##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the Quarterly Period Ended March 31, 2007
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for
the Transition Period From
 to
 Commission File Number: 001-08634
 Temple-Inland Inc.
  Delaware
    
    75-1903917(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 1300 MoPac Expressway South, Austin, Texas 78746
 (512) 434-5800
 Not Applicable
 þ o
  þ o o
 o þ
  Class
    
    Number of common shares outstanding
as of March 31, 2007Common Stock (par value $1.00 per share)
    
    105,816,730




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##### 



PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Temple-Inland Inc. and Subsidiaries
    
    
    3Consolidated Balance Sheets
    
    
    4Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Parent Company (Temple-Inland Inc. and its manufacturing and
real estate subsidiaries)
    
    
    7Summarized Balance Sheets
    
    
    7Summarized Statements of Income
    
    
    8Summarized Statements of Cash Flows
    
    
    9Financial Services
    
    
    10Summarized Balance Sheets
    
    
    10Summarized Statements of Income
    
    
    11Summarized Statements of Cash Flows
    
    
    12Notes to the Consolidated Financial Statements
    
    
    13Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4. Controls and Procedures
    
    
    44PART II. OTHER INFORMATION
    
    
    44Item 1. Legal Proceedings
    
    
    44Item 1A. Risk Factors
    
    
    45Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3. Defaults Upon Senior Securities
    
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    
    46Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46SIGNATURES
    
    
    47Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
 
 Parent
    
    
    FinancialCompany
    
    
    Services
    
    
    Consolidated(In millions)ASSETSCash and cash equivalents
    
    $
    24
    
    
    $
    208
    
    
    $
    232Trade receivables, net of allowance for doubtful accounts of $15
    
    
    479
    
    
    
    
    
    
    
    479Inventories
    
    
    431
    
    
    
    
    
    
    
    431Assets held-for-sale
    
    
    311
    
    
    
    
    
    
    
    311Timber and timberland
    
    
    64
    
    
    
    
    
    
    
    64Real estate
    
    
    562
    
    
    
    
    
    
    
    562Loans held for sale
    
    
    
    
    
    
    23
    
    
    
    23Loans, net of allowance for losses of $71
    
    
    
    
    
    
    9,575
    
    
    
    9,575Securities available-for-sale
    
    
    
    
    
    
    502
    
    
    
    502Securities held-to-maturity
    
    
    
    
    
    
    4,608
    
    
    
    4,608Investment in Federal Home Loan Bank stock
    
    
    
    
    
    
    208
    
    
    
    208Property and equipment
    
    
    1,624
    
    
    
    224
    
    
    
    1,848Goodwill
    
    
    365
    
    
    
    141
    
    
    
    506Other intangible assets
    
    
    
    
    
    
    25
    
    
    
    25Prepaid expenses and other assets
    
    
    389
    
    
    
    226
    
    
    
    560Investment in financial services
    
    
    1,009
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    $
    5,258
    
    
    $
    15,740
    
    
    $
    19,934LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable, accrued expenses, and other liabilities
    
    $
    774
    
    
    $
    153
    
    
    $
    904Long-term debt and other borrowings
    
    
    1,712
    
    
    
    141
    
    
    
    1,853Deposits
    
    
    
    
    
    
    9,494
    
    
    
    9,488Federal Home Loan Bank borrowings
    
    
    
    
    
    
    4,324
    
    
    
    4,324Deferred income taxes
    
    
    184
    
    
    
    
    
    
    
    158Liability for pension benefits
    
    
    220
    
    
    
    
    
    
    
    220Liability for postretirement benefits
    
    
    141
    
    
    
    
    
    
    
    141Subordinated notes payable to trust
    
    
    
    
    
    
    314
    
    
    
    314Preferred stock issued by subsidiaries
    
    
    
    
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    3,031
    
    
    
    14,731
    
    
    
    17,707SHAREHOLDERS EQUITYPreferred stock  par value $1 per share:authorized 25,000,000 shares; none issued
    
    
    
    
    
    
    
    
    
    
    Common stock  par value $1 per share: authorized 200,000,000
shares; issued 123,605,344 shares, including shares held in the
treasury
    
    
    
    
    
    
    
    
    
    
    124Additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    461Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (188
    )Retained earnings
    
    
    
    
    
    
    
    
    
    
    2,5082,905Cost of shares held in the treasury: 17,788,614 shares
    
    
    
    
    
    
    
    
    
    
    (678
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    
    2,227TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    $
    19,934
  3




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##### Table of Contents



Parent
    
    
    FinancialCompany
    
    
    Services
    
    
    Consolidated(In millions)ASSETSCash and cash equivalents
    
    $
    38
    
    
    $
    372
    
    
    $
    405Trade receivables, net of allowance for doubtful accounts of $14
    
    
    452
    
    
    
    
    
    
    
    452Inventories
    
    
    435
    
    
    
    
    
    
    
    435Timber and timberland
    
    
    358
    
    
    
    
    
    
    
    358Real estate
    
    
    512
    
    
    
    
    
    
    
    512Loans held for sale
    
    
    
    
    
    
    23
    
    
    
    23Loans, net of allowance for losses of $65
    
    
    
    
    
    
    9,617
    
    
    
    9,617Securities available-for-sale
    
    
    
    
    
    
    529
    
    
    
    529Securities held-to-maturity
    
    
    
    
    
    
    4,853
    
    
    
    4,853Investment in Federal Home Loan Bank stock
    
    
    
    
    
    
    262
    
    
    
    262Property and equipment
    
    
    1,639
    
    
    
    214
    
    
    
    1,853Goodwill
    
    
    365
    
    
    
    141
    
    
    
    506Other intangible assets
    
    
    
    
    
    
    26
    
    
    
    26Prepaid expenses and other assets
    
    
    403
    
    
    
    214
    
    
    
    582Investment in financial services
    
    
    1,015
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    $
    5,217
    
    
    $
    16,251
    
    
    $
    20,413LIABILITIES AND SHAREHOLDERS EQUITYAccounts payable, accrued expenses, and other liabilities
    
    $
    836
    
    
    $
    126
    
    
    $
    953Long-term debt and other borrowings
    
    
    1,628
    
    
    
    101
    
    
    
    1,729Deposits
    
    
    
    
    
    
    9,486
    
    
    
    9,479Federal Home Loan Bank borrowings
    
    
    
    
    
    
    5,076
    
    
    
    5,076Deferred income taxes
    
    
    198
    
    
    
    
    
    
    
    174Liability for pension benefits
    
    
    231
    
    
    
    
    
    
    
    231Liability for postretirement benefits
    
    
    135
    
    
    
    
    
    
    
    135Subordinated notes payable to trust
    
    
    
    
    
    
    142
    
    
    
    142Preferred stock issued by subsidiaries
    
    
    
    
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    3,028
    
    
    
    15,236
    
    
    
    18,224SHAREHOLDERS EQUITYPreferred stock  par value $1 per share:authorized 25,000,000 shares; none issued
    
    
    
    
    
    
    
    
    
    
    Common stock  par value $1 per share: authorized 200,000,000
shares; issued 123,605,344 shares, including shares held in the
treasury
    
    
    
    
    
    
    
    
    
    
    124Additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    468Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (191
    )Retained earnings
    
    
    
    
    
    
    
    
    
    
    2,5012,902Cost of shares held in the treasury: 18,754,907 shares
    
    
    
    
    
    
    
    
    
    
    (713
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    
    2,189TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    $
    20,413
  4




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##### Table of Contents



First Quarter2007
    
    
    2006(In millions, except per share)REVENUESManufacturing and real estate
    
    $
    1,037
    
    
    $
    1,101Financial services
    
    
    284
    
    
    
    2831,321
    
    
    
    1,384COSTS AND EXPENSESManufacturing and real estate
    
    
    (991
    )
    
    
    (988
    )Financial services
    
    
    (238
    )
    
    
    ( 237
    )(1,229
    )
    
    
    (1,225
    )OPERATING INCOME
    
    
    92
    
    
    
    159Parent company interest
    
    
    (31
    )
    
    
    (33
    )Other non-operating income (expense)
    
    
    
    
    
    
    INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES
    
    
    61
    
    
    
    126Income tax expense
    
    
    (23
    )
    
    
    (47
    )INCOME FROM CONTINUING OPERATIONS
    
    
    38
    
    
    
    79Discontinued operations
    
    
    
    
    
    
    NET INCOME
    
    $
    38
    
    
    $
    79WEIGHTED AVERAGE COMMON SHARES
OUTSTANDINGBasic
    
    
    105.6
    
    
    
    111.1Diluted
    
    
    107.7
    
    
    
    113.4EARNINGS PER SHAREBasic:Income from continuing operations
    
    $
    0.36
    
    
    $
    0.71Discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    0.36
    
    
    $
    0.71Diluted:Income from continuing operations
    
    $
    0.35
    
    
    $
    0.70Discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    0.35
    
    
    $
    0.70DIVIDENDS PAID PER SHARE OF COMMON STOCK
    
    $
    0.28
    
    
    $
    0.25
  5




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##### Table of Contents



First Quarter2007
    
    
    2006(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    38
    
    
    $
    79Adjustments:Depreciation and amortization
    
    
    61
    
    
    
    61Amortization and accretion of financial
instrument discounts and premiums and deferred
loan fees and origination costs, net
    
    
    5
    
    
    
    5Provision (credit) for credit losses
    
    
    (2
    )
    
