SFO Merrill Lynch

Declares Q2 Dividend of $0.03 Per Share JACKSONVILLE, Fla., Aug. 15 /PRNewswire-FirstCall/ -- Sunset Financial Resources, Inc. (NYSE:SFO) announced today a net loss for the second quarter ended June 30, 2005 of $5.1 million, or ($0.49) per diluted share, compared to net income of $171,000 in the same period a year ago. This compares to net income of $1.4 million, or $0.14 per diluted share, for the quarter ended March 31, 2005. The net loss for the second quarter of 2005 was attributed primarily to a $5.7 million impairment charge relating to a commercial loan. The Company also announced it has declared a quarterly cash dividend of $0.03 per share, payable September 2, 2005, to shareholders of record as of August 22, 2005. Bert Watson, Chairman, President and CEO of Sunset Financial Resources, said, "Second quarter results reflect the difficult operating environment affecting the entire residential mortgage industry, including tightened rate spreads and increased residential loan prepayment activity." "While Sunset did not attain taxable income during the quarter, we determined it was prudent to maintain our commitment to providing shareholders with quarterly dividends. We are confident the cash used from our capital reserves for our second quarter dividend will not have any material impact on our ability to conduct business or grow operations. We expect dividends for the remainder of the year to be based on taxable income." As of June 30, 2005, Sunset's total assets were $1.1 billion (including $896 million of investments in Mortgage Backed Securities; $182 million of residential mortgage related loans and $30 million of commercial bridge loans), compared to $423 million (including $128 million of investments in Mortgage Backed Securities; $230 million of residential mortgage related loans and $39 million of commercial bridge loans) in the same period a year ago. This compares to total assets of $1.1 billion (including $818 million of investments in Mortgage Backed Securities; $192 million of residential mortgage related loans and $36 million of commercial bridge loans) as of March 31, 2005. Watson concluded, "We continue to diligently work through major performance issues affecting our existing commercial portfolio. At the same time, we are actively evaluating and in certain situations, taking advantage of opportunities to prudently deploy capital. In the last 60 days, we successfully executed two commercial mortgage loans, one in Florida (master plan development center) and the other in West Virginia (equestrian facility)." As of June 30, 2005, the Company's residential mortgage portfolio was fully leveraged at approximately 10 times; its commercial portfolio was leveraged approximately 1.6 times, compared to 1.1 times as of March 31, 2005. For the quarter ended June 30, 2005, the yield on average earning assets was 4.25% and the cost of funds was 3.58%, which equates to an interest rate spread of 0.67%. This compares to a yield on average earning assets of 4.42% and a cost of funds of 3.30%, which equates to an interest rate spread of 1.12%, for the quarter ended March 31, 2005. Sunset's book value per share at June 30, 2005 was $10.47, compared $11.22, at of March 31, 2005. Sunset Financial has scheduled a conference call to discuss its first quarter financial results at 10:00 a.m. ET on Monday, August 15, 2005. Those wishing to listen to the conference call by telephone may dial 1-800-599-9795 and the reservation number is 47206471. Please call approximately ten minutes prior to the scheduled conference call time. The conference call will also be archived on the Company's web site for 30 days following the call at http://www.sunsetfinancial.net/. 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 (dollar amounts in thousands) June 30, December 31, June 30, 2004 2004 2005 (unaudited) (unaudited) Assets Mortgage assets Mortgage backed securities, available for sale $128,431 $614,154 $896,099 Securitized hybrid adjustable rate mortgages 223,041 201,381 180,089 Hybrid adjustable rate residential mortgages 1,292 1,286 1,159 Fixed rate residential mortgages 5,832 1,045 936 Commercial mortgages 39,260 44,522 29,726 Total mortgage assets 397,856 862,388 1,108,009 Allowance for loan losses (64) (1,333) (6,077) Net mortgage assets 397,792 861,055 1,101,932 Cash and cash equivalents 17,986 25,700 10,802 Interest receivable 1,523 2,676 4,273 Fixed assets, net 764 861 688 Other assets 2,377 484 16,150 Hedging assets 2,953 2,716 