UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2007
Commission file number 001-11252
 
Hallmark Financial Services, Inc.
(Exact name of registrant as specified in its charter)
 
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)

Registrant's telephone number, including area code: (817) 348-1600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o    Accelerated filer  o  Non-accelerated filer x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, par value $.18 per share - 20,768,252 shares outstanding as of November 7, 2007.
 

PART I
FINANCIAL INFORMATION

Item 1.   Financial Statements

INDEX TO FINANCIAL STATEMENTS
 
 
Page Number
   
Consolidated Balance Sheets at September 30, 2007 (unaudited) and December 31, 2006
3
   
Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 30, 2007 and September 30, 2006
4
   
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited) for the three months and nine months ended September 30, 2007 and September 30, 2006

5
   
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2007 and September 30, 2006
6
   
Notes to Consolidated Financial Statements (unaudited)
7
   
2

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)

   
September 30
 
December 31
 
   
2007
 
2006
 
   
(unaudited)
 
(audited)
 
ASSETS
         
Investments:
         
Debt securities, available-for-sale, at market value
 
$
163,054
 
$
133,030
 
Equity securities, available-for-sale, at market value
   
41,988
   
4,580
 
Short-term investments, available-for-sale, at market value
   
56,311
   
25,275
 
               
Total investments
   
261,353
   
162,885
 
               
Cash and cash equivalents
   
61,681
   
81,474
 
Restricted cash and cash equivalents
   
15,646
   
24,569
 
Premiums receivable
   
53,136
   
44,644
 
Accounts receivable
   
18,503
   
13,223
 
Prepaid reinsurance premium
   
1,154
   
1,629
 
Reinsurance recoverable
   
5,781
   
5,930
 
Deferred policy acquisition costs
   
20,776
   
17,145
 
Excess of cost over fair value of net assets acquired
   
30,025
   
31,427
 
Intangible assets
   
24,354
   
26,074
 
Prepaid expenses
   
1,094
   
1,769
 
Other assets
   
12,131
   
5,184
 
               
Total assets
 
$
505,634
 
$
415,953
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Liabilities:
             
Notes payable
 
$
60,681
 
$
35,763
 
Structured settlements
   
9,897
   
24,587
 
Unpaid losses and loss adjustment expenses
   
116,136
   
77,564
 
Unearned premiums
   
108,365
   
91,606
 
Unearned revenue
   
3,356
   
5,734
 
Reinsurance balances payable
   
-
   
1,060
 
Accrued agent profit sharing
   
1,990
   
1,784
 
Accrued ceding commission payable
   
7,052
   
3,956
 
Pension liability
   
2,884
   
3,126
 
Deferred federal income taxes
   
115
   
2,310
 
Current federal income tax payable
   
336
   
2,132
 
Accounts payable and other accrued expenses
   
22,736
   
15,600
 
               
Total liabilities
   
333,548
   
265,222
 
               
Commitments and Contingencies
         
               
Stockholders' equity:
             
Common stock, $.18 par value (authorized 33,333,333 shares in 2007 and 2006; issued 20,776,080 shares in 2007 and 2006)
   
3,740
   
3,740
 
Additional paid in capital
   
118,283
   
117,932
 
Retained earnings
   
51,847
   
31,480
 
Accumulated other comprehensive loss
   
(1,707
)
 
(2,344
)
Treasury stock, at cost (7,828 shares in 2007 and 2006)
   
(77
)
 
(77
)
               
Total stockholders' equity
   
172,086
   
150,731
 
               
   
$
505,634
 
$
415,953
 

The accompanying notes are an integral part
of the consolidated financial statements

3

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

   
Three Months Ended
 
Nine Months Ended
 
   
September 30
 
September 30
 
   
2007
 
2006
 
2007
 
2006
 
                   
Gross premiums written
 
$
62,304
 
$
58,107
 
$
193,539
 
$
153,718
 
Ceded premiums written
   
(779
)
 
(3,102
)
 
(8,947
)
 
