SFO Merrill Lynch

JACKSONVILLE, Fla., Aug. 9 /PRNewswire-FirstCall/ -- Sunset Financial Resources, Inc. (NYSE:SFO), a specialty finance REIT, today provided an update on its asset redeployment efforts and announced its financial results for three months ended June 30, 2006. The three months ended June 30, 2006, represent the first quarter of Sunset's operations during which the external management agreement with Cohen Brothers Management, LLC has been in effect. Although the agreement has only been in place since April 27, 2006, Sunset has made substantial progress to date in executing its asset redeployment. As part of the redeployment, Sunset has been exiting its existing investments in residential mortgage securities and reinvesting its capital into its new targeted asset classes, including collateralized debt obligations and collateralized loan obligations, which are collateralized by residential mortgage-backed securities, commercial mortgage-backed securities, subordinated debt financings primarily in the form of trust preferred securities issued by banks and insurance companies and leveraged loans. Through August 9, 2006, Sunset has redeployed capital of $61.8 million into new target asset classes, which are expected to yield a 10%-14% return on equity. To generate the net capital needed to invest in the new asset classes, Sunset has sold three blocks of its residential mortgage securities, repaid the related repurchase agreements and terminated interest rate swap agreements. Two of these transactions occurred during the second quarter and one occurred during July 2006. In the two transactions completed in the second quarter, Sunset: * Sold mortgage backed securities with a fair value of $358.4 million; * Paid off related reverse repurchase agreements of approximately $342.0 million; * Terminated interest rate swaps in a gain position for cash proceeds of $9.6 million; and * Recognized a net gain of $919,000 on the transaction, consisting of a loss on the sale of securities of $8.7 million and a gain on the interest rate swaps of $9.6 million. For the transaction completed in July, Sunset: * Sold mortgage backed securities with a fair value of $450.7 million; * Paid off reverse repurchase agreements totaling $433.3 million; and * Terminated interest rate swaps in a gain position for cash proceeds of $8.9 million. * Economically, the July transaction resulted in a net loss of $4.6 million, comprised of a $13.5 million loss on sale of the securities, offset in part by an $8.9 million gain on the termination of swaps. However, for financial reporting purposes, the $13.5 million loss on the securities sale was reflected as an impairment charge on the income statement for the quarter ended June 30, 2006. The gain on the termination of the swaps in July will be reflected in the third quarter income statement. In both the second quarter and the July transactions, the losses realized on the sales of securities and the gains realized on the termination of the swaps reflect the cumulative mark-to-market adjustments on these assets over time, which were previously reflected in other comprehensive income. Upon the sales (or identification for sale) and termination transactions, however, these mark-to-market adjustments were, or will be, reclassified out of other comprehensive income (balance sheet) and onto the income statement. Commenting on the disposition activity, Stacy M. Riffe, Chief Executive Officer and Chief Financial Officer of Sunset Financial Resources, said, "We have made considerable progress in our asset redeployment. And when you look at the transactions in total, we accomplished exactly what we set out to do, namely to systematically sell assets and terminate hedges so as not to incur losses in excess of the mark-to-market adjustments that we had already recorded on these assets through other comprehensive income. The combination of asset sales and swap terminations from May through July resulted in a net realized loss of $3.7 million. This net amount does not constitute an additional loss on these assets; it is simply a reclassification of an unrealized loss in OCI to a realized loss on the income statement." Continuing, Ms. Riffe added, "In interpreting our second quarter performance, it is important to realize that the results include a timing difference in regards to our gain and loss recognition on our July asset sales. At June 30, we realized an impairment loss on the securities we sold in July. GAAP requires us to recognize the loss on these securities in the second quarter since, due to their impending sale, we would not be able to recover the mark-to-market loss on these securities. The gain on the interest rate swaps terminated in July was substantially recorded within OCI in the current quarter, and will be recognized in earnings in the third quarter upon realization of