To Our Shareowners, Employees, and Customers


It is, again, my pleasure to report exceptional earnings for Frontier
Financial Corporation during 2005.  After 27 years of operation since
1978, this brings our overall record to 26 years in which our
earnings were at record levels.

In addition to our exceptional earnings, we achieved outstanding loan
growth during the year, driven by the robust residential real estate
construction and land development markets in the Puget Sound area.

The economy in our region continues to be resilient.  The residential
and commercial real estate market, the unemployment rate, and the
business environment continue to be sound.

Our net income for the year was $51.6 million, an increase of 19.8%
over 2004 earnings of $43.0 million.  Diluted earnings per share of
$1.81 reflected an increase of $.28 or 18.3% over the $1.53 earned in
2004, split adjusted.

At year-end 2005, Frontier's total assets were $2.64 billion, and
deposits totaled $2.06 billion, an increase of 17.5% and 14.8%,
respectively.  Net loans of $2.35 billion and investments of $110.6
million reflected an increase of 20.9% and a decrease of 27.9%,
respectively.  For the second year in a row, many of our investments
have been called and the proceeds were used to fund the growth in the
loan portfolio.

Return on average assets for the year was 2.09% compared to 1.98% for
2004, and return on shareowners' equity was 18.75% compared to 18.35%
in the prior year.  Frontier's efficiency ratio was 41% compared to
42% last year.  This ratio reflects the cost of producing a dollar of
revenue, and a lower ratio reflects a more productive organization.
Based on the above ratios, Frontier continues to be among the top
performing financial holding companies in the nation.

Nonperforming assets were .19% of total assets at year-end 2005, down
from .63% a year ago.  Nonaccruing loans decreased to $4.9 million at
year-end compared to $14.1 million at December 31, 2004.  For the
years ended December 31, 2005 and 2004, net charge-offs amounted to a
net recovery of $147 thousand, compared to a net loss of $328
thousand, respectively.  The loan loss reserve stood at $37.1
million, or 1.55% of total loans at year-end, compared to $32.7
million, or 1.65% of total loans at the end of the prior year-end.
Frontier considers the reserve for loan losses adequate to cover
losses inherent in the portfolio at December 31, 2005.

<PAGE>


The principal driver of earnings growth was an increase in net
interest income of $21.9 million, or 20.8%.  This margin expansion
was attributable to the Federal Reserve Board increasing rates 25
basis points eight times during 2005.

I am pleased to report that in February, the Federal Reserve Bank
gave approval to Frontier for the purchase of up to 20.0% of the
common stock of Skagit State Bank, headquartered in Burlington,
Washington.  Subsequent purchases have now brought our total
ownership in that bank to 12.02%.

In March, we opened our Bellingham Downtown Office with Carol
Sanderson as the  manager.  Bellingham continues to be an area of
high growth, and that office has been extremely successful in
capturing a strong share of the market in the year that it has been
opened.

In June, we opened our Renton Office, where we acquired a long-time
Renton banker, William LeBlanc as manager. Our Renton Office
continues to grow steadily and make inroads in that community.
Our 41st office opened in Lynden in September, with Lynden banker,
Gerald Kuiken, joining us as manager.  Jerry has been a member of the
Lynden City Council for many years, is well known throughout the
community, and continues to grow his office.

Our 41st office opened in Lynden in September, with Lynden banker, Gerald
Kuiken, joining us as manager. Jerry has been a member of the Lynden city
Council for many years, is well known throughout the community, and continues to
grow his office.

In September, we announced plans to acquire NorthStar Financial,
a bank with $176 million in assets and two offices in the Ballard and
Fremont neighborhoods of Seattle.  That merger was finalized as of
January 31, 2006.  NorthStar President and CEO, Ellen Sas, has joined
Frontier Bank as Executive Vice President and Chief Risk Officer, and
we are extremely pleased to add her expertise to our organization.
NorthStar has been a financially strong institution with the same
customer-driven focus that we emphasize at Frontier, and we expect
this partnership will be very successful as we expand our company
into these two Seattle communities.

Last Fall, we were pleased to announce that a team of six long-time
Bellevue bankers, all formerly with Wells Fargo/Pacific Northwest
Bank, joined Frontier Bank.  The six, along with additional support
staff, will open a new office for us in the central Bellevue business
district during 2006.  Until we establish a permanent site, they are
temporarily located at our Kirkland Office.  The team is headed by
Senior Vice President and Manager, Milton Douglas.  Joining Milt are:
Chuck Brockway, Ron Jackman, Cheryl Gunderson, Alan Parsons, and
Theresa Sykes. We are extremely pleased with the caliber that this
team of highly-respected bankers bring to our bank.

<PAGE>

In May, our Board of Directors announced the election of Mark Zenger
as a new outside director to our Board, effective June 1, 2005.  Mr.
Zenger brings a wealth of financial expertise to our Board with his
background as a retired CPA. Mark is currently President of First
Western Investments, a real estate development and investment company.

The Board also approved the appointment of Patrick Fahey and David
Cuthill to the Boards of Frontier Financial Corporation and Frontier
Bank in November.  Pat has spent 38 years in banking in the
Northwest, and retired from Wells Fargo in October, 2004 where he was
Chairman of Regional Banking in Washington.  From 1988 to 2003, he
was Chairman, President, and CEO of Pacific Northwest Bank, which he
founded in 1988.

David Cuthill is currently Real Estate Director with Opus Northwest,
LLC, a full-service real estate developer serving the northwestern
region of the United States.  From 1995 to 2002, he was responsible
for real estate management for Nordstrom, Inc.  He brings a wealth of
experience and expertise to our Board.

I am pleased to announce that John Dickson was elected to President
and CEO of Frontier Financial Corporation (FFC) in December, with the
realignment effective January 1, 2006.  John replaced Michael
Clementz, who retired  as President and CEO.  Mike will continue to
serve on the Boards of both FFC and Frontier Bank, and he will work
part time as President of FFP, Inc., our premise subsidiary, as he
continues to locate sites for new branch offices for our bank.

John has been CEO of Frontier Bank since May, 2003.  He has been with
Frontier for nearly 21 years and is a 1982 graduate of the University
of Puget Sound, earning a BA in Business and Economics.

The Board continued to increase the cash dividend on our stock in
each successive quarter during the year.  The dividend of $.17 per
share declared in December, 2005 marked the 25th consecutive quarter
in which the cash dividend has been increased.  For the year ended
December 31, 2005, the total return on our stock was 26.7%, including
cash dividends.

<PAGE>

In April, we declared a 3-for-2 stock split to shareowners of record
as of May 2, 2005.  Shareowners received one additional share for
every two shares of stock they owned.  This was equivalent to a 50%
stock dividend.  This marks the seventh time that Frontier has had a
stock split since our opening in 1978.  As a result of those seven
splits, and our 17 stock dividends since inception, an original
shareowner in 1978 who bought 100 shares for $10,000, would own
75,360 shares at year-end, with a market value in excess of $2.4
million, provided no shares were sold during that time.

Our community service continued throughout the year. One of the many
awards we received was the Martin Luther King Housing Development
Association "Alberta J. Canada Community Service Award" for exemplary
service and for our bank's involvement with the community.  This
award recognized our partnering with the MLKHDA, for whom we financed
more than $10 million in capital projects sponsored by that
association.  The MLKHDA provides emergency shelter and affordable
housing, promoting self-sufficiency, home ownership, and neighborhood
revitalization.

In June we were recognized by the Independent Community Bankers of
America (ICBA) as a "Top 20" industry earnings performer.  This
announcement was released through the ICBA national publication,
Independent Banker.

We sincerely thank our Board of Directors for their wisdom and
leadership during 2005, and we thank our employees for their
dedication in providing outstanding service to our customers and to
our communities.

To those many customers whom we have featured throughout this year's
Annual Report, and hundreds of others with whom we have built loyal
relationships, we say a hearty "thank you" for your business.

Equally important, we thank our shareowners for their continued
support.  Without all of you, our bank would not be in the extremely
enviable position of being the top-performing bank that we are today.

Sincerely,




Robert J. Dickson
Chairman

<PAGE>







                         FRONTIER FINANCIAL CORPORATION
                                AND SUBSIDIARIES


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareowners
Frontier Financial Corporation

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Frontier
Financial Corporation and subsidiaries (Corporation) as of December 31, 2005 and
2004, and the related  consolidated  statements of income,  shareowners' equity,
and cash flows for the three years in the period ended  December  31,  2005.  We
also  have  audited   management's   assessment  included  in  the  accompanying
Management  Report  on  Internal  Control  over  Financial  Reporting  that  the
Corporation maintained effective internal control over financial reporting as of
December  31,  2005,  based  on  criteria  established  in  Internal  Control  -
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
Treadway  Commission  (COSO).  The  Corporation's  management is responsible for
these financial  statements,  for maintaining  effective  internal  control over
financial  reporting,  and for its assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
these  financial  statements,  an opinion  on  management's  assessment,  and an
opinion  on  the  effectiveness  of  the  Corporation's  internal  control  over
financial reporting based on our audits.

We conducted  our audits in  accordance  with  auditing  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements are free of material  misstatement  and whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. An audit includes examining,  on a test basis, evidence supporting the
amounts and  disclosures  in the  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
Our audit of internal  control over financial  reporting  included  obtaining an
understanding   of  internal  control  over  financial   reporting,   evaluating
management's  assessment,  testing  and  evaluating  the  design  and  operating
effectiveness  of internal  control,  and performing such other procedures as we
considered necessary in the circumstances.  We believe that our audits provide a
reasonable basis for our opinions.

The  Corporation's  internal  control  over  financial  reporting  is a  process
designed to provide reasonable  assurance regarding the reliability of financial
reporting and the preparation of financial  statements for external  purposes in
accordance  with  generally  accepted  accounting  principles.  A  Corporation's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the  maintenance  of records  that,  in  reasonable  detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Corporation; (2) provide reasonable assurance that transactions are recorded
as necessary to permit  preparation of financial  statements in accordance  with
generally accepted accounting principles,  and that receipts and expenditures of
the  Corporation  are  being  made only in  accordance  with  authorizations  of
management  and  Directors  of  the  Corporation;  and  (3)  provide  reasonable
assurance regarding prevention or timely detection of unauthorized  acquisition,
use,  or  disposition  of the  Corporation's  assets  that could have a material
effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Frontier  Financial  Corporation  and  subsidiaries  as of December 31, 2005 and
2004,  and the results of their  operations and cash flows for each of the three
years  ended  December  31,  2005,  in  conformity  with  accounting  principles
generally  accepted  in the  United  States  of  America.  Also in our  opinion,
management's  assessment that Frontier  Financial  Corporation and  subsidiaries
maintained  effective  internal control over financial  reporting as of December
31,  2005,  is  fairly  stated,  in all  material  respects,  based on  criteria
established in Internal  Control - Integrated  Framework issued by the Committee
of Sponsoring  Organizations  of the Treadway  Commission.  Furthermore,  in our
opinion,  Frontier  Financial  Corporation and subsidiaries  maintained,  in all
material  respects,  effective  internal control over financial  reporting as of
December  31,  2005,  based  on  criteria  established  in  Internal  Control  -
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
Treadway Commission.

/s/ Moss Adams LLP

Everett, Washington
March 14, 2006


   The accompanying notes are an integral part of these financial statements.

                                       -1-
<PAGE>



                         FRONTIER FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                 (In Thousands)


<TABLE>
<CAPTION>

                                                                                             DECEMBER 31,
                                                                                   --------------------------------
ASSETS                                                                                2005                  2004
                                                                                   -----------          -----------
<S>                                                                                <C>                  <C>
Cash and due from banks                                                            $    85,631          $    70,851
Federal funds sold                                                                         733                5,946
Investment securities
     Available for sale, at fair value                                                 104,904              145,917
     Held to maturity (fair value 2005: $5,919; 2004: $7,912)                            5,713                7,534
                                                                                   -----------          -----------
            Total investment securities                                                110,617              153,451

Loans for resale                                                                         5,711                3,813
Loans                                                                                2,383,513            1,974,239
Less allowance for loan losses                                                         (37,075)             (32,728)
                                                                                   -----------          -----------
            Net loans                                                                2,352,149            1,945,324

Premises and equipment, net                                                             29,769               29,226
Intangible assets                                                                        6,476                6,476
Federal Home Loan Bank (FHLB) stock                                                     14,154                 --
Bank owned life insurance                                                               18,136               17,400
Other assets                                                                            19,340               14,722
                                                                                   -----------          -----------
                Total assets                                                       $ 2,637,005          $ 2,243,396
                                                                                   ===========          ===========
LIABILITIES

Deposits
    Noninterest bearing accounts                                                   $   395,852          $   313,275
    Interest bearing accounts                                                        1,665,528            1,482,567
                                                                                   -----------          -----------
            Total deposits                                                           2,061,380            1,795,842

Federal funds purchased and securities sold under agreements to repurchase              20,813               10,205
Federal Home Loan Bank advances                                                        240,000              175,088
Other liabilities                                                                       18,715                8,031
                                                                                   -----------          -----------
            Total liabilities                                                        2,340,908            1,989,166
                                                                                   -----------          -----------
COMMITMENTS AND CONTINGENCIES (Note 15)


SHAREOWNERS' EQUITY

Preferred stock, no par value; 10,000,000 shares authorized                               --                   --
Common stock, no par value; 100,000,000 shares authorized; 28,438,150 and
    28,117,778 shares issued and outstanding in 2005 and 2004                          131,695              124,617
Retained earnings                                                                      159,978              126,216
Accumulated other comprehensive income, net of tax                                       4,424                3,397
                                                                                   -----------          -----------
            Total shareowners' equity                                                  296,097              254,230
                                                                                   -----------          -----------
                Total liabilities and shareowners' equity                          $ 2,637,005          $ 2,243,396
                                                                                   ===========          ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       -2-

<PAGE>





                       FRONTIER FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF INCOME
                  (In Thousands, except for per share amounts)

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                    ---------------------------------------------------
                                                                        2005                2004              2003
                                                                    ------------       -------------     --------------
INTEREST INCOME
<S>                                                                 <C>                <C>                <C>
     Interest and fees on loans                                     $    173,753       $    133,232       $    126,555
     Interest on federal funds sold                                          361                170                558
     Interest on investment securities
         Taxable                                                           4,497              6,351              7,045
         Exempt from federal income tax                                      275                475              1,043
                                                                    ------------       ------------       ------------
            Total interest income                                        178,886            140,228            135,201
                                                                    ------------       ------------       ------------
INTEREST EXPENSE
     Interest on deposits                                                 40,714             26,418             29,907
     Interest on FHLB advances                                            10,434              8,365              7,763
     Interest on federal funds purchased and securities
         sold under agreements to repurchase                                 588                156                159
                                                                    ------------       ------------       ------------
            Total interest expense                                        51,736             34,939             37,829
                                                                    ------------       ------------       ------------
            Net interest income                                          127,150            105,289             97,372

PROVISION FOR LOAN LOSSES                                                 (4,200)            (3,500)            (4,250)
                                                                    ------------       ------------       ------------
            Net interest income after provision for loan losses          122,950            101,789             93,122
                                                                    ------------       ------------       ------------
NONINTEREST INCOME
     Provision for loss on equity investment                                (211)              --                 --
     Gain (loss) on sale of securities                                      --                  (44)               190
     Gain on sale of secondary market loans                                1,249              1,028              2,048
     Service charges                                                       4,365              4,926              4,595
     Other                                                                 7,672              8,034              5,924
                                                                    ------------       ------------       ------------
            Total noninterest income                                      13,075             13,944             12,757
                                                                    ------------       ------------       ------------
NONINTEREST EXPENSE
     Salaries                                                             26,718             23,403             20,819
     Employee benefits                                                     9,825              8,509              7,976
     Occupancy                                                             7,654              7,035              6,255
     State business taxes                                                  1,798              1,751              1,820
     Other                                                                12,117             10,027              9,349
                                                                    ------------       ------------       ------------
            Total noninterest expense                                     58,112             50,725             46,219
                                                                    ------------       ------------       ------------
INCOME BEFORE INCOME TAX                                                  77,913             65,008             59,660

PROVISION FOR INCOME TAX                                                 (26,329)           (21,963)           (20,053)
                                                                    ------------       ------------       ------------
NET INCOME                                                          $     51,584       $     43,045       $     39,607
                                                                    ============       ============       ============
Weighted average number of shares
outstanding for the period                                            28,321,096         27,951,083         27,829,941
BASIC EARNINGS PER SHARE                                            $       1.82       $       1.54       $       1.42

Weighted average number of diluted
shares outstanding for the period                                     28,495,034         28,137,089         27,982,059
DILUTED EARNINGS PER SHARE                                          $       1.81       $       1.53       $       1.42
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       -3-

<PAGE>
                         FRONTIER FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                  CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
                     (In Thousands, except number of shares)


<TABLE>
<CAPTION>

                                                                                                       Accumulated
                                                                                                          Other
                                                       Common Stock                                   Comprehensive
                                                --------------------------- Comprehensive    Retained     Income/
                                                   Shares        Amount        Income        Earnings      (Loss)       Total
                                                ------------- ------------- -------------- ------------- ----------- ------------
<S>                                              <C>             <C>                           <C>          <C>        <C>
Balance, December 31, 2002                        18,817,684      $116,925                      $79,841      $2,097     $198,863
                                                ------------- -------------                ------------- ----------- ------------
Comprehensive Income
     Net income for 2003                                   -             -        $39,607        39,607           -       39,607
     Other comprehensive income,
       Unrealized gain on available
         for sale securities, net of tax $751              -             -          1,395             -       1,395        1,395
                                                                            --------------
          Total comprehensive income                                              $41,002
                                                                            ==============
Stock options exercised                               83,354         1,559                            -           -        1,559
Stock award plan                                      10,822           281                            -           -          281
Repurchase of common shares                         (361,800)          (72)                      (9,076)          -       (9,148)
Cash dividend declared                                     -             -                      (13,151)          -      (13,151)

                                                ------------- -------------                ------------- ----------- ------------
Balance, December 31, 2003                        18,550,060       118,693                       97,221       3,492      219,406
                                                ------------- -------------                ------------- ----------- ------------
Comprehensive Income
     Net income for 2004                                   -             -        $43,045        43,045           -       43,045
     Other comprehensive income,
       Unrealized gain (loss) on available
         for sale securities, net of tax $(51)             -             -            (95)            -         (95)         (95)
                                                                            --------------
          Total comprehensive income                                              $42,950
                                                                            ==============
Stock options exercised                              104,755         2,393                            -           -        2,393
Stock award plan                                      15,995           528                            -           -          528
Issuance of common shares                             74,375         3,003                                                 3,003
Tax benefit from stock options                             -             -                          698           -          698
Cash dividend declared                                     -             -                      (14,748)          -      (14,748)
                                                ------------- -------------                ------------- ----------- ------------
Balance, December 31, 2004                        18,745,185       124,617                      126,216       3,397      254,230
                                                ------------- -------------                ------------- ----------- ------------
Comprehensive Income
     Net income for 2005                                   -             -        $51,584        51,584           -       51,584
     Other comprehensive income,
       Unrealized gain on available
         for sale securities, net of tax $554              -             -          1,027             -       1,027        1,027
                                                                            --------------
          Total comprehensive income                                              $52,611
                                                                            ==============
Stock options exercised                              154,791         2,549                            -           -        2,549
Stock award plan                                      22,584           601                            -           -          601
Issuance of common shares                            143,438         3,928                                                 3,928
Tax benefit from stock options                             -             -                          205           -          205
Three for two stock split                          9,372,152             -
Cash dividend declared                                     -             -                      (18,027)          -      (18,027)
                                                ------------- -------------                ------------- ----------- ------------
Balance, December 31, 2005                        28,438,150      $131,695                     $159,978      $4,424     $296,097
                                                ============= =============                ============= =========== ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       -4-

<PAGE>
                         FRONTIER FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>

                                                                                     YEAR ENDED DECEMBER 31,
                                                                          -----------------------------------------------
                                                                               2005            2004            2003
                                                                          --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                              <C>             <C>             <C>
     Net income                                                                  $51,584         $43,045         $39,607
     Adjustments to reconcile net income to net
            cash provided by operating activities
         Depreciation                                                              2,704           2,501           2,296
         Provision for loan losses                                                 4,200           3,500           4,250
         Gain on sale of other real estate owned                                     (25)           (512)              -
         (Gain) loss on sale of premises and equipment                                31              (9)              3
         Gain (loss) on sale of securities                                             -              44            (190)
         Provision for loss on equity investment                                     211               -               -
         Deferred taxes                                                           (1,633)           (199)           (683)
         Stock award plan compensation                                               601             528             281
         Dividend income from Federal Home Loan Bank                                 (58)           (397)           (781)
         Increase in cash surrender value of BOLI                                   (736)           (574)           (830)
     Changes in operating assets and liabilities
         Income taxes payable                                                      1,964            (726)            633
         Interest receivable                                                      (3,005)            359            (243)
         Interest payable                                                          3,033             290            (853)
         Proceeds from sales of mortgage loans                                    91,293          65,847         137,059
         Origination of mortgage loans held for sale                             (93,191)        (67,707)       (130,249)
         Other operating activities                                                  735           1,872             824
                                                                          --------------- --------------- ---------------
            Net cash provided by operating activities                             57,708          47,862          51,124
                                                                          --------------- --------------- ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Net federal funds sold                                                        5,213          (5,938)         13,520
     Proceeds from maturities of available for sale securities                    90,294          78,368          45,548
     Proceeds from maturities of held to maturity securities                       1,176           4,646          44,116
     Proceeds from sales of available for sale securities                          1,852           1,086           5,051
     Purchase of investment securities available for sale                        (58,923)        (47,127)       (116,985)
     Purchase of investment securities held to maturity                                -               -         (26,565)
     Net cash flows from loan activities                                        (409,274)       (204,804)       (122,703)
     Purchases of premises and equipment                                          (3,193)         (3,052)         (4,084)
     Proceeds from the sale of other real estate owned                                25           5,721             300
     Proceeds from the sale of premises and equipment                                147              91              31
     Other investing activities                                                     (633)         (1,065)          3,381
                                                                          --------------- --------------- ---------------
            Net cash used by investing activities                               (373,316)       (172,074)       (158,390)
                                                                          --------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
     Net change in core deposit accounts                                         (13,360)         77,995         140,060
     Net change in certificates of deposit                                       278,898          50,830         (33,919)
     Stock options exercised                                                       2,549           2,393           1,559
     Cash dividends paid                                                         (17,021)        (14,337)        (12,824)
     Repurchase of common shares                                                       -               -          (9,148)
     Net change in federal funds purchased and securities sold under
         agreements to repurchase                                                 10,608            (190)         (1,794)
     Advances from the Federal Home Loan Bank                                    110,000          55,000          45,000
     Repayments to the Federal Home Loan Bank                                    (45,088)        (50,016)        (35,017)
     Other financing activities                                                    3,802          (1,164)           (746)
                                                                          --------------- --------------- ---------------
            Net cash provided by financing activities                            330,388         120,511          93,171
                                                                          --------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS                                    14,780          (3,701)        (14,095)

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR                                      70,851          74,552          88,647
                                                                          --------------- --------------- ---------------
CASH AND DUE FROM BANKS AT END OF YEAR                                           $85,631         $70,851         $74,552
                                                                          =============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Cash paid during the year for interest                                      $48,703         $34,649         $38,682
     Cash paid during the year for income taxes                                  $26,000         $22,505         $24,657

SUPPLEMENTAL INFORMATION ABOUT NONCASH INVESTING AND FINANCING ACTIVITIES

     Other real  estate  acquired in  settlement  of loans in 2004 and 2003 were
     $1.0 million and $2.2 million, respectively.

     Purchase of  investment  through  issuance of common  shares in 2005 and in
     2004 were $3.9 million and $3.0 million, respectively.

     Tax benefits for  disqualifying  distributions  of stock  options were $205
     thousand and $698 thousand in 2005 and 2004, respectively.
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       -5-



<PAGE>

                         FRONTIER FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

NOTE ONE - Basis of Presentation, Nature of Operations and Summary of
Significant Accounting Policies

Basis of  Presentation  - The  consolidated  financial  statements  include  the
accounts of Frontier Financial Corporation (the Corporation or FFC), a financial
holding company,  and its wholly owned  subsidiaries,  Frontier Bank (the Bank),
and FFP, Incorporated (FFP). FFP owns certain real property,  which is leased to
the Bank for use in its operations.  Significant  inter-company account balances
and transactions have been eliminated in consolidation.  Assets held by the Bank
in an  agency  or  fiduciary  capacity,  are not  included  in the  accompanying
financial statements.

Nature of Operations - The Corporation is primarily  engaged in providing a full
range of banking and mortgage  services to individual  and  corporate  customers
through the Bank.  The Bank also provides  other services such as trust services
and insurance and financial  service  brokerage  activities.  The Corporation is
subject to competition  from other financial  institutions  and to regulation by
certain federal and state agencies and undergoes periodic  examinations by those
regulatory authorities.

Summary of Significant Accounting Policies

(a)  Investment  Securities  -  Investments  in equity and debt  securities  are
classified into one of three categories: 1) held to maturity (HTM), 2) available
for sale (AFS), or 3) trading.  Investment securities are categorized as held to
maturity when the  Corporation has the positive intent and ability to hold those
securities to maturity. Securities which are held to maturity are stated at cost
and adjusted for amortization of premiums and accretion of discounts,  which are
recognized as adjustments to interest income.  Investment securities categorized
as available for sale are generally held for investment  purposes (to maturity),
although  unanticipated future events may result in the sale of some securities.
Available  for  sale  securities  are  recorded  at  fair  value,  with  the net
unrealized gain or loss included in comprehensive income, net of the related tax
effect.  Realized gains or losses on dispositions  are based on the net proceeds
and the  adjusted  carrying  amount  of  securities  sold,  using  the  specific
identification  method.  The Corporation did not have any investment  securities
categorized as trading securities at December 31, 2005 and 2004.

Declines in the fair value of individual held to maturity and available for sale
securities  below their cost that are other than  temporary  are  recognized  by
write-downs of the individual  securities to their fair value.  Such write-downs
would be included in earnings as realized  losses.  Premiums and  discounts  are
recognized in interest  income using the interest method over the period to call
or maturity.

(b) Federal Home Loan Bank (FHLB) Stock - The Bank's  investment in Federal Home
Loan Bank stock is  carried  at par value  ($100 per  share),  which  reasonably
approximates  its fair  value.  As a  member  of the  FHLB  system,  the Bank is
required  to  maintain a minimum  level of  investment  in FHLB  stock  based on
specific  percentages of its  outstanding  FHLB advances.  The FHLB announced in
December 2004 that it would not  repurchase any stock until further  notice.  On
April 5, 2005,  the FHLB of Seattle  submitted a proposed  business  and capital
plan to its regulator,  the Federal Housing Finance Board ("Finance Board").  In
May 2005, the Finance Board accepted the Seattle Bank's three-year plan. To meet
the Finance  Board's  conditions  under the three-year  plan, the Seattle Bank's
board adopted a resolution that suspends dividends on all classes of stock going
forward.  The Seattle Bank  anticipates a trend of net losses for 2005 and 2006,
with the  potential  for net  income in 2007.  As such,  the FHLB stock has been
disclosed as a nonearning asset as of December 31, 2005. Since December of 2005,
the Seattle  Bank board has  suspended  all Class B (1) stock  repurchases,  and
allowed  limited Class B (2) stock  repurchases;  however,  the Seattle Bank may
seek waivers from the Finance  Board to allow for very  limited  repurchases  of
Class B (2) stock.  The  dividend  income  shown on the  statement of cash flows
represents dividends declared in 2004, but not paid until 2005. At year-end 2005
and 2004, the Bank held FHLB stock of $14.1 million.



                                       -6-
<PAGE>


NOTE  ONE  -  Basis  of  Presentation,  Nature  of  Operations  and  Summary  of
Significant Accounting Policies (continued)


        (c) Loans and Related Income - Loans that  management has the intent and
ability to hold for the  foreseeable  future,  or until  maturity  or payoff are
reported at their outstanding principal, adjusted for unearned discounts, net of
unamortized  nonrefundable  fees and  related  direct  loan  origination  costs.
Interest income is accrued as earned.

        Net deferred fees and costs are generally amortized into interest income
as an adjustment to the loan yield using the interest method.  Expenses deferred
(principally personnel expense) and recognized in the yield adjustment result in
a reduction in noninterest expense.

Nonrefundable  fees  related  to  lending  activities  other  than  direct  loan
origination  or purchase are  recognized as credit  related fees and included in
noninterest  income  during the period the related  service is  provided.  These
include, standby letter of credit and loan commitment fees.

Loans are placed on nonaccrual  status when, in the opinion of  management,  the
collection  of  additional  interest is doubtful or when the loan  becomes 90 or
more days past due.  When a loan is placed on  nonaccrual  status,  all interest
previously accrued, but not collected,  is reversed and charged against interest
income. Income on nonaccrual loans is then recognized only to the extent cash is
received and where the future collection of principal is probable.  Accruals are
resumed  only when the loan is  brought  current,  and when,  in the  opinion of
management,  the borrower  has  demonstrated  the ability to resume  payments of
principal  and interest.  Interest  income on  restructured  loans is recognized
pursuant  to the  terms  of the new loan  agreement.  Interest  income  on other
impaired  loans is  monitored  and based upon the terms of the  underlying  loan
agreement.  However,  the recorded net investment in impaired  loans,  including
accrued interest,  is limited to the present value of the expected cash flows of
the impaired  loan or the  observable  fair market value of the loan or the fair
market value of the loan's collateral.

        A loan is considered impaired when management  determines it is probable
that all  contractual  amounts of  principal  and  interest  will not be paid as
scheduled in the loan  agreement.  These loans include all loans in  nonaccrual,
loans restructured, and other loans that management considers to be impaired.

        (d)  Allowance  For Loan  Losses - The  allowance  for  loan  losses  is
established  as losses are  estimated to have  occurred  through a provision for
loan losses charged to earnings.  Loan losses are charged  against the allowance
when management  believes the  uncollectibility  of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.

        The  allowance  for loan  losses  is  evaluated  on a  regular  basis by
management and is based upon management's  periodic review of the collectibility
of the loans in light of  historical  experience,  the  nature and volume of the
loan portfolio,  adverse  situations  that may affect the borrower's  ability to
repay,  estimated  value of any underlying  collateral  and prevailing  economic
conditions.  This evaluation is inherently  subjective as it requires  estimates
that  are  susceptible  to  significant  revision  as more  information  becomes
available.

The allowance  consists of specific,  general and  unallocated  components.  The
specific  component  relates to loans that are  classified  as either  doubtful,
substandard  or special  mention.  For such loans  that are also  classified  as
impaired,  an  allowance  is  established  when the  discounted  cash  flows (or
collateral value or observable  market price) of the impaired loan is lower than
the carrying  value of that loan.  The general  component  covers  nonclassified
loans  and is based on  historical  loss  experience  adjusted  for  qualitative
factors.  An  unallocated  component is maintained to cover  uncertainties  that
could affect management's estimate of probably losses. The unallocated component
of the allowance  reflects the margin of imprecision  inherent in the underlying
assumptions used in the methodologies for estimated  specific and general losses
in the portfolio.

A loan is considered  impaired when, based on current information and events, it
is  probable  that the  Corporation  will be unable  to  collect  the  scheduled
payments of principal or interest when due according to the contractual terms of
the loan

                                      -7-
<PAGE>



NOTE  ONE  -  Basis  of  Presentation,  Nature  of  Operations  and  Summary  of
Significant Accounting Policies (continued)


agreement.  Factors  considered by management in determining  impairment include
payment status,  collateral  value, and the probability of collecting  scheduled
principal and interest  payments when due. Loans that  experience  insignificant
payment delays and payment shortfalls  generally are not classified as impaired.
Management  determines the significant of payment delays and payment  shortfalls
on a case-by-case  basis,  taking into  consideration  all of the  circumstances
surrounding  the loan and the borrower,  including the length of the delay,  the
reasons for the delay,  the borrower's  prior payment record,  and the amount of
the  shortfall in relation to the  principal  and interest  owed.  Impairment is
measured on a loan-by-loan basis for commercial and construction loans by either
the present  value of the expected  future cash flows  discounted  at the loan's
effective  interest rate, the loan's  obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.

(e) Loans Held For Sale - Mortgage  loans  originated and designated as held for
sale are carried at the lower of cost or estimated fair value,  as determined by
quoted market prices,  in aggregate.  Net unrealized  losses are recognized in a
valuation  allowance  by charges to income.  Gains or losses on the sale of such
loans are based on the specific identification method.

(f) Premises and Equipment - Premises,  leasehold improvements and equipment are
shown at cost and  depreciated  using  the  straight-line  method.  Depreciation
expense is computed over the following estimated useful lives:

               Premises                                   7 to 40 years
               Furniture, fixtures and equipment           3 to 7 years

(g) Other Real Estate Owned - Other real estate owned  consists  principally  of
properties  acquired  through  foreclosure and is stated at the lower of cost or
estimated market value. Losses arising from the acquisition of property, in full
or partial satisfaction of loans, are charged to the allowance for loan losses.

Subsequent  to the  transfer to  foreclosed  assets held for sale,  these assets
continue to be recorded at the lower of cost or fair value (less estimated costs
to sell), based on periodic evaluations.  Generally, legal and professional fees
associated with foreclosures are expensed as incurred. Costs incurred to improve
property prior to sale are capitalized,  however, in no event are recorded costs
allowed to exceed fair value.  Subsequent gains,  losses, or expenses recognized
on the sale of these properties are included in noninterest income or expense.

(h) Income Tax - The  Corporation  reports income and expenses using the accrual
method of accounting  and files a  consolidated  tax return.  Deferred taxes are
determined  using the  asset-liability  method and are  reflected  at  currently
enacted  income tax rates  applicable  to the period in which the  deferred  tax
assets or liabilities are expected to be realized or settled.  As changes in tax
laws or rates are  enacted,  deferred  tax assets and  liabilities  are adjusted
through the  provision for income taxes.  Deferred  taxes result from  temporary
differences in recognition  of certain  income and expense  amounts  between the
Bank's financial statements and its tax returns.

(i) Retirement  Plan - The  Corporation has a profit sharing and salary deferral
plan that covers eligible employees. The Corporation's contributions to the plan
were $3.2  million  in 2005,  $2.5  million in 2004,  and $2.4  million in 2003.
Contributions to the profit sharing plan are discretionary  with a minimum of 6%
of employee compensation. Employer contributions are funded during the period in
which it is committed by the Board of Directors.

(j) Advertising Costs - The Corporation  expenses  advertising costs as they are
incurred and such costs are not considered to be material.

(k)  Financial  Instruments - In the ordinary  course of business,  the Bank has
entered into off-balance sheet financial  instruments  consisting of commitments
to extend credit, commitments under credit card arrangements, commercial letters
of credit,  and  standby  letters  of credit.  Such  financial  instruments  are
recorded in the  financial  statements  when they are funded or related fees are
incurred or received.



