Annual Investor Conference€¦ · Asset-Based Lending to Healthcare Companies Fee Businesses Asset Management Business and Servicing Businesses to Lever Platform Expertise First

®

Annual Investor ConferenceAnnual Investor Conference

September 27, 2006September 27, 2006

Annual Investor ConferenceSeptember 27, 20062

®ForwardForward--Looking StatementsLooking Statements

This presentation contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this presentation that are not clearly historical in nature are forward-looking, and the words “anticipate”, “assume”, “believe,” “expect”, “estimate”, “guidance”, “outlook”, “plan”, “project”, “will”, and similar expressions are generally intended to identify forward-looking statements. Examples of these forward-looking statements include, but are not limited to: our belief that we will elect REIT tax status with our 2006 tax year and that such election will result in tax efficiencies in our business; our belief that we will pay a stable and growing dividend; our belief that all of our businesses will grow; that asset quality will remain stable; our belief that we will obtain better creditoutcomes, including the stabilization of non-accruals and delinquencies in our portfolio; our belief that we will diversify our franchise; and our belief that we will obtain deposit-based funding.

All forward-looking statements (including statements regarding future financial and operating results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements. The forward-looking statements in this presentation regarding our anticipated results and performance as a REIT commencing in 2006 are subject to particular risks including, but not limited to: events that may require a change in the timing of our REIT election; material variance in the expected level of our cumulative earnings and profits or our projected dividend payout, and the implications of any such variance on our stock price; our ability to access the capital markets on attractive terms or at all to obtain the additional capital we will require to operate as a REIT; our management’s ability to operate our business in accordance with the complex rules and regulations governing REITs as necessary to ensure our qualification for and maintenance of our REIT status; potential changes in tax laws that could reduce the benefits we associate with the REIT election; and the relative attractiveness of our dividend payout as compared to other investment options should market interest rates continue to rise. More detailed information about factors we believe could cause our actual results, performance or achievements to differ materially from anticipated levels is contained in our filings with the SEC, including the sections captioned “Risk Factors” and “Business” in our Annual Report on Form 10-K as filed with the SEC on March 8, 2006. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.


®AgendaAgenda

12:00 PM CapitalSource Strategy & Positioning John Delaney, Chairman & Chief Executive Officer

12:30 PM Business Environment & Operating Overview Dean Graham, President & Chief Operating Officer

12:50 PM Q & A1:10 PM Business Insights Jason Fish, Vice Chairman & Chief Investment Officer

1:30 PM Credit Overview Bryan Corsini, Chief Credit Officer

1:50 PM Q & A2:00 PM Break

2:15 PM Healthcare and Specialty Finance Keith Reuben, Co-President Jim Pieczynski, Co-President

2:45 PM Structured Finance Michael Szwajkowski, President Structured Finance

Chris Kelly, Managing Director Commercial Real Estate Group

3:15 PM Corporate Finance Joe Kenary, Executive Vice President Corporate Lending

Dan Duffy, Managing Director

3:45 PM Residential Mortgage Investments Brian Graham, Managing Director

4:00 PM Q & A4:30 PM Break4:45 PM Financial Overview Tom Fink, Chief Financial Officer

5:15 PM Q & A5:30 PM Wrap-Up and Q & A John Delaney, Chairman & Chief Executive Officer

6:30 PM Cocktails and Dinner

®

Strategy & PositioningStrategy & Positioning

John DelaneyJohn DelaneyChairman and CEOChairman and CEO


®CapitalSource OverviewCapitalSource Overview

Leading, Specialized Commercial Finance Company Providing HighlyLeading, Specialized Commercial Finance Company Providing HighlyCustomized Financing to Small & MediumCustomized Financing to Small & Medium--Sized BusinessesSized Businesses

Large Scale, Broad-Based Middle Market Lending Platform“Super REIT” Structure Blending Asset Based Loans, Corporate Loans, Commercial & Healthcare Real Estate Loans and InvestmentsMarket Leadership Position in All Major Business Lines

Proprietary, Direct Origination CapabilityProprietary, Direct Origination CapabilityApproximately 550 Employees in 24 Offices$7.4 Billion in Commercial Loans & Investments956 Loans to 615 Borrowers

Strong Growth Opportunities Across the Business

Seasoned, Proven Management TeamSeasoned, Proven Management Team

Balanced, Diversified, Tax Advantaged EnterpriseBalanced, Diversified, Tax Advantaged Enterprise

Delivering a Growing & Predictable DividendDelivering a Growing & Predictable Dividend

As of June 30, 2006


®

(1)ABL: Asset-Based Lending

Senior Secured Debt to Finance Leveraged

Buy-Outs

Corporate FinanceCorporate FinanceCorporate Finance

ABL(1) (Including DIP Loans)& Distressed Investing to

Non-Healthcare

Business Credit SvcsBusiness Credit Svcs

Asset-Based Lending to Security Alarm

Companies

Security FinanceSecurity Finance

Captive In-House Audit,Due Diligence and Loan

Approval Functions

CapitalAnalyticsCapitalAnalytics

Healthcare CreditHealthcare Credit

Asset-Based Lending to

Healthcare Companies

Fee BusinessesFee Businesses

Asset Management Business and Servicing Businesses to

Lever Platform Expertise

First Mortgage Debt Secured by All Real Estate Asset

Types

Commercial Real EstateCommercial Real Estate

Asset Based Lending to Middle Market Finance

Companies

Rediscount FinanceRediscount Finance

First Mortgage Debt& Sale Leasebacks on Healthcare Properties

Healthcare Real EstateHealthcare Real Estate

Multiple Lending GroupsMultiple Lending Groups


®Strong Returns for ShareholdersStrong Returns for Shareholders

26% Total Annual Return Since IPO56% Total Annual Return Since REIT Announcement25% Total Annualized Return YTD

26% Total Annual Return Since IPO56% Total Annual Return Since REIT Announcement25% Total Annualized Return YTD

Note: As of September 22, 2006; Assumes reinvestment of dividends; Pro Forma for September 2006 Dividend

$100

$110

$120

$130

$140

$150

$160

$170

$180

$190

$200

$210

Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06

IPO on 08/11/03 at $14.50 per

share

REIT Election

Announced on 09/19/05

Total Value of Initial Investment = $202 at

09/22/06

Value of $100 Invested in CapitalSource Shares at IPOValue of $100 Invested in CapitalSource Shares at IPO


®Seven Attributes Of A Superior Business ModelSeven Attributes Of A Superior Business Model

1. Broad-Based, Diversified Franchise

2. True Middle Market Focus

3. Direct Origination Platform

4. Deep Credit and Investment Culture

5. Superior Financial Model

6. Tax Efficient Structure

7. Stable and Growing Dividend

The CapitalSource Business Model Generates Superior Returns

The CapitalSource Business Model Generates Superior Returns


®Attribute #1: A BroadAttribute #1: A Broad--Based, Diversified FranchiseBased, Diversified Franchise

Predictable Growth

Diversification

Greater Management Discipline

Stronger Funding Platform

Stable Stream of Cash Flow

Application of Best Lending Practices

Helps Attract and Retain People

Economies of Scale

Benefits of a Broad-Based, Diversified FranchiseBenefits of a BroadBenefits of a Broad--Based, Diversified FranchiseBased, Diversified Franchise



Portfolio by Product MixPortfolio by Product MixPortfolio by Lending GroupsPortfolio by Lending Groups

34%

23%

43%

23%

4%

41%32%

CorporateFinance

Structured Finance

Healthcare &

SpecialtyFinance

Senior SecuredAsset Based

Senior Secured Cash Flow

First Mortgage

Mezzanine

As of June 30, 2006



Portfolio by Loan Type Portfolio by Loan Type (1)(1)

CapitalSource Has A Large and Diverse PortfolioCapitalSource Has A Large and Diverse PortfolioCapitalSource Has A Large and Diverse Portfolio(1) As of June 30, 2006

32.56%

0.01%0.12%0.32%0.96%1.02%1.17%

1.59%1.64%

1.86%

2.01%

2.76%

2.86%

2.97%

3.49%

3.74%4.08%4.57%4.64%

6.41%

6.76%

14.46%

Total HealthCare - 32.56%

Business Prods & Svc - 14.46%

Consumer Prods & Svc - 6.76%

Land Portfolio - 6.41%

Mortgage Lender - 4.64%

Resort Finance - 4.57%

Security-Alarm - 4.08%

Value-Added Manufact - 3.74%

Direct Money Lender - 3.49%

Office/ Retail/ Industrial RE - 2.97%

Media - 2.86%

Condo Conversion - 2.76%

Hospitality - 2.01%

Hard Money Lender - 1.86%

Multi-Family Real Estate - 1.64%

Special Situations - 1.59%

Enhanced Mezzanine - 1.17%

Auto Lender - 1.02%

Retail - 0.96%

Home Building - 0.32%

Commercial Real Esta - 0.12%

Rediscount (Other) - 0.01%


®Attribute #2: A True Middle Market FocusAttribute #2: A True Middle Market Focus

““Bulge BracketBulge Bracket”” Capabilities Applied to Middle MarketCapabilities Applied to Middle Market

++ Direct Origination Platform, Not Reliant on the StreetDirect Origination Platform, Not Reliant on the Street

++ Execution Focused Business ModelExecution Focused Business Model

++ ““AuditAudit”” Orientation Designed For Smaller CompaniesOrientation Designed For Smaller Companies

= A Business Built For the Middle Market= A Business Built For the Middle Market

The Only “Pure Play” Middle Market LenderThe Only The Only ““Pure PlayPure Play”” Middle Market LenderMiddle Market Lender


®

Benefits of Controlling Deal Flow:Benefits of Controlling Deal Flow:

Permits a High Degree of Selectivity

Produces Higher Yielding Opportunities

Generates More Consistent Growth

Allows for More Favorable Deal Structures

Results in Better Credit Outcomes

Attribute #3: A Direct Origination PlatformAttribute #3: A Direct Origination Platform

CapitalSource’s Direct Origination Capability isa Key Advantage

CapitalSource’s Direct Origination Capability isa Key Advantage


®

549 Employees390 Investment Professionals (1)

24 Offices$368 Billion of Deals Reviewed From Inception to June 30, 2006 (2)

(1) Investment professionals include Credit Committee, Development Officers, Investment Officers, Loan Officers, Underwriting Officers, Loan Analysts, Attorneys and related support staff. As of June 30, 2006

(2) Source: CapitalSource DealTracker, unaudited. As of June 30, 2006.

Attribute #3: A Direct Origination PlatformAttribute #3: A Direct Origination Platform

EuropeEuropeEurope


®Attribute #3: Direct Origination PlatformAttribute #3: Direct Origination Platform

$17.6

$24.4$21.7 $20.5

$26.4

$29.9$32.9

$34.8 $34.9$36.6

5.1% 5.0% 5.2%5.6% 5.5% 5.5%

5.2% 5.1%

4.3%4.6%

$0

$5

$10

$15

$20

$25

$30

$35

$40

1Q2004

2Q2004

3Q2004

4Q2004

1Q2005

2Q2005

3Q2005

4Q2005

1Q2006

2Q2006

3%

4%

5%

6%

7%

8%

9%

10%

Dollars (Billions) Closing Rate

Clo

sing

Rat

e

Dol

lars

(Billi

ons)

A Growing Pipeline While Maintaining DisciplineA Growing Pipeline While Maintaining Discipline


®Attribute #4: Deep Credit and Investment CultureAttribute #4: Deep Credit and Investment Culture

Industry or Sector Focus

Numerous Checks and Balances in the System

Disciplines Investment Philosophy

Experienced Team

Rigorous Asset Management

Our Credit and Investment Culture Results in Better Credit OutcomeOur Credit and Investment Culture Results in Better Credit Outcome

Core Elements of the CapitalSource Credit AdvantageCore Elements of the CapitalSource Credit AdvantageCore Elements of the CapitalSource Credit Advantage


®Attribute #4: Deep Credit and Investment Culture Attribute #4: Deep Credit and Investment Culture

Areas of FocusAreas of FocusIndustries

HealthcareMediaRetailFinancial ServicesSecurityTechnologyCommercial Real EstateConsumer ProductsResort and Vacation OwnershipManufacturingBusiness Services

Products (Senior Debt for)Acquisitions GrowthDistressedRecapitalizationAlso, Asset Management


®Attribute #4: Deep Credit and Investment CultureAttribute #4: Deep Credit and Investment Culture

Wholly Owned Subsidiary of CapitalSource

“BackBone” of the Dual Track Underwriting Process

Provides Unique Diligence and Audit Capabilities

~90 Professionals

Specialized Industry Groups

Customized Credit and Underwriting Tools

CapitalAnalytics at the Core of the Credit ProcessCapitalAnalytics at the Core of the Credit Process

Capital Analytics

• More Resources• Better Quality• Better Execution• Ongoing Monitoring

• More Resources• Better Quality• Better Execution• Ongoing Monitoring

• Massive Check on the System

• All Staff Report to the CCO

• Massive Check on the System

• All Staff Report to the CCO


®Attribute #5: Superior Financial ModelAttribute #5: Superior Financial Model

96%

0%

25%

50%

75%

100%

% Senior (2)

Strong ReturnsStrong Returns……

3.46x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

Debt:Equity Ratio (2)

22.1%

0%

5%

10%

15%

20%

25%

Adjusted ROE (1)

on High Quality Assetson High Quality Assets…… with Conservative with Conservative LeverageLeverage

(1) YTD Annualized as of June 30, 2006(2) As of June 30, 2006


®Attribute #6: Tax Efficient StructureAttribute #6: Tax Efficient Structure

38% 39% 39%

21%

0%

10%

20%

30%

40%

2003 2004 2005 2006 1H*

Optimizing the Corporate Structure for Tax EfficienciesOptimizing the Corporate Structure for Tax Efficiencies* Excludes the effect of a reduction in net deferred tax liabilities as a result of our REIT Election


®

Stable DividendStable Dividend Growing DividendGrowing Dividend&&

Ability For Greater ROE

Ability To Retain Earnings

Ability For Greater ROEAbility For Greater ROE

Ability To Retain EarningsAbility To Retain Earnings

A Diverse Collection of Businesses

Prudent Payout Ratio

High Quality Asset Profile

A Diverse Collection A Diverse Collection of Businessesof Businesses

Prudent Payout RatioPrudent Payout Ratio

High Quality Asset ProfileHigh Quality Asset Profile

Attribute #7: Stable and Growing DividendAttribute #7: Stable and Growing Dividend


®Dividend GuidanceDividend Guidance

Updated Guidance 2006 2007 % Increase

Annual Dividends $2.00 $2.40 +20%

Payout Ratio (1) 80% - 90% 80% - 90%

Expect to Pay Dividends of At Least $2.00 Per Share for 2006

Projecting a 20% Dividend Increase Next Year to $2.40 Per Share for 2007

Payout Ratio is Expected to be 80% to 90% of Adjusted Earnings

(1) Dividends as a percentage of Adjusted Earnings. See page 142 – 144 for a definition of Adjusted Earnings and a reconciliation to GAAP net income.


