Lehman Brothers Global Financial Services ConferenceJohn K. Delaney
Chairman & CEO
September 10, 2008
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 2
Forward Looking Statements
This presentation contains "forward-looking statements" within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including certain plans, expectations, goals, and projections and includingstatements about our near and longer term strategies, growing CapitalSource Bank and its depositbase, the A Participation Interest, general economic conditions, market conditions for senior loans,securitization markets, loan yields, credit statistics, our proposed healthcare REIT IPO, our dividends,financial performance and the outlook for our commercial finance business and possible acquisitions,which are subject to numerous assumptions, risks, and uncertainties. All statements contained in thisrelease that are not clearly historical in nature are forward-looking, and the words "anticipate,""assume," "believe," "expect," “projected,” transform,” “become,” "estimate," "plan," "will,“ “should,” "lookforward," and similar expressions are generally intended to identify forward-looking statements. Allforward-looking statements (including statements regarding future financial and operating results andfuture transactions and their results) involve risks, uncertainties and contingencies, many of which arebeyond our control which may cause actual results, performance, or achievements to differ materiallyfrom anticipated results, performance or achievements. Actual results could differ materially from thosecontained or implied by such statements for a variety of factors, including without limitation: the recentlycompleted bank transaction; our ability to originate new loans and to grow our commercial financebusiness; changes in economic conditions; continued disruptions in credit and other markets;movements in interest rates; competitive pressures on product pricing and services; success and timingof other business strategies; the nature, extent, and timing of governmental actions and reforms;extended disruption of vital infrastructure; and other factors described in CapitalSource's 2007 AnnualReport on Form 10- K, and documents subsequently filed by CapitalSource with the Securities andExchange Commission. All forward-looking statements included in this presentation are based oninformation available at the time of the release. We are under no obligation to (and expressly disclaimany such obligation to) update or alter our forward-looking statements, whether as a result of newinformation, future events or otherwise.
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 3
Agenda
• CapitalSource Overview
• The Strategic Evolution of CapitalSource
• The Transition to CapitalSource Bank
• A Diversified Commercial Lending & Lease Portfolio
• The Market Opportunity for Commercial Lending
• Maintaining Strong Credit Performance
• Key Financial Drivers
• Strategy and Outlook
• Conclusion
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 4
CapitalSource Overview
Leading U.S. middle market commercial lending franchise
Large scale, broad-based middle market lending platform
Market leadership position in three major business lines
Significant California-based depository
22 retail branches with 65,000 customers throughout southernCalifornia(1)
Pursuing IPO and carve-out of our healthcare net leasebusiness
Diverse portfolio and proprietary, direct origination capability
24 offices throughout the U.S.
Over $12 billion in commercial lending and lease assets(2)
Loan portfolio includes 1,117 loans to 669 clients(3)
(1) As of July 28, 2008(2) As of June 30, 2008 pro forma for formation of CapitalSource Bank(3) As of June 30, 2008
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 5
CapitalSource Overview (cont’d)
Focused asset strategy
Multiple lending groups compete on service, expertise andindustry insight
Non-commodity products
Superior risk adjusted returns and superior credit outcomes
Diversified funding platform
Deposits, Secured and Unsecured funding sources
Investment grade ratings
Seasoned, proven management team
Strong shareholder alignment
Management, directors and certain of their affiliates beneficiallyown approximately 32% of outstanding shares(1)
(1) As of June 30, 2008
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 6
Fast growthDisciplined growthFast growthGrowthProfile
Transform commercial lendingbusiness into a large scale,“clean” banking business
Rapidly shift assets to theBank and increase deposits asa percentage of total funding
Rebuild ROE
Lower REIT tax rate allowed forcontinued focus on senior lending &avoidance of pressure to chase yieldat the expense of risk management
Leveraged market-leadinghealthcare platform to createhealthcare net lease business
