<PAGE>   1
                                  EXHIBIT 13


        Frontier Financial Corporation and Subsidiaries Annual Report to
        Shareholdes for year ended 1995.

<PAGE>   2
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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REPORT OF MANAGEMENT
--------------------------------------------------------------------------------

The management of Frontier Financial Corporation and its subsidiaries has
prepared and is responsible for the integrity and fairness of the financial
statements and other financial information included in this annual report. The
financial statements are prepared in accordance with generally accepted
accounting principles and prevailing practices of the banking industry and, when
appropriate, include amounts based on management's best estimates and judgment.

Management has established and is responsible for maintaining an internal
control environment designed to provide reasonable assurance that transactions
are properly authorized, assets are safeguarded and financial records are
reliably maintained. The internal control environment includes: an effective
financial accounting structure; a comprehensive internal audit function; an
independent Audit Committee of the Board of Directors; and extensive financial
and operating policies and procedures. The Corporation's management also fosters
an ethical climate supported by a code of conduct along with appropriate
selection and training of personnel.

The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with management, the independent accountants and
the internal auditors to ensure that each is properly discharging its
responsibilities with regard to the financial statements and internal accounting
controls. The independent accountants have full and free access to the Audit
Committee and meets with it to discuss auditing and financial reporting matters.

The Corporation's financial statements are audited by Moss Adams LLP, the
Corporation's independent auditors. Their audits were conducted in accordance
with generally accepted auditing standards and include a consideration of the
internal control structure, tests of accounting records and other audit
procedures necessary to allow the auditors to express their opinion on the
fairness of the financial statements.

Management recognizes that there are inherent limitations in the effectiveness
of any internal control environment. However, management believes that, as of
December 31, 1995, the Corporation's internal control environment provided
reasonable assurance as to the integrity and reliability of the financial
statements and related financial information.

Management is responsible for compliance with the federal and state laws and
regulations concerning restrictions and loans to insiders designated by the FDIC
as safety and soundness laws and regulations.

Management assessed the Corporation's compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that the Corporation complied, in all significant respects,
with the designated laws and regulations related to safety and soundness for the
year ended December 31, 1995.






ROBERT J. DICKSON                                             JAMES F. FELICETTY
President and Chief Executive Officer                        Secretary/Treasurer


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                                   PAGE ONE
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<PAGE>   3

[MOSS-ADAMS LLP LETTERHEAD]


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
Frontier Financial Corporation

We have audited the accompanying consolidated balance sheet of Frontier
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995.  These financial statements are the responsibility of the Corporation's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  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.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Frontier Financial
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.

As discussed in Note 1 to the financial statements, in 1994 the Corporation
changed its method of accounting for investment securities.

                                     /s/ Moss Adams LLP

Everett, Washington
January 22, 1996

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                                   PAGE TWO
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<PAGE>   4
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
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<TABLE>
<CAPTION>
In Thousands                                                          December 31,
------------                                                          ------------

                                                                   1995        1994
                                                                   ----        ----

<S>                                                              <C>         <C>     
ASSETS
Cash and due from banks                                          $ 19,708    $ 22,081
Federal funds sold                                                 55,930       1,120
Investment securities
    Available for sale, at fair value                             102,300      42,278
    Held to maturity (Fair value 1995: $43,889; 1994: $89,200)     42,676      94,048
                                                                 --------    --------
Total investment securities                                       144,976     136,326
Loans                                                             504,988     470,512
    Less allowance for loan losses                                (11,897)    (10,410)
                                                                 --------    --------
Net loans                                                         493,091     460,102
Premises and equipment, net                                        11,758      11,845
Other real estate owned                                               590       1,118
Other assets                                                        9,130       9,976
                                                                 --------    --------
TOTAL ASSETS                                                     $735,183    $642,568
                                                                 ========    ========

LIABILITIES

Deposits
    Noninterest bearing accounts                                 $ 83,281    $ 71,754
    Interest bearing accounts                                     557,937     467,849
                                                                 --------    --------
Total deposits                                                    641,218     539,603
Federal funds purchased and securities sold
    under agreements to repurchase                                  7,596       9,615
Other liabilities                                                   5,880       4,826
Federal Home Loan Bank advances                                    15,000      37,500
Long-term debt                                                        136         565
                                                                 --------    --------
TOTAL LIABILITIES                                                 669,830     592,109
                                                                 --------    --------

COMMITMENTS (Note 14)

SHAREHOLDERS' EQUITY
Common stock, no par value;
    10,000,000 shares authorized;
    6,322,255 and 4,196,435 shares issued
    and outstanding in 1995 and 1994                               44,084      43,917
Retained earnings                                                  20,336       7,721
Unrealized gains(losses) on available for
    sale securities, net of tax effect                                933      (1,179)
                                                                 --------    --------
TOTAL SHAREHOLDERS' EQUITY                                         65,353      50,459
                                                                 --------    --------

TOTAL LIABILITIES AND
    SHAREHOLDERS' EQUITY                                         $735,183    $642,568
                                                                 ========    ========
</TABLE>

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

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                              P A G E   T H R E E
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<PAGE>   5
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME
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<TABLE>
<CAPTION>
In Thousands, except for per share amounts     Year Ended December 31,
------------------------------------------     -----------------------
                                             1995        1994       1993
                                             ----        ----       ----
<S>                                       <C>         <C>         <C>     
INTEREST INCOME
    Interest and fees on loans            $ 52,146    $ 43,595    $ 35,223
    Interest on federal funds sold           2,194          52         991
    Interest on investment securities
       taxable                               6,781       7,237       6,247
       exempt from federal income tax        1,965       2,061       1,863
                                          --------    --------    --------
Total interest income                       63,086      52,945      44,324
                                          --------    --------    --------
INTEREST EXPENSE
    Interest on deposits                    27,855      18,764      17,594
    Interest on FHLB advances                1,297       1,255          --
    Interest on federal funds purchased
        and securities sold under
        agreements to repurchase               175         538          35
    Interest on long-term debt                  20          82         153
                                          --------    --------    --------
Total interest expense                      29,347      20,639      17,782
                                          --------    --------    --------
Net Interest Income                         33,739      32,306      26,542

PROVISION FOR LOAN LOSSES                   (1,525)     (3,900)     (3,012)
                                          --------    --------    --------
Net interest income after
    provision for loan losses               32,214      28,406      23,530
                                          --------    --------    --------
OTHER INCOME
    Service charges                          1,578       1,574       1,530
    Gain on sale of mortgage loans             174         316       1,286
    Securities losses                           (4)       (355)         --
    Other                                    1,669       1,375       1,567
                                          --------    --------    --------
Total other income                           3,417       2,910       4,383
                                          --------    --------    --------
OTHER EXPENSE
    Salaries                                 7,109       6,792       6,242
    Employee benefits                        2,868       2,533       2,318
    Occupancy                                2,494       2,316       2,367
    FDIC insurance premium                     633       1,110       1,008
    State business taxes                       859         719         589
    Losses recognized on other
        real estate owned                       --           5         563
    Other                                    3,201       3,176       3,689
                                          --------    --------    --------
Total other expense                         17,164      16,651      16,776
                                          --------    --------    --------

INCOME BEFORE INCOME TAX                    18,467      14,665      11,137

PROVISION FOR INCOME TAX                    (5,852)     (4,305)     (3,391)
                                          --------    --------    --------

NET INCOME                                $ 12,615    $ 10,360    $  7,746
                                          ========    ========    ========

PER SHARE OF COMMON STOCK                    $2.00       $1.65       $1.24
                                          ========    ========    ========
</TABLE>

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
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<TABLE>
<CAPTION>
In Thousands                                                         Year Ended December 31,
------------                                                         -----------------------

                                                                  1995         1994         1993
                                                                  ----         ----         ----
<S>                                                            <C>          <C>          <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income                                                     $  12,615    $  10,360    $   7,746
Adjustments to reconcile net income to net
    cash provided by operating activities
        Depreciation and amortization                                959        1,044          955
        Provision for loan losses                                  1,525        3,900        3,012
        Provision for losses on other real estate owned               --            5          563
        Deferred taxes                                              (398)        (769)      (1,020)
        Increase (decrease) in income taxes payable                  177       (1,158)         767
        Decrease in interest receivable                             (409)        (309)        (831)
        Increase (decrease) in interest payable                    1,611          707         (564)
        Proceeds from sales of mortgage loans                     17,241       17,045       50,785
        Origination of mortgage loans held for sale              (17,512)     (16,050)     (50,305)
        Gain (loss) on sale of available for sale securities          (4)         355           --
        Other operating activities                                  (152)         112          230
                                                               ---------    ---------    ---------
Net cash provided by operating activities                         15,653       15,242       11,338
                                                               ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from federal funds sold                           (54,810)      (1,120)      41,210
Proceeds from sales of available for sale securities                  87       10,782           --
Proceeds from maturities of available for sale
    and held to maturity securities                               19,150       12,153       24,695
Purchase of investment securities held to maturity               (24,165)      (9,230)     (87,010)
Net cash flows from loan activities                              (35,587)    (101,951)     (50,365)
Purchases of premises and equipment                                 (450)      (1,669)      (3,088)
Proceeds from the sale of other real estate owned                  1,423          566          385
Cash invested in other real estate owned                            (101)        (178)        (462)
                                                               ---------    ---------    ---------
Net cash used by investing activities                            (94,453)     (90,647)     (74,635)
                                                               ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit accounts                            (43,205)     (39,912)      81,656
Net change in certificates of deposit                            144,820       72,976      (23,936)
Net change in federal funds purchased                             (2,019)       3,575        5,240
Advances from the Federal Home Loan Bank                              --       45,000           --
Repayments to the Federal Home Loan Bank                         (22,500)      (7,500)          --
Principal payments on long-term debt                                (812)        (172)        (677)
Other financing activities                                           143           79          169
                                                               ---------    ---------    ---------
Net cash provided by financing activities                         76,427       74,046       62,452
                                                               ---------    ---------    ---------

DECREASE IN CASH AND DUE FROM BANKS                               (2,373)      (1,359)        (845)

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR                      22,081       23,440       24,285
                                                               ---------    ---------    ---------
CASH AND DUE FROM BANKS AT END OF YEAR                         $  19,708    $  22,081    $  23,440
                                                               =========    =========    =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest                         $  27,736    $  19,932    $  18,346
Cash paid during the year for income taxes                     $   6,073    $   5,554    $   3,639
</TABLE>

SUPPLEMENTAL INFORMATION ABOUT NONCASH INVESTING AND FINANCING ACTIVITIES

Other real estate acquired in settlement of loans in 1995, 1994 and 1993 was
$883 thousand, $187 thousand, and $195 thousand, respectively. Sales of other
real estate financed by the Bank in 1995 and 1993 were $90 thousand, and $127
thousand, respectively.