®Looking ForwardLooking Forward

Deliver on Guidance

Grow the Businesses (Both Balance Sheet Lending & Fee Businesses)

Diversify Franchise

Maintain Focus & Credit Discipline

Improve Operating Efficiencies

Further Broaden & Diversify Funding Sources

®

Dean GrahamDean GrahamPresident & Chief Operating OfficerPresident & Chief Operating Officer

Business Environment &Business Environment &Operating OverviewOperating Overview


®Business & Operating OverviewBusiness & Operating Overview

The Origination Platform is Fully Built-Out and Operating Efficiently

Our Strategy – Focus on Attractive, Defensible, High-Margin Niches

All Markets Have Ample Room for Growth

Our Product Diversity Allows us to React to Market Changes Reorientation of Corporate Finance Business

We are Not Diverging from our Core Credit PrincipalsFocus on Quality Growth, Selectivity and Active Portfolio Management

Further Efficiencies Exist in the Operating Model

Our Origination Platform and our Products Efficiently Target Niche Markets with High Margins and Strong Growth Characteristics

Our Origination Platform and our Products Efficiently Target Niche Markets with High Margins and Strong Growth Characteristics


®Attractive, Defensible, High Margin NichesAttractive, Defensible, High Margin Niches

Low

High

Low

High

The CapitalSource Zone

EXPERTISE

RE

LA

TIV

E C

OM

PET

ITIO

N

Equipment Leasing

Conduit Real Estate

Large Sponsor

Cash Flow

Mezzanine Loans

Structured Real Estate

Sale Leasebacks

HealthCare Real Estate

HealthCare Working Capital

Small Sponsor

Cash Flow

Higher Risk Adjusted ReturnsRediscount

Asset-Based

RevolversDIP Loans

549 Employees390 Investment Professionals24 Offices$368 Billion of Deal Reviewed from Inception to June 30, 2006

549 Employees390 Investment Professionals24 Offices$368 Billion of Deal Reviewed from Inception to June 30, 2006


®Market OpportunitiesMarket Opportunities

Fully Built-Out Platform + Strength of the REIT Election = Increased Growth OpportunitiesTotal Deals Reviewed…. up 20+% Year Over Year*Real Estate Deals Reviewed… up 60+% Year Over Year*All Lending Businesses showing Growth in Volume of Deals Reviewed

Fully Built-Out Platform + Strength of the REIT Election = Increased Growth OpportunitiesTotal Deals Reviewed…. up 20+% Year Over Year*Real Estate Deals Reviewed… up 60+% Year Over Year*All Lending Businesses showing Growth in Volume of Deals Reviewed

* Unaudited, from CapitalSource DealTracker, January through August of 2006 versus 2005

Lending Group Business Growth Potential Competition

Cash Flow Consistent HighAsset Management Strong NA

Healthcare Real Estate Strong - REIT Enabled ModerateHealthcare Asset Based Consistent ModerateBusiness Credit Services Consistent High

Security Finance Consistent ModerateAsset Management Strong NA

Real Estate Strong - REIT Enabled High but ConsistentRediscount Consistent Moderate

Asset Management Strong NA

Corporate Finance

Healthcare & Specialty Finance

Structured Finance


®

$367.9

$74.9

$32.4

$18.7

Screened prospects

Term sheetsproposed

Closed

Term sheets accepted

$ Billions

20.4%

8.8%

5.1%

%

Source: Unaudited, CapitalSource DealTracker from inception to June 30, 2006

High Degree of Deal SelectivityHigh Degree of Deal Selectivity

Focus on Quality GrowthFocus on Quality GrowthFocus on Quality Growth


®

4.1 4.0

4.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

12/ 31/ 2004 12/ 31/ 2005 YTD 2006

# Borrowers per Loan Administration Headcount# Borrowers per Loan Administration Headcount

Active Portfolio ManagementActive Portfolio Management

CapitalSource has Consistently Invested in Portfolio AdministrationPromotes Rigorous Loan ManagementMetric May Increase Slightly with Continued Shift Towards Real Estate and Asset-Based Lending

CapitalSource has Consistently Invested in Portfolio AdministrationPromotes Rigorous Loan ManagementMetric May Increase Slightly with Continued Shift Towards Real Estate and Asset-Based Lending


®Operating InitiativesOperating Initiatives

Drive Additional Efficiencies Throughout the Operating Model

Attention to Headcount GrowthEnsure Proper Alignment in Groups to Maximize Resource EfficienciesImplement “Best Practices” to Drive Process EfficiencyContinue to Leverage Technology Improve Cost Discipline and Rigor Across all of the BusinessesMaintain Portfolio and Credit Staffing Consistent with Historical Metrics

Develop Compensation Plans to Improve Transparency and Maintain Alignment and Attractive Incentives

Move to Formula Based Compensation Tied to Performance

Increase Objective Measures of Employee Performance

Further Efficiencies Exist in the Operating ModelFurther Efficiencies Exist in the Operating ModelFurther Efficiencies Exist in the Operating Model


®

3.51%

3.03%

2.60% 2.68%

0%

1%

2%

3%

4%

2003 2004 2005 2006 1H

Operating ExpensesOperating Expenses(1)(1) as a % of Average Commercial as a % of Average Commercial AssetsAssets

Historical Operating LeverageHistorical Operating Leverage

Increase During 2006 Due to Expenses Related to

REIT Election

Increase During 2006 Due to Expenses Related to

REIT Election

(1) Operating Expenses, Excluding Depreciation and Amortization

Expect Operating Expenses Ratio to Decrease

Full Year 2006 -2.6%






®

CompensationCompensation(1)(1) as a % of Average Commercial Assetsas a % of Average Commercial Assets

1.35%

1.11%

0.95% 0.93%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

2003 2004 2005 YTD 2006

A Scaleable Labor ModelA Scaleable Labor Model

(1) Includes employee salaries and benefits, excludes bonus and equity compensation


®

285

398

520548 549

0

100

200

300

400

500

600

2003 2004 2005 1Q 2006 2Q 2006

HeadcountHeadcount

Headcount Appropriately Leveling OffHeadcount Appropriately Leveling Off


®

Professional Fees as a % of Average AssetsProfessional Fees as a % of Average Assets

0.28%

0.23%

0.30%

0.38%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

2003 2004 2005 YTD 2006

Professional Fees Driven by REIT ElectionProfessional Fees Driven by REIT Election

Increase during 2006 due to expenses related to REIT

Election


®Key TakeawaysKey Takeaways

The Platform is Large, Diversified and Well Positioned for Long-Term, Sustainable Growth

The Pipeline is Strong and Deal Selectivity Remains Consistent

The “Credit First” Approach is Uncompromised

We are Striving to Drive Efficiencies Throughout the Operating Platform

We are Highly Confident in Our Ability to Deliver Superior Performance

®

Questions and AnswersQuestions and Answers

®

Business InsightsBusiness Insights

Jason FishJason FishVice Chairman & Chief Investment OfficerVice Chairman & Chief Investment Officer


®Roadmap for DiscussionRoadmap for Discussion

Origination Process

Building the Portfolio

Impact of the REIT Election

Portfolio & Credit Management


®The Origination Process is ProvenThe Origination Process is Proven

Consistent Credit Process for Deals

Significant Resources in the Approval Process

“Dual Track” UnderwritingCapitalAnalytics as Unbiased Credit Function

Credit Approval Centralized with Credit Committee

“Front End”Origination

Process

Reports to ChiefCredit Officer


Underwriting Officer

Development Officer

Investment Officer

Credit Committee

Loan Officer

Loan Analyst

Reports to Business President

Origination Underwriting Approval ServicingReports to Business

President

Key:

= Lending Business Role

= CapitalAnalytics Employee


®A Disciplined View Of A Disciplined View Of ““Debt RiskDebt Risk””

All Loans are Either…

And have Been…Underwritten in a Comprehensive and Focused Manner

And Managed with…The Most Sophisticated Collateral Control and Structural Integrity For a Zero Loss Tolerance

Secured by Assets

TheValue of Which

is Known in all Market Conditions

Secured by Assets

TheValue of Which

is Known in all Market Conditions

Secured by a BusinessEnterprise Value

Which has beenProven over time

(e.g. Historical Cash Flow)and is Predictable in all Market Conditions

Secured by a BusinessEnterprise Value

Which has beenProven over time

(e.g. Historical Cash Flow)and is Predictable in all Market Conditions


®Investment AnalysisInvestment Analysis

Qualitative Credit Analysis

+ Customized Structuring

+ Pricing & Return Hurdles Met

= Closed Deal

Keys to Investment Thesis:

Our Selectivity is Consistent

We Benefit from Screening Many Deals

Our Credit Focus is Unwavering

We are Running the Business to an After Tax ROE Target

Positive Positive Risk/Reward Risk/Reward

OutcomesOutcomes

All Deals All Deals Fully Fully

UnderwrittenUnderwritten


®Focus on Generating Higher RiskFocus on Generating Higher Risk--Adjusted YieldsAdjusted Yields

Lend in Markets that are Underserved by Traditional Lenders

Understand True Yield Based on Average Life and Average Outstanding Balance of a Loan

Create Yield Through Loan Structuring

Create Yield Through Syndication Efforts

Lend to Borrowers Who Want and Will Pay for a Value-Added Product


®CapitalSource is Focused on ValueCapitalSource is Focused on Value--Added LendingAdded Lending

CapitalSource provides High Value-Added FinancingAcquisitions & RecapitalizationsRapid GrowthChange in Use / Repositioning of an AssetProviding “Wall Street Style” Financing to the Middle MarketSituations Where Specialized Industry Expertise and Focus Matter

This Requires a “High Touch” Origination ProcessMultiple Resources Involved in Each Deal

Lending Group, In-House Diligence Function, In-House Legal, Credit CommitteeUnanimous Credit Committee Approval on Credit, Structure and Pricing


®A Diverse, Changing PortfolioA Diverse, Changing Portfolio

33% 28% 26% 33%41%

32%

24% 35% 37%29% 23%

4% 6% 4% 4%

33%34%

31%32%

11%

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 YTD 2006

First Mortgage Senior Secured Asset Based Senior Secured Cash Flow Mezzanine

Note: Data as of June 30, 2006. Excludes residential mortgage assets and sale-leasebacks.

Portfolio By Product MixPortfolio By Product Mix


®Distribution of Commercial Loans & InvestmentsDistribution of Commercial Loans & Investments

Commercial Lending & Investment SegmentCommercial Lending & Investment SegmentBy Balance and REIT/TRS DistributionBy Balance and REIT/TRS Distribution

60%66%76%

40%34%24%

$0.0

$2.0

$4.0

$6.0

$8.0

12/ 31/ 2005 03/ 31/ 06 06/ 30/ 06

Billi

ons

Taxable REIT Subsidiary Qualified REIT Subsidiary


®Benefits Of The REIT ElectionBenefits Of The REIT Election

Illustration AIllustration AIllustration A

(1) Assumes Corporate Leverage of 4.5x.(2) Net Yield Less Operating Expenses(3) Assumes 38.8% Effective Corporate Tax Rate.

