| TEMPLE INLAND INC Item 1A Risk Factors The industries in which we operate are highly competitive |
| All of the industries in which we operate are highly competitive and are affected to varying degrees by supply and demand factors and economic conditions, including changes in interest rates, new housing starts, home repair and remodeling activities, loan collateral values (particularly real estate), and the strength of the US dollar |
| Given the commodity nature of our manufactured products, we have little control over market pricing or market demand |
| No single company is dominant in any of our industries |
| Our corrugated packaging competitors include large, vertically-integrated paperboard and packaging products companies and numerous smaller companies |
| Because these products are globally traded commodities, the industries in which we compete are particularly sensitive to price fluctuations as well as other factors, including innovation, design, quality, and service, with varying emphasis on these factors depending on the product line |
| To the extent that one or more of our competitors become more successful with respect to any key competitive factor, our business could be materially adversely affected |
| Although corrugated packaging is dominant in the national distribution process, our products also compete with various other packaging materials, including products made of paper, plastics, wood, and various types of metal |
| In the forest products markets, our forest products segment competes with many companies that are substantially larger and have greater resources in the manufacturing of forest products |
| 9 _________________________________________________________________ [65]Table of Contents The financial services industry is also a highly competitive business, and a number of entities with which we compete are substantially larger and have greater resources than we do |
| Our financial services segment competes with commercial banks, savings and loan associations, mortgage banks, and other lenders in our savings bank activities; with real estate investment and development companies in our real estate activities; and with insurance agencies in our insurance activities |
| Our manufacturing segments are affected by the cost of certain raw materials and energy |
| Virgin wood fiber and recycled fiber are the principal raw materials we use to manufacture corrugated packaging |
| The portion of our virgin fiber requirements that do not come from our timberland or that are not produced as a by-product from our forest products operations are purchased in highly competitive, price sensitive markets |
| The price for these materials has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which we have no control, including environmental and conservation regulations, natural disasters, the price and level of imported timber and the continuation of any applicable tariffs, and weather |
| In addition, the increase in demand for products manufactured, in whole or in part, from recycled fiber, including old corrugated containers, has caused an occasional tightness in the supply of recycled fiber |
| It may also cause a significant increase in the cost of such fiber used in the manufacture of recycled containerboard and related products |
| While we have not experienced any significant difficulty in obtaining wood fiber and recycled fiber in economic proximity to our mills, this may not continue to be the case for any or all of our mills |
| The cost of producing our products is also sensitive to the price of energy |
| While we have attempted to contain energy costs through internal generation and in some instances the use of by-products from our manufacturing processes as fuel, no assurance can be given that such efforts will be successful in the future or that energy prices will not rise to levels that would have a material adverse effect on our results of operations |
| The corrugated packaging and forest products industries are cyclical in nature and experience periods of overcapacity |
| The operating results of our paper and forest products segments reflect each such industry’s general cyclical pattern |
| While the cycles of each industry do not necessarily coincide, demand and prices in each tend to drop substantially in an economic downturn |
| The forest products industry is further influenced by the residential construction and remodeling markets |
| Further, each industry has had substantial overcapacity for several years |
| Both industries are capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover marginal costs |
| These conditions have contributed to substantial price competition and volatility in these industries, even when demand is strong |
| Any increased production by our competitors could further depress prices for our products |
| From time to time, we have closed certain of our facilities or have taken downtime based on prevailing market demand for our products and may continue to do so, reducing our total production levels |
| Certain of our competitors have also temporarily closed or reduced production at their facilities, but can reopen and/or increase production capacity at any time, which could exacerbate the overcapacity in these industries and depress prices |
| Our manufacturing activities are subject to environmental regulations and liabilities that could have a negative effect on our operating results |
| Our manufacturing operations are subject to federal, state, and local provisions regulating the discharge of materials into the environment and otherwise related to the protection of the environment |
| Compliance with these provisions has required us to invest substantial funds to modify facilities to ensure compliance with applicable environmental regulations |
| In other sections of this Annual Report on Form 10-K, we provide certain estimates of expenditures we expect to make for environmental compliance in the next few years |