Continued pursuit of and attaineddeposit based funding
Created market leadingcommercial lending platform
Maintained prudentleverage and multiple,diverse funding sources
Became the market leadingissuer of middle marketCLOs
Began pursuit of depositbased funding
Action Items
CapitalSourceStrategy
MarketContext
Focus
Leverage stability of newdepository to focus on growth
Focus on structural efficiencies (e.g.,tax) in light of intense marketcompetition
Established platform &infrastructure to capitalizeon market inefficiencies andlack of liquidity
Lack of liquidityAbundant liquidity through mid-2007Lack of liquidity
Become the premiercommercially oriented bankserving the middle-market
REIT election for commercial lendingbusiness, start Healthcare Net Leasebusiness
Start up and buildcommercial lendingbusiness
A Strategic Evolution: Increased Efficiencies and Capital Market Independence
2000 - 2005 2006 - 2008 2009 & beyond2009 & beyond
The Transition is Underway
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 8
CapitalSource Bank - A Transformational Achievement
CapitalSource Bank commenced operations on July 25th with 22 retailbranches in Southern and Central California De novo California Industrial Bank “Clean” asset purchase of deposits and branches
Realization of a well-planned strategy to pair our stellar commerciallending business with a robust depository Meaningful scale (>$5 billion in retail deposits) without legacy asset quality issues Significant liquidity now and ability to meaningfully grow deposits in the future
CapitalSource is positioned to maximize unparalleled investment andlending opportunities The leading middle-market asset origination platform Proprietary underwriting and expert diligence resources in focused markets Proven credit experience and concentration in recession resistant businesses
(particularly healthcare and rediscount) further strengthens credit profile Excellent liquidity and capital position, with deposits at CapitalSource Bank and
ample committed borrowing capacity and investment grade ratings atCapitalSource Inc.
A seasoned management team
At inception, CapitalSource Bank held approximately 35% of theCompany’s commercial lending assets(1)
(1) Commercial lending assets are loans plus A Participation Interest
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 9
The Initial CapitalSource Bank Balance Sheet
$5.9 billion in high-quality commercial assets(1)
$2.0 billion cash and liquid short-term investments $2.1 billion diversified portfolio of loans acquired from CapitalSource $1.8 billion A Participation Interest, purchased at 97% of par
Average monthly amortization since July 2007 has beenapproximately $190 million
$921 million of Tier 1 risk-based capital(capital ratio = ~ 15.6%)
A Very Clean and Highly Liquid Balance SheetA Very Clean and Highly Liquid Balance Sheet
(1) Data as of 7/25/08
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 10
Note: Commercial lending segment debt and other liabilities, including deposits, pro forma for formation of CapitalSource Bank
62%
16% 22%
11%
33%
11%
45%
DepositsCredit Facilities Term Debt Other Borrowings
6/30/08$7.5 billion
6/30/08 pro forma forCapitalSource Bank
$11.6 billion
CapitalSource’s Improved Funding Mix with CapitalSource Bank
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 11
Looking Ahead: The Growth of CapitalSource Bank
We expect most new loans to be originated inCapitalSource Bank
We have excess liquidity in CapitalSource Bank today,plus the ability to grow deposits as needed $2.0 billion cash and investment portfolio Expect $1.8 billion A Participation Interest to fully amortize over 12-15
months No need to grow deposits near term, but existing branch network had
over $8.4 billion in retail deposits at March 31, 2007
Looking out three years we estimate that over 80% of ourcommercial lending assets could be in CapitalSource Bank
and over 80% of our funding could come from deposits
Looking out three years we estimate that over 80% of ourcommercial lending assets could be in CapitalSource Bank
and over 80% of our funding could come from deposits
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 12
Our Commercial Lending Business:A Diversified Portfolio
Primary Business GroupsCorporate FinanceHealthcare & Specialty FinanceStructured Finance
Commercial Lending & Lease Portfolio
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 13
Overview of Business Groups and Areas of Lending
Asset-Based & CorporateLending to Security,
Homeland Defense & PublicSafety Companies
Security FinanceSecurity Finance
First Mortgage Debt Securedby All Real Estate Asset
Types
Commercial Real EstateCommercial Real Estate
Asset-Based Lending toMiddle Market Finance
Companies
Rediscount FinanceRediscount Finance