    
    2Deferred income taxes
    
    
    (1
    )
    
    
    6Non-cash real estate cost of sales
    
    
    8
    
    
    
    14Real estate development expenditures
    
    
    (54
    )
    
    
    (10
    )Other
    
    
    36
    
    
    
    8Changes in:Receivables
    
    
    (27
    )
    
    
    (43
    )Inventories
    
    
    4
    
    
    
    9Accounts payable and accrued expenses
    
    
    (61
    )
    
    
    (64
    )Prepaid expenses and other
    
    
    
    
    
    
    31Loans held for sale:Originations
    
    
    (17
    )
    
    
    (116
    )Sales
    
    
    17
    
    
    
    3477
    
    
    
    329CASH PROVIDED BY (USED FOR) INVESTINGCapital expenditures
    
    
    (53
    )
    
    
    (44
    )Reforestation and net acquisition of timber and timberland
    
    
    (2
    )
    
    
    (2
    )Sale of non-strategic assets and operations
    
    
    5
    
    
    
    3Securities available-for-sale, net
    
    
    26
    
    
    
    33Securities held-to-maturity, net
    
    
    238
    
    
    
    293Redemption of Federal Home Loan Bank stock
    
    
    58
    
    
    
    Loans originated or acquired, net of principal collected
    
    
    43
    
    
    
    (194
    )Acquisitions, net of cash acquired, and joint ventures
    
    
    
    
    
    
    (135
    )Other
    
    
    (10
    )
    
    
    305
    
    
    
    (46
    )CASH PROVIDED BY (USED FOR) FINANCINGAdditions to debt
    
    
    18
    
    
    
    277Payments of debt
    
    
    (255
    )
    
    
    (372
    )Borrowings under accounts receivable securitization facility, net
    
    
    86
    
    
    
    139Borrowings under revolving credit facility, net
    
    
    (13
    )
    
    
    Changes in book overdrafts
    
    
    (6
    )
    
    
    Deposits, net
    
    
    8
    
    
    
    79Repurchase agreements and short-term borrowings, net
    
    
    (462
    )
    
    
    (453
    )Issuance of subordinated notes payable to trust
    
    
    172
    
    
    
    Cash dividends paid to shareholders
    
    
    (29
    )
    
    
    (27
    )Repurchase of common stock
    
    
    (24
    )
    
    
    (51
    )Exercise of stock options
    
    
    12
    
    
    
    27Tax benefit on stock options exercised
    
    
    7
    
    
    
    6Other
    
    
    1
    
    
    
    (485
    )
    
    
    (375
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    Discontinued operations, principally operating activities
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    (173
    )
    
    
    (92
    )Cash and cash equivalents at beginning of period
    
    
    405
    
    
    
    441Cash and cash equivalents at end of period
    
    $
    232
    
    
    $
    349
  6




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##### Table of Contents



(Unaudited)FirstQuarter-End
    
    
    Year-End2007
    
    
    2006(In millions)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    24
    
    
    $
    38Trade receivables, net of allowance for doubtful accounts of $15
in 2007 and
$14 in 2006
    
    
    479
    
    
    
    452Inventories:Work in process and finished goods
    
    
    109
    
    
    
    109Raw materials
    
    
    204
    
    
    
    211Supplies and other
    
    
    118
    
    
    
    115Total inventories
    
    
    431
    
    
    
    435Prepaid expenses and other
    
    
    81
    
    
    
    72Assets held-for-sale
    
    
    311
    
    
    
    Total current assets
    
    
    1,326
    
    
    
    997Investment in Financial Services
    
    
    1,009
    
    
    
    1,015Timber and Timberland
    
    
    64
    
    
    
    358Real Estate
    
    
    562
    
    
    
    512Property and EquipmentLand and buildings
    
    
    637
    
    
    
    648Machinery and equipment
    
    
    3,379
    
    
    
    3,402Construction in progress
    
    
    90
    
    
    
    82Less allowances for depreciation
    
    
    (2,482
    )
    
    
    (2,493
    )Total property and equipment
    
    
    1,624
    
    
    
    1,639Goodwill
    
    
    365
    
    
    
    365Assets held-for-sale
    
    
    
    
    
    
    20Other Assets
    
    
    308
    
    
    
    311TOTAL ASSETS
    
    $
    5,258
    
    
    $
    5,217LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    190
    
    
    $
    230Accrued employee compensation and benefits
    
    
    67
    
    
    
    128Accrued interest
    
    
    28
    
    
    
    32Accrued property taxes
    
    
    15
    
    
    
    23Other accrued expenses
    
    
    157
    
    
    
    134Liabilities of discontinued operations
    
    
    6
    
    
    
    7Current portion of long-term debt
    
    
    22
    
    
    
    19Current portion of pension and postretirement benefits
    
    
    19
    
    
    
    15Total current liabilities
    
    
    504
    
    
    
    588Long-Term Debt
    
    
    1,712
    
    
    
    1,628Deferred Income Taxes
    
    
    184
    
    
    
    198Liability for Pension Benefits
    
    
    218
    
    
    
    229Liability for Postretirement Benefits
    
    
    124
    
    
    
    122Other Long-Term Liabilities
    
    
    289
    
    
    
    263TOTAL LIABILITIES
    
    
    3,031
    
    
    
    3,028Shareholders Equity
    
    
    2,227
    
    
    
    2,189TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    5,258
    
    
    $
    5,217
  7




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##### Table of Contents



First Quarter2007
    
    
    2006(In millions)NET REVENUES
    
    $
    1,037
    
    
    $
    1,101COSTS AND EXPENSESCost of sales
    
    
    (875
    )
    
    
    (910
    )Selling
    
    
    (40
    )
    
    
    (34
    )General and administrative
    
    
    (64
    )
    
    
    (56
    )Other operating income (expense)
    
    
    (12
    )
    
    
    12(991
    )
    
    
    (988
    )46
    
    
    
    113FINANCIAL SERVICES EARNINGS
    
    
    46
    
    
    
    46OPERATING INCOME
    
    
    92
    
    
    
    159Interest expense
    
    
    (31
    )
    
    
    (33
    )Other non-operating income (expense)
    
    
    
    
    
    
    INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
    
    
    61
    
    
    
    126Income tax expense
    
    
    (23
    )
    
    
    (47
    )INCOME FROM CONTINUING OPERATIONS
    
    
    38
    
    
    
    79Discontinued operations
    
    
    
    
    
    
    NET INCOME
    
    $
    38
    
    
    $
    79
  8




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##### Table of Contents



First Quarter2007
    
    
    2006(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    38
    
    
    $
    79Adjustments:Depreciation and amortization
    
    
    56
    
    
    
    56Non-cash share-based compensation
    
    
    20
    
    
    
    16Non-cash pension and postretirement expense
    
    
    11
    
    
    
    14Cash contribution to pension and postretirement plans
    
    
    (20
    )
    
    
    (18
    )Deferred income taxes
    
    
    1
    
    
    
    2Net earnings of financial services
    
    
    (29
    )
    
    
    (29
    )Dividends from financial services
    
    
    35
    
    
    
    Earnings of joint ventures
    
    
    (2
    )
    
    
    (12
    )Dividends from joint ventures
    
    
    1
    
    
    
    1Non-cash real estate cost of sales
    
    
    8
    
    
    
    14Real estate development expenditures
    
    
    (54
    )
    
    
    (10
    )Other
    
    
    2
    
    
    
    (3
    )Changes in:Receivables
    
    
    (27
    )
    
    
    (43
    )Inventories
    
    
    4
    
    
    
    9Accounts payable and accrued expenses
    
    
    (61
    )
    
    
    (64
    )Prepaid expenses and other
    
    
    
    
    
    
    31(17
    )
    
    
    43CASH PROVIDED BY (USED FOR) INVESTINGCapital expenditures
    
    
    (40
    )
    
    
    (30
    )Reforestation and net acquisition of timber and timberland
    
    
    (2
    )
    
    
    (2
    )Sales of non-strategic assets and operations and proceeds from
the sale of property and equipment
    
    
    5
    
    
    
    3Acquisitions, net of cash acquired, and joint ventures
    
    
    
    
    
    
    (135
    )Other
    
    
    (5
    )
    
    
    (42
    )
    
    
    (164
    )CASH PROVIDED BY (USED FOR) FINANCINGPayments of debt
    
    
    (5
    )
    
    
    (241
    )Borrowings under accounts receivable securitization facility, net
    
    
    86
    
    
    
    139Borrowings under revolving credit facility, net
    
    
    (13
    )
    
    
    Change in book overdrafts
    
    
    (7
    )
    
    
    Other additions to debt
    
    
    18
    
    
    
    277Cash dividends paid to shareholders
    
    
    (29
    )
    
    
    (27
    )Repurchase of common stock
    
    
    (24
    )
    
    
    (51
    )Exercise of stock options
    
    
    12
    
    
    
    27Tax benefit on stock options exercised
    
    
    7
    
    
    
    6Other
    
    
    
    
    
    
    (11
    )45
    
    
    
    119Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    Discontinued operations, principally operating activities
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    (14
    )
    
    
    (2
    )Cash and cash equivalents at beginning of period
    
    
    38
    
    
    
    13Cash and cash equivalents at end of period
    
    $
    24
    
    
    $
    11
  9




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##### Table of Contents



(Unaudited)FirstQuarter-End
    
    
    Year-End2007
    
    
    2006(In millions)ASSETSCash and cash equivalents
    
    $
    208
    
    
    $
    372Loans held for sale
    
    
    23
    
    
    
