UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-Q
  QUARTERLY REPORT PURSUANT TO
    SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
    quarterly period ended September 30, 2009
  Commission File
    No. 1-31753
  CapitalSource Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State of
    Incorporation)

35-2206895(I.R.S. Employer
    Identification No.)   4445 Willard Avenue, 12th Floor
    Chevy Chase, MD 20815 (Address of Principal
    Executive Offices, Including Zip Code)
  (800) 370-9431
 (Registrants telephone
    number, including area code)
  þ o
  Regulation S-T o o
  Rule 12b-2
  Large
    accelerated
    filer þ
    Accelerated
    filer o
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ




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##### 





TABLE OF
    CONTENTS
  PagePART I. FINANCIAL INFORMATIONItem 1.

Financial StatementsConsolidated Balance Sheets as of
    September 30, 2009 (unaudited) and December 31,
    2008


3Consolidated Statements of Income (unaudited) for
    the three and nine months ended September 30, 2009 and
    2008


4Consolidated Statement of Shareholders
    Equity (unaudited) for the nine months ended September 30,
    2009


5Consolidated Statements of Cash Flows (unaudited)
    for the nine months ended September 30, 2009 and 2008


6Notes to the Unaudited Consolidated Financial
    Statements


7Item 2.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


57Item 3.

Quantitative and Qualitative Disclosures about
    Market Risk


95Item 4.

Controls and Procedures


95PART II. OTHER INFORMATIONItem 1A

Risk Factors


96Item 2.

Unregistered Sales of Equity Securities and Use
    of Proceeds


98Item 6.

Exhibits


98Signatures


99Index to Exhibits


100   2




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##### 



CapitalSource
    Inc.
  Consolidated
    Balance Sheets
  September 30,


December 31,2009


2008(Unaudited)($ in thousands)ASSETSCash and cash equivalents

$
1,037,818


$
1,338,563Restricted cash


227,185



419,383Investment securities:Available-for-sale,
    at fair value


710,312



679,551Held-to-maturity,
    at amortized cost


250,222



14,389Total investment securities


960,534



693,940Mortgage-backed securities pledged, trading






1,489,291Mortgage-related receivables, net


1,529,795



1,801,535Commercial real estate A Participation Interest, net


714,238



1,396,611Loans:Loans held for sale


32,743



8,543Loans held for investment


8,587,607



9,396,751Less deferred loan fees and discounts


(150,300
)


(174,317
)Less allowance for loan losses


(517,405
)


(423,844
)Loans held for investment, net


7,919,902



8,798,590Total loans


7,952,645



8,807,133Interest receivable


113,541



117,516Direct real estate investments, net


946,459



989,716Other investments


96,229



127,746Goodwill


173,135



173,135Other assets


488,262



1,065,063Total assets

$
14,239,841


$
18,419,632LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Deposits

$
4,390,486


$
5,043,695Repurchase agreements






1,595,750Credit facilities


826,611



1,445,062Term debt


4,733,273



5,338,456Other borrowings


1,547,037



1,573,813Other liabilities


315,232



592,136Total liabilities


11,812,639



15,588,912Shareholders equity:Preferred stock (50,000,000 shares authorized; no shares
    outstanding)






Common stock ($0.01 par value, 1,200,000,000 shares
    authorized; 323,100,000 and 282,804,211 shares issued and
    outstanding, respectively)


3,231



2,828Additional paid-in capital


3,899,604



3,686,765Accumulated deficit


(1,501,669
)


(868,425
)Accumulated other comprehensive income, net


25,910



9,095Total CapitalSource Inc. shareholders equity


2,427,076



2,830,263Noncontrolling interests


126



457Total shareholders equity


2,427,202



2,830,720Total liabilities and shareholders equity

$
14,239,841


$
18,419,632    3




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##### 



CapitalSource
    Inc.Consolidated Statements of Income
  Three Months Ended September 30,


Nine Months Ended September 30,2009


2008


2009


2008As Adjusted





As Adjusted(Note 3)





(Note 3)(Unaudited)($ in thousands, except per share data)Net investment income:Interest income:Loans

$
173,980


$
239,294


$
556,465


$
707,913Investment securities


13,421



24,739



47,443



111,496Other


1,126



9,979



3,781



17,150Total interest income


188,527



274,012



607,689



836,559Fee income


25,281



29,974



81,583



104,882Total interest and fee income


213,808



303,986



689,272



941,441Operating lease income


27,247



28,140



82,533



80,040Total investment income


241,055



332,126



771,805



1,021,481Interest expense:Deposits


22,674



32,178



91,020



32,178Borrowings


82,672



142,672



256,226



491,259Total interest expense


105,346



174,850



347,246



523,437Net investment income


135,709



157,276



424,559



498,044Provision for loan losses


221,385



110,261



580,499



147,594Net investment (loss) income after provision for loan losses


(85,676
)


47,015



(155,940
)


350,450Operating expenses:Compensation and benefits


29,339



29,473



99,184



99,070Depreciation of direct real estate investments


8,713



8,898



26,515



26,804Professional fees


15,263



7,839



44,543



29,762Other administrative expenses


20,026



15,309



59,138



44,034Total operating expenses


73,341



61,519



229,380



199,670Other (expense) income:Loss on investments, net


(8,472
)


(30,010
)


(29,566
)


(34,003
)(Loss) gain on derivatives


(10,298
)


2,659



(12,317
)


(20,354
)(Loss) gain on residential mortgage investment portfolio


(3
)


(26,956
)


15,308



(73,273
)Gain (loss) on extinguishment of debt


11,472



70,057



(41,091
)


82,782Other (expense) income, net


(9,725
)


12,413



(36,192
)


16,898Total other (expense) income


(17,026
)


28,163



(103,858
)


(27,950
)Net (loss) income before income taxes


(176,043
)


13,659



(489,178
)


122,830Income tax expense


98,193



58



135,947



40,377Net (loss) income


(274,236
)


13,601



(625,125
)


82,453Net income (loss) attributable to noncontrolling interests


10



(100
)


(28
)


1,480Net (loss) income attributable to CapitalSource Inc.

$
(274,246
)

$
13,701


$
(625,097
)

$
80,973Net (loss) income per share attributable to CapitalSource
    Inc.:Basic

$
(0.87
)

$
0.05


$
(2.07
)

$
0.33Diluted

$
(0.87
)

$
0.05


$
(2.07
)

$
0.33Average shares outstanding:Basic


315,604,434



272,005,048



301,823,130



242,495,601Diluted


315,604,434



272,585,479



301,823,130



243,614,848Dividends declared per share

$
0.01


$
0.05


$
0.03


$
1.25    4




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##### 



CapitalSource
    Inc.
  Consolidated
    Statement of Shareholders Equity
  CapitalSource Inc. Shareholders EquityAccumulatedOtherAdditional





Comprehensive





TotalCommon


Paid-In


Accumulated


Income


Noncontrolling


ShareholdersStock


Capital


Deficit


(Loss), Net


Interests


Equity(Unaudited)($ in thousands)Total shareholders equity as of December 31, 2008

$
2,828


$
3,686,765


$
(868,425
)

$
9,095


$
457


$
2,830,720Net loss










(625,097
)






(28
)


(625,125
)Other comprehensive loss:Cumulative effect of adoption of investment valuation guidance










397



(397
)






Unrealized gain, net of tax














17,212







17,212Total comprehensive loss






















(607,913
)Divestiture of noncontrolling interests


















(303
)


(303
)Repurchase of common stock


(6
)


(794
)














(800
)Dividends paid






(730
)


(8,544
)










(9,274
)Proceeds from issuance of common stock, net


203



76,872















77,075Exchange of convertible debt


198



118,358















118,556Stock option expense






2,985















2,985Restricted stock activity


8



16,148















16,156Total shareholders equity as of September 30, 2009

$
3,231


$
3,899,604


$
(1,501,669
)

$
25,910


$
126


$
2,427,202    5




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##### 



CapitalSource
    Inc.Consolidated Statements of Cash Flows
   Nine Months EndedSeptember 30,2009


2008Unaudited($ in thousands)Operating activities:Net (loss) income

$
(625,125
)

$
82,453Adjustments to reconcile net (loss) income to net cash provided
    by operating activities:Stock option expense


2,985



530Restricted stock expense


17,962



26,498Loss (gain) on extinguishment of debt


41,091



(82,782
)Amortization of deferred loan fees and discounts


(58,818
)


(71,576
)Paid-in-kind
    interest on loans


(17,434
)


13,430Provision for loan losses


580,499



147,594Amortization of deferred financing fees and discounts


48,146



89,086Depreciation and amortization


25,309



28,608Provision (benefit) for deferred income taxes


130,607



(18,807
)Non-cash loss on investments, net


31,495



35,119Non-cash loss on property and equipment disposals


21,180



9,270Unrealized loss on derivatives and foreign currencies, net


22,280



10,756Unrealized (gain) loss on residential mortgage investment
    portfolio, net


(60,567
)


51,810Net decrease in mortgage-backed securities pledged, trading


1,485,133



2,508,787Amortization of discount on residential mortgage investments


11



(8,398
)Accretion of discount on commercial real estate A
    participation interest


(20,487
)


(12,694
)Decrease in interest receivable


5,893



16,077Decrease in loans held for sale, net


31,055



246,376Decrease (increase) in other assets


485,411



(43,402
)Decrease in other liabilities


(271,734
)


(96,676
)Cash provided by operating activities


1,874,892



2,932,059Investing activities:Decrease (increase) in restricted cash


192,198



(1,282,422
)Decrease in mortgage-related receivables, net


215,090



175,556Decrease in commercial real estate A participation
    interest, net


702,860



206,730Acquisition of CS Advisors CLO II






(18,619
)Decrease in loans, net


344,641



292,458Cash received (paid) for real estate


15,710



(10,154
)Acquisition of marketable securities, available for sale, net


(36,991
)


(845,813
)Acquisition of marketable securities, held to maturity, net


(227,591
)


Reduction of other investments, net


5,401



5,917Net cash acquired in FIL transaction






3,187,037Acquisition of property and equipment, net


(17,456
)


(3,564
)Cash provided by investing activities


1,193,862



1,707,126Financing activities:Payment of deferred financing fees


(39,161
)


(59,477
)Deposits accepted, net of repayments


(653,552
)


(122,115
)Repayments under repurchase agreements, net


(1,595,750
)


(1,039,954
)Repayments on credit facilities, net


(628,489
)


(860,855
)Borrowings of term debt


311,874



Repayments of term debt


(907,634
)


(1,682,698
)Borrowings (repayments) under other borrowings


76,174



(68,505
)Proceeds from issuance of common stock, net of offering costs


77,075



601,881Repurchase of common stock


(800
)


Proceeds from exercise of options






361Tax expense on share-based payments






(6,548
)Payment of dividends


(9,236
)


(290,614
)Cash used in financing activities


(3,369,499
)


(3,528,524
)(Decrease) increase in cash and cash equivalents


(300,745
)


1,110,661Cash and cash equivalents as of beginning of period


1,338,563



178,699Cash and cash equivalents as of end of period

$
1,037,818


$
1,289,360Supplemental information:Noncash transactions from investing and financing activities:Assumption of FIL assets and liabilities

$



$
3,292,185Beneficial conversion option on convertible debt






52,946Exchange of common stock for convertible debentures


61,618



Assets acquired through foreclosure


48,660



94,030Assumption of note payable






25,647Acquisition of real estate






2,120Conversion of noncontrolling interests into common stock






34,819Intangible lease liability adjustments






2,397    6




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  Note 1.
    Organization      Segment Data
  Note 2.
    Summary
    of Significant Accounting Policies  Interim
    Consolidated Financial Statements Basis of
    Presentation
  Form 10-Q Regulation S-X. Form 8-K Form 10-K (Form 10-K).
      Reclassifications
   7




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Summary of Significant Accounting
    Policies Form 10-K.
  New
    Accounting Pronouncements
  Generally Accepted Accounting Principles
           8




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    other-than-temporary other-than-temporary other-than-temporary
  Fair Value Measurements
       9




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 3.
    Retrospective
    Application of Accounting Pronouncements        Consolidated
    Balance Sheets
  September 30, 2009As Computed Prior to


As Reported afterAdoption


Adoption


Effect of Change($ in thousands)Other assets

$
483,298


$
488,262


$
4,964Other borrowings


1,557,390



1,547,037



(10,353
)Additional paid-in capital


3,883,572



3,899,604



16,032Accumulated deficit


(1,500,954
)


(1,501,669
)


(715
)   December 31, 2008As Computed Prior to


As Reported afterAdoption


Adoption


Effect of Change($ in thousands)Other assets

$
1,060,332


$
1,065,063


$
4,731Other borrowings


1,560,224



1,573,813



13,589Additional paid-in capital


3,683,065



3,686,765



3,700Accumulated deficit


(855,867
)


(868,425
)


(12,558
)  10




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidated
    Statements of Income
  Three Months Ended September 30, 2009As Computed Prior to


As Reported afterAdoption


Adoption


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
84,595


$
82,672


$
(1,923
)Net loss


(276,149
)


(274,236
)


1,913Net income attributable to noncontrolling interests(1)


10



10



Net loss attributable to CapitalSource Inc.






(274,246
)


(274,246
)Net loss per share attributable to CapitalSource Inc.(2)Basic


(0.87
)


(0.87
)


Diluted


(0.87
)


(0.87
)


   Three Months Ended September 30, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
148,318


$
142,672


$
(5,646
)Net income


8,055



13,601



5,546Net loss attributable to noncontrolling interests(1)


(100
)


(100
)


Net income attributable to CapitalSource Inc.






13,701



13,701Net income per share attributable to CapitalSource Inc.(2)Basic


0.03



0.05



0.02Diluted


0.03



0.05



0.02   Nine Months Ended September 30, 2009As Computed Prior to


As Reported afterAdoption


Adoption


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
268,069


$
256,226


$
(11,843
)Net loss


(636,996
)


(625,125
)


11,871Net loss attributable to noncontrolling interests(1)


(28
)


(28
)


Net loss attributable to CapitalSource Inc.