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
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<TABLE>
<CAPTION>
In Thousands, except number of shares
-------------------------------------
                                                                                            Net Unrealized
                                                   Common Stock               Retained      Gains (Losses)
                                             Shares           Amount          Earnings      On Securities          Total
                                           ---------        ---------        ---------      ------------         ---------

<S>                                        <C>              <C>              <C>                                 <C>      
Balance, December 31, 1992                 1,144,898        $  27,974        $   5,283                --         $  33,257

Net income for 1993                               --               --            7,746                --             7,746
Stock options exercised                       10,377              138               --                --               138
Stock dividend                               114,557            6,540           (6,540)               --                --
Fractional shares purchased, (net)               441               26               --                --                26
Three-for-one split                        2,529,204               --               --                --                --
                                           ---------        ---------        ---------         ---------         ---------

Balance, December 31, 1993                 3,799,477           34,678            6,489                --            41,167

Adoption of SFAS No. 115                          --               --               --         $   1,143            1,143
Net income for 1994                       $       --               --           10,360                --            10,360
Stock options exercised                       16,100               96               --                --                96
Stock dividend                               380,295            9,128           (9,128)               --                --
Fractional shares purchased, (net)               563               15               --                --                15
Unrealized losses on available
    for sale securities, net of tax
    effect                                        --               --               --            (2,322)           (2,322)
                                           ---------        ---------        ---------         ---------         ---------

Balance, December 31, 1994                 4,196,435           43,917            7,721            (1,179)           50,459

Net income for 1995                               --               --           12,615                --            12,615
Stock options exercised                       24,821              159               --                --               159
Three-for-two split                        2,100,651               --               --                --                --
Fractional shares purchased, (net)               348                8               --                --                 8
Unrealized gains on transfer from
    held to maturity to available
    for sale, net of tax effect                   --               --               --               237               237
Unrealized gains on available
    for sale securities, net of tax
    effect                                        --               --               --             1,875             1,875
                                           ---------        ---------        ---------         ---------         ---------

Balance, December 31, 1995                 6,322,255        $  44,084        $  20,336         $     933         $  65,353
                                           =========        =========        =========         =========         =========
</TABLE>


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

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                                P A G E   S I X
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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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 bank
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 intercompany account balances
and transactions have been eliminated. 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. The Corporation is
also subject to regulation by certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT SECURITIES - Effective January 1, 1994, the Corporation adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt Equity Securities". Investments in equity and debt
securities are classified into one of three categories: 1) held to maturity, 2)
available for sale, 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, 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 as a separate component of shareholders'
equity 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, 1995 and 1994.

LOANS AND RELATED INCOME - On January 1, 1995 the Corporation adopted Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan". Under this Statement, a loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Concurrently, the Corporation adopted SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures". This
Statement amends SFAS No. 114 to require information about certain impaired
loans and their related income recognition. The adoption of these statements did
not have a material effect on the Corporation's financial condition and results
of operations. Loans are stated at the principal balance outstanding, adjusted
for unearned discounts, and the net of unamortized nonrefundable fees and
related direct loan origination costs. Interest income is accrued as earned.

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NOTE ONE - Continued
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Net deferred fees and costs are generally amortized into interest income as an
adjustment to the loan yield. Expenses deferred (principally origination
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 fees
include agency, standby letter of credit, loan commitment, and loan servicing
fees.

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 nonaccruing loans past due 90 days or
more, loans restructured in the current year, and other loans that management
considers to be impaired.

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, or 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.

ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at a
level management believes is adequate to provide for potential loan, loan
commitment and standby letter of credit losses. The allowance is based on a
continuing review of loans, loan commitments and standby letters of credit which
includes consideration of actual loss experience, changes in the size and
character of the portfolio, identification of individual problem situations
which may affect the borrower's ability to repay, and evaluations of the
prevailing and anticipated economic conditions.

Material estimates that are particularly susceptible to significant change,
relate to the determination of the allowance for loan losses 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.

Management believes the allowance for loan losses and the valuation of
foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions necessitate revision of these estimates in future
years. In addition, various regulatory agencies, as an integral part of their
examination processes, periodically review the Corporation's allowance for loan
losses and valuation of foreclosed assets held for sale. Such agencies may
require the Corporation to recognize additional losses based on their judgment
using information available to them at the time of their examination.

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<PAGE>   10
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NOTE ONE - Continued
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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.

PREMISES AND EQUIPMENT - Premises and equipment are shown at cost and
depreciated using the straight-line and accelerated methods. Depreciation
expense is computed over the following estimated useful lives:

                     Premises: 7 to 39 1/2 years
                     Furniture, fixtures and equipment: 3 to 7 years

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.

INCOME TAX - The Corporation reports income and expenses using the accrual
method of accounting and files a consolidated tax return. The Corporation
accounts for income taxes on the liability method. The liability method
recognizes the amount of tax payable at the date of the financial statements, as
a result of all events that have been recognized in the financial statements as
measured by the provisions of currently enacted tax law and rates.

RETIREMENT PLANS - The Corporation has a profit sharing and salary deferral plan
and a money purchase pension plan which covers eligible employees. The
Corporation's contributions to the plans were $1.2 million in 1995, $1.1 million
in 1994, and $838 thousand in 1993. Contributions to the profit sharing plan are
discretionary while contributions to the money purchase pension plan are
currently 5% of employees eligible salaries. Both plans are funded during the
period in which they are committed by the Board of Directors.

INCOME PER SHARE - Income per share has been calculated on the basis of the
weighted average number of shares outstanding during the period after giving
retroactive effect to stock dividends and stock splits. The dilutive effect of
common stock options is not material.

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.

USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.

RECLASSIFICATIONS - Certain amounts in prior years' financial statements have
been reclassified to conform to the 1995 presentation.

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<PAGE>   11
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NOTE TWO - INVESTMENT SECURITIES
--------------------------------------------------------------------------------

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 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>

In Thousands
------------
                                                      Gross           Gross
                                    Amortized      Unrealized       Unrealized          Fair
                                       Cost            Gains           Losses            Value
                                    ---------       ---------        ---------        ---------
<S>                                 <C>             <C>              <C>              <C>
1995
Available for sale (AFS)
    U.S. Treasury                   $   2,759       $      96             --          $   2,855
    U.S. Agencies                      46,381             552        $    (246)       $  46,687
    Corporate bonds                    44,197           1,144             (125)          45,216
    FHLB Stock                          7,542            --               --              7,542
                                    ---------       ---------        ---------        ---------
                                      100,879           1,792             (371)         102,300
                                    ---------       ---------        ---------        ---------
Held to maturity (HTM)
    U.S. Agencies                       2,210              19        $     (12)           2,217
    State and municipal bonds          30,046           1,289              (55)          31,280
    Corporate bonds                     7,370               9              (37)           7,342
    Certificates of deposit             3,050            --               --              3,050
                                    ---------       ---------        ---------        ---------
                                       42,676           1,317             (104)          43,889
                                    ---------       ---------        ---------        ---------
Total Securities                    $ 143,555       $   3,109        $    (475)       $ 146,189
                                    =========       =========        =========        =========

1994
Available for sale (AFS)
    U.S. Treasury                   $   2,506       $       3        $      (6)       $   2,503
    U.S. Agencies                      20,252              28           (1,089)          19,191
    Corporate bonds                    14,223              35             (757)          13,501
    FHLB stock                          7,083            --               --              7,083
                                    ---------       ---------        ---------        ---------
                                       44,064              66           (1,852)          42,278
                                    ---------       ---------        ---------        ---------
Held to maturity (HTM)
    U.S. Treasury                         252            --                (18)             234
    U.S. Agencies                      19,336              17           (1,307)          18,046
    State and municipal bonds          32,814             541           (1,507)          31,848
    Corporate bonds                    41,646              40           (2,614)          39,072
                                    ---------       ---------        ---------        ---------
                                       94,048             598           (5,446)          89,200
                                    ---------       ---------        ---------        ---------
Total Securities                    $ 138,112       $     664        $  (7,298)       $ 131,478
                                    =========       =========        =========        =========
</TABLE>








--------------------------------------------------------------------------------
                                 P A G E  T E N
--------------------------------------------------------------------------------

<PAGE>   12
--------------------------------------------------------------------------------
NOTE TWO - INVESTMENT SECURITIES (Continued)
--------------------------------------------------------------------------------

Contractual maturities of investment securities as of December 31, 1995 are
shown below. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.

<TABLE>
<CAPTION>
In Thousands                             Available for Sale                   Held to Maturity
------------                         Amortized          Fair              Amortized          Fair
             Maturity                  Cost             Value               Cost             Value
                                     --------         --------             -------          ------- 
              <S>                    <C>              <C>                  <C>              <C>
                  0-1 Yr              $15,530          $15,599             $12,745          $12,726
                  1-5 Yrs              35,587           35,980               1,126            1,175
                 5-10 Yrs              49,181           50,087              15,951           16,748
              Over 10 Yrs                 581              634              12,854           13,240
                                     --------         --------             -------          ------- 
                                     $100,879         $102,300             $42,676          $43,889 
                                     ========         ========             =======          ======= 
</TABLE>


In December, the Bank transferred securities with an amortized cost of $43.8
million from the held to maturity portfolio to the available for sale portfolio
under one time reassessment guidelines issued by the Financial Accounting
Standards Board in November 1995.

Proceeds from sales of available for sale securities in 1995 and 1994 were $87
thousand and $10.8 million, respectively. Gross gains were $35 thousand in 1994.
Gross losses were $4 thousand and $390 thousand in 1995 and 1994, respectively.

Investments in states 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 16% and 24% of the investments in corporate
bonds at December 31, 1995 and 1994, respectively, consisted of investments in
companies doing business in the financial services industry. These bonds were
all rated in the top four investment grades as required by the Bank's investment
policy.

Investment securities, with a book value of $18.7 million and $12 million with
fair values of $18.8 million and $11.8 million in 1995 and 1994, respectively,
were pledged to secure U.S. Government and public deposits as required by law.

NOTE THREE - LOANS

The Bank originates commercial, real estate mortgage, construction and land
development, and installment loans primarily in Snohomish and north King
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 and variable interest rates.




