SFO Merrill Lynch

JACKSONVILLE, Fla., March 14 /PRNewswire-FirstCall/ -- Sunset Financial Resources, Inc. (NYSE:SFO), a specialty finance REIT, today announced financial results for the quarter and year-ended December 31, 2005. For the fourth quarter of 2005, Sunset reported net income of $305,000, or $0.03 per diluted share, compared to net income of $583,000, or $0.05 per diluted share, in the same period a year ago. Net interest income in the fourth quarter was $2.6 million, compared to $3.8 million in the same quarter of 2004. This represented an annualized net interest margin on average earning assets of 91 basis points for the quarter ended December 31, 2005, versus 186 basis points in the same quarter last year. For the fourth quarter, the yield on average earning assets declined slightly to 4.41%, compared to 4.46% in the same quarter last year. However, rising interest rates caused the average cost of liabilities for the quarter to increase to 3.83%, versus 3.03% in the fourth quarter of 2004. According to Byron Boston, Chief Investment Officer of Sunset Financial Resources, "Although our net margin compressed during the quarter, we benefited from our hedging strategy of using interest rate swaps to mitigate the impact of rising short term interest rates. During the quarter, the Federal Reserve raised rates 50 basis points. Against this backdrop, the net spread from our residential portfolio declined by only 9 basis points and the fair value of the portfolio was unchanged. The net spread on our total portfolio remained relatively stable with only a 6 basis point decline in the quarter due to the contribution of the commercial portfolio. We will continue to maintain a defensive posture in this rising rate environment." At December 31, 2005 Sunset Financial had a book value of $10.17 per share and an overall leverage of 9.8 times stockholders' equity. As a reminder, the book value per share is calculated by dividing the shareholders equity as of 12/31/05 by the number of shares outstanding and includes the value of securitized loans at their historical cost of $160.6 million. As of 12/31/05, the fair value of the securitized loans was $154.6 million. George Deehan, President and Chief Executive Officer of Sunset Financial Resources, said, "We are now experiencing considerable improvement in our commercial portfolio. Specifically, the Multi-Sport property was sold in January, and we expect to receive funds, that in addition to the reserve we took in the third quarter, will cover our outstanding exposure. In addition, the Resort Development property has begun making principal reductions and is current with its required interest payments. Finally, we are working closely with Banc of America Securities to explore strategic alternatives. I am encouraged by our progress to date and remain confident that these efforts will result in the best interest of all shareholders." For the year ended December 31, 2005, Sunset reported a net loss of ($4.7) million, or ($0.45) per diluted share, compared to net income of $644,000, or $0.07 per diluted share, in the same period a year ago. For the year ended December 31, 2005, the provision for loan losses increased $5.7 million to $7.0 million, compared to $1.3 million for the same period last year. The provision recorded during 2005 was related primarily to impairment charges on two loans within the commercial loan portfolio. As of December 31, 2005, Sunset's total assets were $1.2 billion (including $942.9 million of investments in Mortgage Backed Securities; $160.6 million of residential mortgage related loans and $29.3 million of commercial bridge loans), compared to $893.5 million (including $614.2 million of investments in Mortgage Backed Securities; $203.7 million of residential mortgage related loans and $44.5 million of commercial bridge loans) in the same period a year ago. On March 7, 2006, the Company's Board of Directors declared a fourth quarter dividend of $0.03 per common share. The dividend is payable on March 30, 2006 to stockholders of record on March 16, 2006. Sunset Financial expects to file its fourth quarter and year-end 2005 results on Form 10-K with the Securities and Exchange Commission late in the day on March 14, 2006. Sunset Financial has scheduled a conference call to discuss its fourth quarter financial results at 9:00 a.m. ET on Wednesday, March 15, 2006. A live webcast of the conference call will be available online at http://www.sunsetfinancial.net/. Web participants are encouraged to go to the Web site at least 15 minutes prior to the start of the