(625,097
)


(625,097
)Net loss per share attributable to CapitalSource Inc.(2)Basic


(2.11
)


(2.07
)


0.04Diluted


(2.11
)


(2.07
)


0.04   11




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Nine Months Ended September 30, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands, except per share amounts)Interest expense: borrowings

$
497,346


$
491,259


$
(6,087
)Net income


74,886



82,453



7,567Net income attributable to noncontrolling interests(1)


1,480



1,480



Net income attributable to CapitalSource Inc.






80,973



80,973Net income per share attributable to CapitalSource Inc.(2)Basic


0.31



0.33



0.02Diluted


0.31



0.33



0.02     (1)
    
    The caption Noncontrolling interests expense was
    changed to Net (loss) income attributable to
    noncontrolling interests to conform to the presentation
    requirements of the Consolidation Topic of the Codification.(2)
    
    The caption Net (loss) income per share was changed
    to Net (loss) income per share attributable to
    CapitalSource Inc. to conform to the presentation
    requirements of the Consolidation Topic of the Codification.  Consolidated
    Statements of Cash Flows
  Nine Months Ended September 30, 2009As Computed Prior to


As Reported afterAdoption


Adoption


Effect of Change($ in thousands)Net loss

$
(636,996
)

$
(625,125
)

$
11,871Operating activities:Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Amortization of deferred financing fees and discounts


59,989



48,146



(11,843
)Financing activities:Payment of dividends


(9,208
)


(9,236
)


(28
)   Nine Months Ended September 30, 2008As Originally Reported


As Adjusted


Effect of Change($ in thousands)Net income

$
74,886


$
82,453


$
7,567Operating activities:Adjustments to reconcile net income to net cash provided by
    operating activities:Amortization of deferred financing fees and discounts


95,173



89,086



(6,087
)Financing activities:Payment of dividends


(289,134
)


(290,614
)


(1,480
)  12




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 4.
    Cash and
    Cash Equivalents and Restricted Cash    September 30,


December 31,2009


2008($ in thousands)Cash and due from banks(1)

$
194,051


$
249,610Interest-bearing deposits in other banks(2)


30,915



19,963Other short-term investments(3)


795,932



984,237Investment securities(4)


244,105



504,136Total cash and cash equivalents and restricted cash

$
1,265,003


$
1,757,946     (1)
    
    Represents principal and interest collections on loan assets
    held by securitization trusts or pledged to credit facilities
    and escrows for future expenses related to our direct real
    estate investments. A portion of these collections are invested
    in money market funds that invest primarily in U.S. Treasury
    securities, and in 2008, repurchase agreements secured by U.S.
    Treasury securities. The restricted portion of the balance was
    $37.4 million and $60.9 million as of
    September 30, 2009 and December 31, 2008,
    respectively. Cash and due from bank accounts for CapitalSource
    Bank were $141.9 million and $132.3 million as of
    September 30, 2009 and December 31, 2008,
    respectively. Included in this balance for CapitalSource Bank
    were $100.7 million and $52.1 million in deposits at
    the Federal Reserve Bank (FRB) as of
    September 30, 2009 and December 31, 2008,
    respectively. The cash and due from bank accounts for
    CapitalSource Bank were not restricted.(2)
    
    Represents principal and interest collections on loan assets
    pledged to credit facilities. The restricted portion was
    $11.0 million and $8.4 million as of
    September 30, 2009 and December 31, 2008, respectively.(3)
    
    Represents principal and interest collections on loan assets
    held by securitization trusts or pledged to credit facilities
    and also includes short-term investments held by CapitalSource
    Bank. Principal and interest collections are invested in money
    market funds that invest primarily in U.S. Treasury securities,
    and in 2008, repurchase agreements secured by U.S. Treasury
    securities. The restricted portion was $178.8 million and
    $150.0 million as of September 30, 2009 and
    December 31, 2008, respectively. The CapitalSource Bank
    cash is invested in (i) short term investment grade
    commercial paper which is rated by at least two of the three
    major rating agencies (S&P, Moodys or Fitch) and has
    a rating of A1 (S&P), P1 (Moodys) or F1 (Fitch), and
    (ii) in money market funds that invest primarily in U.S.
    Treasury and Agency securities and repurchase agreements secured
    by the same.(4)
    
    Includes discount notes with AAA ratings totaling
    $244.1 million and $303.0 million as of
    September 30, 2009 and December 31, 2008,
    respectively, issued by the Federal Home Loan Bank System
    (FHLB), Fannie Mae or Freddie Mac. These investments
    have a remaining weighted average maturity of 40 days and
    61 days as of September 30, 2009 and December 31,
    2008, respectively. CapitalSource Bank pledged these notes to
    the FHLB of San Francisco (FHLB SF) as a source
    of borrowing capacity as of September 30, 2009. There was
    no restricted portion as of September 30, 2009, and
    $200.0 million was restricted as of December 31, 2008.  Note 5.
    Mortgage-Related
    Receivables and Related Owner
    Trust Securitizations   13




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      loan-to-value
      September 30,

December 31,2009

2008($ in thousands)Mortgage-related receivables whose underlying mortgage loans are
    90 or more days past due or are in the process of foreclosure(1)

$
127,723


$
51,348Percentage of mortgage-related receivables


8.17
%


2.82
%     (1)
    
    Mortgage loans 90 or more days past due are also placed on
    non-accrual status.   14




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##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Nine Months EndedSeptember 30,2009


2008Balance as of beginning of period

$
9,266


$
796Provision for loan losses


66,000



11,876Charge offs, net of recoveries


(40,858
)


(4,888
)Balance as of end of period

$
34,408


$
7,784     Note 6.
    Commercial
    Lending Assets and Credit Quality    Commercial
    Real Estate A Participation Interest
      A Participation Interest as of December 31, 2008

$
1,396,611Principal payments


(702,860
)Discount accretion


20,487A Participation Interest as of September 30,
    2009

$
714,238       pari passu
 15




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Loans
    Held for Sale
      Loans
    Held for Investment
    Nine Months EndedSeptember 30,2009


2008($ in thousands)Balance as of beginning of period

$
423,844


$
138,930Provision for loan losses


514,499



135,718Charge offs, net of recoveries


(420,938
)


(110,793
)Balance as of end of period

$
517,405


$
163,855     September 30,


December 31,2009


2008($ in thousands)Loans
    30-89 days
    contractually delinquent

$
131,567


$
299,322Loans 90 or more days contractually delinquent


395,537



141,104Non-accrual loans(1)


993,543



439,547Impaired loans(2)


1,306,719



692,278     (1)
    
    Includes loans with aggregate principal balances of
    $359.6 million and $110.3 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were also classified as loans 90 or more
    days contractually 16




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  delinquent and loans with aggregate principal balances of
    $104.0 million and $49.4 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were classified as
    30-89 days
    contractually delinquent. Includes non-performing loans
    classified as held for sale that had an aggregate principal
    balance of $25.1 million and $14.5 million as of
    September 30, 2009 and December 31, 2008, respectively.(2)
    
    Includes loans with aggregate principal balances of
    $366.1 million and $128.9 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were also classified as loans 90 or more
    days contractually delinquent, loans with aggregate principal
    balances of $131.6 million and $133.2 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were classified as
    30-89 days
    contractually delinquent, and loans with aggregate principal
    balances of $968.5 million and $423.4 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were also classified as loans on non-accrual
    status. The net carrying value of impaired loans was
    $1.3 billion and $683.1 million as of
    September 30, 2009 and December 31, 2008,
    respectively, prior to the application of allocated reserves.  and/or
      Foreclosed
    Assets
  Real
    Estate Owned
   17




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008($ in thousands)REO as of beginning of period

$
95,149


$
67,609


$
84,437


$
19,741Transfers from loans held for investment


11,150







47,873



54,843Fair value adjustments


(2,298
)


(7,575
)


(18,923
)


(8,651
)Transfers to property held for investment


(11,260
)






(11,260
)


Real estate sold


(25,687
)


(1,057
)


(35,073
)


(6,956
)REO as of end of period

$
67,054


$
58,977


$
67,054


$
58,977     Other
    Foreclosed Assets
   18




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 7.
    Investments  Investment
    Securities,
    Available-for-Sale
  available-for-sale
  September 30, 2009


December 31, 2008Gross


Gross








Gross


GrossUnrealized


Unrealized


Fair





Unrealized


Unrealized


FairCost


Gains


Losses


Value


Cost


Gains


Losses


Value($ in thousands)Agency discount notes

$
9,999


$
1


$



$
10,000


$
149,383


$
562


$



$
149,945Agency callable notes


193,300



403



(446
)


193,257



312,829



2,249







315,078Agency debt


25,560



275



(158
)


25,677



30,697







(383
)


30,314Agency MBS


325,735



7,845



(129
)


333,451



141,213



1,023







142,236Non-agency MBS


133,743



373



(635
)


133,481



325



52







377Equity security


514







(321
)


193



514







(301
)


213Corporate debt


12,287



776







13,063



39,100



147



(219
)


39,028Collateralized loan obligation


1,169



21







1,190



2,360











2,360Total

$
702,307


$
9,694


$
(1,689
)

$
710,312


$
676,421


$
4,033


$
(903
)

$
679,551   available-for-sale, available-for-sale
  available-for-sale
  other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary
 19




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  available-for-sale
  available-for-sale,
  Less Than 12 Months


12 Months or More


TotalGross





Gross





GrossUnrealized





Unrealized





UnrealizedLosses


Fair Value


Losses


Fair Value


Losses


Fair Value($ in thousands)As of September 30, 2009Agency callable notes

$
(446
)

$
84,854


$



$



$
(446
)

$
84,854Agency debt


(158
)


16,040











(158
)


16,040Agency MBS


(129
)


22,780











(129
)


22,780Non-agency MBS


(635
)


72,398











(635
)


72,398Equity security










(321
)


193



(321
)


193Total

$
(1,368
)

$
196,072


$
(321
)

$
193


$
(1,689
)

$
196,265As of December 31, 2008Agency debt

$
(383
)

$
30,314


$



$



$
(383
)

$
30,314Equity security










(301
)


213



(301
)


213Corporate debt


(219
)


2,781











(219
)


2,781Total

$
(602
)

$
33,095


$
(301
)

$
213


$
(903
)

$
33,308   available-for-sale other-than-temporary
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity, held-to-maturity,
 20




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Contractual
    Maturities
  available-for-sale, held-to-maturity,
  Investment Securities,


Investment Securities,Available-for-Sale


Held-to-MaturityEstimated





EstimatedAmortized Cost


Fair Value


Amortized Cost


Fair Value($ in thousands)Due in one year or less

$
29,816


$
29,763


$
35,202


$
34,901Due after one year through five years


159,042



159,495



205,681



218,893Due after five years through ten years


106,952



108,562



9,339



10,342Due after ten years(1)(2)


406,497



412,492







Total

$
702,307


$
710,312


$
250,222


$
264,136     (1)
    
    Included in this category are Agency and Non-agency MBS with
    weighted-average expected maturities of approximately
    3.5 years and 2.2 years, respectively, based on
    interest rates and expected prepayment speeds as of
    September 30, 2009.(2)
    
    Includes securities with no stated maturity.  Other
    Investments
    September 30,


December 31,2009


2008($ in thousands)Investments carried at cost

$
53,896


$
61,279Investments carried at fair value


1,498



4,661Investments accounted for under the equity method


40,835



61,806Total

$
96,229


$
127,746   other-than-temporary other-than-temporary
  Residential
    Mortgage-Backed Securities
   21




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 8.
    Guarantor
    Information  Borrowings Form 10-K Borrowings, Borrowings,
 22




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    September 30, 2009
   CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.(Unaudited)($ in thousands)AssetsCash and cash equivalents

$
3,997


$
733,618


$
284,797


$
15,406


$



$
1,037,818Restricted cash






75,229



92,515



59,441







227,185Investment securities:Available-for-sale,
    at fair value






701,566



595



8,151







710,312Held-to-maturity,
    at amortized cost






250,222















250,222Total investment securities






951,788



595



8,151







960,534Mortgage-related receivables, net














1,529,795







1,529,795Commercial real estate A participation interest, net






714,238















714,238Loans:Loans held for sale






26,537







6,206







32,743Loans held for investment






5,385,353



288,627



2,913,633



(6
)


8,587,607Less deferred loan fees and discounts






(76,392
)


(19,040
)


(37,724
)


(17,144
)


(150,300
)Less allowance for loan losses






(237,868
)


(66,375
)


(213,162
)






(517,405
)Loans held for investment, net






5,071,093



203,212



2,662,747



(17,150
)


7,919,902Total loans






5,097,630



203,212



2,668,953



(17,150
)


7,952,645Interest receivable






47,945



1,524



64,047



25



113,541Direct real estate investments, net














946,459







946,459Investment in subsidiaries


3,270,484



4,542



1,511,337



1,485,258



(6,271,621
)


Intercompany note receivable


375,000



10



131,029



412,180



(918,219
)


Other investments






66,082



14,480



15,667







96,229Goodwill






173,135















173,135Other assets


53,971



164,011



123,523



257,643



(110,886
)


488,262Total assets

$
3,703,452


$
8,028,228


$
2,363,012


$
7,463,000


$
(7,317,851
)

$
14,239,841Liabilities and shareholders equityLiabilities:Deposits

$



$
4,390,486


$



$



$



$
4,390,486Credit facilities


419,488



200,953



57,505



148,665







826,611Term debt


282,536



1,713,281







2,737,456







4,733,273Other borrowings


558,701



200,000



443,569



344,767







1,547,037Other liabilities


15,651



90,936



91,505



231,042



(113,902
)


315,232Intercompany note payable






46,850



271,097



600,272



(918,219
)


Total liabilities


1,276,376



6,642,506



863,676



4,062,202



(1,032,121
)


11,812,639Shareholders equity:Common stock


3,231



921,000











(921,000
)


3,231Additional paid-in capital


3,899,573



(234,258
)


746,449



3,314,931



(3,827,091
)


3,899,604(Accumulated deficit) retained earnings


(1,501,638
)


677,671



726,913



65,488



(1,470,103
)