(7,542
)
Net premiums written
   
61,525
   
55,005
   
184,592
   
146,176
 
Change in unearned premiums
   
(2,100
)
 
(12,811
)
 
(18,209
)
 
(41,289
)
Net premiums earned
   
59,425
   
42,194
   
166,383
   
104,887
 
                           
Investment income, net of expenses
   
3,774
   
2,912
   
9,811
   
7,505
 
Gain (loss) on investments
   
418
   
(135
)
 
1,299
   
(1,501
)
Finance charges
   
1,206
   
1,037
   
3,477
   
2,940
 
Commission and fees
   
7,280
   
9,943
   
23,344
   
32,223
 
Processing and service fees
   
111
   
410
   
586
   
1,994
 
Other income
   
4
   
4
   
12
   
24
 
                           
Total revenues
   
72,218
   
56,365
   
204,912
   
148,072
 
                           
Losses and loss adjustment expenses
   
36,723
   
23,589
   
99,620
   
60,478
 
Other operating expenses
   
24,087
   
23,044
   
70,511
   
64,097
 
Interest expense
   
1,026
   
1,527
   
2,608
   
4,774
 
Interest expense from amortization of discount on convertible notes
   
-
   
-
   
-
   
9,625
 
Amortization of intangible asset
   
573
   
573
   
1,719
   
1,719
 
                           
Total expenses
   
62,409
   
48,733
   
174,458
   
140,693
 
                           
Income before tax
   
9,809
   
7,632
   
30,454
   
7,379
 
                           
Income tax expense
   
3,227
   
2,755
   
10,087
   
2,918
 
                           
Net income
 
$
6,582
 
$
4,877
 
$
20,367
 
$
4,461
 
                           
Common stockholders net income per share:
                         
Basic
 
$
0.32
 
$
0.27
 
$
0.98
 
$
0.28
 
Diluted
 
$
0.32
 
$
0.27
 
$
0.98
 
$
0.28
 

The accompanying notes are an integral part
of the consolidated financial statements

4

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
($ in thousands)

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
                   
Common Stock
                 
Balance, beginning of period
 
$
3,740
 
$
3,198
 
$
3,740
 
$
2,606
 
Conversion of note payable to common stock
   
-
   
-
   
-
   
589
 
Issuance of common stock upon option exercises
   
-
   
-
   
-
   
3
 
Balance, end of period
   
3,740
   
3,198
   
3,740
   
3,198
 
                           
Additional Paid-In Capital
                         
Balance, beginning of period
   
118,085
   
93,663
   
117,932
   
62,907
 
Discount on convertible notes, net of tax
   
-
   
-
   
-
   
6,066
 
Conversion of note payable to common stock
   
-
   
-
   
-
   
24,562
 
Equity based compensation
   
198
   
50
   
351
   
107
 
Exercise of stock options
   
-
   
(1
)
 
-
   
70
 
Balance, end of period
   
118,283
   
93,712
   
118,283
   
93,712
 
                           
Retained Earnings
                         
Balance, beginning of period
   
45,265
   
21,873
   
31,480
   
22,289
 
Net income
   
6,582
   
4,877
   
20,367
   
4,461
 
Balance, end of period
   
51,847
   
26,750
   
51,847
   
26,750
 
                           
Accumulated Other Comprehensive Loss
                         
Balance, beginning of period
   
(2,746
)
 
(3,668
)
 
(2,344
)
 
(2,597
)
Amortization of net actuarial loss, net of tax
   
33
   
-
   
97
   
32
 
Unrealized gains on securities, net of tax
   
1,006
   
1,438
   
540
   
335
 
Balance, end of period
   
(1,707
)
 
(2,230
)
 
(1,707
)
 
(2,230
)
                           
Treasury Stock
                         
Balance, beginning of period
   
(77
)
 
(77
)
 
(77
)
 
(17
)
Acquisition of treasury shares
   
-
   
-
   
-
   
(100
)
Exercise of stock options
   
-
   
-
   
-
   
40
 
Balance, end of period
   
(77
)
 