    23Loans, net of allowance for losses of $71 in 2007 and
$65 in 2006
    
    
    9,575
    
    
    
    9,617Securities available-for-sale
    
    
    502
    
    
    
    529Securities held-to-maturity
    
    
    4,608
    
    
    
    4,853Investment in Federal Home Loan Bank stock
    
    
    208
    
    
    
    262Property and equipment, net
    
    
    224
    
    
    
    214Accounts, notes, and accrued interest receivable
    
    
    107
    
    
    
    104Goodwill
    
    
    141
    
    
    
    141Other intangible assets
    
    
    25
    
    
    
    26Other assets
    
    
    119
    
    
    
    110TOTAL ASSETS
    
    $
    15,740
    
    
    $
    16,251LIABILITIES AND SHAREHOLDERS EQUITYDeposits
    
    $
    9,494
    
    
    $
    9,486Federal Home Loan Bank borrowings
    
    
    4,324
    
    
    
    5,076Other liabilities
    
    
    153
    
    
    
    126Other borrowings
    
    
    141
    
    
    
    101Subordinated notes payable to trust
    
    
    314
    
    
    
    142Preferred stock issued by subsidiaries
    
    
    305
    
    
    
    305Total Liabilities
    
    
    14,731
    
    
    
    15,236Shareholders Equity
    
    
    1,009
    
    
    
    1,015TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    15,740
    
    
    $
    16,251
  10




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##### Table of Contents



First Quarter2007
    
    
    2006(In millions)INTEREST INCOMELoans and loans held for sale
    
    $
    171
    
    
    $
    166Securities available-for-sale
    
    
    8
    
    
    
    8Securities held-to-maturity
    
    
    60
    
    
    
    62Other earning assets
    
    
    4
    
    
    
    5Total interest income
    
    
    243
    
    
    
    241INTEREST EXPENSEDeposits
    
    
    (83
    )
    
    
    (62
    )Borrowed funds
    
    
    (65
    )
    
    
    (75
    )Total interest expense
    
    
    (148
    )
    
    
    (137
    )NET INTEREST INCOME
    
    
    95
    
    
    
    104(Provision) credit for credit losses
    
    
    2
    
    
    
    (2
    )NET INTEREST INCOME AFTER (PROVISION) CREDIT FOR
CREDIT LOSSES
    
    
    97
    
    
    
    102NONINTEREST INCOMEInsurance commissions and fees
    
    
    13
    
    
    
    14Service charges on deposits
    
    
    12
    
    
    
    11Loan origination and sale of loans
    
    
    
    
    
    
    2Operating lease income
    
    
    2
    
    
    
    2Other
    
    
    14
    
    
    
    13Total noninterest income
    
    
    41
    
    
    
    42NONINTEREST EXPENSECompensation and benefits
    
    
    (48
    )
    
    
    (48
    )Insurance operations, other than compensation
    
    
    (4
    )
    
    
    (5
    )Occupancy
    
    
    (6
    )
    
    
    (6
    )Information systems and technology
    
    
    (3
    )
    
    
    (3
    )Charges related to asset impairments and severance
    
    
    
    
    
    
    (3
    )Other
    
    
    (31
    )
    
    
    (33
    )Total noninterest expense
    
    
    (92
    )
    
    
    (98
    )INCOME BEFORE TAXES
    
    
    46
    
    
    
    46Income tax expense
    
    
    (17
    )
    
    
    (17
    )NET INCOME
    
    $
    29
    
    
    $
    29
  11




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##### Table of Contents



First Quarter2007
    
    
    2006(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    29
    
    
    $
    29Adjustments:Depreciation and amortization
    
    
    4
    
    
    
    3Depreciation of assets leased to others
    
    
    1
    
    
    
    2Amortization and accretion of financial instrument discounts
and premiums and deferred loan fees and origination costs,
net
    
    
    5
    
    
    
    5Provision (credit) for credit losses
    
    
    (2
    )
    
    
    2Deferred income taxes
    
    
    (2
    )
    
    
    4Changes in:Loans held for sale:Originations
    
    
    (17
    )
    
    
    (116
    )Sales
    
    
    17
    
    
    
    347Other
    
    
    20
    
    
    
    1055
    
    
    
    286CASH PROVIDED BY (USED FOR) INVESTINGSecurities available-for-sale:Purchases
    
    
    
    
    
    
    (1
    )Principal payments and maturities
    
    
    26
    
    
    
    34Securities held-to-maturity:Purchases
    
    
    (142
    )
    
    
    Principal payments and maturities
    
    
    380
    
    
    
    293Redemption of Federal Home Loan Bank stock
    
    
    58
    
    
    
    Loans originated or acquired, net of collections
    
    
    43
    
    
    
    (194
    )Capital expenditures
    
    
    (13
    )
    
    
    (14
    )Other
    
    
    (5
    )
    
    
    347
    
    
    
    118CASH PROVIDED BY (USED FOR) FINANCINGDeposits, net
    
    
    8
    
    
    
    84Repurchase agreements and short-term borrowings, net
    
    
    (462
    )
    
    
    (453
    )Payments of long-term Federal Home Loan Bank and other borrowings
    
    
    (250
    )
    
    
    (131
    )Issuance of subordinated notes payable to trust
    
    
    172
    
    
    
    Dividends paid to parent company
    
    
    (35
    )
    
    
    Other
    
    
    1
    
    
    
    3(566
    )
    
    
    (497
    )Net increase (decrease) in cash and cash equivalents
    
    
    (164
    )
    
    
    (93
    )Cash and cash equivalents at beginning of period
    
    
    372
    
    
    
    431Cash and cash equivalents at end of period
    
    $
    208
    
    
    $
    338
  12




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##### Table of Contents



Note 1  Basis of Presentation
    Note 2  Transformation
  
    
    retaining our manufacturing operations  corrugated packaging and building
products,
    
    spinning off our financial services segment to our shareholders,
    
    spinning off our real estate segment to our shareholders, and
    
    selling our strategic timberland.
     Note 3  New Accounting Pronouncements
  Accounting for Uncertainty
in Income Taxes
 13




---



##### Table of Contents



Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  Employers
Accounting for Pensions
 Accounting for Planned Major Maintenance Activities Interim Financial Reporting
 FullFirst
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    YearQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    2006(in millions, except per share data)Income from Continuing
Operations:As originally reported
    
    $
    76
    
    
    $
    192
    
    
    $
    96
    
    
    $
    105
    
    
    $
    469Effects of AUG AIR-1
    
    
    3
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    As recast
    
    $
    79
    
    
    $
    191
    
    
    $
    95
    
    
    $
    104
    
    
    $
    469Net Income:As originally reported
    
    $
    76
    
    
    $
    192
    
    
    $
    96
    
    
    $
    104
    
    
    $
    468Effects of AUG AIR-1
    
    
    3
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    As recast
    
    $
    79
    
    
    $
    191
    
    
    $
    95
    
    
    $
    103
    
    
    $
    468Earnings Per Share (Diluted):Income from continuing
operations:As originally reported
    
    $
    0.67
    
    
    $
    1.71
    
    
    $
    0.87
    
    
    $
    0.98
    
    
    $
    4.23Effects of AUG AIR-1
    
    
    0.03
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    As recast
    
    $
    0.70
    
    
    $
    1.70
    
    
    $
    0.86
    
    
    $
    0.97
    
    
    $
    4.23Net Income:As originally reported
    
    $
    0.67
    
    
    $
    1.71
    
    
    $
    0.87
    
    
    $
    0.97
    
    
    $
    4.22Effects of AUG AIR-1
    
    
    0.03
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    As recast
    
    $
    0.70
    
    
    $
    1.70
    
    
    $
    0.86
    
    
    $
    0.96
    
    
    $
    4.22
  2006 ending shareholders equity
    
    $
    2,189Adoption of accounting for uncertainty in income taxes
    
    
    5Net periodic benefit cost related to transition of
defined benefit and postretirement benefit plan
measurement date from September 30 to our fiscal
year-end, net of tax
    
    
    (5
    )Adoption of expense as incurred method of accounting
for planned major maintenance activities
    
    
    2007 beginning shareholders equity
    
    $
    2,189
 14




---



##### Table of Contents



Pending Accounting Pronouncements
 The Fair Value Option for Financial
Assets and Financial Liabilities
 Note 4  Employee Benefit Plans
  Defined Benefits
    
    
    PostretirementQualified
    
    
    Supplemental
    
    
    Total
    
    
    Benefits2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006(In millions)
    
    
    
    
    
    
    
    
    
    
    (In millions)Service costs  benefits earned
during the period
    
    $
    7
    
    
    $
    7
    
    
    $
    
    
    
    $
    
    
    
    $
    7
    
    
    $
    7
    
    
    $
    
    
    
    $
    1Interest cost on projected benefit
obligation
    
    
    19
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    18
    
    
    
    2
    
    
    
    2Expected return on plan assets
    
    
    (21
    )
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (20
    )
    
    
    
    
    
    
    Amortization of prior service costs
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )Amortization of actuarial net loss
    
    
    3
    
    
    
    5
    
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    6
    
    
    
    
    
    
    