(1,501,669
)Accumulated other comprehensive income, net


25,910



21,309



25,974



20,231



(67,514
)


25,910Total CapitalSource Inc. shareholders equity


2,427,076



1,385,722



1,499,336



3,400,650



(6,285,708
)


2,427,076Noncontrolling interests














148



(22
)


126Total shareholders equity


2,427,076



1,385,722



1,499,336



3,400,798



(6,285,730
)


2,427,202Total liabilities and shareholders equity

$
3,703,452


$
8,028,228


$
2,363,012


$
7,463,000


$
(7,317,851
)

$
14,239,841  23




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Balance Sheet
    December 31, 2008
   CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.($ in thousands)AssetsCash and cash equivalents

$
11


$
1,230,254


$
38,866


$
69,432


$



$
1,338,563Restricted cash






35,695



81,337



302,351







419,383Investment securities:Available-for-sale,
    at fair value






646,675



1,236



31,640







679,551Held-to-maturity,
    at amortized cost






14,389















14,389Total investment securities






661,064



1,236



31,640







693,940Mortgage-backed securities pledged, trading














1,489,291







1,489,291Mortgage-related receivables, net














1,801,535







1,801,535Commercial real estate A participation interest, net






1,396,611















1,396,611Loans:Loans held for sale






1,561







6,982







8,543Loans held for investment






6,040,079



398,509



2,958,169



(6
)


9,396,751Less deferred loan fees and discounts






(85,245
)


(32,950
)


(45,052
)


(11,070
)


(174,317
)Less allowance for loan losses






(55,600
)


(295,002
)


(73,242
)






(423,844
)Loans held for investment, net






5,899,234



70,557



2,839,875



(11,076
)


8,798,590Total loans






5,900,795



70,557



2,846,857



(11,076
)


8,807,133Interest receivable






55,689



2,178



59,649







117,516Direct real estate investments, net














989,716







989,716Investment in subsidiaries


4,397,772







1,657,532



1,602,354



(7,657,658
)


Intercompany note receivable


75,000



9



185,765



264,000



(524,774
)


Other investments






86,239



21,098



20,409







127,746Goodwill






173,135















173,135Other assets


39,169



102,213



253,270



853,546



(183,135
)


1,065,063Total assets

$
4,511,952


$
9,641,704


$
2,311,839


$
10,330,780


$
(8,376,643
)

$
18,419,632Liabilities and shareholders equityLiabilities:Deposits

$



$
5,043,695


$



$



$



$
5,043,695Repurchase agreements














1,595,750







1,595,750Credit facilities


890,000



456,999



82,462



15,601







1,445,062Term debt






2,238,382







3,100,074







5,338,456Other borrowings


729,474







441,899



402,440







1,573,813Other liabilities


62,181



198,272



52,552



463,656



(184,525
)


592,136Intercompany note payable






46,850



122,917



355,007



(524,774
)


Total liabilities


1,681,655



7,984,198



699,830



5,932,528



(709,299
)


15,588,912Shareholders equity:Common stock


2,828



921,000











(921,000
)


2,828Additional paid-in capital


3,686,965



146,019



699,806



3,926,123



(4,772,148
)


3,686,765(Accumulated deficit) retained earnings


(868,394
)


587,837



908,731



468,063



(1,964,662
)


(868,425
)Accumulated other comprehensive income, net


8,898



2,650



3,472



3,586



(9,511
)


9,095Total CapitalSource Inc. shareholders equity


2,830,297



1,657,506



1,612,009



4,397,772



(7,667,321
)


2,830,263Noncontrolling interests














480



(23
)


457Total shareholders equity


2,830,297



1,657,506



1,612,009



4,398,252



(7,667,344
)


2,830,720Total liabilities and shareholders equity

$
4,511,952


$
9,641,704


$
2,311,839


$
10,330,780


$
(8,376,643
)

$
18,419,632  24




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended September 30, 2009
   CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.(Unaudited)($ in thousands)Net investment income:Interest income:Loans

$
7,638


$
110,589


$
1,229


$
63,412


$
(8,888
)

$
173,980Investment securities






12,839



56



526







13,421Other






1,086



25



15







1,126Total interest income


7,638



124,514



1,310



63,953



(8,888
)


188,527Fee income






9,486



11,601



6,217



(2,023
)


25,281Total interest and fee income


7,638



134,000



12,911



70,170



(10,911
)


213,808Operating lease income














27,247







27,247Total investment income


7,638



134,000



12,911



97,417



(10,911
)


241,055Interest expense:Deposits






22,674















22,674Borrowings


32,442



11,617



7,815



39,686



(8,888
)


82,672Total interest expense


32,442



34,291



7,815



39,686



(8,888
)


105,346Net investment (loss) income


(24,804
)


99,709



5,096



57,731



(2,023
)


135,709Provision for loan losses






42,940



5,628



172,817







221,385Net investment (loss) income after provision for loan losses


(24,804
)


56,769



(532
)


(115,086
)


(2,023
)


(85,676
)Operating expenses:Compensation and benefits


230



12,999



16,110











29,339Depreciation of direct real estate investments














8,713







8,713Professional fees


2,886



696



8,791



2,890







15,263Other administrative expenses


1,049



13,625



14,675



7,992



(17,315
)


20,026Total operating expenses


4,165



27,320



39,576



19,595



(17,315
)


73,341Other (expense) income:Loss on investments, net






(4,813
)


(221
)


(3,438
)






(8,472
)Loss on derivatives






(3,259
)


(81
)


(6,958
)






(10,298
)Loss on residential mortgage investment portfolio














(3
)






(3
)Gain on debt extinguishment














11,472







11,472Other income (expense), net


10



3,896



11,511



(8,159
)


(16,983
)


(9,725
)Earnings in subsidiaries


(254,378
)


(889
)


16,731



(14,359
)


252,895



Total other (expense) income


(254,368
)


(5,065
)


27,940



(21,445
)


235,912



(17,026
)Net (loss) income before income taxes


(283,337
)


24,384



(12,168
)


(156,126
)


251,204



(176,043
)Income tax (benefit) expense


(9,091
)


2,363



500



104,421







98,193Net (loss) income


(274,246
)


22,021



(12,668
)


(260,547
)


251,204



(274,236
)Net income attributable to noncontrolling interests














10







10Net (loss) income attributable to CapitalSource Inc.

$
(274,246
)

$
22,021


$
(12,668
)

$
(260,557
)

$
251,204


$
(274,246
)  25




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Three Months Ended September 30, 2008
   CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.(Unaudited)($ in thousands)Net investment income:Interest income:Loans

$
1,081


$
139,953


$
6,346


$
93,001


$
(1,087
)

$
239,294Investment securities






2,021



172



22,546







24,739Other






7,025



551



2,403







9,979Total interest income


1,081



148,999



7,069



117,950



(1,087
)


274,012Fee income






5,305



15,383



8,919



367



29,974Total interest and fee income


1,081



154,304



22,452



126,869



(720
)


303,986Operating lease income














28,140







28,140Total investment income


1,081



154,304



22,452



155,009



(720
)


332,126Interest expense:Deposits






32,178















32,178Borrowings


24,509



35,966



12,195



71,089



(1,087
)


142,672Total interest expense


24,509



68,144



12,195



71,089



(1,087
)


174,850Net investment (loss) income


(23,428
)


86,160



10,257



83,920



367



157,276Provision for loan losses






3,535



107,166



(440
)






110,261Net investment (loss) income after provision for loan losses


(23,428
)


82,625



(96,909
)


84,360



367



47,015Operating expenses:Compensation and benefits


194



9,455



19,820



4







29,473Depreciation of direct real estate investments














8,898







8,898Professional fees


234



1,593



4,732



1,280







7,839Other administrative expenses


8,688



11,832



12,966



9



(18,186
)


15,309Total operating expenses


9,116



22,880



37,518



10,191



(18,186
)


61,519Other income (expense):Loss on investments, net






(2,284
)


(4,009
)


(23,717
)






(30,010
)Gain (loss) on derivatives






3,677



1,725



(2,743
)






2,659Loss on residential mortgage investment portfolio














(26,956
)






(26,956
)Gain on debt extinguishment










14,259



55,798







70,057Other income, net






14,712



23,295



1,545



(27,139
)


12,413Earnings in subsidiaries


46,245







61,527



(33,191
)


(74,581
)


Intercompany






(7,109
)


13,025



(5,916
)






Total other income (expense)


46,245



8,996



109,822



(35,180
)


(101,720
)


28,163Net income (loss) before income taxes


13,701



68,741



(24,605
)


38,989



(83,167
)


13,659Income tax expense (benefit)






7,285







(7,227
)






58Net income (loss)


13,701



61,456



(24,605
)


46,216



(83,167
)


13,601Net loss attributable to noncontrolling interests






(71
)






(29
)






(100
)Net income (loss) attributable to CapitalSource Inc.

$
13,701


$
61,527


$
(24,605
)

$
46,245


$
(83,167
)

$
13,701  26




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Nine Months Ended September 30, 2009
   CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.(Unaudited)($ in thousands)Net investment income:Interest income:Loans

$
8,930


$
352,111


$
4,306


$
204,018


$
(12,900
)

$
556,465Investment securities






33,790



290



13,363







47,443Other






3,551



79



151







3,781Total interest income


8,930



389,452



4,675



217,532



(12,900
)


607,689Fee income






23,531



39,110



23,265



(4,323
)


81,583Total interest and fee income


8,930



412,983



43,785



240,797



(17,223
)


689,272Operating lease income














82,533







82,533Total investment income


8,930



412,983



43,785



323,330



(17,223
)


771,805Interest expense:Deposits






91,020















91,020Borrowings


86,059



39,831



24,867



118,369



(12,900
)


256,226Total interest expense


86,059



130,851



24,867



118,369



(12,900
)


347,246Net investment (loss) income


(77,129
)


282,132



18,918



204,961



(4,323
)


424,559Provision for loan losses






179,746



85,516



315,237







580,499Net investment (loss) income after provision for loan losses


(77,129
)


102,386



(66,598
)


(110,276
)


(4,323
)


(155,940
)Operating expenses:Compensation and benefits


1,044



39,195



58,945











99,184Depreciation of direct real estate investments














26,515







26,515Professional fees


6,664



2,534



27,997



7,348







44,543Other administrative expenses


3,452



41,022



43,884



32,872



(62,092
)


59,138Total operating expenses


11,160



82,751



130,826



66,735



(62,092
)


229,380Other (expense) income:Loss on investments, net






(10,357
)


(2,723
)


(16,486
)






(29,566
)(Loss) gain on derivatives






(7,876
)


279



(3,368
)


(1,352
)


(12,317
)Gain on residential mortgage investment portfolio














15,308







15,308(Loss) gain on debt extinguishment


(57,128
)










16,037







(41,091
)Other income (expense), net


10



18,666



25,145



(19,408
)


(60,605
)


(36,192
)Earnings in subsidiaries


(488,760
)


(889
)


2,076



(173,777
)


661,350



Intercompany










3,558



(3,558
)






Total other (expense) income


(545,878
)


(456
)


28,335



(185,252
)


599,393



(103,858
)Net (loss) income before income taxes


(634,167
)


19,179



(169,089
)


(362,263
)


657,162



(489,178
)Income tax (benefit) expense


(9,070
)


7,682



500



136,835







135,947Net (loss) income


(625,097
)


11,497



(169,589
)


(499,098
)


657,162



(625,125
)Net loss attributable to noncontrolling interests














(28
)






(28
)Net (loss) income attributable to CapitalSource Inc.

$
(625,097
)

$
11,497


$
(169,589
)

$
(499,070
)

$
657,162


$
(625,097
)  27




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Income
    Nine months Ended September 30, 2008
   CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.(Unaudited)($ in thousands)Net investment income:Interest income:Loans

$
3,335


$
336,004


$
30,075


$
341,843


$
(3,344
)

$
707,913Investment securities






2,522



633



108,341







111,496Other






8,190



2,646



6,314







17,150Total interest income


3,335



346,716



33,354



456,498



(3,344
)


836,559Fee income






27,292



39,320



37,941



329



104,882Total interest and fee income


3,335



374,008



72,674



494,439



(3,015
)


941,441Operating lease income














80,040







80,040Total investment income


3,335



374,008



72,674



574,479



(3,015
)


1,021,481Interest expense:Deposits






32,178















32,178Borrowings


66,094



114,507



36,773



277,229



(3,344
)


491,259Total interest expense


66,094



146,685



36,773



277,229



(3,344
)


523,437Net investment (loss) income


(62,759
)


227,323



35,901



297,250



329



498,044Provision for loan losses






3,535



135,635



8,424







147,594Net investment (loss) income after provision for loan losses


(62,759
)


223,788



(99,734
)


288,826



329



350,450Operating expenses:Compensation and benefits


875



15,766



82,425



4







99,070Depreciation of direct real estate investments














26,804







26,804Professional fees


2,459



2,963



20,421



3,919







29,762Other administrative expenses


31,001



13,989



33,060



2,615



(36,631
)


44,034Total operating expenses


34,335



32,718



135,906



33,342



(36,631
)


199,670Other income (expense):Loss on investments, net






(2,986
)


(6,229
)


(24,574
)


(214
)


(34,003
)(Loss) gain on derivatives






(1,389
)


23,812



(42,777
)






(20,354
)Loss on residential mortgage investment portfolio














(73,273
)






(73,273
)Gain on debt extinguishment










28,504



54,278







82,782Other income, net






13,260



48,840



382



(45,584
)


16,898Earnings in subsidiaries


178,281







181,733



55,225



(415,239
)


Intercompany






(10,915
)


22,829



(11,914
)






Total other income (expense)


178,281



(2,030
)


299,489



(42,653
)


(461,037
)


(27,950
)Net income before income taxes


81,187



189,040



63,849



212,831



(424,077
)


122,830Income tax expense






7,285







33,092







40,377Net income


81,187



181,755



63,849



179,739



(424,077
)


82,453Net income attributable to noncontrolling interests






28







1,458



(6
)


1,480Net income attributable to CapitalSource Inc.