--------------------------------------------------------------------------------
                              P A G E  E L E V E N
--------------------------------------------------------------------------------


<PAGE>   13
--------------------------------------------------------------------------------
NOTE THREE - LOANS (Continued)
--------------------------------------------------------------------------------

Major classifications of loans at December 31 are as follows:

<TABLE>
<CAPTION>
In Thousands                                        1995             1994
------------                                      --------         -------- 
<S>                                               <C>              <C>     
    Commercial                                    $127,239         $121,600
    Real estate commercial                         172,327          152,528
    Real estate construction                        96,639          101,408
    Real estate mortgage                            92,711           79,613
    Installment                                     19,758           18,935
                                                  --------         -------- 
                                                   508,674          474,084
    Less deferred loan fees                         (3,686)          (3,572)
                                                  --------         -------- 
                                                  $504,988         $470,512 
                                                  ========         ======== 
</TABLE>


Contractual maturities of loans as of December 31, 1995 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                            $67,068          $54,035          $6,136            $127,239
    Real estate commercial                 20,130          142,618           9,579            $172,327
    Real estate construction               62,442           34,121              76             $96,639
    Real estate mortgage                   18,750           72,975             986             $92,711
    Installment                             4,727            9,156           5,875             $19,758
                                         --------         --------         -------            -------- 
                                         $173,117         $312,905         $22,652            $508,674 
                                         ========         ========         =======            ======== 
</TABLE>


<TABLE>
<CAPTION>
                                                            1-5             After
                                                           Years           5 Years
                                                          --------         ------- 
<S>                                                       <C>              <C>   
    Loans Maturing After
    One Year With:

    Fixed Rates                                           $247,932          $5,750
    Variable Rates                                          64,973          16,902
                                                          --------         ------- 
                                                          $312,905         $22,652 
                                                          ========         ======= 
</TABLE>

--------------------------------------------------------------------------------
                              P A G E  T W E L V E
--------------------------------------------------------------------------------


<PAGE>   14
--------------------------------------------------------------------------------
NOTE THREE - LOANS (Continued)
--------------------------------------------------------------------------------

LOAN LOSS RESERVE

Changes in the allowance for loan losses are summarized below:

<TABLE>
<CAPTION>
In Thousands                                                       1995              1994              1993
------------                                                      -------           -------            ------ 
<S>                                                               <C>               <C>                <C>   
    Balance at the beginning of year                              $10,410           $ 7,368            $5,906
    Provision charged to operating expense                          1,525             3,900             3,012
    Deduct:
        Loans charged-off                                          (2,212)           (2,090)           (2,269)
        Less recoveries                                             2,174             1,232               719
                                                                  -------           -------            ------ 
        Net charged-off loans                                         (38)             (858)           (1,550)
                                                                  -------           -------            ------ 
    Balance at the end of year                                    $11,897           $10,410            $7,368 
                                                                  =======           =======            ====== 
</TABLE>


At December 31, 1995, the Bank had loans amounting to $4.4 million that were
specifically classified as impaired with an average balance of $3.5 million. The
allowance for loan losses related to these loans was approximately $1.5 million.
Interest collected on these loans in cash and included in income amounted to
$378 thousand in 1995. If interest on these loans had been accrued, such income
would have approximated $501 thousand in 1995. At December 31, there were no
commitments to lend additional funds to borrowers whose loans were classified as
impaired.

Loans past due 90 days or more on which the accrual of interest has been
discontinued as of December 31, 1994 totaled $2.7 million. Interest collected on
these loans and included in income amounted to $207 thousand in 1994. If
interest on these loans had been accrued, such income would have been
approximately $261 thousand in 1994.

The effects of troubled debt restructurings are not considered material to the
Corporation's financial position and results of operations.

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 FOUR - PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
In Thousands                                                    1995              1994
------------                                                   -------           ------- 
<S>                                                            <C>               <C>    
    Premises                                                   $ 9,001           $ 8,903
    Furniture, fixtures and equipment                            5,193             4,699
    Land                                                         3,811             3,739
    Construction in progress                                        13                74
                                                               -------           ------- 
                                                                18,018            17,415
    Less accumulated depreciation                               (6,260)           (5,570)
                                                               -------           ------- 
                                                               $11,758           $11,845 
                                                               =======           ======= 
</TABLE>


Depreciation expense on premises and equipment totaled $881 thousand in 1995,
$952 thousand in 1994, and $863 thousand in 1993.
 
--------------------------------------------------------------------------------
                            P A G E  T H I R T E E N
--------------------------------------------------------------------------------


<PAGE>   15
--------------------------------------------------------------------------------
NOTE FIVE - INTEREST BEARING DEPOSITS
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
In Thousands                                               1995                        1994
------------                                              --------                    --------
<S>                                                       <C>                         <C>     
    Money market and NOW accounts                         $ 69,945                    $ 70,670
    Savings                                                141,396                     195,404
    Time deposits, $100,000 and over                        91,701                      72,643
    Other time deposits                                    254,895                     129,132
                                                          --------                    --------
                                                          $557,937                    $467,849 
                                                          ========                    ======== 
</TABLE>


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

<TABLE>
In Thousands
------------

    <S>                                                   <C>     
    Year ending December 31, 1996                         $246,659
                             1997                           35,128
                             1998                           32,839
                             1999                           12,806
                             2000                           17,353
                       Thereafter                            1,811
                                                          -------- 
                                                          $346,596 
                                                          ======== 
</TABLE>


NOTE SIX - CREDIT ARRANGEMENTS

The Bank is a member of the Federal Home Loan Bank of Seattle. As a member, the
Bank has a committed line of credit up to 14% of total assets. Borrowings
generally provide for interest at the then current published rates. There was
$15.0 million and $37.5 million outstanding at December 31, 1995 and 1994,
respectively.

At December 31, 1995, committed lines of credit agreements totaling
approximately $26 million were available to the Bank from unaffiliated banks.
Such lines generally provide for interest at the lending bank's federal funds
rate or other money market rates. There were no borrowings outstanding or
compensating balance requirements under these credit arrangements at December
31, 1995 and 1994.

In addition, at December 31, 1995 the Bank has a committed line of credit up to
$3.8 million from the Federal Reserve Bank (FRB). Borrowings generally provide
for interest at rates as published by the FRB and are secured by U.S. Treasury
and Agency securities. There were no borrowings outstanding at December 31, 1995
and 1994.

NOTE SEVEN - FEDERAL HOME LOAN BANK (FHLB) ADVANCES

At December 31, 1995, FHLB advances were scheduled to mature as follows:



<TABLE>
<CAPTION>
                                                                                        Interest
In Thousands                                               Amount                         Rates
------------                                               -------                       -------
                                                   
<S>                                                        <C>                             <C> 
    One to two years                                       $ 5,000                         4.7%
    Three to four years                                      5,000                         5.4%
    Five to ten years                                        5,000                         5.8%
                                                           -------
                                                           $15,000 
                                                           ======= 
</TABLE>


--------------------------------------------------------------------------------
                            P A G E  F O U R T E E N
--------------------------------------------------------------------------------

<PAGE>   16
--------------------------------------------------------------------------------
NOTE SEVEN - FEDERAL HOME LOAN BANK (FHLB) ADVANCES (Continued)
--------------------------------------------------------------------------------

Advances from FHLB are collateralized by qualifying first mortgage loans and
government agencies as described in the Advances, Security and Deposit Agreement
with the FHLB.

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


<TABLE>
<CAPTION>
In Thousands                                                         1995              1994
------------                                                         ----              ----

<S>                                                               <C>               <C>       
    Maximum outstanding at any month-end                          $   37,500        $   37,500
    Average outstanding                                               22,541            23,260
    Weighted average interest rates:
        Annual                                                          5.75%             5.40%
        End of Year                                                     5.30%             5.58%
</TABLE>


NOTE EIGHT - 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. The securities
underlying the agreements were held by a safekeeping agent under control by the
Bank.

At December 31, 1995, securities under agreements to repurchase were $4.7
million. The average daily balance of outstanding agreements during the period
was $1.4 million with maximum outstanding agreements at any month-end of $5.7
million.

NOTE NINE - LONG-TERM DEBT

At December 31, long-term debt was as follows:


<TABLE>
<CAPTION>
In Thousands                                                         1995              1994
------------                                                         ----              ----

<S>                                                                  <C>               <C>
    Mortgage note, with interest payable monthly
    at 9.5% per annum.  Collateralized by a deed
    of trust.                                                          --              $325
                                                                    
    Mortgage note, due in monthly installments of
    $3 thousand, including interest at 10% per
    annum.  The principal remaining any time after
    December 1996 is due upon demand.  Collater-
    alized by a deed of trust.                                       $136               170
 
    Note payable to a bank, due in semiannual pay-
    ments of $35 thousand, plus interest quarterly at
    the bank's prime rate plus 3/4%.  Collateralized
    by Frontier Bank stock.                                            --                70
                                                                     ----              ---- 

                                                                     $136              $565 
                                                                     ====              ==== 
</TABLE>


The approximate principal reduction of long-term debt through 1996 is $136
thousand.

--------------------------------------------------------------------------------
                             P A G E  F I F T E E N
--------------------------------------------------------------------------------

<PAGE>   17
--------------------------------------------------------------------------------
NOTE TEN - INCOME TAX
--------------------------------------------------------------------------------

The components of the provision for income tax are as follows:

<TABLE>
<CAPTION>
In Thousands                                     1995           1994           1993
------------                                    -------        -------        -------
<S>                                             <C>            <C>            <C>      
Current                                         $ 6,250        $ 5,074        $ 4,411  
Deferred                                           (398)          (769)        (1,020)
                                                -------        -------        -------
                                                $ 5,852        $ 4,305        $ 3,391
                                                =======        =======        =======
</TABLE>
                            
Deferred taxes result from temporary differences in recognition of income and
expense which are reported in different periods for financial reporting purposes
and for income tax purposes. The sources of the differences and the resulting
deferred income tax provision are as follows:

<TABLE>
<CAPTION>
In Thousands                                      1995           1994          1993
------------                                    -------        -------        -------
<S>                                             <C>            <C>            <C>     
Loan fees                                       $   (49)       $   510        $   (30)
Provision for loan losses                          (596)        (1,095)          (779)
Other items - net                                   247           (184)          (211)
                                                -------        -------        -------
                                                $  (398)       $  (769)       $(1,020)
                                                =======        =======        ======= 
</TABLE>

                             
The following table shows the nature and components of the Corporation's net
deferred tax assets, established at an estimated tax rate of 34% at December 31:


<TABLE>
<CAPTION>
In Thousands
------------

                                                 1995            1994
                                                -------        -------
<S>                                             <C>            <C>      
DEFERRED TAX ASSETS
    Allowance for possible loan
        losses, in excess of tax
        reserves                                $ 3,952        $ 3,355  
    Other deferred tax assets                       769            794
                                                -------        -------
    Total deferred tax assets                     4,721          4,149
                                                -------        -------
                                             
DEFERRED TAX LIABILITIES                     
                                             
    Other deferred tax liabilities               (1,152)          (978)
                                                -------        -------
    Total deferred tax liabilities               (1,152)          (978)
                                                -------        -------
Net deferred tax assets                         $ 3,569        $ 3,171
                                                =======        =======
</TABLE>
                                      
The Corporation believes, based upon the 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.


--------------------------------------------------------------------------------
                             P A G E  S I X T E E N
--------------------------------------------------------------------------------

<PAGE>   18
--------------------------------------------------------------------------------
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                           1995                            1994                          1993
------------                           ----                            ----                          ----
                              Amount             Rate        Amount            Rate        Amount              Rate
                              ------             ----        ------            ----        ------              ----
<S>                          <C>                 <C>        <C>                <C>         <C>                 <C>
Income tax provision
     at statutory rate       $ 6,502               35%      $ 4,986              34%       $ 3,787               34%

Effect of nontaxable
     interest income            (574)              -3%         (624)             -4%          (499)              -5%

Other                            (76)             --            (57)             --            103                1%
                             -------             ----       -------            ----        -------             ----
                             $ 5,852               32%      $ 4,305              30%       $ 3,391               30%
                             =======             ====       =======            ====        =======             ====
</TABLE>


NOTE ELEVEN - SHAREHOLDERS' EQUITY AND REGULATORY MATTERS

On January 17, 1996, the Board of Directors declared a 7% stock dividend,
payable March 18, 1996, to shareholders of record as of January 17, 1996.