Illustration BIllustration BIllustration B

Expand Existing Real Estate Business

Ability to Make Lower Yielding Investments Without ROE CompressionLarger DealsLower Leverage SituationsBetter Credits

Expand Existing Real Estate BusinessExpand Existing Real Estate Business

Ability to Make Lower Yielding Investments Without ROE CompressionLarger DealsLower Leverage SituationsBetter Credits

REIT C-Corp REIT C-CorpNet Yield 10.0% 10.0% Net Yield 10.0% 12.2%Operating Expenses 2.0% 2.0% Operating Expenses 2.0% 2.0%

ROA 8.0% 8.0% ROA 8.0% 10.2%Financing Cost 5.5% 5.5% Financing Cost 5.5% 5.5%Return on Debt 2.5% 2.5% Return on Debt 2.5% 4.7%Levered Return on Debt (1) 11.3% 11.3% Levered Return on Debt (1) 11.3% 21.4%Return on Equity (2) 8.0% 8.0% Return on Equity (2) 8.0% 10.2%Pre-Tax ROE 19.3% 19.3% Pre-Tax ROE 19.3% 31.6%Taxes (3) - 7.5% Taxes (3) - 12.3%

ROE 19.3% 11.8% ROE 19.3% 19.3%


®

Triple-Net Lease TransactionsTripleTriple--Net Lease TransactionsNet Lease TransactionsFixed Rate, Long-Term Assets with Low Credit Risk

Initial Lease Rates Range from 8.5% to 10% with Rent Escalators

Characteristics:

Broadened Rediscount Finance BusinessBroadened Rediscount Finance BusinessBroadened Rediscount Finance Business

Asset Based Lending to Other Real Estate Lenders

Structured as REIT Compliant Assets

Benefits Of The REIT ElectionBenefits Of The REIT Election

Sale Leaseback LoanTerm 10-15 yrs 3 yrsLTV N/ A 70%-80%Residual Value Yes NoLeverage 4.0:1 4.5:1


®Managing a Diverse PortfolioManaging a Diverse Portfolio

Loans are Managed in a “High Touch” Manner by the Portfolio Management TeamsLoan Officers & Account Executives serve as Primary Client Interface following Closing

Frequent, Regular Dialog with Clients Regarding PerformanceComparisons of Actual Results to Underwritten Projections

Portfolio Managers and Chief Operating OfficersReady Resource for Loan Officers and Account ExecutivesDirect Attention to Matters requiring Intervention (COO, MD or President in Business, CCO)

Chief Credit Officer Provides Overall Portfolio Monitoring & Directs CapitalAnalytics Resource

“Back End”Servicing /

Loan Management

Process



Underwriting Officer

Development Officer

Investment Officer

Credit Committee

Loan Officer

Loan Analyst

Reports to Business President

Origination Underwriting Approval ServicingReports to Business

President

Key:

= Lending Business Role

= CapitalAnalytics Employee


®Loan Management ProcessLoan Management Process

Active Portfolio Management

Extensive Borrower Information

Intensive Collateral Management

Continuous Monitoring of Performance

Proactive vs. Reactive

Rational Loan Workout Approach

Achievingthe Best

EconomicOutcome

AchievingAchievingthe Best the Best

EconomicEconomicOutcomeOutcome

Results in


®Recovery Analysis through June 30, 2006Recovery Analysis through June 30, 2006

Since June 2003, CapitalSource has Reported 37 Loans (Totaling $385.8 Million) as Delinquent and/or Non-Accrual

Twenty-Five Loans (Totaling $187.5 Million) were Resolved with a Net Recovery of 91%

Senior Secured Asset-Based: 3 Loans ($18.4 Million); Net Recovery of 94%

Senior Secured Cash Flow: 6 Loans ($67.2 Million); Net Recovery of 83%

First Mortgage: 16 Loans ($102.0 Million); Net Recovery of 96%

Twelve Loans (Totaling $198.2 Million) Remain Unresolved

Senior Secured Asset-Based: 4 Loans ($30.8 Million)

Senior Secured Cash Flow : 5 Loans ($97.5 Million)

First Mortgage : 3 Loans ($69.9 Million)

Note: Data as of June 30, 2006. Non-Accrual and Delinquent Loan Balances as of Date Loans First Disclosed in Credit Statistics.

Source: CapitalSource Asset Manager (CAM) - Unaudited


®

DelinquenciesDelinquencies::Loans that are 60 or more days past due with respect to principal and/or interest.

NonNon--AccrualAccrual ::Loans where it is probable we will be unable to collect the interest as agreed in the loan agreement, thus we do not accrue interest.

Impaired Impaired ::Loans in which we determine it is probable that CapitalSource will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement, including interest and scheduled interest payments.

Includes Loans where we expect to have a loss as well as Loans where CapitalSourcedoes not expect to lose any principal and/or interest.

From time to time, CapitalSource may amend a loan agreement to ensure the full collectibility of principal and interest.

ChargeCharge--OffsOffs ::Principal balance that has been written-off due to the inability of the borrower to repay the loan balance.

Credit Metric DefinitionsCredit Metric Definitions


®Credit Quality RatiosCredit Quality Ratios

(1) Charge-offs for the calendar period to date, divided by average loans, annualized(2) Charge-offs for the last twelve months, divided by average loans

1Q2005 2Q2005 3Q2005 4Q2005 1Q2006 2Q2006

60+ Days Delinquencies 1.12% 1.13% 1.00% 0.70% 0.66% 1.31%

Loans on Nonaccrual Status 1.49% 2.22% 2.18% 2.30% 2.24% 2.01%

Impaired Loans 3.01% 3.45% 3.74% 3.33% 3.34% 3.28%

Charge-Offs Annualized (1) 0.00% 0.47% 0.45% 0.14% 0.02% 0.74%

LTM Charge-Offs (2) 0.17% 0.20% 0.31% 0.27% 0.25% 0.34%

Allowance % 0.96% 0.88% 1.49% 1.46% 1.58% 1.41%


®Putting Credit Statistics in PerspectivePutting Credit Statistics in Perspective

1,696

715

944

0

500

1000

1500

2000

Total Loans Originated # Loans Paid Off at ParResolved 60+ and Non-Accrual Loans Unresolved 60+ and Non-Accrual LoansRemaining Loans in the Portfolio

# of Loans Paid off at

Par

Resolved Delinquent & Non-Accrual

Loans*

Unresolved Delinquent & Non-Accrual

Loans*

# of Loans Remaining in the Portfolio

Delinquent and Non-Accrual Loans Represent a Small Number of the Loans Originated by CapitalSource

Delinquent and NonDelinquent and Non--Accrual Loans Represent a Accrual Loans Represent a Small Number of the Loans Originated by CapitalSourceSmall Number of the Loans Originated by CapitalSource

* Loans reported as 60+ delinquent or on Non-Accrual status since June 2003

®

Credit OverviewCredit Overview

Bryan CorsiniBryan CorsiniChief Credit OfficerChief Credit Officer


®The Credit EnvironmentThe Credit Environment

The Macro Credit Environment Looks “Good” Right NowDefault Rates are at or Near Cyclical Lows

Over the Last 18 Months, the Middle Market Lending Marketplace has been Affected by a Significant Influx of Liquidity and New Entrants

The Result has been Tighter Spreads and Higher Leverage

We Anticipate a Correction in the Credit Markets within +/- the Next 12 Months

Industry Default Rates IncreaseCredit Availability Will Generally TightenNumber of Entrants Will Consolidate

CapitalSource is Positioned to Withstand a Downturn in the Credit Markets without Significant Impact


®CapitalSource Credit PostureCapitalSource Credit Posture

We are Maintaining DisciplineThe Business Model is Founded on a “Credit First” MentalityWe have Maintained a High Degree of Selectivity Across a Growing Pipeline

Our Focus in on Senior, Secured Lending73% of CapitalSource’s Loan Portfolio is Senior Secured Asset-Based or First Mortgage Loans(1)

Maintaining Prudent LTV’s on in All of our Lending ProductsContrary to the Market, We are Maintaining Consistent Debt to EBITDA Multiples on our Cash Flow Lending

Strict Portfolio Management“High-Touch” Portfolio Management Leads to Early Detection of IssuesWe Engage in Active Problem Resolution Strategies

CapitalSource has Excellent Historical Loss Rates and Recovery RatesA “Credit Correction” Should Lead to Increased Lending Opportunities for CapitalSource’s Disciplined Lending Platforms

(1) At June 30, 2006


®Risk Assessment by ProductRisk Assessment by Product

Note: “LTV” = Loan to Value

Product Environment CSE Posture

Highly SelectiveGrowth has SlowedManage to Lower Hold SizesMoving "Up Market" and Syndicating

LTV's Consistent at ~70%No Credit Losses in 10+Years of Lending

Other ABL Risk Stable LTV's Consistent at ~80%

LTV's Consistent at ~85%HealthCare RE SupportedStable Cash Flows; No Credit Losses10+ YearsOther Real Estate GenerallyTransitional in Nature

Cash Flow

HealthCare ABL

Real Estate

Risk Increasing

Risk Stable

Risk Stable


®Recovery Analysis through June 30, 2006Recovery Analysis through June 30, 2006

Since June 2003, CapitalSource has Reported 37 Loans (Totaling $385.8 Million) as Delinquent and/or Non-Accrual

Twenty-Five Loans (Totaling $187.5 Million) were Resolved with a Net Recovery of 91%

Senior Secured Asset-Based: 3 Loans ($18.4 Million); Net Recovery of 94%

Senior Secured Cash Flow: 6 Loans ($67.2 Million); Net Recovery of 83%

First Mortgage: 16 Loans ($102.0 Million); Net Recovery of 96%

Twelve Loans (Totaling $198.2 Million) Remain Unresolved

Senior Secured Asset-Based: 4 Loans ($30.8 Million)

Senior Secured Cash Flow : 5 Loans ($97.5 Million)

First Mortgage : 3 Loans ($69.9 Million)

Note: Data as of June 30, 2006. Non-Accrual and Delinquent Loan Balances as of Date Loans First Disclosed in Credit Statistics.

Source: CapitalSource Asset Manager (CAM) - Unaudited


®

Balance of Loans WorkedBalance of Loans Worked--Out Prior to Going on Out Prior to Going on 60+Delinquent or Non60+Delinquent or Non--Accrual StatusAccrual Status

$38

$91

$108

$0

$20

$40

$60

$80

$100

$120

4Q05 1Q06 2Q06

Highly Successful Proactive Workout ResultsHighly Successful Proactive Workout Results

Since September 2005, CapitalSource has Successfully Resolved $237M Loans with 100% Recovery

Since September 2005, CapitalSource has Successfully Resolved $237M Loans with 100% Recovery


®How Potential Problems Are IdentifiedHow Potential Problems Are Identified

CapitalSource Uses “High Touch”, Active Portfolio ManagementThorough, Recurring Loan/Portfolio Review ProcessesProblems, Issues and Outliers are Quickly Identified and Discussed

Specific Problem Warning Signs Include, but are not Limited to:Technical Defaults under CovenantsUnderperformance Relative to Projections or Business Plan Hurdles“Matured but Unpaid” Status / Loans Maturing in the next 60 daysUnpaid Property Taxes or Payroll TaxesPoor State Survey Results (Healthcare)Significant “Buzz” in the Industry or within our Extensive Contact Network


®““High TouchHigh Touch”” Management Improves Credit VisibilityManagement Improves Credit Visibility

LossLoss

Impairment Impairment forfor

CreditCredit

Non AccrualNon Accrual

Delinquency Delinquency

Conventional LendingConventional Lending

Limited Borrower InformationLimited Borrower InteractionFormulaic vs. HolisticReactive vs. Proactive

Limited Borrower InformationLimited Borrower InteractionFormulaic vs. HolisticReactive vs. Proactive

CapitalSourceCapitalSource

Proof:

Non-Accruals > 60+ Delinquencies

Extensive Borrower InformationActive Portfolio ManagementIntensive Collateral Management Continuous Monitoring of PerformanceProactive vs. Reactive

Extensive Borrower InformationActive Portfolio ManagementIntensive Collateral Management Continuous Monitoring of PerformanceProactive vs. Reactive

Result = Conventional Credit Trajectory


®Credit Trends & ExpectationsCredit Trends & Expectations

The Portfolio has Seasoned

Credit Statistics are in an Acceptable Range and are Reasonably Stable

Portfolio Mix Shift Towards Asset-Based Loans and Generally Higher Credits

Cash Flow Loans Take Longer to Workout – Therefore, they stay in Credit Metrics Longer

Expect Allowance to Decrease as Current Workouts Resolve


®Credit Metrics Show a Seasoned, Stable PortfolioCredit Metrics Show a Seasoned, Stable Portfolio

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2Q 04 3Q 04 4Q 04 1Q 05 2Q 05 3Q 05 4Q 05 1Q 06 2Q 06

Annualized Charge Offs60+ DelinquenciesNon-Accruals

50bps Annual Chargeoff Guidance


®Our Historical Loss Experience Has ImprovedOur Historical Loss Experience Has Improved

Analysis of all Paid-Off Loans Since Inception Shows Portfolio’s Average Historical Losses Have Decreased

60 bps (as of 8/31/06) Compared to 69 bps Last Year (as of 8/31/05)

$4.27B of Loans Paid Off at Par and Loans Resolved without a Loss

1.51%

0.34%0.18%

0.69%

1.10%

0.33%0.22%

0.60%

0.00%

0.50%

1.00%

1.50%

2.00%

Cash Flow Real Estate Asset Based WeightedAverage

LTD as of 8/ 31/ 05LTD as of 8/ 31/ 06


®Hold Size DeterminationsHold Size Determinations

Key Factors in Determining Hold Sizes

Cash Flow vs. Asset Based

Quality of Collateral

“Pooled” vs. Single Obligor

Results in Hold Sizes as Low as $10-15 Million for Cash Flow Loans and Several Hundred Million for Pooled, Asset Based Obligors