(77
)
 
(77
)
 
(77
)
                           
Stockholders' Equity
 
$
172,086
 
$
121,353
 
$
172,086
 
$
121,353
 
                           
Net income
 
$
6,582
 
$
4,877
 
$
20,367
 
$
4,461
 
Amortization of net actuarial loss, net of tax
   
33
   
-
   
97
   
32
 
Unrealized gains on securities, net of tax
   
1,006
   
1,438
   
540
   
335
 
Comprehensive Income
 
$
7,621
 
$
6,315
 
$
21,004
 
$
4,828
 

The accompanying notes are an integral part
of the consolidated financial statements

5

Hallmark Financial Services, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
($ in thousands)

   
Nine Months Ended
 
   
September 30
 
   
2007
 
2006
 
Cash flows from operating activities:
         
Net income
 
$
20,367
 
$
4,461
 
               
Adjustments to reconcile net income to cash provided by operating activities:
             
Depreciation and amortization expense
   
2,344
   
2,418
 
Amortization of beneficial conversion feature
   
-
   
9,625
 
Amortization of discount on structured settlement
   
310
   
784
 
Deferred federal income tax benefit
   
(1,170
)
 
(4,062
)
(Gain) loss on investments
   
(1,299
)
 
1,501
 
Change in prepaid reinsurance premiums
   
475
   
(808
)
Change in prepaid commissions
   
487
   
659
 
Change in premiums receivable
   
(8,492
)
 
(10,118
)
Change in accounts receivable
   
1,604
   
(8,725
)
Change in deferred policy acquisition costs
   
(3,631
)
 
(5,578
)
Change in unpaid losses and loss adjustment expenses
   
38,572
   
29,793
 
Change in unearned premiums
   
16,759
   
42,114
 
Change in unearned revenue
   
(2,378
)
 
(6,516
)
Change in accrued agent profit sharing
   
206
   
(319
)
Change in reinsurance recoverable
   
149
   
(3,396
)
Change in reinsurance balances payable
   
(1,060
)
 
(1,542
)
Change in current federal income tax payable
   
(1,796
)
 
(2,197
)
Change in accrued ceding commission payable
   
3,096
   
104
 
Change in all other liabilities
   
3,059
   
(3,556
)
Change in all other assets
   
(5,835
)
 
854
 
               
Net cash provided by operating activities
   
61,767
   
45,496
 
               
Cash flows from investing activities:
             
Purchases of property and equipment
   
(367
)
 
(487
)
Premium finance notes repaid, net of finance notes originated
   
(856
)
 
(2,184
)
Acquisition of subsidiaries, net of cash acquired
   
-
   
(25,964
)
Change in restricted cash
   
12,244
   
778
 
Purchases of debt and equity securities
   
(187,256
)
 
(67,795
)
Maturities and redemptions of investment securities
   
115,288
   
20,104
 
Net purchases of short-term investments
   
(30,713
)
 
(27,776
)
               
Net cash used in investing activities
   
(91,660
)
 
(103,324
)
               
Cash flows from financing activities:
             
Proceeds from exercise of employee stock options
   
-
   
40
 
Payment of structured settlement
   
(15,000
)
 
-
 
Proceeds from issuance of trust preferred securities
   
25,774
   
-
 
Debt issuance costs
   
(674
)
 
-
 
Proceeds from issuance of convertible debt
   
-
   
25,000
 
Proceeds from note payable to related party
   
-
   
12,500
 
Proceeds from revolving loan on credit facility
   
-
   
15,000
 
               
Net cash provided by financing activities
   
10,100
   
52,540
 
               
Decrease in cash and cash equivalents
   
(19,793
)
 
(5,288
)
Cash and cash equivalents at beginning of period
   
81,474
   
44,528
 
               
Cash and cash equivalents at end of period
 
$
61,681
 
$
39,240
 
               
Supplemental Cash Flow Information:
             