Senior Secured Debtto Finance Leveraged
Buy-Outs
Corporate FinanceCorporate Finance Healthcare CreditHealthcare Credit
Asset-Based & CorporateLending to
Healthcare Companies
First Mortgage Debt,Mezzanine Debt
and Sale Leasebackson Healthcare Properties
Healthcare Real EstateHealthcare Real Estate
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 14
Portfolio Review
(1) Pro Forma for A Participation interest obtained in connection with formation of CapitalSource Bank
($ in millions) Count % Balance %
Corporate 508 38% 2,784$ 23%Healthcare 383 28% 2,872 23%Structured 226 17% 3,773 31%Total Loans 1,117 83% 9,428$ 77%
A Participation Interest 167 12% 1,821 15%
Healthcare Net Lease 63 5% 1,046 8%
Total Portfolio 1,347 100% 12,295$ 100%
Commercial Lending and Lease Portfolio at 6/30/08 (1)
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 15
The Market Opportunity for Commercial Lending
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 16
The Market Opportunity - Commercial Lending
This dislocation is creating “oncein a lifetime” lendingopportunities for those fewinstitutions, like CapitalSource,able to combine lendingexpertise, capital and liquidity
Portfolio and businessacquisitions are also veryattractive
Economic downturns and theirimmediate aftermath havealways been good times to makenew loans, as higher spreadsmore than offset higher creditcosts
This dislocation is creating “oncein a lifetime” lendingopportunities for those fewinstitutions, like CapitalSource,able to combine lendingexpertise, capital and liquidity
Portfolio and businessacquisitions are also veryattractive
Economic downturns and theirimmediate aftermath havealways been good times to makenew loans, as higher spreadsmore than offset higher creditcosts
The U.S. is in the midst of themost serious financial crisissince the Depression
There is an unprecedented lackof liquidity in all markets
Most banks and financial servicecompanies world-wide areunder-capitalized, de-leveragingand on the defensive
The U.S. is in the midst of themost serious financial crisissince the Depression
There is an unprecedented lackof liquidity in all markets
Most banks and financial servicecompanies world-wide areunder-capitalized, de-leveragingand on the defensive
Current Market Situation Effect on CapitalSource
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 17
Maintaining Strong Credit Performance:
A Closer Look
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 18
Key Credit Metrics as a Percentage of Commercial Loans
Indicates low since 1Q 2006 Indicates high since 1Q 2006
As a %of Loans: 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Average of10 qtrs
(1Q'06 -2Q'08)
60 day deliquent loans 0.66% 1.31% 0.84% 1.12% 0.85% 1.09% 0.74% 0.75% 0.77% 1.16% 0.93%
Non-accrual loans 2.24% 2.01% 2.39% 2.34% 1.78% 1.97% 1.76% 1.73% 1.79% 2.20% 2.02%
Annualized charge-offs 0.02% 0.74% 1.22% 0.66% 0.51% 0.63% 1.15% 0.25% 0.25% 1.00% 0.64%
Rolling 12 month charge-offs 0.25% 0.34% 0.57% 0.69% 0.78% 0.75% 0.76% 0.64% 0.57% 0.66% 0.60%
Consistent and Strong Credit PerformanceConsistent and Strong Credit Performance
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 19
Charge-Offs
Life to date charge-offs have been 0.83% of total originations(only 0.58%, if two discontinued business lines are excluded)
No current business lines have demonstrated systemic losses
Business# of Loans& Leases
FundedOrginations Charge-Offs
Charge-Off%
Charge-OffImpact
Corporate Finance Business 953 6,748,806,551 81,183,398 1.20% SomeHealthcare Real Estate 281 3,574,883,016 2,080,878 0.06% None
Healthcare Credit 257 1,860,025,004 8,350 0.00% NoneCommercial Real Estate 247 2,618,260,117 16,301,526 0.62% Some
Rediscount 250 1,427,784,988 5,848,002 0.41% NoneSecurity Lending 104 735,778,639 4,141 0.00% None
Other 304 1,225,450,210 - 0.00% N/AOngoing Business Subtotal 2,396 18,190,988,525 105,426,295 0.58%
Enhanced Mezzanine 55 165,199,375 11,258,220 6.81% Exited 2Q05
Business Credit 128 743,020,771 41,424,542 5.58% Exited 4Q06Exited Business Subtotal 183 908,220,146 52,682,762 5.80%
Total 2,579 19,099,208,671 158,109,057 0.83%
EconomicHeadwind
YesNo
Life to Date Performance through 6/30/08
N/A
NoYes
YesNo
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 20
Credit: Our Macro View
Despite the challenging economy, we expect CapitalSource credit statisticsto trend modestly higher but stay within historical ranges because:
The U.S. economy is in recession - challenges affecting financial institutionsare impacting both businesses and consumers
Deterioration is likely to continue for the next 12-18 months
The economic downturn has begun to impact commercial, as well asconsumer credit performance
The U.S. economy is in recession - challenges affecting financial institutionsare impacting both businesses and consumers