                                      -8-
<PAGE>




NOTE  ONE  -  Basis  of  Presentation,  Nature  of  Operations  and  Summary  of
Significant Accounting Policies (continued)


(l) Stock Option Plans - At December 31, 2005, the Corporation has a stock-based
employee  compensation  plan,  which is  described  more  fully in Note 11.  The
Corporation  accounts  for the plan  using  the  intrinsic  value  method  under
recognition  and  measurement  principles of APB Opinion No. 25,  Accounting for
Stock Issued to Employees, and related Interpretations.  No stock-based employee
compensation  cost is reflected in net income, as all options granted under this
plan had an exercise  price equal to the market value of the  underlying  common
stock on the date of grant and vest immediately. The following table illustrates
the effect on net income and earnings per share if the  Corporation  had applied
the fair value recognition  provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.

In Thousands, except for per share amounts

Pro forma disclosures              2005            2004             2003
                                   ----            ----             ----
  Net income as reported           $51,584          $43,045          $39,607
  Additional compensation for
     fair value of stock options     1,098            1,091            1,998
                                 ----------     ------------    -------------

Pro forma net income               $50,486          $41,954          $37,609
                                 ==========     ============    =============

Earnings per share
  Basic
    As reported                    $  1.82          $  1.54          $  1.42
    Pro forma                      $  1.78          $  1.50          $  1.35
                                 ==========     ============    =============
  Diluted
    As reported                    $  1.81          $  1.53          $  1.42
    Pro forma                      $  1.77          $  1.49          $  1.34
                                 ==========     ============    =============


(m) Earnings Per Share - Basic  earnings per share amounts are computed based on
the weighted average number of shares outstanding during the period after giving
retroactive  effect to stock  dividends and stock splits.  Diluted  earnings per
share are  computed  by  determining  the number of  additional  shares that are
deemed  outstanding  due to stock options under the treasury  stock method.  All
numbers have been restated to reflect the three-for-two  stock split declared by
the Corporation in May 2005.

(n) Cash  Equivalents  - For  purposes of  reporting  cash flows,  cash and cash
equivalents  include  cash on hand,  and amounts  due from banks.  Cash and cash
equivalents have an original maturity of three months or less.

(o) Use of Estimates - The  preparation  of financial  statements  in conformity
with accounting  principles  generally  accepted in the United States of America
requires  management to make estimates and  assumptions  that affect the amounts
reported in the financial  statements  and  accompanying  notes.  Actual results
could differ from those estimates.

Material  estimates that are  particularly  susceptible  to significant  change,
relate to the  determination  of the allowance for loan losses,  deferred income
taxes, and the valuation of real estate acquired in connection with foreclosures
or in  satisfaction  of  loans.  In  connection  with the  determination  of the
allowance for loan losses and the valuation of foreclosed  assets held for sale,
management obtains independent appraisals for significant properties.

(p) Transfer of Financial  Assets - Transfers of financial  assets are accounted
for as sales,  when control over the assets has been  surrendered.  Control over
transferred  assets is deemed to be  surrendered  when (1) the assets  have been
isolated from the  Corporation,  (2) the  transferee  obtains the right (free of
conditions  that constrain it from taking  advantage of that right) to pledge or
exchange  the  transferred  assets,  and (3) the  Corporation  does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.


                                      -9-
<PAGE>




NOTE  ONE  -  Basis  of  Presentation,  Nature  of  Operations  and  Summary  of
Significant Accounting Policies (continued)


(q)  Comprehensive  Income  -  Accounting   principles  generally  require  that
recognized  revenue,  expenses,  gains and  losses be  included  in net  income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale  securities,  are reported as separate component of
the equity section of the balance sheet,  such items,  along with net income are
components of comprehensive income.

The  components  of other  comprehensive  income and  related tax effects are as
follows:

<TABLE>
<CAPTION>

In Thousands                                                                        Years Ended December 31,
                                                                         ----------------------------------------------
                                                                             2005           2004          2003
                                                                         --------------  ------------  ------------

<S>                                                                             <C>           <C>           <C>
Unrealized holding gains on available-for-sale securities                       $6,807        $5,226        $5,372
Tax effect                                                                      (2,383)       (1,829)       (1,880)
                                                                         --------------  ------------  ------------

     Net-of-tax amount                                                          $4,424        $3,397        $3,492
                                                                         ==============  ============  ============
</TABLE>

The  components  of  accumulated  other   comprehensive   income,   included  in
shareowners' equity, are as follows:

<TABLE>
<CAPTION>
In Thousands                                                                             December 31,
                                                                         ------------------------------------------
                                                                             2005                         2004
                                                                         --------------                ------------
<S>                                                                             <C>                          <C>
Net unrealized gain (loss) on securities available-for-sale                     $1,581                       ($146)
Tax effect                                                                        (554)                         51
                                                                         --------------                ------------

Accumulated other comprehensive income (loss)                                   $1,027                        ($95)
                                                                         ==============                ============
</TABLE>


(r) Business  Combinations - Statement of Financial  Accounting Standards (SFAS)
No.  141,  Business  Combinations,   (SFAS  141),  requires  that  all  business
combinations  initiated  after June 30, 2001 be accounted for using the purchase
method. The purchase method of accounting  requires that the cost of an acquired
entity be allocated  to the assets  acquired and  liabilities  assumed  based on
their estimated fair values at the date of acquisition.  The difference  between
the fair values and the purchase price is recorded to Goodwill. Also, under SFAS
141,  identified  intangible assets acquired in a purchase business  combination
must be  separately  valued and  recognized  on the  balance  sheet if they meet
certain  requirements.  See Note 2 of the consolidated  financial statements for
further discussion.

(s)  Reclassifications  - Certain amounts in prior years'  financial  statements
have  been   reclassified   to   conform   to  the  2005   presentation.   These
classifications have not had an effect on previously reported income.

NOTE TWO - Acquisition

On February 1, 2006,  the  Corporation  acquired 100 percent of the  outstanding
shares of NorthStar  (NorthStar) Financial  Corporation.  NorthStar's results of
operations  will be included in the  Corporation's  results  beginning  in 2006.
NorthStar had two full service offices in the Seattle communities of Ballard and
Fremont.  The purchase of NorthStar provided Frontier the opportunity to fill in
branches within its market area. The aggregate purchase price was $46.4 million.

The  acquisition  was accounted for as a purchase in accordance  with SFAS 141.
Accordingly  the purchase  price was  allocated  to the assets  acquired and the
liabilities assumed based on their estimated fair values at the acquisition date
as summarized in the following table:



                                      -10-
<PAGE>




NOTE TWO - Acquisition (continued)


<TABLE>
<CAPTION>
In Thousands
Purchase Price
<S>                                                                                                     <C>
Total value of the Corporation's common stock exchanged                                                 $43,731
Value of stock options assumed                                                                            2,709
                                                                                                  --------------
          Total Purchase Price                                                                                           46,440

Allocation of purchase price
       NorthStar's shareowner equity                                                                                     11,931
       Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:
          Loan                                                                                                              278
          Core deposit intangible                                                                                           681
          Federal Home Loan Bank advances                                                                                   159
          Junior subordinated debentures                                                                                     52
                                                                                                                  --------------
          Estimated fair value of net assets acquired                                                                    13,101
                                                                                                                  --------------
               Goodwill resulting from acquisition                                                                     $ 33,339
                                                                                                                  ==============
</TABLE>

The acquired core deposit intangible assets has a useful life of approximately 5
years. The $33.3 million of goodwill acquired assigned to the NorthStar business
segment and none of it is deductible for tax purposes.

The fair value of assets and liabilities of NorthStar at the date of acquisition
are presented below:

<TABLE>
<CAPTION>
<S>                                                                                                                      <C>
     Cash                                                                                                               $ 3,481
     Securities available-for-sale                                                                                        8,176
     Federal funds sold and interest beraring deposits at banks                                                           8,003
     Loans, net of allowance for loan losses of $2,501                                                                  150,099
     Premises and equipment, net                                                                                            178
     BOLI                                                                                                                 3,174
     Other assets                                                                                                         2,521
     Investment in Trust I and Trust II                                                                                     156
     Goodwill                                                                                                            33,339
                                                                                                                  --------------
          Total assets                                                                                                  209,127
     Deposits                                                                                                          (145,172)
     Federal Home Loan Bank advances                                                                                    (11,152)
     Junior subordinated debentures                                                                                      (5,104)
     Other liabilities                                                                                                   (1,259)
                                                                                                                  --------------
Net assets acquired                                                                                                     $46,440
                                                                                                                  ==============
</TABLE>

Unaudited Pro Forma Condensed Consolidated Financial Information

The following unaudited pro forma condensed  consolidated  financial information
presents the results of operations of the Corporation had the acquisition  taken
place at January 1, 2004:
<TABLE>
<CAPTION>

In Thousands, except per share amounts                                For the years ended December 31,
                                                                          2005              2004
                                                                     ----------------  ----------------
<S>                                                                      <C>               <C>
Net interest income                                                      $   134,868       $   111,866
Provision for loan losses                                                     (4,990)           (4,378)
Noninterest income                                                            14,181            14,623
Noninterest expense                                                           63,025            54,848
Income before income tax                                                      81,034            67,263
Net income                                                                    53,646            44,552
Per common share information:
Basis earnings per share                                                 $      1.80       $      1.52
Diluted earnings per share                                               $      1.79       $      1.50
Average common shares issued and outstanding                              29,776,071        29,407,042
Average diluted common shares issued and outstanding                      30,020,635        29,662,218
</TABLE>



                                      -11-
<PAGE>

NOTE TWO - Acquisition (continued)

The pro forma results  presented in the previous table include  amortization  of
purchase  premiums of  approximately  $241 thousand for the years ended December
31, 2005 and 2004.  Excluded from the pro forma results are acquisition  related
expenses  of  approximately  $2.5  million  paid for by  NorthStar  prior to the
acquisition date.

NOTE THREE - Investments

Investments in federal funds sold are made with major banks,  which are approved
by the Board of  Directors.  The Bank has an  investment  policy that  generally
permits  holding  securities  rated  only  in  one of the  four  highest  rating
categories by a nationally recognized credit rating organization.

The  aggregate  amortized  cost and fair  values  of  investment  securities  at
December 31 are as follows:


<TABLE>
<CAPTION>
                                                                              Less than          12 months
In Thousands                                                                  12 months           or more
                                                             Gross              Gross              Gross
2005                                    Amortized          Unrealized         Unrealized         Unrealized             Fair
                                           Cost              Gains             Losses              Losses               Value
                                       -------------       -----------       ------------       -------------       --------------
Available for sale
<S>                                          <C>                  <C>                <C>        <C>                 <C>
     U.S. Treasury bonds                   $  7,232            $   57              ($  1)                  -             $  7,288
     U.S. Agency bonds                       49,621               109                (26)            ($1,179)              48,525
     Municipal securities                        45                 -                  -                   -                   45
     Corporate bonds                         17,799               336               (147)               (135)              17,853
     Equities                                23,400             8,366               (198)               (375)              31,193
                                       -------------       -----------       ------------       -------------       --------------
                                             98,097             8,868               (372)             (1,689)             104,904
                                       -------------       -----------       ------------       -------------       --------------
Held to maturity
     Municipal securities                     4,186                84                  -                  (5)               4,265
     Corporate bonds                          1,527               127                  -                   -                1,654
                                       -------------       -----------       ------------       -------------       --------------
                                              5,713               211                  -                  (5)               5,919
                                       -------------       -----------       ------------       -------------       --------------
         Total Securities                  $103,810            $9,079              ($372)            ($1,694)            $110,823
                                       =============       ===========       ============       =============       ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                              Less than          12 months
                                                                              12 months           or more
                                                             Gross              Gross              Gross
2004                                    Amortized          Unrealized         Unrealized         Unrealized             Fair
                                           Cost              Gains             Losses              Losses               Value
                                       -------------       -----------       ------------       -------------       --------------
Available for sale
<S>                                         <C>                   <C>               <C>         <C>                 <C>
     U.S. Treasury bonds                   $ 15,704            $   60              ($ 26)                  -             $ 15,738
     U.S. Agency bonds                       49,738                 9               (361)                  -               49,386
     Municipal securities                        45                 -                  -               ($  1)                  44
     Corporate bonds                         42,686               649                (10)                (46)              43,279
     Equities                                32,518             5,426                (20)               (454)              37,470
                                       -------------       -----------       ------------       -------------       --------------
                                            140,691             6,144               (417)               (501)             145,917
                                       -------------       -----------       ------------       -------------       --------------
Held to maturity
     Municipal securities                     6,006               225                 (1)                 (1)               6,229
     Corporate bonds                          1,528               155                  -                   -                1,683
                                       -------------       -----------       ------------       -------------       --------------
                                              7,534               380                 (1)                 (1)               7,912
                                       -------------       -----------       ------------       -------------       --------------
         Total Securities                  $148,225            $6,524              ($418)              ($502)            $153,829
                                       =============       ===========       ============       =============       ==============
</TABLE>





Certain  investment  securities shown above currently have fair values less than
amortized cost and therefore  contain  unrealized  losses.  The  Corporation has
evaluated these securities and has determined that the decline in value


                                      -12-
<PAGE>





NOTE THREE - Investments (continued)

is  temporary,  and is not related to any company or  industry  specific  event.
There are 28 investment  securities with unrealized losses at December 31, 2005.
The  Corporation  anticipates  full  recovery of amortized  cost with respect to
these  securities at maturity or sooner in the event of a more favorable  market
interest rate environment.

Contractual  maturities  of  investment  securities  as of December 31, 2005 are
shown below. Expected maturities will differ from contractual maturities because
issuers  may  have the  right  to call or  prepay  obligations  with or  without
prepayment penalties.


<TABLE>
<CAPTION>
In Thousands
                                                            Available for Sale                   Held to Maturity
                                                       -----------------------------       -----------------------------
                                                        Amortized          Fair             Amortized          Fair
                                                           Cost           Value                Cost            Value
                                                       -------------   -------------       -------------    ------------
                Maturity
<S>                                                         <C>             <C>                  <C>             <C>
                    Less than one year                      $33,899        $ 41,639              $1,700          $1,697
                    One to five years                        61,383          60,056               2,252           2,313
                    Five to ten years                           251             308                 234             255
                    Over ten years                            2,564           2,901               1,527           1,654
                                                       -------------   -------------       -------------    ------------

                                                            $98,097        $104,904              $5,713          $5,919
                                                       =============   =============       =============    ============
</TABLE>

Investments in state and political subdivisions represent purchases of municipal
bonds,  with  localities  principally  in  western  Washington.  Investments  in
corporate bonds are made in companies located and doing business  throughout the
United States.  Approximately  70% and 56% of the investments in corporate bonds
at  December  31,  2005 and 2004,  respectively,  consisted  of  investments  in
companies doing business in the financial services sector. Approximately 30% and
44% of the  investments  in  corporate  bonds at  December  31,  2005 and  2004,
respectively,  consisted  of  investments  in  companies  doing  business in the
industrial sector.

As of December  31, 2005 and 2004,  the  Corporation  held FHLB bonds that had a
book  value of $34.0  million  and a market  value of $33.2  million  and  $33.8
million, respectively.

Proceeds from sales of available for sale  securities were $1.9 million in 2005,
$1.1 million in 2004 and $5.1 million in 2003.  Gross  realized gain on sales of
securities  was  $191  thousand  in  2003.  Gross  realized  losses  on sales of
securities  were $44  thousand  in 2004  and $1  thousand  in  2003.  Investment
securities,  with an amortized cost of $32.3 million and $29.2 million with fair
values of $31.6 and $29.2 million in 2005 and 2004,  respectively,  were pledged
to secure public deposits and securities sold under  agreements to repurchase as
required by law.

NOTE FOUR - Loans

The Bank originates  commercial,  real estate  mortgage,  construction  and land
development  and  installment  loans  primarily in  Snohomish,  Skagit,  Island,
Jefferson, Clallam, Kitsap, Whatcom, King and Pierce Counties. Although the Bank
has  a  diversified  loan  portfolio,   local  economic  conditions  may  affect
borrowers' ability to meet the stated repayment terms.  Collateral for each loan
is  based on a credit  evaluation  of the  customer,  and such  collateral  may,
depending on the loan, include accounts receivable,  inventory,  equipment, real
estate or other collateral.  Loans are originated at both fixed, adjustable, and
variable interest rates.



                                      -13-
<PAGE>




NOTE FOUR - Loans (continued)

Major classifications of loans at December 31 are as follows:


<TABLE>
<CAPTION>
In Thousands                                                                  2005               2004
------------                                                              --------------    ---------------
<S>                                                                            <C>                <C>
     Commercial and agriculture                                              $  321,980         $  302,986
     Real estate commercial                                                     860,826            850,107
     Real estate construction and land development                              978,120            617,515
     Real estate mortgage                                                       191,137            166,527
     Installment                                                                 46,825             50,023
                                                                          --------------    ---------------
                                                                              2,398,888          1,987,158
     Less deferred loan fees                                                    (15,375)           (12,919)
                                                                          --------------    ---------------
                                                                             $2,383,513         $1,974,239
                                                                          ==============    ===============
</TABLE>


Contractual  maturities of loans,  net of deferred fees, as of December 31, 2005
are shown below.  Expected  maturities will differ from  contractual  maturities
because borrowers may have the right to prepay loans with or without  prepayment
penalties.

<TABLE>
<CAPTION>

In Thousands                                               Within              1-5              After
------------                                               1 Year             Years            5 Years             Total
                                                       ---------------    --------------    ---------------    --------------
<S>                                                          <C>               <C>                  <C>             <C>
Commercial and agriculture                                   $202,386          $111,749             $7,168          $321,303
Real estate commercial                                         72,572           498,056            288,623           859,251
Real estate construction and land development                 753,758           207,405              6,172           967,335
Real estate mortgage                                           57,287            93,848             37,637           188,772
Installment                                                     9,479            14,578             22,795            46,852
                                                       ---------------    --------------    ---------------    --------------

                                                           $1,095,482          $925,636           $362,395        $2,383,513
                                                       ===============    ==============    ===============    ==============

     Loans maturing after                                                      1-5              After
         one year with:                                                       Years            5 Years
                                                                          --------------    ---------------
     Fixed rates                                                               $671,911            $60,670
     Variable rates                                                             253,725            301,724
                                                                          --------------    ---------------
                                                                               $925,636           $362,394
                                                                          ==============    ===============
</TABLE>

LOAN LOSS RESERVE

Changes in the allowance for loan losses are summarized below:

<TABLE>
<CAPTION>
In Thousands                                                                  2005               2004              2003
------------                                                              --------------    ---------------    --------------
<S>                                                                             <C>                <C>               <C>
     Balance at beginning of year                                               $32,728            $29,556           $28,175
     Provision charged to operating expense                                       4,200              3,500             4,250

         Loans charged-off                                                         (706)            (1,412)           (3,622)
         Less recoveries                                                            853              1,084               753
                                                                          --------------    ---------------    --------------

                 Net recoveries (charge-offs)                                       147               (328)           (2,869)
                                                                          --------------    ---------------    --------------

     Balance at end of year                                                     $37,075            $32,728           $29,556
                                                                          ==============    ===============    ==============
</TABLE>



                                      -14-
<PAGE>


NOTE FOUR - Loans (continued)



The Bank had loans  amounting  to $4.9 at December 31,  2005,  $14.1  million at
December 31, 2004, and $12.9 million at December 31, 2003 that were specifically
classified as impaired with an average  balance during the year of $5.0 million,
$14.1 million,  and $12.9 million,  respectively.  The allowance for loan losses
related to these loans was approximately  $247 thousand in 2005, $3.6 million in
2004,  and $1.0 million in 2003.  Interest  collected on these loans in cash and
included in income amounted to $327 thousand in 2005, $350 thousand in 2004, and
$429  thousand  in 2003.  If  interest  on these  loans  had  been  accrued  the
additional  amount of such income would have  approximated $67 thousand in 2005,
$925  thousand in 2004,  and $443  thousand in 2003.  At December 31, 2005 there
were no  commitments  to lend  additional  funds to  borrowers  whose loans were
classified as impaired.


NONPERFORMING ASSETS

The Bank's  nonperforming assets (NPA's) (includes loans in nonaccrual and other
real estate owned)  totaled 0.19% and 0.63% of total assets at December 31, 2005
and 2004, respectively.

OTHER REAL ESTATE OWNED

From  time-to-time  management  has  written-off  various  parcels of other real
estate  owned due to  unresolved  issues  relating  to  permitting,  zoning  and
wetlands. Management is attempting to work through the above-mentioned issues to
be able to  effectively  market  these  properties.  Contingent  gains  could be
realized, should the above issues be favorably resolved.

NOTE FIVE - Premises And Equipment

Premises and equipment at December 31 are comprised of the following:

<TABLE>
<CAPTION>

In Thousands                                                                                     2005              2004
------------                                                                                ---------------    --------------
<S>                                                                                                <C>               <C>
     Premises                                                                                      $27,440           $26,516
     Furniture, fixtures and equipment                                                              18,280            16,889
     Land                                                                                            9,601             8,965
     Construction in progress                                                                          578               514
                                                                                            ---------------    --------------
                                                                                                    55,899            52,884
     Less accumulated depreciation                                                                 (26,130)          (23,658)
                                                                                            ---------------    --------------
                                                                                                   $29,769           $29,226
                                                                                            ===============    ==============
</TABLE>


Depreciation  expense on premises  and  equipment  totaled $2.7 million in 2005,
$2.5 million in 2004, and $2.3 million in 2003.

NOTE SIX - Interest Bearing Deposits

The major  classifications  of interest  bearing  deposits at December 31 are as
follows:


<TABLE>
<CAPTION>
In Thousands                                                                                     2005              2004
------------                                                                                ---------------    --------------
<S>                                                                                               <C>               <C>
     Money market, sweep and NOW accounts                                                       $  322,283        $  270,894
     Savings                                                                                       495,108           642,434
     Time deposits, $100,000 and over                                                              471,726           283,472
     Other time deposits                                                                           376,411           285,767
                                                                                            ---------------    --------------
                                                                                                $1,665,528        $1,482,567
                                                                                            ===============    ==============
</TABLE>



                                      -15-
<PAGE>



NOTE SIX - Interest Bearing Deposits (continued)

The total remaining maturity schedule for time deposits is as follows:

<TABLE>
<CAPTION>
In Thousands
------------
<S>                                                       <C>                              <C>
         December 31,                                            2006                             $611,284
                                                                 2007                              100,383
                                                                 2008                               60,952
                                                                 2009                               43,588
                                                                 2010                               29,732
                                                           Thereafter                                2,198
                                                                                            ---------------
                                                                                                  $848,137
                                                                                            ===============
</TABLE>


NOTE SEVEN - Credit Arrangements

The Bank is a member  of the  Federal  Home Loan Bank  (FHLB) of  Seattle.  As a
member,  the Bank has a committed  line of credit up to 24% of total assets,  or
$581.4  million.  At December  31,  2005  committed  lines of credit  agreements
totaling   approximately   $55.0  million  were   available  to  the  Bank  from
unaffiliated  banks and there were no  outstanding  balances as of December  31,
2005.  Such lines  generally  provide for interest at the lending bank's federal
funds rate or other money market rates.

NOTE EIGHT - Federal Home Loan Bank (FHLB) Advances

Contractual  maturities  of FHLB  advances as of December  31, 2005 and 2004 are
shown below. Expected maturities will differ from contractual maturities because
FHLB has the right to call without penalties:

<TABLE>
<CAPTION>
                                                                 2005                                   2004
                                                  ----------------------------------     -------------------------------------
                                                                        Interest                                Interest
             In Thousands                             Amount             Rates               Amount              Rates
                                                  ----------------   ---------------     ---------------   -------------------
<S>                                                       <C>         <C>   <C>                 <C>           <C>   <C>
                 Within one year                         $ 15,000     3.05%-4.84%              $ 25,000       1.28%-3.83%
                 Two through three years                   82,500     3.55%-6.04%                60,030       3.05%-7.32%
                 Four through nine years                  122,500     3.53%-6.77%                90,058       4.77%-6.77%
                 Ten through fifteen years                 20,000           3.87%                     -       N/A
                                                  ----------------                       ---------------
                                                         $240,000                              $175,088
                                                  ================                       ===============
</TABLE>

Advances  from FHLB are  collateralized  by  qualifying  first  mortgage  loans,
qualifying  commercial real estate, and government agency securities as required
by the agreement with FHLB.

The maximum and  average  outstanding  balances  and average  interest  rates on
advances from FHLB were as follows for the year ended December 31:


<TABLE>
<CAPTION>

In Thousands                                                  2005                2004
------------                                             ----------------    ----------------
<S>                                                             <C>                 <C>
     Maximum outstanding at any month-end                       $240,075            $185,093
     Average outstanding                                         221,392             180,860
     Weighted average interest rates:
                 Annual                                             4.71%               4.63%
                 End of year                                        4.70%               4.66%
</TABLE>




                                      -16-
<PAGE>


NOTE NINE - Securities Sold Under Agreements To Repurchase

The Bank has sold certain securities of the U.S. Government and its agencies and
other approved investments under agreements to repurchase on a short-term basis.
The  securities  underlying  the  agreements  were held by a safekeeping  agent.
Securities  sold under  agreements to repurchase  are reflected at the amount of
cash  received  in  connection  with the  transaction.  The  Corporation  may be
required  to  provide  additional  collateral  based  on the  fair  value of the
underlying securities.

Securities sold under agreement to repurchase were $7.8 million in 2005 and $4.5
million in 2004. The average daily balance of outstanding  agreements during the
period  was $6.9  million  in 2005  and  $4.7  million  in  2004,  with  maximum
outstanding  agreements  at any  month-end  of $8.9  million  and $4.5  million,
respectively.

NOTE TEN - Income Tax

The components of the provision for income tax are as follows:
<TABLE>
<CAPTION>

             In Thousands                                     2005               2004               2003
             ------------                                --------------    ----------------   ----------------
<S>                                                            <C>                 <C>                <C>
                 Current                                       $27,962             $22,162            $20,736
                 Deferred                                       (1,633)               (199)              (683)
                                                         --------------    ----------------   ----------------
                                                               $26,329             $21,963            $20,053
                                                         ==============    ================   ================
</TABLE>


The following  table shows the nature and  components of the  Corporation's  net
deferred tax assets, established at an estimated tax rate of 35% at December 31:

<TABLE>
<CAPTION>

             In Thousands                                                          2005               2004
             ------------                                                     ---------------    ----------------
                 Deferred tax assets
<S>                                                                            <C>                <C>
                    Allowance for possible loan losses,
                        in excess of tax reserves                                    $12,976             $11,455
                    Other deferred tax assets                                            739                 813
                                                                              ---------------    ----------------
                        Total deferred tax assets                                     13,715              12,268
                                                                              ---------------    ----------------
                 Deferred tax liabilities
                    FHLB stock dividends                                              (2,468)             (2,449)
                    Unrealized gain on available-for-sale securities                  (2,382)             (1,829)
                    Other deferred tax liabilities                                    (2,342)             (2,547)
                                                                              ---------------    ----------------
                        Total deferred tax liabilities                                (7,192)             (6,825)
                                                                              ---------------    ----------------
                        Net deferred tax assets                                      $ 6,523             $  5,443
                                                                              ===============    ================
</TABLE>


The Corporation believes,  based upon available  information,  that all deferred
assets will be realized in the normal course of operations.  Accordingly,  these
assets have not been reduced by a valuation allowance.


                                      -17-
<PAGE>


NOTE TEN - Income Tax (continued)

A reconciliation of the effective income tax rate with the federal statutory tax
rate is as follows:
<TABLE>
<CAPTION>
In Thousands                   2005                             2004                             2003
------------               -----------------------------    ------------------------------   ------------------------------
                              Amount           Rate            Amount            Rate           Amount            Rate
                           -------------   -------------    -------------    -------------   -------------    -------------
<S>                             <C>                 <C>          <C>                  <C>         <C>                  <C>
Income tax provision
     at statutory rate          $27,270             35%          $22,753              35%         $20,881              35%

Effect of nontaxable
     interest income               (740)            (1%)            (576)             (1%)           (543)             (1%)

Other                              (201)              -             (214)               -            (285)               -
                           -------------   -------------    -------------    -------------   -------------    -------------

                                $26,329             34%          $21,963              34%         $20,053              34%
                           =============   =============    =============    =============   =============    =============
</TABLE>


NOTE ELEVEN - Shareowners' Equity And Regulatory Matters

In addition to 100 million shares of common stock authorized, the Corporation is
authorized  to issue up to 10  million  shares of  preferred  stock  with no par
value.  The Board of Directors  has the  authority  to determine  the rights and
privileges to be granted to holders of preferred  stock.  There are no preferred
shares issued and outstanding.

In December 2005, the Board of Directors declared a $.17 per share cash dividend
to shareowners of record as of January 9, 2006, and payable on January 24, 2006.

On January  17, 2001 the Board  announced  the  adoption  of a stock  repurchase
program  authorizing  the  Corporation to repurchase up to 5% of its outstanding
stock in the open market.  On October 17, 2001 and 2002 and  September  16, 2004
the Board of Directors  authorized  three  increases of 5% for the repurchase of
outstanding  common stock under the plan. The plan expires  September  2006. The
Corporation  repurchased  361,800 in 2003. There were 1,398,405 shares remaining
under the current plan at December 31, 2005.

During 2005 and 2004 the Corporation  made a purchase of Skagit State Bank stock
through the  issuance of common  shares with a market  value of $3.9 million and
$3.0 million, and cash of $3.2 million and $2.5 million cash, respectively.  See
Note 14 for additional discussion.

The Corporation and Bank are subject to various regulatory capital  requirements
administered by the federal and state banking agencies.  Failure to meet minimum
capital  requirements  can initiate  certain  mandatory and possible  additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect  on  the  Corporation's  financial  statements.  Under  capital
adequacy  guidelines in the regulatory  framework for prompt corrective  action,
the  Bank  must  meet  specific   capital   adequacy   guidelines  that  involve
quantitative  measures  of  each  entity's  assets,  liabilities,   and  certain
off-balance  sheet items as calculated  under regulatory  accounting  practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  maintenance  of minimum  amounts and ratios (set forth in the following
table).  Tier I capital includes common stock,  surplus,  retained  earnings and
undivided  profits less  goodwill.  Total capital  includes Tier I capital and a
portion of the loan loss reserve. Tier I capital to average risk weighted assets
is referred to as the Tier I ratio. Management believes, as of December 31, 2005
and 2004, that the Corporation  and Bank meet capital  adequacy  requirements to
which they are subject.



                                      -18-
<PAGE>



NOTE ELEVEN - Shareowners' Equity And Regulatory Matters (continued)

As of the most recent  notification from the Bank's primary regulator,  the Bank
was categorized as well  capitalized  under the regulatory  framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based,  Tier I risk-based,  and Tier I leverage ratios as set
forth in the table.  There are no conditions  or events since that  notification
that management believes have changed this category.


<TABLE>
<CAPTION>
In Thousands                                                            To Be Well
------------                                                         Capitalized Under
                                                                     Prompt Corrective                  For Capital
                                          Actual                     Action Provisions               Adequacy Purposes
                                   -------------------------    ----------------------------    ----------------------------
2005                               Amount          Ratio           Amount          Ratio           Amount          Ratio
                                   ----------    -----------    -------------    -----------    -------------    -----------
<S>                                 <C>              <C>                                            <C>               <C>
     Total Capital (to risk
            weighted assets)
         Consolidated               $316,902         12.37%         N/A             N/A             $204,891          8.00%
         Frontier Bank               289,801         11.39%          254,470         10.00%          203,576          8.00%

     Tier I Capital (to risk
            weighted assets)
         Consolidated                284,825         11.12%         N/A             N/A              102,445          4.00%
         Frontier Bank               257,947         10.14%          152,682          6.00%          101,788          4.00%

     Tier I Capital (to
            average assets)
         Consolidated                284,825         10.99%         N/A             N/A              103,654          4.00%
         Frontier Bank               257,947         10.07%          128,081          5.00%          102,465          4.00%


2004

     Total Capital (to risk
            weighted assets)
         Consolidated               $273,139         11.76%         N/A             N/A             $185,885          8.00%
         Frontier Bank               252,645         10.97%          230,290         10.00%          184,232          8.00%

     Tier I Capital (to risk
            weighted assets)
         Consolidated                244,049         10.50%         N/A             N/A               92,942          4.00%
         Frontier Bank               233,810          9.72%          138,174          6.00%           92,116          4.00%

     Tier I Capital (to
            average assets)
         Consolidated                244,049         10.85%         N/A             N/A               90,010          4.00%
         Frontier Bank               233,810         10.03%          111,566          5.00%           89,253          4.00%


</TABLE>

Under federal regulations,  the Bank is limited,  unless previously approved, as
to the amount it may loan the holding company and other affiliates to 10% of its
capital stock  (approximately $5.6 million at December 31, 2005 and $5.6 million
at December 31, 2004).

Federal Reserve Board regulations require maintenance of certain minimum reserve
balances on deposit with the Federal  Reserve Bank.  The average  amount of such
balances was $22.3 million in 2005 and $16.3 million in 2004.



                                      -19-
<PAGE>


NOTE TWELVE - Benefit Plans

On January 2, 2001, the Corporation adopted a 2001 Stock Award Plan for selected
employees,   officers  and  directors  to  advance  the  best  interest  of  the
Corporation  by  providing  certain  stock-based  benefits  to persons  who have
substantial  responsibility for the management and growth of the Corporation and
its subsidiaries. The maximum number of shares that may be issued is 150,000 and
is adjusted to reflect any future changes in capitalization  due to common share
dividends, splits, recapitalization or reorganization.  During fiscal 2005, 2004
and 2003, grants of 21,583, 22,808 and 15,765 shares with a market value of $576
thousand, $504 thousand and $273 thousand, respectively, were awarded under this
plan. The stock awards vest immediately when granted.  The plan is effective for
ten years from adoption.  There are currently 33,512 shares remaining under this
plan.

On February 17, 1999, the Corporation adopted the 1999 Employee Stock Award Plan
to  recognize,   motivate,   and  reward  eligible  employees  for  longstanding
performance  with the Corporation and its  subsidiaries.  Employees  eligible to
receive stock awards under this plan must have been employees of the Corporation
for at least 20 years,  or some other tenure as determined  from time to time by
the Board of  Directors.  The  maximum  number  of shares  that may be issued is
30,000 and is  adjusted  to  reflect  future  common  share  dividends,  splits,
recapitalization  or  reorganization.  During fiscal year 2005,  2004, and 2003,
there were 1,001, 1,185 and 468 shares with a market value of $25 thousand,  $24
thousand and $8 thousand, respectively, were awarded under this plan. Currently,
there have been 4,273  shares  issued  under this plan.  The stock  awards  vest
immediately  when granted.  The plan is effective  for ten years from  adoption.
There are currently 25,726 shares remaining under this plan.

In 1998, the shareowners of the  Corporation  approved an Incentive Stock Option
Plan  (the  Plan)  to  promote  the  best  interest  of  the  Corporation,   its
subsidiaries  and its  shareowners,  by  providing  an  incentive  to those  key
employees  who  contribute  to the  operating  success of the  Corporation.  The
maximum  number of shares that may be issued under the Plan is 1,125,000  common
shares of the  Corporation.  Options  issued and  outstanding  are  adjusted  to
reflect  any  future  common  stock  dividends,  splits,  recapitalization,   or
reorganization. The Board of Directors make available sufficient shares for each
option  granted.  Options are granted at fair market  value and  generally  vest
immediately. Options expire ten years from the date of grant, and are subject to
certain restrictions and limitations.