®Key Credit TakeawaysKey Credit Takeaways

We are Well Positioned for a Turn in the Credit Cycle

Our Credit and Loan Management Processes, In Place Since Inception, Continue to Protect the Balance Sheet

Our Credit Focus and Market Positions Should Lead to Outcomes that Compare Favorably to the Industry

A “Credit Correction” Should Lead to Increased Lending Opportunities for CapitalSource’s Disciplined Lending Platforms

®


®

15 Minute Break15 Minute Break

®

HealthCare & Specialty FinanceHealthCare & Specialty Finance

Keith ReubenKeith ReubenCoCo--PresidentPresident



General Review of the Healthcare & Specialty Finance Business

In-Depth look at Healthcare Real Estate

Benefits of Sale Leaseback Transactions

Our Opportunity in Healthcare Real Estate


®Healthcare & Specialty FinanceHealthcare & Specialty Finance

Healthcare & Specialty Finance Lending GroupsHealthcare & Specialty Finance Lending GroupsHealthcare Credit Group

Healthcare Real Estate Group

Healthcare Cash Flow Group

Business Credit Services

CapitalSource Mortgage Finance (HUD)

Security Alarm and Homeland Security Group

ProductsProductsFirst Mortgage/Acquisition Loans Secured by Healthcare Facilities

Asset-Based Loans Secured by Accounts Receivable, Inventory & Other Assets

Cash Flow Loans for Sponsored Healthcare-related LBOs

Top 10 HUD Approved Lender



Specialized Credit SkillsSpecialized Credit Skills

Deep Industry Knowledge Leads to Better Credit Outcomes

Dedicated, Specialized CapitalAnalytics Resources

In-House Reimbursement/Clinical Expertise

Proprietary Loan Management Capabilities

Intense Collateral Review, Controlled Funding



Market OpportunityMarket Opportunity

Large Size of Middle Market

Underserved by Traditional Lenders

Middle Market Commands Premium Pricing

Rewards Speed and Execution

Rewards Industry Specific Knowledge

Real Estate Businesses Further Enabled by REIT Election


®Healthcare & Specialty Finance Healthcare & Specialty Finance -- Portfolio StatisticsPortfolio Statistics

($ in millions) 6/ 30/ 2005 6/ 30/ 2006 Increase(%)

Increase

Outstanding Loans 342 454 112 32.7%

Current Borrowers 256 316 60 23.4%

Outstanding Commitments 3,185$ 4,945$ 1,760$ 55.2%

Loan Balance 1,883$ 3,104$ 1,221$ 64.8%

Direct Real Estate Investments N/ A 238$ 238$ N/ A

Average Loan Amount 5.51$ 6.84$ 1.33$ 24.2%

Average Borrower Balance 7.36$ 9.82$ 2.46$ 33.5%

Healthcare & Specialty Finance - Portfolio Statistics

®

HealthCare Real Estate GroupHealthCare Real Estate Group

Jim PieczynskiJim PieczynskiCoCo--PresidentPresident


®Healthcare Real Estate Healthcare Real Estate -- OverviewOverview

Healthcare Real Estate

Group50%

Healthcare Real Estate

Group50%

Healthcare Real Estate Group is a Significant Part of Healthcare & Specialty Finance

$1.7 Billion Healthcare Real Estate Portfolio of Loans & Leases

Over 120 Loans to 60 Operators

Originated over $2.4 Billion of Loans Since Inception

Excellent Credit PerformanceNo Losses to Date

Healthcare & Specialty Finance Portfolio (1)

(1) As of June 30 2006, includes Sale Leasebacks


®Healthcare Real Estate Healthcare Real Estate -- CapabilitiesCapabilities

CapitalSource can Provide Full Array of Products to Healthcare BorrowersAccounts Receivable FinancingFirst Mortgages

Ability to Compete in a Wide SpectrumVery Small to Very Large Transactions

Closed many high profile industry deals, including:Fountain View (now Skilled Health Care)Centennial HealthcareMariner Health CareLaurel Health Care

Ability to Grow with Our Clients

Many Repeat Customers

Very Strong Pipeline

Healthcare Real Estate Group is an Industry LeaderHealthcare Real Estate Healthcare Real Estate Group is an Industry Leaderis an Industry Leader

Sale LeasebackApproved HUD MAP Lender

Kindred Florida PortfolioLifecareTandem Health CareSouthTrust Portfolio Acquisition


®Healthcare Real Estate Healthcare Real Estate –– Target MarketTarget Market

The Skilled Nursing Industry is a Significant Target Market for Healthcare Real Estate

Focus is on Operators with Solid Management

Area of Strength is in Financing Opportunistic Acquisitions

Strategic Strengths are Speed and Expert Industry/Market Knowledge

Currently in the US there are~ 16,000 Nursing Homes~ 7,100 Assisted Living Facilities

CapitalSource’s Target Market is the Small Owner and the Regional Chain which is ~ 85% of the Market

CapitalSourceCapitalSource’’s Target Market is the Small Owner and the Regional s Target Market is the Small Owner and the Regional Chain which is ~ 85% of the MarketChain which is ~ 85% of the Market

Large National Owners15%

Small Owners andRegional Chains

85%


®Favorable Skilled Nursing FundamentalsFavorable Skilled Nursing Fundamentals

Nationwide Skilled Nursing Facility Occupancy Currently Exceeds 90%Nursing Home Supply is Declining85+ Population is Growing and Growing Faster than the General Population

Nursing Home Supply is Decreasing

13.5

14.5

15.5

16.5

17.5

1995 1998 2000 2005

Thou

sand

s

0

5

10

15

20

2000A 2010E 2020E 2030E 2040EM

illio

ns0%

1%

2%

3%

4%

% of Total Population

85+ Population 85+ as % of Total Population

…While Demand is Increasing


®Healthcare Real Estate Healthcare Real Estate -- Skilled Nursing FacilitiesSkilled Nursing Facilities

Why Skilled Nursing Facility Assets Retain ValueWhy Skilled Nursing Facility Assets Retain ValueCertificates of Need Create a Significant Barrier to Entry

Long-Term Medicaid Contracts Provide Revenue Stability

Limited Availability of Land & Increasing Construction Costs Reduces Competitive Supply Pressure

Local Business

Facility is Integral to the Operating Business

Capitalization Rates have Ranged from 12-14%

Other Favorable CharacteristicsOther Favorable CharacteristicsFacilities Located Nationwide Resulting in a Highly Diverse by both Geography and by Operator

Numerous Takeout Sources, Including CMBS, HUD, and Banks


®Healthcare Real Estate Healthcare Real Estate -- Economics of a DealEconomics of a Deal

Sale LeasebackSale LeasebackSale Leaseback

Life 3 - 10 Yrs 10 Yrs +Typical Size $5.6 Million $7 MillionCommitment Fees 1.00% -Exit Fees 1.00% -Intial Yield LIBOR + 3.25% LIBOR Swap +4.00%Annual Increase - 2.50%Effective Yield w/ out Real Estate Appreciation

LIBOR + 3.45% LIBOR Swap +4.90%

ROE ~18.5% 18.5% +

MortgageMortgageMortgage


®Benefits of Sale LeasebacksBenefits of Sale Leasebacks

All Leases are Triple Net

Steady Growth in Rental Income

Stability in Portfolio with No Run-Off

Ability to Realize Appreciation in Property Value

Stable Operating Environment


®Our Opportunity in Healthcare Real EstateOur Opportunity in Healthcare Real Estate

Porfolio Size(In Millions)

Sale Leaseback Mortgage HUD Loans A/ R Cash Flow

CapitalSource $ 1,750

REITsHCP $ 4,300 HCN $ 3,300 VTR $ 3,100 NHP $ 2,800 SNH $ 1,700 OHI $ 1,100 LTC $ 600

Other LendersGE

MerrillLynch CapitalCapMark

We are Building a Large Healthcare REIT within CapitalSourceWe are Building a Large Healthcare REIT within CapitalSourceWe are Building a Large Healthcare REIT within CapitalSource

®

Structured Finance BusinessStructured Finance Business

Michael SzwajkowskiMichael SzwajkowskiPresidentPresident


®

Overview of Structured Finance

Review of the Portfolio

Review of Rediscount Finance

Review of Commercial Real Estate (Christopher Kelly)

Roadmap for DiscussionRoadmap for Discussion


®Structured Finance BusinessStructured Finance Business

Providing Focused Capital to Niche Segments within Large Financial Markets

We Generate Premium Risk-Adjusted Returns Principally on Senior Asset-Based Transactions

Emphasize Specific Segments of the Real Estate & Financial Services Markets that Demonstrate Strong Growth and Earnings Potential

We have Expanded Opportunities as a Result of CapitalSource’s REIT Election

OverviewOverviewOverview

Our Goal is to be the Premier Player in our Markets by DeliveringCreative Capital Solutions in an Intelligent & Highly Responsive Manner

Our Goal is to be the Premier Player in our Markets by DeliverinOur Goal is to be the Premier Player in our Markets by DeliveringgCreative Capital Solutions in an Intelligent & Highly ResponsiveCreative Capital Solutions in an Intelligent & Highly Responsive MannerManner


®

Leader in Rediscount Finance, a Highly Fragmented and Inefficient Market

Clients Include Broad Range of Commercial and Consumer Finance Companies

Focus on Mortgage Finance Companies

“First Call” Lender in This Dynamic and Lucrative Market

Lender & Rediscount FinanceLender & Rediscount FinanceLender & Rediscount FinanceReal Estate FinanceReal Estate FinanceReal Estate Finance

Leading Provider of Solutions for Real Estate Owners and Developers

Broad Array of Products for Diverse Property Types

National Originations Team

Continue to Broaden Product Offerings

Two Specialized Lending PlatformsTwo Specialized Lending Platforms

Consistency, Creativity and Execution Provide Competitive Advantage

Consistency, Creativity and Execution Provide Competitive Consistency, Creativity and Execution Provide Competitive AdvantageAdvantage


®Competitive EnvironmentCompetitive Environment

Significant Liquidity Generally Exists in the Debt Markets Today and in Varying Degrees within our Target Markets

Real Estate Capital Markets, in Particular, are Demonstrating Unprecedented Levels of Liquidity Given Significant Investor Demand which has Resulted in Relaxed Underwriting Standards, Higher Leverage, Lower Pricing.Currently More Than $2 Trillion in Mortgage Debt Outstanding in the Commercial Market

Accelerating Growth and Liquidity:Commercial Mortgage Market has Grown at a 10% Compound Rate Over the Past 50 yearsCompound Annual Growth Accelerated to 16% Between 2003 and 1Q06Over the Past 15 Years the Securitization Market has Grown Dramatically Year to Date Volume (as of 9/15/06) of $167.5 Billion Represents a Significant Increase Over 2005

Sources: Federal Reserve and Commercial Mortgage Alert

The Tremendous Liquidity of the Current Environment has Put Significant Pressure on Asset Spreads, Particularly within Commodity Businesses

The Tremendous Liquidity of the Current Environment has Put SignThe Tremendous Liquidity of the Current Environment has Put Significant ificant Pressure on Asset Spreads, Particularly within Commodity BusinesPressure on Asset Spreads, Particularly within Commodity Businessesses


®Strategic and Competitive AdvantagesStrategic and Competitive Advantages

CapitalSource is a Market Leader in Structured Finance

Fully Built-Out, Dominant, National Direct Origination Platform

Strong Credit Culture, In-House Underwriting and Checks and Balances to Ensure Quality

Established and Disciplined Portfolio Management

Most of the Competition Outsources at Least One of these Critical

Elements

Lack of Proprietary Advantage Forces Others to Compete on Credit & Pricing

Lack of Proprietary Advantage Forces Others to Compete on Credit & Pricing


®SummarySummary

Structured Finance has Built a Real Franchise Through its Prolific and Proprietary Origination Engine

Prolific Originations Enable Structured Finance to:Unearth Opportunities Not Addressed by the Broader Market Due to Size and Timing RequirementsIdentify New & Emerging Niche OpportunitiesGrow with our Clients as they Expand Geographically and by Product Type

As a Balance Sheet Lender Structured Finance Provides Much Sought After Debt Capital to Support Opportunities not Served by the Conduit & Securitization Market

These Opportunities Require a Lender Who Desires to Hold These Opportunities Generally Provide Greater Risk Adjusted Returns

Structured Finance Backs this Origination Effort with Proprietary Underwriting and Servicing - Delivering Controlled Execution From lead to Repayment

The Portfolio Management Team is Staffed by Highly-Trained and Experienced Professionals Covering all Necessary Disciplines


®

Structured Finance has Established a Highly Effective Loan Origination PlatformInvestment Professionals in Offices throughout the United StatesDedicated “Banking Teams” with Compensation based on Contributed Value of Transactions and Long-Term Performance to Ensure QualityUse the CapitalSource “Dual-Track” Operating Model to Optimize Execution

Strong, Proprietary Direct Origination Capability Provides Key AdvantagesEnables Identification of Unparalleled OpportunitiesSignificant Deal Flow results in High Degree of Selectivity and Control Credit QualityMany other Market Participants are Dependent upon 3rd Party Originations