Deterioration is likely to continue for the next 12-18 months
The economic downturn has begun to impact commercial, as well asconsumer credit performance
The way we built our business:• Specialized expertise in focused markets• A diverse portfolio anchored in recession resistant sectors, such as healthcare• Senior debt orientation
The way we manage our business:• Direct origination focus• End-to-end control of the lending / credit process, including forensic accounting group• Credit-first approach and intense underwriting discipline
The way we built our business:• Specialized expertise in focused markets• A diverse portfolio anchored in recession resistant sectors, such as healthcare• Senior debt orientation
The way we manage our business:• Direct origination focus• End-to-end control of the lending / credit process, including forensic accounting group• Credit-first approach and intense underwriting discipline
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 21
Key Financial Drivers
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 22
Key Financial Drivers
Asset growth Very attractive lending and loan purchase environment should allow
CapitalSource to grow its balance sheet in a highly profitable way Originating new, senior loans underwritten to 600-800 bps over LIBOR
Cost of Funds Migration of the balance sheet to CapitalSource Bank will drive down the
cost of funds
Operating Expenses Balance sheet growth will leverage fixed cost investments in lending and
retail banking platforms to drive efficiencies
Credit Some worsening, though not material, is expected based on the
economic environment Balance sheet growth should contribute to relative stability in credit
metrics
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 23
Strategy and Outlook
• Near-Term
• Longer-Term
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 24
CapitalSource: Near-Term Strategy
1. Carefully manage our existing book of business, in light of negativeeconomic outlook
2. Aggressively grow the commercial lending business insideCapitalSource Bank -- originating safe new loans while maintaininguncompromising credit standards
3. Opportunistically pursue portfolio or business acquisitions consistentwith areas of historical expertise
4. Rapidly shift the commercial lending funding mix to deposits andunsecured, creating an even stronger balance sheet
5. Pay dividends at a "bank like" level, in order to retain capital to investat high ROEs
6. Complete the initial public offering of CapitalSource Healthcare REITcommon shares
CapitalSource is poised to be a clear winnerin the midst of unprecedented market dislocation
CapitalSource is poised to be a clear winnerin the midst of unprecedented market dislocation
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 25
Longer-Term Strategy (18-36 months)
1. Explore opportunities to enhance the banking franchise,including modifications to the charter to enable a broaderrange of retail and commercial banking services
2. Continue to aggressively originate commercial loans, as longas risk-adjusted yields remain attractive
3. When liquidity ultimately returns: maintain credit discipline,scale back lending and invest excess capital to optimizebalance sheet leverage
4. With the integration of CapitalSource Bank and future depositgrowth, realize new operating leverage efficiencies from a fullybuilt-out CapitalSource infrastructure
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 26
Conclusion:
CapitalSource is Uniquely Positioned to Thrive,Despite Challenging Market Conditions
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 27
CapitalSource “Has It All” to Capitalize on Market Opportunity
The liquidity crisis has created market opportunities for CapitalSourcewhich are the most attractive in its history
The addition of CapitalSource Bank uniquely positions the Company toattack the current market with strengths few others have, including:
Access to a robust depository to complement an historically strong balance sheet
Excellent liquidity and available capital, sufficient to support $10 -15 billion of newloans and/or portfolio acquisitions over the next three years
A proven asset strategy and the leading middle market commercial lendingplatform in the United States including: proprietary underwriting, expert diligenceresources and a seasoned management team
A consistent and long-term record of solid credit performance and high ROEs,paired with a steadfast commitment to maintain the discipline that has producedthat record
We expect steady progress, over the next three years, toward targetedafter-tax ROEs of 16%
Creating Long-Term Shareholder ValueCreating Long-Term Shareholder Value
Lehman Brothers Global Financial Services Conference l September 10, 2008 l p. 28
Questions & Answers