Interest paid
 
$
2,184
 
$
3,698
 
Taxes paid
 
$
13,053
 
$
9,084
 

The accompanying notes are an integral part
of the consolidated financial statements

6

Hallmark Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

1. General
 
Hallmark Financial Services, Inc. (“Hallmark” and, together with subsidiaries, “we,” “us” or “our”) is an insurance holding company which, through its subsidiaries, engages in the sale of property/casualty insurance products to businesses and individuals. Our business involves marketing, distributing, underwriting and servicing commercial insurance, non-standard automobile insurance and general aviation insurance, as well as providing other insurance related services. Our business is geographically concentrated in the south central and northwest regions of the United States, except for our general aviation business which is written on a national basis.

We pursue our business activities through subsidiaries whose operations are organized into four operating units which are supported by our three insurance company subsidiaries. Our HGA Operating Unit handles standard lines commercial insurance products and services and is comprised of Hallmark General Agency, Inc. (“Hallmark General Agency”) and Effective Claims Management, Inc. Our TGA Operating Unit handles primarily excess and surplus lines commercial insurance products and services and is comprised of Texas General Agency, Inc. (“Texas General Agency”), Pan American Acceptance Corporation (“PAAC”) and TGA Special Risk, Inc. (“TGASRI”). Our Aerospace Operating Unit handles general aviation insurance products and services and is comprised of Aerospace Insurance Managers, Inc. (“Aerospace Insurance Managers”), Aerospace Special Risk, Inc. (“ASRI”) and Aerospace Claims Management Group, Inc. (“ACMG”). Our Phoenix Operating Unit handles non-standard personal automobile insurance products and services and is comprised solely of American Hallmark General Agency, Inc. (which does business as Phoenix Indemnity Insurance Company).

These four operating units are segregated into three reportable industry segments for financial accounting purposes. The Standard Commercial Segment presently consists solely of the HGA Operating Unit and the Personal Segment presently consists solely of our Phoenix Operating Unit. The Specialty Commercial Segment includes both our TGA Operating Unit and our Aerospace Operating Unit.

2. Basis of Presentation

Our unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2006 included in our Annual Report on Form 10-K filed with the SEC.

The interim financial data as of September 30, 2007 and 2006 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the period ended September 30, 2007 are not necessarily indicative of the operating results to be expected for the full year.

7

Reclassification

Certain previously reported amounts have been reclassified in order to conform to current year presentation. Such reclassification had no effect on net income or stockholders’ equity. Investment balances that were previously reported in Restricted Cash and Investments on the balance sheet have been reclassified to debt securities, available-for-sale, at market value during the current period. The amount reclassified from the December 31, 2006 presentation is $7.2 million.

Redesignation of Segments

Each of our four operating units was reported as a separate segment during the first three quarters of 2006. Commencing in the fourth quarter of 2006, our HGA Operating Unit was designated as the sole component of the Standard Commercial Segment, our TGA Operating Unit and our Aerospace Operating Unit were aggregated in the Specialty Commercial Segment, and our Phoenix Operating Unit was designated as the sole component of the Personal Segment.
 
Reverse Stock Split

All share and per share amounts have been adjusted to reflect a one-for-six reverse split of all issued and unissued shares of our authorized common stock effected July 31, 2006, and a corresponding increase in the par value of our authorized common stock from $0.03 per share to $0.18 per share.

Use of Estimates in the Preparation of the Financial Statements

Our preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the date of our financial statements, as well as our reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Recently Issued Accounting Standards

In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). This statement provides guidance on accounting for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” previously issued by the Financial Accounting Standards Board (“FASB”). SOP 05-01 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The adoption of SOP 05-01 had no material impact on our financial condition or results of operations.