Proforma information  regarding net income and earnings per share is required by
Statement of Financial  Accounting Standards No. 123, Accounting for Stock-Based
Compensation.   The  proforma  information  recognizes,  as  compensation,   the
estimated present value of stock options granted using an option valuation model
known as the Black-Scholes model. Proforma earnings per share amounts reflect an
adjustment  as  if  the  present  value  of  the  options  were   recognized  as
compensation for the period.

For the most part,  variables  and  assumptions  are used in the model.  For the
periods 2005,  2004,  and 2003 the risk-free  interest rate is 5.25%,  3.25% and
2.90%;  the dividend yield rate is 2.20%,  2.20% and 2.37%; the price volatility
is 23.34%,  35.51% and 77.04%;  and the weighted  average  expected  life of the
options has been measured at 3.4 years, 3.1 years and 5.1 years, respectively.

Management  believes  that the  variables  and  assumptions  used in the options
pricing model are subjective and represent only one estimate of possible  value.
The fair value of options  granted that are  recognized in proforma  earnings is
shown in Note 1.



                                      -20-
<PAGE>




NOTE TWELVE - Benefit Plans (continued)

Stock option transactions were:

<TABLE>
<CAPTION>

                                                                                                               Weighted
                                                                        Shares of Common Stock                Average of
                                                                  -----------------------------------     Exercisable Price
                                                                   Available for           Under              of Shares
                                                                    Option/Award           Plans             Under Plans
                                                                  -----------------    --------------    ---------------------
<S>                                                                <C>               <C>                <C>
       Balance, December 31, 2002                                          503,485           425,075            $22.07
           Granted                                                        (156,700)          156,700            33.00
           Exercised                                                                         (83,354)           18.70
           Forfeited/Expired                                                10,932           (10,932)             N/M
                                                                  -----------------    --------------    ---------------------
       Balance, December 31, 2003                                          357,717           487,489            26.06
           Granted                                                        (180,642)          180,642            40.00
           Exercised                                                                        (104,755)           22.84
           Forfeited/Expired                                                10,181           (10,181)           31.50
                                                                  -----------------    --------------    ---------------------
       Balance, December 31, 2004                                          187,256           553,195            30.87
           Three-for-two stock split                                        93,784           276,455
           Granted                                                        (292,200)          292,200            32.25
           Exercised                                                                        (154,791)           16.47
           Forfeited/Expired                                                14,936           (14,936)           25.40
                                                                  -----------------    --------------    ---------------------
       Balance, December 31, 2005                                            3,776           952,123            $24.75
                                                                  =================    ==============    =====================
</TABLE>

The numbers of shares  under  option for the plans  represent  3.3% of the total
shares  outstanding  as of December 31, 2005.  The  following  table  summarizes
information concerning currently outstanding and exercisable options:


<TABLE>
<CAPTION>
                                                            Options Outstanding                Options Exercisable
                                                       ------------------------------   ----------------------------------
                                                         Weighted
                                                         Average          Weighted                           Weighted
                Range of                                Remaining         Average                            Average
                Exercise               Number          Contractual        Exercise         Number            Exercise
                 Prices             Outstanding            Life            Price          Exercisable         Price
             ----------------    -------------------   -------------    -------------   ----------------------------------
<S>                                    <C>              <C>             <C>            <C>                   <C>
                 $ 1-10                       2,590            0.96            $9.01          2,590                 $9.01
                  10-20                     242,764            5.69            16.23         242,764                16.23
                  20-30                     414,569            8.53            24.69         414,569                24.69
                  30-40                     292,200            9.97            32.25         284,120                32.25
</TABLE>



                                      -21-
<PAGE>



NOTE THIRTEEN - Earnings Per Share

The numerators and  denominators  of basic and fully diluted  earnings per share
are as follows:


<TABLE>
<CAPTION>
In Thousands, except for per share amounts
------------------------------------------
                                                          2005                2004              2003

<S>                                                           <C>               <C>               <C>
     Net income (numerator)                                   $51,584           $43,045           $39,607
                                                    ==================   ===============   ===============
     Shares used in the calculation
        (denominator)
        Weighted average shares outstanding                    28,321            27,951            27,830
        Effect of dilutive stock options                          174               186               152
                                                    ------------------   ---------------   ---------------
        Diluted shares                                         28,495            28,137            27,982
                                                    ==================   ===============   ===============
     Basic Earnings per share                                 $  1.82           $  1.54           $  1.42
                                                    ==================   ===============   ===============
     Diluted Earnings per share                               $  1.81           $  1.53           $  1.42
                                                    ==================   ===============   ===============
</TABLE>




NOTE FOURTEEN - Related Party Transactions

Loans to  directors,  executive  officers  and their  affiliates  are subject to
regulatory  limitations.  Such loans had aggregate  balances and activity during
2005, 2004 and 2003 as follows and were within regulatory limitations:


<TABLE>
<CAPTION>
      In Thousands                                                             2005              2004              2003
      ------------                                                         --------------    --------------    --------------
<S>                                                                              <C>               <C>               <C>
         Balance at beginning of year                                            $55,762           $49,496           $40,782
         New loans or advances                                                    35,322            22,804            24,646
         Repayments                                                              (18,384)          (16,538)          (15,932)
                                                                           --------------    --------------    --------------
         Balance at end of year                                                  $72,700           $55,762           $49,496
                                                                           ==============    ==============    ==============
</TABLE>

Total deposits  beneficially  owned by related  parties were $4.8 million,  $4.5
million,  and $5.3  million at December  31,  2005,  2004,  C OMITTED] and 2003,
respectively.


NOTE FIFTEEN - Commitments and Contingent Liabilities

The Bank leases various branch  offices under  agreements,  which expire between
2006 and 2020. The agreements  contain  various  renewal options and require the
Bank to maintain the properties.

The total future  minimum lease  commitments  through 2010 and thereafter are as
follows:

<TABLE>
<CAPTION>

         In Thousands
         ------------
<S>                                   <C>                      <C>
         Year ending December 31,        2006                     $1,314
                                         2007                      1,171
                                         2008                      1,175
                                         2009                        995
                                         2010                        888
                                         Thereafter                3,046
                                                              -----------
                                                                  $8,589
                                                              ===========
</TABLE>

Rental expense  charged to operations was $1.6 million in 2005,  $1.3 million in
2004, and $1.1 million in 2003.



                                      -22-
<PAGE>




NOTE FIFTEEN - Commitments and Contingent Liabilities (continued)

The Bank is a party to financial  instruments with off-balance sheet risk in the
normal  course of  business  to meet  financing  needs of its  customers.  These
financial  instruments include commitments to extend credit,  standby letters of
credit and financial guarantees.  Those instruments involve, to varying degrees,
elements of credit and interest-rate  risk in excess of the amount recognized in
the balance sheet. The contract amount of those  instruments  reflect the extent
of the Bank's involvement in particular classes of financial instruments.

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party to the instrument for  commitments  to extend credit,  standby  letters of
credit,  and financial  guarantees  written is  represented  by the  contractual
amount of those  instruments.  The Bank uses the same credit  policies in making
commitments  and  conditional   obligations  as  it  does  for  on-balance-sheet
instruments.

Commitments  to Extend Credit and Financial  Guarantees - Commitments  to extend
credit are  agreements to lend to a customer as long as there is no violation of
any condition  established  in the contract.  Commitments  generally  have fixed
expiration dates or other termination  clauses and may require payment of a fee.
Since many of the  commitments  are expected to expire without being drawn upon,
the  total  commitment   amounts  do  not  necessarily   represent  future  cash
requirements.  The Bank's  experience has been that  approximately 49 percent of
loan commitments are drawn upon by customers. While approximately 100 percent of
commercial  letters  of credit  are  utilized,  a  significant  portion  of such
utilization is on an immediate payment basis. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
it is  deemed  necessary  by the Bank  upon  extension  of  credit,  is based on
management's  credit evaluation of the borrower.  Collateral held varies but may
include accounts  receivable,  inventory,  property,  plant, and equipment,  and
income-producing commercial properties.

Standby  letters of credit and  financial  guarantees  written  are  conditional
commitments  issued by the Bank to guarantee the  performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing  arrangements,  bond  financing,  and similar  transactions.  The Bank
underwrites  its standby  letters of credit using its  policies  and  procedures
applicable  to  loans in  general.  Standby  letters  of  credit  are made on an
unsecured  and secured  basis.  The Bank has not been required to perform on any
financial  guarantees  during the past two years.  The Bank has not incurred any
significant losses on its commitments in 2005, 2004, or 2003.

A summary  of the  notional  amount of the  Bank's  financial  instruments  with
off-balance sheet risk at December 31, 2005 follows:


<TABLE>
<CAPTION>
In Thousands                                                                                           Amount
------------                                                                                       ---------------
<S>                                                                                                      <C>
             Commitments to extend credit                                                                $810,736
             Credit card arrangements                                                                      31,917
             Standby letters of credit                                                                     29,979
</TABLE>


The  Corporation is a defendant in certain  claims and legal actions  arising in
the  ordinary  course  of  business.   In  the  opinion  of  management,   after
consultation  with legal counsel,  the ultimate  disposition of these matters is
not expected to have a material  adverse effect on the  Corporation's  financial
condition or results of operations.

In December 2004, the Corporation  entered into an agreement to purchase a total
of 80,000 shares  Skagit State Bank (SSB) stock,  headquartered  in  Burlington,
Washington. An initial purchase of 35,000 shares representing 4.95% of SSB total
outstanding  shares was made in  December  2004  through an  issuance  of common
shares with a market  value of $3.0 million and cash of $2.5  million.  A second
purchase of 22,500  shares was made in  February  2005  through the  issuance of
common shares with a market value of $1.8 million and cash of $1.6 million for a
cumulative  ownership  percentage of 8.13%. In July 2005, a third installment of
22,500 shares was made through the issuance of common shares with a market value
of $2.1 million and cash of $1.6 million for a cumulative ownership of 11.3%. In
January 2006, the Corporation purchased 5,022 shares for $653 thousand, bringing
total ownership to 12.02%.



                                      -23-
<PAGE>




NOTE SIXTEEN - Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of  Financial  Instruments.  The  estimated  fair value  amounts have been
determined by the Corporation using available market information and appropriate
valuation  methodologies.   However,   considerable  judgment  is  necessary  to
interpret market data in the development of the estimates of fair value. The use
of different  market  assumptions  and/or  estimation  methodologies  may have a
material effect on the estimated fair value amounts.  The following  methods and
assumptions  were used to  estimate  the fair value of each  class of  financial
instruments for which it is practicable to estimate that value.

 (a) Cash equivalents and federal funds sold - For these short-term instruments,
the carrying amount is a reasonable estimate of fair value.

(b) Investment  securities - For investment  securities fair values are based on
quoted market prices or dealer quotes, if available. If a quoted market price is
not  available,  fair value is estimated  using quoted market prices for similar
securities.

(c) Loans - The fair value of loans  generally is estimated by  discounting  the
future cash flows using the current  rates at which  similar loans would be made
to borrowers with similar credit ratings and for the same remaining  maturities.
For  certain   homogeneous   categories  of  loans,   such  as  Small   Business
Administration guaranteed loans, fair value is estimated using the quoted market
prices for securities backed by similar loans,  adjusted for differences in loan
characteristics.

(d) Deposits and federal  funds  purchased - The fair value of demand  deposits,
savings accounts, certain money market deposits, and federal funds purchased, is
the  amount  payable  on  demand  at the  reporting  date.  The  fair  value  of
fixed-maturity  certificates  of deposit is estimated by discounting  the future
cash flows using the rates currently  offered for deposits of similar  remaining
maturities.

(e) FHLB  advances and  securities  sold under  agreements  to repurchase - Fair
value is  determined  by  discounting  future cash flows  using rates  currently
available to the Bank for debt with similar terms and remaining maturities.

(f) Off-Balance  sheet financial  instruments - Commitments to extend credit and
letters of credit  represent  the  principal  categories  of  off-balance  sheet
financial  instruments (see Note 15). The fair value of these commitments is not
material.

<TABLE>
<CAPTION>
             In Thousands                                    2005                                2004
                                                --------------------------------   ---------------------------------
                                                  Carrying            Fair            Carrying            Fair
             Assets                                Value             Value             Value             Value
                                                --------------   ---------------   ---------------   ---------------
<S>                                                   <C>               <C>               <C>               <C>
                 Cash and due from banks          $    85,631       $    85,631       $    70,851       $    70,851
                 Federal funds sold                       733               733             5,946             5,946
                 Investment securities
                    Available for sale                104,904           104,904           145,917           145,917
                    Held to maturity                    5,713             5,919             7,534             7,912
                 Net loans                          2,352,149         2,355,206         1,945,324         1,942,456

             Liabilities

                 Noninterest bearing deposits         395,852           395,852           313,275           313,275
                 Interest bearing deposits          1,665,528         1,666,295         1,482,567         1,486,629
                 Federal funds purchased
                    and securities sold under
                    agreements to repurchase           20,813            20,813            10,205            10,205
                 FHLB Advances                        240,000           238,521           175,088           182,059
</TABLE>


                                      -24-
<PAGE>

NOTE SEVENTEEN - Parent Company (Only) Financial Information

Condensed balance sheets at December 31:

<TABLE>
<CAPTION>
        In Thousands                                                                            2005              2004
        ------------                                                                       ---------------   ---------------
        ASSETS
<S>                                                                                             <C>                <C>
           Cash                                                                                  $    306          $    899
           Investment in subsidiaries:
                       Bank                                                                       259,621           224,629
                       Nonbank                                                                      9,343             9,694
           Investment securities
                       Available for sale, at fair value                                           27,470            17,625
           Other assets                                                                             4,350             5,227
                                                                                           ---------------   ---------------
                                                                                                 $301,090          $258,074
                                                                                           ===============   ===============
        LIABILITIES
           Other liabilities                                                                       $4,993            $3,844
                                                                                           ---------------   ---------------
        SHAREOWNERS' EQUITY
           Common stock                                                                           131,695           124,617
           Retained earnings                                                                      159,978           126,216
           Accumulated other comprehensive income, net of tax                                       4,424             3,397
                                                                                           ---------------   ---------------
           Total Shareowners' equity                                                              296,097           254,230
                                                                                           ---------------   ---------------
                                                                                                 $301,090          $258,074
                                                                                           ===============   ===============
</TABLE>

Condensed statements of income for the years ended December 31:

<TABLE>
<CAPTION>
        In Thousands                                                          2005              2004              2003
                                                                          --------------    --------------    --------------
               Income
<S>                                                                             <C>               <C>               <C>
                   Dividends from Bank                                          $16,416           $12,322           $21,662
                   Dividend from FFP                                                900             1,200             1,564
                   Other dividends                                                  367               214               163
                   Other income                                                      95                14                 -
                   Interest                                                         167               187               229
                                                                          --------------    --------------    --------------
                       Total income                                              17,945            13,937            23,618
                                                                          --------------    --------------    --------------
               Expenses
                   Personnel                                                        910               688               700
                   Depreciation and amortization                                     35                25                10
                   Other                                                          1,362               804               761
                                                                          --------------    --------------    --------------
                       Total expenses                                             2,307             1,517             1,471
                                                                          --------------    --------------    --------------
               Income before equity in undistributed income
                   of subsidiaries and benefit equivalent to income tax          15,638            12,420            22,147

               Benefit equivalent to income tax                                     622               438               378
                                                                          --------------    --------------    --------------
               Income before equity in undistributed income
                   of subsidiaries                                               16,260            12,858            22,525

               Equity in undistributed
                   income of subsidiaries                                        35,324            30,187            17,082
                                                                          --------------    --------------    --------------

                       Net income                                               $51,584           $43,045           $39,607
                                                                          ==============    ==============    ==============
</TABLE>

                                      -25-
<PAGE>





NOTE SEVENTEEN - Parent Company (Only) Financial Information (continued)

Condensed statements of cash flows for the years ended December 31:


<TABLE>
<CAPTION>
        In Thousands                                                          2005              2004              2003
        ------------                                                      --------------    --------------    --------------
        Cash flows from operating activities
<S>                                                                             <C>               <C>               <C>
               Net income                                                       $51,584           $43,045          $ 39,607
               Adjustments to reconcile net income to net cash
                       provided by operating activities
                   Equity in undistributed income of subsidiaries               (35,324)          (30,187)          (17,082)
                   Depreciation and amortization                                     35                25                10
                   Other operating activities                                       714               543                 7
                                                                          --------------    --------------    --------------
                       Net cash flows from operating activities                  17,009            13,426            22,542
                                                                          --------------    --------------    --------------
               Purchase of available for sale securities                         (3,196)           (2,485)           (2,529)
               Other investment activities                                           79               452                49
                                                                          --------------    --------------    --------------
                       Net cash flows from investing activities                  (3,117)           (2,033)           (2,480)
                                                                          --------------    --------------    --------------
        Cash flows from financing activities
               Stock options exercised                                            2,549             2,393             1,559
               Purchase of common shares                                              -                 -            (9,148)
               Cash dividends paid to shareowners                               (17,021)          (14,337)          (12,824)
               Other financing activities                                           (13)                -               (18)
                                                                          --------------    --------------    --------------
                       Net cash flows from financing activities                 (14,485)          (11,944)          (20,431)
                                                                          --------------    --------------    --------------
        Increase (decrease) in cash                                                (593)             (551)             (369)

        Cash at beginning of year                                                   899             1,450             1,819
                                                                          --------------    --------------    --------------
        Cash at end of year                                                     $   306           $   899          $  1,450
                                                                          ==============    ==============    ==============
</TABLE>


NOTE EIGHTEEN-Recent Accounting Pronouncements

In December 2004, the FASB issued a replacement of Statement No. 123, Accounting
for Stock-Based  Compensation and supersedes APB Opinion No. 25,  Accounting for
Stock Issued to Employees.  This Statement  applies to all  share-based  payment
transactions  in which an entity  acquires  goods or  services  by  issuing  its
shares,  share options or other equity instruments.  This Statement is effective
as of the beginning of the first interim or annual  reporting  period after June
15, 2005. See Note 1 for proforma disclosures as required by FAS 123.

In April 2005, the Securities and Exchange Commission amended the effective date
of the  Statement  of  Financial  Accounting  Standard  No.  123R,  Share -Based
Payment,  (SFAS 123R),  from the first  interim or annual  period after June 15,
2005 to the  beginning  of the next fiscal year that begins after June 15, 2005.
SFAS 1232R  requires  that the cost of all  share-based  payment  to  employees,
including  grants of employee  stock  options,  be  recognized  in the financial
statement based on their fair value.  That cost will be recognized as an expense
over the vesting period of the award. Pro forma disclosures previously permitted
under  SFAS  123  no  longer  will  be an  alternative  to  financial  statement
recognition.  In addition,  the  Corporation  will be required to determine fair
value in accordance with SFAS 123R. The Corporation  expects that SFAS 123R will
have an  impact of  approximately  2(cent)  per  share on its 2006  consolidated
financial statements.



                                      -26-
<PAGE>




NOTE  NINETEEN-  Unaudited  Quarterly  Financial  Data - Condensed  Consolidated
Statement of Income


<TABLE>
<CAPTION>
                                                                                2005 Quarter Ended
In Thousands                                                                        (Unaudited)
------------                                         --------------------------------------------------------------------------
                                                        December 31        September 30        June 30             March 31
<S>                                                         <C>                 <C>                <C>                 <C>
Interest income                                             $50,569             $46,763            $43,204             $38,350
Interest expense                                             15,082              13,633             12,497              10,524
                                                     ---------------    ----------------    ---------------     ---------------
  Net interest income                                        35,487              33,130             30,707              27,826
Provision for loan losses                                      (900)             (1,400)            (1,050)               (850)
                                                     ---------------    ----------------    ---------------     ---------------
Net interest income after provision
   for loan losses                                           34,587              31,730             29,657              26,976
Non interest income                                           3,042               3,417              3,474               3,142
Non interest expense                                         16,020              14,571             13,848              13,673
                                                     ---------------    ----------------    ---------------     ---------------
Income before income tax                                     21,609              20,576             19,283              16,445
Provision for income tax                                     (7,308)             (6,998)            (6,485)             (5,538)
                                                     ---------------    ----------------    ---------------     ---------------
Net income                                                  $14,301             $13,578            $12,798             $10,907
                                                     ===============    ================    ===============     ===============
Basic earnings per share                                      $0.50               $0.48              $0.45               $0.39
Diluted earnings per share                                    $0.50               $0.48              $0.45               $0.38
Weighted average basic shares outstanding                28,426,408          28,372,658         28,276,831          28,205,505
Weighted average diluted shares outstanding              28,640,296          28,554,847         28,416,730          28,363,647
</TABLE>



<TABLE>
<CAPTION>
                                                                                2004 Quarter Ended
In Thousands                                                                        (Unaudited)
------------                                         --------------------------------------------------------------------------
                                                        December 31        September 30        June 30             March 31
<S>                                                         <C>                 <C>                <C>                 <C>
Interest income                                             $37,576             $35,356            $33,911             $33,385
Interest expense                                              9,379               8,712              8,291               8,557
                                                     ---------------    ----------------    ---------------     ---------------
  Net interest income                                        28,197              26,644             25,620              24,828
Provision for loan losses                                    (1,000)             (1,000)            (1,000)               (500)
                                                     ---------------    ----------------    ---------------     ---------------
Net interest income after provision
   for loan losses                                           27,197              25,644             24,620              24,328
Non interest income                                           3,996               3,236              3,532               3,180
Non interest expense                                         13,985              12,349             12,170              12,221
                                                     ---------------    ----------------    ---------------     ---------------
Income before income tax                                     17,208              16,531             15,982              15,287
Provision for income tax                                     (5,749)             (5,534)            (5,530)             (5,150)
                                                     ---------------    ----------------    ---------------     ---------------
Net income                                                  $11,459             $10,997            $10,452             $10,137
                                                     ===============    ================    ===============     ===============
Basic earnings per  share                                     $0.41               $0.39              $0.37               $0.36
Diluted earnings per  share                                   $0.41               $0.39              $0.37               $0.36
Weighted average basic shares outstanding                28,021,938          27,953,168         27,909,288          27,895,442
Weighted average diluted shares outstanding              28,252,613          28,128,825         28,075,065          28,062,131
</TABLE>


                                      -27-
<PAGE>



                         FRONTIER FINANCIAL CORPORATION
                                AND SUBSIDIARIES

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION
--------------------------------------------------------------------------------

The information contained in this section should be read in conjunction with the
Consolidated  Financial  Statements and  accompanying  Notes to the Consolidated
Financial Statements.

Frontier Financial Corporation ("the Corporation") a Washington corporation,  is
a  financial  holding  company  owning  all of the  equity of its  wholly  owned
subsidiaries,  Frontier Bank (the "Bank") and FFP, Inc., a bank premises holding
company.

FINANCIAL HIGHLIGHTS

Frontier  Financial  Corporation's  performance in 2005 reflects another year of
record earnings, continued asset growth, and good credit quality.

Net income was up 19.8%,  totaling  $51.6  million,  or $1.81 per diluted share,
which  compares to $43.0  million,  $1.53 per diluted  share,  in 2004 and $39.6
million,  or $1.42 per diluted share in 2003.  Net income in 2005 was influenced
by a favorable  increase in net interest income. Our net interest income in 2005
improved to $127.2 million from $105.3 million in 2004, an increase of 20.8% and
increased to $105.3 million from $97.4 million in 2003, an increase of 8.1%.

Contributing  to our record  earnings  for 2005 was the growth in total  assets,
which increased $393.6 million,  or 17.5% and increased $168.0 million,  or 8.1%
in 2004. By comparison,  the increase in assets in 2003 was $131.7  million,  or
6.8%.  The  growth in our assets  occurred  principally  in the loan  portfolio.
Portfolio loans (loans receivable) in 2005 increased to $2.39 billion,  or 20.8%
and in 2004 increased to $1.98  billion,  a growth of 11.6% from 2003 balance of
$1.77 billion.

Nonperforming  assets were .19% of total assets at December 31, 2005,  down from
..63% at December 31, 2004 and .52% at year-end 2004. Nonaccruing loans decreased
to $4.9 million at year-end,  down from $14.1 million at December 31, 2004.  The
year ended 2003 the amount was $6.7  million and was down from $12.4  million at
year-end 2002. For the years ended December 31, 2005, 2004 and 2003, loan charge
offs amounted to a net recovery of $.1 million, and charge off's $.3 million and
$2.9  million,  respectively.  This  represents  a recovery of 1 basis point for
2005,  a loss of 2 basis points for 2004 and 17 basis points for 2003 of average
loans  outstanding.  The total allowance for loan losses stood at $37.1 million,
or 1.55% of total loans outstanding in 2005 compared to $32.7 million,  or 1.65%
of total loans  outstanding  in 2004 compared to $29.6 million or 1.67% of total
loans at year-end 2003.

During the year cash dividends of $17.0 million were paid to shareowners and the
Corporation did not purchase any common stock in the open market under the stock
repurchase program. There were 361,800 shares repurchased in 2003, totaling $9.1
million.

RESULTS OF OPERATIONS

Net Interest Income

Net  interest  income is the  Corporation's  principal  source of revenue and is
comprised  of  interest  income on  earning  assets,  less  interest  expense on
interest  bearing  liabilities.  The net interest  margin is net interest income
expressed as a percent of average  earning  assets and represents the difference
between the yield on earning assets and the composite  interest rate paid on all
sources of funds.

Net interest income is adjusted to a taxable  equivalent basis to present income
earned on taxable and tax-exempt assets on a comparable basis.  Reference to net
interest income and net interest margin (NIM),  in this  discussion,  represents
taxable  equivalent  (TE) amounts  using a tax rate of 35%, and applies to loans
and  investments  as  no  other  assets  or  liabilities  are  affected  by  the
adjustment.



                                      -28-
<PAGE>

FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued

The level of growth in our earning assets and the repricing  characteristics  of
our assets and liabilities influenced net interest income, which increased 20.8%
from the prior year. The latter, repricing of assets and liabilities, is in turn
influenced by the direction of interest  rates. In 2005, we benefited from FRB's
eight rate increases totaling 200 basis points. These increases caused the yield
on assets to increase,  while the cost on interest bearing liabilities increased
at a slower  rate.  The  tables on pages 44 and 45  include a  breakdown  of the
change in earning  assets and  liabilities,  referred  to as  "volume,"  and the
repricing of assets and liabilities  labeled "rate."

Average  earning  assets  rose  $269.7  million,  or 13.1%,  in 2005,  following
increases of 8.4% and 8.7% in 2004 and 2003,  respectively.  The growth over the
past year in earning  assets has come from the  increase in the loan  portfolio.
Loans rose $312.8 million, or 16.6% this past year, $196.5 million, or 11.6%, in
2004 and $90.0 million or 5.6% in 2003.  Investments decreased $40.7 million, or
24.9% for the year and  increased  $2.8  million,  or 1.8% in 2004 and increased
$47.9  million,  or 34.2% in 2003.  The increase in earning  assets  contributed
$21.3  million to net  interest  income in 2005.  In 2004 and 2003 the growth in
assets  increased  net  interest  income  by $14.4  million  and  $9.9  million,
respectively.  The  increase  in income  from the  change in  interest  rates on
average  earning  assets  totaled  $17.4 million for the year and a reduction of
$9.6 million and $13.7 million for 2004 and 2003 respectively.

Interest  bearing  liabilities  rose $193.4 million  during the year,  following
increases of $92.5  million and $128.1  million in 2004 and 2003,  respectively.
The growth over the past year has been from  interest  bearing  deposits,  which
increased  $146.6  million.   The  increase  in  interest  bearing   liabilities
contributed  $6.1  million to interest  expense in 2005.  The effect of changing
interest  rates  increased  interest  expense  $10.7  million in 2005.  In 2004,
increased balances of interest bearing liabilities increased interest expense by
$2.9 million, while decreasing rates decreased interest expense by $5.8 million.
In 2003,  increased volume of interest bearing  liabilities  increased  interest
expense by $2.7 million and declining rates decreased  interest expense by $10.4
million.

The net interest margin increased in 2005 to 5.48% from 5.14% the previous year,
and  5.16%  in  2003.  The  increase  in the  net  interest  margin  in  2005 is
attributable to the eight rate increases in our base rate and  liabilities  have
not  repriced as quickly.  The  decrease in the net  interest  margin in 2004 is
attributable  to the  interest  income  ratio  decreasing  faster than  interest
expense ratio. The interest expense ratio (interest expense/average deposits and
borrowings)  increased  from 2.14% in 2004 to 2.83% in 2005,  an  increase of 69
basis  points.  During  the same  period the  interest  income  ratio  (interest
income/average  earning  assets)  increased  87 basis  points.  Several  factors
contributed  to the movement in ratios,  including the effect of interest  rates
and the repricing characteristics of loans and deposits.

The Federal Reserve Bank (FRB) increased  short-term  interest rates eight times
in 2005, 25 basis points each time. There were two 25 basis point rate increases
in each quarter of 2005.  These  increases  increased our net interest margin to
5.48%,  up 34 basis  points from 2004.  The FRB dropped  interest  rates once in
2003,  and  increased  five times in 2004,  25 basis points each time.  Although
rates were increased in 2004, the 25 basis point  increases were not substantial
enough to bring many loans off of their floors, and not until the fourth quarter
did we see a meaningful  movement of the net interest  margin,  which was 5.32%,
for the fourth quarter 2004. In 2003, the flat interest rate environment allowed
the interest bearing  liabilities,  due to the lag effect,  to "catch up" to the
interest bearing assets.

Interest  bearing  liabilities are mainly  comprised of deposits,  which make up
86.7% of all liabilities.  In contrast to adjustable-rate  loans,  deposit rates
are not  directly  governed  by  indexes.  We set our  rates as often as  weekly
depending on the general rates in effect for competing  financial  institutions.
When  interest  rates drop  quickly,  there is a tendency  for deposit  rates to
decline more slowly, because of local competitive factors, than loan rates.


                                      -29-
<PAGE>

FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued

Following is a table  showing the tax  equivalent  net  interest  margin at each
quarter end:

<TABLE>
<CAPTION>
                                                                         Tax Equivalent     Tax Equivalent
                                                    Net Interest          Effect on          Net Interest
               Quarter Ended                           Margin               Margin              Margin
              ------------------------------------------------------  ------------------  ------------------
<S>                                                   <C>                 <C>                 <C>
              December 31, 2004                               5.27%               0.05%               5.32%
              March 31, 2005                                  5.08%               0.04%               5.12%
              June 30, 2005                                   5.37%               0.03%               5.40%
              September 30, 2005                              5.52%               0.04%               5.56%
              December 31, 2005                               5.75%               0.05%               5.80%

</TABLE>

A review of the past 12 months shows that the tax equivalent net interest margin
began year 2005 at 5.32%  (quarter  ended  December 31,  2004).  The margin then
declined  to 5.12% for the first  quarter but  increased  to 5.40% in the second
quarter,  increased  in the third  quarter  to 5.56% and to 5.80% in the  fourth
quarter.  The  Corporation  increased  its key lending  index 25 basis points in
February,  March, May, June,  August,  September,  November,  and December.  The
improvement in the net interest  margin was attributed to these rate  increases.
In 2004,  the  Corporation  increased  its key lending  index 25 basis points in
August,  September,  November  and  December.  The  Corporation  dropped its key
lending  index 25 basis points in the third  quarter  2003.  The impact of these
movements in 2004 and 2003 contributed to the narrowing of the margin in all but
the fourth quarter of 2003 and the second, third, and fourth quarters of 2004.

We attempt to measure the effect of changing  interest  rates with our  interest
rate  simulation  model.  The simulation  model suggests that rising rates would
continue to be to our  advantage.  At December 31, 2005,  if rates were to raise
200 basis points ratably over the next 12 months,  our net interest income would
improve by 14.0%, or $19.9 million.  If rates were to fall 100 basis points, our
net interest  income would  decrease 3.7%, or $5.2 million  thousand.  The model
indicates that we are currently positively gapped, meaning that more assets will
reprice within a one-year period than liabilities. However, a further discussion
of the model results,  under the headings "Market Risk Sensitivity  Instruments"
and "Asset/Liability Management", pages 33 and 34 explains why this is not so.

OTHER OPERATING INCOME

Service Charges

Deposit fee income has decreased  $561  thousand to $4.4 million,  or 11.4% over
the prior  year-end.  In 2004 and 2003,  deposit  fee income  increased  to $4.9
million  and  $4.6   million,   respectively.   Virtually  all  that  income  is
attributable to checking accounts. While our growth in checking account balances
has been solid this year,  increasing  from $313.3  million  last year to $395.9
million this year, or 26.4%,  more customers are increasing their balances along
with  increased  use of debit cards  thereby  reducing  their  service  charges.
Checking  account  deposits  increased  $41.9  million  in 2004,  or  15.4%  and
increased  $33.4  million  in 2003,  or  14.0%.

Other  Income

Other income is comprised of a variety of sources and  decreased in 2005 to $7.7
million  from $8.0  million  in 2004.  The  comparable  figure for 2003 was $5.9
million.  In 2004  there was a gain on sale of other real  estate  owned of $610
thousand.  Other income was up in 2004 due to increased  insurance and financial
service fees of $648 thousand, followed by an increase in the sale of other real
estate  owned of $512  thousand  over the prior  year and an  increase  in trust
department  fees of $273 thousand for the period.  The major  increases in other
income for 2003 were letter of credit fees and trust department fees, which were
up $130 thousand and $107 thousand, respectively.




                                      -30-
<PAGE>

FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued

Gain (Loss) On The Sale Of Investments

In 2005, the $211 thousand loss on sale of securities was due to a write down of
an equity investment in a financial  services company.  For 2004, we had a small
loss on the sale of a security of $44 thousand due to credit  concerns.  In 2003
our gains amounted to $190 thousand which  consisted of accepting a tender offer
from the issuer of a security and a bond that offered a premium as  compensation
for allowing early retirement of the bond.

OTHER OPERATING EXPENSES

Salaries And Employee Benefits

Salaries and benefits  expense rose 14.5% for 2005,  increasing  $4.6 million to
$36.5  million.  Those costs rose $3.1 million or 10.8% in 2004 and $3.0 million
or 11.5% in 2003.  Salaries  and  employee  benefits  costs were  affected by an
increase in staff, merit raises and a rise in commissions and bonuses.

The staffing level,  referred to as full-time  equivalent (FTE),  totaled 663 at
year-end 2005, an increase of 3.1%, over the prior year. That figure compares to
643 at  December  2004,  and 622  the  previous  year.

One of the issues that complicates the reporting of compensation  expense is the
deferral of loan  origination  costs. In accordance with the current  accounting
standards,  loan  origination  costs are deferred and amortized over the life of
the loan.  The loan costs,  which are  determined  for each loan type,  are then
deducted from personnel expense,  with the net figures reported in the financial
statements.  Compensation  is  thus  comprised  of the  expected  items  such as
salaries,  benefits  and  commissions,  but also the  effect  of  deferred  loan
origination costs, which can vary substantially from year-to-year.

Occupancy Expense

Occupancy expense totaled $7.7 million for 2005, an increase of $619 thousand or
8.8%, over the prior year.  Depreciation  expense comprised $203 thousand of the
increase and  infrastructure  improvements,  mainly related to network  security
improvements were $416 thousand.  Depreciation and other increased expenses were
related to new or relocated offices in downtown Bellingham,  Renton, and Lynden.
Occupancy  expense of $7.0 million in 2004 was up 12.5% from $6.3 million in the
previous year mainly due to infrastructure improvements.