Structured Finance is Continuing to Invest in its Direct Origination PlatformAdditional Hiring and Expansion of Geographic PlatformFurther Developing the CapitalSource Franchise through Advertising, Conference Sponsorship and Attendance and other Grassroots Marketing Activities

Focus on Direct OriginationFocus on Direct Origination


®Structured Finance Business Structured Finance Business –– Diverse PortfolioDiverse Portfolio

Special Situations

7%Enhanced Mezzanine

6%

Hard Money Lender

4%

Commercial R.E. 1%

Multi-Family R.E.9%

Office/ Retail/ Industrial RE

16%

Condo Conversion

14%

Hospitality 11%

Land 32%

Note: Portfolio data as of June 30, 2006

Real Estate Portfolio (by Property Type)Real Estate Portfolio (by Property Type) Rediscount Portfolio (by Product)Rediscount Portfolio (by Product)

Hard Money Lender

9%

Auto Lender 7%

Resort Finance 30%

Mortgage Lender 30%

Direct Money Lender 24%


®Portfolio StatisticsPortfolio Statistics

Increase in CapitalSource’s Franchise and the Strength of Direct Origination is Evident in the Year over Year Portfolio Metrics

Increase in CapitalSourceIncrease in CapitalSource’’s Franchise and the Strength of Direct s Franchise and the Strength of Direct Origination is Evident in the Year over Year Portfolio MetricsOrigination is Evident in the Year over Year Portfolio Metrics

($ in millions) 6/ 30/ 2005 6/ 30/ 2006 Increase(%)

Increase



Outstanding Commitments 2,282$ 3,480$ 1,198$ 52.5%

Loan Balance 1,486$ 2,445$ 959$ 64.5%

Average Loan Amount 8.12$ 12.04$ 3.92$ 48.3%

Average Borrower Balance 9.12$ 14.30$ 5.18$ 56.8%

Structured Finance - Portfolio Statistics


®Lender & Rediscount FinanceLender & Rediscount Finance

Rediscount Finance Provides Asset-Based Lending to Smaller Consumer and Commercial Finance Companies

Bringing a Sophisticated, “Wall Street-style” Financing to Firms too Small to go to the Capital Markets

Large and Fragmented Market~ 15,000 Specialty Finance Companies in the United StatesCapital Markets Only Address Needs Principally Over $250 Million

Rediscount Business has been Further Enabled Due to REIT ElectionIncreased Opportunities with Rediscount of Real Estate Related Assets

To be Effective in the Rediscount Market, Capital Providers Need:Direct Origination CapabilitySophisticated Underwriting ExpertiseStrong Portfolio Management

Principal competitors for CapitalSourceWells Fargo FoothillTextronBank Of AmericaCITSmaller Regional BanksHedge Funds


®Lender & Rediscount Finance Lender & Rediscount Finance -- OverviewOverview

CustomersCustomersSpecialty Lenders

Mortgage CompaniesConsumer and Commercial Lenders

Asset Originators

Specialized Credit SkillsSpecialized Credit SkillsIntense Collateral AnalysisRigorous StructuringPortfolio Acquisition Experience/Expertise

Market OpportunityMarket OpportunityMarket Segments that Require Highly Specialized Lending ExpertiseFragmented and UnderservedNeed for Highly Customized Solutions

ProductsProductsAsset-Based Lending PracticeSenior Asset-Based RevolversMortgage Loan HypothecationMortgage Loan Portfolio Acquisitions

Competitive AdvantagesCompetitive AdvantagesSophisticated Structuring CapabilitiesFlexibility ▪ SpeedExpertise ▪ “One-Stop” Shop

CompetitionCompetitionCommodity Lenders: Regional Banks, Investment Banks, SecuritizationNon-Commodity: Foothill, Textron, Hedge Funds


®Lender & Rediscount Finance Lender & Rediscount Finance –– Competitive EnvironmentCompetitive Environment

CapitalSource Brings A Strong Balance Sheet and Creativity to Bear in this Highly Fragmented and Diverse Market

Compelling Product Mix

On-Balance Sheet Revolving Warehouse Facilities

Purchase Facilities

Whole Loan Purchase

Fragmented and Inconsistent Competition

Need for Servicing Capabilities and Organized Business Development Process Limits Direct Competition

Requires Sophisticated Structuring Skills to Effectively Compete

Requires Robust Infrastructure (Systems and People)

CapitalSource is a Dominant Player Due to Strong Balance Sheet, Origination Engine and Servicing Expertise

Market PresenceMarket PresenceMarket UpdateMarket Update

CapitalSource is the Leading Source of Responsive and Creative Lender & Rediscount Finance in the United States

CapitalSource is the Leading Source of Responsive and Creative LCapitalSource is the Leading Source of Responsive and Creative Lender ender & Rediscount Finance in the United States& Rediscount Finance in the United States

®

Commercial Real EstateCommercial Real Estate

Christopher KellyChristopher KellyManaging Director, Structured Managing Director, Structured

Finance Real Estate GroupFinance Real Estate Group


®Commercial Real Estate LendingCommercial Real Estate Lending

CapitalSource’s Commercial Real Estate Group Provides Non-Commodity Lending for Developers/Operators of “Transitional” Real Estate

“Portfolio Lender” In a Market Dominated By Securitization LendersPrimarily a “Loan to Cost” Lender in a Market that is Generally Focused on “Loan-To-Value” - as Determined By Capitalization of Property Cash Flows

We Continue to Build-Out Platform to More Efficiently Source Sponsors & Transactions and Capitalize On Local Market Opportunities/Inefficiencies

Continued Focus in Major Metropolitan Markets Driven By Regional Presence and a Strategic Shift To Direct Origination

45% of YTD 2006 Originations have been with “Direct” Clients Versus Approximately 35% for the Same Period 2005.

We Actively Look to Market-Driven Opportunities to Expand our Real Estate Lending Product Line

“Advantage” Senior Loans, Enhanced Mezzanine, Flexible Fixed Rate, Construction Loans

Tax-Efficient REIT Structure Allows Us to be More Competitive in the Market and Extend our Reach

Stronger, More Experienced SponsorsLower Leverage Situations Where Pricing of Debt is More Important Than Loan Proceeds


®Providing Structured Financing SolutionsProviding Structured Financing Solutions

The Majority of Our Commercial Real Estate Originations are Senior Debt Combined with Some Mezzanine Debt Delivering “One-Stop” Service

Other Products Include Second Lien, Mezzanine Debt and B-Note Investments

Loans are Collateralized by Virtually all Types of Real Estate Asset Classes

Nearly all Commercial Real Estate Transactions are Supported by an Acquisition of a Real Estate Asset with a Plan to Enhance Value of the Asset Over a 2-5 Year Period

Sponsors Typically Contribute Meaningful Cash Equity at Closing Providing “Credit Enhancement” and Alignment with CapitalSource

Typical “Exit” for Interim Loans is an Asset Sale or Refinancing by Conduit orConventional Lender Once the Asset Achieves Stabilization

Our Lending is More “Execution Dependent” and Less “Cap Rate Dependent”, Which Provides Greater, Risk-Adjusted Returns

CapitalSource’s Platform has been Specifically Set Up to Address this Market and Service/Manage These More Execution-Dependent Loans

CapitalSource’s Platform has been Specifically Set Up to Address this Market and Service/Manage These More Execution-Dependent Loans


®

CustomersCustomersCustomersReal Estate DevelopersOwners and InvestorsCorporate Users / Sale Leaseback

Specialized Credit SkillsSpecialized Credit SkillsSpecialized Credit SkillsProperty AnalyticsMarket Specific AnalysisSponsor Capabilities

Commercial Real Estate Finance Commercial Real Estate Finance -- OverviewOverview

Market OpportunityMarket OpportunityMarket Opportunity

Provide On-Balance Sheet, Non-Commodity SolutionsNeed for Highly Customized SolutionsExecution-Oriented

Competitive AdvantagesCompetitive AdvantagesCompetitive Advantages

Sophisticated Structuring CapabilitiesFlexibility & SpeedExpertise“One-Stop” Shop


®Case Study Case Study -- RV Portfolio RefinancingRV Portfolio Refinancing

$8.3 $75.5

Wall Street Conduit

80% Loan to Appraised Value

Ratio

$52.9CapitalSource

Senior Whole Loan

$18.9Implied

Equity Value

$-

$20

$40

$60

$80

$100

CapitalSource InterimFinancing

Take-Out Financing

Mill

ions

Hard Cash Equity InvestmentBehind Senior Loan

$14.3 Additional Cash Provided by

Refinancing above Borrower's Cost

After 25 Months and Borrower’s Success in Executing its Business Plan, CapitalSource’s Loan was Refinance by a Wall Street Conduit LoanConduit Loan Provided $23MM in Proceeds in Excess of CapitalSource LoanCapitalSource Loan to Stabilized Value of 56%

Closing Date: June 2004 August 2006Term (Years): 3.0 years 5yr Final / 20yr Amort / 1yr IOCoupon (%): ~5.30% over LIBOR 6.85% FixedValuation Parameter: ~85% Loan to Cost 80% Appraised LTV

Borrower’s Initial Cost


®Case Study Case Study -- Boutique Hotel RefinancingBoutique Hotel Refinancing

Borrower’s Successfully Executed its Business Plan in approximately 27 months. Wall Street Floating Rate Conduit Loan Refinanced CapitalSource Senior Loan which Represented 78.5% of costs.$40MM Conduit Loan Provided $22 MM in Proceeds in Excess of CapitalSource Loan (For Fee Purchase and Partial (35%) Equity Return).CapitalSource Loan to Stabilized Value of 34%

Closing Date: July 2004 September 2006Term (Years): 3 Years 5 YearsCoupon (%): 4.25% over LIBOR 1.50% over LIBORValuation Parameter: 51% Loan to Cost 75% Appraised LTV

Borrower’s Initial Cost

$18.0MMCapitalSource Senior Loan

$39.8MMWall Street

Conduit 75% Loan to

Appraised Value

$13.3MMImplied

Equity Value

$17.0MM Sponsor Equity

$-

$20

$40

$60

CapitalSource Interim Financing Take-Out Financing

Mill

ions

$5MM Additional Cash Provided above

borrower cost (for Fee Purchase and Partial

Equity Recapture)

Hard Cash Equity InvestmentBehind Senior Loan


®Positive Effects of the REIT ElectionPositive Effects of the REIT Election

REIT Election has Provided Expanded Opportunities for the Commercial Real Estate Business

Since the REIT Election(1) …

These Statistics Reflect the Increased “Institutional” Nature of the Commercial Real Estate Business Since the REIT Election

These Statistics Reflect the Increased These Statistics Reflect the Increased ““InstitutionalInstitutional”” Nature of the Nature of the Commercial Real Estate Business Since the REIT ElectionCommercial Real Estate Business Since the REIT Election

(1) Commercial Real Estate Group

Originations$ Millions TTM - June 2006 TTM - June 2005 % IncreaseOriginations 67 97Dollar Amount 786.1$ 486.8$ 61.5%Average Loan Size 11.7$ 5.0$ 133.8%

®

Corporate Finance BusinessCorporate Finance Business

Joe KenaryJoe KenaryExecutive Vice President, Corporate Executive Vice President, Corporate

LendingLending



Overview

Middle Market Lender Review

Evolution of Corporate Finance Business and Strategy

Syndication and Asset Management (Dan Duffy)


®

ProductsProductsProducts

Cash Flow Loans Underwritten to Enterprise Value

Senior Loans at 40-60% of Enterprise Value

Mezzanine Loans at 60-75% of Enterprise Value

Senior Secured Cash Flow Loans

Term B, Second Lien and Mezzanine Loans; Limited Equity –Co-Invests

Asset-Based Revolvers

Underwriting & StructuringUnderwriting & StructuringUnderwriting & Structuring

Corporate Finance Business Corporate Finance Business

“Core” MarketHedge FundsFoothillRegional BanksGolub CapitalNewStar

CompetitionCompetitionCompetitionLarger, Capital Markets Focused Merrill Lynch CapitalCITGE AntaresFreeportFoothillHedge Funds

Competitive AdvantagesCompetitive AdvantagesCompetitive Advantages

ExecutionCreativityFlexibilitySpeedExpertise“One-Stop” ShopReputation as Reliable Lender/Brand


®Corporate Finance Corporate Finance –– Portfolio StatisticsPortfolio Statistics

We Continue to be Active in the Space in a Very Disciplined Fashion

We Continue to Experience a High Level of Prepayments, Some at Our Discretion

Conscious Effort to Reduce Hold Sizes

(%) Increase /

($ in millions) 6/ 30/ 2005 6/ 30/ 2006 Increase (Decrease)



Outstanding Commitments 2,207$ 2,120$ (87)$ -3.9%

Loan Balance 1,700$ 1,622$ (78)$ -4.6%

Average Loan Amount 7.02$ 5.42$ (1.60)$ -22.8%

Corporate Finance - Portfolio Statistics


®Middle Market Lending ReviewMiddle Market Lending Review

Since CapitalSource’s Founding, Activity in Corporate Finance’s Middle Market Lending Space Has Increased

Since CapitalSourceSince CapitalSource’’s Founding, Activity in Corporate Finances Founding, Activity in Corporate Finance’’s Middle s Middle Market Lending Space Has IncreasedMarket Lending Space Has Increased

$11.9

$17.2

$12.5

$26.0

$33.8

$15.0

$0

$10

$20

$30

$40

$50

2001 2002 2003 2004 2005 2006

In B

illio

ns1H 2H

136118 110

266

328

143

0

100

200

300

400

2001 2002 2003 2004 2005 2006

1H 2H

Number of MiddleNumber of Middle--Market Market DealsDeals11

Source: Standard and Poor’s LCD (1) Issuers with EBITDA of $50 Million or Less

Total MiddleTotal Middle--Market Market VolumeVolume11


®

Domestic Bank

Finance Co.