$
81,187


$
181,727


$
63,849


$
178,281


$
(424,071
)

$
80,973  28




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
    Nine Months Ended September 30, 2009
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedCapitalSource


Non-Guarantor


Guarantor


Non-Guarantor





CapitalSourceInc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.(Unaudited)($ in thousands)Operating activities:Net (loss)

$
(625,097
)

$
11,497


$
(169,589
)

$
(499,098
)

$
657,162


$
(625,125
)Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:Stock option expense






792



2,193











2,985Restricted stock expense






2,841



15,121











17,962Loss (gain) loss on extinguishment of debt


57,128











(16,037
)






41,091Amortization of deferred loan fees and discounts






(20,983
)


(26,767
)


(11,068
)






(58,818
)Paid-in-kind
    interest on loans






(11,194
)


606



(6,846
)






(17,434
)Provision for loan losses






179,746



85,516



315,237







580,499Amortization of deferred financing fees and discounts


22,131



11,894



314



13,807







48,146Depreciation and amortization






(280
)


2,829



22,760







25,309Provision (benefit) for deferred income taxes


8,224



(3,508
)


(36
)


125,927







130,607Non-cash loss on investments, net






15,085



2,998



13,412







31,495Non-cash loss on property and equipment and writedowns of real
    estate owned






1,993



5,737



13,450







21,180Unrealized loss on derivatives and foreign currencies, net






8,891



1,307



12,082







22,280Unrealized gain on residential mortgage investment portfolio, net














(60,567
)






(60,567
)Net decrease in mortgage-backed securities pledged, trading














1,485,133







1,485,133Amortization of discount on residential mortgage investments














11







11Accretion of discount on commercial real estate A
    participation interest






(20,487
)














(20,487
)Decrease (increase) in interest receivable






7,815



8,778



(10,675
)


(25
)


5,893Decrease in loans held for sale, net






11,887



19,168











31,055(Increase) decrease in intercompany note receivable


(300,000
)






54,735



(148,180
)


393,445



(Increase) decrease in other assets


(5,172
)


(69,776
)


169,308



463,300



(72,249
)


485,411(Decrease) increase in other liabilities


(47,528
)


(107,818
)


39,533



(226,544
)


70,623



(271,734
)Net transfers with subsidiaries


1,164,901



(338,186
)


213,752



(378,882
)


(661,585
)


Cash provided by (used in) operating activities, net of impact
    of acquisitions


274,587



(319,791
)


425,503



1,107,222



387,371



1,874,892Investing activities:(Increase) decrease in restricted cash






(39,534
)


(11,178
)


242,910







192,198Decrease in mortgage-related receivables, net














215,090







215,090Decrease in commercial real estate A participation
    interest






702,860















702,860Decrease (increase) in loans, net






665,671



(272,358
)


(54,746
)


6,074



344,641Cash received for real estate














15,710







15,710Acquisition of marketable securities,
    available-for-sale,
    net






(36,991
)














(36,991
)Acquisition of marketable securities,
    held-to-maturity,
    net






(227,591
)














(227,591
)Disposal (acquisition) of other investments, net






13,794



2,573



(10,966
)






5,401(Acquisition) disposal of property and equipment, net






(14,134
)


(17,051
)


13,729







(17,456
)Cash provided by (used in) investing activities






1,064,075



(298,014
)


421,727



6,074



1,193,862Financing activities:Payment of deferred financing fees


(30,523
)


(738
)






(7,900
)






(39,161
)Deposits accepted, net of repayments






(653,552
)














(653,552
)Increase in intercompany note payable










148,180



245,265



(393,445
)


Repayments under repurchase agreements, net














(1,595,750
)






(1,595,750
)(Repayments of) borrowings on credit facilities, net


(470,512
)


(261,358
)


(29,683
)


133,064







(628,489
)Borrowings of term debt


281,898



6,000







23,976







311,874Repayments of term debt






(531,272
)






(376,362
)






(907,634
)(Repayments of) borrowings under other borrowings


(118,503
)


200,000



(55
)


(5,268
)






76,174Proceeds from issuance of common stock, net of offering costs


77,075



















77,075Repurchase of common stock


(800
)


















(800
)Payment of dividends


(9,236
)


















(9,236
)Cash (used in) provided by financing activities


(270,601
)


(1,240,920
)


118,442



(1,582,975
)


(393,445
)


(3,369,499
)Increase (decrease) in cash and cash equivalents


3,986



(496,636
)


245,931



(54,026
)






(300,745
)Cash and cash equivalents as of beginning of period


11



1,230,254



38,866



69,432







1,338,563Cash and cash equivalents as of end of period

$
3,997


$
733,618


$
284,797


$
15,406


$



$
1,037,818  29




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidating
    Statement of Cash Flows
    Nine Months Ended September 30, 2008
  CapitalSource Finance LLCCombined


Combined


Other





ConsolidatedNon-Guarantor


Guarantor


Non-Guarantor





CapitalSourceCapitalSource Inc.


Subsidiaries


Subsidiaries


Subsidiaries


Eliminations


Inc.(Unaudited)($ in thousands)Operating activities:Net income

$
81,187


$
181,755


$
63,849


$
179,739


$
(424,077
)

$
82,453Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:Stock option expense






(50
)


580











530Restricted stock expense






2,313



24,185











26,498Gain on extinguishment of debt










(28,504
)


(54,278
)






(82,782
)Amortization of deferred loan fees and discounts






(26,660
)


(25,789
)


(19,127
)






(71,576
)Paid-in-kind
    interest on loans






9,585



2,945



900







13,430Provision for loan losses






3,535



135,635



8,424







147,594Amortization of deferred financing fees and discounts


36,338



25,946



2,486



24,316







89,086Depreciation and amortization






1,184



2,786



24,638







28,608Benefit for deferred income taxes














(18,807
)






(18,807
)Non-cash loss (gain) on investments, net






28,442



6,757



(80
)






35,119Non-cash loss on property and equipment and writedowns of real
    estate owned










9,270











9,270Unrealized (gain) loss on derivatives and foreign currencies, net






(4,869
)


9,312



6,313







10,756Unrealized loss on residential mortgage investment portfolio, net














51,810







51,810Net decrease in mortgage-backed securities pledged, trading














2,508,787







2,508,787Amortization of discount on residential mortgage investments














(8,398
)






(8,398
)Accretion of discount on commercial real estate A
    participation interest






(12,694
)














(12,694
)(Increase) decrease in interest receivable






(51,107
)


45,370



21,814







16,077Decrease in loans held for sale, net






42,545



4,547



199,284







246,376Decrease in intercompany note receivable










90,225



(15,153
)


(75,072
)


Increase in other assets


(4,343
)


(33,652
)


(90,808
)


(37,385
)


122,786



(43,402
)(Decrease) increase in other liabilities


(27,154
)


93,846



(23,285
)


(25,929
)


(114,154
)


(96,676
)Net transfers with subsidiaries


(798,809
)


570,731



(195,434
)


8,059



415,453



Cash (used in) provided by operating activities


(712,781
)


830,850



34,127



2,854,927



(75,064
)


2,932,059Investing activities:Decrease (increase) in restricted cash






19,608



85,840



(1,387,870
)






(1,282,422
)Decrease in mortgage-related receivables, net














175,556







175,556Decrease in commercial real estate A participation
    interest






206,730















206,730Acquisition of CS Advisors CLO II














(18,619
)






(18,619
)(Increase) decrease in loans, net






(1,569,218
)


(173,529
)


2,035,259



(54
)


292,458Cash paid for real estate














(10,154
)






(10,154
)Acquisition of marketable securities, available-for-sale, net






(845,813
)














(845,813
)Disposal (acquisition) of other investments, net






15,028



(4,168
)


(4,943
)






5,917Net cash acquired in FIL transaction






3,187,037















3,187,037Acquisition of property and equipment, net






(804
)


(2,430
)


(330
)






(3,564
)Cash provided by (used in) investing activities






1,012,568



(94,287
)


788,899



(54
)


1,707,126Financing activities:Payment of deferred financing fees


(25,178
)


(20,353
)


120



(14,066
)






(59,477
)Deposits accepted, net of repayments






(122,115
)














(122,115
)Decrease in intercompany note payable










15,153



(90,225
)


75,072



Repayments under repurchase agreements, net






(12,673
)






(1,027,281
)






(1,039,954
)Borrowings on (repayments of) credit facilities, net


424,763



(440,949
)


111,091



(955,760
)






(860,855
)Borrowings of term debt






(46
)










46



Repayments of term debt






(298,528
)






(1,384,170
)






(1,682,698
)Repayments of other borrowings










(59,163
)


(9,342
)






(68,505
)Proceeds from issuance of common stock, net of offering costs


601,881



















601,881Proceeds from exercise of options


361



















361Tax expense on share based payments














(6,548
)






(6,548
)Payment of dividends


(289,035
)










(1,579
)






(290,614
)Cash provided by (used in) financing activities


712,792



(894,664
)


67,201



(3,488,971
)


75,118



(3,528,524
)Increase in cash and cash equivalents


11



948,754



7,041



154,855







1,110,661Cash and cash equivalents as of beginning of period






151,511



19,005



8,183







178,699Cash and cash equivalents as of end of period

$
11


$
1,100,265


$
26,046


$
163,038


$



$
1,289,360  30




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 9.
    Direct
    Real Estate Investments  triple-net
  September 30,


December 31,2009


2008($ in thousands)Land

$
104,961


$
106,797Buildings


895,205



910,413Furniture and equipment


50,374



51,814Accumulated depreciation


(104,081
)


(79,308
)Total

$
946,459


$
989,716   Note 10.
    Deposits        September 30,


December 31,2009


2008($ in thousands)Interest-bearing deposits:Money market

$
265,053


$
279,577Savings


544,693



471,014Certificates of deposit


3,580,740



4,259,153Brokered certificates of deposit






33,951Total interest-bearing deposits

$
4,390,486


$
5,043,695  31




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2010

$
3,451,4262011


101,6512012


18,2802013


1,7312014


7,652Total

$
3,580,740     Three Months Ended


Nine Months EndedSeptember 30, 2009


September 30, 2009($ in thousands)Money market

$
828


$
2,937Savings


1,743



5,704Certificates of deposit


20,181



82,210Brokered certificates of deposit






456Fees for early withdrawal


(78
)


(287
)Total interest expense

$
22,674


$
91,020   Note 11.
    Borrowings  Borrowings Form 10-K.
    September 30,


December 31,2009


2008($ in thousands)Repurchase agreements(1)

$



$
1,595,750Credit facilities


826,611



1,445,062Term debt


4,733,273



5,338,456Other borrowings:Convertible debt, net(2)


558,701



729,474Subordinated debt


440,524



438,799Mortgage debt(3)


324,767



330,311FHLB SF borrowings


200,000



Notes payable


23,045



75,229Total other borrowings


1,547,037



1,573,813Total

$
7,106,921


$
9,953,081     (1)
    
    In the first quarter of 2009, we repaid in full all borrowings
    outstanding under our master repurchase agreements. 32




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   (2)
    
    Amounts presented are net of debt discount of $21.3 million
    and $30.6 million as of September 30, 2009 and
    December 31, 2008, respectively.(3)
    
    Includes a senior loan and a mezzanine loan with outstanding
    principal balances of $234.6 million and
    $34.7 million, respectively, as of September 30, 2009.
    In September 2008, we exercised the first of our three optional
    one-year extensions on both of these mortgage loans resulting in
    the extension of their maturities from April 2009 to April 2010.
    This balance also includes pre-existing HUD debt of
    $55.5 million as of September 30, 2009.  Credit
    Facilities
    Form 10-K.
     33




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            
    provided that the loan commitments of non-extending lenders will
    be reduced to $94.9 million on December 31, 2009 and
    to zero on March 13, 2010;
    deleted the requirement to maintain minimum senior unsecured
    debt ratings;
    deleted financial maintenance covenants relating to portfolio
    charged off ratios;
    replaced the existing minimum interest coverage ratio test with
    an interest coverage test that is calculated prior to giving
    effect to our provision for loan losses;
    added certain provisions relating to issuance of the 2014 Senior
    Secured Notes, including, among other things,
    (1) provisions permitting the sharing of collateral with
    such indebtedness, (2) limitations on our ability to make
    payments in respect of the 2014 Senior Secured Notes (other than
    scheduled interest payments and certain prepayments), (3) a
    cross-default provision to the 2014 Senior Secured Notes and
    (4) a provision that incorporates more restrictive terms of
    the 2014 Senior Secured Notes into the terms of the
    facility; and
    provided for certain reductions of the
    sub-facilities
    relating to swing-line borrowings, letters of credit and foreign
    currency associated with reductions in the aggregate credit
    facility amount. 34




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Term
    Debt
  2007-A
           35




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Convertible
    Debt
      Retrospective
    Application of Accounting Pronouncements
  September 30, 2009


December 31, 2008($ in thousands)Convertible debt principal

$
580,000


$
760,120Less:Debt discount


21,299



30,646Net carrying value

$
558,701


$
729,474Equity components recorded in additional paid-in capital

$
101,220


$
101,220     Conversion Price

Number of Shares3.5% Senior Convertible Debentures due 2034

$
21.01



401,9994.0% Senior Subordinated Convertible Debentures due 2034


21.01



15,304,8137.25% Senior Subordinated Convertible Debentures due 2037


27.09



9,226,975  36




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008($ in thousands)Interest expense recognized on:Contractual interest coupon

$
7,821


$
8,690


$
23,964


$
26,071Amortization of deferred financing fees


299



560



1,109



1,651Amortization of debt discount


2,595



4,626



9,439



13,640Total interest expense recognized

$
10,715


$
13,876


$
34,512


$
41,362Effective interest rate on the liability component:3.5% Senior Convertible Debentures due 2034


7.25
%


7.25
%


7.25
%


7.25
%4.0% Senior Subordinated Convertible Debentures due 2034


7.68
%


7.68
%


7.68
%


7.68
%7.25% Senior Subordinated Convertible Debentures due 2037


7.79
%


7.79
%


7.79
%


7.79
%   Retrospective Application of Accounting
    Pronouncements
  FHLB
    SF Borrowings and FRB Credit Program
      Notes
    Payable
   37




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Debt
    Covenants
  and/or
  12-month Credit Facilities
      Note 12.
    Shareholders
    Equity  Common
    Stock Shares Outstanding
    Outstanding as of December 31, 2008


282,804,211Issuance of common stock


40,036,259Repurchase of common stock


(639,400
)Restricted stock and other stock grants, net


898,930Outstanding as of September 30, 2009


323,100,000   Dividend
    Reinvestment and Stock Purchase Plan
   38




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Share
    Repurchase Plan
    Equity
    Offerings
      Note 13.
    Income
    Taxes     39




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
             40




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 14.
    Comprehensive
    (Loss) Income    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008($ in thousands)Net (loss) income

$
(274,236
)

$
13,601


$
(625,125
)

$
82,453Unrealized gains (losses) on
    available-for-sale
    securities, net of tax


6,911



(9,501
)


522



(14,522
)Unrealized gains (losses) on foreign currency translation, net
    of tax


7,836



(12,328
)


16,754



(2,198
)Loss on cash flow hedges, net of tax


(22
)


(22
)


(64
)


(799
)Comprehensive (loss) income


(259,511
)


(8,250
)


(607,913
)


64,934Comprehensive income (loss) attributable to noncontrolling
    interests


10



(100
)


(28
)


1,480Comprehensive (loss) income attributable to CapitalSource
    Inc.