Other Expenses

Other expense  increased $2.1 million in 2005, or 20.8%. The largest increase in
this  category was  consulting  fees,  which  increased  $518  thousand over the
previous year as a part of our information technology upgrade. Some of the other
areas of increases were legal fees of $120 thousand,  data security  expenses of
$130 thousand,  audits and  examinations of $310 thousand,  deposit account fees
paid of $150 thousand and NASDAQ fees of $49 thousand.  Other expense  increased
$678 thousand in 2004, or 7.7% and increased  slightly to $9.3 million,  or 3.2%
in 2003.

Reserve And Provision For Loan Losses

Management's  determination  of the level of the  provision  for loan  losses is
based  on  various   judgments  and  assumptions,   including  general  economic
conditions,  loan  portfolio  composition,   prior  loan  loss  experience,  the
evaluation of credit risk related to specific credits and market  segments,  and
monitoring results from the Corporation's  ongoing internal credit review staff.
Management  believes our methodology  for assessing  credit risk is adequate and
reflected in the resulting  allowance  calculation.  The  allowance  methodology
takes into account that the loan loss reserve will change at different points in
time based on economic conditions,  credit performance,  loan mix and collateral
values.

The  allowance  for loan losses  increased  to $37.1  million as of December 31,
2005. At year-end  2004,  the reserve  balance was $32.7  million,  which was an
increase of $3.1  million  over  year-end  2003  balance of $29.6  million.  The
allowance  for loan  loss  reserve  was  1.55% of  totals  loans as of  year-end
December 31, 2005.  For year-end  December 31, 2004 our reserve  ratio was 1.65%
and was 1.67% for year-end 2003.



                                      -31-
<PAGE>


FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued

The Bank considers the reserve for loan losses adequate to cover losses inherent
in the portfolio at December 31, 2005.

REVIEW OF FINANCIAL CONDITION

Investment  Securities

During 2005,  run off  continued  with  investment  securities  totaling  $110.6
million or declining 27.9%. Almost all of this run off was due to maturities and
calls prior to maturity.

During 2005 and 2004, management used these cash flows for funding growth in the
loan portfolio.  Investment securities decreased from $187.9 million at year-end
2003 to $153.5 million as of December 31, 2004, or 18.3%. There was considerable
activity within the securities portfolio during 2003.

Loans

Loans increased 20.8% in 2005, from $1.98 billion at December 31, 2004, to $2.39
billion at year-end 2005. In 2003,  loans grew to $1.77 billion or 6.8%.  Please
see pages 41 and 42 of this report and Form 10-K for the year-ended December 31,
2005 for a further discussion of loans.

Deposits

Deposits  increased  $265.5 million,  or 14.8%, in 2005, and $128.8 million,  or
7.7% in 2004 and $106.1  million,  or 6.8% in 2003.  The shift in  deposits  was
characterized by a changing interest rate  environment.


Interest bearing deposits at December 31,

<TABLE>
<CAPTION>
    In Thousands
                                                               2005                 2004                2003
                                                        -------------------  ------------------- --------------------
<S>                                                             <C>                  <C>                  <C>
        NOW and money market accounts                           $  322,283           $  270,894           $  251,376
        Savings accounts                                           495,108              642,434              625,843
        Time deposits                                              848,137              569,239              518,409
                                                        -------------------  ------------------- --------------------
               Total                                            $1,665,528           $1,482,567           $1,395,628
                                                        ===================  =================== ====================
</TABLE>


The trend for the three years prior to 2004 has been declining time deposits and
increasing  savings balances,  due to the aversion of customers to lock into low
rate CD's. However,  with interest rates on the rise in late 2004 and 2005, that
trend has reversed. Total interest bearing deposits increased $183.0 million, or
12.3% in 2005,  $87.0  million,  or 6.2% in 2004 and $72.7  million,  or 5.5% in
2003. NOW and money market accounts  decreased in 2003 but increased in 2004 and
2005.  Starting in the second half of 2004, interest rates began to increase and
CD's became more attractive to investors and continued throughout 2005. Balances
increased to $848.1 million in 2005, $278.9 million over 2004, and $50.8 million
over 2003.  Prior to 2004,  the type of  savings  accounts  having  the  largest
increase over the last 3 years was our premium savings account,  which increased
from $415.4 million in 2002 to $577.8 million in 2004.  This account was created
as an alternative to certificates of deposit and pays a higher annual percentage
yield than other core deposits. However, these accounts ran off substantially in
2005  to a  portfolio  balance  of  $450.2  million.  The  change  in the mix is
attributable to the rates paid on the various deposits products.



                                      -32-
<PAGE>


FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued



MARKET RISK SENSITIVE INSTRUMENTS

Market risk is the risk of loss from adverse changes in market prices and rates.
A  significant  market  risk  arises  from  interest  rate risk  inherent in our
lending,  deposit,  borrowing, and mortgage-banking  activities. To that end, we
actively monitor and manage interest rate risk exposure.

A number of measures  are  utilized to monitor  and manage  interest  rate risk,
including  income  simulation and "gap" analysis  (further  discussed  under the
subheading  "Asset and Liability  Management" on page 34). An income  simulation
model is primarily  used to assess the impact on earnings  changes that interest
rates  may  produce.  Key  assumptions  in the  model  include,  cash  flows and
maturities of financial instruments,  changes in market conditions, loan volumes
and pricing, deposit sensitivity, consumer preferences, and management's capital
leverage plans. These assumptions are inherently uncertain; therefore, the model
cannot precisely estimate net interest income or precisely predict the impact of
higher or lower  interest  rates on net  interest  income.  Actual  results  may
significantly  differ  from  simulated  results  due to  timing,  magnitude  and
frequency  of  interest  rate  changes,  and  changes in market  conditions  and
specific strategies, among other factors.

We use a simulation  model to estimate the impact of changing  interest rates on
the Corporation's  earnings and capital.  The model calculates the change in net
interest  income under various rate shocks.  As of December 31, 2005,  the model
predicted that net income would increase about $12.8 million if rates  increased
2%, and decrease about $3.4 million if rates fell 1%.

Based on the  results of  simulations  at the end of the last three  years,  the
estimated impact of a steady change in interest rates over the next 12 months is
shown in the table below (assumes a 34% tax rate):

<TABLE>
<CAPTION>
In Thousands
                                        2006 Estimated Change         2005 Estimated Change         2004 Estimated Change
                                     ----------------------------  ----------------------------  ----------------------------
<S>                                           <C>           <C>             <C>           <C>             <C>           <C>
Rate shock                                   -1.0%          2.0%           -1.0%          2.0%           -1.0%          2.0%
                                     ----------------------------  ----------------------------  ----------------------------
Net interest income                        ($5,213)      $19,922           ($309)       $8,969            $242        $6,548
Net income                                  (3,409)       12,768             (71)        5,597             157         4,256
</TABLE>


During 2005, we did have a 200 basis point upward movement in rates. At year-end
2004,  the model  predicted  that our net interest  income would  increase  $9.0
million and our net income would  increase $5.6 million,  if rates  increased by
2%. Actually, our net interest income increased $21.9 million and our net income
increased $8.5 million,  approximately 2 1/2 and 1 1/2 times the model estimate.
Net loan growth was approximately 2 times the growth  anticipated at the time of
the projections and gross loan  production for the year was  approximately  $1.7
billion,  considerably  more  than  estimated.  In  addition,  repricing  on our
interest  bearing   liabilities   lagged  to  a  great  extent  than  originally
anticipated in the simulation model.

The interest rate scenarios  reflected  above  represent the results of possible
near-term  interest rate movements.  Approximately  50% of the loan portfolio is
tied to rate  indexes  that  are one  year or less in  duration.  These  indexes
include our Base rate,  Federal Home Loan Bank of Seattle  (FHLB)  Advance Rate,
Wall Street Journal prime, London Interbank Offering Rate (LIBOR),  and Constant
Maturity  Treasury (CMT).  Interesting to note that in 2003, the model indicated
that declining rates would increase net interest income and net income.  This is
due to a  significant  portion of variable rate loans that were at or near their
floors, and the multiplier effect that will be discussed later.

The percentages  shown represent  changes over a 12-month period in net interest
income  and net  income  under  two rate  scenarios.  The cash  flows  have been
adjusted to account for prepayments and other factors.

Our primary  objective in managing interest rate risk is to minimize the adverse
impact of changes in  interest  rates on our net  interest  income and  capital,
while  structuring the asset and liability  components to obtain the maximum net
interest  margin.  We rely  primarily  on our asset and  liability  structure to
control interest rate risk.


                                      -33-
<PAGE>


FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued

ASSET AND LIABILITY MANAGEMENT

Asset and liability  management  is the  responsibility  of the  Asset/Liability
Committee,  which acts  within  policy  directives  established  by the Board of
Directors.  This  Committee  meets  regularly to monitor the  composition of the
balance sheet, to assess projected earnings trends, and to formulate  strategies
consistent  with the objectives  for liquidity,  interest rate risk, and capital
adequacy.  The objective of asset/liability  management is to maximize long-term
shareholder  returns by optimizing net interest income within the constraints of
credit quality,  interest rate risk policies,  levels of capital  leverage,  and
adequate  liquidity.

Assets and  liabilities  are managed by matching  maturities  and repricing in a
systematic manner. In addition to a simulation model, an interest "gap" analysis
is used to measure the effect interest rate changes have on net interest income.
The gap is the difference between the amount of interest-earning assets maturing
or repricing  within a specific  time period and the amount of interest  bearing
liabilities  maturing or repricing in that same time period. A gap is considered
positive when the amount of interest-rate-sensitive assets exceeds the amount of
interest-rate-sensitive liabilities. A gap is considered negative in the reverse
situation.  However,  the exact impact of the gap on future  income is uncertain
both in timing and amount because  interest rates for our assets and liabilities
can  change  rapidly  as a result of market  conditions  and  customer  behavior
patterns.

In the following table the expected maturities for financial liabilities with no
stated  maturity,  reflect  assumptions  based on historical  run-off rates. The
run-off rates for  noninterest  bearing  deposits is 6% per year; for NOW, sweep
and money market  accounts it is 8% per year and for savings  accounts it is 10%
per  year.  The  weighted  average  interest  rates  for  financial  instruments
presented  are at year-end for 2005.  Please refer to page 24 of this report for
details regarding estimated fair value.






                                      -34-
<PAGE>

FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued

MARKET RISK


<TABLE>
<CAPTION>
In Thousands, at December 31, 2005
-----------------------------------
                                                      Expected Maturity Date                                            Fair
                                          2006       2007       2008       2009      2010    Thereafter    Total       Value
                                       ----------  ---------  ---------  ---------  -------  ----------    ---------  ---------
Financial Assets
Cash and due from banks
<S>                                    <C>         <C>       <C>        <C>         <C>       <C>           <C>        <C>
     Noninterest bearing               $    85,631         -          -          -         -          -      $85,631    $85,631
Fed Funds Sold
     Variable Rate                             733         -          -          -         -          -          733        733
     Weighted average interest rate          4.20%                                                              4.20%
Securities available for sale
     Fixed Rate                             33,899     9,161     32,222     18,000     2,000      2,815       98,097    104,904
     Weighted average interest rate           3.84%     3.12%      3.60%      3.87%     3.00%     10.18%        3.86%
Securities held to maturity
     Fixed Rate                              1,700       715      1,094        200       244      1,760        5,713      5,919
     Weighted average interest rate (1)      5.31%     8.03%      8.13%      8.09%     8.49%      9.56%         7.73%
Loans Receivable, net
     Fixed Rate                            123,903   122,052    242,127    157,406   150,326     60,670      856,484    858,829
     Weighted average interest rate (2)       7.06%     7.01%      6.48%      6.78%     7.08%      6.62%        6.81%
     Variable Rate                         971,579   169,263     24,374     45,247    14,840    301,726    1,527,029  1,533,452
     Weighted average interest rate (2)       8.50%     8.28%      8.01%      7.46%     8.11%      6.66%        8.06%

Financial Liabilities
Noninterest bearing deposits                23,751    22,326     20,986     19,727    18,544    290,518      395,852    395,852
NOW, Sweep and Money Market accounts        25,783    23,720     21,822     20,077    18,471    212,411      322,284    322,284
     Weighted average interest rate           1.74%     1.74%      1.74%      1.74%     1.74%      1.74%        1.74%
Savings accounts                            49,511    44,560     40,104     36,093    32,484    292,356      495,108    495,108
     Weighted average interest rate           2.27%     2.27%      2.27%      2.27%     2.27%      2.27%        2.27%
Time Certificates
     Fixed Rate                            611,553   100,340     60,910     43,446    29,690      2,198      848,137    848,903
     Weighted average interest rate           3.82%     4.16%      4.04%      3.87%     4.35%      4.00%        3.91%
Federal funds purchased
     Variable rate                          12,157         -          -          -         -          -       12,157     12,157
     Weighted average interest rate          4.11%                                                              4.11%
Securities sold under agreements
     to repurchase
     Variable rate                           8,656         -          -          -         -          -        8,656      8,656
     Weighted average interest rate           3.22%                                                             3.22%
FHLB advances
     Fixed Rate                             15,000    45,000     37,500     42,500    10,000     90,000      240,000    238,521
     Weighted average interest rate          4.01%      4.64%      4.26%      4.11%     6.77%      5.07%        4.70%

     (1) Represents tax equivalent yield
     (2) Represents weighted note rates exclusive of loan fees



</TABLE>


Please note that in the above chart, financial assets and liabilities are listed
at their expected maturity date. Our variable rate financial assets will reprice
much sooner than their expected maturity date and liabilities may or may not run
off at the expected rate as indicated  above.  We like to analyze our assets and
liabilities  as shown in the chart below,  which  indicates  when the assets and
liabilities can be repriced.


                                      -35-
<PAGE>




FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued


REPRICING OPPORTUNITIES FOR ASSETS AND LIABILITIES
(Amortized cost used for investments)

<TABLE>
<CAPTION>
In Thousands, at December 31, 2005
                                2006         2007          2008          2009          2010       Thereafter       Total
                              ----------- ------------  ------------ -------------  ------------  ---------------------------
ASSETS
<S>                           <C>            <C>           <C>           <C>           <C>           <C>          <C>
     Loans (1) (2)            $1,462,878     $187,798      $344,031      $200,232      $175,112      $ 28,837     $2,398,888
       Yield                        8.18%        6.93%         6.44%         6.62%         7.05%         6.38%          7.60%
     Investments (2)              35,599        9,876        33,316        18,200         2,243         4,576        103,810
       Yield                        3.83%        3.47%         6.74%         3.92%         3.60%         9.95%          4.04%
     Fed funds sold                  733            -             -             -                                        733
       Yield                        4.20%                                                                               4.20%
                              ----------- ------------  ------------ -------------  ------------  ------------  -------------
     Total earning assets      1,499,210      197,674       377,347       218,432       177,355        33,413      2,503,431
                              =========== ============  ============ =============  ============  ============  =============
       Yield                        8.07%        6.76%         6.21%         6.39%         7.01%         6.87%          7.44%
                              =========== ============  ============ =============  ============  ============  =============

LIABILITIES
     NOW, money market,
           and sweep accounts     93,844       34,982         8,750         8,750         8,750       167,508        322,584
       Cost                         1.74%        1.74%         1.74%         1.74%         1.74%         1.74%          1.74%
     Savings                     180,953      180,953       117,924         9,885         5,393                      495,108
       Cost                         2.27%        2.27%         2.27%         2.27%         2.27%         2.27%          1.74%
     Time deposits               611,553     $100,340      $ 60,910        43,446        29,690         2,198        848,137
       Cost                         3.82%        4.16%         4.04%         3.87%         4.35%         4.00%          3.91%
     Fed funds purchased
          and repurchase
            agreements            20,813            -             -             -                                     20,813
       Cost                         3.62%                                                                               3.62%
     FHLB borrowings              15,000       45,000        37,500        42,500        10,000        90,000        240,000
       Cost                         4.01%        4.64%         4.26%         4.26%         6.77%         5.07%          4.70%
                              ----------- ------------  ------------ -------------  ------------  ------------  -------------
     Total interest
        bearing liabilities      922,163      361,275       225,084       104,581        53,833       259,706      1,926,642
                              =========== ============  ============ =============  ============  ============  =============
       Cost                         3.31%        3.04%         3.06%         3.64%         4.17%         2.91%          3.22%
                              =========== ============  ============ =============  ============  ============  =============
     GAP                      $  577,047    ($163,601)     $152,263      $113,851      $123,522     ($226,293)      $576,789
                              =========== ============  ============ =============  ============  ============  =============
(1) Loan fees and costs are included in balance but not in the yield
(2) Taxable equivalent
</TABLE>

It is generally  assumed that during a period of rising interest rates,  the net
earnings of an institution with a negative gap may be adversely  affected due to
its  interest  bearing  liabilities  repricing  to a  greater  extent  than  its
interest-earning assets. Conversely,  during a period of falling interest rates,
net earnings may increase.  That  assumption,  however,  is based on the premise
that assets/liabilities  within a one-year time frame will generally move in the
same direction at approximately the same rate. However, historical data reflects
that the relationship between one-year  asset/liabilities may not be as strongly
correlated as assumed. Loans with one-year repricing characteristics are tied to
a number of indexes to include our base rate, the Wall Street Journal prime, the
one-year constant maturity  treasury,  LIBOR, and FHLB rates.  Those indexes are
subject to the movement of the one-year market rates. On the other hand, savings
accounts,  which constitute the bulk of the one-year repricing liabilities,  are
subject to the local  financial  institutions'  market.  Pricing  for savings is
dependent on customer  preferences and the subjective pricing influence of local
banks,  credit unions,  etc. Thus, while a good portion of our loans are tied to
national and international money markets, deposits are subject to the conditions
of the Puget Sound area.  Additionally,  when interest  rates change,  different
rates  change  by  different  amounts.  The use of  "multipliers"  is used  that
represent the change of each  asset/liability rate compared to the change in the
federal funds rate. For example,  the prime rate has a factor of 1 indicating it
changes the same amount as any federal funds rate change.  Core deposit  sectors
may have a factor of .25, indicating those rates move only 25% as much. Applying
the  multipliers  to the balance  sheet,  at December 31,  2005,  the Bank had a
positive gap of $577.0 million.




                                      -36-
<PAGE>
FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued



ASSET QUALITY

The  Bank's  nonperforming  assets  include  the  balances  of loans  placed  in
nonaccrual  status and Other Real Estate Owned.  The following chart  summarizes
the composition of our nonperforming assets, including restructured debt.

<TABLE>
<CAPTION>
        In Thousands                                            Years ending December 31,
                                                  --------------------------------------------------------
                                                        2005                2004               2003
                                                  -----------------   -----------------  -----------------
<S>                                                         <C>                <C>                 <C>
        Total nonaccruing loans                             $4,949             $14,107             $6,694
        Other real estate owned                                  -                   -              4,162
                                                  -----------------   -----------------  -----------------
        Total nonperforming assets                          $4,949             $14,107            $10,856
                                                  =================   =================  =================
        Restructured loans                                       -                   -             $6,178
                                                  =================   =================  =================
        NPA's to total loans                                   0.21%              0.71%              0.61%
        NPA's to total assets                                  0.19%              0.63%              0.52%
        NPA's to total capital                                 1.67%              5.55%              4.95%
        NPA's & restructured
            loans to total assets                              0.19%              0.63%              0.82%
</TABLE>




As shown in the chart above, our ratio of  nonperforming  assets to total assets
ended the year at .19% as compared to .63% at December 31, 2004.

NONACCRUAL LOANS

It is the Bank's  practice to  discontinue  accruing  interest on virtually  all
loans  that are  delinquent  in  excess of 90 days  regardless  of risk of loss,
collateral, etc. Some problem loans, which are less than 90 days delinquent, are
also placed into  nonaccrual  status if the success of collecting full principal
and  interest  in a timely  manner  is in  doubt.  Some  loans  will  remain  in
nonaccrual even after improved  performance  until a consistent timely repayment
pattern is exhibited and/or timely performance is considered reliable.

The Bank ended the year with three  nonaccruing loans with a combined balance of
$4.9  million.  This  compares to  previous  year-end  balance of $14.1  million
consisting of 6 loans.  Two loans,  totaling $4.9 million,  make up 99.8% of our
year-end balance.

OTHER REAL ESTATE OWNED

Other real estate  owned (OREO) is carried at the lesser of book value or market
value. The costs related to completion,  repair,  maintenance, or other costs of
such properties, are generally expensed with any gains or inadvertent shortfalls
from the ultimate sale of OREO being shown as other income or other expense.

The Bank had no OREO  totals to report at year-end  December  31, 2005 and 2004.
The 2003 year-end OREO balance totaled $4.2 million, or .2% of total assets. The
change in OREO  totals is a  reflection  of our  aggressive  collection  efforts
resulting  in  an  orderly  transition  of  assets  from  acquisition,   through
foreclosure, and sale.


                                      -37-
<PAGE>
FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued


Certain other loans, currently in nonaccrual,  are in the process of foreclosure
and there is a likelihood  these  foreclosures  will be completed  and the loans
will then  become  OREO.  This is viewed as an ordinary  part of the  collection
process  and  efforts  are  constantly  underway  to reduce  and  minimize  such
nonperforming assets.

LIQUIDITY

Liquidity refers to the ability to generate  sufficient cash to meet the funding
needs of current  loan  demand,  deposit  withdrawals,  principal  and  interest
payments with respect to outstanding borrowings,  and to pay operating expenses.
The need for  liquidity  is  affected  by loan  demand,  net  changes in deposit
levels,  and the scheduled  maturities of borrowings.  Liquidity is derived from
assets by receipt of interest and  principal  payments and  prepayments,  by the
ability to sell assets at market prices,  earnings,  and by utilizing  unpledged
assets as collateral for borrowings. Liquidity is also derived from a variety of
funding sources, including deposits, advances from the FHLB, and other short and
long term borrowings.

The  principal  use of funds is to  invest in  securities  and  loans.  Security
purchases  amounted  to $58.9  million  in 2005,  up 25% from  $47.1  million in
purchases in 2004, and purchases  totaled $143.6 million in 2003. The reason for
the decline over 2003  purchases was stronger loan demand in 2005 and 2004.  Net
cash flows for loan  originations  totaled $409.3 million,  $204.8 million,  and
$122.7 million during 2005,  2004, and 2003,  respectively.  The  origination of
mortgage  loans held for sale totaled $93.2 million,  $67.7 million,  and $130.2
million during 2005,  2004, and 2003,  respectively.  Proceeds from the sales of
mortgage loans amounted to $91.3 million in 2005, $65.8 million in 2004,  $137.1
million in 2003.

Our line of  credit  with the FHLB  has been  established  at 24% of  qualifying
loans, which at December 31, 2005 was $581.4 million. Net advances totaled $64.9
million,  $5.0 million and $10.0 million for 2005, 2004 and 2003,  respectively.
Borrowings totaled $240.0 million,  $175.1 million,  $170.1 million, at December
31, 2005, 2004, and 2003,  respectively.  These  borrowings  represented 9.1% of
year-end assets in 2005, 7.8% in 2004, and 8.2% in 2003.

Unused lines of credit available to us include $338.5 million  available at FHLB
and $55.0 million available from correspondent banks. We also have the option of
funding asset growth or funding withdrawals with brokered deposits.  At year-end
2005, broker deposits were $16.9 million.

The  table on the next page is a  probable  indication  of when we might  expect
assets to mature, but we cannot be certain that we will receive or pay out these
cash  flows as loans may be  renewed  and  depositors  may not want to roll over
their deposits at the current rate we are willing to pay.



                                      -38-
<PAGE>


FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued



MATURITY SCHEDULE FOR EARNING ASSETS
(Amortized cost used for investments)

<TABLE>
<CAPTION>

                                                                                                                 Percent
In Thousands                                                                                     Total           of Total
------------                  0-1              1-5            After                               Fair             Fair
December 31, 2005            Year             Years          5 Years            Total            Value            Value
                          -------------   --------------  ---------------  ----------------  ---------------  ---------------
<S>                            <C>              <C>               <C>             <C>              <C>                  <C>
     Investments            $   35,599         $ 63,635         $  4,576        $  103,810       $  110,823             4.5%

     Loans                   1,101,193          925,635          362,396         2,389,224        2,355,206            95.5%
     Federal funds sold            733                -                -               733              733             0.0%
                          -------------   --------------  ---------------  ----------------  ---------------  ---------------
         Total              $1,137,525         $989,270         $366,972        $2,493,767       $2,466,762           100.0%
                          =============   ==============  ===============  ================  ===============  ===============
</TABLE>
<TABLE>
<CAPTION>

                                                                                                                 Percent
In Thousands                                                                    Total            Total           of Total
------------                  0-1              1-5            After           Carrying            Fair             Fair
December 31, 2004            Year             Years          5 Years            Cost             Value            Value
                          -------------   --------------  ---------------  ----------------  ---------------  ---------------
<S>                            <C>              <C>               <C>             <C>              <C>                  <C>
     Investments            $   73,645         $ 67,759         $  6,821        $  148,225       $  153,829             7.3%
     Loans                     747,571          860,599          369,882         1,978,052        1,942,456            92.4%
     Federal funds sold          5,946                -                -             5,946            5,946             0.3%
                          -------------   --------------  ---------------  ----------------  ---------------  ---------------
         Total              $  827,162         $928,358         $376,703        $2,132,223       $2,102,231           100.0%
                          =============   ==============  ===============  ================  ===============  ===============
</TABLE>




For additional information regarding liquidity,  see the Statement of Cash Flows
in the  Consolidated  Financial  Statements.


CAPITAL


We are subject to various  regulatory capital  requirements  administered by the
federal  banking  agencies.  Failure to meet minimum  capital  requirements  can
initiate  certain  mandatory and possibly  additional  discretionary  actions by
regulators  that, if undertaken,  could have a material  effect on our financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action, we must meet specific capital guidelines that involve
quantitative  measures of assets,  liabilities,  and  certain  off-balance-sheet
items as calculated under regulatory accounting  practices.  The capital amounts
and classifications are also subject to qualitative  judgments by the regulators
about components, risk weightings, and other factors. The minimum ratios and the
actual   capital   ratios   are  set   forth  in  the  table   below.



<TABLE>
<CAPTION>
                                                  Frontier                                   Well
                                                  Financial            Frontier           Capitalized
CAPITAL RATIOS                                   Corporation             Bank               Minimum
                                              ------------------  ------------------- -------------------
<S>                                                <C>                  <C>                 <C>
Total capital to risk-weighted assets              12.37%               11.39%              10.00%
Tier 1 capital to risk-weighted assets             11.12%               10.14%              6.00%
Tier 1 leverage capital to average assets          10.99%               10.07%              5.00%
</TABLE>

The holding  company is registered  with the Federal Reserve Bank as a financial
holding company.  The Federal Reserve Bank requires  financial holding companies
to meet the well-capitalized status of the regulatory capital requirements.



                                      -39-
<PAGE>

FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued



The capital of the  Corporation at year-end was $296.1  million,  up from $254.2
million  a year ago,  or an  increase  of  16.5%.  Frontier  began  paying  cash
dividends to shareowners in 1999 and approved a stock  repurchase  plan in 2000.
During 2005,  cash dividends of $17.0 million were paid to  shareowners  and the
Corporation did not purchase any common stock in the open market in 2005.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The  following  table  sets  forth  the  Corporation's   long-term   contractual
obligations:

<TABLE>
<CAPTION>
In Thousands                   Payments due per period
                        -------------------------------------------------------------------------------
                            Less Than
                             One Year            1-3 Years           3-5 Years          Thereafter             Total
                        -------------------  ------------------  ------------------  ------------------  -------------------
<S>                               <C>                 <C>                 <C>                  <C>               <C>
       Time deposits              $611,284            $161,335            $ 73,320             $ 2,198           $  848,137
       FHLB borrowings              15,000              82,500              52,500              90,000              240,000
       Operating leases              1,314               2,346               1,883               3,046                8,589
                        -------------------  ------------------  ------------------  ------------------  -------------------
       Total                      $627,598            $246,181            $127,703             $95,244           $1,096,726
                        ===================  ==================  ==================  ==================  ===================
</TABLE>


See additional  discussion  under Notes 6, 8 and 15.




OFF-BALANCE SHEET ARRANGEMENTS

See Note 15 for discussion.

MARKET  FOR   FRONTIER   FINANCIAL   CORPORATION'S   COMMON  STOCK  AND  RELATED
SHAREOWNERS' MATTERS


Frontier  Financial  Corporation's  common  stock began  trading on the National
Association of Securities  Dealers' Automated Quotation System (Nasdaq) on April
16, 1998.  Nasdaq reported the 2005 daily average trade volume was 41,357 shares
and a total trade volume of  10,421,896.  During  2005,  the market price of our
common  stock ranged from $23.61 to $33.49.  The average  price for the year was
$27.64.

At December 31,  2005,  the total  number of  shareowners  of record of Frontier
Financial  Corporation's common stock was 3,739 and there were 28,438,150 shares
outstanding,  which includes  14,729,743 shares registered in street name.

Prior to 1999 the Corporation had always paid stock dividends, which ranged from
7% to 10% and the  Corporation has had six stock splits since the Bank opened in
1978. In 1999, the Board of Directors declared the first annual cash dividend of
$.25 per share on post two-for-one  split shares. On January 19, 2000, the Board
declared the first  quarterly cash dividend.  Please see the table below for the
detail of the year 2005 dividends.


<TABLE>
<CAPTION>
                         Dividend Payable                 Record Date                  Payable Date
                    ----------------------------  ----------------------------  ----------------------------
<S>                              <C>                           <C> <C>                       <C> <C>
                                 $.137                 January 10, 2005              January 25, 2005
                                 $. 14                   April 11, 2005                April 25, 2005
                                 $. 16                    July 11, 2005                 July 25, 2005
                                 $.165                 October 11, 2005              October 24, 2005
</TABLE>

The Board will continue to review the dividend policy on a quarterly basis.


                                      -40-
<PAGE>
FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued



STOCK REPURCHASE PROGRAM
There was no stock  repurchase  activity in 2005.  On September  16,  2004,  the
Corporation authorized a new plan to repurchase 5% of the authorized outstanding
stock. There are currently 1,398,405 authorized under this plan.

LOAN PORTFOLIO

The Bank  classifies its lending  activities in the following  principal  areas:
installment,  commercial and agriculture,  real estate  commercial,  real estate
construction and land  development,  and  residential.  As of December 31, 2005,
these categories  accounted for approximately 2.2%, 14.6%, 39.4%, 35.4% and 8.4%
respectively of the Bank's loan portfolio.

The chart below  summarizes  the  composition of the loan portfolio for the past
three years by average balance:



<TABLE>
<CAPTION>
In Thousands                                        2005                          2004                         2003
------------                             ----------------------------  ---------------------------  ----------------------------
                                             Amount     Percentage        Amount     Percentage         Amount     Percentage
                                         ----------------------------  ---------------------------  ----------------------------
<S>                                         <C>                <C>       <C>                 <C>       <C>                 <C>
Installment                                 $   47,930          2.2%     $   44,111          2.3%      $   42,731          2.6%
Commercial and agriculture                     320,923         14.6%        287,180         15.2%         275,429         16.3%
Real estate commercial                         866,647         39.4%        831,823         44.1%         761,782         45.0%
Real estate construction
  and land development                         779,364         35.4%        564,726         29.9%         473,647         28.0%
Real estate residential                        185,480          8.4%        159,688          8.5%         137,462          8.1%
                                         ----------------------------  ---------------------------  ----------------------------
  Total                                     $2,200,344        100.0%     $1,887,528        100.0%      $1,691,051        100.0%
                                         ============================  ===========================  ============================
</TABLE>


Total average loan balances ended the year 2005 at $2.2 billion, representing an
increase of $312.8 million,  or 16.6% over the average balance for 2004. Average
loan  balances  for 2004 were $1.9  billion  representing  an increase of $196.5
million,  or 11.6%  increase over 2003 average loans  outstanding.  2003 average
loans increased $90.0 million, or 5.6% over 2002.

Commercial  real  estate  and  construction  and  land  development  loans  have
historically  represented the largest  portion of the Bank's loan portfolio.  In
2005,  the average  balances of commercial  real estate and  construction  loans
comprised  75% of the  portfolio  totaling  $1.6 billion  versus $1.4 billion in
2004. In 2003 they totaled $1.2 billion.

Our commercial real estate portfolio consists of a wide cross-section of retail,
small office, warehouse, and industrial type properties. These loans are secured
by first  trust  deeds  with  maturities  from  three to ten years and  original
loan-to-value  ratios generally from 65% to 75%. Ten-year  maturities  generally
reprice  every  five  years.  A  substantial  number  of  these  properties  are
owner-occupied.  While the  Corporation  has  significant  balances  within this
lending category, management believes that its lending policies and underwriting
standards are sufficient to minimize risk even during uncertain  economic times.
Management   closely  monitors  the  effects  of  current  and  expected  market
conditions and other factors that may influence the repayment of these loans.

Real estate construction and land development loans also represent a significant
piece of the Corporation's  loan mix in 2005. Loans within this category grew by
$214.6 million or 38%. Continued demand for housing and favorable interest rates
continue to fuel this  growth.  Real  estate  construction  loans are  generally
composed of  commitments  to customers  within our market area for  construction
purposes.  Loans within this  category are used for  construction  projects that
range from  residential  and commercial  land  development  to  residential  and
commercial  building  projects.  They are generally secured by first trust deeds
with well-defined repayment sources following project completion. Maturities are
set to match the time required for project completion,  which typically run from
12 to 18 months depending on complexity.

Commercial and  agriculture  loans  increased  $33.7 million,  or 11.7% in 2005.
Expanding  our branch  network and the  recruitment  of seasoned  local  lenders
provided strong support for favorable growth in commercial loan totals.



                                      -41-
<PAGE>


FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued


At 2.2% of total loans,  our  installment  lending  continues to be the smallest
portion of our overall  loan  portfolio.  Loans  within this  category  remained
relatively  unchanged for the year.  This area of consumer  lending  continues a
shift toward  credit card,  factory-lending  programs for  automobiles  and home
equity lines of credit.  While the Corporation  does offer credit cards and home
equity lines, emphasis has not been placed on these product offerings.

Real estate  residential  loans averaged $185.5 million at year-end 2005.  Loans
within this category are used to finance  individual owner and nonowner occupied
residences.  These loans will  generally be repaid at maturity as they move into
lower  interest rate term mortgage  loans  available  through  secondary  market
programs.

The loan portfolio yield increased to 7.92% in 2005 from 7.08% in 2004 and 7.51%
in 2003.  There were eight rate increased in 2005.  Although FRB increased rates
five times in the second half of 2004, many variable rate loans in our portfolio
had floors,  which slowed down the increase in interest income.  With respect to
2003, although we reduced our prime rate .25% in the third quarter,  most of the
decline was attributable to market competition.