The Federal Reserve Board establishes minimum capital levels for banks and bank
holding companies. These guidelines require banks and holding companies to
maintain a minimum leverage ratio of core capital (which excludes the allowance
for loan losses) to total adjusted average assets. For the most highly-rated
holding companies, this ratio must be at least 3%, and for others it must be 4%
to 5%. Failure to meet minimum capital requirements can initiate certain
mandatory actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. At year-end 1995, the
Corporation's leverage ratio was 8.81%, compared to 8.04% at year-end 1994. In
addition, holding companies are required to meet minimum risk-based capital
guidelines, under which risk percentages are assigned to various categories of
assets and off-balance-sheet items to calculate a risk-adjusted capital ratio.
Tier I capital generally consists of shareholders' equity, less goodwill, while
Tier II capital includes the allowance for possible loan losses, subject to a
limitation of 1.25% of risk-adjusted assets. The chart below indicates the
Corporation's capital components at December 31:


<TABLE>
<CAPTION>
In Thousands                                      1995             1994
------------                                      ----             ----

<S>                                            <C>               <C>      
Shareholders' equity                           $  65,353         $  50,459
Less goodwill                                       (364)             (401)
Adjusted for unrealized (gain)loss on
    available for sale securities                   (933)            1,179
                                               ---------         ---------
        Tier I capital                            64,056            51,237
                                               ---------         ---------

Eligible portion of the allowance
    for possible loan losses                       7,292             6,614
                                               ---------         ---------
        Tier II capital                        $  71,348         $  57,851
                                               =========         =========

        Total adjusted risk-based assets       $ 578,719         $ 525,348
                                               =========         =========

Tier I capital ratio                               11.07%             9.75%
                                               =========         =========

Tier I and Tier II capital ratio                   12.33%            11.01%
                                               =========         =========
</TABLE>

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                           P A G E  S E V E N T E E N
--------------------------------------------------------------------------------

<PAGE>   19
--------------------------------------------------------------------------------
NOTE ELEVEN - SHAREHOLDERS' EQUITY AND REGULATORY MATTERS (Continued)
--------------------------------------------------------------------------------

Under federal regulations, the Bank is limited, unless previously approved, as
to the amount it may loan to the holding company and other affiliates to 10% of
its capital stock and surplus (approximately $3.4 million at December 31, 1995
and 1994, respectively).

Under State of Washington regulations, dividends declared by the Bank to be paid
to the holding company in any one calendar year may not, without regulatory
approval, exceed its net income for that year combined with its retained net
income for the preceding two years (approximately $31.8 million at December 31,
1995).

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 $4.7 million in 1995 and $4.6 million in 1994.

NOTE TWELVE - EMPLOYEE STOCK OPTION PLAN

The Corporation has an Incentive Stock Option Plan (the Plan) for the benefit of
key employees. The option price is fair market value at date of grant and the
option is exercisable after six months and expires 10 years from the date of
grant. Shares and amounts of options exercised in 1995, 1994, and 1993 are
disclosed in the Consolidated Statement of Changes in Shareholders' Equity. At
December 31, 1995 options for 157,441 shares were outstanding at prices ranging
from $3 to $29 per share. The price range has been adjusted for stock splits and
dividends since the date options were granted. At December 31, 1995, the number
of shares as to which options were exercisable was 144,565. Maximum shares that
may be issued pursuant to the Plan, as restated, were 1,757,908 of December 31,
1995.

NOTE THIRTEEN - RELATED PARTY TRANSACTIONS

Loans to directors, executive officers and their affiliates are subject to
regulatory limitations. Such loans had aggregate balances and activity during
1995, 1994 and 1993 as follows and were within regulatory limitations:

<TABLE>
<CAPTION>
In Thousands                         1995            1994            1993
------------                         ----            ----            ----

<S>                                <C>             <C>             <C>     
Balance at beginning of year       $ 10,044        $  5,969        $  8,328
New loans or advances                 4,123           7,695           8,561
Repayments                           (5,615)         (3,620)        (10,920)
                                   --------        --------        --------
Balance at end of year             $  8,552        $ 10,044        $  5,969
                                   ========        ========        ========
</TABLE>


NOTE FOURTEEN - COMMITMENTS AND CONTINGENT LIABILITIES

The Bank leases various branch offices under agreements which expire between
1996 and 2014. The agreements contain various renewal options and require the
Bank to maintain the properties.


--------------------------------------------------------------------------------
                            P A G E  E I G H T E E N
--------------------------------------------------------------------------------

<PAGE>   20
--------------------------------------------------------------------------------
NOTE FOURTEEN - Continued
--------------------------------------------------------------------------------

The total future minimum rental commitment through 2000 and thereafter is as
follows:

<TABLE>
In Thousands
------------

<S>                                                      <C>
    Year Ending December 31, 1996                        $  362
                             1997                           317
                             1998                           277
                             1999                           263
                             2000                           272
                             Thereafter                   3,227
                                                         ------ 
                                                         $4,718 
                                                         ====== 
</TABLE>


Rental expense charged to operations was $380 thousand in 1995, $244 thousand in
1994 and $332 thousand in 1993.

The Bank enters into agreements to extend credit and standby letters of credit
to customers. These commitments are limited to a period of time and, in some
instances, provide for other conditions. These commitments are issued only after
an evaluation of credit and collateral is made, and are subject to customary
lending standards. Terms of the commitments protect the Bank in the event there
are significant changes in interest rates. Many of the commitments are expected
to expire without being drawn upon.

Commitments outstanding under these agreements at December 31, 1995 are
summarized below:

<TABLE>
In Thousands
------------

<S>                                                  <C>    
    Loan commitments                                 $76,329

    Standby letters of credit                        $ 2,829
</TABLE>

NOTE FIFTEEN - 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 Bank 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.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Bank could realize in a current market exchange. 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:


--------------------------------------------------------------------------------
                            P A G E  N I N E T E E N
--------------------------------------------------------------------------------


<PAGE>   21
--------------------------------------------------------------------------------
NOTE FIFTEEN - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
--------------------------------------------------------------------------------

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

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.

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.

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.

FHLB advances and long-term debt - Fair value is determined by discounting the
cash flow using rates currently available to the Bank for debt with similar
terms and remaining maturities.

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 14 to the financial statements. The fair value
of these commitments is not material since they are for a short period of time
and subject to customary credit terms.


<TABLE>
<CAPTION>
In Thousands                                              1995                                  1994
------------                                              ----                                  ----

                                                 Carrying            Fair             Carrying            Fair
                                                  Value              Value              Value             Value
                                                 --------           --------          --------          --------

<S>                                              <C>                <C>               <C>               <C>     
Assets
    Cash and due from banks                      $ 19,708           $ 19,708          $ 22,081          $ 22,081
    Investment securities:
        Available for sale                        102,300            102,300            42,278            42,278
        Held to maturity                           42,676             43,889            94,048            89,200
    Federal funds sold                             55,930             55,930             1,120             1,120
    Net loans                                     493,091            499,076           460,102           461,950

Liabilities
    Noninterest bearing deposits                   83,281             83,281            71,754            71,754
    Interest bearing deposits                     557,937            561,032           467,849           466,999
    Federal funds purchased
        and securities sold under
        agreements to repurchase                    7,596              7,596             9,615             9,615
    FHLB Advances                                  15,000             14,934            37,500            36,024
    Long-term debt                                    136                136               565               565
</TABLE>

Limitations: The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995, and 1994. Since
December 31, 1995, and 1994, amounts have not been comprehensively revalued for
purposes of these financial statements and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein. Management is
not aware of any factors that would significantly affect the estimated fair
value amounts.

--------------------------------------------------------------------------------
                              P A G E  T W E N T Y
--------------------------------------------------------------------------------


<PAGE>   22
--------------------------------------------------------------------------------
NOTE SIXTEEN - PARENT COMPANY (ONLY) FINANCIAL INFORMATION
--------------------------------------------------------------------------------

Condensed balance sheets at December 31:

<TABLE>
<CAPTION>
In Thousands                           1995          1994
------------                          -------       -------

    <S>                               <C>           <C>    
    Cash                              $   138       $    13
    Investment in subsidiaries:
        Bank                           64,489        49,706
        Nonbank                           104            55
    Premises, net                          70           636
    Other assets                          552           619
                                      -------       -------
                                      $65,353       $51,029
                                      =======       =======
    
    Other liabilities                    --         $     5
    Long-term debt                       --             565
    Shareholders' equity              $65,353        50,459
                                      -------       -------
                                      $65,353       $51,029
                                      =======       =======
</TABLE>


Condensed statements of income for the years ended December 31:


<TABLE>
<CAPTION>
                                                          1995            1994            1993
                                                        --------        --------        --------

<S>                                                     <C>             <C>             <C>
    Income
        Dividend from Bank subsidiary                   $    210        $    145        $     50
        Rental                                                54             105              98
        Interest                                               2               3               2
                                                        --------        --------        --------
    Total Income                                             266             253             150
                                                        --------        --------        --------

    Expenses
        Interest                                              13              59              71
        Personnel                                             89              83              60
        Depreciation and amortization                         81             108             126
        Other                                                184             148              77
                                                        --------        --------        --------
    Total Expenses                                           367             398             334
                                                        --------        --------        --------

    Loss before equity in undistributed income
        of subsidiaries and benefit equivalent to
        income taxes                                        (101)           (145)           (184)

    Benefit equivalent to income taxes                        79              67              48
                                                        --------        --------        --------

    Loss before equity in undistributed income
        of subsidiaries                                      (22)            (78)           (136)

    Equity in undistributed
        income of subsidiaries                            12,637          10,438           7,882
                                                        --------        --------        --------

    Net income                                          $ 12,615        $ 10,360        $  7,746
                                                        ========        ========        ========
</TABLE>



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<PAGE>   23
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NOTE SIXTEEN - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (Continued)
--------------------------------------------------------------------------------

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


<TABLE>
<CAPTION>
In Thousands                                                         1995              1994              1993
------------                                                         ----              ----              ----

<S>                                                                 <C>               <C>                <C>
    Cash flows from operating activities
        Net income                                                  $12,615           $10,360            $7,746
    Adjustments to reconcile net income to net cash
        provided by operating activities
            Equity in undistributed income
                of subsidiaries                                     (12,847)          (10,583)           (7,932)
            Depreciation and amortization                                80               108               126
            Other operating activities                                  (11)              (23)              (14)
                                                                    -------           -------            ------ 
    Net cash flows from operating activities                           (163)             (138)              (74)
                                                                    -------           -------            ------ 
    Cash flows from investing activities
        Dividends received                                              210               145                50
                                                                    -------           -------            ------ 
    Net cash flows from investing activities                            210               145                50
                                                                    -------           -------            ------ 
    Cash flows from financing activities
        Sales of common stock                                           167               111               164
        Principal payments of long-term debt                            (84)             (172)             (136)
        Other financing activities                                       (5)              ---               ---
                                                                    -------           -------            ------ 
    Net cash flows from financing activities                             78               (61)               28
                                                                    -------           -------            ------ 
    Increase (decrease) in cash                                         125               (54)                4
    Cash at beginning of year                                            13                67                63
                                                                    -------           -------            ------ 
    Cash at end of year                                                $138               $13               $67 
                                                                    =======           =======            ====== 
</TABLE>

NOTE SEVENTEEN - NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", and SFAS No. 123, "Accounting for Stock-Based Compensation" effective for
years beginning after December 15, 1995. Statement No. 121 addresses situations
where information indicates that a company might be unable to recover, through
future operations or sale, the carrying amount of long-lived assets,
identifiable intangibles and goodwill related to those assets. Management does
not believe the adoption of this statement will have a material effect on its
financial condition or results of operations.

