   |      | 15,385  |   |       |   | 5,770  |       |   |   | (270   | )      |   |   | 20,885 |   |
| All other                                                   |   |      | 17,084  |   |       |   | 6,196  |       |   |   | (123   | )      |   |   | 23,157 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total equity securities                                     |   |      | 32,469  |   |       |   | 11,966 |       |   |   | (393   | )      |   |   | 44,042 |   |
|                                                        |   |      |    |   |       |   |   |       |   |   |   |   |   |   |   |   |
| Total debt and equity securities                            |   | $         | 415,999 |   |       | $      | 19,616 |       |   | $      | (3,174 | )      |   | $ | 432,441 |   |

----

|                                                        |   | As of March 31, 2011 |   |
|-------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                        |   | 12 months or less         |   |   | Longer than 12 months |   |   | Total |   |
|                                                        |   |                                     |   |   | Unrealized |   |   |   |   |   | Unrealized |   |   |   |   |   | Unrealized |   |
|                                                        |   | Fair Value                          |   |   | Losses |   |   | Fair Value |   |   | Losses |   |   | Fair Value |   |   | Losses |   |
|                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government |   | $                                        | 3,038  |   |   | $ | (8 | ) |   | $ | - |   |   | $ | - |   |   | $ | 3,038 |   |   | $ | (8 | ) |
| Corporate bonds                                             |   |                                     | 496    |   |   |   | (4 | ) |   |   | 2,402 |   |   |   | (765 | ) |   |   | 2,898 |   |   |   | (769 | ) |
| Collateralized corporate bank loans                         |   |                                     | 22,851 |   |   |   | (98 | ) |   |   | 19 |   |   |   | (4 | ) |   |   | 22,870 |   |   |   | (102 | ) |
| Municipal bonds                                             |   |                                     | 39,068 |   |   |   | (452 | ) |   |   | 40,492 |   |   |   | (1,835 | ) |   |   | 79,560 |   |   |   | (2,287 | ) |
| Total debt securities                                       |   |                                     | 65,453 |   |   |   | (562 | ) |   |   | 42,913 |   |   |   | (2,604 | ) |   |   | 108,366 |   |   |   | (3,166 | ) |
|                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial services                                          |   |                                     | 2,905  |   |   |   | (208 | ) |   |   | - |   |   |   | - |   |   |   | 2,905 |   |   |   | (208 | ) |
| All other                                                   |   |                                     | 4,717  |   |   |   | (209 | ) |   |   | - |   |   |   | - |   |   |   | 4,717 |   |   |   | (209 | ) |
| Total equity securities                                     |   |                                     | 7,622  |   |   |   | (417 | ) |   |   | - |   |   |   | - |   |   |   | 7,622 |   |   |   | (417 | ) |
|                                                        |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total debt and equity securities                            |   | $                                        | 73,075 |   |   | $ | (979 | ) |   | $ | 42,913 |   |   | $ | (2,604 | ) |   | $ | 115,988 |   |   | $ | (3,583 | ) |

|                                                        |   | As of December 31, 2010 |   |
|-------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                        |   | 12 months or less            |   |   | Longer than 12 months |   |   | Total |   |
|                                                        |   |                                        |   |   | Unrealized |   |   |   |   |   | Unrealized |   |   |   |   |   | Unrealized |   |
|                                                        |   | Fair Value                             |   |   | Losses |   |   | Fair Value |   |   | Losses |   |   | Fair Value |   |   | Losses |   |
|                                                        |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury securities and obligations of U.S. Government |   | $                                           | -      |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |
| Corporate bonds                                             |   |                                        | 8,036  |   |   |   | (13 | ) |   |   | 2,342 |   |   |   | (831 | ) |   |   | 10,378 |   |   |   | (844 | ) |
| Collateralized corporate bank loans                         |   |                                        | 17,370 |   |   |   | (90 | ) |   |   | 19 |   |   |   | (5 | ) |   |   | 17,389 |   |   |   | (95 | ) |
| Municipal bonds                                             |   |                                        | 24,755 |   |   |   | (248 | ) |   |   | 46,591 |   |   |   | (1,594 | ) |   |   | 71,346 |   |   |   | (1,842 | ) |
| Total debt securities                                       |   |                                        | 50,161 |   |   |   | (351 | ) |   |   | 48,952 |   |   |   | (2,430 | ) |   |   | 99,113 |   |   |   | (2,781 | ) |
|                                                        |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial services                                          |   |                                        | 1,234  |   |   |   | (270 | ) |   |   | - |   |   |   | - |   |   |   | 1,234 |   |   |   | (270 | ) |
| All other                                                   |   |                                        | 625    |   |   |   | (123 | ) |   |   | - |   |   |   | - |   |   |   | 625 |   |   |   | (123 | ) |
| Equity securities                                           |   |                                        | 1,859  |   |   |   | (393 | ) |   |   | - |   |   |   | - |   |   |   | 1,859 |   |   |   | (393 | ) |
|                                                        |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total debt and equity securities                            |   | $                                           | 52,020 |   |   | $ | (744 | ) |   | $ | 48,952 |   |   | $ | (2,430 | ) |   | $ | 100,972 |   |   | $ | (3,174 | ) |