4,173 Total assets $423,395 $893,492 $1,138,018 Liabilities Whole loan financing facility $- $9,718 $- Reverse repurchase agreements 301,589 761,205 1,002,368 Trust preferred securities - - 20,000 Hedging liabilities 350 944 2,704 Accrued liabilities 1,035 2,367 3,249 Total liabilities 302,974 774,234 1,028,321 Commitments - - - Shareholders' equity Preferred stock, $.001 par value, authorized 50,000,000; no shares outstanding - - - Common stock 10 10 10 Additional paid in capital 119,057 119,219 119,330 Accumulated other comprehensive income 2,748 87 (1,954) Retained earnings (1,394) (58) (7,689) Total shareholders' equity 120,421 119,258 109,697 Total liabilities and shareholders' equity $423,395 $893,492 $1,138,018 Book value per share 11.52 11.41 10.47 Leverage 2.5 6.5 9.4 Sunset Financial Resources, Inc. Consolidated Statement of Operations (unaudited) (dollar amounts in thousands, except per share amounts) Quarter Quarter Six months Six months ended ended ended ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 Interest and fee income $11,802 $3,058 $21,973 $3,102 Interest expense 9,031 1,345 15,730 1,377 Net interest income 2,771 1,713 6,243 1,725 Provision for loan losses 5,722 49 5,798 64 Net interest income after provision (2,951) 1,664 445 1,661 Securities gains 8 - 8 - Operating expenses Salaries and employee benefits 564 543 1,304 1,445 Professional fees 756 315 1,220 539 Other 830 635 1,579 1,049 Total operating expenses 2,150 1,493 4,103 3,033 Net income (loss) $(5,093) $171 $(3,650) $(1,372) Basic earnings per share (0.49) 0.02 (0.35) (0.22) Diluted earnings per share (0.49) - (0.36) (0.25) Weighted average basic shares 10,475 10,450 10,465 6,281 Weighted average diluted shares 10,477 10,458 10,467 6,290 Sunset Financial Resources, Inc. Trended Income Statements (dollar amounts in thousands) 2004 2005 Second Third Fourth First Second quarter quarter quarter quarter quarter Interest and fee income $3,058 $5,989 $9,142 $10,171 $11,802 Interest expense 1,345 3,118 5,347 6,699 9,031 Net interest income 1,713 2,871 3,795 3,472 2,771 Provision for loan losses 49 85 1,184 76 5,722 Net interest income after provision 1,664 2,786 2,611 3,396 (2,951) Securities gains - 403 331 - 8 Loss on sale of loans - - (48) - - Operating expenses Salaries and employee benefits 543 660 759 740 564 Professional fees 315 349 263 464 756 Other 635 747 924 749 830 Special charge - - 365 - - Total operating expenses 1,493 1,756 2,311 1,953 2,150 Net income (loss) $171 $1,433 $583 $1,443 $(5,093) Averages and yields/ costs Residential assets $223,720 $476,388 $754,493 $878,454 $1,074,277 Yield 3.79% 4.04% 4.25% 4.21% 4.12% Commercial assets 33,671 42,003 52,839 44,457 28,850 Yield 11.09% 10.24% 7.72% 8.90% 9.63% Earning assets 267,312 535,385 815,065 933,880 1,114,511 Yield 4.60% 4.45% 4.46% 4.42% 4.25% Borrowings 163,380 422,786 701,938 823,171 1,012,197 Interest 2.02% 1.58% 2.16% 2.65% 3.16% Swaps 0.90% 1.20% 0.78% 0.57% 0.36% Fees 0.39% 0.15% 0.09% 0.08% 0.06% Total 3.31% 2.93% 3.03% 3.30% 3.58% Net interest margin 2.58% 2.13% 1.85% 1.51% 1.00% Net interest spread 1.29% 1.52% 1.43% 1.12% 0.67% Sunset Financial Resources, Inc. Earning Assets (dollar amounts in thousands) Investment securities Agency Non Agency Securities Securities Total Par $598,437 $291,547 $889,984 Unamortized premium 8,517 2,288 10,805 Unamortized discount (687) (490) (1,177) Amortized cost 606,267 293,345 899,612 Gross unrealized gains 806 67 873 Gross unrealized losses (3,375) (1,011) (4,386) Estimated fair value $603,698 $292,401 $896,099 Investment securities - repricing characteristics Floating rate $71,998 Three year ARM $57,840 Five year ARM 750,808 Seven year ARM 15,453 $896,099 Residential Loans Par Prem/disc Book value Fixed rates $908 $28 $936 Three year ARM 6,661 187 6,848 Five year ARM 61,637 1,716 63,353 Seven year ARM (and other) 110,239 808 111,047 Total residential loans $179,445 $2,739 $182,184 Commercial loans (dollars in millions) Balance Location Participation Resort development $15.6 NC No Cemetery / funeral home 5.7 HI Yes Multi sports facility 4.7 NJ No Retail development 4.2 FL No Total $30.2 DATASOURCE: Sunset Financial Resources, Inc. CONTACT: Michael Pannell, Chief Financial Officer, Sunset Financial Resources, +1-904-425-4349, ; Jeffrey Goldberger, +1-212-896-1249, , or Michael Cimini, +1-212-896-1233, , both of KCSA Worldwide for Sunset Financial Resources Web site: http://www.sunsetfinancial.net/

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