$
(259,521
)

$
(8,150
)

$
(607,885
)

$
63,454     September 30,


December 31,2009


2008($ in thousands)Unrealized gain on
    available-for-sale
    securities, net of tax

$
7,990


$
7,468Unrealized gain on foreign currency translation, net of tax


18,211



1,457Unrealized gain on cash flow hedge, net of tax


106



170Effect of adoption of amended investment guidance


(397
)


Accumulated other comprehensive income, net

$
25,910


$
9,095  41




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Note 15.
    Net
    (Loss) Income Per Share Attributable to CapitalSource
    Inc.    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008($ in thousands, except for share and per share data)Basic net (loss) income per share attributable to
    CapitalSource Inc.:Net (loss) income attributable to CapitalSource Inc.

$
(274,246
)

$
13,701


$
(625,097
)

$
80,973Average shares  basic


315,604,434



272,005,048



301,823,130



242,495,601Basic net (loss) income per share attributable to CapitalSource
    Inc.

$
(0.87
)

$
0.05


$
(2.07
)

$
0.33Diluted net (loss) income per share attributable to
    CapitalSource Inc.:Net (loss) income attributable to CapitalSource Inc.

$
(274,246
)

$
13,701


$
(625,097
)

$
80,973Average shares  basic


315,604,434



272,005,048



301,823,130



242,495,601Effect of dilutive securities:Option shares






53,964







73,245Unvested restricted stock






362,763







918,736Stock units






163,704







127,266Average shares  diluted


315,604,434



272,585,479



301,823,130



243,614,848Diluted net (loss) income per share attributable to
    CapitalSource Inc.

$
(0.87
)

$
0.05


$
(2.07
)

$
0.33     Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008Stock units


2,570,429







2,420,071



Stock options


5,911,081



8,785,232



5,527,284



8,699,727Non-managing member units






499,226







1,070,871Shares subject to a written call option






7,401,420



3,137,696



7,401,420Unvested restricted stock


1,562,336







2,161,833



    42




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.5% Senior Convertible Debentures due 2034

$
21.541.25% Senior Convertible Debentures due 2034


20.604.0% Senior Subordinated Convertible Debentures due 2034


21.541.625% Senior Subordinated Convertible Debentures due 2034


20.607.25% Senior Subordinated Convertible Debentures due 2037


27.09   Note 16.
    Bank
    Regulatory Capital      September 30, 2009


December 31, 2008Actual


Minimum Required


Actual


Minimum RequiredAmount


Ratio


Amount


Ratio


Amount


Ratio


Amount


Ratio($ in thousands)Tier-1 Leverage

$
681,985



12.52
%

$
272,361



5.00
%

$
794,622



13.38
%

$
296,876



5.00
%Tier-1 Risk-Based Capital


681,985



15.47



264,432



6.00



794,622



16.30



292,489



6.00Total Risk-Based Capital


737,998



16.75



661,081



15.00



850,318



17.44



731,222



15.00     Note 17.
    Commitments
    and Contingencies    Commitments and Contingencies Form 10-K.
 43




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Note 18.
    Derivative
    Instruments           44




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Investments,
      Asset Derivatives


Liability DerivativesLocation


Fair Value


Location


Fair Value($ in thousands)Interest rate contracts


Other assets


$
21,406



Other liabilities


$
(93,756
)Foreign exchange contracts


Other assets







Other liabilities



(4,947
)Total





$
21,406






$
(98,703
)     Gain (Loss) Recognized in IncomeThree Months Ended


Nine Months EndedLocation

September 30, 2009


September 30, 2009($ in thousands)Interest rate contracts

(Loss) gain on derivatives

$
(6,010
)

$
(5,605
)Interest rate contracts

(Loss) gain on residential mortgage investment portfolio






862Foreign exchange contracts

(Loss) gain on derivatives


(4,288
)


(6,712
)Total



$
(10,298
)

$
(11,455
)   Note 19.
    Fair
    Value Measurements  available-for-sale,
 45




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  held-to-maturity,
  Fair
    Value Determination
      Assets
    and Liabilities
  Investment
    Securities,
    Available-for-Sale
  available-for-sale, available-for-sale
  available-for-sale,
  available-for-sale,
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity other-than-temporary
 46




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Loans
    Held for Sale
    Loans
    Held for Investment
    Direct
    Real Estate Investments, net
  Direct Real Estate
    Investments.
  Other
    Investments
  other-than-temporarily
 47




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Warrants
    Derivative
    Assets and Liabilities
  over-the-counter
  Real
    Estate Owned
    Assets
    and Liabilities Carried at Fair Value on a Recurring
    Basis
    Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement as of


Active Markets for


Observable


UnobservableSeptember 30, 2009


Identical Assets (Level 1)


Inputs (Level 2)


Inputs (Level 3)($ in thousands)AssetsInvestment securities,
    available-for-sale

$
710,312


$



$
701,163


$
9,149Investments carried at fair value:Warrants


1,498











1,498Other assets held at fair value:Derivative assets


21,406







21,406



Total assets

$
733,216


$



$
722,569


$
10,647LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
98,703


$



$
98,703


$
  48




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair Value


Quoted Prices in


Significant Other


SignificantMeasurement as of


Active Markets for


Observable


UnobservableDecember 31, 2008


Identical Assets (Level 1)


Inputs (Level 2)


Inputs (Level 3)($ in thousands)AssetsInvestment securities,
    available-for-sale

$
679,551


$



$
642,927


$
36,624Mortgage-backed securities pledged, trading


1,489,291







1,489,291



Investments carried at fair value:Warrants


4,661











4,661Other assets held at fair value:Derivative assets


206,979







206,979



Total assets

$
2,380,482


$



$
2,339,197


$
41,285LiabilitiesOther liabilities held at fair value:Derivative liabilities

$
342,784


$



$
342,784


$
     Realized and Unrealized(Losses) GainsTotalRealized


Purchases,








UnrealizedIncluded in


and


Sales,








LossesBalance as of





Other


Unrealized


Issuances, and


Transfers


Balance as of


As ofJuly 1,


Included in


Comprehensive


Gains


Settlements,


In (Out)


September 30,


September 30,2009


Income


Income, net


(Losses)


Net


of Level 3


2009


2009($ in thousands)AssetsInvestment securities,
    available-for-sale

$
13,417


$
(128
)

$
2,083


$
1,955


$
(6,223
)

$



$
9,149


$
(298
)Warrants


5,068



(2
)






(2
)


(3,568
)






1,498



(166
)Total assets

$
18,485


$
(130
)

$
2,083


$
1,953


$
(9,791
)

$



$
10,647


$
(464
)     Realized and UnrealizedLossesTotal


Purchases,








UnrealizedIncluded in


Realized


Sales,





Balance as


LossesBalance as of





Other


and


Issuances, and


Transfers


of


As ofJuly 1,


Included in


Comprehensive


Unrealized


Settlements,


In (Out)


September 30,


September 30,2008


Income


Income, net


Losses


Net


of Level 3


2008


2008($ in thousands)AssetsInvestment securities,
    available-for-sale

$
50,794


$
(2,074
)

$
(15,883
)

$
(17,957
)

$



$



$
32,838


$
(17,957
)Warrants


7,900



(772
)






(772
)


(1,198
)






5,930



(1,521
)Total assets

$
58,694


$
(2,846
)

$
(15,883
)

$
(18,729
)

$
(1,198
)

$



$
38,768


$
(19,478
)  49




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Loss onInterest

Loss on

Residential MortgageIncome

Investments, net

Investment Portfolio($ in thousands)Total gains (losses) included in earnings for the period

$
116


$
(242
)

$
(4
)Unrealized gains (losses) relating to assets still held at
    reporting date


102



(562
)


(4
)     Loss onInterest

Loss on

Residential MortgageIncome

Investments, net

Investment Portfolio($ in thousands)Total losses included in earnings for the period

$
(114
)

$
(1,294
)

$
(1,438
)Unrealized losses relating to assets still held at reporting date


(114
)


(2,043
)


(1,438
)     Realized and Unrealized(Losses) GainsTotal


Purchases,Realized


Sales,








UnrealizedIncluded in


and


Issuances,








LossesBalance as of





Other


Unrealized


and


Transfers


Balance as of


As ofJanuary 1,


Included in


Comprehensive


(Losses)


Settlements,


In (Out)


September 30,


September 30,2009


Income


Income, net


Gains


Net


of Level 3


2009


2009($ in thousands)AssetsInvestment securities,
    available-for-sale

$
36,624


$
(12,334
)

$
782


$
(11,552
)

$
(15,923
)

$



$
9,149


$
(1,147
)Warrants


4,661



85







85



(3,248
)






1,498



(79
)Total assets

$
41,285


$
(12,249
)

$
782


$
(11,467
)

$
(19,171
)

$



$
10,647


$
(1,226
)     Realized and UnrealizedLossesTotal


Purchases,








UnrealizedIncluded in


Realized


Sales,








LossesBalance as of





Other


and


Issuances and


Transfers


Balance as of


As ofJanuary 1,


Included in


Comprehensive


Unrealized


Settlements,


In (Out)


September 30,


September 30,2008


Income


Income, net


Losses


Net


of Level 3


2008


2008($ in thousands)AssetsInvestment securities,
    available-for-sale

$
12,837


$
(4,793
)

$
(24,106
)

$
(28,899
)

$
48,900


$



$
32,838


$
(28,899
)Warrants


8,994



(569
)


(18
)


(587
)


(2,477
)






5,930



(927
)Total assets

$
21,831


$
(5,362
)

$
(24,124
)

$
(29,486
)

$
46,423


$



$
38,768


$
(29,826
)  50




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Loss onInterest


Loss on


Residential MortgageIncome


Investments, net


Investment Portfolio($ in thousands)Total gains (losses) included in earnings for the period

$
703


$
(12,948
)

$
(4
)Unrealized gains (losses) relating to assets still held at
    reporting date


689



(1,911
)


(4
)     Loss onInterest


Loss on


Residential MortgageIncome


Investments, net


Investment Portfolio($ in thousands)Total gains (losses) included in earnings for the period

$
96


$
(1,398
)

$
(4,061
)Unrealized gains (losses) relating to assets still held at
    reporting date


96



(1,756
)


(4,061
)   Assets
    Carried at Fair Value on a Nonrecurring Basis
    Total LossesQuoted Prices in








Three Months


Nine MonthsFair Value


Active Markets


Significant Other


Significant


Ended


EndedMeasurement as of


for Identical


Observable Inputs


Unobservable


September 30,


September 30,September 30, 2009


Assets (Level 1)


(Level 2)


Inputs (Level 3)


2009


2009($ in thousands)AssetsLoans held for sale

$
32,743


$



$
32,743


$



$



$
(21
)Loans held for investment(1)


345,288











345,288



(40,525
)


(167,226
)Investments carried at cost


11,199











11,199



(6,743
)


(10,749
)Investments accounted for under the equity method


555











555



(2,048
)


(2,802
)Direct real estate investments, net


1,650







1,650







(3,737
)


(3,737
)REO(2)


58,057







1,225



56,832



(2,971
)


(7,777
)Total assets

$
449,492


$



$
35,618


$
413,874


$
(56,024
)

$
(192,312
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the collateral less transaction costs. Transaction
    costs were not significant during the period.(2)
    
    Represents REO measured at fair value of the collateral less
    transaction costs. Transaction costs were not significant during
    the period. 51




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Quoted Prices in








Total LossesFair Value


Active Markets


Significant Other


Significant


Three Months


Nine MonthsMeasurement as of


for Identical


Observable Inputs


Unobservable


Ended


EndedSeptember 30, 2008


Assets (Level 1)


(Level 2)


Inputs (Level 3)


September 30, 2008


September 30, 2008($ in thousands)AssetsLoans held for sale

$
29,055


$



$
15,392


$
13,663


$
(1,087
)

$
(1,087
)Loans held for investment(1)


383,762











383,762



(74,954
)


(89,988
)Investments carried at cost


18,523











18,523



(33,377
)


(33,790
)Investments accounted for under the equity method


6,675











6,675



(2,598
)


(2,812
)Total assets

$
438,015


$



$
15,392


$
422,623


$
(112,016
)

$
(127,677
)     (1)
    
    Represents impaired loans held for investment measured at fair
    value of the loans collateral less transaction costs.
    Transaction costs were not significant during the period.  Fair
    Value of Financial Instruments
  Fair
    Value Measurements, Form 10-K.
    52




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  September 30, 2009


December 31, 2008Carrying Value


Fair Value


Carrying Value


Fair Value($ in thousands)Assets:Mortgage-related receivables, net

$
1,529,795


$
1,134,744


$
1,801,535


$
1,005,639Commercial real estate A Participation Interest, net


714,238



696,390



1,396,611



1,266,921Loans held for investment, net


7,919,902



8,085,626



8,798,590



7,902,886Investments carried at cost


53,896



81,270



61,279



81,237Investment securities,
    held-to-maturity


250,222



264,136



14,389



14,389Liabilities:Deposits

$
4,390,486


$
4,393,166


$
5,043,695


$
5,066,874Credit facilities


826,611



736,848



1,445,062



1,343,512Owner Trust term debt


1,524,859



1,135,166



1,724,914



997,611Other term debt


3,208,414



2,171,153



3,613,542



2,135,646Convertible debt


558,701



491,653



729,474



455,368Subordinated debt


440,524



255,504



438,799



219,400Mortgage debt


324,767



280,334



330,311



275,995Loan commitments and letters of credit






39,608







45,488   Note 20.
    Segment
    Data      53




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended September 30, 2009OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
78,785


$
140,969


$
107


$
(6,053
)

$
213,808Operating lease income










27,247







27,247Interest expense(2)


23,602



78,729



7,066



(4,051
)


105,346Provision for loan losses


48,451



172,934











221,385Operating expenses(3)


25,365



48,636



11,293



(11,953
)


73,341Other income (expense), net


7,409



(7,987
)


(4,833
)


(11,615
)


(17,026
)Net (loss) income before income taxes


(11,224
)


(167,317
)


4,162



(1,664
)


(176,043
)Income tax expense


3,925



93,807



461







98,193Net (loss) income


(15,149
)


(261,124
)


3,701



(1,664
)


(274,236
)Net income attributable to noncontrolling interests






10











10Net (loss) income attributable to CapitalSource Inc.