----

|                                   |   | Amortized      |    |   | Fair   |   |
|----------------------------------------|--------|----------------|---------|--------|--------|--------|
|                                   |   | Cost           |    |   | Value  |   |
|                                   |   | (in thousands) |    |
|                                   |   |           |    |   |   |   |
| Due in one year or less                |   | $              | 45,670  |   |   | $      | 46,019 |   |
| Due after one year through five years  |   |           | 167,362 |   |   |   | 171,331 |   |
| Due after five years through ten years |   |           | 119,531 |   |   |   | 119,227 |   |
| Due after ten years                    |   |           | 46,035  |   |   |   | 45,358 |   |
| Mortgage-backed                        |   |           | 689     |   |   |   | 730 |   |
|                                   |   | $              | 379,287 |   |   | $      | 382,665 |   |

----

----

|                           |   |           |      |   | Average  |   |   | Contractual |   |   | Intrinsic |   |
|--------------------------------|--------|----------------|-----------|--------|----------|--------|--------|-------------|--------|--------|-----------|--------|
|                           |   | Number of |      |   | Exercise |   |   | Term        |   |   | Value     |   |
|                           |   | Shares         |      |   | Price    |   |   | (Years)     |   |   | $         | (000   | ) |
|                           |   |           |      |   |     |   |   |        |   |   |      |   |   |
| Outstanding at January 1, 2011 |   |           | 1,627,500 |   |     | $      | 9.66   |        |   |   |      |   |   |   |   |
| Granted                        |   |           | -         |   |     | $      | -      |        |   |   |      |   |   |   |   |
| Exercised                      |   |           | -         |   |     | $      | -      |        |   |   |      |   |   |   |   |
| Forfeited or expired           |   |           | (20,834   | )      |     | $      | 4.13   |        |   |   |      |   |   |   |   |
| Outstanding at March 31, 2011  |   |           | 1,606,666 |   |     | $      | 9.73   |        |   |   | 6.9       |   |   | $ | 1,158 |   |
| Exercisable at March 31, 2011  |   |           | 756,093   |   |     | $      | 10.53  |        |   |   | 6.2       |   |   | $ | 346 |   |

|                                                            |   | Three Months Ended |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|
|                                                            |   | March 31,                    |   |
|                                                            |   | 2011                         |   |   | 2010 |   |
|                                                            |   |                         |   |   |   |   |
| Intrinsic value of options exercised                            |   | $                            | -      |   |   | $ | 44 |   |
|                                                            |   |                         |   |   |   |   |   |   |
| Cost of share-based payments (non-cash)                         |   | $                            | 262    |   |   | $ | 298 |   |
|                                                            |   |                         |   |   |   |   |   |   |
| Income tax benefit of share-based payments recognized in income |   | $                            | 8      |   |   | $ | 8 |   |