    Defined benefit expense
    
    $
    8
    
    
    $
    11
    
    
    $
    1
    
    
    $
    1
    
    
    $
    9
    
    
    $
    12
    
    
    $
    2
    
    
    $
    2
  Note 5  Share-Based Compensation
   First Quarter2007
    
    
    2006(In millions)Restricted or performance units
    
    $
    17
    
    
    $
    8Restricted stock
    
    
    
    
    
    
    1Stock options
    
    
    6
    
    
    
    7Total pre-tax share-based compensation expense
    
    $
    23
    
    
    $
    16
  15




---



##### Table of Contents



First Quarter2007
    
    
    2006(In millions)Parent CompanyCost of sales
    
    $
    3
    
    
    $
    2Selling expense
    
    
    1
    
    
    
    1General and administrative
    
    
    16
    
    
    
    13Total Parent Company
    
    
    20
    
    
    
    16Financial Services
    
    
    3
    
    
    
    Total pre-tax share-based compensation expense
    
    $
    23
    
    
    $
    16
 Restricted or performance units
  WeightedAverage Grant
    
    
    AggregateDate Fair Value
    
    
    CurrentShares
    
    
    Per Share
    
    
    Value(In thousands)
    
    
    
    
    
    
    (In millions)Not vested beginning of the year
    
    
    1,408
    
    
    $
    39Granted
    
    
    769
    
    
    
    51Vested and settled
    
    
    (532
    )
    
    
    30Forfeited
    
    
    (5
    )
    
    
    45Not vested end of first quarter 2007
    
    
    1,640
    
    
    
    47
    
    
    $
    98
 Stock options
  Weighted
    
    
    AggregateWeighted
    
    
    Average
    
    
    Intrinsic ValueAverage
    
    
    Remaining
    
    
    (Current valueExercise Price
    
    
    Contractual
    
    
    less exerciseShares
    
    
    Per Share
    
    
    Term
    
    
    price)(In thousands)
    
    
    
    
    
    
    (In years)
    
    
    (In millions)Outstanding beginning of the year
    
    
    6,012
    
    

    $32Granted
    
    
    1,028
    
    
    51Exercised
    
    
    (727
    )
    
    29Forfeited
    
    
    (9
    )
    
    39Outstanding end of first quarter
2007
    
    
    6,304
    
    
    35
    
    
    7
    
    
    $
    223Exercisable end of first quarter
2007
    
    
    3,635
    
    
    29
    
    
    5
    
    
    $
    106
  First Quarter2007
    
    
    2006Expected life of options (in years)
    
    
    6
    
    
    
    6Expected stock price volatility
    
    
    22.8
    %
    
    
    25.1
    %Expected dividend yield
    
    
    2.3
    %
    
    
    2.4
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    4.5
    %Weighted average estimated fair
value of options granted
    
    $
    12.47
    
    
    $
    11.53
 16




---



##### Table of Contents



Note 6  Earnings Per Share
  First Quarter2007
    
    
    2006(In millions)Weighted average common shares outstanding  basic
    
    
    105.6
    
    
    
    111.1Dilutive effect of stock options
    
    
    2.1
    
    
    
    2.3Weighted average shares outstanding  diluted
    
    
    107.7
    
    
    
    113.4
 Note 7  Comprehensive Income
  First Quarter2007
    
    
    2006(In millions)Net income
    
    $
    38
    
    
    $
    79Other comprehensive income (loss), net of taxes:Unrealized gains (losses) on:Available-for-sale securities
    
    
    
    
    
    
    Derivative instruments
    
    
    
    
    
    
    Foreign currency translation adjustment
    
    
    (1
    )
    
    
    (2
    )Defined benefit plans
    
    
    4
    
    
    
    Other comprehensive income (loss)
    
    
    3
    
    
    
    (2
    )Comprehensive income
    
    $
    41
    
    
    $
    77
  Note 8  Contingencies
   17




---



##### Table of Contents



Note 9  Segment Information
   18




---



##### Table of Contents



Expenses NotAllocated toCorrugated
    
    Forest
    
    Real
    
    Financial
    
    Segments andPackaging
    
    Products
    
    Estate
    
    Services
    
    Eliminations
    
    TotalFor First Quarter 2007 or at First
Quarter-End 2007:(In millions)Revenues from external customers
    
    $
    761
    
    
    $
    246
    
    
    $
    30
    
    
    $
    284
    
    
    $
    
    
    
    $
    1,321Depreciation and amortization
    
    
    37
    
    
    
    16
    
    
    
    
    
    
    
    5
    
    
    
    3
    
    
    
    61Income (loss) before taxes
    
    
    64
    
    
    
    38
    
    
    
    3
    
    
    
    49
    
    
    
    (93
    )(a)
    
    
    61Financial services, net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    95Total assets
    
    
    2,275
    
    
    
    1,026
    
    
    
    594
    
    
    
    15,740
    
    
    
    299
    
    
    
    19,934Investment in equity method investees
and joint ventures
    
    
    11
    
    
    
    22
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    124Capital expenditures and reforestation
    
    
    25
    
    
    
    12
    
    
    
    
    
    
    
    13
    
    
    
    5
    
    
    
    55Goodwill
    
    
    236
    
    
    
    129
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    506For First Quarter 2006 or at First
Quarter-End 2006:(In millions)Revenues from external customers
    
    $
    721
    
    
    $
    333
    
    
    $
    47
    
    
    $
    283
    
    
    $
    
    
    
    $
    1,384Depreciation and amortization
    
    
    38
    
    
    
    14
    
    
    
    1
    
    
    
    5
    
    
    
    3
    
    
    
    61Income (loss) before taxes
    
    
    44
    
    
    
    82
    
    
    
    26
    
    
    
    49
    
    
    
    (75)(a)
    
    
    
    126Financial services, net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    104Total assets
    
    
    2,314
    
    
    
    1,071
    
    
    
    435
    
    
    
    17,570
    
    
    
    304
    
    
    
    21,694Investment in equity method investees
and joint ventures
    
    
    13
    
    
    
    21
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    108Capital expenditures and reforestation
    
    
    19
    
    
    
    10
    
    
    
    
    
    
    
    14
    
    
    
    3
    
    
    
    46Goodwill
    
    
    236
    
    
    
    129
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    524
 
 (a)
    
    Expenses not allocated to segments consist of: First Quarter2007
    
    
    2006(In millions)General and administrative
    
    $
    (25
    )
    
    $
    (23
    )Share-based compensation
    
    
    (23
    )
    
    
    (16
    )Other operating income (expense)
    
    
    (14
    )
    
    
    (3
    )Other non-operating income (expense)
    
    
    
    
    
    
    Parent company interest
    
    
    (31
    )
    
    
    (33
    )$
    (93
    )
    
    $
    (75
    )Other operating income (expense) applies to:Corrugated packaging
    
    $
    (10
    )
    
    $
    (2
    )Forest products
    
    
    
    
    
    
    Real estate
    
    
    
    
    
    
    Financial services
    
    
    
    
    
    
    (3
    )Unallocated
    
    
    (4
    )
    
    
    2$
    (14
    )
    
    $
    (3
    )
 19




---



##### Table of Contents



Note 10  Real Estate
  FirstQuarter-End
    
    
    Year-End2007
    
    
    2006(In millions)Entitled, developed, and under development land
    
    $
    297
    
    
    $
    255Land held for investment or future development
    
    
    149
    
    
    
    142Investment in real estate ventures
    
    
    91
    
    
    
    90Income producing properties, net of accumulated depreciation
    
    
    25
    
    
    
    25$
    562
    
    
    $
    512
   FirstQuarter-End
    
    
    Year-End2007
    
    
    2006(In millions)Real estate
    
    $
    191
    
    
    $
    186Total assets
    
    
    285
    
    
    
    281Borrowings, principally non-recourse
    
    
    65
    
    
    
    66Total liabilities
    
    
    86
    
    
    
    84Equity
    
    
    199
    
    
    
    197Our investment in real estate ventures:Our share of their equity
    
    $
    98
    
    
    $
    97Unrecognized deferred gain(a)
    
    
    (7
    )
    
    
    (7
    )Investment in real estate ventures
    
    $
    91
    
    
    $
    90
 
 (a)
    
    We recognize the deferred gain from our sale of real estate to the
venture as the venture sells the real estate to third parties. First Quarter2007
    
    2006(In millions)Revenues
    
    $
    7
    
    
    $
    53Earnings
    
    
    2
    
    
    
    20Our equity in their earnings
    
    
    1
    
    
    
    10
   Note 11  Assets Held For Sale
  20




---



##### Table of Contents



Note 12  Other Operating Income (Expense)
 First Quarter2007
    
    
    2006(In millions)Equity in earnings of manufacturing joint ventures
    
    $
    1
    
    
    $
    2Equity in earnings of real estate ventures
    
    
    1
    
    
    
    10Litigation
    
    
    (10
    )
    
    
    Transformation plan
    
    
    (4
    )
    
    
    $
    (12
    )
    
    $
    12
  Beginning of
    
    
    
    
    
    
    Cash
    
    
    End ofPeriod
    
    
    Additions
    
    
    Payments
    
    
    Period(In millions)Involuntary employee terminations
    
    $
    1
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    Demolition and environmental remediation
    
    
    8
    
    
    
    
    
    
    
    (2
    )
    
    
    6$
    9
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    6
 Note 13  Subsequent Events
  21