Statement No. 123 specifies a fair value based method of accounting for
stock-based compensation plans and encourages (but does not require) entities to
adopt that method in place of the provisions of APB Opinion 25, "Accounting for
Stock Issued to Employees". The Corporation has not yet determined which method
of accounting will be used or what impact the adoption of this statement will
have on the Corporation's results of operations.



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<PAGE>   24
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

OVERVIEW OF REPORTED RESULTS

The Corporation experienced record earnings for the seventeenth consecutive
year. Net income for 1995 was up $12.6 million, or 21.8% as compared to 1994 net
income of $10.4 million, which was up 33.7% compared to 1993 income of $7.7
million, which was up $2.1 million, or 37.2% from 1992. The reasons for this
continued performance are discussed below.

Earnings per share increased to $2.00 from $1.65 in 1994, and $1.24 in 1993. Per
share amounts have been adjusted giving retroactive effect to stock dividends
and stock splits.

Return on average assets (ROA) was 1.82% for 1995; 1.69% for 1994, and 1.50% in
1993. Return on average equity (ROE) for 1995 was 21.59%; 22.21% for 1994, and
20.59% for 1993.

ECONOMIC ENVIRONMENT

The Bank's lending and other activities are concentrated in Snohomish County,
Washington, but also includes the northern part of King County, by having two
branches located in Bothell and Woodinville, Washington. The major city in
Snohomish County is Everett, and the major city in King County is Seattle, the
largest city in the state.

An important segment of the Snohomish County economy is the Boeing Company,
which has its 747 and 777 assembly plant in Everett. Boeing also has other
assembly plants and facilities in the Puget Sound area. In 1994, Boeing
completed a workforce reduction of 19% which began in 1993. Since that time,
there has been another workforce reduction of approximately 12,000 personnel,
including 6,300 to 6,500 early retirements. Current news releases indicate that
the announced reductions have been completed, and that Boeing's management does
not anticipate any further reductions in the near future. There is unconfirmed
talk that additions to the workforce may be necessary if aircraft orders
continue at their current pace. After a four year decline in aircraft orders,
Boeing's backlog is starting to build. Analysts expect Boeing to win about 325
orders in 1996, which would be the highest in five years. The orders are likely
to be for the new 777 and the redesigned 737.

Management believes that in 1995 the Corporation began to notice the effects of
prior reductions at the Boeing Company. Since the first quarter of 1995, there
has been a decline in the number of loan applications. Comparatively, in 1994,
loan demand was brisk, increasing $100.9 million, or 27.3%. This compared to
increased loans in 1995 of $34.5 million, or 7.3%. Management responded early on
in the first quarter to this trend, and placed increased emphasis on loan
development. Management believes that this action was very important to what
loan growth the Corporation did have during the year. Although 1995 was a year
of less than dynamic loan demand, the year was also characterized by narrower
interest rate spreads, excellent expense control, and a reduction in the
provision for loan losses.

Still on the horizon and yet to fully influence the local economy, the Everett
Naval Base, which began operations in spring of 1994, will be receiving an
aircraft carrier group in 1996. Management looks forward to, and remains
cautiously optimistic about the future.

In November 1994, the long bond (30 year treasury bond) was hitting highs of
around 8.16% making it one of the worst years for returns on the bond market
since 1926. At year-end 1994, the long bond yield was 7.84%, the 10 year was
7.80%, and 5 year was 7.81%, and the one year was 7.12%. By the close of the
last business day of 1995, the bond market had made a dramatic recovery, having
one of the best rallies in history. The long bond was at 5.94%, the 10 year at
5.56%, the 5 year at 5.37%, and the one year at 5.13%. Federal funds sold
inverted the yield curve at 5.19%. Considering the change in interest rates for
1994 and 1995, it has been a challenging two years for managing the interest
rate spread.

In 1995, the base rate of the Corporation was changed as follows:

<TABLE>
            <S>                              <C>
            February 3, 1995                 Up to 9.00% from 8.50%
            July 10, 1995                    Down to 8.75% from 9.00%
            December 26, 1995                Down to 8.50% from 8.75%
</TABLE>


On February 2, 1996, the Corporation decreased its base rate to 8.25% from
8.50%. Due to lower interest rates in 1995, the Corporation's investment
portfolio, which had a net unrealized loss at year-end 1994 of $6.6 million,
increased in value to show a net unrealized gain of $2.6 million at year-end
1995.

FINANCIAL REVIEW / BALANCE SHEET

The Corporation manages its balance sheet to meet the needs of its business
strategy, which adapts to the changing economic environment, and business and
competitive factors.

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<PAGE>   25
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
--------------------------------------------------------------------------------

Based on the balances at year-end 1995, assets increased $92.6 million, or
14.4%; increased $84.5 million, or 15.2% in 1994, and increased $71.4 million,
or 14.7% in 1993. Average earning assets as a percent of total average assets,
were 95.6%, or $661.1 million in 1995; 94.1%, or $575.1 million in 1994, and
93.0%, or $480.6 million in 1993. Local economic conditions and an aggressive
business development program were the largest factors contributing to the growth
in earning assets.

Loans increased $34.5 million, or 7.3% in 1995. This compares to loan growth of
$100.9 million, or 27.3% in 1994, and $48.8 million, or 15.2% in 1993. In 1995,
the investment portfolio increased $8.6 million to $145.0 million, or 6.3%. The
investment portfolio decreased in 1994 versus 1993, by $15.2 million, or 10.0%.
The earning asset with the largest increase for the year was federal funds sold,
increasing from $1.1 million in 1994 to $55.9 million in 1995. The increase in
fed funds sold for the year reflects the decline in loan demand that the
Corporation experienced in 1995. Whereas in 1994, loan demand was so much
greater it was necessary to shift cash flows and additional borrowings from the
Federal Home Loan Bank of Seattle (FHLB) into loans.

The primary source of funds for earning assets are deposits and borrowings.
Total deposits were up $101.6 million, or 18.8% in 1995; increased $33.1
million, or 6.5% in 1994, and increased $57.7 million, or 12.9% in 1993. Money
Market and NOW accounts were down $.7 million, or 1.0% in 1995; down $6.8
million, or 8.8% in 1994, and down $3.4 million, or 4.3% in 1993. Savings
accounts were down $54.0 million or 27.6% in 1995, down $32.0 million, or 14.1%
in 1994; and up $81.6 million, or 55.9% in 1993. Time CD's increased $144.8
million, or 71.8% in 1995, increased $73.0 million in 1994, or 56.7%; and were
down $23.9 million, or 15.7% in 1993. The decrease in Money Market, NOW and
savings accounts for 1995 was planned by management in response to lower
interest rates. The Bank aggressively competes for consumer and business
deposits.

The 1995 results of operations compared to 1994 and 1993 include the following
contributing factors, which are discussed more fully in other sections of the
financial review.

1) Net interest income increased $1.4 million, or 4.4% in 1995; increased $5.8
million, or 21.7% in 1994, versus an increase of $5.2 million, or 24.5% in 1993.
The increase in 1995 is attributable to an increase in interest expense of $8.7
million, or 42.2% and an increase in interest income of $10.1 million, or 19.2%.
2) The provision for loan losses decreased in 1995 to $1.5 million, down from
$3.9 million in 1994, and down from $3.0 million in 1993. The reason for the
decline in the provision for 1995 was due to continued loan quality, evidenced
by lower net charge offs, and smaller growth in the portfolio. The current level
of the provision is deemed by management to be adequate given the actual loss
experience, the size of the portfolio, and anticipated economic conditions. 3)
Total noninterest expense increased $513 thousand, or 3.1% in 1995, indicating
the Corporation's continued emphasis on overhead expense control. Noninterest
expense decreased $125 thousand, or .7% in 1994.

NET INTEREST INCOME

Net interest income is the difference between total interest income and total
interest expense. Several factors contribute to changes in net interest income.
These include the effects of changes in average balances, changes in rates on
earning assets and rates paid for interest bearing liabilities, the level of
noninterest bearing deposits, shareholders' equity, and the level of nonaccrual
loans.

The cost of funds and asset yields for the Corporation during the last three
years were mixed. For the year 1993, the average yield on earning assets dropped
117 basis points, and the average cost of interest bearing liabilities dropped
137 basis points. In 1994, the yield on average earning assets dropped 1 basis
point and the average cost of interest bearing liabilities dropped 12 basis
points. In 1995, the yield on average assets was up 31 basis points, while the
average cost of interest bearing liabilities increased 107 basis points. The
slight decline in 1994 in interest bearing liabilities was in spite of the
Corporation increasing rates paid on deposit accounts fourteen times. As noted
before, 1995 was a difficult year for the interest rate spread due to less than
dynamic loan demand and paying deposit rates consistent with prudent liquidity
management. The net interest margin (net interest income divided by total
average assets) was 5.03% in 1995; 5.46% in 1994; and 5.30% in 1993 (see
"Liquidity and Interest Sensitivity" in this section). As noted on page 33 of
this report, it was the growth, or volume, which contributed mostly to the
increased net interest earnings of the Corporation for all three years. The
following is a more detailed discussion of the factors comprising net interest
income.

The earnings from certain assets are exempt from federal income tax, and it is
customary in the financial services industry to analyze changes in net interest
income on a "tax equivalent" or "fully taxable" basis. Under this method,
nontaxable income from loans and investments is adjusted to an amount which
would have been earned if such income were subject to federal income tax at a
34% rate. Tables 1 and 2 on pages 32 and 33 of this report present an analysis
of the changes in net income. Table 1 (Average Balances) indicates the changes
in the average balance of accounts, and Table 2 (Rate/Volume Analysis) indicates
the causes of the changes in net interest income; whether by changes in the
average balance (Volume) or changes in interest (Rate). The discussion below
presents an analysis based on a taxable equivalent basis, unless otherwise
stated.

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<PAGE>   26
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
--------------------------------------------------------------------------------

Table 1 indicates that net interest income totaled $34.8 million in 1995, an
increase of 4.2%, $33.4 million in 1994, an increase of $6.0 million, or 21.9%,
and an increase of $5.4 million in 1993, or 24.3%. Table 2 indicates that of the
$1.4 million increase in net interest income, there was an increase in interest
income of $10.1 million and an increase in interest expense of $8.7 million,
which leaves a net increase in net interest income of $1.4 million. Using the
tables in the same fashion, Table 1 indicates that net interest income for 1994
totaled $33.4 million, which was $6.0 million over 1993. Table 2 indicates there
was an increase in interest income of $8.8 million and an increase in interest
expense of $2.8 million, which leaves an increase in net interest income of $6.0
million.