----

|                                                    |   | Three Months Ended |    |
|---------------------------------------------------------|--------|------------------------------|---------|
|                                                    |   | March 31,                    |    |
|                                                    |   | 2011                         |    |   | 2010 |   |
| Revenues:                                               |   |                         |    |   |   |   |
| Standard Commercial Segment                             |   | $                            | 17,427  |   |   | $ | 18,034 |   |
| Specialty Commercial Segment                            |   |                         | 33,143  |   |   |   | 32,487 |   |
| Personal Segment                                        |   |                         | 25,050  |   |   |   | 21,214 |   |
| Corporate                                               |   |                         | 1,788   |   |   |   | 4,088 |   |
| Consolidated                                            |   | $                            | 77,408  |   |   | $ | 75,823 |   |
|                                                    |   |                         |    |   |   |   |   |   |
| Pre-tax income (loss), net of non-controlling interest: |   |                         |    |   |   |   |   |   |
| Standard Commercial Segment                             |   | $                            | (380    | ) |   | $ | (939 | ) |
| Specialty Commercial Segment                            |   |                         | 3,458   |   |   |   | 6,347 |   |
| Personal Segment                                        |   |                         | (13,214 | ) |   |   | 2,650 |   |
| Corporate                                               |   |                         | (1,483  | ) |   |   | 1,118 |   |
| Consolidated                                            |   | $                            | (11,619 | ) |   | $ | 9,176 |   |

|                         |   | March 31, |    |   | December 31, |   |
|------------------------------|--------|----------------|---------|--------|-------------------|--------|
|                         |   | 2011           |    |   | 2010              |   |
| Assets                       |   |           |    |   |              |   |
|                         |   |           |    |   |              |   |
| Standard Commercial Segment  |   | $              | 128,238 |   |              | $      | 118,818 |   |
| Specialty Commercial Segment |   |           | 331,758 |   |              |   | 330,843 |   |
| Personal Segment             |   |           | 197,239 |   |              |   | 204,660 |   |
| Corporate                    |   |           | 74,682  |   |              |   | 82,299 |   |
|                         |   | $              | 731,917 |   |              | $      | 736,620 |   |

----

|                   |   | Three Months Ended |   |
|------------------------|--------|------------------------------|--------|
|                   |   | March 31,                    |   |
|                   |   | 2011                         |   |   | 2010 |   |
|                   |   |                         |   |   |   |   |
| Ceded earned premiums  |   | $                            | 16,792 |   |   | $ | 7,824 |   |
| Reinsurance recoveries |   | $                            | 12,546 |   |   | $ | 3,736 |   |

|   | · | Property catastrophe.  Our property catastrophe reinsurance reduces the financial impact a catastrophe could have on our commercial and personal property insurance lines.  Catastrophes might include multiple claims and policyholders.  Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires.  Our property catastrophe reinsurance is excess-of-loss reinsurance, which provides us reinsurance coverage for losses in excess of an agreed-upon amount.  We utilize catastrophe models to assist in determining appropriate retention and limits to purchase.  The terms of our property catastrophe reinsurance are: |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | We retain the first $3.0 million of property catastrophe losses; and |
|--------|---|----------------------------------------------------------------------|

|   | o | Our reinsurers reimburse us 100% for any loss in excess of our $3.0 million retention up to $30.0 million for each catastrophic occurrence, subject to an aggregate limit of $54.0 million. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Commercial property.  Our commercial property reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event or catastrophic loss may have on our results.  The terms of our commercial property reinsurance are: |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | We retain the first $1.0 million of loss for each commercial property risk; |
|--------|---|-----------------------------------------------------------------------------|

|   | o | Our reinsurers reimburse us for the next $5.0 million for each commercial property risk, and $10.0 million for all commercial property risk involved in any one occurrence, in all cases subject to an aggregate limit of $30.0 million for all commercial property losses occurring during the treaty period; and |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | Individual risk facultative reinsurance is purchased on any commercial property with limits above $6.0 million. |
|--------|---|-----------------------------------------------------------------------------------------------------------------|

|   | · | Commercial casualty.  Our commercial casualty reinsurance is excess-of-loss coverage intended to reduce the financial impact a single-event loss may have on our results.  The terms of our commercial casualty reinsurance are: |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | We retain the first $1.0 million of any commercial liability risk; and |
|--------|---|------------------------------------------------------------------------|