this gain. As a result of these GAAP requirements, the second quarter results include the loss associated with the sale of the securities in July but not the corresponding gain on the interest rate hedges terminated." For the second quarter of 2006, Sunset reported a net loss of ($13.2 million), or ($1.26) per diluted share, compared to a net loss of ($5.1 million), or ($0.49) per diluted share, in the same period a year ago. Included in the net loss of ($13.2) million were: * An $8.7 million loss on the sale of securities in the second quarter; * A $13.5 million impairment charge on the securities sold in July; * A $9.6 million gain on the interest rate swaps terminated in the second quarter; and * A $1.3 million charge for merger related expenses. Net interest income in the second quarter was $2.5 million, compared to $2.8 million in the same quarter of 2005. For the second quarter, the yield on average earning assets increased to 4.93%, compared to 4.25% in the same period last year. The cost of interest bearing liabilities, net of the positive contribution of interest rate hedges, during the second quarter was 4.03%, compared to 3.58% in the period ended June 30, 2005. This resulted in a continued improvement in our net interest spread of 90 basis points during the second quarter, compared to 67 basis points in the same period last year. Included in operating expenses for the quarter were approximately $1.3 million in transaction-related expenses. These included legal costs directly related to the merger and legal costs related to stockholder activist activities, as well as audit, tax and banking fees related to merger activities. While Sunset is the legal entity that will survive the merger with Alesco, under accounting literature for business combinations, Sunset is considered the entity being acquired for accounting purposes. Therefore, transaction-related expenses must be expensed as incurred. As of June 30, 2006, Sunset's net assets (total assets less total liabilities) were $108.6 million versus $109.7 million a year ago and $109.6 million at March 31, 2006. Total assets at June 30, 2006, were $731.4 million, and were comprised of residential mortgage-related assets, commercial bridge loans, warehouse deposits and the preferred equity of an entity that issues loan obligations. At June 30, 2006 Sunset Financial had a GAAP book value of $10.33 per share. As a reminder, the book value per share is calculated by dividing the stockholders equity as of June 30, 2006, by the number of shares outstanding and includes the value of securitized loans at their historical cost of $149.3 million. As of June 30, the fair value of the securitized loans was $141.9 million. On April 27, 2006, Sunset Financial announced a definitive merger agreement with Alesco Financial Trust and entered an external management agreement with Cohen Brothers Management, LLC. The combined company will continue to trade on the NYSE and will operate under the Alesco Financial name. The merged company will pursue Alesco's investment strategy focused on trust preferred securities issued by banks and insurance companies, middle market loans and residential mortgage backed securities. On July 20, 2006, Sunset and Alesco announced a revision to the merger agreement to include the addition of a special merger dividend of $0.50 per share to Sunset stockholders. Ms. Riffe concluded, "Overall, it was a very active quarter. We made considerable progress in our asset redeployment. Once we are fully invested in the asset classes consistent with the new investment strategy, we anticipate the return on equity on the redeployed capital to be approximately 10-14%. In addition to the asset redeployment, we continued to make progress on our merger preparation to ensure a seamless and smooth integration of the two companies. We remain committed to completing the proposed merger with Alesco and continue to believe this transaction serves the long-term interests of our stockholders." Sunset Financial has scheduled a conference call to discuss its second quarter results at 10:00 a.m. ET on Thursday, August 10, 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 (866) 543-6407 and the participant code is 43207822. An archive of the webcast will be available online from August 10, 2006 through September 10, 2006 at http://www.sunsetfinancial.net/. In addition, a dial-in replay of the call will be available from August 10 - August 17, 2006. The replay dial-in number is (888) 286-8010. The passcode is 17145493. About Sunset Financial Resources, Inc. Sunset is a specialty finance REIT headquartered in Jacksonville, Florida and trades on the New York Stock Exchange under the symbol "SFO." About Cohen Brothers Management, LLC Cohen Brothers is a leading asset management firm with approximately $22 billion in assets under management, including nearly $8 billion in trust preferred securities. Based in Philadelphia, PA, the company has over 70 professionals in offices in Philadelphia, New York City, and Paris. Cohen Brothers is a market leader in trust preferred securities origination for bank and insurance companies with a 35% market share in 2005. The company has managed 21 CDO and CLO transactions since 2002 and was ranked as the second largest manager of aggregate CDO assets under management for 2002-2005, according to Asset-Backed Alert, an industry publication. About Alesco Financial Trust Alesco is a specialty finance REIT headquartered in Philadelphia, Pennsylvania. The company is externally managed by an affiliate of Cohen Brothers. Alesco invests primarily in trust preferred securities issued by banks and insurance companies, middle market loans and residential mortgage backed securities. As of June 30, 2006, Alesco had approximately $3.1 billion in assets. 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 has filed a preliminary proxy statement/prospectus with the Securities and Exchange Commission and will file a final proxy statement/prospectus and a tender offer statement on Schedule TO with the SEC. Investors are urged to read the proxy statement/prospectus and the tender offer statement (including an offer to purchase and related documents) when they become available because they will contain important information. These materials will be available free of charge at the SEC's website, http://www.sec.gov/, or by directing a request to . Sunset, its directors, and its executive officers may be considered participants in the solicitation of proxies in connection with the proposed transactions. Information about the directors and executive officers of Sunset and their ownership of Sunset stock is set forth in the 2005 Annual Report on Form 10-K. Investors may obtain additional information regarding the interests of such participants by reading the proxy statement/prospectus for the proposed merger when it becomes available. Contact: Stacy M. Riffe Jeffrey Goldberger / Garth Russell Chief Executive Officer KCSA Worldwide (904) 425-4365 (212) 896-1249 / (212) 896-1250 / Sunset Financial Resources, Inc. Consolidated Balance Sheets (in thousands, except share data) June 30, December 31, 2006 2005 (unaudited) Assets Mortgage assets Mortgage backed securities, available for sale $468,238 $942,900 Securitized hybrid adjustable rate mortgages 149,321 160,602 Commercial mortgages 17,503 29,347 Total mortgage assets 635,062 1,132,849 Allowance for loan losses (6,085) (7,321) Net mortgage assets 628,977 1,125,528 Debt securities, available for sale 49,999 - Cash and cash equivalents 31,065 17,570 Warehouse deposits 4,500 - Interest receivable 2,743 4,542 Fixed assets, net 361 521 Other assets 1,586 1,853 Interest rate swap agreements 12,197 12,246 Total assets $731,428 $1,162,260 Liabilities Reverse repurchase agreements $565,292 $1,031,831 Junior subordinated notes due to Sunset Financial Statutory Trust I 20,619 20,619 Trust preferred obligations 35,000 - Interest rate swap agreements - 137 Accrued liabilities 1,954 2,676 Total liabilities 622,865 1,055,263 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; 10,516,100 and 10,516,600 outstanding at June 30, 2006 and December 31, 2005, respectively 11 11 Additional paid in capital 119,455 119,391 Accumulated other comprehensive income (loss) 11,404 (2,998) Accumulated deficit (22,307) (9,407) Total stockholders' equity 108,563 106,997 Total liabilities and stockholders' equity $731,428 $1,162,260 Sunset Financial Resources, Inc. Unaudited Consolidated Statements of Operations (in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2006 2005 2006 2005 Interest and fee income $11,433 $11,802 $24,405 $21,973 Interest expense (8,967) (9,031) (18,728) (15,730) Net interest income 2,466 2,771 5,677 6,243 Provision for loan losses (70) 5,722 (74) 5,798 Net interest income after provision 2,536 (2,951) 5,751 445 Net gain (loss) on sales of securities (8,697) 8 (8,697) 8 Net gain on termination of interest rate swaps 9,616 -- 9,525 -- Impairment losses on mortgage-backed securities (13,518) -- (13,518) -- Operating expenses Salaries and employee benefits 663 564 1,195 1,304 Professional fees 1,603 756 2,525 1,220 External manager fees 234 -- 234 -- Other 684 830 1,376 1,579 Total operating expenses 3,184 2,150 5,330 4,103 Net loss $(13,247) $(5,093) $(12,269) $(3,650) Basic and diluted loss per share $(1.26) $(0.49) $(1.17) $(0.35) Weighted average basic and diluted shares 10,481 10,475 10,478 10,465 DATASOURCE: Sunset Financial Resources, Inc. CONTACT: Stacy M. Riffe, Chief Executive Officer of Sunset Financial Resources, Inc., +1-904-425-4365, ; or Jeffrey Goldberger, +1-212-896-1249, , or Garth Russell, +1-212-896-1250, , both of KCSA Worldwide for Sunset Financial Resources, Inc.

Copyright