8

In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”), was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as providing guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 with earlier application permitted as long as the company has not yet issued financial statements, including interim financial statements, in the period of adoption. We adopted the provisions of FIN 48 on January 1, 2007. Since we had no unrecognized tax benefits, we recognized no additional liability or reduction in deferred tax asset as a result of the adoption of FIN 48. We are no longer subject to U. S. federal, state, local or non-U.S. income tax examinations by tax authorities for years prior to 2003.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a separate framework for determining fair values of assets and liabilities that are required by other authoritative GAAP pronouncements to be measured at fair value. In addition, SFAS 157 incorporates and clarifies the guidance in FASB Concepts Statement 7 regarding the use of present value techniques in measuring fair value. SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.

In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value with changes in fair value included in current earnings. The election is made on specified election dates, can be made on an instrument-by- instrument basis, and is irrevocable. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 159 on our financial statements.

3. Business Combinations

We account for business combinations using the purchase method of accounting. The cost of an acquired entity is allocated to the assets acquired (including identified intangible assets) and liabilities assumed based on their estimated fair values. The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed is an asset referred to as “excess of cost over net assets acquired” or “goodwill.” Indirect and general expenses related to business combinations are expensed as incurred. While preparing our income tax return during the third quarter of 2007 we identified certain tax deductions that were not considered deductible when we initially recorded the purchase price allocation for the TGA and Aerospace Operating Units in 2006. This correction is considered immaterial to the purchase price allocation and was corrected on the September 30, 2007 balance sheet. The correction reduced total goodwill and total deferred federal income tax liability by $1.4 million.

9

4. Supplemental Cash Flow Information

Effective January 1, 2006, we acquired the subsidiaries now comprising our TGA Operating Unit and our Aerospace Operating Unit. In conjunction with the acquisitions, cash and cash equivalents were used in the acquisitions as follows (in thousands):

   
TGA
 
Aerospace
 
   
Operating Unit
 
Operating Unit
 
           
Fair value of tangible assets excluding cash and cash equivalents
 
$
52,906
 
$
8,391
 
Fair value of intangible assets acquired
   
30,531
   
12,356
 
Capitalized direct expenses
   
232
   
36
 
Structured settlement
   
(23,542
)
 
-
 
Liabilities assumed
   
(47,468
)
 
(7,478
)
               
Cash and cash equivalents used in acquisitions
 
$
12,659
 
$
13,305
 

5. Pledged Investments

We have certain of our securities pledged for the benefit of various state insurance departments, reinsurers and the sellers of our TGA Operating Unit. These securities are included with our available-for-sale debt securities as we have the ability to trade these securities. We retain the interest earned on these securities. These securities had a carrying value of $23.3 million at September 30, 2007.

6. Share-Based Payment Arrangements

Our 2005 Long Term Incentive Plan (“2005 LTIP”) is a stock compensation plan for key employees and non-employee directors that was approved by the shareholders on May 26, 2005. There are 833,333 shares authorized for issuance under the 2005 LTIP. Our 1994 Key Employee Long Term Incentive Plan (the “1994 Employee Plan”) and 1994 Non-Employee Director Stock Option Plan (the “1994 Director Plan”) both expired in 2004.

As of September 30, 2007, there were incentive stock options to purchase 677,499 shares of our common stock outstanding and non-qualified stock options to purchase 40,000 shares of our common stock outstanding under the 2005 LTIP, leaving 115,834 shares reserved for future issuance. As of September 30, 2007, there were incentive stock options to purchase 93,001 shares outstanding under the 1994 Employee Plan and non-qualified stock options to purchase 23,334 shares outstanding under the 1994 Director Plan. In addition, as of September 30, 2007, there were outstanding non-qualified stock options to purchase 16,666 shares of our common stock granted to certain non-employee directors outside the 1994 Director Plan in lieu of fees for service on our board of directors in 1999. The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

10

Options granted under the 1994 Employee Plan prior to October 31, 2003, vest 40% six months from the date of grant and an additional 20% on each of the first three anniversary dates of the grant and terminate ten years from the date of grant. Incentive stock options granted under the 2005 LTIP and the 1994 Employee Plan after October 31, 2003, vest 10%, 20%, 30% and 40% on the first, second, third and fourth anniversary dates of the grant, respectively, and terminate five to ten years from the date of grant. Non-qualified stock options granted under the 2005 LTIP vest 100% six months after the date of grant and terminate ten years from the date of grant. All non-qualified stock options granted under the 1994 Director Plan vest 40% six months from the date of grant and an additional 10% on each of the first six anniversary dates of the grant and terminate ten years from the date of grant. The options granted to non-employee directors outside the 1994 Director Plan fully vested six months after the date of grant and terminate ten years from the date of grant.