----

|   | o | Our reinsurers reimburse us for the next $5.0 million for each commercial liability risk. |
|--------|---|-------------------------------------------------------------------------------------------|

|   | · | Aviation.  We purchase reinsurance specific to the aviation risks underwritten by our General Aviation business unit.  This reinsurance provides aircraft hull and liability coverage and airport liability coverage on a per occurrence basis on the following terms: |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | We retain the first $1.0 million of each aircraft hull or liability loss or airport liability loss; and |
|--------|---|---------------------------------------------------------------------------------------------------------|

|   | o | Our reinsurers reimburse us for the next $5.5 million of each combined aircraft hull and liability loss and for the next $4.0 million of each airport liability loss. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Excess & Umbrella.  Currently, we purchase proportional reinsurance where we retain 20% of each risk and cede the remaining 80% to reinsurers.  In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty.  Through June 30, 2009, our Excess & Umbrella business unit wrote policies pursuant to a general agency agreement with an unaffiliated carrier and we assumed 35% of the risk from that carrier. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | E&S Commercial. Currently, we purchase proportional reinsurance on our medical professional liability risks where we retain 40% of each risk and cede the remaining 60% to reinsurers.  In states where we are not yet licensed to offer a non-admitted product, we utilize a fronting arrangement pursuant to which we assume all of the risk and then retrocede a portion of that risk under the same proportional reinsurance treaty. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hallmark County Mutual.  HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas where we previously produced policies for third party county mutual insurance companies and reinsured 100% for a fronting fee.  In addition, HCM is used to front business produced by unaffiliated third parties. HCM does not retain any business. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hallmark National Insurance Company. Simultaneous with the December 31, 2010 closing of our acquisition of HNIC, HNIC entered into reinsurance contracts with an affiliate of the seller, pursuant to which such affiliate of the seller will handle all claims and assume all liabilities arising under policies issued by HNIC prior to closing or during a transition period of up to six months following the closing. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|      |   | Three Months Ended |    |
|-----------|--------|------------------------------|---------|
|      |   | March 31,               |    |
|      |   | 2011                         |    |   | 2010 |   |
|      |   |                         |    |   |   |   |
| Deferred  |   | $                            | (15,559 | ) |   | $ | (15,855 | ) |
| Amortized |   |                         | 14,295  |   |   |   | 14,449 |   |
|      |   |                         |    |   |   |   |   |   |
| Net       |   | $                            | (1,264  | ) |   | $ | (1,406 | ) |

----

|                                        |   | Three Months Ended |   |
|---------------------------------------------|--------|------------------------------|--------|
|                                        |   | March 31,                    |   |
|                                        |   | 2011                         |   |   | 2010 |   |
|                                        |   |                         |   |   |   |   |
| Weighted average shares - basic             |   |                         | 20,124 |   |   |   | 20,119 |   |
| Effect of dilutive securities               |   |                         | 27     |   |   |   | 20 |   |
| Weighted average shares - assuming dilution |   |                         | 20,151 |   |   |   | 20,139 |   |

|                           |   | Three Months Ended |   |
|--------------------------------|--------|------------------------------|--------|
|                           |   | March 31,               |   |
|                           |   | 2011                         |   |   | 2010 |   |
| Interest cost                  |   | $                            | 152    |   |   | $ | 162 |   |
| Amortization of net loss       |   |                         | 72     |   |   |   | 56 |   |
| Expected return on plan assets |   |                         | (148   | ) |   |   | (136 | ) |
| Net periodic pension cost      |   | $                            | 76     |   |   | $ | 82 |   |