For  2005,  the  tax  equivalent  interest  and  fees  totaled  $174.3  million,
increasing  $40.6  million or 30.3% from the prior  year-end.  In 2004 we saw an
increase in tax equivalent loan interest and fees,  which totaled $133.7 million
and increased $6.8 million, or 5.3%. Tax equivalent interest and fee income from
loans decreased $4.9 million in 2003, or 3.7%. The increase of $312.8 million in
the average  balances of loans in 2005 increased  interest  income $23.1 million
and the increase in rates  increased  interest  income by $17.5  million,  for a
total increase of $40.6  million.  The increase of $196.5 million in the average
balance of loans in 2004 increased interest income $15.0 million and the decline
in rates decreased  interest income by $8.2 million,  for a net increase of $6.8
million.  The increase of $90.0 million in the average  balance of loans in 2003
increased  interest  income by $7.7  million  and the  decline in rates  reduced
interest income by $12.6 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The  preparation of the  consolidated  financial  statements in conformity  with
accounting   principles   generally  accepted  in  the  United  States  requires
management to make estimates and assumptions that affect amounts reported in the
consolidated  financial  statements.  Changes in these estimates and assumptions
are  considered  reasonably  possible  and may  have a  material  impact  on the
consolidated  financial statements and thus actual results could differ from the
amounts reported and disclosed  herein.  The Company considers the allowance for
loan loss a critical accounting policy subject to estimate.

For  additional  information,  regarding  the  allowance  for loan  losses,  see
"Analysis of the Allowance for Loan Losses" in this Management's  Discussion and
"Allowance  for Loan  Loss" in Note 1 in  Notes  to the  Consolidated  Financial
Statements.

The Company's financial statements are based on the selection and application of
significant  accounting  policies which require  management to make  significant
estimates and assumptions (see Note 1 to the consolidated financial statements).
The Company  believes  that the  allowance  for credit losses is one of the more
critical  judgment  areas in the  application  of its  accounting  policies that
affect  financial  condition  and  results  of  operations.  This is more  fully
described in the Liquidity and Financial Condition section.

Material  estimates that are  particularly  susceptible  to significant  change,
relate to the  determination  of the allowance for loan losses,  deferred income
taxes, and the valuation of real estate acquired in connection with foreclosures
or in  satisfaction  of  loans.  In  connection  with the  determination  of the
allowance for loan losses and the valuation of foreclosed  assets held for sale,
management obtains independent appraisals for significant properties.


                                      -42-
<PAGE>

FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued

FORWARD LOOKING STATEMENTS

Except  for  historical  financial  information  contained  herein,  the  matter
discussed  in  this  annual  report  of  the   Corporation   may  be  considered
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended  and subject to the safe  harbor  created by the  Private  Securities
Litigation Reform Act of 1995.  Forward-looking  statements are subject to risks
and  uncertainties  that may cause actual future  results to differ  materially.
Sentences  containing  words  such as  "may",  "will",  "expect",  "anticipate",
"believe",  "estimate",  "should",  "projected"  or similar words may constitute
forward-looking  statement.  The  Corporation  may have used the  statements  to
describe expectations and estimates in various areas, including, but not limited
to:  changes in the economy of the markets in which it operates:  interest  rate
movements;  future  acquisitions and growth  strategies;  system conversions and
integration  activities;  the  impact  of  competitive  products,  services  and
pricing;  and  legislative,  regulatory  and  accounting  changes  affecting the
banking and financial  service  industry.  Actual results could vary  materially
from the future results covered in forward-looking  statements.  Factors such as
interest rate trends and loan delinquency rates, as well as the general state of
the economy in  Washington  state and the United  States as a whole,  could also
cause actual results to vary materially  from the future results  anticipated in
such  forward-looking   statements.   These  factors  should  be  considered  in
evaluating  the  forward-looking  statements  and undue  reliance  should not be
placed on such statements.



                                      -43-
<PAGE>



FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued


AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN - Table 1

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                         -------------------------------------------------------------------------------------
                                       2005                        2004                      2003
                         -------------------------------------------------------------------------------------
In Thousands                                  Average                     Average                     Average
                                     Interest  Rates             Interest Rates             Interest   Rates
                           Average   Income/  Earned/  Average    Income/ Earned/ Average    Income/  Earned/
                           Balance   Expense   Paid    Balance    Expense  Paid   Balance    Expense   Paid
                         -------------------------------------------------------------------------------------
Interest Earning Assets
<S>                         <C>        <C>      <C>     <C>         <C>    <C>     <C>         <C>      <C>
Taxable investments         $117,268   $4,586   3.91%   $154,381    $6,411 4.15%   $141,256    $7,045   4.99%
Nontaxable investments (1)     5,810      423   7.28%      9,438       731 7.75%     19,719     1,604   8.13%
                         -------------------------------------------------------------------------------------
        Total                123,078    5,009   4.07%    163,819     7,142 4.36%    160,975     8,649   5.37%
                         -------------------------------------------------------------------------------------

Federal funds sold            11,445      361   3.15%     13,779       170 1.23%     52,398       558   1.06%
Loans (1) (2)
     Installment              47,930    4,244   8.85%     44,111     3,626 8.22%     42,731     3,732   8.73%
     Commercial(1)           320,923   23,364   7.28%    287,180    18,383 6.40%    275,429    18,905   6.86%
     Real estate
        Commercial (1)       866,647   60,468   6.98%    831,823    56,868 6.84%    761,782    56,150   7.37%
        Construction         779,364   71,155   9.13%    564,726    43,110 7.63%    473,647    37,302   7.88%
        Residential          185,480   15,111   8.15%    159,688    11,718 7.34%    137,462    10,855   7.90%
                         -------------------------------------------------------------------------------------
        Total              2,200,344  174,342   7.92%  1,887,528   133,705 7.08%  1,691,051   126,944   7.51%
                         -------------------------------------------------------------------------------------
Total earning assets/total
     interest income       2,334,867  179,712   7.70%  2,065,126   141,017 6.83%  1,904,424   136,151   7.15%
                         -------------------------------------------------------------------------------------
Reserve for loan losses      (35,004)                    (30,946)                   (28,851)
Cash and due from banks       80,644                      75,768                     68,657
Other assets                  85,205                      69,260                     72,000
                         ------------                 -----------                -----------
TOTAL ASSETS              $2,465,712                  $2,179,208                 $2,016,230
                         ============                 ===========                ===========

Interest Bearing Liabilities
Money Market, Sweep &
     NOW accounts           $302,497    4,195   1.39%   $249,789     1,707 0.68%   $269,531     2,611   0.97%
Savings accounts             575,164   11,539   2.01%    649,678     9,246 1.42%    579,430    10,590   1.83%
Other time deposits          708,201   24,980   3.53%    539,784    15,465 2.87%    519,841    16,706   3.21%
                         -------------------------------------------------------------------------------------
Total interest bearing
     deposits              1,585,862   40,714   2.57%  1,439,251    26,418 1.84%  1,368,802    29,907   2.18%

Short-term borrowings         21,614      588   2.72%     15,400       156 1.01%     17,828       159   0.89%
FHLB borrowings              221,392   10,434   4.71%    180,860     8,365 4.63%    156,427     7,763   4.96%
                         -------------------------------------------------------------------------------------
Total interest bearing
     liabilities/total
     interest expense      1,828,868   51,736   2.83%  1,635,511    34,939 2.14%  1,543,057    37,829   2.45%
                         -------------------------------------------------------------------------------------
Noninterest bearing
     deposits                348,737                     298,711                       255,455
Other liabilities             13,006                      10,443                        11,799
Shareowners' equity          275,101                     234,543                       205,919
                         ------------                 -----------                   -----------
TOTAL LIABILITIES
     AND CAPITAL          $2,465,712                  $2,179,208                    $2,016,230
                         ============                 ===========                   ===========
NET INTEREST INCOME                  $127,976                     $106,078                       $98,322
                                     =========                   ==========                    ==========
NET YIELD ON INTEREST
     EARNING ASSETS                             5.48%                        5.14%                         5.16%
                                              ========                      =======                      ========
(1) Includes amounts to convert nontaxable amounts to a fully taxable equivalent basis at a 35% tax rate.
(2) Includes nonaccruing loans.
</TABLE>

                                      -44-
<PAGE>

FRONTIER FINANCIAL CORPORATION AND SUBSIDIAIRES
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Continued
<TABLE>
<CAPTION>


RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME - Table 2

                                                          Year ended December 31,
                          ------------------------------------------------------------------------------------------
                                2005 versus 2004              2004 versus 2003               2003 versus 2002
                          ----------------------------- -----------------------------   ----------------------------
                            Increase (Decrease) Due       Increase (Decrease) Due         Increase (Decrease) Due
In Thousands                      to Change in                  to Change in                   to Change in
                          ----------------------------- -----------------------------   ----------------------------
                                                 Total                          Total                       Total
                          Average   Average    Increase    Average   Average   Increase  Average  Average  Increase
                           Volume    Rate     (Decrease)   Volume     Rate   (Decrease)  Volume    Rate   (Decrease)
                          --------- --------- ---------- --------- --------- ---------- ------- --------- ---------
INTEREST INCOME
<S>                        <C>         <C>     <C>          <C>    <C>         <C>       <C>       <C>     <C>
     Taxable investments   ($1,541)  ($  284) ($ 1,825)  $   659   ($1,293)  ($  634)    $2,043  ($  808)  $1,235
     Nontaxable investments   (281)      (27)     (308)     (837)      (36)     (873)      (269)      (9)    (278)
                          --------- --------- ---------- --------- --------- ---------- ------- --------- ---------
           Total            (1,822)     (311)   (2,133)     (178)   (1,329)   (1,507)     1,774     (817)     957

     Federal funds sold        (29)      220       191      (412)       24      (388)       463     (294)     169

     Loans
        Installment            314       304       618       119      (225)     (106)      (267)    (216)    (483)
        Commercial           2,160     2,821     4,981       796    (1,318)     (522)    (1,373)  (2,125)  (3,498)
        Real estate
           Commercial        2,381     1,219     3,600     5,155    (4,437)      718      3,535   (6,264)  (2,729)
           Construction     16,385    11,660    28,045     7,198    (1,390)    5,808      4,817   (2,981)   1,836
           Residential       1,893     1,500     3,393     1,760      (897)      863        958   (1,005)     (47)
                          --------- --------- ---------- --------- --------- ---------- ------- --------- ---------
           Total            23,133    17,504    40,637    15,028    (8,267)    6,761      7,670  (12,591)  (4,921)

TOTAL INTEREST
     INCOME                 21,282    17,413    38,695    14,438    (9,572)    4,866      9,907  (13,702)  (3,795)
                          --------- --------- ---------- --------- --------- ---------- ------- --------- ---------
INTEREST EXPENSE
     Money Market, Sweep &
        NOW accounts           360     2,128     2,488      (188)     (716)     (904)      (164)  (1,577)  (1,741)
     Savings accounts       (1,060)    3,353     2,293     1,299    (2,643)   (1,344)     5,377   (4,577)     800
     Other time deposits     4,825     4,690     9,515       621    (1,862)   (1,241)    (3,813)  (3,809)  (7,622)
                          --------- --------- ---------- --------- --------- ---------- ------- --------- ---------
           Total interest
              bearing
              deposits       4,125    10,171    14,296     1,732    (5,221)   (3,489)     1,400   (9,963)  (8,563)

     Short-term borrowings      63       369       432       (22)       19        (3)        81      (54)      27
     FHLB borrowing          1,875       194     2,069     1,208      (606)      602      1,210     (426)     784
                          --------- --------- ---------- --------- --------- ---------- ------- --------- ---------
TOTAL INTEREST
     EXPENSE                 6,063    10,734    16,797     2,918    (5,808)   (2,890)     2,691  (10,443)  (7,752)
                          --------- --------- ---------- --------- --------- ---------- ------- --------- ---------
CHANGE IN NET
      INTEREST INCOME      $15,219    $6,679   $21,898   $11,520   ($3,764)   $7,756     $7,216  ($3,259)  $3,957
                          ========= ========= ========== ========= ========= ========== ======= ========= =========

</TABLE>

                                      -45-




                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES  EXCHANGE
     ACT OF 1934

                   For the Fiscal Year Ended December 31, 2005

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15 (D) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                        Commission File Number 000-15540

                         FRONTIER FINANCIAL CORPORATION
             (Exact Name of Registrant as Specified in its Charter)


           WASHINGTON                                      91-1223535
 -------------------------------                    ----------------------------
 (State or Other Jurisdiction of                    (IRS Employer Identification
  Incorporated or Organization)                      Number)

                            332 S.W. Everett Mall Way
                                 P. O. Box 2215
                            Everett, Washington 98203
               (Address of Principal Executive Office) (Zip Code)

                                 (425-514-0700)
              (Registrant's Telephone Number, Including Area Code)

           Securities Registered Pursuant to Section 12(g) of the Act:
                           Common Stock (No Par Value)
                                (Title of Class)

Indicate by a check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
                                                             Yes [X]     No [  ]

Indicate by a check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
                                                             Yes [X]     No [  ]

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
                                                             Yes [X]     No [  ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or  information  statements  incorporated  by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]

Indicate by a check mark whether the registrant is large  accelerated  filer, an
accelerated  filer, or a  nonaccelerated  filer.  See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one): Large accelerated filer [X] Accelerated filer [ ] Nonaccelerated filer [ ]

Indicate by a check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act)
                                                             Yes [  ]     No [X]

The aggregate market value of common stock held by nonaffiliates at February 28,
2006 was  $845,706,049  based on the last  reported  sale price at February  28,
2006.

The issuer has one class of common stock (no par value) with  28,438,150  shares
outstanding  as of December 31, 2005, and  30,002,122  shares  outstanding as of
February 28, 2006.

DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Annual  Report to  Shareowners  for the year  ended  December  31,  2005;  Proxy
Statement dated March 22, 2006

<PAGE>


<TABLE>
<CAPTION>
<S>                                                  <C>    <C>  <C>           <C>
TABLE OF CONTENTS
                                                                               Annual
                                                             Shareowners'      Proxy
                                                Form10-K        Report       Statement
ITEM NUMBER                                       Page           Page           Page
-----------                                   ------------   ------------   ------------
PART I
------

  1   Business                                   1 - 13
  1A  Risk Factors                              13 - 20
  1B  Unresolved Staff Comments                      20
      Statistical Disclosure Index                   21
  2   Properties                                     32
  3   Legal Proceedings                              32
  4   Submission of Matters to
      a Vote of Shareowners                          32

PART II
-------

  5   Market for Registrant's Common
      Equity and Related Shareowner Matters          33     18 - 19, 40
  6   Selected Financial Data                        34
  7   Management's Discussion and
      Analysis of Financial Condition
      and Results of Operations                                 28 - 45
  7A  Quantitative and Qualitative
      Disclosures about Market Risk             26 - 29         33 - 36
  8   Financial Statements and
      Supplementary Data                             35
  9   Changes in and Disagreements with
      Accountants on Accounting and
      Financial Disclosure                           35
  9A  Controls and Procedures                   35 - 36

  9B  Other Information                              36

PART III
--------

  10  Directors and Executive
      Officers of Frontier
      Financial Corporation                                                      4 - 6
  11  Executive Compensation                                                   23 - 25
  12  Security Ownership of Certain
      Beneficial Owners and Management
      And Related Shareowner Matters                                           20 - 21
  13  Certain Relationships and
      Related Transactions                                                          29
  14  Principal Accountant Fees and Services                                   29 - 30

PART IV
-------

  15  Exhibits and Financial Statement
      Schedules                                      38
      Signatures                                     40
</TABLE>


                                       i

<PAGE>


PART I

ITEM 1 - BUSINESS

Frontier  Financial  Corporation  ("FFC" or "the  Corporation")  is a Washington
corporation  which was  incorporated  in 1983 and is  registered  as a financial
holding company under the Bank Holding Company Act of 1956. As part of a plan of
reorganization  consummated  following the close of business September 30, 1983,
FFC acquired all of the stock of Frontier Bank (the "Bank"),  issuing its common
stock in an exchange for the Bank's common stock on a share-for-share basis. FFC
has two  subsidiaries:  the Bank, which is engaged in a general banking business
and in businesses related to banking, and FFP, Inc., a nonbank corporation which
leases property to the Bank. As of December 31, 2005,  Frontier had total assets
of approximately  $2.64 billion,  net loans  receivable of  approximately  $2.39
billion,  total deposits of approximately  $2.06 billion and shareowner's equity
of approximately $296.1 million.

THE BANK

Frontier  Bank  is  a  Washington  state-chartered  commercial  bank  that  is a
nonmember  with  its  headquarters   located  in  Everett,   Snohomish   County,
Washington.  It was  founded in  September  1978 by Robert J.  Dickson and local
business  persons.  The Bank is an  "insured  bank" as  defined  in the  Federal
Deposit Insurance Act.

LOCATION OF PRINCIPAL MARKET AREAS

The Bank  engages  in  general  banking  business  in the  State of  Washington,
including the acceptance of demand,  time and savings deposits and the making of
loans. Headquartered in Everett, Washington,  Frontier served its customers from
forty-one full service  offices in 2005. In Snohomish  County,  four offices are
located in Everett, and one office each is located in Arlington,  Edmonds,  Lake
Stevens,  Marysville, Mill Creek, Monroe, Lynnwood, Smokey Point, Snohomish, and
Stanwood.  Six offices  are  located in Pierce  County in the cities of Buckley,
Edgewood-Milton,  Orting, Puyallup, Sumner and Tacoma. Frontier has ten branches
in  King  County,  one  each in  Bothell,  Duvall,  Kent,  Kirkland,  Lake  City
(Seattle),  Redmond, Renton, Seattle, Totem Lake (Kirkland) and Woodinville.  In
addition,  the  following  eleven  branches  are located in Clallam,  Jefferson,
Kitsap,  Skagit and  Whatcom  Counties:  two  branches  each in  Bellingham  and
Poulsbo, and one each in Bainbridge Island,  Lynden, Mount Vernon, Port Angeles,
Port Townsend, Sequim and Silverdale.

In  February  2004,  the Bank  opened a full  service  banking  office  downtown
Seattle,  its only office in downtown Seattle.  In April 2004, the Bank opened a
real estate lending office in Tacoma,  Pierce County, which makes commercial and
construction  loans.  In 2005,  the Bank opened a second full service  office in
Bellingham  downtown,  a Renton Office in Pierce County and an office in Lynden,
Whatcom  County.  As of February  1, 2006,  Frontier  completed  its merger with
NorthStar  Financial  Corporation  and  acquired two  additional  offices in the
Ballard and Fremont communities of Seattle for a total of 43 offices.

On January 31, 2006,  FFC  completed  the  acquisition  of  NorthStar  Financial
Corporation  and its  subsidiary,  NorthStar  Bank, a privately  held  financial
institution  headquartered in Seattle,  Washington,  with two additional banking
centers in the Ballard and Fremont  communities north of downtown  Seattle.  The
shareowners  of  NorthStar  received  1,455,959  share  so FFC  common  stock in
exchange for all of the  outstanding  shares of NorthStar.  The  transaction was
accounted for under the purchase method of accounting. As of September 30, 2005,
NorthStar had total assets of $180.5 million,  total loans  receivable of $149.8
million,  total  deposits  of $147.2  million and  shareowners'  equity of $14.3
million.

BANKING SERVICES

The Bank provides a full range of consumer  banking services  including  savings
accounts,  checking accounts,  installments and commercial lending, safe deposit
facilities,  time  deposits and other  consumer and business  related  financial
services.  In addition to  consumer-oriented  activities,  the Bank  maintains a
strong  commercial  lending  program,   servicing   individuals  and  businesses
headquartered in the Bank's principal market area.

                                      -1-
<PAGE>


Frontier's loan portfolio consists of primarily of loans secured by real estate,
although emphasis is also placed on commercial and agriculture  loans,  consumer
installment loans and bankcard loans. At December 31, 2005, real estate category
loans comprised 85% of the net loan portfolio,  while commercial and agriculture
loans made up 13% of the portfolio and  installment  and bankcard loans were 2%.
Loans  totaled  $2.39  billion,  and were 116% of deposits.  Almost all of these
loans were to borrowers  within the Bank's  principal  market areas. See page 23
for loan category amounts for the last five years.

COMMERCIAL AND AGRICULTURE LOANS

This category of loans includes both  commercial and  agriculture  loans used to
provide  working  capital  or for  specific  purposes,  such as to  finance  the
purchase of fixed assets, equipment or inventory. Commercial loans include lines
of credit and term loans.  Lines of credit are extended to  businesses  based on
the financial  strength and  integrity of the borrower and generally  (with some
exceptions) are collateralized by short-term assets such as accounts  receivable
and have a maturity  of one year or less.  Such lines of credit bear an interest
rate that floats  with the base rate or another  established  index.  Commercial
term  loans are  typically  made to finance  the  acquisition  of fixed  assets,
refinance  short-term  debt originally used to purchase fixed assets or, in rare
cases, to finance a businesses purchase.  Commercial term loans generally mature
within one to five years. They may be collateralized by the asset being acquired
or other  available  assets.  These term loans will generally bear interest that
either  floats with the base rate or another  established  index or is fixed for
the term of the loan. Agricultural loans consist of farm related credits used to
finance  operating  expenses.  These loans  generally have terms of one year and
bear  interest  that either floats with the base or is fixed for the term of the
loan. These loans are generally  collateralized by farm related assets including
land, equipment, crops or livestock.

REAL ESTATE LOANS

Real estate loans represent the largest share of our loan portfolio. These loans
are comprised of construction and land development loans,  commercial term loans
and home mortgages.  The  construction  and land  development  loan portfolio is
comprised of three types:

     o    Loans for construction of residential and commercial  income-producing
          properties  that  generally  have  terms of less  than two  years  and
          typically bear an interest rate that floats with the base rate.
     o    Loans  for  construction  of  single-family  spec  and  owner-occupied
          properties that generally have terms of one year or less and typically
          bear an interest rate that floats with the base rate.
     o    Land development used for either  residential or commercial  purposes.
          These  loans  generally  have terms of one year or less and  typically
          bear an interest rate that floats with the base rate.

Our real estate  commercial term loans finance the purchase and/or  ownership of
income producing properties. These loans are generally made with an amortization
schedule  ranging from 15 to 25 years with a lump sum balloon payment due in one
to ten years. Interest rates will either be fixed or variable.  Fixed rate loans
typically reprice within one to five years.

Mortgages  loans include  various types of loans for which real property is held
as collateral.  These loans,  collateralized  by one to four family  residences,
will  typically  have  maturities  between one and five years with  amortization
schedules ranging from 10 to 20 years.  Mortgage loans will be written with both
fixed and variable rates.

In  addition  to home  mortgages  held in our  portfolio,  the Bank is active in
originating and selling mortgages into the secondary  market.  The Bank offers a
variety of products for  refinancing  and purchases and is approved to originate
FHA and VA loans.  The  majority  of loans  originated  in 2005 were  fixed rate
single-family  loans. Total loans sold in 2005 were approximately $91.3 million.
Servicing is sold with the loan.  Funding  requirements  for these loans is very
minimal as few of these loans originated through this operation are retained for
investment.

INSTALLMENT LOANS

We provide  loans for  personal  use  including:  auto loans,  boat loans,  home
improvement loans,  revolving lines of credit, VISA credit cards and other loans
typically  made by banks to individual  borrowers.  These loans  generally  have
terms ranging from one to five years,  with up to 20-year  amortizations and are
written with both fixed and variable rates.

                                      -2-
<PAGE>


INVESTMENTS

From time to time, the Bank acquires  investment  securities when funds acquired
through deposit activities exceed loan demand.  When excess funds are considered
temporary in nature by  management,  they are typically  placed in federal funds
sold on an  overnight  basis to  correspondent  banks,  approved by the Board of
Directors.  This type of investment is not considered desirable, as the interest
rate  earned on these  funds is  minimal in  nature.  When funds are  considered
longer term,  they are generally  invested in  securities  purchased in the open
market.  At December 31, 2005, the Bank had investments  totaling $103.8 million
at  amortized  cost.  U.S.  Agency  bonds  comprised  48% of the  portfolio  and
corporate bonds made up 19% and U.S.  Treasury bonds made up 7%. Please see Note
3, page 12 of our 2005 Annual Report for details on the makeup of the portfolio.
The Bank has an investment policy that generally permits  purchasing  securities
rated  only  in  one of the  four  highest  rating  categories  by a  nationally
recognized  credit  rating  organization.  The policy also provides for maturity
patterns,  diversification of investments and avoidance of concentrations within
the portfolio.

DEPOSIT ACTIVITIES

The Bank's primary source of funds has historically been customer deposits.  The
Bank  offers a variety of  accounts  designed  to attract  both  short-term  and
long-term  deposits  from its market area.  These  accounts  include NOW,  money
market, sweep accounts, savings and certificates of deposit. Interest rates paid
on these account vary from time to time and are based on competitive factors and
liquidity   needs.   One  of   the   goals   of   management   is  to   maintain
noninterest-bearing  deposits at the highest level possible.  These are low cost
funds and help to increase  the net  interest  margin.  Over the last two years,
noninterest-bearing  accounts have grown from 17.4% of total deposits at the end
of 2003 to 19.2% of total deposits at the end of 2005.

OTHER FUNDING SOURCES/FHLB ADVANCES

The  Bank  has  other  funding  sources  such as FHLB  advances,  federal  funds
purchased and repurchase  agreements.  The major source of funds in this area is
advances  from the FHLB of Seattle.  Although this source of funding can be more
costly than  deposit  activities,  large  portions of funds are  available  very
quickly for meeting loan commitments. The Bank's line of credit with the FHLB is
24% of qualifying  assets and is  collateralized  by qualifying  first  mortgage
loans,  qualifying commercial real estate and government agency securities.  The
Bank, as of December 31, 2005, had FHLB advances totaling $240.0 million (please
refer to page 16 of the Annual Report to Shareowners for detail  regarding these
advances).  These advances were collateralized with $581.4 million in qualifying
first  mortgages,  other certain assets, a blanket filing on our commercial real
estate  portfolio  and the remainder was secured by stock in FHLB. No commercial
real  estate or  government  securities  were  pledged at  year-end.  The unused
portion of this credit line at December 31, 2005 was $341.4 million.

BUSINESS STRATEGY

Frontier is attempting to pursue the following strategies:

          o    increasing the  percentage of its assets  consisting of business,
               construction,  and  commercial  real  estate  loans  with  higher
               risk-adjusted returns, shorter maturities and greater sensitivity
               to interest rate fluctuations;
          o    increasing deposits by attracting lower cost transaction accounts
               (such as checking,  savings and money market accounts) through an
               enhanced branch network and online banking;
          o    maintaining  cost-effective  operations by  efficiently  offering
               products and services;
          o    maintaining    its    capital    position   at   or   above   the
               "well-capitalized"  (as defined for regulatory  purposes) levels;
               and
          o    exploring  prudent means to grow the business  internally  and/or
               through acquisitions.

                                      -3-
<PAGE>


A source of future growth may be through acquisitions, although no assurance can
be given that  acquisition  activity  will  continue  in the  future.  See "Risk
Factors".

FACILITIES

Frontier owns its  administrative  offices and operations centers in Everett and
Sumner,  and 24 of its branches,  through its wholly-owned bank premises holding
corporation  subsidiary,  FFP,  Inc.,  which leases the  properties to the Bank.
Owned  offices and branches  range in size from 1,000 to 42,000  square feet and
have  a  total  net  book  value  at  December  31,  2005,  including  leasehold
improvements, furniture and fixtures, of $29.8 million.

OTHER FINANCIAL SERVICES

The Bank offers other financial  services  complementary to banking including an
insurance and investment center that markets annuities, life insurance products,
and mutual funds to Bank customers and the general  public,  a trust  department
that  offers a full array of trust  services,  and a private  banking  office to
provide personal service to high net worth customers.

         COMPETITION. The banking industry is highly competitive. The Bank faces
strong  competition in attracting  deposits and in originating  loans.  The most
direct  competition  for deposits has  historically  come from other  commercial
banks, saving institutions and credit unions located in the primary market area.
As with all banking  organizations,  FFC also has  competition  from  nonbanking
sources,  including mutual funds, corporate and governmental debt securities and
other investment  alternatives.  FFC expects  increasing  competition from other
financial  institutions  and  nonbanking  sources in the  future.  Many of FFC's
competitors have more significant  financial resources,  larger market share and
greater name recognition than FFC. The existence of such competitors may make it
difficult for FFC to achieve its financial goals.

         Competition  has further  increased as a result of  Washington  banking
laws  that  permit  statewide   branching  of  Washington   domiciled  financial
institutions  and  acquisitions of  Washington-based  financial  institutions by
out-of-state bank holding companies.

         Management  believes that the principal  competitive  factors affecting
FFC's markets include  interest rates paid on deposits and charged on loans, the
range of banking products available, and customer service and support.  Although
management  believes that the Bank's products  currently  compete favorably with
respect to these  factors,  there can be no assurance  that FFC can maintain its
competitive position against current and potential competitors, especially those
with significantly greater financial resources.

         The  Bank's   competition  for  loans  comes   principally  from  other
commercial  banks,  savings  institutions,  credit  unions and mortgage  banking
companies.  The Bank competes for loans  principally  through the efficiency and
quality of the  services it  provides  borrowers,  real estate  brokers and home
builders, and the interest rates and loan fees it charges.

         The Bank competes for deposits by offering depositors a wide variety of
checking accounts, savings accounts, certificates and other services. The Bank's
ability to attract and retain deposits depends on its ability to provide deposit
products  that  satisfy the  requirements  of  customers  as to interest  rates,
liquidity,  transaction  fees,  risk of loss of deposit,  convenience  and other
factors.  Deposit  relationships  are  actively  solicited  through  a sales and
service system.

         Changes in  technology,  mostly from the growing use of  computers  and
computer-based technology,  present competitive challenges to FFC. Large banking
institutions  typically  have the  ability to devote  significant  resources  to
developing and maintaining technology-based services such as on-line banking and
other  banking  products  and  services  over the  Internet,  including  deposit
services and mortgage  loans.  Some new banking  competitors  offer all of these
services online.  Customers who bank by computer or by telephone may not need to
go to a branch  location in person.  FFC's high  service  philosophy  emphasizes
face-to-face  contact  with  tellers,  loan  officers and other  employees.  FFC
believes a personal  approach to banking is a  competitive  advantage,  one that
will  remain  popular  in the  communities  that it  serves.  However,  customer
preferences  may change,  and the rapid growth of online banking could,  at some
point, render the Bank's personal,  branch-based approach obsolete. FFC believes
that it has  reduced  this risk by  offering  on-line  banking  services  to its
customers,  and by continuing to provide 24-hour banking services.  There can be
no assurance  that these efforts will be  successful  in preventing  the loss of
customers to competitors.

                                      -4-
<PAGE>


EMPLOYEES

At December 31, 2005, the Bank had 663 full time equivalent  employees.  None of
the Bank's employees are covered by a collective bargaining agreement.  The Bank
considers its relations with employees to be good.

COMPETITION

All phases of the Bank's activities are highly competitive.  Management believes
that the  principal  competitive  factors  affecting the  Corporation's  markets
include  interest  rates paid on  deposits  and  charged on loans,  the range of
banking products available,  and customer service and support. The Bank competes
actively with national and state banks,  mutual savings banks,  savings and loan
associations,  finance  companies,  credit unions,  brokerage houses,  and other
financial  institutions  operating in its service area.  Some of these financial
institutions  have  greater  resources  than those of the Bank.  On December 31,
2005,  the  consolidated  Corporation  had  total  assets of $2.64  billion  and
deposits of $2.06 billion.

REGULATION AND SUPERVISION

To the extent that the following  information describes statutory and regulatory
provisions,  it is  qualified  in its  entirety by reference to the full text of
those provisions. Also, such statutes,  regulations and policies are continually
under review by Congress and state legislatures and federal and state regulatory
agencies. A change in statutes, regulations or regulatory policies applicable to
FFC could have a material effect on the business of FFC.

INTRODUCTION

FFC, its banking and nonbanking subsidiaries are subject to extensive regulation
by federal and state  agencies.  The  regulation  of bank holding  companies and
their  subsidiaries  is intended  primarily for the  protection  of  depositors,
federal  deposit  insurance  funds and the banking system as a whole and not for
the protection of security holders.

As discussed in more detail  below,  this  regulatory  environment,  among other
things,  may restrict FFC's ability to diversify into certain areas of financial
services  and pay  dividends  on its capital  stock.  It may also require FFC to
provide financial support to its banking  subsidiary,  maintain capital balances
in excess of those  desired  by  management  and pay  higher  deposit  insurance
premiums  as a  result  of the  deterioration  in  the  financial  condition  of
depository institutions in general.

HOLDING COMPANY STRUCTURE

FFC is a Washington corporation which was incorporated in 1983 and is registered
as a bank holding  company under the Bank Holding Company Act of 1956 (the "Bank
Holding Company Act"). As part of a plan of reorganization consummated following
the close of business on September  30,  1983,  FFC acquired all of the stock of
Frontier  Bank (the  "Bank"),  issuing its common  stock in an exchange  for the
Bank's common stock on a share-for-share  basis. FFC has two  subsidiaries:  the
Bank, which is engaged in a general banking  business and in businesses  related
to banking,  and FFP, Inc., a nonbank  corporation  which leases property to the
Bank. Effective October 28, 2000, FFC became a financial holding company.

SOURCE OF STRENGTH DOCTRINE. Under current FRB policy, FFC is expected to act as
a source of financial and managerial  strength to its subsidiary bank and, under
appropriate circumstances, to commit resources to support such subsidiary bank.

                                      -5-
<PAGE>


Capital  loans  from  FFC to its  subsidiary  bank are  subordinate  in right of
payment to deposits and certain other  indebtedness  of the subsidiary  bank. In
the  event  of  FFC's  bankruptcy,  any  commitment  by  FFC to a  federal  bank
regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

DEPOSITOR  PREFERENCE.  The Federal  Deposit  Insurance Act ("FDI Act") provides
that,  in the  event of the  "liquidation  or other  resolution"  of an  insured
depository institution,  the claims of depositors of the institution,  including
the claims of the FDIC as subrogate of insured  depositors,  and certain  claims
for  administrative  expenses of the FDIC as a receiver  will have priority over
other general unsecured claims against the institution. If an insured depository
institution fails, insured and uninsured  depositors,  along with the FDIC, will
have  priority in payment ahead of unsecured,  nondeposit  creditors,  including
FFC,  with  respect to any  extensions  of credit they have made to such insured
depository institution.

REGULATORY AGENCIES

BANK  HOLDING  COMPANY.  FFC,  as a  financial  holding  company,  is subject to
regulation under the Bank Holding Company Act and to inspection, examination and
supervision  by the Board of Governors of the Federal  Reserve  System  (Federal
Reserve  Board)  ("FRB")  under the Bank Holding  Company Act. As of October 28,
2000, FFC became a financial holding company under the Bank Holding Company Act.

SUBSIDIARY  BANK.  FFC's  subsidiary  bank,   Frontier  Bank,  is  a  Washington
state-chartered   commercial   nonmember  bank.  Frontier  Bank  is  subject  to
supervision and examination by applicable  federal and state bank agencies,  the
Federal Deposit Insurance  Corporation ("FDIC") and the Division of Banks of the
Department  of  Financial   Institutions   for  the  State  of  Washington  (the
"Division").

BANK HOLDING COMPANY ACTIVITIES

"FINANCIAL  IN NATURE"  REQUIREMENT.  As a bank  holding  company  that has also
elected to become a  financial  holding  company  pursuant  to the Bank  Holding
Company Act, FFC may affiliate with securities firms and insurance companies and
engage in other  activities  that are  financial in nature or are  incidental or
complementary to activities that are financial in nature.  "Financial in nature"
activities   include  securities   underwriting,   dealing  and  market  making,
sponsoring  mutual funds and investment  companies,  insurance  underwriting and
agency,  merchant  banking,  and activities that the FRB determines from time to
time to be so closely related to banking or managing or controlling  banks as to
be a  proper  incident  thereto.  A bank  holding  company  that  is not  also a
financial  holding  company  is limited to  engaging  in banking  and such other
activities  as  determined  by the FRB to be so  closely  related  to banking or
managing or controlling banks as to be a proper incident thereto.