LOAN PORTFOLIO

Average loans grew $59.1 million, or 13.9% in 1995, and $88.3 million, or 26.1%
in 1994, and $53.8 million, or 18.9% in 1993. For 1995, real estate commercial
loans had the largest growth of $43.5 million, or 37.2%. This was followed by
real estate residential loans which increased $15.7 million, or 20.9% for the
year. In 1994, real estate commercial loans also had the largest growth at $41.0
million, or 53.8%, however, real estate construction loans had the second
largest growth at $27.8 million, or 41.9%. The increases in real estate
commercial and residential loans in 1995 does indicate a trend away from real
estate construction loans. This was due to a slowdown in land development in
1995. Going forward, management will continue to pursue these, and all types of
loans in accordance with established lending policies.

Rates on loans in 1995 increased 51 basis points, however, during the last two
quarters of 1995, they trended lower due to lack of demand. Management expects
that loan rates will continue to ease in 1996 unless demand increases. At
December 31, 1995, 63% of the portfolio was fixed rate and 37% was variable
rate. At December 31, 1994, 62% was fixed rate, and 38% was variable rate. At
December 31, 1993, 65% was fixed rate and 35% was variable rate.

Interest and fee income from loans increased $8.6 million, or 19.6% in 1995, and
$8.4 million, or 23.7% in 1994 as compared to 1993. Interest and fee income in
1993 increased $2.7 million, or 8.3%, as compared to 1992. The earnings on the
$59.1 million increase in 1995 average balances of loans, resulted in increased
income of $6.0 million in 1995, while an increase in interest rates increased
income by $2.6 million. The earnings on the $88.3 million increase in 1994
average balances of loans resulted in increased income of $9.5 in 1994, and a
decrease in interest rates reduced interest income by $1.2 million. The earnings
on the $53.8 million increase in 1993 average balances of loans resulted in
increased income of $5.9 million, while a decrease in interest rates decreased
income by $3.2 million. Loan fee income totaled $3.9 million in 1995, $4.0
million in 1994, compared to $2.9 million in 1993 and $2.3 million in 1992.

The Bank has a credit card department which began issuing cards to both
consumers and businesses in 1993. At year-end 1995, this department had $4.0
million in credit lines versus $3.1 million in 1994. The department had $913
thousand in active balances which is a 28.4% increase over 1994 active balances
of $711 thousand.

Management expects loan demand to remain lower than normal in 1996. However,
there has been an increase in loan applications through the Bank's secondary
market mortgage operations, and it is estimated that this trend will continue
provided long-term interest rates remain reasonably low. An increase in this
activity would increase the other income of the Corporation.

LOAN LOSS PROVISION

The provision for loan losses decreased in 1995 to $1.5 million from $3.9
million in 1994, or 60.9%, and $3.0 million in 1993, or 50.0%. The small growth
of the loan portfolio in 1995 and continued loan quality did not require as
large a contribution in 1995 as compared to prior years.

When considering the amount of the loan loss provision, management considers the
actual loss experience, changes in the size and character of the portfolio,
identification of individual problem situations which may affect the borrowers
ability to repay, and the prevailing and anticipated economic conditions.

The allowance for loan losses was 2.36% of total loans at year-end 1995, 2.21%
of total loans at year-end 1994, and 1.99% of total loans at year-end 1993. This
ratio changes when 1) loans are charged-off to the reserve; 2) a provision is
charged to expense and added to the reserve; 3) when prior loans charged-off are
recovered, or 4) when total loans increase or decrease. At year-end 1995,
management considered the reserve to be adequate. Please refer to Note 3, page
13 of this report for details regarding changes in the level of the allowance.

The allowance for loan losses as a percent of impaired loans was 371% for
year-end 1995, 256% for year-end 1994, and 222% for year-end 1993. As indicated
above, management evaluates the adequacy of the allowance for loan losses based
upon a number of factors and estimates its allowance for loan losses in relation
to the entire portfolio's estimated losses over the life


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<PAGE>   27
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
--------------------------------------------------------------------------------

of the portfolio. Accordingly, the ratio of the allowance for loan losses to
impaired loans may vary greatly because the timing of certain events described
in the previous paragraph cannot be controlled. General conditions leading to
management's decision to increase the allowance include concerns about a
perceived overall slowing in the Northwest's economic environment, regional
concerns, and adverse effects of changes in government regulation and taxation.

INVESTMENTS

Total interest income from investments, including federal funds sold, increased
$1.5 million in 1995, $.5 million in 1994, and $1.5 million in 1993. The
increase in average investment balances of $26.9 million in 1995, contributed
$.9 million to income, while rate changes accounted for an increase of $.6
million to income. The increase of $6.2 million in the 1994 average balance of
investments contributed $2.2 million to income, while rate changes accounted for
a decrease of $1.7 million in income. The increase of $39.2 million in the 1993
average balance of investments contributed $3.0 million to income, while rates
accounted for a decrease of $1.5 million in income.

There were no significant securities losses in 1995, compared to securities
losses of $355 thousand in 1994. The 1994 losses were taken as part of
management efforts to improve the value, while reducing the volatility of the
portfolio. There were no securities gains or losses in 1993.

INTEREST EXPENSE

Total interest expense in 1995 increased $8.7 million, or 42.2%. In 1994 it
increased $2.9 million as compared to 1993, or 16.1% and decreased $1.2 million
in 1993 as compared to 1992. The increase of $65.5 million in the 1995 average
balance of interest bearing liabilities contributed $4.9 million to expense,
while a increase in average rate accounted for a increase of $3.8 million in
interest expense. The increase of $78.8 million in the 1994 average balance of
interest bearing liabilities contributed $4.4 million to expense, while a
decrease in average rate accounted for a decrease of $1.6 million in interest
expense. The increase of $77.9 million in the 1993 average balance of interest
bearing liabilities contributed $3.1 million to expense, while a decrease in
average rate accounted for a decrease of $4.3 million in interest expense.

OTHER NONINTEREST INCOME

Other noninterest income totaled $3.4 million in 1995, up $507 thousand, or
17.4%; in 1994 totaled $2.9 million, down $ 1.5 million, or 33.6% as compared to
an increase of $.3 million, or 7.2% in 1993. In keeping with the historical
trend, service charges increased only $4 thousand in 1995, or .2%. This compares
to a growth of $43 thousand, or 2.8% in 1994, and a decrease of $80 thousand in
1993, or 5.0% from 1992. While deposits have grown at a substantially higher
rate than service charges, the growth in accounts most susceptible to service
charges has remained reasonably flat. Also, management estimates that more
customers are maintaining higher balances to avoid service charges. The number
of accounts increased 4,882 in 1995, 1,177 in 1994; and 3,014 in 1993, or 11.5%,
2.9%, and 7.9% respectively.

Other income increased $152 thousand, or 9.0% to $1.8 million in 1995, and
decreased from $2.9 million in 1993 to $1.7 million in 1994, excluding
securities gains/(losses). The increase in 1995 is due to non-recurring income
of $157 thousand on the sale of other real estate owned, and interest of $98
thousand on amended tax returns. Otherwise, insurance and financial services
income was down $118 thousand, or 58.1% for the year, along with a decrease of
$142 thousand, or 45.0% in broker loan fees. Gains on the sale of mortgage loans
accounted for a $1.0 million decrease in other income in 1994. Income from this
same source again dropped in 1995 to $174 thousand from $316 thousand in 1994,
or 44.9%. The reason for this large decline is due to high long-term interest
rates in 1994 which all but halted the mortgage loan and refinance business.
Although 1995 brought with it lower interest rates, it was not until the fourth
quarter of 1995 that the Corporation began experiencing increased fee income
from those activities. Management estimates that income from this operation will
increase in 1996.

Trust administration income increased $116 thousand, or 25.8% to $565 thousand
in 1995, increased $10 thousand, or 2.3% in 1994 to $449 thousand, and increased
$131 thousand, or 42.5% to $439 thousand in 1993. The market value of trust
assets managed at year-end 1995 was $106.9 million, up $34.2 million, or 47.0%,
year-end 1994 was $72.7 million, up $6.4 million, or 9.7% in 1993.

OTHER NONINTEREST EXPENSE

Total noninterest expenses increased $513 thousand, or 3.1% in 1995. These
expenses decreased $125 thousand, or .7% in 1994 and increased $1.9 million, or
12.4% in 1993.

Salaries and employee benefits increased $.7 million or 7.0% for 1995. In 1994,
the increase was $.8 million, or 8.9% to $9.3 million, and $.6 million, or 7.2%
in 1993 to $8.6 million. The increase in salaries of 4.7% in 1995 was
attributable to an


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<PAGE>   28
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
--------------------------------------------------------------------------------

increase in staff. Salaries increased $550 thousand to $6.8 million for the 1994
operating year, or 8.8%. This increase was due to the Bank of Northshore
personnel being on the payroll for a full year in 1994, and the remaining 5.8%
represents merit increases and Christmas bonuses.

Employee benefits increased $335 thousand, or 13.2% for 1995. This increase was
attributable to an increase of $160 thousand, or 11.9% in profit sharing
contributions, and an increase of $41 thousand, or 7.2% in social security
taxes. In 1994, employee benefits increased $215 thousand to $2.5 million, 9.3%.
The major component of this increase in employee benefits was the profit sharing
contribution by the Corporation of $1.1 million, up $262 thousand, or 31.3% from
the 1993 contribution of $.8 million. These increases are a function of
increased profits of the Corporation.

Occupancy expense was $2.5 million in 1995, up $178 thousand, or 7.7% from 1994;
$2.3 million in 1994, down $51 thousand, or 2.1% over 1993, and $2.4 million in
1993. Approximately 35% of occupancy expense is depreciation. The increase in
occupancy expense in 1995 was due to office rental costs which increased $146
thousand to $389 thousand, or 60.1%. Occupancy expense in 1994 was reflective of
what the Corporation did in prior years. In 1992, the Corporation began
construction on a new administration building, which added to occupancy expense
in 1992 and 1993. Additionally in 1993, the Corporation completed its merger
with the Bank of Northshore, which created higher occupancy expenses.

FDIC insurance premiums for 1995 were down $477 thousand or 43.0% due to the
Bank Insurance Fund reaching its congressionally mandated level. FDIC insurance
premium increases in prior years were the result of increases imposed by the
Financial Institutions Reform and Recovery Act of 1989, and higher deposit
balances. The component of other expense, titled "other", increased $25
thousand, or .8% in 1995 to $3.2 million, reflecting the continued emphasis on
maintaining low overhead costs. Other expense decreased by $513 thousand, or
13.9%, in 1994 and $248 thousand, or 7.2%, in 1993.
 
The Corporation's efficiency ratio for 1995 was 46.2%; 47.3% in 1994, and 54.2%
in 1993, which is considered excellent in the industry. This ratio is a measure
used by many large banks and bank holding companies, and indicates the amount of
"overhead" expenses to total revenues. The ratio is arrived at by dividing total
other noninterest expense by the sum of net interest income and other
noninterest income. The lower the number, the more efficient the organization.

LIQUIDITY

The primary function of asset/liability management is to ensure adequate
liquidity and to maintain an appropriate balance between interest-sensitive
earning assets and interest bearing liabilities. Liquidity management involves
the ability to meet the cash flow requirements of customers who either may be
depositors wanting to withdraw funds, or borrowers needing assurance that
sufficient funds will be available to meet their credit needs.