Foreign Bank

Institutional

Securities Firm0%

25%

50%

75%

1997 1998 1999 2000 2001 2002 2003 2004 2005 LTM6/ 30/ 06

Shar

e of

Mar

ket

Middle Market Lending ReviewMiddle Market Lending Review

Since 2001, There has been an Influx of New Liquidity into the Middle Market

More Importantly, the Composition of Lenders in the Market has ChangedSource: Standard and Poor’s LCD (1) Issuers with EBITDA of $50 Million or Less

Primary Market for Highly Leveraged Loans Primary Market for Highly Leveraged Loans (1) (1)


®

30%

35%

40%

45%

2001 2002 2003 2004 2005 1H06 2Q06

Middle Market Lending ReviewMiddle Market Lending Review

We Also Have Seen an Increase in the Purchase Prices Being Paid for Middle Market Businesses, With a Corresponding Increase in the Amount of Debt Lenders are Providing

Source: Standard and Poor’s LCD Issuers with EBITDA of $50 Million or Less

Equity ContributionEquity ContributionPurchase Price Purchase Price BreakdownBreakdown

5.9x6.7x 7.0x 7.2x

8.5x 8.6x 8.7x

0.0x

5.0x

10.0x

2001 2002 2003 2004 2005 1H06 2Q06

Senior Debt/ EBITDA Sub Debt/ EBITDA Equity/ EBITDA Others


®Middle Market Lending ReviewMiddle Market Lending Review

And Pricing has Decreased While Leverage Statistics have Declined

As a Result, CapitalSource has been Highly Selective During the Past Two Years

Source: Standard and Poor’s LCD (1) Issuers with EBITDA of $50 Million or Less

Average EBITDA / Cash Average EBITDA / Cash Interest for MiddleInterest for Middle--Market Market

Transactions Transactions (1)(1)

3.22x3.64x 3.67x

3.92x

3.34x

2.86x 2.74x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

2001 2002 2003 2004 2005 1H06 2Q06

EBITDA/ Cash Interest

Average Institutional Spread Average Institutional Spread Rated B+Rated B+

438

365

304

246 254

334

252 238237271

242

367375

L+0

L+100

L+200

L+300

L+400

L+500

2001 2002 2003 2004 2005 1H06 2Q06EBITDA <= $50 Million EBITDA > $50 Million


®Dynamically Adapting to Changes in the MarketDynamically Adapting to Changes in the Market

Recognize the Existence of An Inverted MarketRecognize the Existence of An Inverted MarketSmaller-Sized Middle Market Companies Borrowing at “Larger Size” Company Terms and Structures

Inherent Risks of Smaller Companies Demand Premium

Risk Premium is Currently Unavailable Given Influx of Liquidity

Shift Business a More Capital Markets Focused ModelShift Business a More Capital Markets Focused ModelTargeting Larger Sized Transactions and Using Syndication

Capital Markets Provides Risk Management and Fee Income

Safe Credits at Same Spreads

Participation in Capital Markets Offers Better Insight to Relative Risk/Reward


®Dynamically Adapting to Changes in the MarketDynamically Adapting to Changes in the Market

Focus on Portfolio Risk Management TechnologiesFocus on Portfolio Risk Management TechnologiesReduce Hold Size

Aggressive Outplacement Underperforming Credits This Year

$150 Million + This Year With No Losses

Timely and Rational Assessment of Borrower And Leverage Prevailing Market Liquidity

Broader Business FocusBroader Business FocusCapitalSource Can Service Customers, Grow and Profit in Liquid and Illiquid Markets

Breadth of Business will Reduce Overall Volatility on Balance Sheet

Providing a Broader Business Focus Requires a Strategic Reassessment of Our Execution Capabilities


®Rethinking the Customer BaseRethinking the Customer Base

Customer Universe - Private Equity Firms (Approx. 500 Primary Sponsors and 1,000 Secondary Sponsors)

Over the Past Two Years, 89 of the 500 Primary Sponsors Closed 5 or More Deals

Represents 54% of the Deal Flow

Agency Business Cultivated Rather than Opportunistic

Cultivated Relationships Tend to Protect Lender in Downside Scenario

More Frequent and Substantial Calling of Select Private Equity Sponsors

CustomersCustomersCustomers


®Consistent Borrower CharacteristicsConsistent Borrower Characteristics

Continued Focus on Fundamentals

Emphasis on Companies with:

Strong Historical and Prospective Cash Flows

Experienced Management Teams and Sponsors

Limited Operating Leverage and Event Risk

Leadership in Market Niches

Focus on Industries with Experience and Expertise

Borrower CharacteristicsBorrower CharacteristicsBorrower Characteristics


®Strategy and Growth InitiativesStrategy and Growth Initiatives

EuropeEurope

Over $100 Million Outstanding with ~$200 Million Target for Year End

5 Professionals, 3 European Nationals and 1 American with >5 Years Experience in Europe

Strong Market Response – Built Relationships with Top Tier Sponsors & Arrangers- Carlyle, Hg Capital, Summit Partners, RBS, JP Morgan, CreditSuisse

Syndication and Asset Management OpportunitiesSyndication and Asset Management Opportunities

Organizing Alternative Investment Platform for Junior Capital to Exploit CapitalSource Origination Platform and Expertise

CapitalSource will Take Effort In-House

Dan Duffy, Managing Director

®

Corporate Finance BusinessCorporate Finance BusinessDan DuffyDan Duffy

Managing DirectorManaging Director


®Syndication & Asset Management OpportunitiesSyndication & Asset Management Opportunities

Proven Capital Markets CapabilitiesProven Capital Markets CapabilitiesFully Built Team – Complete Player in Middle Market LendingTop 20 in Middle Market League TablesStrong Demand for CapitalSource Originated Paper

Complementary Asset Management BusinessComplementary Asset Management BusinessCLO Executed First Transaction – Subsequent Transactions Provide Real Profitability Leverage


®Syndication CapabilitiesSyndication Capabilities

TeamTeamThe CapitalSource Syndication Team is Made Up of 6 IndividualsProvides Structuring, Pricing and Syndication Support to Deal TeamsProvides CapitalSource Credit Committee with Ongoing Market Data Related to Pricing, Leverage and Market Liquidity as Well as Confidence Opinions on Individual Transactions

Strategic FocusStrategic FocusExtend CapitalSource Reach Into Larger Middle Market TransactionsEnhance “All-in Yield” Via Skim Income Generated During Sell Down ProcessAllow CapitalSource to Effectively Manage Individual Hold Sizes on Larger Transactions

Syndication Activities Syndication Activities —— Last 12 MonthsLast 12 Months17 Syndicated Deals Totaling Approximately $1.0 Billion $530.0 Million was Syndicated29 Unique InvestorsNo Syndication Failures


®

Technical ConceptsTechnical ConceptsLiberty PartnersGlobal Provider of Touch-Free Automated Products for the Control of Hygiene and Odor Management in Away-From-Home Washrooms$114.5 Million Senior Facility ($ and €)

Representative Transaction ExampleRepresentative Transaction Example

$61,000,000€44,583,333

Senior Credit FacilitiesLead Arranger

To support the acquisition of Bentfield Intl. BV by

Technical Concepts LLC

A portfolio company ofLiberty Partners

February 2006


®

Citizens of HumanityCitizens of HumanityBerkshire Partners

Leading Provider of Premium Denim

$75.0 Million Senior Facility

Representative Transaction ExampleRepresentative Transaction Example

$75,000,000Senior Credit Facilities

Lead Arranger

To support the acquisition ofCitizens of Humanity

byBerkshire Partners

February 2006


®

1H 2006 U.S. Middle Market Sponsored Lead ArrangerRank Bank Holding Company Lead Arranger Volume # of Deals Market Share

1 Credit Suisse 5,033,744,000 29 15%2 JP Morgan 4,166,400,000 29 13%3 General Electric Capital Corporation 3,800,716,194 50 11%4 Bank of America 2,435,200,000 20 7%5 UBS AG 1,818,477,750 10 5%6 Wachovia Securities 1,389,750,000 17 4%7 Deutsche Bank 1,308,400,000 8 4%8 Bear Stearns Companies 1,202,500,000 7 4%9 Wells Fargo & Company 1,020,500,000 15 3%

10 Merrill Lynch & Company 1,010,301,000 12 3%11 Royal Bank of Scotland Plc 982,313,481 8 3%12 Madison Capital Funding LLC 798,101,000 13 2%13 CIBC World Markets 649,400,000 6 2%14 Lehman Brothers 645,000,000 4 2%15 Goldman Sachs & Company 644,100,000 4 2%16 BMO Capital Markets 534,375,000 9 2%17 Citigroup 464,850,000 4 1%18 CapitalSource Finance LLC 446,600,000 8 1%19 Jefferies Finance LLC 440,000,000 5 1%20 KeyBank 412,100,000 4 1%21 Calyon Corporate & Investment Bank 371,000,000 2 1%22 Ableco Finance/Dymas Capital 365,000,000 4 1%23 BNP Paribas 314,000,000 3 1%24 National City Corporation 308,700,000 6 1%25 Morgan Stanley 240,000,000 2 1%26 Rabobank 238,000,000 2 1%27 AC Finance LLC 235,750,000 6 1%28 Scotia Capital 209,314,172 3 1%29 GMAC Commercial Finance 200,000,000 1 1%30 Dresdner Bank 180,977,750 1 1%

Syndication Syndication –– Market Share Market Share


®

PlanningPlanning MarketingMarketing Bank MeetingBank Meeting Legal Documentation

Legal Documentation ClosingClosing

Work with deal team on structure

Initial due diligence conducted

Descriptive information prepared

Potential investors selected

Potential investors contacted

Descriptive information distributed

Dialogue with potential investors

Lender presentation and data room preparation

Bank meeting held

Facility tours conducted, as necessary

Continued dialogue with potential investors

Lenders allocations determined

Legal documents distributed to lenders

Negotiate as required

Finalize legal documents

Closing and funding

Typical Transaction ProcessTypical Transaction Process


®

TeamTeamFully Staffed Team of 11 with Limited Future Headcount Growth Required

Strategic FocusStrategic FocusExtend CapitalSource’s Market Reach in the Middle Market and Broadly Syndicated Leveraged Loan Market in the Context of a Fee Oriented Asset Management PlatformLeverage CapitalSource Infrastructure, Credit Culture, Proprietary Deal Flow and Market Access to Efficiently Enter a New Market Segment

Accomplishments and Growth PlansAccomplishments and Growth PlansCompleted First CLO in August 2006 - $325 MillionHighly Successful Placement For “First Time” IssuerCurrently Opening Warehouse for Second CLO by September 30 Open Additional Funds Approximately Every 6 to 12 Months Based on Market Conditions Anticipate Approximately $1.5 Billion in AUM by the End of 2008

Asset Management Opportunities / CLOAsset Management Opportunities / CLO


®Corporate Finance Corporate Finance –– CLOCLO

Summary of First CLOSummary of First CLO$325.0 Million Transaction Closed in August 2006

Focus on Middle Market

~60% Middle Market

~40% Broadly Syndicated Leveraged Loans

80% of Equity Raised from Third Parties

Broad Investor Base Across All Tranches From US, European and Asian Institutions

Debt Pricing Levels at the Tight End of All Relevant Comps


®Why This is an Asset Management BusinessWhy This is an Asset Management Business

CapitalSource Advisors CLO CapitalSource "Balance Sheet Financing"

Broadly Syndicated Loans Senior Secured Cash FlowMiddle Market Loans Asset Based Loans

3rd Party Originated Directly Originated by CapitalSource

~90% Debt - Sold to 3rd Parties ~90% Debt - Sold to 3rd Parties~10% Equity - 80% Sold to 3rd Parties ~10% Equity - Retained by CapitalSource

Motivation Asset Management Financing

Assets

Primary Sourcing

Capital Structure / Distribution

®


®

15 Minute Break15 Minute Break

®

Residential Mortgage InvestmentsResidential Mortgage Investments

Brian GrahamBrian Graham

Managing DirectorManaging Director



Portfolio and Business Strategy

Risk Management Strategy

Asset Versus Equity Allocation

Risk metrics


®Residential Mortgage: OverviewResidential Mortgage: Overview

Strategy SummaryStrategy SummaryStrategy Summary Risk ManagementRisk ManagementRisk Management

Meet or Exceed Asset Targets to Optimize REIT Structure

Manage Interest Rate Risk Intensively

Manage Operational Risk Obsessively

Mitigate Credit Risk Carefully

Maximize ROE, Given Above

Realistic ROE Expectations are Our Best Protection

Tight Duration & Convexity Limits

High Credit Standards for Both Collateral and Counterparties

Ample Excess Funding Capacity

Keep It Simple

Over-Resource the Back Office (Internal and External Resources)