A summary of the status of our stock options as of and changes during the year-to-date ended September 30, 2007 is presented below:

       
Average
 
Contractual
 
Intrinsic
 
   
Number of
 
Exercise
 
Term
 
Value
 
   
Shares
 
Price
 
(Years)
 
($000)
 
                   
Outstanding at January 1, 2007
   
332,334
 
$
7.04
             
Granted
   
520,000
 
$
12.52
             
Exercised
   
-
 
$
-
             
Forfeited or expired
   
(1,834
)
$
5.05
             
Outstanding at September 30, 2007
   
850,500
 
$
10.40
   
8.1
 
$
3,108
 
Exercisable at September 30, 2007
   
138,751
 
$
4.79
   
3.6
 
$
1,285
 

The following table details the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
                   
Intrinsic value of options exercised
 
$
-
 
$
-
 
$
-
 
$
103
 
                           
Cost of share-based payments (non-cash)
 
$
198
 
$
50
 
$
351
 
$
107
 
                           
Income tax benefit of share-based payments recognized in income
 
$
69
 
$
17
 
$
123
 
$
37
 
 
As of September 30, 2007 there was $2.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our plans, of which $0.2 million is expected to be recognized in the remainder of 2007, $0.6 million is expected to be recognized in 2008, $0.8 million is expected to be recognized in each of 2009 and 2010 and $0.3 million is expected to be recognized in 2011.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on historical volatility of our common stock. The risk- free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant.

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The following table details the weighted average grant date fair value and related assumptions for the periods indicated (in thousands). There were no options granted in the third quarter of 2006.
 
   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
                   
Grant date fair value per share
 
$
4.14
   
n/a
 
$
4.04
 
$
6.26
 
                           
Expected term (in years)
   
6.5
   
n/a
   
6.4
   
5.0
 
Expected volatility
   
19.0
%
 
n/a
   
19.4
%
 
59.1
%
Risk free interest rate
   
4.8
%
 
n/a
   
4.5
%
 
4.9
%
 
7. Segment Information

The following is business segment information for the three and nine months ended September 30, 2007 and 2006 (in thousands):
 
   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2007
 
2006
 
2007
 
2006
 
Revenues:
                 
Standard Commercial Segment
 
$
23,530
 
$
20,964
 
$
65,300
 
$
57,768
 
Specialty Commercial Segment
   
32,760
   
22,889
   
93,836
   
56,003
 
Personal Segment
   
15,185
   
12,257
   
43,654
   
34,944
 
Corporate
   
743
   
255
   
2,122
   
(643
)
Consolidated
 
$
72,218
 
$
56,365
 
$
204,912
 
$
148,072
 
                           
Pre-tax income (loss):
                         
Standard Commercial Segment
 
$
3,514
 
$
5,112
 
$
8,937
 
$
11,245
 
Specialty Commercial Segment
   
6,350
   
2,867
   
20,477
   
7,925
 
Personal Segment
   
1,854
   
2,316
   
6,148
   
6,760
 
Corporate
   
(1,909
)
 
(2,663
)
 
(5,108
)
 
(18,551
)
Consolidated
 
$
9,809
 
$
7,632
 
$
30,454
 
$
7,379
 
 
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The following is additional business segment information as of the dates indicated (in thousands):

   
September 30, 
2007
 
December 31, 
2006
 
Assets
         
Standard Commercial Segment
 
$
129,527
 
$
130,764
 
Specialty Commercial Segment
   
235,335
   
167,675
 
Personal Segment