The profitability of the U.S. commercial banking industry remained strong again in 2005, although it was a bit below the levels of recent years. Asset quality was still sound, but pressure on net interest margins lowered the return on assets, and an increase in equity relative to assets—owing to an accumulation of goodwill from recent large mergers—pushed down the return on equity more substantially (figure 1). Growth in industry assets remained solid. These bank profit and balance sheet developments were in large part attributable to the generally favorable financial and economic conditions of the U.S. economy in 2005. On the financial front, shortand intermediate-term interest rates increased as monetary policy tightening lifted the target federal funds rate 2 percentage points during the year (figure 2). Longer-term interest rates remained quite low, however, and thus the Treasury yield curve flattened considerably. Interest rates on fixed-rate homemortgage loans were relatively low over most of 2005, although they rose somewhat late in the year. Corporate risk spreads stayed quite narrow by historical standards. The U.S. economy continued to expand at a solid pace in 2005. In the household sector, consumer spending remained vigorous despite higher energy prices; it was supported by an improving labor market and gains in household wealth that reflected further substantial increases in house prices. The low level of residential mortgage interest rates last year spurred sales of both new and existing homes to record levels, although sales cooled somewhat late in the year. Mortgage refinancing rose for a time during the first half of the year but dropped back in the second half. In the corporate sector, investment spending expanded at a solid pace, buoyed by robust growth in final sales. Corporate profits posted strong gains, and firms maintained ample stocks of liquid assets. As a result, businesses financed much of their capital expenditures out of internal funds. Nonetheless, elevated merger and acquisition activity and a considerable rise in share buybacks contributed to a pickup in business borrowing, particularly in the form of commercial and industrial (CI large banks, $7.3 billion to $85.7 billion; medium-sized banks, $457 million to $7.2 billion; and small banks, less than $457 million. Data shown in this article may not match data published in earlier years because of revisions and corrections. In the tables, components may not sum to totals because of rounding. Appendix table A.1, A–E, reports portfolio composition, income, and expense items, all as a percentage of overall average net consolidated assets, for all banks and for each of the four size categories. Appendix table A.2 reports income statement data for all banks. 1. Bank profitability, 1990–2005