----

----

|   | · | Standard Commercial Segment.  Our Standard Commercial Segment includes the standard lines commercial property/casualty insurance products and services handled by our Standard Commercial business unit. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Specialty Commercial Segment.  Our Specialty Commercial Segment includes the excess and surplus lines commercial property/casualty, medical professional liability and satellite launch insurance products and services handled by our E&S Commercial business unit, the general aviation insurance products and services handled by our General Aviation business unit, and the commercial excess liability and umbrella insurance products handled by our Excess & Umbrella business unit. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Personal Segment.  Our Personal Segment includes the non-standard personal automobile insurance, low value dwelling/homeowners, renters, motorcycle and business auto insurance products and services handled by our Personal Lines business unit. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | American Hallmark Insurance Company of Texas (“AHIC”) presently retains a portion of the risks on the commercial property/casualty policies marketed within the Standard Commercial Segment, retains a portion of the risks on personal policies marketed within the Personal Segment and retains a portion of the risks on the commercial, medical professional liability, aviation and satellite launch property/casualty policies marketed within the Specialty Commercial Segment. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hallmark Specialty Insurance Company (“HSIC”) presently retains a portion of the risks on the commercial property/casualty and medical professional liability policies marketed within the Specialty Commercial Segment. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Hallmark Insurance Company (“HIC”) presently retains a portion of the risks on both the personal policies marketed within the Personal Segment and the commercial and aviation property/casualty products marketed within the Specialty Commercial Segment. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hallmark National Insurance Company (“HNIC”) was acquired on December 31, 2010.  Simultaneous with the closing of the acquisition, HNIC entered into reinsurance contracts with an affiliate of the seller, pursuant to which such affiliate of the seller will handle all claims and assume all liabilities arising under policies issued by HNIC prior to the closing or during a transition period of up to six months following the closing.  Commencing January 1, 2011, HNIC retains a portion of the risks on the personal policies marketed within the Personal Segment. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Hallmark County Mutual Insurance Company (“HCM”) control and management is maintained through our wholly owned subsidiary CYR Insurance Management Company (“CYR”).  CYR has as its primary asset a management agreement with HCM, which provides for CYR to have management and control of HCM.  HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas. HCM does not retain any business. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                     |   | Three Months Ended March 31, 2011 |   |
|------------------------------------------|--------|------------------------------------------------------------|--------|
|                                     |   | Standard                                                   |   |   | Specialty |   |   |   |   |   |   |   |   |   |   |
|                                     |   | Commercial                                                 |   |   | Commercial |   |   | Personal |   |   |   |   |   |   |   |
|                                     |   | Segment                                                    |   |   | Segment |   |   | Segment |   |   | Corporate |   |   | Consolidated |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Produced premium (1)                     |   | $                                                          | 17,455 |   |   | $ | 38,534 |   |   | $ | 27,703 |   |   | $ | - |   |   | $ | 83,692 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross premiums written                   |   |                                                       | 17,455 |   |   |   | 40,082 |   |   |   | 32,175 |   |   |   | - |   |   |   | 89,712 |   |
| Ceded premiums written                   |   |                                                       | (1,172 | ) |   |   | (7,720 | ) |   |   | (4,586 | ) |   |   | - |   |   |   | (13,478 | ) |
| Net premiums written                     |   |                                                       | 16,283 |   |   |   | 32,362 |   |   |   | 27,589 |   |   |   | - |   |   |   | 76,234 |   |
| Change in unearned premiums              |   |                                                       | (391   | ) |   |   | (1,147 | ) |   |   | (4,583 | ) |   |   | - |   |   |   | (6,121 | ) |
| Net premiums earned                      |   |                                                       | 15,892 |   |   |   | 31,215 |   |   |   | 23,006 |   |   |   | - |   |   |   | 70,113 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                           |   |                                                       | 17,427 |   |   |   | 33,143 |   |   |   | 25,050 |   |   |   | 1,788 |   |   |   | 77,408 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Losses and loss adjustment expenses      |   |                                                       | 12,625 |   |   |   | 19,801 |   |   |   | 31,359 |   |   |   | - |   |   |   | 63,785 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Pre-tax  income (loss), net of |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| non-controlling interest                 |   |                                                       | (380   | ) |   |   | 3,458 |   |   |   | (13,214 | ) |   |   | (1,483 | ) |   |   | (11,619 | ) |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss ratio (2)                       |   |                                                       | 79.4   | % |   |   | 63.4 | % |   |   | 136.3 | % |   |   |   |   |   |   | 91.0 | % |
| Net expense ratio (2)                    |   |                                                       | 31.4   | % |   |   | 30.1 | % |   |   | 23.9 | % |   |   |   |   |   |   | 30.6 | % |
| Net combined ratio (2)                   |   |                                                       | 110.8  | % |   |   | 93.5 | % |   |   | 160.2 | % |   |   |   |   |   |   | 121.6 | % |