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  
    
    general economic, market or business conditions;
    
    the opportunities (or lack thereof) that may be presented to us and that we may pursue;
    
    fluctuations in costs and expenses including the costs of raw materials, purchased
energy, and freight;
    
    demand for new housing;
    
    accuracy of accounting assumptions related to pension and postretirement costs,
impaired assets, and allowance for credit losses;
    
    competitive actions by other companies;
    
    changes in laws or regulations and actions or restrictions of regulatory agencies;
    
    our ability to execute certain strategic and business improvement initiatives,
including our transformation plan; and
    
    other factors, many of which are beyond our control.
  Non-GAAP Financial Measure
    22




---



##### Table of Contents



Accounting Policies
 Critical Accounting Estimates
  New and Pending Accounting Pronouncements
 Accounting for Planned Major Maintenance Activities; Accounting for Uncertainty in Income Taxes Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans. Note 3 to the Consolidated
Financial Statements
 Transformation Plan
  
    
    retaining our manufacturing operations  corrugated packaging and building products,
    
    spinning off our financial services segment to our shareholders,
    
    spinning off our real estate segment to our shareholders, and
    
    selling our strategic timberland.
     Results of Operations for First Quarter 2007 and 2006
 Summary
  23




---



##### Table of Contents



First Quarter2007
    
    
    2006(In millions, except pershare)RevenuesCorrugated packaging
    
    $
    761
    
    
    $
    721Forest products
    
    
    246
    
    
    
    333Real estate
    
    
    30
    
    
    
    47Financial services
    
    
    284
    
    
    
    283Total revenues
    
    $
    1,321
    
    
    $
    1,384Segment operating incomeCorrugated packaging (a)
    
    $
    64
    
    
    $
    44Forest products
    
    
    38
    
    
    
    82Real estate
    
    
    3
    
    
    
    26Financial services
    
    
    49
    
    
    
    49Total segment operating income
    
    
    154
    
    
    
    201Expenses not allocated to segmentsGeneral and administrative
    
    
    (25
    )
    
    
    (23
    )Share-based compensation
    
    
    (23
    )
    
    
    (16
    )Other operating income (expense)
    
    
    (14
    )
    
    
    (3
    )Other non-operating income (expense)
    
    
    
    
    
    
    Parent company interest
    
    
    (31
    )
    
    
    (33
    )Income before taxes
    
    
    61
    
    
    
    126Income tax expense
    
    
    (23
    )
    
    
    (47
    )Income from continuing operations
    
    
    38
    
    
    
    79Discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    38
    
    
    $
    79Average diluted shares outstanding
    
    
    107.7
    
    
    
    113.4Income from continuing operations, per diluted share
    
    $
    0.35
    
    
    $
    0.70ROI, annualized
    
    
    8.3
    %
    
    
    14.2
    %
 
 (a)
    
    2006 retrospectively adjusted to reflect expense as incurred method of accounting
for planned major maintenance costs.  
    
    We experienced higher prices and lower volumes for our corrugated packaging
products.
    
    While we continue to see the benefit in our manufacturing operations from our
initiatives to lower costs, improve asset utilization, and increase operating
efficiencies, the cost of recycled fiber used at our containerboard mills offset some
of the benefits.
    
    We experienced lower pricing and volumes for our forest products, principally lumber
and gypsum.
    
    Our real estate operations incurred a decline in lot sales resulting from the
overall slowdown in the housing industry.
    
    Our financial services operations experienced a decrease in net interest income due
primarily to a decrease in earning assets, which was offset by lower loan loss
provision and noninterest expense.
    
    We increased litigation reserves by $10 million as a result of a recent California
Supreme Court decision and incurred $4 million of costs associated with our
transformation plan.
    
    We expensed $7 million of share-based compensation due to the higher share price at
first quarter-end.
 24




---



##### Table of Contents




    
    We experienced improved markets for our forest products, principally lumber and
gypsum, and we benefited from the acquisition of our partners 50 percent interest in
Standard Gypsum LP.
    
    While we continued to see the benefit in our manufacturing operations from our
initiatives to lower costs, improve asset utilization and increase operating
efficiencies, costs, principally energy and freight, offset much of the benefit.
    
    Real estate operations benefited from an $8 million gain on sale of land held for
commercial use.
    
    Financial services operations benefited from improved net interest income
attributable to an increase in earning assets, principally mortgage-backed securities.
Actions taken to lower costs in our financial services operation associated with the
elimination of the wholesale mortgage operation resulted in charges of $3 million.
    
    We expensed $7 million of share-based compensation related to awards granted to
retirement eligible employees.
  Corrugated Packaging
   First Quarter2007
    
    
    2006(Dollars in millions)Revenues
    
    $
    761
    
    
    $
    721Costs and expenses
    
    
    (697
    )
    
    
    (677
    )Segment operating income
    
    $
    64
    
    
    $
    44Segment ROI
    
    
    12.7
    %
    
    
    8.6
    %
 25




---



##### Table of Contents



First Quarter 2007versusFirst Quarter 2006Increase/(Decrease)Corrugated packagingAverage prices
    
    
    8
    %Shipments, average week
    
    
    (4
    )%Industry shipments, average week (a)
    
    
    (2
    )%LinerboardAverage prices
    
    
    21
    %Shipments, in thousand tons
    
    
    40
 
 (a)
    
    Source: Fibre Box Association     First Quarter 2007versusFirst Quarter 2006Increase (Decrease)(In millions)Wood fiber
    
    $
    3Recycled fiber
    
    
    21Energy, principally natural gas
    
    
    (6
    )Freight
    
    
    (1
    )Depreciation
    
    
    (1
    )Pension and postretirement
    
    
    (3
    )
  26




---



##### Table of Contents



First Quarter2007
    
    2006Number of converting facilities (at quarter-end)
    
    
    64
    
    
    
    65Mill capacity, in thousand tons
    
    
    899
    
    
    
    892Mill production, in thousand tons
    
    
    897
    
    
    
    890Percent mill production used internally
    
    
    89
    %
    
    
    93
    %Percent of total fiber requirements sourced from recycled fiber
    
    
    37
    %
    
    
    34
    %Corrugating medium purchases from our Premier Boxboard Limited
LLC joint venture, in thousand tons
    
    
    20
    
    
    
    14
 Forest Products
    First Quarter2007
    
    
    2006(Dollars in millions)Revenues
    
    $
    246
    
    
    $
    333Costs and expenses
    
    
    (208
    )
    
    
    (251
    )Segment operating income
    
    $
    38
    
    
    $
    82Segment ROI
    
    
    16.5
    %
    
    
    33.3
    %
 27




---



##### Table of Contents



First Quarter 2007versusFirst Quarter 2006Increase/(Decrease)Lumber:Average prices
    
    
    (25
    )%Shipments
    
    
    (7
    )%Gypsum wallboard:Average prices
    
    
    (7
    )%Shipments
    
    
    (32
    )%Particleboard:Average prices
    
    
    22
    %Shipments
    
    
    (13
    )%MDF:Average prices
    
    
    11
    %Shipments
    
    
    (5
    )%
     First Quarter 2007versusFirst Quarter 2006Increase (Decrease)(In millions)Wood fiber
    
    $
    (10
    )Energy, principally natural gas
    
    
    (10
    )Freight
    
    
    (4
    )Chemicals
    
    
    (1
    )Depreciation
    
    
    2
   28




---



##### Table of Contents



First Quarter2007
    
    2006Timber harvest, in million tons:Sawtimber
    
    
    0.6
    
    
    
    0.6Pulpwood
    
    
    0.8
    
    
    
    0.8Total
    
    
    1.4
    
    
    
    1.4Number of converting and manufacturing facilities (at quarter-end)
    
    
    17
    
    
    
    17Average operating rates for all product lines excluding sold or closed facilities:High
    
    
    91
    %
    
    
    110
    %Low
    
    
    67
    %
    
    
    93
    %Average
    
    
    79
    %
    
    
    100
    %Gypsum facing paper purchases from our Premier Boxboard Limited LLC joint venture, in thousand
tons
    
    
    12
    
    
    
    16Percent of gypsum facing paper supplied by our Premier Boxboard Limited LLC joint venture
    
    
    78
    %
    
    
    64
    %
 Real Estate
   First Quarter2007
    
    
    2006(Dollars in millions)Revenues
    
    $
    30
    
    
    $
    47Costs and expenses
    
    
    (28
    )
    
    
    (31
    )Our share of real estate ventures income
    
    
    1
    
    
    
    10Segment operating income
    
    $
    3
    
    
    $
    26Segment ROI
    
    
    2.3
    %
    
    
    25.3
    %
   29




---



##### Table of Contents



First Quarter2007
    
    
    2006(Dollars in millions)Residential real estate
    
    $
    18
    
    
    $
    17Lots sold
    
    
    250
    
    
    
    342Commercial real estate
    
    $
    4
    
    
    $
    16Acres sold
    
    
    11
    
    
    
    7Land held for investment or future development
    
    $
    2
    
    
    $
    7Acres sold
    
    
    268
    
    
    
    923Income producing properties, timber and other
    
    $
    6
    
    
    $
    7$
    30
    
    
    $
    47
  First Quarter-End2007
    
    2006Owned and consolidated ventures:Entitled, developed, and under development landNumber of projects
    
    
    41
    
    
    
    29Residential lots remaining
    
    
    19,364
    
    
    
    11,415Commercial acres remaining
    
    
    970
    
    
    
    564Land held for investment or future developmentNumber of projects
    
    
    26
    
    
    
    20Acres in entitlement process
    
    
    27,380
    
    
    