FRB  approval is not  required  for FFC to acquire a company  (other than a bank
holding  company,  bank or savings  association)  engaged in activities that are
financial in nature or incidental to activities that are financial in nature, as
determined by the FRB. Prior FRB approval is required before FFC may acquire the
beneficial  ownership  or  control  of more  than  5% of the  voting  shares  or
substantially  all of the  assets of a bank  holding  company,  bank or  savings
association.

If the subsidiary bank of FFC receives a rating under the Community Reinvestment
Act of 1977 of less than  satisfactory,  FFC will be prohibited from engaging in
new activities or acquiring  companies other than bank holding companies,  banks
or savings associations.

REGULATORY  APPROVAL.   In  determining  whether  to  approve  a  proposed  bank
acquisition,  federal banking regulators will consider, among other factors, the
effect of the  acquisition on competition,  the public  benefits  expected to be
received  from the  acquisition,  the projected  capital  ratios and levels on a
post-acquisition basis, and the acquiring institution's record of addressing the
credit  needs of the  communities  it  serves,  including  the  needs of low and
moderate income  neighborhoods,  consistent with the safe and sound operation of
the bank, under the Community Reinvestment Act of 1977.

DIVIDEND RESTRICTIONS

FFC is a legal entity  separate  and  distinct  from its  subsidiary  bank.  Its
principal  source of funds to pay dividends on its common stock and debt service
on its debt is dividends from its subsidiary bank. The Bank, by statute,  cannot
declare or pay any  dividend in an amount  greater  than its  retained  earnings
without the  approval of the  Director of the Division of Banks for the State of
Washington.

                                      -6-
<PAGE>


DEPOSIT INSURANCE ASSESSMENTS

Through the Bank Insurance Fund ("BIF"),  the FDIC insures the deposits of FFC's
depository institution  subsidiaries up to prescribed limits for each depositor.
The amount of FDIC assessments  paid by each BIF member  institution is based on
its relative risk of default as measured by regulatory  capital ratios and other
factors.  Specifically,  the  assessment  rate  is  based  on the  institution's
capitalization risk category and supervisory subgroup category. An institution's
capitalization risk category is based on the FDIC's determination of whether the
institution is well capitalized,  adequately capitalized or less than adequately
capitalized.  An  institution's  supervisory  subgroup  category is based on the
FDIC's  assessment  of the  financial  condition  of  the  institution  and  the
probability that FDIC  intervention or other corrective action will be required.
Frontier Bank is currently rated well capitalized under the regulatory framework
for prompt corrective action.

The BIF  assessment  rate  currently  ranges  from  zero to 27 cents per $100 of
domestic  deposits.  The FDIC may  increase  or  decrease  the  assessment  rate
schedule on a semi-annual  basis.  An increase in the BIF assessment  rate could
have a material adverse effect on FFC's earnings, depending on the amount of the
increase. The FDIC is authorized to terminate a depository institution's deposit
insurance upon a finding by the FDIC that the institution's  financial condition
is unsafe or unsound or that the  institution  has  engaged in unsafe or unsound
practices or has violated any applicable  rule,  regulation,  order or condition
enacted or imposed by the institution's regulatory agency.

All  FDIC-insured  depository  institutions  must pay an  annual  assessment  to
provide  funds for the  payment of  interest  on bonds  issued by the  Financing
Corporation,  a federal corporation chartered under the authority of the Federal
Housing  Finance  Board.  The bonds,  commonly  referred to as FICO bonds,  were
issued to capitalize  the Federal  Savings and Loan Insurance  Corporation.  The
FDIC  established the FICO  assessment  rates effective for the first quarter of
2002 at approximately $.0154 per $100 annually for BIF-assessable  deposits. The
FICO  assessments  are adjusted  quarterly to reflect  changes in the assessment
bases of the FDIC's  insurance  funds and do not vary  depending on a depository
institution's capitalization or supervisory evaluations.

FDIC-insured  depository  institutions  pay an assessment rate equal to the rate
assessed on deposits insured by the Savings Association Insurance Fund ("SAIF").

SECURITIES REGISTRATION AND REPORTING

FFC  common  stock  is  registered  with  the SEC  under  Section  12(g)  of the
Securities  Exchange Act of 1934 and thus is subject to the  periodic  reporting
and proxy solicitation requirements and the insider-trading restrictions of that
Act. The periodic  reports,  proxy statements and other information filed by FFC
under that Act can be inspected  and copied at or obtained from the SEC's Public
Reference Room at 450 Fifth Street NW,  Washington,  D.C. 20549.  The public may
obtain  information on the operation of the Public Reference Room by calling the
SEC at  1-800-SEC-0330.  FFC is an  electronic  filer with the SEC,  and the FFC
filings may be obtained at the SEC website  (http://www.sec.gov).  In  addition,
the securities issued by FFC are subject to the registration requirements of the
Securities Act of 1933 and applicable  state  securities laws unless  exemptions
are available.

NASD

FFC common  stock is traded on the Nasdaq  market  under the  symbol  FTBK.  The
National  Association  of  Securities  Dealers  ("NASD") is the  self-regulatory
organization of the Nasdaq market. FFC is subject to the rules of the NASD.

The NASD may implement rules from time to time that are required by the SEC. The
NASD implemented  rules under the  Sarbanes-Oxley  Act of 2002 regarding certain
required   disclosures  to  shareowners,   and  independence   requirements  for
directors.  In order for FFC common stock to continue to be traded on the Nasdaq
market, FFC is required to comply with these listing rules, as amended from time
to time.

                                      -7-
<PAGE>


FISCAL AND MONETARY POLICIES

FFC's  business  and  earnings  are  affected  significantly  by the  fiscal and
monetary  policies  of  the  federal   government  and  its  agencies.   FFC  is
particularly  affected by the policies of the FRB, which regulates the supply of
money and credit in the United States.  Among the instruments of monetary policy
available to the Federal  Reserve are (a) conducting  open market  operations in
United  States  government  securities,  (b)  changing  the  discount  rates  of
borrowings  of  depository  institutions,   (c)  imposing  or  changing  reserve
requirements  against  depository  institutions'  deposits,  and (d) imposing or
changing  reserve  requirements  against  certain  borrowing  by banks and their
affiliates.  These  methods  are used in varying  degrees  and  combinations  to
directly  affect the  availability  of bank loans and  deposits,  as well as the
interest rates charged on loans and paid on deposits. For that reason alone, the
policies of the FRB have a material effect on the earnings of FFC.

DISCLOSURE CONTROLS AND PROCEDURES

The Sarbanes-Oxley Act of 2002 and related rulemaking by the SEC, which effected
sweeping corporate disclosure and financial reporting reform,  generally require
public  companies  to focus more  attention  on their  disclosure  controls  and
procedures.  As a result,  public companies such as FFC now must have disclosure
controls  and  procedures  in place and make certain  disclosures  about them in
their periodic SEC reports (I.E., Forms 10-K and 10-Q) and their chief executive
and  chief  financial  officer  must  certify  in these  filings  that  they are
responsible for developing and evaluating disclosure controls and procedures and
disclose the results of an evaluation conducted by them within the 75-day period
preceding the filing of the relevant report, among other things.

FUTURE LEGISLATION

Various  legislation,  including proposals to substantially change the financial
institution  regulatory  system and to expand or contract  the powers of banking
institutions and bank holding companies, are from time to time introduced in the
Congress.  This  legislation  may  change  banking  statutes  and the  operating
environment of FFC and its subsidiaries in substantial and  unpredictable  ways.
If enacted,  such  legislation  could  increase  or  decrease  the cost of doing
business,  limit or expand  permissible  activities  or affect  the  competitive
balance among banks,  savings  associations,  credit unions, and other financial
institutions.  FFC cannot predict whether any of this potential legislation will
be enacted, and if enacted, the effect that it, or any implementing regulations,
would have on the financial  condition or results of operations of FFC or any of
its subsidiaries.

THE BANK

GENERAL.  Applicable  federal and state  statutes  and  regulations  governing a
bank's operations relate, among other matters, to capital requirements, required
reserves against deposits,  investments,  loans,  legal lending limits,  certain
interest  rates  payable,  mergers  and  acquisitions,  borrowings,  issuance of
securities,  payment of dividends (see  "Restrictions on Capital  Distributions"
below),  establishment of branches,  and dealings with affiliated  persons.  The
FDIC has authority to prohibit  banks under their  supervision  from engaging in
what they  consider to be an unsafe and unsound  practice  in  conducting  their
business.

FFC's subsidiary bank, Frontier Bank, is a Washington state-chartered commercial
bank that is a  nonmember  bank.  Frontier  Bank is subject to  supervision  and
examination by applicable  federal and state banking agencies,  the FDIC and the
Division.  The Bank is also subject to regulation  and  examination  by the FDIC
which  insures the deposits of the Bank to the maximum  extent  permitted by law
and by  requirements  established by the FRB. The federal laws that apply to the
Bank  regulate,  among other  things,  the scope of its  business,  investments,
reserves against deposits, the timing of the availability of deposited funds and
the nature  and amount of and  collateral  for loans.  The laws and  regulations
governing the Bank generally have been promulgated to protect depositors and not
to protect shareowners of such institutions or their holding companies.

The Federal  Deposit  Insurance  Corporation  Improvement Act of 1991 ("FDICIA")
requires  federal  banking  regulators to adopt  regulations  or guidelines in a
number  of areas  to  ensure  bank  safety  and  soundness  including:  internal
controls, credit underwriting, asset growth, management compensation,  ratios of
classified  assets to capital,  and earnings.  FDICIA also  contains  provisions
which are intended to change  independent  auditing  requirements;  restrict the
activities of "undercapitalized banks" to borrow from the FRB's discount window;
and require  regulators  to perform  annual  on-site bank  examinations  and set
standards for real estate lending.

                                      -8-
<PAGE>


LOANS TO ONE  BORROWER.  The Bank is subject  to  limitations  on the  aggregate
amount  of  loans  that  it can  make  to any one  borrower,  including  related
entities.  Applicable  regulations  generally limit loans-to-one  borrower to 20
percent of capital.  As of December 31, 2005,  the Bank was in  compliance  with
applicable loans-to-one borrower requirements.

FDIC INSURANCE. Generally, customer deposit accounts in banks are insured by the
FDIC for up to a maximum  amount of $100,000.  The FDIC has adopted a risk-based
insurance assessment system under which depository institutions contribute funds
to the Bank Insurance Fund ("BIF"), based on their risk.

On September 30, 1996, the Deposit  Insurance Fund Act of 1996 ("Funds Act") was
enacted. The Funds Act provides, among other things, for the recapitalization of
the SAIF through a special  assessment on all depository  institutions that hold
SAIF insured deposits. The one-time assessment was designed to place the SAIF at
its 1.25 reserve ratio goal.

The Funds Act, for the three-year period beginning in 1997, subjects BIF insured
deposits to a Financing  Corporation  ("FICO")  premium  assessment  on domestic
deposits at one-fifth the premium rate  (approximately 1.3 basis points) imposed
on SAIF insured deposits (approximately 6.5 basis points).

Beginning in the year 2000,  BIF insured  institutions  were required to pay the
FICO  obligations  on a  pro-rata  basis with all  thrift  institutions;  annual
assessments are expected to equal  approximately 2.4 basis points until 2017, to
be phased out completely by 2019. Until further action by the FDIC, BIF premiums
will be maintained at their current level.

Banking  regulations  are  empowered  under the Funds  Act to  prohibit  insured
institutions  and their holding  companies from  facilitating or encouraging the
shifting  of  deposits  from  the  SAIF  to the BIF in  order  to  avoid  higher
assessment  rates.  It is  expected  that  Congress  will  continue  to  address
comprehensive  legislation  on the  merger of the funds and  elimination  of the
thrift charter.

The  FDIC  may  terminate  the  deposit  insurance  of  any  insured  depository
institution if it determined after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law. The insurance may be
terminated  permanently,  if the institution has no tangible capital. If deposit
insurance  is  terminated,  the accounts at the  institution  at the time of the
termination,  less  subsequent  withdrawals,  will  continue to be insured for a
period of six months to two years, as determined by the FDIC.

CAPITAL  ADEQUACY  REQUIREMENTS.  The  FRB  and  the  FDIC  (collectively,   the
"Agencies")  have  adopted  risk-based  capital  guidelines  for  banks and bank
holding companies that are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies
and account for off-balance  sheet items.  The guidelines are minimums,  and the
federal   regulators   have  noted  that  banks  and  bank   holding   companies
contemplating  significant  expansion  programs  should not allow  expansion  to
diminish  their  capital  ratios  and  should  maintain  ratios in excess of the
minimums.  Failure to achieve and maintain adequate capital levels may give rise
to supervisory  action through the issuance of a capital directive to ensure the
maintenance  of required  capital  levels.

The current guidelines require all federally regulated banks to maintain a
minimum risk-based total ratio equal to 8 percent, of which at least 4 percent
must be Tier 1 capital. Tier 1 capital includes common shareowners' equity,
qualifying perpetual preferred stock, and minority interest in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles,
gains or losses on available for sale securities and the allowance for losses on
loans. Total capital includes the excess of any preferred stock not included in
Tier 1 capital, mandatory convertible securities, hybrid capital instruments,
subordinated debts and intermediate term preferred stock and the allowance for
losses on loans up to 1.25 percent of risk-weighted assets. The Bank has not
received notice indicating that it will be subject to higher capital
requirements.

                                      -9-
<PAGE>


PROMPT  CORRECTIVE  ACTION.  Regulations  adopted by the Agencies as required by
FDICIA impose even more stringent capital  requirements.  The regulators require
the FDIC and other Federal Banking  Agencies to take certain "prompt  corrective
action" when a bank fails to meet certain capital requirements.  The regulations
establish  and  define  five  capital  levels:   (1)   "well-capitalized",   (2)
"adequately   capitalized",    (3)   "undercapitalized",    (4)   "significantly
undercapitalized",  and (5) "critically  undercapitalized."  To qualify as "well
capitalized" an institution  must maintain at least 10 percent total  risk-based
capital,  6 percent Tier 1 risk-based  capital,  and a leverage ratio of no less
than 5 percent.  Increasingly  severe restrictions are imposed on the payment of
dividends and management  fees, asset growth and other aspects of the operations
of institutions that fall below the category of being  "adequately  capitalized"
(which requires at least 8 percent total  risk-based  capital,  4 percent Tier 1
risk-based   capital,   and  a   leverage   ratio  of  at   least  4   percent).
Undercapitalized  institutions  are  required to develop and  implement  capital
plans acceptable to the appropriate  federal regulatory agency.  Such plans must
require that any company that  controls the  undercapitalized  institution  must
provide certain  guarantees that the institution will comply with the plan until
it is  adequately  capitalized.  As of  December  31,  2005,  the  Bank was well
capitalized and maintained a risk-based total capital ratio of 11.39 percent,  a
risk-based Tier 1 capital ratio of 10.14 percent,  and a leverage ratio of 10.07
percent.

RESTRICTIONS ON CAPITAL  DISTRIBUTIONS.  Dividends paid to FFC by the Bank are a
material  source  of FFC's  cash  flow.  Various  federal  and  state  statutory
provisions  limit the amount of  dividends  the Bank is  permitted to pay to FFC
without regulatory approval.

FRB policy further limits the  circumstances  under which bank holding companies
may declare  dividends.  For example, a bank holding company should not continue
its existing rate of cash dividends on its common stock unless its net income is
sufficient  to fully fund each  dividend  and its  prospective  rate of earnings
retention appears consistent with its capital needs, asset quality,  and overall
financial condition.

If, in the  opinion of the  applicable  federal  banking  agency,  a  depository
institution  under its  jurisdiction  is  engaged in or is about to engage in an
unsafe or unsound  practice (which  depending on the financial  condition of the
institution,  could include the payment of  dividends),  the agency may require,
after  notice and  hearing,  that such  institution  cease and desist  from such
practice. In addition,  the FRB and the FDIC have issued policy statements which
provide  that insured  banks and bank holding  companies  should  generally  pay
dividends only out of current operating earnings.

According to Washington  law, the Bank may not declare or pay a cash dividend in
an amount  greater  than its  retained  earnings,  without  the  approval of the
Director of the Division of Financial Institutions.

INTERSTATE  BANKING  AND  BRANCHING.  The  Riegle-Neal  Interstate  Banking  and
Branching Efficiency Act of 1994 ("Interstate Act") generally permits nationwide
interstate  banking and  branching  by  relaxing  federal  law  restrictions  on
interstate banking and providing general authorization for interstate branching.
Subject to certain state laws, such as age and contingency  laws, the Interstate
Act allows adequately  capitalized and adequately managed bank holding companies
to purchase the assets of out-of-state banks. Additionally,  since June 1, 1997,
the Interstate Act permits  interstate bank mergers subject to these state laws,
unless the home state of either merging bank has "opted-out" of these provisions
by enacting  "opt-out"  legislation.  The  Interstate  Act does allow  states to
impose certain  conditions on interstate bank mergers within their borders;  for
example,  states may require that the in-state merging bank exist for up to five
years before the interstate  merger.  Under the Interstate  Act, states may also
"opt-in" to de novo branching,  allowing out-of-state banks to establish de novo
branches within the state.

In 1996,  Washington  enacted  "opting-in"  legislation  authorizing  interstate
mergers  pursuant to the  Interstate  Act.  Accordingly,  as of June 6, 1996, an
out-of-state  bank  holding  company may now acquire  more than 5 percent of the
voting shares of a Washington-based  bank,  regardless of reciprocity,  provided
such bank or its  predecessor  has been doing  business  for at least five years
prior to the acquisition. Further, an out-of-state bank may engage in banking in
Washington if the  requirement of  Washington's  interstate  banking statute are
met, and either:  (1) was lawfully  engaged in banking in  Washington on June 6,
1996, (2) resulted from an interstate  combination  pursuant to Washington  law,
(3) resulted from a relocation of a head office of a state bank or a main office
of  a  national  bank  pursuant  to  federal  law,  or  (4)  resulted  from  the
establishment of a savings bank branch in compliance with applicable  Washington
law.  Additionally,  the Director of the Division of Financial  Institutions may
approve  interstate  combinations  if the  basis  for  such  approval  does  not
discriminate  against  out-of-state banks,  out-of-state  holding companies,  or
their subsidiaries.

                                      -10-
<PAGE>


The agencies recently adopted regulations, under which banks are prohibited from
using their interstate branches primarily for deposit  production.  The Agencies
have accordingly implemented a loan-to-deposit ratio screen to ensure compliance
with this prohibition.

REGULATORY IMPROVEMENT.  In 1994, Congress enacted the Community Development and
Regulatory  Improvement Act ("Regulatory  Improvement Act"), with the intent of,
among other things,  reducing the regulatory  burden on financial  institutions.
This Act is intended  to  streamline  certain  regulatory  procedures  and relax
certain  regulatory  compliance   requirements.   In  addition,  the  Regulatory
Improvement Act  specifically  directs each federal banking agency to review and
streamline its regulations and written supervisory policies.

EFFECT  OF  GOVERNMENTAL  POLICIES.  The Bank is  affected  not only by  general
economic conditions,  but also by the monetary and fiscal policies of the United
States Government and various agencies, particularly the Federal Reserve System.
In its role of implementing its monetary  policy,  the Federal Reserve Board has
the power to regulate the national supply of bank credit through such methods as
open market  operations  in the United  States  Government  securities  markets,
control of the discount rate on member bank  borrowings,  and  establishment  of
reserve  requirements  against  bank  deposits.  These means are used in varying
combinations  and have an influence over the growth of bank loans,  investments,
and deposits.  They may also affect  interest  rates charged on loans or paid on
deposits. The nature and timing of future changes in monetary policies and their
impact on the Bank are not predictable. As a consequence of extensive regulation
of commercial  banking  activities in the United States,  the Bank's business is
particularly   susceptible  to  being  affected  by  Federal   legislation   and
regulations  which may have the effect of increasing  the cost of doing business
or limiting permissible activities.

CUSTOMER PRIVACY  REGULATION.  The  Gramm-Leach-Bliley  Act restricts  financial
institutions  from disclosing  nonpublic  consumer  information to nonaffiliated
third parties. As a result, the Bank is required to disclose its written privacy
policy to its consumers and must restrict  dissemination of consumer information
as required by law.

ANTI-MONEY LAUNDERING REGULATION. The Bank Secrecy Act of 1970 requires banks to
maintain internal systems to prevent banks from being utilized to facilitate the
flow of illegal or illicit  money.  The USA  Patriot  Act of 2001 was enacted in
response  to  terrorist  activities  in  2001  and  significantly  expanded  the
restrictions on so-called  "money  laundering"  schemes and terrorist  financing
activities.  These  statutes and related  regulations  have required the Bank to
implement  additional operating systems and controls,  to expand  record-keeping
and  positive  customer  identification  policies,  and  to  develop  additional
reporting systems to ensure  compliance and to assist the Federal  government in
detecting money laundering schemes and terrorist financing  activities.  Failure
to comply could result in legal consequences and/or penalties to the Bank.

Bank  regulatory  authorities  have been placing a special  emphasis upon banks'
compliance  with the Bank Secrecy Act (BSA) and the USA Patriot Act as a part of
the effort to thwart terrorism and other criminal  activity in this country.  In
June 2005, the Federal Financial  Institutions  Examination  Council published a
new Bank Secrecy  Act/Anti-Money  Laundering  Examination  Manual which provides
guidelines for  examination of compliance  with the Bank Secrecy Act and the USA
Patriot Act.

In substantial  part in response to that  examination,  the Bank has developed a
plan to expand and  enhance the Bank's Bank  Secrecy  Act/Anti-Money  Laundering
compliance  program.  Bank  management,  at the direction of the Bank's Board of
Directors,  has  evaluated  and is in the process of modifying  its controls and
procedures  to  better  identify  customers  and  transactions  that  should  be
evaluated and reported under the BSA.

Bank  management  expects that the Federal  Reserve Bank will continue to review
the Bank's plans relative to Bank Secrecy  Act/Anti-Money  Laundering compliance
and following that review will determine any  regulatory  action  concerning the
Bank's Bank Secrecy  Act/Anti-Money  Laundering program that may be unnecessary.
Such action may include an  agreement  with the Federal  Reserve Bank to correct
the  weaknesses  by  implementing  the  steps  described  in the  plan or  other

                                      -11-
<PAGE>


corrective  action  deemed  necessary  by  the  regulatory   authorities.   Bank
management  is committed to enhancing  the Bank's  compliance  with Bank Secrecy
Act/Anti-Money Laundering statutes and regulations and believes that the plan as
developed  and   implemented   will  be  in  full   compliance  with  applicable
requirements.  Other than the  ongoing  costs of  compliance  with Bank  Secrecy
Act/Anti-Money Laundering requirements,  the Bank does not expect to incur other
costs.

EQUITY COMPENSATION PLANS

The following table sets forth  information  regarding  outstanding  options and
shares reserved for issuance under the Corporation's plans:

<TABLE>
<CAPTION>
<S>                              <C>                             <C>                         <C>
                                                                                      Number of securities
                           Number of securities                                      remaining available for
                             to be issued upon            Weighted-average            future issuance under
                          exercise of outstanding         exercise price of         equity compensation plans
                           options, warrants and         outstanding options,         (excluding securities
                                  rights                  warrants and rights       reflected in first column)
                          -----------------------        --------------------       --------------------------

Equity compensation
plans approved by
security holders    (A)          952,123                         $24.75                      3,776

Equity compensation
plans not approved
by security holders (B)          180,000                            N/A                     59,238
                               ---------                                                  --------

                               1,132,123                                                    63,014
                               =========                                                  ========
</TABLE>


     (A)  Consists of FFC Incentive Stock Option Plan.

     (B)  Consists  of FFC 1999  Employee  Stock Award Plan and 2001 Stock Award
          Plan.

FFP, INC.

On April 4, 1988, the  Corporation  formed a new subsidiary  corporation  called
FFP, Inc. The purpose of this corporation is to purchase and lease improved real
property to the Bank. For further details,  please see page 32 of this Form 10-K
Report, "Properties." It is intended that future purchases of real property will
be made by FFP,  Inc. At this time,  it is not  anticipated  that FFP, Inc. will
engage in any other type of business.

RECENT STOCK PURCHASE

In December 2004, the Corporation  purchased 4.95% of the common stock of Skagit
State Bank, located in Burlington,  Washington,  which is approximately 44 miles
north  of  Everett  in  Skagit  County.  Subsequent  to  this  investment,   the
Corporation  applied to the Board of Governors of the Federal  Reserve System to
purchase up to 20% of Skagit  State.  Approval was received in February 2005 and
the Corporation has made additional  purchases for a total ownership of 11.3% as
of December 31, 2005. In January 2006, the  Corporation  purchased  5,022 shares
for $653 thousand, bringing total ownership to 12.02%.

SHARE REPURCHASE PROGRAM

In January 2001, the Board announced the adoption of a stock repurchase  program
authorizing the  Corporation to repurchase up to 5% of its outstanding  stock in
the open market.  On October 17, 2001and 2002, and September 16, 2004, the Board
of Directors  authorized  three increases of 5% of the outstanding  common stock
under the plan.  The plan  expires  in  September  2006.  The  Corporation  last
repurchased  361,800 shares in 2003. There were 1,398,405 shares remaining under
the current plan at December 31, 2005.

                                      -12-
<PAGE>


TREATMENT OF GOODWILL

The Corporation has goodwill which was recorded in connection with  acquisitions
over the years.  Prior to January 1, 2002, the  Corporation  amortized  goodwill
over 20 years. Upon the  implementation of Statement of Financial  Standards No.
142 (SFAS No. 142),  GOODWILL AND OTHER INTANGIBLE  ASSETS,  on January 1, 2002,
the Company ceased  amortization of goodwill.  SFAS 142 requires the Corporation
to test the goodwill for impairment at least annually.  The  Corporation  tested
its goodwill and found no impairment  during 2005. The Corporation uses the fair
market value approach to determine if there has been any impairment.

AVAILABLE INFORMATION

FFC maintains an Internet website at  www.frontierbank.com.  FFC makes available
free of charge  through its website its annual  reports on Form 10-K,  quarterly
reports  on Form 10-Q,  current  reports on Form 8-K,  and  amendments  to these
reports,  generally  within 24 hours after FFC files these reports with the SEC.
FFC's Code of Ethics for Senior  Financial  Officers  is also  available  on the
website. From FFC's home page at www.frontierbank.com,  go to "Resource Centers"
and click on "Investor  Relations" to access these reports and other  documents.
The Code of Ethics for Senior Financial Officers is also available in print upon
written request addressed to Investor Relations, Frontier Financial Corporation,
332 S.W. Everett Mall Way, P.O. Box 2215, Everett, WA 98213.

FORWARD-LOOKING STATEMENTS

The  Annual  Report on Form 10-K  contains  certain  forward-looking  statements
within the meaning of the Private  Securities  Litigation Reform Act of 1995. In
addition,  the Corporation may make certain statements in future SEC filings, in
press releases,  and in oral and written  statements made with the Corporation's
approval  that  are  not  statements  of  historical  fact  and  may  constitute
forward-looking  statements.  Forward-looking  statements may relate to, without
limitation the Corporation's financial condition, results of operations,  plans,
objectives, future performance or business.

Forward-looking  statements  are  identified by the fact that they do not relate
only to historical or current facts.  Sentences  containing words such as "may",
"will", "expect", "anticipate", "believe", "estimate", "should", "projected", or
similar words may constitute  forward-looking  statements,  but are not the only
means  to  identify  these  statements.  The  Corporation  may have  used  these
statements to describe  expectations and estimates in various areas,  including,
but not limited to:  changes in the economy of the markets in which it operates;
interest  rate  movements;  future  acquisition  and growth  strategies;  system
conversions  and  integration  activities;  the impact of competitive  products,
services  and  pricing;  and  legislative,  regulatory  and  accounting  changes
affecting the banking and financial service industry.

Forward-looking statements are subject to risks and uncertainties that may cause
actual future results to differ materially from estimated or projected  results.
Factors  that  could  cause  this  difference--many  of  which  are  beyond  the
Corporation's control--include the following, without limitation:  interest rate
trends  may  differ  more  than  expected;   loan   delinquency   rates  may  be
significantly  higher  than  expected;  the  general  state  of the  economy  in
Washington  state and the United States as a whole could be worse than expected;
competitive pressures among financial institutions could increase significantly;
and changes in laws and regulations could adversely affect the Corporation.

ITEM 1A.  RISK FACTORS

An investment in our common shares is subject to risks inherent to our business.
The material risks and  uncertainties  that  management  believes  affect us are
described  below.  Before making an investment  decision,  one should  carefully
consider the risks and uncertainties  described below together,  with all of the
other  information,  included or incorporated  by reference in this report.  The
risks and uncertainties  described below are not the only ones we face. Although
we have  significant  risk  management  policies,  procedures  and  verification
processes in place,  additional risks and  uncertainties  that management is not
aware of or focused on or that management  currently  deems  immaterial may also
impair our  business  operations.  This report is  qualified  in its entirety by
these risk factors.

If any of the  following  risks  actually  occur,  our  financial  condition and
results of operations could be materially and adversely  affected.  If this were
to happen, the value of our common shares could decline,  perhaps significantly,
and you could lose all or part of your investment. Investments in shares of bank
stock are not government guaranteed.
                                      -13-
<PAGE>


RISKS RELATED TO OUR BUSINESS

WE ARE SUBJECT TO INTEREST RATE RISK

Our earnings and cash flows are largely  dependent upon our net interest income.
Net  interest  income  is the  difference  between  interest  income  earned  on
interest-earning  assets such as loans and securities and interest  expense paid
on  interest-bearing  liabilities such as deposits and borrowed funds.  Interest
rates  are  highly  sensitive  to many  factors  that are  beyond  our  control,
including but not limited to general economic conditions and policies of various
governmental  and regulatory  agencies and, in particular,  the Federal  Reserve
Board.  Changes in monetary policy,  including changes in interest rates,  could
influence not only the amount of interest we receive on loans and securities and
the amount of interest we pay on deposits and borrowings, but such changes could
also affect our ability to  originate  loans and obtain  deposits as well as the
fair value of our financial  assets and  liabilities.  If the interest we pay on
deposits  and other  borrowings  increases at a faster rate than the interest we
receive on loans and other  investments,  our net interest income, and therefore
earnings, could be adversely affected. Earnings could also be adversely affected
if the interest we receive on loans and other investments fall more quickly than
the interest we pay on deposits and other borrowings.

Although  management  believes it has implemented  effective asset and liability
management  strategies  to reduce the  potential  effects of changes in interest
rates on our results of operations, any substantial, unexpected and/or prolonged
change in market  interest  rates  could have a material  adverse  effect on our
financial condition and results of operations.

WE ARE SUBJECT TO CREDIT RISK

There are inherent  risks  associated  with our lending and trading  activities.
These risks include, among other things, the impact of changes in interest rates
and changes in the economic  conditions  in the markets where we operate and the
customers  we serve.  Increases  in interest  rates  and/or  weakening  economic
conditions could adversely impact the ability of borrowers to repay  outstanding
loans or the value of the collateral  securing these loans.  We also are subject
to various laws and regulations that affect our lending  activities.  Failure to
comply with  applicable  laws and  regulations  could  subject us to  regulatory
enforcement action that could result in the assessment against us of civil money
or other penalties.

As of December  31,  2005,  approximately  85% of our loan  portfolio  consisted
primarily of loans  secured by real estate,  including  real estate  commercial,
construction,  land development and mortgage. These types of loans are generally
viewed as potentially  having more risk of default than  residential real estate
loans  or  consumer   loans.   Although  we  closely  monitor  and  manage  risk
concentrations  and utilize various  portfolio  management  practices,  our loan
portfolio contains a number of real estate loans with relatively large balances.
The  deterioration  of one or a few of these  loans  could  cause a  significant
increase in nonperforming loans, and an increase in overall  nonperforming loans
could  result  in a net loss of  earnings,  an  increase  in the  provision  for
probable  loan losses and an increase  in loan  charge-offs,  all of which could
have a  material  adverse  effect on our  financial  condition  and  results  of
operations.   Additional  information  regarding  credit  risk  is  included  in
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  on page 41 and 42 of Frontier  Financial  Corporation's  2005 Annual
report to Shareowners.

VARIOUS FACTORS MAY CAUSE OUR ALLOWANCE FOR PROBABLE LOAN LOSSES TO INCREASE

We  maintain  an  allowance  for  probable  loan  losses,  which  is  a  reserve
established  through a provision  for probable  loan losses  charged to expense,
which  represents  management's  estimate of probable losses within the existing
portfolio of loans. The allowance,  in the judgment of management,  is necessary
to reserve for estimated loan losses and risks  inherent in the loan  portfolio.
The  level of the  allowance  reflects  management's  continuing  evaluation  of
industry  concentrations;  specific credit risks; loan loss experience;  current
loan portfolio  quality;  present and future economic,  political and regulatory
conditions;  and unexpected  losses inherent in the current loan portfolio.  The
determination of the appropriate level of the allowance for probable loan losses
inherently  involves  a  degree  of  subjectivity  and  requires  that  we  make
significant  estimates of current credit risks and future  trends,  all of which
may  undergo  material  changes.   Changes  in  economic  conditions   affecting
borrowers,   new  information   regarding  existing  loans,   identification  of

                                      -14-
<PAGE>


additional  problem  loans and other  factors,  both  within and  outside of our
control,  may require an increase in the allowance for probable loan losses.  In
addition,  bank regulatory  agencies and our independent  auditors  periodically
review  our  allowance  for loan  losses  and may  require  an  increase  in the
provision  for  probable  loan  losses  or  the   recognition  of  further  loan
charge-offs,  based on judgments that can differ  somewhat from those of our own
management.  In addition,  if charge-offs in future periods exceed the allowance
for probable  loan losses,  we will need  additional  provisions to increase the
allowance for probable loan losses,  which should they become  necessary,  would
result in a decrease in net income and capital,  and may have a material adverse
effect  on  our  financial  condition  and  results  of  operations.  Additional
information  regarding  the allowance for loan losses is included in the section
Reserve and  Provision  for Loan  Losses on pages 31 and 32 of the  Management's
Discussion and Analysis of Financial Condition and Results of Operations section
of Frontier Financial Corporation's 2005 Annual Report to Shareowners.

WE ARE SUBJECT TO LIQUIDITY RISK

Market  conditions or other events could negatively  affect the level or cost of
liquidity, affecting our ongoing ability to accommodate liability maturities and
deposit withdrawals, meet contractual obligations, and fund asset growth and new
business  transactions  at a  reasonable  cost,  in a timely  manner and without
adverse  consequences.   Management  has  implemented   strategies  to  maintain
sufficient  and  diverse  sources of funding to  accommodate  planned as well as
unanticipated  changes in assets and  liabilities  under both normal and adverse
conditions.  However,  substantial,  unexpected  and/or prolonged changes in the
level or cost of liquidity could have a material adverse effect on our financial
condition and results of operations.  Additional information regarding liquidity
risk is included in the section  captioned  "Liquidity"  beginning on page 38 of
the Management's  Discussion and Analysis of Financial  Condition and Results of
Operations  section of Frontier  Financial  Corporation's  2005 Annual Report to
Shareowners.