Hire the BestInternal TeamInvestment Manager (BlackRock)


®Residential Mortgage: Asset MixResidential Mortgage: Asset Mix

$ Balance(1) Credit

RMBS Agency Hybrid MBS ~ $3.1b Repo Fannie/ Freddie(relatively short duration) Swaps, Swaptions, Guaranty

Caps, Futures

“ Mortgage-Related Jumbo Hybrid ARMs ~ $2.4b Non Recourse 743 Average FICO Receivables" (prime/ super-prime loans) SecuritizedTerm Debt 73.6% Average LTV

Repo

Assets Financing/ Deriviatives

(1) As of June 30, 2006

We have Focused on High Quality AssetsWe have Focused on High Quality Assets


®Residential Mortgage: Capital AllocationResidential Mortgage: Capital Allocation

Asset Mix Asset Mix (1)(1)

Residential Mortgage Assets ~10%

Equity Capital Allocation Equity Capital Allocation (1)(1)

Residential Mortgage

Assets

42%

(1) As of June 30, 2006

Commercial Lending Business

58%


®Residential Mortgage: Interest Rate RiskResidential Mortgage: Interest Rate Risk

Management of Portfolio Interest Rate RiskManagement of Portfolio Interest Rate Risk

Total Portfolio, including Hedges

Assets Only

-5

0

5

10

15

20

25

30

1/3/2006 3/3/2006 5/3/2006 7/3/2006

Dur

atio

n (m

onth

s)


®Residential Mortgage: Credit RiskResidential Mortgage: Credit Risk

0.07%Aug

0.09%Jul

0.09%Jun

0.05%May

0.05%Apr

0.00%Mar

0.00%Feb

““MRRMRR”” 60+ Delinquencies60+ Delinquencies

By loan count. "Mortgage related receivables” only

®

Financial OverviewFinancial Overview

Thomas FinkThomas FinkSenior Vice President Senior Vice President –– Finance andFinance and

Chief Financial OfficerChief Financial Officer


®

Net Income (1)

($ Millions)

$82.1

$124.9

$164.7

$0

$50

$100

$150

$200

2003 2004 2005

Proven History of Financial PerformanceProven History of Financial Performance

Earnings Per Share (2)

$0.77

$1.06

$1.33

$0.00

$0.50

$1.00

$1.50

2003 2004 2005

Net Investment Income ($ Millions)

$185.8

$321.1

$459.4

$0

$100

$200

$300

$400

$500

2003 2004 2005

Since IPO, Portfolio Growth & Successful Credit Outcomes Have Driven Strong “Top Line” Growth Resulting in Increasing Net Income & Earnings

Per Share

Since IPO, Portfolio Growth & Successful Credit Outcomes Have Driven Strong “Top Line” Growth Resulting in Increasing Net Income & Earnings

Per Share

58% Avg. Annual Growth






(1) 2003 pro forma to reflect 38% tax rate(2) GAAP earning per share, fully diluted, 2003 pro forma to reflect a 38% tax rate


®11stst Half 2006 HighlightsHalf 2006 Highlights

Strong Financial Performance Across The Business

Capitalizing on Growth Opportunities

Maintaining Credit Discipline

Financial Model is Delivering as Promised

REIT Election is Working

Asset Quality is Strong & Stable

Platform is Producing Strong Earnings and Dividends

1st Half 2006 Accomplishments

Implemented REIT Election Plan - Highly Successful

$3.97 in dividends through September 30, 2006

23% Year-over-Year Increase in Adjusted Earnings

Stabilized Credit Metrics

Expanded and Diversified Funding Sources

Very Conservative Leverage in Commercial Segment (3.5x D:E)1

Achieved >20.0% Adjusted ROE

(1) As of June 30, 2006


®Continuing Record of Improving Financial PerformanceContinuing Record of Improving Financial Performance

Net Investment Income ($ Millions)

$215.4

$289.3

$0

$100

$200

$300

$400

2005 1H 2006 1H

Net Income ($ Millions)

$84.7

$138.1

$0

$50

$100

$150

2005 1H 2006 1H

With REIT Election, CapitalSource has Continued its Record of Improving Financial Performance

With REIT Election, CapitalSource has Continued its Record of Improving Financial Performance

Adjusted EPS

$0.95

$1.17

$0.60

$0.80

$1.00

$1.20

2005 1H 2006 1H

Yr-Yr Growth of

34%

Yr-Yr Growth of

34%

Yr-Yr Growth of

63%

Yr-Yr Growth of

63%

Yr-Yr Growth of

23%

Yr-Yr Growth of

23%

(1) Fully diluted. See pages 142 -144 for a definition of adjusted earnings and a reconciliation to GAAP net income


®Superior Financial ModelSuperior Financial Model

CapitalSource AttributesCapitalSource AttributesBroad Based Platform

Direct Origination Focus

High Asset Quality

Strong Risk-Adjusted Yields

Conservative Financial Leverage

Stable, Diverse, Low-Cost Funding

Significant Financial Flexibility

Efficient, Scalable Cost Structure

Tax Efficient Structure

Produces

AttractiveFinancial Characteristics

Growing, Recurring RevenuesHigh ProfitabilityStrong Risk-Adjusted ReturnsStable and Predictable DividendAbility to Retain Earnings / Internal Capital Formation

AttractiveFinancial Characteristics

Growing, Recurring RevenuesHigh ProfitabilityStrong Risk-Adjusted ReturnsStable and Predictable DividendAbility to Retain Earnings / Internal Capital Formation


®Adjusted EarningsAdjusted Earnings

In 2006 We Introduced “Adjusted Earnings” as an Additional Measure of Our Performance to Supplement GAAP Net Income

Similar to Alternative Performance Measures Used by Other REITsFunds from Operations (“FFO”)Adjusted Earnings per ShareFunds Available for Distribution (“FAD”)Cash Available for Distribution (“CAD”)

Better Measure of Business PerformanceFocused on Core Commercial Lending & Investment Segment Greater Ability to Compare CapitalSource Performance to Peers

Better Indicator of Ability to Pay DividendAdjusted for Selected Non-Cash Items


®Adjusted Earnings DefinedAdjusted Earnings Defined

Beginning 3Q 2006, We Will Further Modify our Adjusted Earnings Definition to Remove the Adjustment for Income Taxes

Beginning 3Q 2006, We Will Further Modify our Adjusted Earnings Definition to Remove the Adjustment for Income Taxes

Net income Add: Comment

1 Real estate depreciation Non-Cash Item2 Amortization of deferred financing fees Non-Cash Item3 Non-cash equity compensation Non-Cash Item4 Net unrealized (gains) losses on residential mortgage

investment portfolio including related derivatives Non-Cash Item

5 Unrealized (gain) loss on derivatives and foreign currencies, net

Non-Cash Item

6 Unrealized (gain) loss on investments, net Non-Cash Item7 Provision for loan losses Add Provision, Deduct Charge-Offs8 Recoveries Provision Related

Less:8 Charge offs Add Provision, Deduct Charge-Offs9 Non-recurring items "One-Time" Charges

10 Cumulative effect of accounting change, net of taxes Non-Cash Item11 Adjustment for income taxes "Not Required"


®

Year Ended December 31,

2005

Six Months Ended June 30,

2006

($ in thousands, except per share amounts)

Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,672$ 138,083$ Add:

Real estate depreciation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,610 Amortization of deferred financing costs. . . . . . . . . . . . . . . . . . . . . 23,187 14,427 Non-cash equity compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 19,071 16,353 Unrealized losses on residential mortgage investment portfolio, including related derivatives (2). . . . . . . . . . . . . . . . . . . . . . . . . 677 Unrealized gain on derivatives and foreign currencies, net . . . . . . . . (407) (7,133) Unrealized (gain) loss on investments, net. . . . . . . . . . . . . . . . . . . (83) 5,106 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,680 26,284 Recoveries (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -

Less:Charge offs (4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,532 276 Nonrecurring items (5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,725 Cumulative effect of accounting change, net of taxes . . . . . . . . . . . - 370

Adjusted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263,588$ 192,036$

Net income per share:Basic - as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.36$ 0.87$ Diluted - as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.33$ 0.85$

Adjusted earnings per share:Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18$ 1.21$ Diluted (6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.14$ 1.17$

-

Reconciliation of Adjusted Earnings to Net IncomeReconciliation of Adjusted Earnings to Net Income

See footnotes on page 144


®Reconciliation FootnotesReconciliation Footnotes

(1) Depreciation for direct real estate investments only. Excludes depreciation for corporate leasehold improvements, fixed assets and other non-real estate items.

(2) Includes adjustments to reflect the period change in fair value of residential mortgage-backed securities and related derivatives.

(3) Includes all recoveries on loans during the period.

(4) To the extent we experience losses on loans for which we specifically provided prior to January 1, 2006, there will be no adjustment to earnings. All charge offs incremental to previously provided for losses will be deducted from net income.

(5) Represents the write-off of a $4.7 million net deferred tax liability recorded in connection with our conversion to a REIT for the six months ended June 30, 2006.

(6) Adjusted to reflect the impact of adding back noncontrolling interests expense of $2.1 million to adjusted earnings due to the application of the if-converted method on non-managing member units which are considered dilutive to adjusted earnings per share, but are antidilutive to GAAP net income per share for the six months ended June 30, 2006.


®

What we said then… September 2005

2006 2007Original Dividend Guidance $1.96 $2.67Original Payout Ratio 100% 100%

Original Guidance Restated for Current Payout Ratio

$1.76 $2.40

Updated Guidance 2006 2007 % Increase

Annual Dividends $2.00 $2.40 +20%

Payout Ratio1 80% - 90% 80% - 90%

Annual Dividend GuidanceAnnual Dividend Guidance

Expect to Pay Dividends of At Least $2.00 Per Share For 2006

Projecting a 20% Dividend Increase Next Year to At Least $2.40 Per Share For 2007

Payout Ratio is Expected to be 80% to 90% of Adjusted Earnings

(1) Dividends as a percentage of Adjusted Earnings. See page 142 – 144 for a definition of Adjusted Earnings and a reconciliation to GAAP net income.

Key Takeaways• Business is Performing Well in 2006• 2007 Guidance “in Line” with

Original Guidance when adjusted fornew Payout Ratio

• We will Deliver Strong DividendGrowth in 2007 in spite of manychanges in market environment

Key Takeaways• Business is Performing Well in 2006• 2007 Guidance “in Line” with

Original Guidance when adjusted fornew Payout Ratio

• We will Deliver Strong DividendGrowth in 2007 in spite of manychanges in market environment


®2007 Outlook2007 Outlook –– Commercial Lending & Investment SegmentCommercial Lending & Investment Segment

We Expect Strong Growth Across the BusinessReaping the Benefits of a Fully Built-Out National, Direct Origination PlatformSeeing Expanded Opportunities Real Estate Businesses as a Result of REIT ElectionGreater Opportunities in Corporate Finance Through Syndication Focus

We are Steering the Business Toward Lower SpreadsWith REIT Election and Targeting More Defensive Mix of Assets, Lower Spreads are “By Design”

Maintain Credit DisciplineHigh Degree of Deal Selectivity and Active Portfolio Management FocusExpect Stable Asset Quality

Expand Sources of Other IncomeFunding Assumptions

Asset Mix and Greater Capital Efficiency will Drive Higher Average LeverageContinued Diversification of Funding SourcesAssuming No Deposit Based Funding

Operating ExpensesOperating Efficiencies will be Realized Across the BusinessAbnormally High Costs Associated with the REIT Conversion will Abate


®

Net Loan Growth Assumptions:

Increasing Sale-Leaseback Activity

Strong Growth TrajectoryStrong Growth Trajectory

Growth in Commercial Lending Portfolio

$1.3

$1.9

$1.7

$0.8

$1.2

$-

$0.5

$1.0

$1.5

$2.0

2003 2004 2005 2005 1H 2006 1H

Endi

ng B

alan

ce ($

Bill

ions

)

Net Growth ($ Billions) 2005 2006 2007

$ % $ %

Ending Balance 6.0$ 2.4$ 41% 3.4$ 41%Average Balance 5.0$ 2.1$ 41% 2.8$ 39%

Balance($ Millions) 2005 2006 2007

$ $

Ending -$ 854$ 1,054$ Average -$ 300$ 954$


®Unique, Positive Factors Affecting Spread Unique, Positive Factors Affecting Spread

Market Forces Put Some Pressure on SpreadsIncreased Competition & Greater Liquidity in All Asset Classes

Positive Factors Unique to CapitalSource Also Contribute to Lower Spreads:REIT Provides Significant Pricing Power in Real Estate Business in CouponShifting Mix toward Greater % of Real Estate Assets Will Reduce Avg. Portfolio Yield

(1) Commercial Lending Portfolio; Net Finance Spread is defined as Yield minus Cost of Funds

With REIT’s Tax Efficient Structure, Lower Pre-Tax Spreads Can Result in Same or Higher After-Tax Spreads Compared to C-CorpWith REIT’s Tax Efficient Structure, Lower Pre-Tax Spreads Can Result in Same or Higher After-Tax Spreads Compared to C-Corp