    21,950Acres undeveloped
    
    
    187,601
    
    
    
    197,224Ventures accounted for using the equity methodVentures lot salesLots sold
    
    
    191
    
    
    
    719
    (a)Revenue per lot sold
    
    $
    56,975
    
    
    $
    49,357Ventures entitled, developed, and under development landNumber of projects
    
    
    22
    
    
    
    24Residential lots remaining
    
    
    10,099
    
    
    
    13,191Commercial acres remaining
    
    
    731
    
    
    
    701Ventures land held for investment or future development, in acres
    
    
    6,384
    
    
    
    6,594
 
 (a)
    
    The elimination of the previously discussed one month reporting lag resulted in a
one-time increase in the number of lots sold of 122 lots. Financial Services
  30




---



##### Table of Contents



First Quarter2007
    
    2006(Dollars in millions)Net interest income
    
    $
    95
    
    
    $
    104Segment operating income (a)
    
    
    49
    
    
    
    49Segment ROI
    
    
    19.3
    %
    
    
    19.3
    %
 
 (a)
    
    Segment operating income excludes share-based compensation and charges related to
asset impairments and severance reported in financial services summarized financial
statements. Net Interest Income and Earning Assets and Deposits
  First Quarter2007
    
    2006Average
    
    Yield/
    
    Average
    
    Yield/Balance
    
    Rate
    
    Balance
    
    Rate(Dollars in millions)Earning assets
    
    $
    14,895
    
    
    
    6.54
    %
    
    $
    16,585
    
    
    
    5.80
    %Interest-bearing liabilities
    
    
    13,744
    
    
    
    (4.31
    )%
    
    
    15,410
    
    
    
    (3.55
    )%Impact of noninterest-bearing funds
    
    
    
    
    
    
    0.33
    %
    
    
    
    
    
    
    0.25
    %Net interest margin
    
    
    
    
    
    
    2.56
    %
    
    
    
    
    
    
    2.50
    %
  Part I,
Item 3, Quantitative and Qualitative Disclosures About Market Risk ,
  First Quarter-End2007
    
    
    2006(Dollars in millions)Residential housing assets:Loans held for sale
    
    $
    23
    
    
    $
    49Loans
    
    
    5,830
    
    
    
    7,012Securities
    
    
    5,318
    
    
    
    6,54011,171
    
    
    
    13,601Other earning assets
    
    
    3,887
    
    
    
    3,280Total earning assets
    
    $
    15,058
    
    
    $
    16,881Residential housing assets as a percentage of earning assets
    
    
    74
    %
    
    
    81
    %Noninterest-bearing deposit accounts
    
    $
    749
    
    
    $
    782Interest-bearing deposit accounts
    
    
    3,799
    
    
    
    3,585Certificates of deposit
    
    
    4,946
    
    
    
    4,917Total deposits
    
    $
    9,494
    
    
    $
    9,284
 31




---



##### Table of Contents



Asset Quality and Allowance for Credit Losses
  First Quarter-End
    
    
    Year-End2007
    
    
    2006
    
    
    2006(Dollars in millions)Non-performing loans
    
    $
    28
    
    
    $
    41
    
    
    $
    26Foreclosed real estate
    
    
    8
    
    
    
    2
    
    
    
    5Non-performing assets
    
    $
    36
    
    
    $
    43
    
    
    $
    31Non-performing loans as a percentage of total loans
    
    
    0.29
    %
    
    
    0.40
    %
    
    
    0.27
    %Non-performing assets ratio
    
    
    0.37
    %
    
    
    0.43
    %
    
    
    0.32
    %Allowance for loan losses as a percentage of non-performing loans
    
    
    257
    %
    
    
    170
    %
    
    
    253
    %Allowance for loan losses as a percentage of total loans
    
    
    0.74
    %
    
    
    0.69
    %
    
    
    0.68
    %Net charge-offs as a percentage of average loans outstanding
    
    
    (0.33
    )%
    
    
    0.28
    %
    
    
    0.10
    %
 32




---



##### Table of Contents



First Quarter2007
    
    
    2006(In millions)Balance at beginning of period
    
    $
    72
    
    
    $
    81Provision (credit) for credit losses
    
    
    (2
    )
    
    
    2Net (charge-offs) recoveries
    
    
    8
    
    
    
    (7
    )Balance at end of period
    
    $
    78
    
    
    $
    76Allowance for credit losses:Loan
    
    $
    71
    
    
    $
    69Commitment-related
    
    
    7
    
    
    
    7Combined allowance for credit losses
    
    $
    78
    
    
    $
    76
   Noninterest Income and Noninterest Expense
  Expenses Not Allocated to Segments
  Note 5 to the Consolidated Financial Statements
    33




---



##### Table of Contents



Income Taxes
   Average Shares Outstanding
  Capital Resources and Liquidity for First Quarter 2007
  Sources and Uses of Cash
  34




---



##### Table of Contents



Parent Company Sources and Uses of Cash
 First Quarter2007
    
    
    2006(In millions)We received cash from:Operations
    
    $
    78
    
    
    $
    106Dividends from financial services (a)
    
    
    35
    
    
    
    Real estate development expenditures, net of non-cash cost of sales
    
    
    (46
    )
    
    
    4Working capital changes
    
    
    (84
    )
    
    
    (67
    )From operations
    
    
    (17
    )
    
    
    43Sale of assets and other
    
    
    
    
    
    
    3Exercise of options and related tax benefits
    
    
    19
    
    
    
    33Borrowing, net
    
    
    86
    
    
    
    175Total sources
    
    
    88
    
    
    
    254We used cash to:Return to shareholders through:Dividends
    
    
    (29
    )
    
    
    (27
    )Repurchase of common stock
    
    
    (24
    )
    
    
    (51
    )Reinvest in the business through:Capital expenditures
    
    
    (42
    )
    
    
    (32
    )Acquisition, joint ventures, and other
    
    
    (7
    )
    
    
    (146
    )Total uses
    
    
    (102
    )
    
    
    (256
    )Change in cash and cash equivalents
    
    $
    (14
    )
    
    $
    (2
    )
 
 (a)
    
    Dividends received from financial services are eliminated in the consolidated
statements of cash flows.       35




---



##### Table of Contents



Financial Services Sources and Uses of Cash
 First Quarter2007
    
    
    2006(In millions)We received cash from:Operations
    
    $
    35
    
    
    $
    45Changes in loans held for sale and other
    
    
    20
    
    
    
    241From operations
    
    
    55
    
    
    
    286Net repayments on loans and securities
    
    
    307
    
    
    
    132Redemption of Federal Home Loan Bank stock
    
    
    58
    
    
    
    Total sources
    
    
    420
    
    
    
    418We used cash to:Pay dividends to the parent company (a)
    
    
    (35
    )
    
    
    Fund decreases in deposits and borrowings
    
    
    (532
    )
    
    
    (500
    )Reinvest in the business through
capital expenditures, acquisitions, and other
    
    
    (17
    )
    
    
    (11
    )Total uses
    
    
    (584
    )
    
    
    (511
    )Change in cash and cash equivalents
    
    $
    (164
    )
    
    $
    (93
    )
 
 (a)
    
    Dividends we pay to the parent company are eliminated in the consolidated
statements of cash flows.     Liquidity
  36




---



##### Table of Contents



Parent Company Liquidity
   AccountsCommitted
    
    
    ReceivableCredit
    
    
    SecuritizationAgreements
    
    
    Facility
    
    
    Total(In millions)Committed
    
    $
    850
    
    
    $
    250
    
    
    $
    1,100Less: borrowings and commitments
    
    
    (6
    )
    
    
    (250
    )
    
    
    (256
    )Unused borrowing capacity at first quarter-end 2007
    
    $
    844
    
    
    $
    
    
    
    $
    844
    Financial Services Liquidity
   Off-Balance Sheet Arrangements
 Parent Company
  37




---



##### Table of Contents



Financial Services
  FirstQuarter-End
    
    
    Year-End2007
    
    
    2006(In millions)Single-family mortgage loans
    
    $
    86
    
    
    $
    91Unused lines of credit
    
    
    1,996
    
    
    
    2,109Unfunded portion of credit commitments
    
    
    4,280
    
    
    
    4,421Commitments to originate commercial loans
    
    
    784
    
    
    
    655Letters of credit
    
    
    386
    
    
    
    386$
    7,532
    
    
    $
    7,662
 Capital Adequacy and Other Regulatory Matters
   For Categorization asActual
    
    Regulatory Minimum
    
    Well CapitalizedRegulatory capital ratios:Tangible capital
    
    
    7.86
    %
    
    
    32.00
    %
    
    
    N/ALeverage capital
    
    
    7.86
    %
    
    
    34.00
    %
    
    
    35.00
    %Risk-based capital
    
    
    10.58
    %
    
    
    38.00
    %
    
    
    310.00
    %
  Pension and Postretirement Matters
  Energy
  38




---



##### Table of Contents



Litigation and Related Matters
   Calculation of Non-GAAP Financial Measure
 Parent
    
    
    Corrugated
    
    
    Forest
    
    
    Real
    
    
    FinancialCompany
    
    
    Packaging
    
    
    Products
    
    
    Estate
    
    
    Services(Dollars in millions)First Quarter 2007Return:Operating income or segment operating income
determined in accordance with GAAP
    
    $
    92
    (a)
    