WE ARE SUBJECT TO OPERATIONAL RISK

We, like all businesses,  are subject to operational  risk, which represents the
risk of loss resulting from human error, inadequate or failed internal processes
and systems, and external events.  Operational risk also encompasses  compliance
(legal) risk,  which is the risk of loss from  violations  of, or  noncompliance
with, laws, rules, and regulations,  prescribed  practices or ethical standards.
Although  we seek to  mitigate  operational  risk  through a system of  internal
controls, losses resulting from operational risk could take the form of explicit
charges,  increased  operational  costs,  harm  to  our  reputation  or  forgone
opportunities,  any and all of which could have a material adverse effect on our
financial condition and results of operations.

OUR PROFITABILITY DEPENDS SIGNIFICANTLY ON ECONOMIC CONDITIONS IN THE GEOGRAPHIC
REGIONS IN WHICH WE OPERATE

Our success depends on the general  economic  conditions of the markets in which
we operate.  The regional economic conditions in the areas have an impact on the
demand for our products and services as well as the ability of our  customers to
repay loans, the value of the collateral securing loans and the stability of our
deposit funding sources. A significant  decline in general economic  conditions,
caused by inflation,  recession,  acts of terrorism,  outbreak of hostilities or
other international or domestic occurrences, unemployment, changes in securities
markets or other  factors  could also impact these  regional  economies  and, in
turn, have a material  adverse effect on our financial  condition and results of
operations.

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY AND MARKET AREAS

We face substantial competition in all areas of our operations from a variety of
different  competitors,  many of which are  larger  and may have more  financial
resources.  Such competitors primarily include national and super-regional banks
as well as  smaller  community  banks  within  the  various  markets in which we
operate.  However,  we also face  competition from many other types of financial
institutions, including without limitation: savings associations, credit unions,
mortgage  banking  companies,   finance  companies,   mutual  funds,   insurance
companies, investment management firms, investment banking firms, broker-dealers
and other local,  regional and national  financial services firms. The financial
services industry could become even more competitive as a result of legislative,
regulatory  and  technological  changes  and  continued   consolidation.   Also,
technology  has lowered  barriers to entry and made it possible  for nonbanks to
offer products and services traditionally provided by banks.

                                      -15-
<PAGE>


Our ability to compete successfully  depends on a number of factors,  including,
among other things:

     o    Our ability to develop and execute strategic plans and initiatives.

     o    Our ability to develop,  maintain  and build upon  long-term  customer
          relationships  based on quality  service,  high ethical  standards and
          safe, sound assets.

     o    Our ability to expand our market position.

     o    The scope, relevance and pricing of the products and services we offer
          to meet customer needs and demands.

     o    The rate at which we introduce  new products and services  relative to
          our competitors.

     o    Industry and general economic trends.

     o    Our ability to attract and retain qualified employees.

     o    Our ability to respond to and resolve unexpected legal,  regulatory or
          other compliance issues.

Failure  to  perform  in any of  these  areas  could  significantly  weaken  our
competitive position,  which could adversely affect our growth and profitability
and have a material  adverse  effect on our  financial  condition and results of
operations.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND SUPERVISION

We are  subject to  extensive  federal  and state  regulation  and  supervision.
Banking regulations are primarily intended to protect depositors' funds, federal
deposit  insurance  funds and the banking  system as a whole,  not  shareowners.
These regulations  affect our lending practices,  capital structure,  investment
practices,  dividend policy and growth, among other things. Congress and federal
regulatory  agencies  continually review banking laws,  regulations and policies
for possible changes.  Changes to statutes,  regulations or regulatory policies;
changes in the  interpretation  or  implementation  of statutes,  regulations or
policies;  and/or  changes to regulatory  requirements  or  expectations,  could
affect us in substantial and  unpredictable  ways. Such changes could subject us
to additional costs,  limit the types of financial services and products that we
may offer and/or increase the ability of nonbanks to offer  competing  financial
services and products,  among other things. Failure to appropriately comply with
laws,  regulations  or policies  (including  internal  policies  and  procedures
designed to prevent such  violations)  could  result in sanctions by  regulatory
agencies,  civil money penalties and/or reputational  damage, which could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.  Additional  information  regarding  regulation  and  supervision is
included  in the  section  captioned  "Regulation  and  Supervision"  in Item 1,
Business, beginning on page 5 of this report.

OUR CONTROLS AND PROCEDURES MAY FAIL OR BE CIRCUMVENTED

Management  regularly  reviews  and updates our  internal  controls,  disclosure
controls and procedures,  and corporate governance policies and procedures.  Any
system of controls,  however well  designed  and  operated,  is based in part on
certain  assumptions and can provide only reasonable,  not absolute,  assurances
that the objectives of the system are met. Any failure or  circumvention  of our
controls  and  procedures  or  failure  to comply  with  regulations  related to
controls and  procedures  could have a material  adverse effect on our business,
financial condition and results of operations.

                                      -16-
<PAGE>


WE RELY ON DIVIDENDS FROM OUR SUBSIDIARIES FOR MOST OF OUR REVENUE

Frontier Financial  Corporation is a legal entity separate and distinct from its
subsidiaries.  It receives  substantially all of its revenue from dividends from
its  subsidiaries.  These  dividends  are the  principal  source of funds to pay
dividends on our common shares. Various laws and regulations limit the amount of
dividends that Frontier Bank may pay to Frontier Financial  Corporation.  In the
event   Frontier  Bank  is  unable  to  pay  dividends  to  Frontier   Financial
Corporation,  we may  not be  able  pay  dividends  on our  common  shares.  The
inability to receive  dividends from Frontier Bank could have a material adverse
effect  on  our  business,   financial  condition  and  results  of  operations.
Additional  information  regarding  dividend  restrictions  is  included  in the
section captioned  "Regulation and Supervision" in Item 1, Business,  on pages 6
-7 of this report.

POTENTIAL ACQUISITIONS MAY DISRUPT OUR BUSINESS AND DILUTE SHAREOWNER VALUE

Acquiring other banks or financial  institutions or financial  service companies
involves various risks commonly associated with acquisitions,  including,  among
other things:

     o    Potential  exposure  to  unknown  or  contingent  liabilities  of  the
          acquired company.

     o    Exposure to potential asset quality issues of the acquired company.

     o    Difficulty and expense of integrating  the operations and personnel of
          the acquired company.

     o    Potential disruption to our business.

     o    Potential diversion of our management's time and attention.

     o    The  possible  loss of key  employees  and  customers  of the acquired
          company.

     o    Difficulty  in  estimating  the  value  (including  goodwill)  of  the
          acquired company.

     o    Difficulty   in  estimating   the  fair  value  of  acquired   assets,
          liabilities and derivatives of the acquired company.

     o    Potential  changes  in  banking  or tax laws or  regulations  that may
          affect the acquired company.

We  regularly  evaluate  merger and  acquisition  opportunities  and conduct due
diligence  activities  related to  possible  transactions  with other  financial
institutions. As a result, merger or acquisition discussions and, in some cases,
negotiations  may take place and future mergers or acquisitions  involving cash,
debt or equity securities may occur at any time.  Acquisitions typically involve
the  payment of a premium  over book and market  values,  and,  therefore,  some
dilution of our tangible book value and net income per common share may occur in
connection  with any future  transaction.  Furthermore,  failure to realize  the
expected  revenue  increases,  cost savings,  increases in geographic or product
presence or market share,  and/or other  projected  benefits from an acquisition
could have a material  adverse effect on our financial  condition and results of
operations.

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN SKILLED PEOPLE

Our success  depends,  in large  part,  on our ability to attract and retain key
people.  Competition  for the best  people  in most  activities  in which we are
engaged  can be  intense  and we may not be able to hire or retain the people we
want  and/or  need.  The  unexpected  loss of services of one or more of our key
personnel could occur, and such events may have a material adverse impact on our
business  because of the difficulty of promptly  finding  qualified  replacement
personnel and the loss of the employee's skills,  knowledge of our market, years
of industry experience.

OUR INFORMATION SYSTEMS MAY EXPERIENCE AN INTERRUPTION OR BREACH IN SECURITY

We rely  heavily on  communications  and  information  systems  to  conduct  our
business. Any failure, interruption or breach in security of these systems could
result in failures  or  disruptions  in our  customer  relationship  management,
general  ledger,  deposit,  loan and other  systems.  While we have policies and
procedures  designed  to prevent or limit the  effect of the  possible  failure,
interruption  or security  breach of our  information  systems,  there can be no
assurance that any such failures,  interruptions  or security  breaches will not
occur  or,  if they do  occur,  that  they  will be  adequately  addressed.  The
occurrence  of  any  failures,   interruptions  or  security   breaches  of  our
information  systems could damage our  reputation,  result in a loss of customer
business,  subject us to additional  regulatory scrutiny,  or expose us to civil
litigation and possible financial liability,  any of which could have a material
adverse effect on our financial condition and results of operations.

                                      -17-
<PAGE>


WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGE

The financial  services industry is continually  undergoing rapid  technological
change  with  frequent  introductions  of  new  technology-driven  products  and
services.  The  effective  use of technology  increases  efficiency  and enables
financial institutions to better serve customers and to reduce costs. Our future
success depends, in part, upon our ability to address the needs of our customers
by using  technology to provide products and services that will satisfy customer
demands,  as well as to create  additional  efficiencies in our operations.  Our
largest   competitors  have   substantially   greater  resources  to  invest  in
technological  improvements.  We may not be able to  effectively  implement  new
technology-driven  products and  services or be  successful  in marketing  these
products and services to our customers.  Failure to successfully  keep pace with
technological  change  affecting the financial  services  industry  could have a
material  adverse impact on our business and, in turn,  our financial  condition
and results of operations.

WE ARE SUBJECT TO CLAIMS AND LITIGATION

From time to time,  customers  and/or  vendors  may make  claims  and take legal
action  against  us.  Whether  these  claims  and legal  action  are  founded or
unfounded,  if such claims and legal  actions are not resolved in our favor they
may result in significant  financial  liability  and/or adversely affect how the
market  perceives us and our  products  and services as well as impact  customer
demand for those  products and services.  Any financial  liability or reputation
damage could have a material  adverse  effect on our business,  which,  in turn,
could have a material  adverse effect on our financial  condition and results of
operations.

OUR EARNINGS MAY BE AFFECTED BY CHANGES IN ACCOUNTING PRINCIPLES AND IN TAX LAWS

Changes  in  U.S.  generally  accepted   accounting   principles  could  have  a
significant  adverse  effect  on  Frontier  Financial   Corporation's   reported
financial results. Although these changes may not have an economic impact on our
business,  they could affect our ability to attain  targeted  levels for certain
performance or regulatory measures.

We, like all businesses, are subject to tax laws, rules and regulations. Changes
to tax laws, rules and regulations,  including changes in the  interpretation or
implementation  of tax  laws,  rules and  regulations  by the  Internal  Revenue
Service  or other  governmental  bodies,  could  affect  us in  substantial  and
unpredictable  ways.  Such changes could subject us to additional  costs,  among
other  things.  Failure  to  appropriately  comply  with  tax  laws,  rules  and
regulations  could  result in  sanctions  by  regulatory  agencies,  civil money
penalties and/or reputation  damage,  which could have a material adverse effect
on our business, financial condition and results of operations.

SEVERE WEATHER,  NATURAL DISASTERS,  ACTS OF WAR OR TERRORISM AND OTHER EXTERNAL
EVENTS COULD SIGNIFICANTLY IMPACT OUR BUSINESS

Severe weather,  natural  disasters,  acts of war or terrorism and other adverse
external  events  could  have a  significant  impact on our  ability  to conduct
business. Such events could affect the stability of our deposit base, impair the
ability of borrowers to repay outstanding loans,  impair the value of collateral
securing loans,  cause significant  property damage,  result in loss of revenue,
interrupt our information systems, and/or cause us to incur additional expenses.
For example,  during 2005, hurricanes Katrina and Rita caused extensive flooding
and  destruction  along the coastal  areas of the Gulf of Mexico which  severely
impacted  the  operations  of many  financial  institutions.  While  we were not
adversely  affected  by the impact of these  specific  disasters,  other  severe
weather or natural disasters, acts of war or terrorism or other adverse external
events  may occur in the  future  that  would  have an  effect on our  business.
Although management has established disaster recovery plans and procedures,  the
occurrence  of any such  event  could  have a  material  adverse  effect  on our
business,  which, in turn, could have a material adverse effect on our financial
condition and results of operations.

                                      -18-
<PAGE>


RISKS ASSOCIATED WITH OUR COMMON SHARES

OUR SHARE PRICE CAN BE VOLATILE

Share price  volatility  may make it more  difficult  to resell our common stock
when desired or at prices  deemed  statisfactory.  Our share price can fluctuate
significantly in response to a variety of factors including, among other things:

     o    Actual or anticipated variations in quarterly results of operations.

     o    Recommendations by securities analysts.

     o    Operating  and  stock  price   performance  of  other  companies  that
          investors deem comparable to our business.

     o    News  reports  relating  to trends,  concerns  and other  issues in or
          affecting the financial services industry.

     o    Perceptions of us and/or our competitors in the marketplace.

     o    New  technology  used, or services  offered,  by our  competitors,  or
          ourselves.

     o    Significant   acquisitions   or   business   combinations,   strategic
          partnerships, joint ventures or capital commitments entered into by us
          or our competitors.

     o    Failure to integrate acquisitions or realize anticipated benefits from
          acquisitions.

     o    Changes in government regulations.

     o    Geopolitical  conditions  such as  acts or  threats  of  terrorism  or
          military conflicts.

General market fluctuations, industry factors and general economic and political
conditions and events,  such as economic slowdowns or recessions,  interest rate
changes or credit loss  trends,  could also cause our share price to increase or
decrease regardless of operating results.

AN INVESTMENT IN OUR COMMON SHARES IS NOT INSURED OR AN INSURED DEPOSIT

Our common stock is not a bank deposit and,  therefore,  is not insured  against
loss by the FDIC,  any other  deposit  insurance  fund or by any other public or
private  entity.  Investment  in our common  stock is  inherently  risky for the
reasons  described in this "Risk  Factors"  section and elsewhere in this report
and is subject to many of the same market forces that affect the price of common
stock in any company.  As a result,  acquisition of our common shares may result
in a loss of some or all of an investment in our shares.

OUR ARTICLES OF INCORPORATION,  REGULATIONS AND SHAREOWNERS  RIGHTS PLAN AS WELL
AS CERTAIN BANKING LAWS MAY HAVE AN ANTI-TAKEOVER EFFECT

Provisions of our articles of  incorporation  and  regulations,  federal banking
laws, including regulatory approval  requirements,  could make it more difficult
for a third  party to  acquire  us,  even if doing so would be  perceived  to be
beneficial to our shareowners. The combination of these provisions may inhibit a
non-negotiated  merger or other  business  combination,  which,  in turn,  could
adversely affect the market price of our common shares.



                                      -19-
<PAGE>


RISKS ASSOCIATED WITH OUR INDUSTRY

THE EARNINGS OF  FINANCIAL  SERVICES  COMPANIES  ARE  SIGNIFICANTLY  AFFECTED BY
GENERAL BUSINESS AND ECONOMIC CONDITIONS

Our operations and  profitability  are impacted by general business and economic
conditions in the United States and abroad.  These conditions include short-term
and  long-term  interest  rates,  inflation,  money  supply,  political  issues,
legislative and regulatory changes, fluctuations in both debt and equity capital
markets,  broad  trends in industry  and  finance,  and the strength of the U.S.
economy and the local economies in which we operate, all of which are beyond our
control.  A deterioration in economic  conditions could result in an increase in
loan delinquencies and nonperforming assets, decreases in loan collateral values
and a decrease in demand for our products and services,  among other things, any
of which could have a material  adverse  impact on our  financial  condition and
results of operations.

FINANCIAL  SERVICES  COMPANIES  DEPEND  ON  THE  ACCURACY  AND  COMPLETENESS  OF
INFORMATION ABOUT CUSTOMERS AND COUNTERPARTIES

In deciding  whether to extend credit or enter into other  transactions,  we may
rely on information  furnished by or on behalf of customers and  counterparties,
including financial statements,  credit reports and other financial information.
We may also rely on representations of those customers,  counterparties or other
third parties, such as independent auditors, as to the accuracy and completeness
of that information.  Reliance on inaccurate or misleading financial statements,
credit  reports or other  financial  information  could have a material  adverse
impact on our business  and, in turn,  our  financial  condition  and results of
operations.

CONSUMERS MAY DECIDE NOT TO USE BANKS TO COMPLETE THEIR FINANCIAL TRANSACTIONS

Technology  and  other  changes  are  allowing  parties  to  complete  financial
transactions  through alternative methods that historically have involved banks.
For example,  consumers can now maintain  funds in brokerage  accounts or mutual
funds that would have  historically  been held as bank  deposits.  Consumers can
also  complete  transactions  such as paying  bills  and/or  transferring  funds
directly  without the assistance of banks.  The process of eliminating  banks as
intermediaries,  known as  "disintermediation,"  could result in the loss of fee
income,  as well as the  loss  of  customer  deposits  and  the  related  income
generated from the use of those deposits.  The loss of these revenue streams and
the lower cost  deposits  as a source of funds  could  have a  material  adverse
effect on our financial condition and results of operations.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

There are no unresolved SEC staff comments.

                                      -20-
<PAGE>


STATISTICAL DISCLOSURE INDEX

The schedules  listed below set forth the  statistical  information  relating to
Frontier  Financial  Corporation and subsidiaries  (unless  otherwise stated) in
accordance with Guide 3. This information should be read in conjunction with the
consolidated financial statements.
                                                                      Annual
                                               Form 10-K              Report
I.   Distribution  of Assets,  Liabilities        PAGE                 PAGE
     and  Shareowners' Equity; Interest        ---------             ---------
     Rates and Interest Differential:

     A.  Consolidated Average Balance
         Sheets/Interest Income and
         Expense/Rates                                                   44
     B.  Changes in Net Interest Income
         and Expense due to Rate and
         Volume                                                          45

II.  Investment Portfolio
     A.  Analysis of Investment Securities
         at Year-end                               22                 12-13
     B.  Maturity Distribution of Investment
         Securities                                22                    13

III. Loan Portfolio

     A.  Types of Loans                            23                    14
     B.  Loan Maturities and Sensitivity to
         Changes in Interest Rates                 23        14, 33, 35 - 37, 39
     C.  Risk Elements                          24-25
     D.  Concentrations of Credit                  30

IV.  Summary of Loan Loss Experience
     A.  Analysis                                  28
     B.  Allocation of Allowance for Possible
         Loan Losses                               29

V.   Deposits

     Average Interest and Noninterest
     Bearing Deposit Balances                                            44

VI.  Return on Equity and Assets

     Significant Financial Ratios                  34

VII. Short-term Borrowings                         32

                                      -21-
<PAGE>


Analysis of Investment Securities

The aggregate amortized cost of investment securities at December 31 are as
follows:

                            2005               2004               2003
                         Amortized          Amortized          Amortized
(In Thousands)              Cost               Cost               Cost
                      -----------------  -----------------  -----------------
U.S. Treasuries                 $7,232            $15,704               $251
U.S. Agencies                   49,621             49,738             67,903
Municipal Bonds                  4,231              6,051             10,705
Corporate Bonds                 19,326             44,214             77,029
Equities                        23,400             32,518             26,653
                      -----------------  -----------------  -----------------
                              $103,810           $148,225           $182,541
                      =================  =================  =================



Maturity Distribution of Investment Securities

The  following  table sets forth the  maturities  of  investment  securities  at
December 31, 2005.  Taxable  equivalent values are used in calculating  weighted
average yields assuming a tax rate of 35%.

<TABLE>
<CAPTION>
<S>                             <C>                <C>                   <C>              <C>               <C>
(In Thousands)                               After 1 Yr        After 5 Yrs                             Totals &
(Amortized cost used)       Within           But Within         But Within           After             Weighted
Need #'s                   1 Year/            5 Years/          10 Years/          10 Years/            Average
                            Yield              Yield              Yield              Yield               Yield
                       -----------------  -----------------  -----------------  -----------------  ------------------
U.S. Treasury                    $6,981                  -               $251                  -              $7,232
                                  3.88%                  -              7.16%                  -               3.97%

U.S. Agencies                     2,506            $47,115                  -                  -              49,621
                                  2.76%              3.45%                  -                  -               3.42%

Municipal Bonds                   1,699              2,253                234                $45               4,231
                                  5.31%              8.13%              8.92%              7.77%               7.04%

Corporate Bonds                   1,013             14,267                  -              4,046              19,326
                                  3.11%              4.02%                  -             10.20%               5.27%

Equities                         23,400                  -                -                  -                23,400
                                  3.98%                  -                  -                  -               3.98%
                       -----------------  -----------------  -----------------  -----------------  ------------------
                                $35,599            $63,635               $485             $4,091            $103,810
                       =================  =================  =================  =================  ==================
                                  3.91%              3.74%              8.00%             10.17%               4.07%
                       =================  =================  =================  =================  ==================
</TABLE>

As of December  31, 2005 and 2004,  the  Corporation  held FHLB bonds that had a
book  value of $34.0  million  and a market  value of $33.2  million  and  $33.8
million, respectively.

                                      -22-
<PAGE>


Types of Loans

Major classifications of loans, net of deferred loan fees, at December 31 are as
follows:

<TABLE>
<CAPTION>
<S>                                <C>               <C>              <C>               <C>              <C>
(In Thousands)                    2005             2004              2003             2002              2001
--------------                    ----             ----              ----             ----              ----

Commercial and agriculture         $321,303          $301,961         $268,963          $272,440         $316,947
Real estate commercial              859,251           848,737          809,307           758,826          659,982
Real estate construction
    and land development            967,335           608,421          507,872           443,461          412,501
Real estate mortgage                188,772           165,063          143,420           127,976          134,233
Installment                          46,852            50,057           40,201            47,217           47,833
                             ---------------  ----------------  ---------------  ----------------  ---------------
                                 $2,383,513        $1,974,239       $1,769,763        $1,649,920       $1,571,496
                             ===============  ================  ===============  ================  ===============
</TABLE>


Loan Maturities and Sensitivity to Changes in Interest Rates

The following table shows the contractual maturity amounts and maturity analysis
of loans  outstanding as of December 31, 2005.  Also, the amounts are classified
as to fixed and variable rate sensitivity for amounts due after one year.

<TABLE>
<CAPTION>
<S>                               <C>               <C>                <C>             <C>
                                                            Maturity
                            --------------------------------------------------------------------
                                Within            1 - 5            After
(In Thousands)                  1 Year            Years           5 Years            Total
--------------              ---------------  ----------------  ---------------  ----------------
Commercial and agriculture        $202,386          $111,749           $7,168          $321,303
Real estate commercial              72,572           498,056          288,623           859,251
Real estate construction
    and land development           753,758           207,405            6,172           967,335
Real estate mortgage                57,287            93,848           37,637           188,772
Installment                          9,479            14,578           22,795            46,852
                            ---------------  ----------------  ---------------  ----------------
                                $1,095,482          $925,636         $362,395        $2,383,513
                            ===============  ================  ===============  ================

Loans maturing after one year with:
                                                  1 - 5            After
                                                  Years           5 Years
                                             ----------------  ---------------
               Fixed Rates                          $671,911          $60,670
               Variable Rates                        253,725          301,725
                                             ----------------  ---------------
                                                    $925,636         $362,395
                                             ================  ===============
</TABLE>

Expected  maturities will differ from contractual  maturities  because borrowers
may have the right to prepay loans with or without prepayment  penalties.  It is
also not uncommon to rollover  loans at the maturity  period,  provided that the
rate and terms of the loan conform to the current policy.

LOAN ADMINISTRATION

The credit  approval  process at the Bank  provides  for the prompt and thorough
underwriting and approval or decline of loan requests. The method used is a step
process based on assigned lending limits.  Approval  process includes  authority
assigned  to  individual  officers  and  an  internal  loan  committee.  Lending
authority is also assigned to the Bank's  Directors'  Loan  Committee to approve
the Bank's  largest  credit  relationships  up to the legal lending limit of the
Bank.

Credit Review personnel conduct  continuous reviews to ensure the loan portfolio
remains in compliance  with our lending  policies and safe and sound  practices.
They provide  ongoing  reporting to  management  regarding  credit  weakness and
policy  exceptions  and economic and  portfolio  trends.  Quarterly  reports are
prepared  for  submission  to  Senior  Management,   and  the  Director's  Audit
Committee,  which  details the levels of  exceptions  and  follow-up  corrective
actions.

                                      -23-
<PAGE>


Certain  problem  loans are placed on a  nonaccrual  basis in  conformance  with
defined policy. The Loan Committee and other administrative  personnel regularly
review  information  reports  on  adversely  classified  and  delinquent  loans.
Comparative  summaries of delinquent  loans are also provided on a regular basis
to senior management and to the Board of Directors.

Management  performs and in dept  analysis of the loan loss reserve four times a
year and closely  monitors the adequacy of the loan loss reserve.  The allowance
is maintained at a level deemed sufficient to meet estimated potential losses.

The reviews,  examinations  and actions  described  above are in addition to the
periodic  examinations by federal and state regulatory agencies,  as well as the
Bank's internal audit department and the Bank's outside public accounting firm.

RISK ELEMENTS - IMPAIRED ASSETS

NONACCRUING/IMPAIRED LOANS

Loans are placed on nonaccrual  status when, in the opinion of  management,  the
collection  of  additional  interest is doubtful or when the loan  becomes 90 or
more days past due.  When a loan is placed on  nonaccrual  status,  all interest
previously accrued, but not collected,  is reversed and charged against interest
income. Income on nonaccrual loans is then recognized only to the extent cash is
received and where the future collection of principal is probable.  Accruals are
resumed  only when the loan is  brought  current,  and when,  in the  opinion of
management,  the borrower  has  demonstrated  the ability to resume  payments of
principal  and interest.  Interest  income on  restructured  loans is recognized
pursuant  to the  terms  of the new loan  agreement.  Interest  income  on other
impaired  loans is  monitored  and based upon the terms of the  underlying  loan
agreement.  However,  the recorded net investment in impaired  loans,  including
accrued interest,  is limited to the present value of the expected cash flows of
the impaired  loan or the  observable  fair market value of the loan or the fair
market value of the loan's collateral.

A loan is considered impaired when management determines it is probable that all
contractual  amounts of principal  and interest will not be paid as scheduled in
the  loan  agreement.  These  loans  include  all  loans  in  nonaccrual,  loans
restructured, and other loans that management considers to be impaired.

This  assessment  for  impairment  occurs  when  and  while  such  loans  are on
nonaccrual,  or the loan has been  restructured.  When a loan with  unique  risk
characteristics has been identified as being impaired,  the amount of impairment
will be measured by the  Corporation.  If the current value of the impaired loan
is less than the recorded  investment in the loan an impairment is recognized by
creating or adjusting an existing allocation of the allowance for loan losses.

RESTRUCTURED LOANS

In cases where a borrower experiences financial difficulties and the Corporation
makes certain concessionary  modifications to the contractual terms, the loan is
classified as a restructured (accruing) loan. Loans restructured at a rate equal
to or greater  than that of a new loan with  comparable  risk at the time of the
contract is modified  may be excluded  from the  impairment  assessment  and may
cease to be considered impaired.

DELINQUENT AND PROBLEM LOANS

Delinquent  and  problem  loans  are a part of any  lending  enterprise.  When a
borrower  fails to make  payments,  the Bank  implements  collection  activities
commencing with simple past due notices. This then progresses to phone calls and
letters,  followed by legal  activity when and if  necessary.  At one month past
due, the loan is tracked and reported as delinquent.

It is the Bank's practice to discontinue accruing interest on all loans that are
delinquent  90 days or more  regardless of risk of loss,  collateral,  etc. Some
problem  loans  which  are less than 90 days  delinquent  are also  placed  into
nonaccrual status if the success of collecting  additional  interest is in doubt
and some loans will remain in nonaccrual even after improved performance until a
consistent  timely  payment  pattern is exhibited  and/or timely  performance is
considered to be reliable.

                                      -24-
<PAGE>


LEVELS OF, AND TRENDS IN, DELINQUENCIES AND NONACCRUALS

Nonperforming  loans and other real estate  decreased  in 2005 to $4.9  million,
from $14.1  million  in 2004.  Management  monitors  delinquencies  monthly  and
reports  are  reviewed  by  the  Board  of  Directors.   Delinquencies  for  the
commercial,  personal,  real  estate and credit  lines  categories  are  charted
separately.  The current level of nonperforming assets represents a 65% decrease
by dollar amount from the previous year.

The dollar amount of loans past due 90 days or more  nonaccruing  and other real
estate  owned as a  percentage  of total  loans was  .21%,  .71%,  and .61%,  at
year-end  2005,  2004,  and 2003,  respectively.  These  loans have a variety of
situations,  some of which may lead to foreclosure or involve a bankruptcy  case
and while some of these loans are in active legal collection  processes,  others
are under  active  repayment  plans and may continue  payment as the  borrower's
financial situation improves.

Loans  delinquent  due 90 days or more or other  nonaccruing,  restructured  and
other  real  estate  owned  (OREO) on which the  accrual  of  interest  has been
discontinued as of December 31st are as follows:

<TABLE>
<CAPTION>
<S>                                                  <C>            <C>            <C>            <C>             <C>
(In Thousands)                                     2005            2004           2003           2002            2001
--------------                                 -------------  --------------  -------------  -------------   -------------
Commercial and agriculture                           $4,939               -           $120           $909          $1,232
Real estate commercial                                    -          $6,847          6,187          6,898           5,111
Real estate construction and land
        development                                       -             356              -          1,783           4,045
Real estate mortgage                                      -           6,904            344          2,291             930
Installment                                              10               -             43            554             133
                                               -------------  --------------  -------------  -------------   -------------
Total nonaccruing loans                               4,949          14,107          6,694         12,435          11,451
Other real estate owned                                   -               -          4,162          6,532             769
                                               -------------  --------------  -------------  -------------   -------------
Total nonperforming assets                           $4,949         $14,107        $10,856        $18,967         $12,220
                                               =============  ==============  =============  =============   =============
Restructured                                              -               -         $6,178         $6,178          $6,200
                                               -------------  --------------  -------------  -------------   -------------
Total loans at end of period                     $2,389,224      $1,978,052     $1,771,716     $1,658,684      $1,575,031
                                               =============  ==============  =============  =============   =============
Total assets at end of period                    $2,637,005      $2,243,396     $2,075,793     $1,943,727      $1,806,740
                                               =============  ==============  =============  =============   =============
Total nonperforming assets
   to total loans                                     0.21%           0.71%          0.61%          1.14%           0.78%
Total nonperforming assets to total assets            0.19%           0.63%          0.52%          0.98%           0.68%
Total impaired assets to total assets                 0.19%           0.63%          0.82%          1.29%           1.02%
</TABLE>


                                      -25-
<PAGE>


There are certain  amounts of interest  collected  on  nonaccrual  loans that is
included in income,  and amounts that have not been accrued  which are indicated
in the following table:

(In Thousands)
At December 31,                     2005     2004      2003      2002       2001
---------------                     ----     ----      ----      ----       ----

Additional interest income which
would have been recorded
during the period under
original terms of loans above       $67      $925      $443     $1,400      $958

Interest collected
and included in
net income for the
period                             $327      $350      $429      $774     $1,600

Commitments for additional
funds related to loans
above                               -0-       -0-       -0-       -0-        -0-


LOAN CHARGE OFF'S

It  is  the  Bank's  policy  to  aggressively   review  questionable  loans  for
charge-off.   The  Bank  adheres  to  all  regulatory,   accounting,  and  legal
requirements in writing off loans.

OTHER REAL ESTATE OWNED (OREO)

OREO is carried at the lesser of book value or market  value.  The costs related
to  completion,  repair,  maintenance,  or other costs of such  properties,  are
generally  expensed with any gains or shortfalls  from the ultimate sale of OREO
being shown as other income or expense.

The Bank had no OREO to report at year-end December 31, 2005 and 2004.

Certain other loans, currently in nonaccrual,  are in the process of foreclosure
and there is a likelihood  these  foreclosures  will be completed  and the loans
will then  become  OREO.  This is viewed as an ordinary  part of the  collection
process  and  efforts  are  constantly  underway  to reduce  and  minimize  such
nonperforming assets.

The table below shows the  carrying  value of OREO at December  31st of the past
five years:

(In Thousands)                 2005      2004       2003        2002       2001
--------------                 ----      ----       ----        ----       ----

Other real estate owned           -         -     $4,162      $6,532       $769


ALLOWANCE FOR LOAN LOSSES - QUALITATIVE FACTORS

The allowance for loan losses was $37.1  million,  or 1.55% of loans at December
31, 2005.  This compares to $32.7  million,  or 1.65% at December 31, 2004,  and
$29.6 million,  or 1.67% at December 31, 2003. Net  charge-off's as a percentage
of average loans was a net recovery of (.01%) in 2005, net  charge-off's of .02%
in 2004 and .17% in 2003. An improving economy,  and positive credit performance
trends, is reflected in year-end 2005 reserves of 1.55% and net recovery of $147
thousand.  An  uncertain  economic  environment  and  increasing   delinquencies
supported the higher loan loss reserve percentages for year-end 2003 and 2002.

                                      -26-
<PAGE>


The  allowance  for  loan  losses  is  the  amount,  which,  in the  opinion  of
management,  provides  adequate  protection  in the event of loan  losses.  This
analysis is performed  quarterly and reviewed by senior  management to determine
the  adequacy of the  reserve.  The analysis  takes into  consideration  current
economic  trends  both on a  national  and  local  level.  It  includes  careful
consideration of delinquency rates and trends for all loan categories  including
commercial, personal and real estate related loans by geographic location.

Management and the Board review policies and procedures at least  annually,  and
changes are made to reflect the current  operating  environment  integrated with
regulatory  requirements.  Partly out of these  policies has evolved an internal
credit risk review  process.  During this process the quality grade of loans are
reviewed  and loans are  assigned  a dollar  value of the loan loss  reserve  by
degree of risk.  This  analysis is  performed  quarterly  and reviewed by senior
management who makes the  determination  if the risk is  reasonable,  and if the
reserve is adequate.

Another  consideration is the volume and terms of loans.  Management reviews the
growth and terms of loans so that the  allowance can be adjusted for current and
anticipated future losses.

QUANTITATIVE FACTORS

The allowance for loan losses is the amount which, in the opinion of management,
is necessary to absorb loan losses.  Management's  evaluation of the adequacy of
the  allowance is based on the market area served,  local and national  economic
conditions,  the growth and  composition  of the loan  portfolio and the related
risk  characteristics,  by continual  review by management of the quality of the
portfolio.

The  Corporation has an active ongoing credit review  function.  When a loan has
degradation in quality its internal rating is downgraded. An assessment of these
loans is  performed  to  determine  whether it is  appropriate  to  establish  a
specific  allocation reserve or write down as directed by FAS 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN. If appropriate,  such allocation  reserve or
write down is made.  For the  remainder  of these  loans that which no  specific
allocation   reserve  or  write  down  is  necessary  a  background  reserve  is
established. The background reserves are also reviewed quarterly to determine if
the background reserve percentages are appropriate.