$
(15,149
)

$
(261,134
)

$
3,701


$
(1,664
)

$
(274,246
)Total assets as of September 30, 2009

$
5,529,035


$
7,983,356


$
1,025,996


$
(298,546
)

$
14,239,841Total assets as of December 31, 2008

$
6,137,197


$
11,526,255


$
1,059,031


$
(302,851
)

$
18,419,632   Three Months Ended September 30, 2008OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
66,552


$
240,365


$
336


$
(3,267
)

$
303,986Operating lease income










28,140







28,140Interest expense(2)


32,178



135,504



10,824



(3,656
)


174,850Provision for loan losses


3,535



106,726











110,261Operating expenses(3)


19,106



41,251



11,555



(10,393
)


61,519Other income


4,573



42,829



107



(19,346
)


28,163Net income before income taxes


16,306



(287
)


6,204



(8,564
)


13,659Income tax expense (benefit)


6,576



(6,518
)










58Net income


9,730



6,231



6,204



(8,564
)


13,601Net (loss) income attributable to noncontrolling interests






(154
)


54







(100
)Net income attributable to CapitalSource Inc.

$
9,730


$
6,385


$
6,150


$
(8,564
)

$
13,701   54




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Nine Months Ended September 30, 2009OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
229,005


$
473,117


$
289


$
(13,139
)

$
689,272Operating lease income










82,533







82,533Interest expense(2)


92,566



245,207



18,347



(8,874
)


347,246Provision for loan losses


163,912



416,587











580,499Operating expenses(3)


75,307



155,353



34,556



(35,836
)


229,380Other income (expense), net


25,334



(91,029
)


(2,463
)


(35,700
)


(103,858
)Net (loss) income before income taxes


(77,446
)


(435,059
)


27,456



(4,129
)


(489,178
)Income tax expense


8,641



125,486



1,820







135,947Net (loss) income


(86,087
)


(560,545
)


25,636



(4,129
)


(625,125
)Net loss attributable to noncontrolling interests






(28
)










(28
)Net (loss) income attributable to CapitalSource Inc.

$
(86,087
)

$
(560,517
)

$
25,636


$
(4,129
)

$
(625,097
)   Nine Months Ended September 30, 2008OtherCapitalSource


Commercial


Healthcare


Intercompany


ConsolidatedBank(1)


Finance


Net Lease


Eliminations


Total($ in thousands)Total interest and fee income

$
66,552


$
883,408


$
1,183


$
(9,702
)

$
941,441Operating lease income










80,040







80,040Interest expense(2)


32,178



468,871



32,479



(10,091
)


523,437Provision for loan losses


3,535



144,059











147,594Operating expenses(3)


19,106



156,849



34,108



(10,393
)


199,670Other income (expense)


4,573



(11,868
)


(1,309
)


(19,346
)


(27,950
)Net income before income taxes


16,306



101,761



13,327



(8,564
)


122,830Income tax expense


6,576



33,801











40,377Net income


9,730



67,960



13,327



(8,564
)


82,453Net (loss) income attributable to noncontrolling interests






(640
)


2,120







1,480Net income attributable to CapitalSource Inc.

$
9,730


$
68,600


$
11,207


$
(8,564
)

$
80,973     (1)
    
    CapitalSource Bank segment reflects activities of CapitalSource
    Bank, which commenced operations on July 25, 2008.(2)
    
    Interest expense in our Healthcare Net Lease segment includes
    interest on a secured credit facility, term debt, and mortgage
    debt.(3)
    
    Operating expenses of our Healthcare Net Lease segment include
    depreciation of direct real estate investments, professional
    fees, an allocation of overhead expenses (including compensation
    and benefits) and other direct expenses. 55




---



##### 



CapitalSource
    Inc.
  NOTES TO
    THE UNAUDITED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Summary of Significant Accounting Policies
  Intercompany
    Eliminations
   56




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  CAUTIONARY
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
  Form 10-Q, Form 10-Q Form 10-K (Form 10-K), Form 10-Q
    Form 10-Q Form 10-K.
 57




---



##### 



Overview
    and Highlights
      Segment
    Data
      triple-net
   58




---



##### 



Consolidated
    Results of Operations
  Explanation
    of Reporting Metrics
  Interest Income.
  Fee Income.
  Operating Lease Income.
  Interest Expense.
  Provision for Loan Losses.
  Other (Expense) Income. other-than-temporary
  Operating Expenses.
 59




---



##### 



Income Taxes.
      Operating
    Results for the Three and Nine Months Ended September 30,
    2009
    
    Increased provision for loan losses;
    Increased income tax expense due to additions to the valuation
    allowance for our deferred tax assets;
    Decreased balance of our commercial lending portfolio;
    Gains and losses on our residential mortgage investment
    portfolio;
    Gains and losses on extinguishment of our debt;
    Losses on derivatives and other investments in our Other
    Commercial Finance segment; and
    Changes in lending and borrowing spreads. 60




---



##### 



Three Months Ended








Nine Months EndedSeptember 30,








September 30,2009


2008


$ Change


% Change


2009


2008


$ Change


% Change($ in thousands)Interest income

$
188,527


$
274,012


$
(85,485
)


(31
)%

$
607,689


$
836,559


$
(228,870
)


(27
)%Fee income


25,281



29,974



(4,693
)


(16
)


81,583



104,882



(23,299
)


(22
)Operating lease income


27,247



28,140



(893
)


(3
)


82,533



80,040



2,493



3Interest expense


105,346



174,850



(69,504
)


(40
)


347,246



523,437



(176,191
)


(34
)Provision for loan losses


221,385



110,261



111,124



101



580,499



147,594



432,905



293Depreciation of direct real estate investments


8,713



8,898



(185
)


(2
)


26,515



26,804



(289
)


(1
)Operating expenses


64,628



52,621



12,007



23



202,865



172,866



29,999



17Other (expense) income


(17,026
)


28,163



(45,189
)


(160
)


(103,858
)


(27,950
)


(75,908
)


(272
)Income tax expense


98,193



58



98,135



169,198



135,947



40,377



95,570



237Net (loss) income


(274,236
)


13,601



(287,837
)


(2,116
)


(625,125
)


82,453



(707,578
)


(858
)Net income (loss) attributable to noncontrolling interests


10



(100
)


110



110



(28
)


1,480



(1,508
)


(102
)Net (loss) income attributable to CapitalSource Inc.


(274,246
)


13,701



(287,947
)


(2,102
)


(625,097
)


80,973



(706,070
)


(872
)     Nine Months Ended September 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


Cost($ in thousands)Interest earning assets:Interest income





$
607,689



5.98
%





$
836,559



7.19
%Fee income






81,583



0.80







104,882



0.90Total interest earning assets(1)

$
13,587,085



689,272



6.78


$
15,508,148



941,441



8.09Total direct real estate investments


1,060,649



82,533



10.40



1,068,530



80,040



9.98Total income earning assets


14,647,734



771,805



7.04



16,576,678



1,021,481



8.21Total interest bearing liabilities(2)


12,595,298



347,246



3.69



13,903,078



523,437



5.02Net finance spread





$
424,559



3.35
%





$
498,044



3.19
%Net finance margin










3.88
%










4.00
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, investment securities (including
    mortgage-backed securities), mortgage-related receivables, loans
    and the A Participation Interest.(2)
    
    Interest bearing liabilities include deposits, FHLB SF
    borrowings, repurchase agreements, secured and unsecured credit
    facilities, term debt, convertible debt and subordinated debt.  Operating
    Expenses
   61




---



##### 



Income
    Taxes
      Comparison
    of the Three Months Ended September 30, 2009 and
    2008
    CapitalSource
    Bank Segment
    Three Months Ended September 30,2009


2008(1)


$ Change


% Change($ in thousands)Interest income

$
71,673


$
64,887


$
6,786



10
%Fee income


7,112



1,665



5,447



327Interest expense


23,602



32,178



(8,576
)


(27
)Provision for loan losses


48,451



3,535



44,916



1,271Operating expenses


25,365



19,106



6,259



33Other income


7,409



4,573



2,836



62Income tax expense


3,925



6,576



(2,651
)


(40
)Net (loss) income


(15,149
)


9,730



(24,879
)


(256
)     (1)
    
    CapitalSource Bank commenced operations on July 25, 2008.
    The operating results for the three months ended
    September 30, 2008, represent 68 days of operations. 62




---



##### 



Interest
    Income
    available-for-sale held-to-maturity available-for-sale held-to-maturity, available-for-sale
  Fee
    Income
    Interest
    Expense
   63




---



##### 



Net
    Finance Margin
    Three Months Ended September 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance(1)


Income(1)


Cost($ in thousands)Interest earning assets:Interest income





$
71,673



5.25
%





$
64,887



5.82
%Fee income






7,112



0.52







1,665



0.15Total interest earning assets(2)

$
5,414,942



78,785



5.77


$
4,423,854



66,552



5.97Total interest bearing liabilities(3)


4,659,811



23,602



2.01



3,774,541



32,178



3.38Net finance spread





$
55,183



3.76
%





$
34,374



2.59
%Net finance margin










4.04
%










3.08
%    (1)
    
    CapitalSource Bank commenced operations on July 25, 2008.
    Weighted average balance and net investment income reflect
    68 days of activity.(2)
    
    Interest earning assets include cash and cash equivalents,
    investments, A Participation Interest and loans.(3)
    
    Interest bearing liabilities include deposits and borrowings.  Provision
    for Loan Losses
  Credit Quality and
    Allowance for Loan Losses
  Operating
    Expenses
      Other
    Income
   64




---



##### 



Other
    Commercial Finance Segment
    Three Months Ended September 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
120,798


$
212,666


$
(91,868
)


(43
)%Fee income


20,171



27,699



(7,528
)


(27
)Interest expense


78,729



135,504



(56,775
)


(42
)Provision for loan losses


172,934



106,726



66,208



62Operating expenses


48,636



41,251



7,385



18Other (expense) income


(7,987
)


42,829



(50,816
)


(119
)Income tax expense (benefit)


93,807



(6,518
)


100,325



1,539Net (loss) income


(261,124
)


6,231



(267,355
)


(4,291
)Net loss attributable to noncontrolling interests


10



(154
)


164



106Net (loss) income attributable to CapitalSource Inc.


(261,134
)


6,385



(267,519
)


(4,190
)   Interest
    Income
    Fee
    Income
    Interest
    Expense
   65




---



##### 



Net
    Finance Margin
      Three Months Ended September 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


Cost($ in thousands)Interest earning assets:Interest income





$
120,798



6.60
%





$
212,666



7.21
%Fee income






20,171



1.10







27,699



0.94Total interest earning assets(1)

$
7,264,436



140,969



7.70


$
11,705,776



240,365



8.15Total interest bearing liabilities(2)


6,841,000



78,729



4.57



10,226,049



135,504



5.26Net finance spread





$
62,240



3.13
%





$
104,861



2.89
%Net finance margin










3.40
%










3.55
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, mortgage-related receivables, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.  Provision
    for Loan Losses
  Credit Quality and
    Allowance for Loan Losses
  Operating
    Expenses
   66




---



##### 



Other
    (Expense) Income
        Healthcare
    Net Lease Segment
    Three Months EndedSeptember 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
107


$
115


$
(8
)


(7
)%Fee income






221



(221
)


(100
)Operating lease income


27,247



28,140



(893
)


(3
)Interest expense


7,066



10,824



(3,758
)


(35
)Depreciation of direct real estate investments


8,713



8,898



(185
)


(2
)Operating expenses


2,580



2,657



(77
)


(3
)Other (expense) income


(4,833
)


107



(4,940
)


(4,617
)Income tax expense


461







461



N/ANet income


3,701



6,204



(2,503
)


(40
)Net income attributable to noncontrolling interests






54



(54
)


(100
)Net income attributable to CapitalSource Inc.