2Q'04 2Q'06

Net Finance Spread 1 8.1% 6.5%

Portfolio Compostion:Senior Secured Cash Flow 41% 23%Senior Secured Asset Based 29% 32%First Mortgage 25% 41%Mezzanine 5% 4%


®Outlook for Lending SpreadsOutlook for Lending Spreads

Core Lending Spreads Decrease “By Design”

Maintain Target of 50bps of Yield for Prepayment-Related Fee Income Guidance

Key Takeaway – We are Steering the Business toward Lower Spreads

Using the Tax Efficiency of the REITTargeting a More Defensive Mix of Asset ClassesManaging our Credit Risk

Key Takeaway – We are Steering the Business toward Lower Spreads

Using the Tax Efficiency of the REITTargeting a More Defensive Mix of Asset ClassesManaging our Credit Risk

2006 2007

Portfolio Yield1 12.19% 11.50%

30-day LIBOR 5.12% 5.19%

"Core" Lending Spread 7.07% 6.31%

Prepayment-Related Fees 0.67% 0.50%

Guidance

(1) Yield in Commercial Lending & Investment Segment, Excluding Prepayment-Related Fees


®Stable Asset QualityStable Asset Quality

Allowance for Loan Loss

0.75%0.82%

1.46% 1.41%

0.00%

0.50%

1.00%

1.50%

2003 2004 2005 2006 1H

Strong Credit Posture

More Proactive Portfolio Management

Positive Recovery Outcomes

= Stable Charge-off Forecast

+ Changing Asset Mix

= Reduction in Allowance for Loan Loss

Expect Allowance to Trend Downward

Approximately 120 bps by year end 2006


Expect Allowance to Trend Downward




®Other IncomeOther Income

Other Income is a Significant and Growing Contributor to Bottom Line Results

Key Current Sources:HUD Mortgage FinanceOccasional Extraordinary Loan FeesEquity GainsDead Deal Fees

New / Growing Sources Include:Asset Management Fee Income

(1)Includes extraordinary loan fees which could ultimately be classified as fee income with a resultant increase in spreads

Expect Other Income (1)

to Increase50+ bps in 2006

~50 bps in 2007

Expect Other Income (1)

to Increase50+ bps in 2006

~50 bps in 2007

Other Income to Average Assets

$25.8

$17.8$19.2

$13.7

0.39%

1.36%

0.35%

0.51%

$0

$10

$20

$30

2003 2004 2005 2006 1H0.0%

0.5%

1.0%

1.5%

2.0%Other Income

Other Income as % of Avg Assets


®Operating ExpensesOperating Expenses


Full Year 2006 - 2.6%

Full Year 2007 - 2.2%


Full Year 2006 - 2.6%

Full Year 2007 - 2.2%

Operating Efficiencies Exist in the Business ModelWe Expect to Realize These Efficiencies Going Forward2006 1H Drivers:

One-time Compensation Charges Related to Senior Management Option GrantsCarry-over Costs Related to REIT ConversionHeadcount Relatively Stable

Efficiency Factors:Front End of the Business Fully Built-Out; Opportunistic Hiring Going ForwardREIT Conversion Costs Will AbateAttention to Headcount Growth & Operating Efficiencies Across the Company

Operating Expenses to Average Assets

2.68%2.60%3.03%

3.51%

0.07%

0.06%

0.05% 0.16%

0.00%

1.00%

2.00%

3.00%

4.00%

2003 2004 2005 2006 1H

Op Ex, Excluding D&A D&A

3.58%

3.09%

2.65% 2.84%


®

15% 12%

40%

8%

23%

2%

Diverse Funding Sources Diverse Funding Sources

Note: Financial data is as of June 30, 2006(1) Pro Forma for closing of Commercial Loan Trust 2006-2.

Debt/Equity: 5.88x Total3.46x Commercial Lending

& Investment

CreditFacilities(1)

Demonstrated Capital Markets AccessDemonstrated Capital Markets Access$1.6B in the Equity Markets

$340 million IPO – August ’03$430 million Secondary Offering – February ’04$429 million Follow-On Offering – October ’05$414 million Follow-On Offering – March ‘06

$0.6B in the Convertible Market$225 million 1.25% – March ’04$330 million 3.50% – July ’04

$6.3B Term Debt Securitizations (1)

Ninth Transaction for $1.5B closing in September, 2006

$5.2B in Credit Facility Capacity$640 million Unsecured

$0.3B in Trust PreferredTerm Debt (1)

Trust Preferred

Equity

Total: $13.4 billion

Diverse, Stable, Low Cost Funding SourcesDiverse, Stable, Low Cost Funding Sources

Low Cost of Funds for Commercial LendingNo Gain on Sale RecognizedLargely Interest Rate Insensitive

Attractive Financial Characteristics Attractive Financial Characteristics

Unsecured

RepurchaseAgreements


®Improving Cost of FundsImproving Cost of Funds

Expect Stable Base Spreads for the Remainder of 2006

Borrowing Spread to 30-day LIBOR

1.25%1.02%

0.50% 0.43%

0.85%

0.56%

0.55%0.54%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2003 2004 2005 20061H

Cash "Coupon" Spread Amortization of Deferred Financing Fees

2.10%

1.58%

1.05%0.97%

Expect Total Borrowing Spreads of 100 bps for 2007 with More Unsecured Debt in the Capital StructureGuidance Does Not Contemplate Any Deposit Based Funding


®Funding StrategyFunding Strategy

Continuing Broadening & Diversifying the Funding PlatformsMore Efficient Term Debt SecuritizationsGreater Use of Unsecured DebtExplore Deposit Based Funding

Key Achievements in 2006Creation of New Funding Platform for REIT Improved Term Debt SecuritizationsEstablished Unsecured Funding Sources

Opportunistically Pursue Other Advantageous Sources of CapitalAdditional Trust Preferred Securities

Dividend Reinvestment & Direct Invest Plan Can Help Smooth out Capital RaisesWe Have Raised $92.0M From This Plan Between March ’06 – August ‘06

Overall Goal is to Maintain Balance Sheet Strength, Continue to Diversify Sources and Protect Against Market Uncertainty

Overall Goal is to Maintain Balance Sheet Strength, Continue to Diversify Sources and Protect Against Market Uncertainty


®What Is The Right Level Of Leverage?What Is The Right Level Of Leverage?

Asset Considerations:Return Profile - High Risk-Adjusted ReturnsCredit Profile - “Credit First” Approach with Demonstrated Credit Performance

Business/Franchise Considerations:Stable Return on AssetsScale and Mix of Business

Funding & Liquidity Considerations:Diverse Sources of Financing Balanced with Desire to Maintain Strong & Liquid Balance SheetSubstantial Committed Credit Facility CapacityLeverage Below Traditional C-Corp Commercial Finance Firms & Regional BanksSignificant Financial Flexibility Through Ability to Retain Earnings in the TRS

Our Views on the Appropriate Level of Leverage Will Continue to Evolve with the Business

Our Views on the Appropriate Level of Leverage Will Continue to Evolve with the Business


®

4.75%

10.50%

6.75%

3.75%

7.75%

66.50%

0%

20%

40%

60%

80%

100%

CapitalSource CLT 2006-2

EquityBBBBBAAAAAA

Market Indication of Appropriate LeverageMarket Indication of Appropriate Leverage

Commercial Loan Trust 2006-2 Details

• Closing September 28, 2006

• $1.5 Billion Term Securitization

• $1.3 Billion Offered Notes Thru Investment Grade

• Includes 3 Year Replenishment Period

• Investment Grade Debt to 88.5% of Assets (7.7x D:E)

CapitalSource’s Commercial Finance

Target Leverage Range: 4.0x to 5.0x

CapitalSource’s Commercial Finance

Target Leverage Range: 4.0x to 5.0x


®CapitalSource is Well CapitalizedCapitalSource is Well Capitalized

Based Upon Our View of Prudent Capital Required Levels for Each Asset Type…

CapitalSource has a Significant Capital Cushion in Excess of Risk-Adjusted Requirements

O

6/ 30/ 2006 Balance

Capital Allocation

Capital Required

($ Millions) (%) ($)Residential Mortgage Investments 5,543$ 3 - 5% 222$

Senior Secured Asset Based Loans 2,337 10 - 15% 292 First Mortgage Loans 2,913 15 - 20% 510 Senior Secured Cash Flow Loans 1,643 15 - 20% 288 Mezzanine Loans 278 40 - 60% 139 Other Investments 124 50% 62 Other Assets 433 100% 433 Total Required Capital 1,946$

Equity Treatment

Adjusted Capital

(%) ($)Trust Preferred Securities 284$ 50 - 100% 213$ Total Shareholders Equity 1,953 100% 1,953 Total Adjusted Equity 2,237$ 2,166$ Plus: Reserves 101 100% 101 Total Capital Available 2,337$ 2,266$

Total Adjusted Capital Available / Total Capital Required 116%


®Return on EquityReturn on Equity

Expect to Maintain Adjusted ROE in the 20+% RangeLending Spreads Trending as ExpectedStable Cost of FundConsistent ProvisioningConservative LeverageTax Efficient Model

24.1%

22.1%

12.4%

14.2%15.1%

15.9%

5%

10%

15%

20%

25%

2003 2004 2005 2006 1H

Adjusted ROE Return on Equity


®InIn--Depth Look at GuidanceDepth Look at GuidanceYTD June 2006

2005 2006 Current 2007Actual Actual Guidance Guidance

CommercialAverage Loans 5.0 B$ 6.5 B$ 7.1 B$ 9.9 B$ Net Loan Growth 1.7 B$ 1.2 B$ 2.4 B$ 3.4 B$ Lending Spread 1 8.5% 7.3% 7.1% 6.3%Prepayment Effect 0.7% 0.9% 0.7% 0.5%

Average Direct Real Estate Investments 0.0 B$ 0.2 B$ 0.3 B$ 1.0 B$ Yield on Direct Real Estate 0.0% 13.2% 11.5% 10.0%

Average Leverage (D:E) 3.8x 3.4x 3.6x 4.4xBorrowing Spread 2 1.1% 1.0% 1.0% 1.0%Net Finance Margin 8.7% 8.2% 7.4% 6.3%

Allowance % 1.5% 1.4% 1.2% 1.1%Net Charge-Offs 13.5 M$ 12.5 M$ 39.9 M$ 50.0 M$ Operating Expenses to Average Assets 2.7% 2.8% 2.6% 2.2%

Other Income to Average Assets 0.4% 0.4% 0.5% 0.5%

Residential Mortgage PortfolioAverage Investments NM 3.9 B$ 4.7 B$ 5.8 B$ Yield NM 5.3% 5.4% 5.4%Cost of Funds NM 5.2% 5.3% 5.3%

1 Yield on loans as spread to 1-month LIBOR, excluding prepayment effect2 Spread to 1-month LIBOR


®InIn--Depth Look at Guidance Depth Look at Guidance –– ConsolidatedConsolidated

YTD June 20062005 2006 Current 2007

Actual Actual Guidance Guidance

Blended Tax Rate 38.8% 18.2% 18.4% 16.4%

Dividend NA 0.98$ 2.00$ 2.40$

®


®

WrapWrap--UpUp


®Value EquationValue Equation

Based on a Comparison of Current Dividend Yields CapitalSource is Still Trading at a Significant Discount to Its Peers

… Our Broad, Diversified Franchise Should Command a Premium Valuation

In addition, CapitalSource Projects 20% Increase in Our Dividend From 2006 to 2007This Projected Dividend Growth is Significantly Greater Than that of Our Peers

In Financial Services, the “Whole” Should be Greater Than the “Sum of the Parts”which Further Underscores the Value Equation with CapitalSource

Our Business Deconstructed …

* Comparative Yield is based on dividend yields and/or net income per share for comparable companies or relevant composites; blended yield weighted based on assets for each CapitalSource business. Yields at September 22, 2006.

CapitalSource BusinessComparative

Yield *

Commercial Real Estate 7.3%HealthCare Real Estate 5.8%Asset-Based Lending 5.9%Cash Flow Lending 9.1%

Blended Yield 7.0% 7.9%

Current Dividend Yield*

on CapitalSource

Shares


®Comparison of Dividend Yields and Growth RatesComparison of Dividend Yields and Growth Rates

Notes: - Source: Bloomberg, NAREIT Real-Time Index, Thomsonone. 9/24/06- Includes Diversified Equity and Healthcare REITs with market cap > $1 billion, commercial REITs except FBR, and the two largest U.S. BDC/RICs by market cap.- Analyst consensus dividends are based on the mean of all analyst estimates for each respective company.- Consensus dividend yields and growth percentages are not a guarantee of future performance. See “Forward Looking Statements.”

● Commercial Mortgage REITsDiversified Equity REITs

■ Healthcare REITsBDC/RICs

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

ABR

ALD

VNO

WRE

CUZ

HCP NHP

VTR

NCT

CEI

AHR RAS

GKK

CT

NRF

HCN

SFI

ACAS

SNH

MCGC


®PrioritiesPriorities

Continue To Balance The Business

Obtain Deposit Based Funding

Build Fee Businesses

Deliver on Guidance

Be Opportunistic In a Market Likely to Suffer Some Measure of Dislocation

Inform Investors as to Value Proposition at The Company

®


Documents

Annual Investor Conference€¦ · Asset-Based Lending to Healthcare Companies Fee Businesses Asset Management Business and Servicing Businesses to Lever Platform Expertise First