| However, we could incur additional significant expenditures due to changes in law or the discovery of new information, and such expenditures could have a material adverse effect on our financial condition and results of operations |
| Our financial services segment operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations |
| Our financial services segment is subject to regulation, supervision, and examination by federal and state banking authorities |
| The regulations enforced by these authorities are intended to protect customers and federal 10 _________________________________________________________________ [66]Table of Contents deposit insurance funds, not creditors, stockholders, or other security holders |
| Regulations affecting banks and financial services companies are continuously changing, and any change in applicable regulations or federal or state legislation could have a negative effect on our financial services segment |
| Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by federal savings banks and their holding companies (including the power to appoint a conservator or receiver for the bank) or to require changes in various aspects of their operation at any time, including restrictions on the payment of dividends to the parent company |
| Any exercise of such regulatory discretion could have a negative effect on our financial condition or the results of our operations |
| We previously disclosed that our savings bank subsidiary, Guaranty Bank, agreed to enter into a Stipulation and Consent to the Issuance of an Order to Cease and Desist for Affirmative Relief with its banking regulator, the OTS, on December 22, 2004 |
| Under this consent order, Guaranty agreed, among other things, to take certain actions primarily related to its repositioned mortgage origination activities, including strengthening its regulatory compliance controls and management, enhancing its suspicious activity reporting and regulatory training programs, and implementing improved risk assessment and loan application register programs |
| The consent order remains in effect and the OTS continues to evaluate Guaranty’s compliance |
| Any failure by Guaranty to meet the requirements of the consent order in a timely fashion, or any additional requirements imposed or supervisory actions taken by the OTS, could have a material adverse effect on our financial condition or the results of our operations |
| Fluctuations in interest rates could reduce our financial services segment’s profitability |
| Fluctuations in interest rates are not predictable or controllable |
| The majority of Guaranty’s assets and liabilities are monetary in nature and may be adversely affected by changes in interest rates |
| Like most financial institutions, changes in interest rates can affect our net interest income as well as the value of our assets and liabilities |
| A significant change in the general level of interest rates may adversely affect our net yield on interest-earning assets because our interest-bearing assets and liabilities do not reprice in tandem |
| In addition, periodic and lifetime caps may limit interest rate changes on our mortgage-backed securities and loans that pay interest at adjustable rates |
| Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans |
| A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits |
| Accordingly, changes in the level of market interest rates will likely affect our net interest income and our overall results |
| If our allowance for loan losses is not sufficient to cover actual loan losses, the income from our financial services segment could decrease |
| Our loan customers may fail to repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment |
| Such loan losses could have a material adverse effect on our operating results |
| We make various assumptions, estimates, and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans |
| In determining the amount of the allowance for loan losses, we rely on a number of factors, including our own experience and our evaluation of economic conditions |
| If our assumptions prove to be incorrect, our current allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio and adjustments may be necessary that would have a material adverse effect on our operating results |
| We face risks related to the composition of our financial services segment’s loan portfolio |
| Commercial real estate, multi-family, and commercial business loans, which represent about one-third of our loan portfolio, generally expose a lender to greater risk of loss than one- to four-family residential mortgage loans because such loans involve larger loan balances to single borrowers or groups of related borrowers |
| The repayment of commercial business loans often depends on the successful operations and income streams of the borrowers |
| Many of Guaranty’s commercial real estate or multi-family borrowers have more than one loan outstanding with Guaranty |
| Consequently, an adverse development with respect to one loan, credit relationship, or geographic market can expose Guaranty to a significantly greater risk of loss compared to an adverse development with respect to a single one- to four-family residential mortgage loan |
| Although the majority of these loans are collateralized by oil and gas reserves, significant changes in energy prices or unsuccessful hedge programs by Guaranty’s borrowers could affect collateral values |
| Approximately one-half of our one- to four-family residential loan portfolio consists of loans in the state of California |
| We would be adversely affected by a reduction in the value of real estate located in California that serves as collateral for our loans |
| We may be forced to increase our allowances for loan losses and may suffer additional loan losses as a result of any such reduction in collateral values |
| The adverse impact from a reduction in real estate values in California may be greater for Guaranty than that suffered by other financial institutions with a more geographically diverse loan portfolio |