3,701



6,150



(2,449
)


(40
)   Operating
    Lease Income
    Interest
    Expense
   67




---



##### 



Depreciation
    of Direct Real Estate Investments
    Operating
    Expenses
    Net
    Income Attributable to Noncontrolling Interests
    Comparison
    of the Nine Months Ended September 30, 2009 and
    2008
    CapitalSource
    Bank Segment
    Nine Months EndedSeptember 30,2009


2008(1)


$ Change


% Change($ in thousands)Interest income

$
211,284


$
64,887


$
146,397



226
%Fee income


17,721



1,665



16,056



964Interest expense


92,566



32,178



60,388



188Provision for loan losses


163,912



3,535



160,377



4,537Operating expenses


75,307



19,106



56,201



294Other income


25,334



4,573



20,761



454Income tax expense


8,641



6,576



2,065



31Net (loss) income


(86,087
)


9,730



(95,817
)


(985
)     (1)
    
    CapitalSource Bank commenced operations on July 25, 2008.
    The operating results for the nine months ended
    September 30, 2008, represent 68 days of operations.  Interest
    Income
   68




---



##### 



available-for-sale held-to-maturity available-for-sale held-to-maturity, available-for-sale
  Fee
    Income
    Interest
    Expense
   69




---



##### 



Net
    Finance Margin
    Nine Months Ended September 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance(1)


Income(1)


Cost($ in thousands)Interest earning assets:Interest income





$
211,284



5.01
%





$
64,887



5.82
%Fee income






17,721



0.42







1,665



0.15Total interest earning assets(2)

$
5,636,690



229,005



5.43


$
1,485,382



66,552



5.97Total interest bearing liabilities(3)


4,779,343



92,566



2.59



1,267,364



32,178



3.38Net finance spread





$
136,439



2.84
%





$
34,374



2.59
%Net finance margin










3.24
%










3.08
%     (1)
    
    CapitalSource Bank commenced operations on July 25, 2008.
    Weighted average balance and net investment income reflect
    68 days of activity.(2)
    
    Interest earning assets include cash and cash equivalents,
    investments, A Participation Interest and loans.(3)
    
    Interest bearing liabilities include deposits and borrowings.  Provision
    for Loan Losses
  Credit Quality and
    Allowance for Loan Losses
  Operating
    Expenses
      Other
    Income
   70




---



##### 



Other
    Commercial Finance Segment
    Nine Months EndedSeptember 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
404,990


$
780,819


$
(375,829
)


(48
)%Fee income


68,127



102,589



(34,462
)


(34
)Interest expense


245,207



468,871



(223,664
)


(48
)Provision for loan losses


416,587



144,059



272,528



189Operating expenses


155,353



156,849



(1,496
)


(1
)Other expense


(91,029
)


(11,868
)


(79,161
)


(667
)Income tax expense


125,486



33,801



91,685



271Net (loss) income


(560,545
)


67,960



(628,505
)


(925
)Net loss attributable to noncontrolling interests


(28
)


(640
)


612



(96
)Net (loss) income attributable to CapitalSource Inc.


(560,517
)


68,600



(629,117
)


(917
)   Interest
    Income
    Fee
    Income
    Interest
    Expense
   71




---



##### 



Net
    Finance Margin
      Nine Months Ended September 30,2009


2008Weighted


Net


Average


Weighted


Net


AverageAverage


Investment


Yield/


Average


Investment


Yield/Balance


Income


Cost


Balance


Income


Cost($ in thousands)Interest earning assets:Interest income





$
404,990



6.83
%





$
780,819



7.43
%Fee income






68,127



1.14







102,589



0.98Total interest earning assets(1)

$
7,933,583



473,117



7.97


$
13,996,134



883,408



8.41Total interest bearing liabilities(2)


7,488,183



245,207



4.38



12,275,617



468,871



5.09Net finance spread





$
227,910



3.59
%





$
414,537



3.32
%Net finance margin










3.84
%










3.95
%     (1)
    
    Interest earning assets include cash and cash equivalents,
    restricted cash, mortgage-related receivables, loans and
    investments in debt securities.(2)
    
    Interest bearing liabilities include repurchase agreements,
    secured and unsecured credit facilities, term debt, convertible
    debt and subordinated debt.  Provision
    for Loan Losses
  Credit Quality and
    Allowance for Loan Losses
  Operating
    Expenses
    Other
    Expense
   72




---



##### 



Healthcare
    Net Lease Segment
    Nine Months EndedSeptember 30,2009


2008


$ Change


% Change($ in thousands)Interest income

$
289


$
944


$
(655
)


(69
)%Fee income






239



(239
)


(100
)Operating lease income


82,533



80,040



2,493



3Interest expense


18,347



32,479



(14,132
)


(44
)Depreciation of direct real estate investments


26,515



26,804



(289
)


(1
)Other operating expenses


8,041



7,304



737



10Other expense


(2,463
)


(1,309
)


(1,154
)


(88
)Income tax expense


1,820







1,820



N/ANet income


25,636



13,327



12,309



92Net income attributable to noncontrolling interests






2,120



(2,120
)


(100
)Net income attributable to CapitalSource Inc.


25,636



11,207



14,429



129   Operating
    Lease Income
    Interest
    Expense
   73




---



##### 



Depreciation
    of Direct Real Estate Investments
    Other
    Operating Expenses
    Net
    Income Attributable to Noncontrolling Interests
    Financial
    Condition
  CapitalSource
    Bank Segment
  Portfolio
    Composition
    September 30,


December 31,2009


2008($ in thousands)Assets:Investment securities,
    available-for-sale

$
700,971


$
642,714Investment securities,
    held-to-maturity


250,222



14,389Commercial real estate A Participation Interest,
    net(1)


715,354



1,400,333Loans(1)(2)


3,007,685



2,713,377FHLB SF stock


20,195



20,195Total

$
4,694,427


$
4,791,008Liabilities:Deposits

$
4,390,486


$
5,043,695FHLB SF borrowings


200,000



Total

$
4,590,486


$
5,043,695     (1)
    
    Includes related interest receivable.(2)
    
    Includes loans held for investment and loans held for sale, net
    of deferred fees and allowance for loan losses.  Investment
    Securities,
    Available-for-Sale
  available-for-sale. available-for-sale, available-for-sale,
 74




---



##### 



available-for-sale, Investments
  Investment
    Securities,
    Held-to-Maturity
  held-to-maturity, held-to-maturity, Investments
  Commercial
    Real Estate A Participation Interest
  Commercial Lending Assets and Credit
    Quality
  CapitalSource
    Bank Segment Loan Portfolio Composition
      September 30, 2009


December 31, 2008($ in thousands)Commercial

$
2,020,616



67
%

$
1,813,414



67
%Real estate


779,620



26



595,751



22Real estate  construction


207,449



7



304,212



11Total

$
3,007,685



100
%

$
2,713,377



100
%     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Commercial

$
311,458


$
1,528,682


$
180,476


$
2,020,616Real estate


192,954



574,566



12,100



779,620Real estate  construction


207,449











207,449Total

$
711,861


$
2,103,248


$
192,576


$
3,007,685    75




---



##### 



Loan TypeReal EstateCommercial


Real Estate


Construction


Total($ in thousands)1-Month LIBOR

$
461,926


$
703,446


$
207,449


$
1,372,821



45
%3-Month LIBOR


134,405











134,405



4Prime


644,387



8,345







652,732



22Canadian Prime


20,532











20,532



1Blended


757,389



46,368







803,757



27Total adjustable rate loans


2,018,639



758,159



207,449



2,984,247



99Fixed rate loans


1,977



21,461







23,438



1Total loans

$
2,020,616


$
779,620


$
207,449


$
3,007,685



100
%   Credit
    Quality and Allowance for Loan Losses
    September 30,

December 31,2009

2008($ in thousands)Loans
    30-89 days
    contractually delinquent

$
37,612


$
Loans 90 or more days contractually delinquent


13,288



Non-accrual loans(1)


184,010



Impaired loans(2)


192,482



     (1)
    
    Includes loans with aggregate principal balances of
    $13.3 million as of September 30, 2009, which were
    also classified as loans 90 or more days contractually
    delinquent and loans with aggregate principal balances of
    $19.4 million as of September 30, 2009, which were
    classified as
    30-89 days
    contractually delinquent. Includes non-performing loans
    classified as held for sale that have an aggregate principal
    balance of $9.8 million as of September 30, 2009.
    There were no non-accrual loans as of December 31, 2008.(2)
    
    Includes loans with aggregate principal balances of
    $5.3 million as of September 30, 2009, which were also
    classified as loans 90 or more days contractually delinquent,
    loans with aggregate principal balances of $37.6 million as
    of September 30, 2009, which were classified as
    30-89 days
    contractually delinquent, and loans with aggregate principal
    balances of $174.3 million as of September 30, 2009,
    which were also classified as loans on non-accrual status. The
    net carrying values of impaired loans were $0.2 billion as
    of September 30, 2009, prior to the application of
    allocated reserves. There were no impaired loans as of
    December 31, 2008. 76




---



##### 



Three Months Ended


Nine Months EndedSeptember 30, 2009


September 30, 2009($ in thousands)Allowance for loan losses as of beginning of period

$
91,533


$
55,600Provision for loan losses:General


27,000



54,400Specific


21,451



109,512Total provision for loan losses


48,451



163,912Charge offs


(13,235
)


(92,763
)Allowance for loan losses as of end of period

$
126,749


$
126,749Total gross loans as of end of period

$
3,007,685


$
3,007,685Allowance for loan losses ratio


4.21
%


4.21
%Provision for loan losses ratio (annualized)


6.39
%


7.29
%Net charge off ratio (annualized)


1.75
%


4.12
%   and/or
          FHLB SF
    Stock
    Deposits
   77




---



##### 



September 30, 2009


December 31, 2008Weighted





WeightedAverage





AverageBalance


Rate


Balance


Rate($ in thousands)Money market

$
265,053



1.13
%

$
279,577



2.26
%Savings


544,693



1.23



471,014



2.89Certificates of deposit


3,580,740



2.00



4,259,153



3.55Brokered certificates of deposit










33,951



5.70Total deposits

$
4,390,486



1.85


$
5,043,695



3.42   September 30, 2009WeightedAverageBalance


Rate($ in thousands)Remaining maturity of certificates of deposit:0-3 months

$
1,100,009



2.48
%4-6 months


1,420,397



1.737-9 months


784,091



1.8510-12 months


146,929



1.47Longer than 12 months


129,314



2.42Total certificates of deposit

$
3,580,740



2.00   FHLB SF
    Borrowings
      WeightedAverageBalance


Rate($ in thousands)Less than 1 year

$
35,000



1.13
%1 to 2 years


74,000



1.552 to 3 years


63,000



2.003 to 4 years


8,000



2.334 to 5 years


20,000



2.86Total

$
200,000



1.78  78




---



##### 



Other
    Commercial Finance Segment
  Portfolio
    Composition
    September 30,


December 31,2009


2008($ in thousands)Investment securities,
    available-for-sale

$
9,341


$
36,837Loans(1)


5,714,352



6,781,496Mortgage-related receivables(2)


1,529,795



1,801,535Other investments


96,229



127,746Total

$
7,349,717


$
8,747,614     (1)
    
    Includes loans held for investment and loans held for sale, net
    of deferred fees and allowance for loan loss, and related
    interest receivable.(2)
    
    Represents secured receivables that are backed by
    adjustable-rate residential prime mortgage loans.  Other
    Commercial Finance Segment Loan Portfolio Composition
      September 30, 2009


December 31, 2008($ in thousands)Commercial

$
3,736,770



65
%

$
4,573,586



67
%Real estate


1,315,206



23



1,525,916



23Real estate  construction


662,376



12



681,994



10Total

$
5,714,352



100
%

$
6,781,496



100
%     Due in


Due inOne Year


One to


Due Afteror Less


Five Years


Five Years


Total($ in thousands)Commercial

$
876,593


$
2,514,094


$
346,083


$
3,736,770Real estate


318,448



882,478



114,280



1,315,206Real estate  construction


583,159



79,217







662,376Total

$
1,778,200


$
3,475,789


$
460,363


$
5,714,352  79




---



##### 



Loan TypeReal EstateCommercial


Real Estate


Construction


Total($ in thousands)1-Month LIBOR

$
439,536


$
950,364


$
556,158


$
1,946,058



34
%2-Month LIBOR


33,569











33,569



13-Month LIBOR


143,392











143,392



26-Month LIBOR


4,958











4,958



1-Month
    EURIBOR


51,132











51,132



1Prime


1,345,554



183,607



3,210



1,532,371



27Canadian Prime


13,406











13,406



Blended


1,543,251







42,602



1,585,853



28Total adjustable rate loans


3,574,798



1,133,971



601,970



5,310,739



93Fixed rate loans


161,972



181,235



60,406



403,613



7Total loans

$
3,736,770


$
1,315,206


$
662,376


$
5,714,352



100
%     Credit
    Quality and Allowance for Loan Losses
    September 30,

December 31,2009

2008($ in thousands)Loans
    30-89 days
    contractually delinquent

$
93,955


$
299,322Loans 90 or more days contractually delinquent


382,249



141,104Non-accrual loans(1)


809,533



439,547Impaired loans(2)


1,114,237



692,278     (1)
    
    Includes loans with aggregate principal balances of
    $346.3 million and $110.3 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were also classified as loans 90 or more
    days contractually delinquent and loans with aggregate principal
    balances of $84.6 million and $49.4 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were classified as
    30-89 days
    contractually delinquent. Includes non-performing loans
    classified as held for sale that have an aggregate principal
    balance of $15.3 million and $14.5 million as of
    September 30, 2009 and December 31, 2008, respectively.(2)
    
    Includes loans with aggregate principal balances of
    $360.8 million and $128.9 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were also classified as loans 90 or more
    days contractually delinquent, loans with aggregate principal
    balances of $94.0 million and $133.2 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were classified as
    30-89 days
    contractually delinquent, and loans with aggregate principal
    balances of $794.2 million and $423.4 million as of
    September 30, 2009 and December 31, 2008,
    respectively, which were also classified as loans on non-accrual
    status. The net carrying values of impaired loans were
    $1.1 billion and $683.1 million as of
    September 30, 2009 and December 31, 2008,
    respectively, prior to the application of allocated reserves. 80




---



##### 



Three Months Ended


Nine Months EndedSeptember 30,


September 30,2009


2008


2009


2008($ in thousands)Allowance for loan losses as of beginning of period

$
356,195


$
141,128


$
368,244


$
138,930Provision for loan losses:General


37,015



18,663



35,136



16,548Specific


118,884



83,084



315,451



115,636Total provision for loan losses


155,899



101,747



350,587



132,184Charge offs, net of recoveries


(121,438
)


(82,554
)


(328,175
)