As indicated on Page 5 of this report, net cash provided by operating activities
totaled $15.7 million for 1995, $15.2 million for 1994 and $11.3 million for
1993. The largest component providing cash from operations was net income for
all three years. In 1995, the downward trend in loans originated for sale
leveled off at $17.5 million, versus $16.1 million in 1994 and $50.3 million in
1993. In the fourth quarter of 1995, it has been noted that loan originations
have increased over 1994, and management estimates that if long-term interest
rates continue to decline, these originations will increase in 1996.
 
Investing activities of the Corporation in 1995 were $54.8 million in federal
funds sold, $35.6 million in loans and $5.0 (net) in investments. The 1995
investing activities are a substantial change from the previous year. In 1995,
the Corporation would have preferred more loans, however, demand was weak and it
was necessary to direct funds into federal funds sold and the investment
portfolio. Note, however, that the rates paid on federal funds sold in 1995 were
generally better than treasury bonds out past seven years. In 1994, the
Corporation had excellent loan growth with $102.0 million being invested in
loans, using $10.8 million of security sales proceeds to help fund the growth.
In 1993, loans had smaller funding requirements than investments, with loans
using $50.4 million and investments using $87.0 million.

Over the last three years, the financing of investment activities has changed.
In 1993, core deposits (demand, Money Market and NOW accounts) provided most of
the funding at $81.7 million. The changes in the financing methods in 1994 and
1995 were planned by management. During this time, funding was provided by time
CD's which financed $73.0 million and $144.8 million respectively. In 1994, FHLB
net borrowings of $37.5 million were also necessary to fund growth, whereas
$22.5 million of those borrowings were repaid with excess liquidity in 1995. It
is the Corporation's intention to continue this type of funding in the future.

The charts on the following page indicate the maturity schedule for earning
assets as of December 31, 1995 and 1994:




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

<TABLE>
<CAPTION>
MATURITY SCHEDULE FOR INVESTMENTS AND LOANS
(Amortized cost used for investments)                                     
In Thousands                                                                 Percent
------------                                              Total     Total   of Total
                         0-1         1-5      After     Carrying    Fair      Fair
                         Year       Years    5 Years      Value     Value     Value
                         ----       -----    -------      -----     -----     -----
                     
<S>                    <C>        <C>        <C>        <C>        <C>        <C>  
December 31, 1995
  Investments          $ 28,275   $ 36,713   $ 78,567   $143,555   $146,189    20.5%

  Loans                 169,727    310,947     24,314    504,988    510,973    71.7%

  Federal Funds sold     55,930         --         --     55,930     55,930     7.8%
                       --------   --------   --------   --------   --------   -----
      Total            $253,932   $347,660   $102,881   $704,473   $713,092   100.0%
                       ========   ========   ========   ========   ========   =====
</TABLE>

<TABLE>
<CAPTION>
In Thousands                                                                 Percent
------------                                              Total     Total   of Total
                         0-1         1-5      After     Carrying    Fair      Fair
                         Year       Years    5 Years      Value     Value     Value
                         ----       -----    -------      -----     -----     -----
                     
<S>                    <C>        <C>        <C>        <C>        <C>         <C>  
December 31, 1994
  Investments          $ 13,920   $ 51,149   $ 73,043   $138,112   $131,478     21.7%

  Loans                 171,270    268,916     30,326    470,512    472,360     78.1%

  Federal Funds sold      1,120         --         --      1,120      1,120      0.2%
                       --------   --------   --------   --------   --------    -----
      Total            $186,310   $320,065   $103,369   $609,744   $604,958    100.0%
                       ========   ========   ========   ========   ========    =====
</TABLE>

In addition to deposit acquisition and borrowings as a source of liquidity,
maturing loans and investments with maturities of less than one year and
overnight federal funds purchased are considered to be available for liquidity
needs.

As indicated in the charts above, $253.9 million in aggregate loans, investments
and federal funds sold were available at year-end 1995, or 36.0% of carrying
value. At year-end 1994, $186.3 million in aggregate loans, investments and
federal funds sold were available, or 30.6% of carrying value, and $142.8
million were available as of year-end of 1993, or 27.4% of carrying value.
Additional sources of liquidity available to the Corporation could be additional
sales of securities under repurchase agreements, additional borrowings from the
FHLB, participation in the Treasury Department's short-term note program,
borrowings at the Federal Reserve Bank, or borrowings from correspondent banks
(see Note 6).

The Corporation has a policy that liquidity of 12.5% of total assets be
maintained as a minimum. At year-end 1995, management considers the liquidity of
the Corporation to be more than adequate. The Corporation does not securitize
loans for liquidity purposes, or issue debt in the capital markets.

INTEREST RATE SENSITIVITY

Interest rate sensitivity is closely related to liquidity because each is
directly affected by the maturity of assets and liabilities. Management
considers any asset or liability which matures, or is subject to repricing
within one year, to be interest-sensitive, although continual monitoring is also
performed for other time intervals. The difference between interest-sensitive
assets and liabilities for a defined period of time is known as the
interest-sensitive "gap" and may be either positive or negative. If positive,
more assets reprice before liabilities; if negative, the reverse is true. In
theory, if the gap is positive, a decrease in general interest rates might have
an adverse impact on earnings as interest income decreases faster than interest
expense. This assumes that management adjusts rates equally as general interest
rates fall. Conversely, an increase in interest rates would increase net
interest income as interest income increases faster than interest expense.
However, the exact impact of the gap on future income is uncertain both in
timing and amount because interest rates for the Corporation's assets and
liabilities can change rapidly as the result of market conditions and customer
patterns.

MANAGEMENT DOES NOT USE INTEREST RATE RISK MANAGEMENT PRODUCTS SUCH AS INTEREST
RATE SWAPS, HEDGES, OR DERIVATIVES, NOR DOES MANAGEMENT INTEND TO USE SUCH
PRODUCTS IN THE FUTURE.

The Corporation's interest rate sensitive positions at December 31, 1995 and
1994 are shown in the tables on the following page:

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

REPRICING CHARACTERISTICS OF EARNING ASSETS AND INTEREST BEARING LIABILITIES

(Amortized cost used for investments)

<TABLE>
<CAPTION>
In Millions                                                     
-----------                                                     Total                                         Non
                                        0-3          4-12     within one     1-5       5-10        Over     interest
December 31, 1995                      Months       Months       Year       Years      Years     10 Years   Sensitive   Total
-----------------                      ------       ------       ----       -----      -----     --------   ---------   -----
<S>                                     <C>         <C>         <C>         <C>        <C>        <C>        <C>        <C>  
Earning assets

   Investment securities                $  12       $  16       $  28       $  37      $  65      $  14         --      $ 144
    Loans (1)                             201          54         255         243          3                 $   4        505
    Federal funds sold                     56          --          56          --         --         --         --         56
                                        -----       -----       -----       -----      -----      -----      -----      -----
TOTAL EARNING ASSETS                    $ 269       $  70       $ 339       $ 280      $  68      $  14      $   4      $ 705
                                        =====       =====       =====       =====      =====      =====      =====      =====

Interest bearing liabilities

    Money market & NOW                  $  70          --       $  70          --         --         --         --      $  70
    Savings deposits                      141          --         141          --         --         --         --        141
    Time deposits                          89       $ 158         247       $  98      $   2         --         --        347
                                        -----       -----       -----       -----      -----      -----      -----      -----
TOTAL INTEREST BEARING DEPOSITS           300         158         458          98          2         --         --        558
    Other                                   8          --           8          10          5         --         --         23
                                        -----       -----       -----       -----      -----      -----      -----      -----
TOTAL INTEREST BEARING LIABILITIES      $ 308       $ 158       $ 466       $ 108      $   7         --         --      $ 581
                                        =====       =====       =====       =====      =====      =====      =====      =====

Incremental gap                         ($ 39)      ($ 88)      ($127)      $ 172      $  61      $  14      $   4      $ 124
Cumulative gap                          ($ 39)      ($127)      ($127)      $  45      $ 106      $ 120      $ 124      $ 124

Gap as a percent of
    total earning assets                 -5.5%      -18.0%      -18.0%        6.4%      15.0%      17.0%      17.6%
                                        =====       =====       =====       =====      =====      =====      =====   
</TABLE>

<TABLE>
<CAPTION>
In Millions                                                     
-----------                                                     Total                                         Non
                                        0-3          4-12     within one     1-5       5-10        Over     interest
December 31, 1994                      Months       Months       Year       Years      Years     10 Years   Sensitive   Total
-----------------                      ------       ------       ----       -----      -----     --------   ---------   -----
<S>                                     <C>         <C>         <C>         <C>        <C>        <C>        <C>        <C>  

Earning assets

   Investment securities                $   2       $  12       $  14       $  51      $  51      $  22         --      $ 138
    Loans (1)                             201          59         260         201          6          1      $   3        471
    Federal funds sold                      1          --           1          --         --         --         --          1
                                        -----       -----       -----       -----      -----      -----      -----      -----
TOTAL EARNING ASSETS                    $ 204       $  71       $ 275       $ 252      $  57      $  23      $   3      $ 610
                                        =====       =====       =====       =====      =====      =====      =====      =====

Interest bearing liabilities

    Money market & NOW                  $  71          --       $  71          --         --         --         --      $  71
    Savings deposits                      195          --         195          --         --         --         --        195
    Time deposits                          40       $ 109         149       $  52      $   1         --         --        202
                                        -----       -----       -----       -----      -----      -----      -----      -----
TOTAL INTEREST BEARING DEPOSITS           306         109         415          52          1         --         --        468
    Other                                  17          15          32          15         --         --         --         47
                                        -----       -----       -----       -----      -----      -----      -----      -----
TOTAL INTEREST BEARING LIABILITIES      $ 323       $ 124       $ 447       $  67      $   1         --         --      $ 515
                                        =====       =====       =====       =====      =====      =====      =====      =====

Incremental gap                         ($119)      ($ 53)      ($172)      $ 185      $  56      $  23      $   3      $  95
Cumulative gap                          ($119)      ($172)      ($172)      $  13      $  69      $  92      $  95      $  95

Gap as a percent of
    total earning assets                -19.5%      -28.2%      -28.2%        2.1%      11.3%      15.1%      15.6%
                                        =====       =====       =====       =====      =====      =====      =====
</TABLE>

(1) Includes nonaccruing loans.

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

At the end of 1995, 1994 and 1993, the gap of the Corporation was negative, with
rate-sensitive liabilities exceeding rate-sensitive assets in a one-year
horizon. This would suggest that a decrease in general interest rates would
improve net interest earnings. At year-end 1993, the net interest margin of the
Corporation was 5.30%, 5.46% in 1994 and 5.03% in 1995. General interest rates
declined in 1993, increased rapidly in 1994, and decreased in 1995. The negative
gap of (28.2%) in 1994 declined to a negative (18.0%) in 1995, or the gap became
more asset sensitive during 1995. Since interest rates declined, the general
theory of the gap would hold true as a more asset sensitive position when rates
are declining would have an adverse effect on the net interest margin, which it
did. In 1993, the gap went from (33.1%) at December 31, 1993 to (28.2%) at
December 31, 1994. For this period also, the gap became more asset sensitive,
however, the net interest margin increased to 5.46% from 5.30%. One major factor
contributes to this uncertain effect of the gap theory; interest rates do not
always change to the same extent and at the same time across all maturities of
assets and liabilities. Actually, management determines the repricing on assets
and liabilities depending on the options available to maximize profit while
maintaining liquidity. The gap reflects management's ability to change rates,
not necessarily that rates must change. For example, while savings accounts are
considered repriceable within one year for reporting purposes, it doesn't
necessarily mean that management will change those rates within a one year
period. Rather, it indicates that management may change the rates. During 1994,
management increased rates on deposit accounts fourteen times. During 1995,
management increased rates four times, and decreased rates ten times.