All other loans which have not been identified with  degradation in quality have
background reserves based upon our experience and information  concerning actual
industry losses by loan types.

Every quarter  certain  qualitative  facts are evaluated to determine if certain
adjustments are indicated for any of the background reserves  established.  This
is  accomplished  through an internal  narrative  and the tracking of statistics
including but not limited to  unemployment  rates,  historical  charge offs, job
growth, effects of changing interest rates, housing starts, trends in volume and
terms of loans,  levels of, and trends in,  delinquencies  and nonaccruals,  and
other real estate owned trends.

Loan concentrations,  quality,  terms and basic underlying  assumptions remained
substantially  unchanged  during the period.  The actual loan loss  reserve as a
percentage  of total loans has declined  over the last two years,  mainly due to
loan portfolio quality performance improvement.

                                      -27-
<PAGE>


SUMMARY OF LOAN LOSS EXPERIENCE

The  following  table  provides an analysis of the allowance for loan losses and
the net losses by loan type for the last five years and December 31:

<TABLE>
<CAPTION>
<S>                                     <C>               <C>              <C>              <C>               <C>
(In Thousands)                        2005              2004             2003             2002             2001
--------------                   ---------------   ---------------  ---------------  ---------------  ----------------
Balance at beginning of year            $32,728           $29,556          $28,175          $26,358           $21,907
                                 ---------------   ---------------  ---------------  ---------------  ----------------

Provision charged to
operating expense                         4,200             3,500            4,250            6,300            13,600
                                 ---------------   ---------------  ---------------  ---------------  ----------------

  Loans charged-off:

     Commercial and agriculture            (342)             (612)          (1,617)          (2,564)          (10,044)
     Real estate commercial                  (4)                -           (1,486)          (1,774)             (115)
     Real estate construction
          and land development                -                 -              (48)             (23)             (178)
     Real estate mortgage                  (116)             (387)            (120)            (211)              (90)
     Installment                           (244)             (413)            (351)            (537)             (266)
                                 ---------------   ---------------  ---------------  ---------------  ----------------
  Total charged-off loans                  (706)           (1,412)          (3,622)          (5,109)          (10,693)
                                 ---------------   ---------------  ---------------  ---------------  ----------------

  Less recoveries:
     Commercial and agriculture             623               741              620              482               297
     Real estate commercial                   -               176                6                -               426
     Real estate construction
           and land development             142                60                -               49                 6
     Real estate mortgage                    27                51               62               22               136
     Installment                             61                56               65               73                27
                                 ---------------   ---------------  ---------------  ---------------  ----------------
  Total recoveries                          853             1,084              753              626               892
                                 ---------------   ---------------  ---------------  ---------------  ----------------

Net (charge-offs) recoveries                147              (328)          (2,869)          (4,483)           (9,801)
                                 ---------------   ---------------  ---------------  ---------------  ----------------
Reserve acquired in merger                    -                 -                -                -               652

Balance at end of year                  $37,075           $32,728          $29,556          $28,175           $26,358
                                 ===============   ===============  ===============  ===============  ================

Total loans at
end of period                        $2,389,224        $1,978,052       $1,771,716       $1,658,684        $1,575,031

Daily average loans                  $2,200,344        $1,887,528       $1,691,051       $1,601,037        $1,524,181

Ratio of net charged-off
loans during period to
average loans outstanding                -0.01%             0.02%            0.17%            0.28%             0.64%
                                 ===============   ===============  ===============  ===============  ================
Loan loss reserve as a
percentage of total loans                 1.55%             1.65%            1.67%            1.70%             1.67%
                                 ===============   ===============  ===============  ===============  ================
</TABLE>


                                      -28-
<PAGE>


ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

Based on  certain  characteristics  of the  portfolio,  potential  losses can be
anticipated for major loan categories. In the following table, the allowance for
loan losses at year-end, for the last five years, has been allocated among major
loan categories based primarily on their  historical net charge-off  experience,
along  with  consideration  of  factors  such as  quality,  volume,  anticipated
economic conditions and other business considerations.


<TABLE>
<CAPTION>
<S>                         <C>       <C>     <C>      <C>     <C>       <C>    <C>       <C>    <C>       <C>
(In Thousands, except percentages)
----------------------------------
                                     Loan             Loan              Loan             Loan             Loan
                             2005   Category  2004   Category   2003   Category  2002   Category  2001   Category
                           Reserve  Percent  Reserve Percent  Reserve  Percent  Reserve Percent  Reserve Percent
                           ----------------- ---------------- ----------------- ---------------- ----------------

Commercial and agriculture  $11,061   14.6%   $9,658   15.3%   $13,465   15.2%  $14,728   16.4%  $13,925   20.1%
Real estate commercial       12,884   39.4%   11,489   43.0%     8,948   45.7%    7,472   45.8%    6,965   41.9%
Real estate construction
  land development            2,203   35.4%    1,668   30.8%       937   28.6%      813   26.7%      787   26.2%
Real estate mortgage          4,733    8.4%    4,341    8.4%     2,084    8.2%    1,631    8.2%    1,643    8.8%
Installment                     724    2.2%      461    2.5%       376    2.3%      235    2.9%      340    3.0%
Standby and letters of
  credit                        240              215               157              138              113
Undisbursed                   3,030            2,196             1,611            1,417            1,160
Unallocated                   2,200            2,700             1,978            1,741            1,425
                           ----------------- ---------------- ----------------- ---------------- ----------------
                            $37,075  100.0%  $32,728  100.0%   $29,556  100.0%  $28,175  100.0%  $26,358  100.0%
                           ================= ================ ================= ================ ================
</TABLE>


Historical net  charge-offs are not  necessarily  accurate  indicators of future
losses  since net  charge-offs  vary  from  period  to  period  due to  economic
conditions  and other  factors that cannot be  accurately  predicted.  Thus,  an
evaluation based on historical loss experience within individual loan categories
is only one of many factors  considered by management in evaluating the adequacy
of the overall allocation.

In  addition,  regulatory  agencies,  as an integral  part of their  examination
process,  periodically  review the estimated losses on loans.  Such agencies may
require the Bank to change the allowance  based upon their  judgment at the time
of their  examination.  It is the  Bank's  policy to be in  compliance  with all
accounting  and  regulatory  standards  related  to loan loss  reserves  and all
accounting policies promulgated by GAAP.

Loan concentrations,  quality,  terms and basic underlying  assumptions remained
substantially  unchanged  during the period.  The actual loan loss  reserve as a
percentage of total loans has declined  over the last five years,  mainly due to
loan portfolio quality and performance improvements.

EFFECTS OF CHANGING INTEREST RATES

A review of the past 12 months shows that the tax equivalent net interest margin
began the year 2005 at 5.32% (quarter ended December 31, 2004).  The margin then
declined  to 5.12% for the first  quarter but  increased  to 5.40% in the second
quarter,  increased  in the third  quarter  to 5.56%  and  5.80% for the  fourth
quarter.  In 2005,  the  Corporation  increased  its key lending  index 25 basis
points in February, March, May, June, August, September,  November and December.
The  improvement  in the net  interest  margin  was  attributed  to these  rates
changes.  In 2004,  the  Corporation  increased  its key lending  index 25 basis
points in August, September,  November and December. However, the improvement in
the net interest margin was more attributed to continued  decline in the cost of
funds during the first three quarters of 2004. The  Corporation  dropped its key
lending  index 25 basis points in the third  quarter  2003.  The impact of these
movements  contributed  to the  narrowing  of the  margin in all but the  fourth
quarter 2003 and the second, third, and fourth quarters of 2004.

                                      -29-
<PAGE>


CONCENTRATIONS OF CREDIT

The most  significant  portion of the loan  portfolio  consists  of real  estate
construction  and land  development  loans.  Loans within this  category grew by
$358.9 million or 59%. Continued demand for housing and favorable interest rated
continued  to fuel this growth.  Real estate  construction  loans are  generally
composed of  commitments  to customers  within our market area for  construction
purposes.  Loans within this  category are used for  construction  projects that
range from  residential  and commercial  land  development  to  residential  and
commercial  building  projects.  They are generally secured by first trust deeds
with well-defined repayment sources following project completion. Maturities are
set to match the time required for project completion,  which typically run from
12 to 18 months depending on complexity. While the Bank has significant balances
within this lending category,  management believes that its lending policies and
underwriting  standards  are  sufficient  to  minimize  risk even  during  these
uncertain economic times. Management closely monitors the effects of current and
expected market conditions and other factors that may influence the repayment of
these loans.

The following chart  indicates the amount of those loans,  net of deferred fees,
and as a percent of total loans for the period:

<TABLE>
<CAPTION>
<S>                                       <C>               <C>              <C>              <C>              <C>
(In Thousands)
--------------
At December 31,                           2005              2004             2003             2002             2001
                                          ----              ----             ----             ----             ----
       Real estate commercial             $859,251          $848,737         $809,307         $758,826         $659,982
                                    ===============  ================  ===============  ===============  ===============
       Real estate construction
         and land development              967,335           608,421          507,872          443,461          412,501
                                    ===============  ================  ===============  ===============  ===============

Total loans at end of period            $2,389,224        $1,978,052       $1,771,716       $1,658,684       $1,575,031
                                    ===============  ================  ===============  ===============  ===============

Real estate commercial loans
  as a percent of total loans                36.0%             42.9%            45.7%            45.7%            41.9%
                                    ===============  ================  ===============  ===============  ===============
Real estate construction loans
  as a percent of total loans                40.5%             30.8%            28.7%            26.7%            26.2%
                                    ===============  ================  ===============  ===============  ===============
</TABLE>


TRENDS IN VOLUME AND TERMS OF LOANS

Average loans for the year 2005 were $2.20 billion,  representing an increase of
$312.8 million,  or 16.6% over the average  balance for 2004.  Average loans for
the year 2004 were $1.89 billion, representing an increase of $196.5 million, or
11.6% over the average balance for 2003. In 2005, growth substantially increased
over  prior  years  increases  mainly due to  favorable  market  conditions  and
additional  lending staff.  Terms of loans have remained  competitive and within
policy guidelines.

CONCLUSION OF QUALITATIVE FACTORS

The  allowance  for  loan  losses  is  the  amount,  which,  in the  opinion  of
management,  is necessary to absorb  inherent loan losses  regardless of source.
Management's  evaluation of the adequacy of the allowance is based on the market
area served, local economic conditions,  the growth and mix of the portfolio and
their related risk  characteristics.  Based solely upon recent actual historical
loan loss rates,  the loan loss  reserve  may appear to be somewhat  larger than
might be necessary;  however our analysis included important  subjective factors
that cause us to believe the reserve is adequate, but not unduly conservative.

OFF BALANCE SHEET ARRANGEMENTS

In the ordinary course of business,  Frontier has entered into off-balance sheet
financial  instruments  consisting of  commitments  for the extension of credit,
credit card  commitments,  letter of credit  commitments,  home equity lines and
standby  letters of credit.  These  instruments  are  recorded in the  financial
statements  only when they are funded or related  fees are incurred or received.
The following  table  summarizes  the amount of  commitments  as of December 31,
2005:

                                      -30-
<PAGE>


(IN THOUSANDS)
--------------
                  Standby letters of credit              $29,979
                  Credit card arrangements                31,917
                  Commitments to fund loans
                  secured by real estate                 810,736

Commitments  to extend credit and letters of credit are written for one year, or
have a call in one year.  The fair value of these  commitments  is not  material
since they are for a short period of time and subject to customary credit terms.
A fee is charged for all  commitments  to lend.  Due to the Bank's  underwriting
policies, there have been no losses associated with these commitments.

DEPOSITS

For the average  amount of deposits  and rates paid on such  deposits  for years
ended  December 31, 2005,  2004, and 2003 please refer to page 44 of 2005 Annual
Report to Shareowners.

Maturities of time  certificates  of deposit  $100,000 and over at year-end 2005
are shown below:

(IN THOUSANDS)
--------------
3 months or less                             $87,288
Over 3 months through 6 months                60,737
6 months through 12 months                   211,453
Over 12 months                               112,248
                                           ----------
                                            $471,726
                                           ==========


The following  table  represents the noninterest  and  interest-bearing  deposit
accounts that will mature or reprice in one year or less as compared to the past
year:

<TABLE>
<CAPTION>
<S>                              <C>             <C>             <C>               <C>
                                                               Dollar         Percent
(In Thousands)                   2005           2004           Change          Change
                             -------------  --------------  -------------   -------------
Demand deposits                  $395,852        $313,275        $82,577           26.4%
Now, money market and
  sweep accounts                  322,283         270,894         51,389           19.0%
Savings                           495,108         642,434       (147,326)         -22.9%
Time deposits                     611,553         370,722        240,831           65.0%
</TABLE>

Although 72% of our time deposit  portfolio will mature within the next year, we
feel that cash flows are sufficient to support  operations  for the  foreseeable
future.  Over the past  year,  we have had the  ability  to retain and grow each
category of our deposit accounts. If liquidity was needed going forward, sources
would  consist of  maturing  securities,  increased  customer  deposits  or loan
maturities.  If need be,  lines  of  credit  are  available  or we  could  issue
additional   capital  stock.   Cash  flows  from   operations   also  contribute
significantly to liquidity needs.

                                      -31-
<PAGE>

BORROWINGS

SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
<S>                             <C>           <C>             <C>            <C>            <C>           <C>

                                             Weighted                      Weighted                      Weighted
(In thousands)                               Average                       Average                       Average
                                             Interest                      Interest                      Interest
At December 31,                 2005           Rate           2004           Rate           2003           Rate
                             -------------  -------------  -------------  -------------  -------------  -------------
Year-end balance:              $20,813        2.72%          $10,205         1.71%         $10,015        0.89%

Highest month end
balance during
the period:                    $52,444                       $39,906                       $56,761
</TABLE>

For information  regarding average balances and yields,  please refer to page 44
of 2005 Annual Report to Shareowners.

ITEM 2 - PROPERTIES

At December 31, 2005, the Bank had 44 offices, including the main office, all of
which are  located in the State of  Washington.  These  offices  are  located in
Arlington, Bainbridge Island, Bellingham, Bellingham Downtown, Bothell, Buckley,
Duvall, Edmonds,  Everett (4), Kent, Kirkland, Lake City, Lake Stevens,  Lynden,
Lynnwood,  Marysville,  Puyallup,  Mill Creek,  Milton,  Monroe,  Mount  Vernon,
Orting, Port Angeles, Port Hadlock, Port Townsend, Poulsbo (2), Redmond, Renton,
Seattle (2), Sequim,  Silverdale,  Smokey Point,  Snohomish,  Stanwood,  Sumner,
Tacoma,  Totem  Lake  and  Woodinville.  All  of its  branches  are  located  on
properties owned by FFP, Inc., a real estate holding subsidiary,  except for the
offices  located in Bellingham  Downtown  (lease expires  August 2009),  Edmonds
(lease expires July 2009),  one office in Everett (lease expires  October 2014),
Lake Stevens (lease expires May 2011),  Lynden (lease expires April 2010),  Mill
Creek (lease expires  November 2010),  Puyallup  (building is owned,  land lease
expires 2009),  Mount Vernon  (building  owned,  land lease expires March 2023),
Bainbridge  Island (lease  expires July 2012) Poulsbo  (lease expires on October
2006 on one of the two branches  there),  Port Angeles  (lease  expires  January
2019),  Renton (lease expires April 2007),  Seattle Metro (lease expires October
2013),  Tacoma (lease expires  September  2011),  Totem Lake (lease expires June
2010) and Milton lease expires March 2007). FFP, Inc. also owns the building and
land in South  Everett  and  Sumner  where  Frontier  Bank data  processing  and
operations departments are located.

 ITEM 3 - LEGAL PROCEEDINGS

The Corporation is involved in ordinary routine litigation arising in the normal
course of business.  In the opinion of management,  liabilities (if any) arising
from such claims  will not have a material  effect on the  business,  results of
operations or financial condition of the Corporation.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS

     No matters were submitted to shareowners during the fourth quarter of 2005.

                                      -32-
<PAGE>

                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS

(a)  Frontier  Financial  Corporation's  common  stock is traded  on the  Nasdaq
     market  under the symbol  FTBK.  The table  below  indicates  the  high/low
     trading range of Frontier stock over the last eight quarters:

                                              HIGH             LOW
                                              ----             ---

            1st quarter 2004                 $23.46           $21.41
            2nd quarter 2004                  23.33            20.67
            3rd quarter 2004                  24.91            21.50
            4th quarter 2004                  27.67            23.10

            1st quarter 2005                 $26.67           $24.33
            2nd quarter 2005                  26.07            23.49
            3rd quarter 2005                  30.26            25.32
            4th quarter 2005                  33.49            26.00


(b)  Frontier  Financial  Corporation  has only one class of stock  outstanding,
     which is common stock.  At February 28, 2006 there were  30,002,122  shares
     outstanding.


(c)  The table  below  indicates  the cash  dividends  paid on each share of its
     common stock over the last two years:

            DIVIDEND DECLARED           RECORD DATE             PAYMENT DATE
            -----------------           -----------             ------------
                   $.123                January 7, 2004         January 20, 2004
                    .127                April 12, 2004          April 26, 2004
                    .13                 July 12, 2004           July 26, 2004
                    .133                October 12, 2004        October 25, 2004

                    .137                January 10, 2005        January 25, 2005
                    .14                 April 11, 2005          April 25, 2005
                    .16                 July 11, 2005           July 25, 2005
                    .165                October 11, 2005        October 24, 2005



(d) During the quarter ended December 31, 2005, there were no issuer repurchases
of its equity securities.

                                      -33-
<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S>                                         <C>           <C>           <C>           <C>            <C>             <C>

                              FINANCIAL HIGHLIGHTS
In thousands
------------
                                                                                                                  % Change
AT YEAR-END                                   2005          2004          2003          2002           2001       2005-2004
                                          ------------- -------------  ------------  ------------  ------------- -------------
Total assets                               $2,637,005    $2,243,396    $2,075,393    $1,943,727     $1,806,740       17.5%
Net loans                                   2,352,149     1,945,324     1,742,160     1,630,509      1,548,673       20.9%
Investment securities                         110,617       153,451       187,915       140,037         81,770      -27.9%
Deposits                                    2,061,380     1,795,842     1,667,017     1,560,876      1,498,370       14.8%
Long-term debt                                      -             -             -             -              -           -
Shareowners' equity                           296,097       254,230       219,406       198,863        183,530       16.5%

FOR THE YEAR
Interest income                              $178,886      $140,228      $135,201      $138,859       $149,055       27.6%
Interest expense                               51,736        34,939        37,829        45,581         65,456       48.1%
                                          ------------- -------------  ------------  ------------  -------------
Net interest income                           127,150       105,289        97,372        93,278         83,599       20.8%
Securities gains (losses)                        (211)          (44)          190          (480)             -          NM
Provision for loan losses                       4,200         3,500         4,250         6,300         13,600       20.0%
Net income                                     51,584        43,045        39,607        36,014         24,499       19.8%
Basic earnings per share                        $1.82         $1.54         $1.42         $1.26          $0.81       18.2%
Diluted earnings per share                      $1.81         $1.53         $1.42         $1.25          $0.81       18.3%
Cash dividends declared per common share        $0.60         $0.51         $0.46         $0.41          $0.35       18.0%
Dividend payout ratio                            33.3%         33.3%         32.4%         32.8%          43.2%
Return on Average
  Assets                                         2.09%         1.98%         1.96%         1.94%          1.35%
  Equity                                        18.75%        18.35%        19.23%        18.36%         11.63%
Avg. equity/avg. assets                         11.16%        10.76%        10.21%        10.57%         11.59%
Efficiency Ratio                                   41%           42%           41%           40%            43%
</TABLE>


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Please see 2005 Annual Report to Shareowners, page 28 through 45.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Please see 2005 Annual Report to  Shareowners,  pages 33-36
Please see this Form 10-K, pages 26-29.

                                      -34-
<PAGE>

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS
                                                                       Annual
                                                         Form         Report to
                                                         10-K        Shareowners
                                                         Page           Page
                                                         ----           ----
Report of Independent Registered Public Accounting Firm                   1

Consolidated Balance Sheet at
December 31, 2005 and 2004                                                2

Consolidated Statement of Income for the years
Ended December 31, 2005, 2004 and 2003                                    3

Consolidated Statement of Shareowners' Equity                             4

Consolidated Statement of Cash Flows for the
Years ended December 31, 2005, 2004 and 2003                              5

Condensed Balance Sheet (Parent Only) at
December 31, 2005 and 2004                                               25

Condensed Statement of Income (Parent Only) for the
Years Ended December 31, 2005, 2004 and 2003                             25

Condensed Statement of Cash Flows (Parent Only)
for Years Ended December 31, 2005, 2004 and 2003                         26

Notes to Consolidated Financial Statements                           6 - 27

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A - CONTROLS AND PROCEDURES

The  Corporation's  management,  including  the  Corporation's  Chief  Executive
Officer  and  Chief  Financial  Officer,  evaluated  the  effectiveness  of  its
disclosure  controls  and  procedures  as of December  31,  2005.  Based on this
evaluation,  the Chief Executive  Officer and the Chief  Financial  Officer each
concludes that as of December 31, 2005,  the  Corporation  maintained  effective
disclosure controls and procedures in all material respects,  including those to
ensure that  information  required to be disclosed in reports filed or submitted
with the SEC is  recorded,  processed,  and  reported  within  the time  periods
specified  by the  SEC,  and is  accumulated  and  communicated  to  management,
including  the Chief  Executive  Officer  and the Chief  Financial  Officer,  as
appropriate to allow for timely decisions regarding required disclosure.

There has been no change in the  Corporation's  internal  control over financial
reporting in the period covered by this report that have materially affected, or
are  reasonably  likely to  affect,  the  Corporation's  internal  control  over
financial reporting.

                                      -35-
<PAGE>

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management  of  Frontier  Financial   Corporation  and  its  subsidiaries  ("the
Corporation") is responsible for establishing and maintaining  adequate internal
control over  financial  reporting,  and for  performing  an  assessment  of the
effectiveness  of internal  control over financial  reporting as of December 31,
2005. The Corporation's  internal control over financial  reporting is a process
designed under the supervision of the  Corporation's  management,  including the
Chief  Executive  Officer and Chief  Financial  Officer,  to provide  reasonable
assurance  regarding the reliability of financial  reporting and the preparation
of financial  statements  for external  purposes in accordance  with  accounting
principles generally accepted in the United States of America.

The Corporation's  system of internal control over financial  reporting includes
policies and procedures  that (i) pertain to the maintenance of records that, in
reasonable detail,  accurately and fairly reflect  transactions and dispositions
of  assets  of  the  Corporation;   (ii)  provide   reasonable   assurance  that
transactions  are  recorded as  necessary  to permit  preparation  of  financial
statements in accordance with accounting  principles  generally  accepted in the
United States,  and that receipts and  expenditures of the Corporation are being
made only in accordance with  authorizations  of Management and Directors of the
Corporation;  and (iii) provide  reasonable  assurance  regarding  prevention or
timely  detection  of  unauthorized  acquisition,  use  or  disposition  of  the
Corporation's  assets  that  could  have a  material  effect  on  the  financial
statements.

Management  recognizes that there are inherent  limitations in the effectiveness
of any system of internal  control,  and  accordingly,  even effective  internal
control  can  provide  only  reasonable  assurance  with  respect  to  financial
statements  preparation and fair  presentation.  Further,  because of changes in
condition, the effectiveness of internal control may vary over time.

Under  the  supervision  and  with  the   participation  of  the   Corporation's
management,  including  the  Corporation's  Chief  Executive  Officer  and Chief
Financial Officer, the Corporation  performed an assessment of the effectiveness
of the  Corporation's  internal control over financial  reporting as of December
31, 2004 based upon criteria in INTERNAL  CONTROL - INTEGRATED  FRAMEWORK issued
by  the  Committee  of  Sponsoring  Organizations  of  the  Treadway  Commission
("COSO"). Based on this assessment, Management determined that the Corporation's
internal control over financial reporting was effective as of December 31, 2005.

The Corporation's  independent registered public accounting firm, Moss Adams LLP
who audits the Corporation's  consolidated financial statements,  have issued an
attestation  report on Management's  assessment and on the  effectiveness of the
Corporation's internal control over financial reporting.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

See Report of Independent  Registered Public Accounting Firm in Annual Report to
Shareowners on page 1.

ITEM 9B - OTHER INFORMATION

Not applicable.

                                      -36-
<PAGE>

                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF FRONTIER FINANCIAL
          CORPORATION

Biographical  and  business  experience  information  about  the  directors  and
director  nominees of FFC  included in Frontier  Financial  Corporation's  Proxy
Statement  for the Annual  Meeting of  Shareowners  to be held on April 19, 2006
(the  Proxy  Statement)  under  the  caption  "Election  of  Directors"  and the
information  incorporated  by  reference  pursuant  to Item 13 below are  hereby
incorporated  herein by reference.  Information on FFC's  executive  officers is
also included in the Proxy Statement.

Information   regarding  FFC's  Audit  Committee   included  under  the  caption
"Directors'  Meetings,  Committees and  Compensation"  of the Proxy Statement is
hereby incorporated herein by reference.

Information  regarding  late  filings  under  Section  16(a)  of the  Securities
Exchange Act of 1934 included in the Proxy Statement under the caption  "Section
16(a) Beneficial  Ownership Reporting  Compliance" is hereby incorporated herein
by reference.

FFC's  Code of Ethics  for  Senior  Executive  Officers  ("Code of  Ethics")  is
available  at  www.frontierbank.com,  as discussed  in  "Available  Information"
above.  FFC intends to disclose  any  amendments  or waivers with respect to its
Code of Ethics on its website at www.frontierbank.com.

ITEM 11 - EXECUTIVE COMPENSATION

Information regarding  compensation of directors and executive officers included
under the caption  "Compensation of Executives" of the Proxy Statement is hereby
incorporated herein by reference. However, the information provided in the Proxy
Statement under the headings "Report of the Compensation  Committee of the Board
of Directors on Executive  Compensation" and "Five Year Performance  Comparison"
shall  not be deemed  to be  "soliciting  material"  or to be  "filed"  with the
Securities and Exchange Commission, subject to Regulation 14A or 14C, other than
as provided in Item 402 of Regulation  S-K, or subject to liabilities of Section
18 of the Securities Exchange Act of 1934.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT AND RELATED SHAREOWNER MATTERS

The information set forth under the caption "Share Ownership Information" in the
Proxy Statement is hereby incorporated herein by reference.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  set forth in the Proxy  Statement  under the caption  "Related
Party Transactions and Business  Relationships" is hereby incorporated herein by
reference.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth in the Proxy Statement under the caption  "Independent
Auditors" is hereby incorporated herein by reference.

                                      -37-
<PAGE>

                                     PART IV

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 (a)    The following documents are filed as part of the report:

        1.  Financial Statements

            Financial  statements  required  by  Item 8 of  this  report  are
            incorporated  by  reference,  from the 2005 Annual Report to
            Shareowners.

        3.  Exhibits

            (3)(a)    Articles of  Incorporation  are  incorporated  herein by
                      reference to Appendix A to the  registrant's  definitive
                      Proxy  Statement on Schedule 14A filed on March 20, 1998
                      (File No. 000-15540).

            (3)(b)    By-Laws are incorporated herein by reference to Exhibit
                      3(ii) to Form 10Q filed on October 29, 2003.

           (10)(a)    Amended  and  Restated  Frontier  Financial  Corporation
                      Incentive Stock Option Plan incorporated by reference to
                      Exhibit  99.1 to  Registration  Statement  on Form  S-8,
                      filed March 27, 1998 (File No. 333-48805).

           (10)(b)    Frontier Financial Corporation 1999 Employee Stock Award
                      Plan is incorporated herein by reference to Exhibit 99.1
                      to  Registration  Statement on Form S-8,  filed March 2,
                      1999 (File No. 333-73217).

           (10)(c)    Frontier Financial Corporation 2001 Stock Award Plan, is
                      incorporated  herein by  reference  to  Exhibit  99.1 to
                      Registration  Statement on Form S-8,  filed  January 26,
                      2001, (File No. 333-54362).

           (10)(d)    Frontier  Financial  Corporation  Employee  Stock Option
                      Plan and Interbancorp,  Inc. Director Stock Option Plan,
                      is  incorporated  herein by reference to Exhibit 10.1 to
                      Registration  Statement on Form S-8,  filed  January 26,
                      2001 (File No. 333-37242).

           (10)(e)   Interbancorp,   Inc.  Employee  Stock  Option  Plan  and
                     Interbancorp,   Inc.  Director  Stock  Option  Plan,  is
                     incorporated  herein by  reference  to  Exhibit  10.1 to
                     Registration  Statement on Form S-8,  filed February 13,
                     2001 (File No. 333-50882).

              (11)   Statement Regarding Computation of Earnings Per Share.

              (13)   Annual Report to Shareowners for the year ended December
                     31,  2005,  is  incorporated  herein by reference to the
                     Annual Report on Schedule 14A, filed March 14, 2006.

              (21)   Subsidiaries of Registrant are incorporated by reference to
                     Part I, pages 1 - 32 of this report.

            (23.1)   Consent of Moss Adams LLP, independent registered public
                     accounting firm.

            (31.1)   Certification  of  Chief  Executive  Officer  Pursuant  to
                     Section 302 of the Sarbanes-Oxley Act.

            (31.2)   Certification  of  Chief  Financial  Officer  Pursuant to
                     Section 302 of the Sarbanes-Oxley  Act.

            (32.1)   Certification  of  Chief  Executive  Officer  Pursuant  to
                     Section 906 of the Sarbanes-Oxley Act.

            (32.2)   Certification  of  Chief  Financial  Officer  Pursuant  to
                     Section 906 of the Sarbanes-Oxley Act.

              (32)   Certification  pursuant  to  28  U.S.C.  Section  1350,  as
                     adopted pursuant to Section 906 of the Sarbanes-Oxley Act.

                                      -38-
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                           FRONTIER FINANCIAL CORPORATION
MARCH 14, 2006                             /S/ JOHN J. DICKSON
-----------------------                    -------------------------------------
                                           John J. Dickson
                                           President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated:

MARCH 14, 2006                      /S/ JOHN J. DICKSON
-----------------------             --------------------------------------------
                                    John J. Dickson
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


MARCH 14, 2006                      /S/ CAROL E. WHEELER
-----------------------             --------------------------------------------
                                    Carol E. Wheeler
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

MARCH 14, 2006                      /S/ GEORGE E. BARBER
-----------------------             --------------------------------------------
                                    George E. Barber, Director

MARCH 14, 2006                      /S/ MICHAEL J. CLEMENTZ
-----------------------             --------------------------------------------
                                    Michael J. Clementz, Director

MARCH 14, 2006                      /S/ DAVID M. CUTHILL
-----------------------             --------------------------------------------
                                    David M. Cuthill, Director

MARCH 14, 2006                      /S/ LUCY DEYOUNG
-----------------------             --------------------------------------------
                                    Lucy DeYoung, Director

MARCH 14, 2006                      /S/ JOHN J. DICKSON
-----------------------             --------------------------------------------
                                    John J. Dickson, Director

MARCH 14, 2006                      /S/ ROBERT J. DICKSON
-----------------------             --------------------------------------------
                                    Robert J. Dickson, Chairman of the Board

MARCH 14, 2006                      /S/ PATRICK M. FAHEY
-----------------------             --------------------------------------------
                                    Patrick M. Fahey, Director

MARCH 14, 2006                      /S/ EDWARD D. HANSEN
-----------------------             --------------------------------------------
                                    Edward D. Hansen, Director & Secretary
                                    of the Board

MARCH 14, 2006                      /S/ WILLIAM H. LUCAS
-----------------------             --------------------------------------------
                                    William H. Lucas, Director

MARCH 14, 2006                      /S/ JAMES H. MULLIGAN
-----------------------             --------------------------------------------
                                    James H. Mulligan, Director

MARCH 14, 2006                      /S/ WILLIAM J. ROBINSON
-----------------------             --------------------------------------------
                                    William J. Robinson, Director

MARCH 14, 2006                      /S/ EDWARD C. RUBATINO
-----------------------             --------------------------------------------
                                    Edward C. Rubatino, Director

-39-
<PAGE>

MARCH 14, 2006                      /S/ DARRELL J. STORKSON
-----------------------             --------------------------------------------
                                    Darrell J. Storkson, Director

MARCH 14, 2006                      /S/ MARK O. ZENGER
-----------------------             --------------------------------------------
                                    Mark O. Zenger, Director

                                      -40-
<PAGE>




                                  EXHIBIT INDEX

The following is a list of exhibits  including items  incorporated by reference.
Compensatory plans and arrangements are identified by an asterisk.


     The following documents are filed as part of the report:

        1.  Financial Statements

            Financial  statements  required  by  Item  8 of  this  report  are
            incorporated  by  reference,   from  the  2005  Annual  Report  to
            Shareowners.

        3.  Exhibits

            (3)(a)    Articles of  Incorporation  are  incorporated  herein by
                      reference to Appendix A to the  registrant's  definitive
                      Proxy  Statement on Schedule 14A filed on March 20, 1998
                      (File No. 000-15540).

            (3)(b)    By-Laws are incorporated herein by reference to Exhibit
                      3(ii) to Form 10Q filed on October 29, 2003.

            *(10)(a)  Amended  and  Restated  Frontier  Financial  Corporation
                      Incentive Stock Option Plan incorporated by reference to
                      Exhibit  99.1 to  Registration  Statement  on Form  S-8,
                      filed March 27, 1998 (File No. 333-48805).

            *(10)(b)  Frontier Financial Corporation 1999 Employee Stock Award
                      Plan is incorporated herein by reference to Exhibit 99.1
                      to  Registration  Statement on Form S-8,  filed March 2,
                      1999 (File No. 333-73217).

            *(10)(c)  Frontier Financial Corporation 2001 Stock Award Plan, is
                      incorporated  herein by  reference  to  Exhibit  99.1 to
                      Registration  Statement on Form S-8,  filed  January 26,
                      2001, (File No. 333-54362).

            *(10)(d)  Frontier  Financial  Corporation  Employee  Stock Option
                      Plan and Interbancorp,  Inc. Director Stock Option Plan,
                      is  incorporated  herein by reference to Exhibit 10.1 to
                      Registration  Statement on Form S-8,  filed  January 26,
                      2001 (File No. 333-37242).

            *(10)(e)  Interbancorp,   Inc.  Employee  Stock  Option  Plan  and
                      Interbancorp,   Inc.  Director  Stock  Option  Plan,  is
                      incorporated  herein by  reference  to  Exhibit  10.1 to
                      Registration  Statement on Form S-8,  filed February 13,
                      2001 (File No. 333-50882).

            (11)      Statement Regarding Computation of Earnings Per Share.

            (13)      Annual Report to Shareowners for the year ended December
                      31,  2005,  is  incorporated  herein by reference to the
                      Annual Report on Schedule 14A, filed March 14, 2006.

            (21)      Subsidiaries of Registrant are incorporated by reference
                      to Part I, pages 1 - 32 of this report.

            (23.2)    Consent of Moss Adams LLP, independent auditors.

            (31.1)    Certification of Chief Executive Officer.

            (31.2)    Certification of Chief Financial Officer.

            (32)      Certification pursuant to 28 U.S.C. Section 1350, as
                      adopted pursuant to Section 906 of the Sarbanes-Oxley Act.

                                      -41-