(110,793
)Allowance for loan losses as of end of period

$
390,656


$
160,321


$
390,656


$
160,321Total gross loans as of end of period

$
5,714,352


$
6,994,028


$
5,714,352


$
6,994,028Allowance for loan losses ratio


6.84
%


2.29
%


6.84
%


2.29
%Provision for loan losses ratio (annualized)


10.82
%


5.77
%


8.20
%


2.52
%Net charge off ratio (annualized)


8.43
%


4.68
%


7.68
%


2.11
%   and/or
        Mortgage-related
    Receivables
  Mortgage-Related Receivables and Related Owner
    Trust Securitizations
 81




---



##### 



Other
    Investments
      Healthcare
    Net Lease Segment
  Direct
    Real Estate Investments
  triple-net triple-net
  Liquidity
    and Capital Resources
      Risk Factors Cautionary Note Regarding Forward Looking Statements Form 10-Q Form 10-K
  CapitalSource Bank Liquidity 
 82




---



##### 



available-for-sale.
  Parent Company Liquidity 
  2006-A
 83




---



##### 



Borrowings, Borrowings 
    Credit Facilities
    and/or
    Cash
    and Cash Equivalents and Restricted Cash
  Cash and Cash Equivalents and
    Restricted Cash
   84




---



##### 



Deposits
  Deposits,
  Borrowings
  Borrowings Form 10-K, Borrowings
    MaximumFacility


Amount


UnusedAmount


Outstanding


Capacity(1)(2)($ in thousands)Credit facilities

$
963,389


$
826,611


$
136,778Term debt


4,812,853



4,733,273



79,580Other borrowings


2,490,062



1,547,037



943,025Total

$
8,266,304


$
7,106,921


$
1,159,383     (1)
    
    Excludes issued and outstanding letters of credit totaling
    $58.5 million as of September 30, 2009.(2)
    
    Unused capacity is limited by the amount of letters of credit
    outstanding under credit facilities and the amount of eligible
    collateral that we have available to pledge in order to utilize
    such unused capacity. We have limited available collateral to
    pledge to use this unused capacity. However, such unused
    capacity may become available to us to the extent we have
    additional eligible collateral in the future. For additional
    information on our credit facilities, see Note 11,
    Borrowings,in our consolidated financial statements for
    the three and nine months ended September 30, 2009.    Repurchase
    Agreements
   85




---



##### 



Credit
    Facilities
    Committed


PrincipalCapacity


Outstanding($ in thousands)Credit Facilities:CS Funding III secured credit facility scheduled to mature
    May 29, 2012(1)

$
58,202


$
58,202CS Funding VII secured credit facility scheduled to mature
    April 17, 2012(2)


212,436



148,665CS Europe secured credit facility scheduled to mature
    May 28, 2010(1)(3)


142,751



142,751CS Inc. senior secured syndicated bank credit facility scheduled
    to mature March 31, 2012(4)


550,000



476,993Total credit facilities

$
963,389


$
826,611     (1)
    
    These credit facilities are in their amortization periods so
    that committed capacity equals principal outstanding. In the
    absence of a default, amounts due under these facilities are
    repaid from proceeds from amortization of the respective
    collateral pools.(2)
    
    On maturity or termination of the revolving period under this
    credit facility, in the absence of a default, amounts due under
    this facility are to be repaid from proceeds from amortization
    of the collateral pool.(3)
    
    CS Europe is a 97.5 million multi-currency facility
    allowing for principal to be drawn in US Dollars
    (USD), Euro or British Pound Sterling, and the
    amounts presented were translated to USD using the applicable
    spot rates on September 30, 2009.(4)
    
    In July 2009, we extended the maturity of approximately
    $478.0 million of commitments to March 31, 2012, while
    the remaining approximately $122.0 million of commitments
    continued to mature March 13, 2010, subject, in each case,
    to mandatory commitment reductions. For additional information
    on this facility, see Note 11, Borrowings, in our
    consolidated financial statements for the three and nine months
    ended September 30, 2009.  Term
    Debt
    Borrowings
  Owner
    Trust Term Debt
  Mortgage-Related Receivables and Related Owner
    Trust Securitizations Borrowings Form 10-K.
  Convertible
    Debt
  Borrowings
 86




---



##### 



Borrowings Form 10-K.
  Subordinated
    Debt
  Borrowings Borrowings Form 10-K.
  Mortgage
    Debt
  Borrowings Borrowings Form 10-K.
  FHLB SF
    Borrowings and Federal Reserve Bank Credit Program
      Notes
    Payable
    Debt
    Covenants
   87




---



##### 



and/or
  12-month Credit Facilities Borrowings
      Equity
  Shareholders Equity Shareholders
    Equity Form 10-K.
      Commitments,
    Guarantees & Contingencies
  Commitments and Contingencies Form 10-K, Liquidity and Capital Resources  Parent
    Company Liquidity
 88




---



##### 



Commitments and Contingencies Form 10-K.
  Commitments
    and Contingencies Commitments and Contingencies Form 10-K.
        Credit
    Risk Management
  agreed-upon
   89




---



##### 



CapitalSource
    Bank and Other Commercial Finance Segments
      Concentrations
    of Credit Risk
      Market
    Risk Management
  and/or
  Derivative Instruments Form 10-K.
 90




---



##### 



Interest
    Rate Risk Management
    12-month
  Rate Change(Basis Points) 100

$
1,440 50


(1,200
)+ 50


(24,120
)+ 100


(47,520
)       Amount


Percentage ofOutstanding(1)


Total Portfolio($ in thousands)Loans with contractual interest rates:Below the interest rate floor

$
4,571,095



52
%Exceeding the interest rate floor


50,925



1At the interest rate floor


79,501



1Loans with no interest rate floor


4,020,516



46Total

$
8,722,037



100
%     (1)
    
    Includes related interest receivable.       91




---



##### 



Critical
    Accounting Estimates
  Managements Discussion and Analysis of Financial
    Condition and Results of Operations Summary of Significant Accounting Policies Form 10-K. Critical Accounting Estimates Managements Discussion and Analysis of Financial
    Condition and Results of Operations Form 10-K.
  Income
    Taxes
             92




---



##### 



Supervision
    and Regulation
  Form 10-K. Item I. Business 
    Supervision and Regulation, Form 10-K.
      General
   93




---



##### 



de novo de novo
  cease-and-desist
      Insurance
    of Accounts and Regulation by the FDIC
         94




---



##### 



ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Managements Discussion and
    Analysis of Financial Condition and Results of Operations Market Risk Management Form 10-Q Form 10-K. Derivative Instruments Credit Risk Form 10-K.
  ITEM 4.
    CONTROLS
    AND PROCEDURES  Rule 13a-15
 95




---



##### 



PART II.
    OTHER INFORMATION  ITEM 1A.
    RISK
    FACTORS  Our business faces many risks. The risks described below
    represent material changes from or additions to the risk factors
    previously identified in our Annual Report on
    Form 10-K
    for the year ended December 31, 2008, as filed with the SEC
    on March 2, 2009 (the
    Form 10-K),
    our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2009 as filed with the SEC
    on August 10, 2009, and our other filings with the SEC. The
    risks identified below and in those other filings may not be the
    only risks we face. Additional risks that we do not yet know of
    or that we currently believe are immaterial may also impair our
    business operations. If any of the events or circumstances
    described in the following risks actually occur, our business,
    financial condition or results of operations could suffer, and
    the trading price of our securities could decline. The
    U.S. economy is currently in an economic recession and we
    expect this to have a significant adverse impact on our business
    and operations, including, without limitation, the credit
    quality of our loan portfolio, our liquidity, our earnings and
    the realizable amount of our net deferred tax assets. Before
    deciding to invest in our securities, you should consider all of
    the following risks, together with all of the other Risk Factors
    set forth in the
    Form 10-K,
    our Quarterly Report on
    Form 10-Q
    for the quarter ended June 30, 2009 as filed with the SEC
    on August 10, 2009, and all of the other information in
    this Quarterly Report on
    Form 10-Q
    and our other filings with the SEC.
  Some statements in this
    Form 10-Q,
    including within the risk factors below and those which are
    incorporated by reference, are forward-looking statements.
    Please refer to the section entitled Cautionary Note
    Regarding Forward-Looking Statements.
  Our
    ability to operate our business depends on our ability to
    maintain our external financing, which is extremely challenging
    in the existing economic environment.
    We
    must comply with various covenants and obligations under our
    indebtedness and our failure to do so could adversely affect our
    ability to operate our business, manage our portfolio or pursue
    certain opportunities.
   96




---



##### 



and/or
    and/or
  The
    change of control rules under Section 382 of the Internal
    Revenue Code may limit our ability to use net operating loss
    carryovers and other tax attributes to reduce future tax
    payments or our willingness to issue equity.
   97




---



##### 



ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    Maximum Numberof Shares (orTotal Number of


ApproximateShares Purchased


Dollar Value)Total Number


Average


as Part of Publicly


that Mayof Shares


Price Paid


Announced Plans


Yet be PurchasedPurchased(1)


per Share


or Programs


Under the Plans(2)July 1  July 31, 2009


113,669


$
4.55






$
August 1  August 31, 2009


13,488



4.27







September 1  September 30, 2009


4,935



4.48







Total


132,092


$
4.52






$
24,218,493     (1)
    
    Represents the number of shares acquired as payment by employees
    of applicable statutory minimum withholding taxes owed upon
    vesting of restricted stock granted under our Third Amended and
    Restated Equity Incentive Plan.(2)
    
    In March 2009, our Board of Directors authorized us to
    repurchase up to $25.0 million of our common stock through
    open market purchases or privately negotiated transactions from
    time to time for a period of up to two years. At the beginning
    of the period, $24.2 million of our common stock was
    available to be repurchased under the plan. There was no
    repurchase activity during the three months ended
    September 30, 2009. The amount and timing of any
    repurchases will depend on market conditions and other factors
    and repurchases may be suspended or discontinued at any time.
    Our ability to repurchase additional shares may be limited by
    the terms of our 2014 Senior Secured Notes, and there is no
    assurance that we will repurchase any additional shares.  ITEM 6.
    EXHIBITS     98




---



##### 



Signatures      Date: November 4, 2009

/s/  JOHN
    K. DELANEYJohn
    K. Delaney
    Chairman of the Board and Chief Executive Officer (Principal
    Executive Officer)Date: November 4, 2009

/s/  DONALD
    F. COLEDonald
    F. Cole
    Chief Financial Officer
    (Principal Financial Officer)Date: November 4, 2009

/s/  BRYAN
    D. SMITHBryan
    D. Smith
    Chief Accounting Officer
    (Principal Accounting Officer)  99




---



##### 



INDEX TO
    EXHIBITS  ExhibitNo

Description3
.1

Second Amended and Restated Certificate of Incorporation
    (composite version; reflects all amendments through May 1,
    2008)(incorporated by reference to exhibit 3.1 to the
    Form 10-Q
    filed by CapitalSource on May 12, 2008).3
.2

Amended and Restated Bylaws (composite version; reflects all
    amendments through October 30, 2007) (incorporated by
    reference to exhibit 3.2 to the
    Form 10-Q
    filed by CapitalSource on November 9, 2007).10
.1

Credit Agreement dated as of March 14, 2006, among
    CapitalSource Inc., as borrower, the guarantors and lenders as
    listed in the Credit Agreement, Wachovia Bank, National
    Association, as administrative agent, swingline lender and
    issuing lender, Bank of America, N.A., as issuing lender, Wells
    Fargo Securities, LLC (f/k/a Wachovia Capital Markets, LLC), as
    sole bookrunner and lead arranger, and Bank of Montreal,
    Barclays Bank PLC and SunTrust Bank, as co-documentation agents
    (composite version; reflects all amendments through
    July 10, 2009) (incorporated by reference to
    Exhibit 10.1 to the
    Form 8-K
    filed by CapitalSource on July 10, 2009).10
.2

Second Amended and Restated Sale and Servicing Agreement by and
    among CS Funding VII Depositor LLC, as the seller, CapitalSource
    Finance LLC, as the servicer and originator, the issuers from
    time to time party thereto, the liquidity banks from time to
    time party thereto, Citicorp North America, Inc., as the
    administrative agent and Wells Fargo Bank, National Association,
    as the backup servicer and as the collateral custodian
    (composite version; reflects all amendments through
    August 28, 2009).10
.3

Second Amendment and Waiver to the Second Amended and Restated
    Sale and Servicing Agreement, dated as of August 28, 2009,
    by and among CS Funding VII Depositor LLC, as the seller,
    CapitalSource Finance LLC, as the servicer and originator, the
    issuers from time to time party thereto, the liquidity banks
    from time to time party thereto, Citicorp North America, Inc.,
    as the administrative agent and Wells Fargo Bank, National
    Association, as the backup servicer and as the collateral
    custodian .10
.4

Fourth Amended and Restated Sale and Servicing Agreement by and
    among CapitalSource Real Estate Loan LLC,
    2007-A, as
    the seller, CSE Mortgage LLC, as the originator and servicer,
    the issuers from time to time party thereto, the liquidity banks
    from time to time party thereto, Citicorp North America, Inc.,
    as the administrative agent and Wells Fargo Bank, National
    Association, as the backup servicer and as the collateral
    custodian (composite version; reflects all amendments through
    August 28, 2009).10
.5

Second Amendment and Waiver to the Fourth Amended and Restated
    Sale and Servicing Agreement, dated as of August 28, 2009,
    by and among CapitalSource Real Estate Loan LLC,
    2007-A, as
    the seller, CSE Mortgage LLC, as the originator and servicer,
    the issuers from time to time party thereto, the liquidity banks
    from time to time party thereto, Citicorp North America, Inc.,
    as the administrative agent and Wells Fargo Bank, National
    Association, as the backup servicer and as the collateral
    custodian .12
.1

Ratio of Earnings to Fixed Charges.31
.1

Rule 13a  14(a) Certification of Chairman of the
    Board and Chief Executive Officer.31
.2

Rule 13a  14(a) Certification of Chief Financial
    Officer.32


Section 1350 Certifications.     
    
    Filed herewith. 100