Management reviews gap and numerous other reports monthly. General economic
conditions and competitive factors, are also considered during the process of
asset/liability management. Due to the options available, management considers
the current rate risk position within acceptable levels. Currently, if downward
moving interest rates level off, the net interest margin will continue to
compact until the cost of funds reaches the level of current interest rates.
Management cannot predict when that will happen, or how much lower interest
rates will go.

CAPITAL

The Financial Accounting Standards Board (FASB) issued Statement No. 115,
"Accounting for Certain Investment in Debt and Equity Securities", in May 1993.
Bank holding companies were required to adopt this new accounting standard as of
January 1, 1994 for financial statement reporting. The Corporation adopted this
standard as required.

During 1994, the Federal Reserve and other regulatory agencies issued final
amendments to its risk-based capital treatment. Under this rule, institutions
are generally directed not to include in Tier I capital the components of common
shareholders' equity, "net unrealized holding gains (losses) on available for
sale debt securities". In addition, net unrealized losses on marketable equity
securities should continue to be deducted when computing Tier I capital. This
rule has the general effect of valuing available for sale debt securities at
amortized cost, rather than fair value, for purposes of calculating the
risk-based and leverage capital ratios. Therefore, the Corporation will now
report capital for both financial statement purposes and regulatory purposes.
For the Corporation's regulatory capital position, please see Note 11, page 17
of this report.

Consolidated capital of the Corporation for financial statement purposes,
increased $14.9 million in 1995 to $65.4 million, or 29.5%; $9.3 million in 1994
to $50.5 million, or up 22.6%, and increased $7.9 million in 1993 to $41.2
million, or 23.8%. In 1995, $2.1 million of the increase was attributable to the
increase in the market value of the AFS securities. Almost all of the remainder
of the increase was the retained earnings of the Bank. In 1994 a loss of $1.2
million in the AFS securities reduced the growth in capital to $9.3 million. In
1993, $6.7 million of the increase in capital came from retained earnings, the
remainder of $1.2 million was attributable to the merger with The Bank of
Northshore. Please see Note 11 of this report for other information of
shareholder's equity, dividends and capital requirements.

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

Trading in Frontier Financial Corporation's common stock has not been extensive,
but could be considered an active trading market. In 1995, private trades and
transfers totaled approximately 7% of the total number of outstanding shares.
Private trades and transfers during the year 1994 totaled approximately 6% of
the total outstanding number of shares at year-end. The Corporation's common
stock is not listed on any exchange, or the National Association of Securities
Dealers' Automated Quotation System (NASDAQ). During 1995, the market price of
common stock ranged from $24.00 to $29.00 per share (prices have been adjusted
for stock dividends and splits).

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

At December 31, 1995, the total number of shareholders of record of Frontier
Financial Corporation's common stock was 2,609, and there were 6,322,255 shares
outstanding.

Management has established an objective to maximize the rate of internal capital
growth as the means of maintaining capital adequacy. The Corporation has not
paid cash dividends in the past. However, the Bank, or the Corporation, has paid
a stock dividend each year since 1981, except for 1995. Management believes that
issuing stock accomplishes much more than a cash dividend. The amount of cash
that could be distributed to shareholders would be far less than the liquidation
value of a stock dividend. Additionally, cash dividends reduce capital which is
needed to fund the continued growth of the Bank. Accordingly, there are no plans
at this time to pay future cash dividends.

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

<TABLE>
<CAPTION>
Year Ended December 31,

In Thousands                              1995                         1994      (1)                     1993    (1)
------------                  ----------------------------  -----------------------------   -----------------------------
                                                   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
                              --------   -------   -------  --------   -------   --------   --------
<S>                           <C>        <C>        <C>     <C>        <C>        <C>       <C>         <C>        <C>
INTEREST EARNING ASSETS
Taxable investments           $106,320   $ 6,781    6.38%   $114,861   $ 7,237    6.30%     $ 85,952    $ 6,495    7.56%
Nontaxable investments (2)      31,872     2,977    9.34%     32,672     3,123    9.56%       23,414      2,448   10.46%
                              --------   -------   -----    --------   -------   -----      --------    -------   -----
            Total              138,192     9,758    7.06%    147,533    10,360    7.02%      109,366      8,943    8.18%
Federal funds sold              37,477     2,194    5.85%      1,256        52    4.14%       33,237        991    2.98%
Loans(3)
    Installment                 19,193     1,916    9.98%     19,430     1,819    9.36%       19,829      1,912    9.64%
    Commercial(2)              124,356    13,218   10.63%    120,359    11,673    9.70%      113,007     11,047    9.78%
    Real estate
         Commercial            160,592    16,222   10.10%    117,087    11,219    9.58%       76,112      7,745   10.18%
         Construction           90,317    11,686   12.94%     94,213     9,965   10.58%       66,381      8,192   12.34%
         Residential            90,972     9,113   10.02%     75,255     8,926   11.86%       62,700      6,339   10.11%
                              --------   -------   -----    --------   -------   -------    --------    -------   -----
            Total              485,430    52,155   10.74%    426,344    43,602   10.23%      338,029     35,235   10.42%
Total earning assets/total
     interest income           661,099    64,107    9.70%    575,133    54,014    9.39%      480,632     45,169    9.40%
                              --------   -------   =====    --------   -------   =====      --------    -------   =====
Reserve for loan losses        (12,467)                       (8,688)                         (6,584)
Cash and due from banks         20,885                        24,380                          24,649
Other assets                    21,810                        20,485                          18,322
                              --------                      --------                        --------
TOTAL ASSETS                  $691,327                      $611,310                        $517,019
                              ========                      ========                        ========

INTEREST BEARING LIABILITIES
Money Market &
     NOW accounts             $ 68,511     2,159    3.15%   $ 75,865     2,000    2.64%     $ 79,157      2,345    2.96%
Savings accounts               151,798     6,349    4.18%    224,657     8,606    3.83%      190,510      7,802    4.10%
Other time deposits            306,724    19,350    6.31%    151,240     8,158    5.39%      136,518      7,482    5.48%
                              --------   -------   ------   --------   -------   -----      --------     ------   -----
Total interest bearing
     deposits                  527,033    27,858    5.29%    451,762    18,764    4.15%      406,185     17,629    4.34%
Short-term borrowings            3,173       175    5.51%     11,753       538    4.58%        1,302         35    2.69%
Long-term debt                  22,848     1,297    5.68%     24,077     1,337    5.55%        1,320        118    8.94%
                              --------   -------   ------   --------   -------   -----      --------     ------   -----
Total interest bearing
     liabilities/total
     interest expense          553,054    29,330    5.30%    487,592    20,639    4.23%      408,807     17,782    4.35%
                              --------   -------   ======   --------   -------   =====      --------     ------   =====
Noninterest bearing
     deposits                   73,001                        72,102                          66,232
Other liabilities                6,832                         4,975                           4,355
Shareholders' equity            58,440                        46,641                          37,625
                              --------                      --------                        --------
TOTAL LIABILITIES
     AND CAPITAL              $691,327                      $611,310                        $517,019
                              ========                      ========                        ========

NET INTEREST INCOME                      $34,777                       $33,375                          $27,387
                                         =======                       =======                          =======

NET YIELD ON INTEREST
     EARNING ASSETS                                 5.26%                         5.80%                            5.70%
                                                   =====                         =====                            =====
</TABLE>


(1) Prior period data restated to conform to current presentation.

(2) Includes amounts to convert nontaxable amounts to a fully taxable equivalent
    basis at a 34% tax rate.

(3) Includes nonaccruing loans.

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

<TABLE>
<CAPTION>
Year ended December 31,             1995 versus 1994                  1994 versus 1993               1993 versus 1992 (1)
In Thousands                     Increase (Decrease) Due           Increase (Decrease) Due          Increase (Decrease) Due
------------                          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)
                              -------   -------   ----------   -------   --------   ----------   ------    -------  ---------
<S>                           <C>       <C>        <C>         <C>       <C>         <C>         <C>       <C>        <C>
INTEREST INCOME
Taxable investments            ($538)      $82      ($456)     $2,184    ($1,442)    $  742      $1,668     ($758)    $  910
Nontaxable investments           (77)      (69)      (146)        968       (293)       675         835      (464)       371
                              ------    ------     ------      ------    -------     ------      ------    ------     ------
            Total               (615)       13       (602)      3,152     (1,735)     1,417       2,503    (1,222)     1,281

Federal funds sold             1,492       650      2,142        (953)        14       (939)        481      (260)       221

Loans
    Installment                  (22)      119         97         (39)       (54)       (93)        (85)     (517)      (602)
    Commercial                   388     1,157      1,545         718        (92)       626       1,686    (2,334)      (648)
    Real estate
        Commercial             4,168       835      5,003       4,170       (696)     3,474       2,482    (1,234)     1,248
        Construction            (413)    2,134      1,721       3,435     (1,662)     1,773         564      (310)       254
        Residential            1,864    (1,677)       187       1,269      1,318      2,587       1,246     1,192      2,438
                              ------    ------     ------      ------    -------     ------      ------    ------     ------
            Total              5,985     2,568      8,553       9,553     (1,186)     8,367       5,893    (3,203)     2,690

TOTAL INTEREST
    INCOME                     6,862     3,231     10,093      11,752     (2,907)     8,845       8,877    (4,685)     4,192
                              ------    ------     ------      ------    -------     ------      ------    ------     ------

INTEREST EXPENSE
Money Market &
    NOW accounts                (194)      353        159         (98)      (247)      (345)        460    (1,108)      (648)
Savings accounts              (2,791)      534     (2,257)      1,398       (594)       804       5,318    (1,656)     3,662
Other time deposits            8,387     2,805     11,192         807       (131)       676      (2,652)   (1,532)    (4,184)
                              ------    ------     ------      ------    -------     ------      ------    ------     ------
Total interest
    bearing deposits           5,402     3,692      9,094       2,107       (972)     1,135       3,126    (4,296)    (1,170)

Short-term borrowings           (393)       30       (363)        281        222        503          11        (2)         9
Long-term debt                   (68)       28        (40)      2,032       (813)     1,219          (1)        6          5
                              ------    ------     ------      ------    -------     ------      ------    ------     ------
TOTAL INTEREST
    EXPENSE                    4,941     3,750      8,691       4,420     (1,563)     2,857       3,136    (4,292)    (1,156)
                              ------    ------     ------      ------    -------     ------      ------    ------     ------

CHANGE IN NET
 INTEREST INCOME              $1,921     ($519)    $1,402      $7,332    ($1,344)    $5,988      $5,741     ($393)    $5,348
                              ======    ======     ======      ======    =======     ======      ======    ======     ======
</TABLE>


(1) Prior period data restated to conform to current presentation.

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