    $
    64
    
    
    $
    38
    
    
    $
    3
    
    
    $
    49Adjustments for significant unusual items
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A$
    92
    
    
    $
    64
    
    
    $
    38
    
    
    $
    3
    
    
    $
    49Investment:Beginning of year total assets, segment assets
or investment in financial services determined
in accordance with GAAP
    
    $
    5,217
    
    
    $
    2,284
    
    
    $
    1,011
    
    
    $
    544
    
    
    $
    1,015Adjustments:Current liabilities
(excluding current
portion of long-term
debt)
    
    
    (554
    )
    
    
    (271
    )
    
    
    (87
    )
    
    
    (11
    )
    
    
    N/AAssets held for sale
    
    
    (20
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMunicipal bonds
related to capital
leases included in
other assets
    
    
    (188
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A$
    4,455
    
    
    $
    2,013
    
    
    $
    924
    
    
    $
    533
    
    
    $
    1,015ROI, annualized
    
    
    8.3
    %
    
    
    12.7
    
    
    
    %                            16.5
    %
    
    
    2.3
    %
    
    
    19.3
    %First Quarter 2006Return:Operating income or segment operating income
determined in accordance with GAAP
    
    $
    159
    (a)
    
    $
    44
    
    
    $
    82
    
    
    $
    26
    
    
    $
    49Adjustments for significant unusual items
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A$
    159
    
    
    $
    44
    
    
    $
    82
    
    
    $
    26
    
    
    $
    49Investment:Beginning of year total assets, segment assets
or investment in financial services determined
in accordance with GAAP
    
    $
    5,001
    
    
    $
    2,318
    
    
    $
    866
    
    
    $
    422
    
    
    $
    1,017Adjustments:Current liabilities
(excluding current
portion of long-term
debt)
    
    
    (492
    )
    
    
    (269
    )
    
    
    (76
    )
    
    
    (11
    )
    
    
    N/AAssets held for sale
    
    
    (34
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMunicipal bonds
related to capital
leases included in
other assets
    
    
    (188
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAcquisition of
Standard Gypsum, LP
in January 2006
    
    
    196
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    $
    4,483
    
    
    $
    2,049
    
    
    $
    986
    
    
    $
    411
    
    
    $
    1,017ROI, annualized
    
    
    14.2
    %
    
    
    8.6
    %
    
    
    33.3
    %
    
    
    25.3
    %
    
    
    19.3
    %
 
 (a)
    
    Net of expenses not allocated to segments of $62 million in 2007 and $42 million in 2006.  39




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##### Table of Contents



STATISTICAL AND OTHER DATA
 Parent Company
   First Quarter2007
    
    
    2006(Dollars in millions)RevenuesCorrugated PackagingCorrugated packaging
    
    $
    717
    
    
    $
    698Linerboard
    
    
    44
    
    
    
    23$
    761
    
    
    $
    721Forest ProductsPine lumber
    
    $
    59
    
    
    $
    84Particleboard
    
    
    52
    
    
    
    49Gypsum wallboard
    
    
    70
    
    
    
    112Medium density fiberboard
    
    
    17
    
    
    
    16Fiberboard
    
    
    14
    
    
    
    21Mineral and hunting leases
    
    
    9
    
    
    
    14Fiber and other
    
    
    25
    
    
    
    37$
    246
    
    
    $
    333Unit salesCorrugated PackagingCorrugated packaging, thousands of tons
    
    
    830
    
    
    
    869Linerboard, thousands of tons
    
    
    100
    
    
    
    60930
    
    
    
    929Forest ProductsPine lumber, million board feet
    
    
    203
    
    
    
    218Particleboard, million square feet
    
    
    143
    
    
    
    165Gypsum wallboard, million square feet
    
    
    382
    
    
    
    563Medium density fiberboard, million square feet
    
    
    37
    
    
    
    39Fiberboard, million square feet
    
    
    74
    
    
    
    102
 40




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##### Table of Contents



(a)
 Project
    
    County
    
    Project Acres(b)CaliforniaHidden Creek Estates
    
    Los Angeles
    
    
    700Terrace at Hidden Hills
    
    Los Angeles
    
    
    30GeorgiaBallground
    
    Cherokee
    
    
    500Bay Springs
    
    Carroll
    
    
    400Birch House Farms
    
    Bartow
    
    
    140Crossing
    
    Coweta
    
    
    230Dunaway Gardens
    
    Coweta
    
    
    200Euharlee II West
    
    Bartow
    
    
    360Fincher Road
    
    Cherokee
    
    
    950Four Seasons
    
    Coweta
    
    
    800Friendship Road
    
    Cherokee
    
    
    110Garland Mountain
    
    Cherokee/Bartow
    
    
    350Gold Creek
    
    Dawson/Lumpkin
    
    
    1,090Grove Park
    
    Coweta
    
    
    160Happy Valley Farm
    
    Coweta
    
    
    750Jackson Park
    
    Jackson
    
    
    690Lithia Springs
    
    Haralson
    
    
    260Mill Creek
    
    Coweta
    
    
    780Overlook
    
    Cherokee
    
    
    510Pickens School
    
    Pickens
    
    
    420Whitfield Estates
    
    Jackson
    
    
    180Wolf Creek
    
    Carroll
    
    
    12,180Yellow Creek
    
    Cherokee
    
    
    1,100TexasLake Houston
    
    Harris/Liberty
    
    
    3,630Entrada(c)
    
    Travis
    
    
    240Woodlake Village(c)
    
    Montgomery
    
    
    620Total
    
    
    
    
    27,380
 
 (a)
    
    A project is deemed to be in the entitlement process when customary steps
necessary for the preparation and submittal of an application, like conducting
pre-application meetings or similar discussions with governmental officials, have
commenced, or an application has been filed. Projects listed may have significant steps
remaining, and there is no assurance that entitlements ultimately will be received.(b)
    
    Acreage is for the total project and is approximate. The actual number of acres
entitled may vary.(c)
    
    We own a 50 percent interest in these projects. 41




---



##### Table of Contents



(a)
 Residential Lots(c)
    
    
    Commercial Acres(d)Lots Sold
    
    
    
    
    
    
    Acres SoldInterest
    
    
    Since
    
    
    Lots
    
    
    Since
    
    
    AcresProject
    
    County
    

Owned(b)
    
    
    Inception
    
    
    Remaining
    
    
    Inception
    
    
    RemainingProjects we ownColoradoBuffalo Highlands
    
    Weld
    
    
    100
    %
    
    
    
    
    
    
    645
    
    
    
    
    
    
    
    Johnstown Farms
    
    Weld
    
    
    100
    %
    
    
    115
    
    
    
    699
    
    
    
    
    
    
    
    Pinery West
    
    Douglas
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Stonebraker
    
    Weld
    
    
    100
    %
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    TexasArrowhead Ranch
    
    Hays
    
    
    100
    %
    
    
    
    
    
    
    232
    
    
    
    
    
    
    
    5Caruth Lakes
    
    Rockwall
    
    
    100
    %
    
    
    245
    
    
    
    629
    
    
    
    
    
    
    
    Cibolo Canyons
    
    Bexar
    
    
    100
    %
    
    
    428
    
    
    
    1,321
    
    
    
    64
    
    
    
    81Harbor Lakes
    
    Hood
    
    
    100
    %
    
    
    177
    
    
    
    401
    
    
    
    
    
    
    
    13Harbor Mist
    
    Calhoun
    
    
    100
    %
    
    
    
    
    
    
    1,393
    
    
    
    
    
    
    
    36Hunters Crossing
    
    Bastrop
    
    
    100
    %
    
    
    250
    
    
    
    327
    
    
    
    19
    
    
    
    95Katy Freeway
    
    Harris
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40La Conterra
    
    Williamson
    
    
    100
    %
    
    
    
    
    
    
    509
    
    
    
    
    
    
    
    60Maxwell Creek
    
    Collin
    
    
    100
    %
    
    
    546
    
    
    
    477
    
    
    
    
    
    
    
    Oakcreek Estates
    
    Comal
    
    
    100
    %
    
    
    
    
    
    
    630
    
    
    
    
    
    
    
    The Colony
    
    Bastrop
    
    
    100
    %
    
    
    340
    
    
    
    1,085
    
    
    
    22
    
    
    
    50The Gables at North Hill
    
    Collin
    
    
    100
    %
    
    
    182
    
    
    
    100
    
    
    
    
    
    
    
    The Preserve at Pecan Creek
    
    Denton
    
    
    100
    %
    
    
    73
    
    
    
    746
    
    
    
    
    
    
    
    9The Ridge at Ribelin Ranch
    
    Travis
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    77Other Texas Projects (6)
    
    Various
    
    
    100
    %
    
    
    2,170
    
    
    
    129
    
    
    
    62
    
    
    
    39GeorgiaOther projects (6)
    
    Various
    
    
    100
    %
    
    
    
    
    
    
    3,540
    
    
    
    
    
    
    
    161Missouri and UtahOther projects (3)
    
    Various
    
    
    100
    %
    
    
    746
    
    
    
    271
    
    
    
    
    
    
    
    5,272
    
    
    
    13,734
    
    
    
    293
    
    
    
    781Projects in entities we consolidateTexasCity Park
    
    Harris
    
    
    75
    %
    
    
    609
    
    
    
    692
    
    
    
    36
    
    
    
    129Lantana
    
    Denton
    
    
    55
    % (e)
    
    
    216
    
    
    
    2,134
    
    
    
    
    
    
    
