goldman sachs small cap growth conference information included in this presentation and other...

Goldman Sachs Small Cap Growth Conference

March 11, 2005

Goldman Sachs Small Cap Growth ConferenceMarch 11, 20052

Forward Looking Statements

Certain information included in this presentation and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company’s business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which the Company operates, including inflation and interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive product and pricing activity; (iv) difficulties of managing growth profitably; and (v) the loss of one or more members of the Company’s management team. More detailed information about these factors is contained in CapitalSource’s filings with the SEC, including the sections captioned “Risk Factors” and “Business” in our Form 10-K. CapitalSource is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.


Who We Are

National, Specialized Commercial Finance ProviderSmall and Mid-Sized Business Clients in Three Focused Areas:

Corporate Finance HealthCare & Specialty FinanceStructured Finance

$4.3B of Loans to 452 Clients as of December 31, 2004Well-Diversified by Loan Size and Type, Customer and Geography

Well Positioned to be the Lender of Choice for Small and Medium-Sized Businesses that Require Customized and Sophisticated Debt Financing


Company History

Formed September 2000 by John Delaney and Jason FishInitial Capitalization of Over $500M (Largest Private Capitalization at the Time)Original Investors Still Own Approximately 60% of the Company, with Approx. 45% Held by Management and Affiliates of the Board of DirectorsPrior to CapitalSource…

John Delaney was the Founder and CEO of HealthCare Financial Partners NYSE-Listed (Ticker: HCF)Sold to Heller Financial in 1999 (46% IRR to Original IPO Investors)

Jason Fish was a Partner at Farallon Capital ManagementResponsible for Real Estate and Distressed Credit Investing

CapitalSource and HCF Met or Exceeded Street Estimates Every Quarter as Public CompaniesIn Four Years, CapitalSource has Grown to Approximately 400 Employees, $4.3B in Loans and $3.0B of Market Capitalization, as of December 31, 2004


Investment Highlights

Large, Underserved Market

Strategic Sector Focus

Tailored Model

Strong Credit Culture“Credit First” Approach

Conservative Balance Sheet Leverage

Experienced, Motivated Team

Superior Growth and Returns

Strong Risk-Adjusted Yields

Stable, Improving Financing Spreads

Scalable Platform

Earnings Growth not Dependent on Volume Growth

Overview of Business



$1 MM – $75 MM< $1 MM $75 MM+

Num

ber o

f Com

pani

es

CapitalSource’s target market: 500,000 companies with

revenues between $5MM and $250MM

Borrowing Needs

Served by local banks

Commodity pricing

Underserved

Specialization required

Non-commodity pricing

Served by major banks

Commodity pricing


Our Strategy – Attractive, Defensible, High Margin Niches

Low

High

Low

High

Higher Risk Adjusted Returns

EXPERTISE

LIQ

UID

ITY

Equipment Leasing

Conduit Real Estate

Large Sponsor

Cash Flow

Mezzanine Loans

Large Structured Real Estate

Small Structured Real Estate

Rediscount

HealthCare Real Estate

HealthCare Working Capital

Small Sponsor

Cash Flow

The Area of Highest Risk-Adjusted Returns…

TheCapitalSource

Zone


Corporate Finance – $1,709 MM / 40% Of Portfolio

President – Joe KenaryCustomers

Private Equity Firms (Approx. 500 Primary Sponsors and 1,000 Secondary Sponsors)Small to Medium-Sized Sponsors are UnderservedSponsor Company Industries: - Business Services - Consumer Products & Services - Retail, Media - Value-Added Manufacturing

Borrower CharacteristicsStrong Historical and Prospective Cash FlowsExperienced Management Teams and SponsorsLimited Operating Leverage and Event RiskLeadership in Market Niches

ProductsCash Flow Loans Underwritten to Enterprise ValueSenior Loans at 40-60% of Enterprise ValueMezzanine Loans at 60-75% of Enterprise Value

Competitive AdvantagesExecution ▪ CreativityFlexibility ▪ SpeedExpertise ▪ “One-Stop” ShopReputation as Reliable Lender/Brand

Underwriting & Structuring

“Core”: <$25MM Borrowings (~75% of CFB Loans)- Foothill - BDC/RICS - Regional BanksLarger Deals: >$25MM Borrowings (~25% of Loans)- Commercial Banks - GE Capital - Merrill Lynch- CIT - Antares - Foothill- Hedge Funds - Abelco Finance