call to register, download, and install any necessary audio software. Those without web access should access the call telephonically at least ten minutes prior to the conference call. The dial-in number is (800) 798-2796 and the participant code is 62697759. Following the conclusion of the presentation, an archive of the webcast will remain available online through April 15, 2006 at http://www.sunsetfinancial.net/. In addition, a dial-in replay of the call will be available from March 15 - March 22, 2006. The replay dial-in number is (888) 286-8010. The passcode is 76643146. About Sunset Financial Resources, Inc. Sunset Financial Resources, Inc. is a self-managed real estate investment trust (REIT) that went public in March 2004. Sunset Financial Resources seeks to deliver attractive dividend income and steady growth to its shareholders through the acquisition and management of a portfolio of high quality residential mortgage loans and well secured commercial mortgage bridge loans in the United States. Certain statements in this news release may constitute "forward-looking statements" within the meaning of the federal securities laws and involve risks, uncertainties and other factors, which may cause the actual performance of Sunset Financial Resources, Inc. to be materially different from the performance expressed or implied by such statements. These risks include the failure of the Company to successfully execute its business plan, gain access to additional financing, the availability of additional loan portfolios for future acquisition, continued qualification as a REIT, the cost of capital, as well as the additional risks and uncertainties detailed in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission. Sunset Financial Resources, Inc. Consolidated Balance Sheets (in thousands, except per share data) December 31, 2005 2004 Assets Mortgage assets Mortgage-backed securities, available for sale $942,900 $614,154 Securitized hybrid adjustable rate mortgages 160,602 201,381 Hybrid adjustable rate residential mortgages -- 1,286 Fixed rate residential mortgages -- 1,045 Commercial mortgages 29,347 44,522 Total mortgage assets 1,132,849 862,388 Allowance for loan losses (7,321) (1,333) Net mortgage assets 1,125,528 861,055 Cash and cash equivalents 17,570 25,700 Interest receivable 4,542 2,676 Fixed assets, net 521 861 Other assets 1,853 484 Interest rate swap agreements 12,246 2,716 Total assets $1,162,260 $893,492 Liabilities Whole loan financing facility $-- $9,718 Reverse repurchase agreements 1,031,831 761,205 Junior subordinated notes due to Sunset Financial Statutory Trust I 20,619 -- Interest rate swap agreements 137 944 Accrued liabilities 2,676 2,367 Total liabilities 1,055,263 774,234 Commitments and contingencies Stockholders' equity Preferred stock, $.001 par value, authorized 50,000,000; no shares outstanding -- -- Common stock, $.001 par value, authorized 100,000,000; 10,516,600 and 10,450,000 outstanding, respectively 11 10 Additional paid in capital 119,391 119,219 Accumulated other comprehensive income (loss) (2,998) 87 Accumulated deficit (9,407) (58) Total stockholders' equity 106,997 119,258 Total liabilities and stockholders' equity $1,162,260 $893,492 Sunset Financial Resources, Inc. Unaudited Consolidated Statements of Operations (in thousands, except per share data) For the Three Months For the Year Ended December 31, Ended December 31, 2005 2004 2005 2004 Interest and fee income $12,438 $9,142 $46,356 $18,233 Interest expense 9,877 5,347 34,788 9,842 Net interest income 2,561 3,795 11,568 8,391 Provision for loan losses 60 1,184 7,042 1,333 Net interest income after provision 2,501 2,611 4,526 7,058 Net gain on sale of securities 1 331 9 734 Loss on sale of loans (59) (48) (59) (48) Operating expenses: Salaries and employee benefits 379 759 2,288 2,864 Professional fees 968 263 2,911 1,151 Other 803 924 3,173 2,720 Severance (12) 365 841 365 Total operating expenses 2,138 2,311 9,213 7,100 Net income (loss) $305 $583 $(4,737) $644 Basic earnings (loss) per share $0.03 $0.06 $(0.45) $0.08 Diluted earnings (loss) per share $0.03 $0.05 $(0.45) $0.07 Weighted average basic shares 10,475 10,450 10,470 8,377 Weighted average diluted shares 10,475 10,469 10,470 8,397 DATASOURCE: Sunset Financial Resources, Inc. CONTACT: Stacy Riffe, Chief Financial Officer of Sunset Financial Resources, +1-904-425-4365, ; or Jeffrey Goldberger, +1-212-896-1249, , or Michael Cimini, +1-212-896-1233, , both of KCSA Worldwide Web site: http://www.sunsetfinancial.net/

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