    Light Ranch
    
    Collin
    
    
    75
    %
    
    
    
    
    
    
    2,496
    
    
    
    
    
    
    
    Other Texas projects (6)
    
    Various
    
    Various
    
    
    273
    
    
    
    308
    
    
    
    5
    
    
    
    601,098
    
    
    
    5,630
    
    
    
    41
    
    
    
    189Total owned and consolidated
    
    
    
    
    
    
    
    
    6,370
    
    
    
    19,364
    
    
    
    334
    
    
    
    970Projects in ventures that we account for using the equity methodGeorgiaSeven Hills
    
    Paulding
    
    
    50
    %
    
    
    566
    
    
    
    514
    
    
    
    26
    
    
    
    The Georgian
    
    Paulding
    
    
    38
    %
    
    
    283
    
    
    
    1,102
    
    
    
    
    
    
    
    Other Georgia projects (5)
    
    Various
    
    Various
    
    
    1,842
    
    
    
    250
    
    
    
    
    
    
    
    TexasBar C Ranch
    
    Tarrant
    
    
    50
    %
    
    
    148
    
    
    
    1,033
    
    
    
    
    
    
    
    Fannin Farms West
    
    Tarrant
    
    
    50
    %
    
    
    224
    
    
    
    219
    
    
    
    
    
    
    
    Lantana
    
    Denton
    
    Various (e)
    
    
    1,675
    
    
    
    173
    
    
    
    1
    
    
    
    79Long Meadow Farms
    
    Fort Bend
    
    
    19
    %
    
    
    535
    
    
    
    1,649
    
    
    
    20
    
    
    
    190Southern Trails
    
    Brazoria
    
    
    40
    %
    
    
    189
    
    
    
    871
    
    
    
    
    
    
    
    Stonewall Estates
    
    Bexar
    
    
    25
    %
    
    
    62
    
    
    
    328
    
    
    
    
    
    
    
    Summer Creek Ranch
    
    Tarrant
    
    
    50
    %
    
    
    780
    
    
    
    1,708
    
    
    
    
    
    
    
    374Summer Lakes
    
    Fort Bend
    
    
    50
    %
    
    
    294
    
    
    
    850
    
    
    
    42
    
    
    
    9Village Park
    
    Collin
    
    
    50
    %
    
    
    311
    
    
    
    258
    
    
    
    
    
    
    
    5Waterford Park
    
    Fort Bend
    
    
    50
    %
    
    
    
    
    
    
    493
    
    
    
    
    
    
    
    37Other Texas projects (4)
    
    Various
    
    Various
    
    
    251
    
    
    
    279
    
    
    
    
    
    
    
    37FloridaOther projects (3)
    
    Various
    
    Various
    
    
    473
    
    
    
    372
    
    
    
    
    
    
    
    Total in ventures
    
    
    
    
    
    
    
    
    7,633
    
    
    
    10,099
    
    
    
    89
    
    
    
    731Combined Total
    
    
    
    
    
    
    
    
    14,003
    
    
    
    29,463
    
    
    
    423
    
    
    
    1,701
 
 (a)
    
    A project is deemed entitled when all major discretionary land-use approvals
have been received. Some projects may require additional permits for development.(b)
    
    Interest owned reflects our net equity interest in the project, whether owned
directly or indirectly. There are some projects that have multiple ownership structures
within them. Accordingly, portions of these projects may appear as owned, consolidated,
and/or accounted for on the equity method.(c)
    
    Lots are for the total project.(d)
    
    Commercial acres are for the total project and are net developable acres, which may
be fewer than the gross acres available in the project.(e)
    
    The Lantana project consists of a series of 17 partnerships in which our interests
range from 25 percent to 55 percent. We account for eight of these partnerships using the
equity method and we consolidate the remaining partnerships. 42




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##### Table of Contents



Financial Services
  First Quarter-End
    
    
    Year-End2007
    
    
    2006
    
    
    2006(In millions)Single-family mortgage
    
    $
    2,131
    
    
    $
    2,987
    
    
    $
    2,323Single-family mortgage warehouse
    
    
    688
    
    
    
    670
    
    
    
    795Single-family construction
    
    
    1,768
    
    
    
    1,924
    
    
    
    1,782Multifamily and senior housing
    
    
    1,243
    
    
    
    1,431
    
    
    
    1,270Total residential housing
    
    
    5,830
    
    
    
    7,012
    
    
    
    6,170Commercial real estate
    
    
    1,356
    
    
    
    865
    
    
    
    1,227Commercial and business
    
    
    1,041
    
    
    
    857
    
    
    
    1,012Energy lending
    
    
    1,283
    
    
    
    815
    
    
    
    1,117Asset-based lending and leasing
    
    
    
    
    
    
    386
    
    
    
    Consumer and other
    
    
    136
    
    
    
    171
    
    
    
    156Total loans
    
    
    9,646
    
    
    
    10,106
    
    
    
    9,682Less allowance for loan losses
    
    
    (71
    )
    
    
    (69
    )
    
    
    (65
    )Loans, net
    
    $
    9,575
    
    
    $
    10,037
    
    
    $
    9,617
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Increase (Decrease) in Income Before TaxesFirst Quarter-End 2007
    
    Year-End 2006Parent
    
    Financial
    
    Parent
    
    FinancialCompany
    
    Services
    
    Company
    
    Services(In millions)Change in
Interest Rates+2%
    
    $
    (5
    )
    
    $
    (30
    )
    
    $
    (2
    )
    
    $
    (45
    )+1%
    
    
    (2
    )
    
    
    (10
    )
    
    
    (1
    )
    
    
    (17
    )-1%
    
    
    2
    
    
    
    (19
    )
    
    
    1
    
    
    
    (18
    )-2%
    
    
    5
    
    
    
    (45
    )
    
    
    2
    
    
    
    (38
    )
  43




---



##### Table of Contents



Foreign Currency Risk
  Commodity Price Risk
  
 Item 4. Controls and Procedures
     
 PART II. OTHER INFORMATION
 
 Item 1 . Legal Proceedings
    44




---



##### Table of Contents



Item 1A. Risk Factors
  Risks Relating to the Transformation Plan
 The cost to complete the transactions contemplated by the transformation plan could be significant.
  We may be unable to complete the transactions.
  
    
    changes in business, political, and economic conditions;
    
    changes in governmental regulations and policies and actions of regulatory bodies;
    
    changes in our operating performance;
    
    required changes to existing financings, factors that could influence establishing
the appropriate capital structure for each company, and changes in credit ratings,
including those that may result from the transformation plan;
    
    the ability to attract a buyer for our strategic timberlands; and
    
    our ability to satisfy certain conditions precedent, including final approval by our
Board of Directors, receipt of certain tax rulings, necessary opinions of counsel, and
the filing and effectiveness of registration statements with the SEC.
 Increased demands on our management team as a result of the transformation plan could distract
managements attention from operating our business.
  Each of the independent companies resulting from the completion of the transformation plan may be
unable to achieve some or all of the benefits that we expect will be achieved from the separation
transactions.
  If certain internal restructuring transactions and the distribution relating to the transformation
plan are determined to be taxable for U.S. federal income tax purposes, we and our stockholders
that are subject to U.S. federal income tax could incur significant U.S. federal income tax
liabilities.
  45




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##### Table of Contents



Item 2 . Unregistered Sales of Equity Securities and Use of Proceeds
 (1)
 MaximumTotal Number
    
    
    Number ofof Shares
    
    
    Shares ThatPurchased as
    
    
    May Yet beAverage
    
    
    Part of Publicly
    
    
    PurchasedTotal Number
    
    
    Price
    
    
    Announced
    
    
    Under theof Shares
    
    
    Paid per
    
    
    Plans or
    
    
    PlansPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    or ProgramsMonth 1 (1/1/2007  1/31/2007)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    1,650,000Month 2 (2/1/2007  2/28/2007)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    6,650,000Month 3 (3/1/2007  3/31/2007)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    6,650,000Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    6,650,000
 
 (1)
    
    On August 4, 2006, we announced that our Board of Directors
authorized the repurchase of up to 6,000,000 shares of our
common stock, of which 1,650,000 remain to be purchased. On
February 2, 2007, we announced that our Board of Directors
authorized the purchase of up to an additional 5,000,000
shares of our common stock, increasing the maximum number
of shares yet to be purchased under our repurchase plans to
6,650,000 shares. The August 4, 2006 and February 2, 2007
plans have no expiration dates. We have no plans or
programs that expired during the period covered by the
table above and no plans or programs that we intend to
terminate prior to expiration or under which we no longer
intend to make further purchases. 
 Item 3 . Defaults Upon Senior Securities
  
 Item 4 . Submission of Matters to a Vote of Security Holders
  
 Item 5 . Other Information
  
 Item 6 . Exhibits
 Exhibits
 31.1 
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1 
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 46




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##### Table of Contents



SIGNATURES
  TEMPLE-INLAND INC. (Registrant)Dated:  May 7, 2007
    By
    /s/ Randall D. LevyRandall D. LevyChief Financial OfficerBy
    /s/ Troy L. HesterTroy L. HesterCorporate Controller and Principal Accounting Officer 47




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##### Table of Contents



Exhibit No.
    
    Description
    
    Page No.31.1
    
    Certification of Chief Executive Officer
pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    4931.2
    
    Certification of Chief Financial Officer
pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    5132.1
    
    Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    5232.2
    
    Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    53
 48