Note: Portfolio data as of December 31, 2004

Competition

Senior Secured Cash Flow LoansTerm B, Second Lien and Mezzanine Loans; Limited EquityAsset-Based Revolvers


HealthCare & Specialty Finance – $1,339 MM / 31% of Portfolio

Product GroupsHealthCare Credit Group (HealthCare asset-based lending)HealthCare Real Estate GroupBusiness Credit Services Group (general asset-based lending)Security Alarm Lending GroupCapitalSource Mortgage Finance (FHA/HUD lending and advisory subsidiary)

Specialized Credit SkillsIntense collateral review; daily borrowing baseIn-house reimbursement and clinical expertiseProprietary loan management capabilities

Market OpportunityHealthCare is 1/6th of U.S. EconomyDominated by small and mid-sized borrowersUnderserved by traditional lendersUnaffected by general economic conditionsUndergoing rapid growth and changeAsset-based lending expertise allows broadening to larger asset-based market

President – Dean Graham

CompetitionGE CapitalMerrill LynchHealthCare Business CreditGMAC

Competitive AdvantagesExpertise ▪ “One-Stop” ShopExperience ▪ SystemsBrandSpeed



Structured Finance – $1,227 MM / 29% Of Portfolio

CustomersSpecialty Lenders:

– Mortgage Companies– Consumer and Commercial Lenders

Real Estate Developers/Investors

Specialized Credit SkillsLender Finance: Intense Collateral AnalysisReal Estate: Property and Market Specific AnalysisPortfolio Acquisition Experience/Expertise

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

ProductsAsset-Based Lending PracticeLender Finance: Senior Asset-Based RevolversReal Estate: Predominately First Mortgage DebtEnhanced Mezzanine Debt

President – Michael C. Szwajkowski

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

CompetitionLender Finance: Foothill, Textron, Regional Banks and Hedge FundsReal Estate: Conduits, Banks, Finance Companies and Hedge Funds



All Lending Groups Share Common Business Attributes

Value-Added Lending Products

Market Leadership Positions

Sustainable Competitive Advantages

Common Operating Model

Entrepreneurial CapitalSource Culture


Specially Designed to Minimize Losses and Optimize Execution

Tailored Operating Model

Reports to ChiefCredit Officer

Reports to ChiefCredit Officer

Underwriting Officer

(CapitalAnalytics)

Development Officer

Investment Officer

Credit Committee

Loan Officer

Loan Analyst (CapitalAnalytics)

Reports to Group Head

Origination Underwriting Approval Servicing

Reports to Group Head


Disciplined Growth Story

CapitalSource is Seeing More Opportunities Across All Lending GroupsMore Resources on the Front EndMore Established BrandDeeply Rooted Referral SourcesIncreasingly Recognized as the “Go To” Lender for Customized Solutions

CapitalSource can Grow at a Faster Rate than Originally Forecast

CapitalSource is Maintaining its Senior Debt FocusCapitalSource has Continued Investing in Infrastructure and Staffing to Accommodate Growth

Front-End Credit ProfessionalsBack-End Portfolio/Loan Management

CapitalSource Credit Staff is Not Being Over-Burdened by Higher GrowthGrowth is the Result of Wider and Deeper Market Penetration… NOT an Easing of Credit StandardsFinancial Model Produces Attainable, High-Growth Earnings and Profitability

Financial Data


Superior Financial Model

CapitalSource Attributes


Efficient, Scalable Cost Structure

Stable, Diverse Low Cost Funding

Low Financial Leverage

Recurring RevenuesNo Gain on Sale Accounting

Stable, Manageable Loan Growth Targets

Strong Credit Quality

Attainable, High-Growth Earnings and

ProfitabilityProduces


CapitalSource – A Compelling Economic Model For Shareholders

Pretax Return on Equity1

10%

15%

20%

25%

30%

3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05

High, Stable Risk-Adjusted Returns

High, Stable Return on Assets

Lower Leverage & Lower Risk

Higher Margin of Safety

Superior Return on Equity

1Data represent trailing four quarter results

CapitalSource

% of Assets

Effect of Leverage

Total Return

Yield & Other Income 12%Provision -1%Operating Expenses -2%Gross Return on Assets 9%

Interest Expense -4%Return to Debt Capital 5% x 4.0 = 20%

Return to Equity Capital 9% x 1.0 = 9%

= 29%

Simple Illustration of the CapitalSource Model

Long-Term Pretax Return on Equity


Strong And Growing Pipeline

Pipeline ($ Billions)