|                                     |   | Three Months Ended March 31, 2010 |   |
|------------------------------------------|--------|------------------------------------------------------------|--------|
|                                     |   | Standard                                                   |   |   | Specialty |   |   |   |   |   |   |   |   |   |   |
|                                     |   | Commercial                                                 |   |   | Commercial |   |   | Personal |   |   |   |   |   |   |   |
|                                     |   | Segment                                                    |   |   | Segment |   |   | Segment |   |   | Corporate |   |   | Consolidated |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Produced premium (1)                     |   | $                                                          | 18,097 |   |   | $ | 35,282 |   |   | $ | 27,131 |   |   | $ | - |   |   | $ | 80,510 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross premiums written                   |   |                                                       | 18,097 |   |   |   | 36,631 |   |   |   | 27,131 |   |   |   | - |   |   |   | 81,859 |   |
| Ceded premiums written                   |   |                                                       | (1,036 | ) |   |   | (8,024 | ) |   |   | (4 | ) |   |   | - |   |   |   | (9,064 | ) |
| Net premiums written                     |   |                                                       | 17,061 |   |   |   | 28,607 |   |   |   | 27,127 |   |   |   | - |   |   |   | 72,795 |   |
| Change in unearned premiums              |   |                                                       | (180   | ) |   |   | 2,116 |   |   |   | (7,716 | ) |   |   | - |   |   |   | (5,780 | ) |
| Net premiums earned                      |   |                                                       | 16,881 |   |   |   | 30,723 |   |   |   | 19,411 |   |   |   | - |   |   |   | 67,015 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                           |   |                                                       | 18,034 |   |   |   | 32,487 |   |   |   | 21,214 |   |   |   | 4,088 |   |   |   | 75,823 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Losses and loss adjustment expenses      |   |                                                       | 13,616 |   |   |   | 16,396 |   |   |   | 13,086 |   |   |   | - |   |   |   | 43,098 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Pre-tax  income (loss), net of |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| non-controlling interest                 |   |                                                       | (939   | ) |   |   | 6,347 |   |   |   | 2,650 |   |   |   | 1,118 |   |   |   | 9,176 |   |
|                                     |   |                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss ratio (2)                       |   |                                                       | 80.6   | % |   |   | 53.4 | % |   |   | 67.4 | % |   |   |   |   |   |   | 64.3 | % |
| Net expense ratio (2)                    |   |                                                       | 30.9   | % |   |   | 28.0 | % |   |   | 21.6 | % |   |   |   |   |   |   | 28.9 | % |
| Net combined ratio (2)                   |   |                                                       | 111.5  | % |   |   | 81.4 | % |   |   | 89.0 | % |   |   |   |   |   |   | 93.2 | % |

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| Exhibit |         |                                                                                                                                                                                                                                                                                                                                                        |
|---------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Number  |         | Description                                                                                                                                                                                                                                                                                                                                                 |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 3(a)    |         | Restated Articles of Incorporation of the registrant, as amended (incorporated by reference to Exhibit 3.1 to the registrant’s Registration Statement on Form S-1 [Registration No. 333-136414] filed September 8, 2006).                                                                                                                             |
| 3(b)    |         | Amended and Restated By-Laws of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed October 1, 2007).                                                                                                                                                                                       |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 10(a)   |         | First Amendment to Office Lease between MS Crescent One SPV, LLC and Hallmark Financial Services, Inc. dated February 28, 2011 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 1, 2011).                                                                                                        |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 10(b)   |         | Eighth Amendment to First Restated Credit Agreement dated March 21, 2011, between Hallmark Financial Services, Inc. and The Frost National Bank (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 22, 2011).                                                                                      |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 10(c)   |         | Stock Purchase Agreement dated March 25, 2011, between American Hallmark Insurance Company of Texas and Robert C. Siddons, Stephen W. Gurasich, Andrew J. Reynolds, Paul W. Keller, Kerry A. Keller and Austin Engineering Co., Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 28, 2011). |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 31(a)   |         | Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                                                                                                  |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 31(b)   |         | Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                                                                                                  |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 32(a)   |         | Certification of principal executive officer Pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                    |
|    |         |                                                                                                                                                                                                                                                                                                                                                        |
| 32(b)   |    | Certification of principal financial officer Pursuant to 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                    |

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|               |   | HALLMARK FINANCIAL SERVICES, INC.                                                                                                                       |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                         (Registrant) |
|               |   |                                                                                                                                                    |
| Date: May 10, 2011 |   | /s/ Mark J. Morrison                                                                                                                                    |
|               |   | Mark J. Morrison, Chief Executive Officer and President                                                                                                 |
|               |   |                                                                                                                                                    |
| Date: May 10, 2011 |   | /s/ Jeffrey R. Passmore                                                                                                                                 |
|               |   | Jeffrey R. Passmore, Chief Accounting Officer and Senior Vice President                                                                                 |

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