$23.9

$53.8

$84.4

$7.7$11.6

$18.1

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Dec. 31, 2002 Dec. 31, 2003 Dec. 31 2004

Screened Prospects Term Sheet IssuedNote: Figures include deals reviewed and term sheets issued over the twelve month period ending on date shownSource: CapitalSource DealTracker


Credit Related Staffing Metrics

$68.2M$68.0MAverage Total Assets Per Back End Credit Professional2

$36.6M$29.4MAverage New Assets Per Front End Credit Professional1

Dec. 31, 2004Dec. 31, 2003

Note: Assets as of period end; average employees over prior twelve months; new deals over prior twelve months1Front end credit professionals include: CapitalAnalytics staff, investment officers, investment associates and investment analysts2Back end credit professionals include: loan officers and account executives


Growth Since IPO

$2.4

$4.3

$5.8

$1.06

$1.42

$0.77

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2005 **

Port

folio

($ B

illio

ns)

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50

EPS

Portfolio EPS * Adjusted to reflect “C” corporation taxes at 38% for 2003** Guidance provided in September 2004

*


Investment Highlights


Strategic Sector Focus

Tailored Model

Strong Credit Culture“Credit First” Approach

Conservative Balance Sheet Leverage

Experienced, Motivated Team

Superior Growth and Returns


Stable, Improving Financing Spreads

Scalable Platform

Earnings Growth not Dependent on Volume Growth

Supplemental Information


Balance Sheet ($000s)

FY 2003 FY 2004 GrowthCash $ 69,865 $ 206,077 195%Restricted Cash 79,913 237,176 197%

Loans 2,416,907 4,274,525 77%Deferred Loan Fees (59,793) (98,936) 65%Allowance for Loan Losses (18,025) (35,208) 95%Loans, net 2,339,089 4,140,381 77%

Investments 39,788 44,044 11%Other Assets 38,436 109,151 184%Total Assets $ 2,567,091 $ 4,736,829 85%

Credit Facilities $ 746,444 $ 966,961 30%Term Debt 923,208 2,189,356 137%Unsecured Debt - 561,371 NATotal Borrowings 1,669,652 3,717,688 123%Other Liabilities 30,307 72,750 140%Total Liabilities 1,699,959 3,790,438 123%Total Equity 867,132 946,391 9%Total Liabilities and Equity $ 2,567,091 $ 4,736,829 85%


Income Statement

($000s, except per share data)FY 2003 FY 2004 Growth

Total Interest and Fee Income $ 225,765 $ 400,151 77%Interest Expense (39,956) (79,053) 98%Net Interest and Fee Income 185,809 321,098 73%

General Reserves (8,609) (14,547) 69%Specific Reserves (2,728) (11,163) 309%Net Interest & Fee Income after Chargeoffs & Provision

174,472 295,388 69%

Total Operating Expenses (67,807) (107,748) 59%Total Other Income 25,815 17,781 -31%Pre-tax Income 132,480 205,421 55%Taxes (50,342) (80,570) 60%Net Income $ 82,138 $ 124,851 52%

EPS (Fully Diluted) $ 0.77 $ 1.06 38%

Note: After-tax net income for 2003 is pro forma based on a 38% effective tax rate


Financial Metrics

FY 2004 FY 2004($ millions, except per share data) Guidance Actual

Net Originations 1,800$ 1,858$

Yield on IEA 11.4% 11.6%

Cost of Funds 3.0% 3.1%

Net Interest Margin 9.1% 9.3%

Other Income 18.3$ 17.8$

General Reserves 73 bps 70 bps

Specific Provisions 40 bps 34 bps

Op Exp to Assets 3.2% 3.1%

ROA 3.5% 3.6%

ROE 13.4% 14.2%

Leverage (Period End) 3.6x 3.9x

Diluted EPS 1.02$ 1.06$


Credit Quality Ratios

3.93x3.41x3.04x2.39x1.93xDebt/Equity

0.82%0.86%0.75%0.84%0.75%Allowance for Loan Losses as % of Loans

0.29%0.00%0.44%0.36%0.00%Net Charge-Offs as % of Avg. Loans, Annualized

0.53%1.16%0.98%0.37%0.36%Loans on Nonaccrual Status

0.76%0.66%0.00%0.00%0.18%60+ Days Delinquencies as % of Loans

4Q043Q042Q041Q042003

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