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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 1998

                         Commission File Number 0-15540

                         FRONTIER FINANCIAL CORPORATION

             (Exact Name of Registrant as Specified in its Charter)

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<CAPTION>
         Washington                                          91-1223535
<S>                                                 <C>
(State or Other Jurisdiction of                     (IRS Employer Identification
Incorporation or Organization)                                 Number)
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                            332 S.W. Everett Mall Way
                                 P. O. Box 2215
                            Everett, Washington 98203

               (Address of Principal Executive Office) (Zip Code)

                                 (425) 514-0700

              (Registrant's Telephone Number, Including Area Code)

           Securities Registered Pursuant to Section 12(g) of the Act:

                           Common Stock (No Par Value)
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of common stock held by nonaffiliates at December 31,
1998 was $333,386,106 based on the price at December 31, 1998.

The issuer has one class of common stock (no par value) with 8,697,261 shares
outstanding as of December 31, 1998.

Documents Incorporated by Reference

Portions of Annual Report to Shareholders for the year ended:

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<S>                                <C>
December 31, 1998..................Part II
1999 Proxy Statement...............Part III
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                               TABLE OF CONTENTS

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<CAPTION>
                                                                                   Annual
Item Number                                                                     Shareholders'            Proxy
                                                              Form 10-K            Report              Statement
PART I                                                          Page                Page                  Page
------                                                          ----                ----                  ----
<S>                                                           <C>               <C>                    <C>
   1              Business                                      1-9

                  Statistical Disclosure Index                  10

   2              Properties                                    19

   3              Legal Proceedings                             20

   4              Submission of Matters to
                  a Vote of Security Holders                    20
PART II
   5              Market for Registrant's Common
                  Stock and Related Shareholder
                  Matters                                                           39

   6              Selected Financial Data                       20

   7              Management's Discussion and
                  Analysis of Financial Condition
                  and Results of Operations                                         27-43

  7a              Quantitative and Qualitative Disclosures
                  About Market Risks                                                36-39

   8              Financial Statements and
                  Supplementary Data                            21

   9              Changes in and Disagreements with
                  Accountants on Accounting and
                  Financial Disclosure                          21
PART III
   10             Directors and Executive
                  Officers of Frontier
                  Financial Corporation                                                                   2-4

   11             Executive Compensation                                                                  7-8

   12             Security Ownership of Certain
                  Beneficial Owners and
                  Management                                                                               5

   13             Certain Relationships and
                  Related Transactions                          22                   21                   8&11
PART IV
   14             Exhibits, Financial Statement
                  Schedules, and Reports on
                  Form 8-K                                      23

                  Signatures                                    26
</TABLE>



                                        i
<PAGE>   3

                                     PART I
ITEM 1 - BUSINESS

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

The Bank

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

The Bank engages in general banking business, including the acceptance of
demand, time and savings deposits and the making of loans. As of December 31,
1998, the Bank conducted its business operations out of 23 offices located in
Snohomish, Pierce, King and Skagit counties, which is the bank's principal
market area. Four offices are located in Everett, one office each is located in
Arlington, Snohomish, Smokey Point, Lake Stevens, Marysville, Lynnwood, Mill
Creek, Edmonds, Stanwood, Bothell, Woodinville, Monroe, Lake City (Seattle),
Redmond, Burlington, and four offices located in Pierce county in the cities of
Sumner, Puyallup, Orting and Buckley.

Banking Services

The Bank provides a full range of consumer banking services including savings
accounts, checking accounts, installment and commercial lending, safe deposit
facilities, time deposits and other consumer and business related financial
services. In addition to consumer oriented activities, the Bank maintains a
strong commercial lending program, servicing businesses headquartered in the
Bank's principal market area. At the end of 1983, the Bank began to offer a
discount brokerage service to its customers. In September of 1984, the Bank
opened its Real Estate Division, offering a broad range of home, construction
and commercial long-term financing. The Trust Department opened for business in
March of 1985. This department offers a full array of trust services to its
customers. In May 1988, the Bank opened a Private Banking Office to give
personal service to upscale customers. In August 1989, the Bank acquired,
through a merger, three banking offices of Citizens Bank of Snohomish County,
and a real estate origination department. In January 1991, the Bank opened an
office in Mill Creek, providing a full range of consumer banking services.

In March 1991, the Bank opened an Insurance and Investment Center which markets
annuities, life insurance products, and mutual funds to Bank customers and the
general public. In July 1992, the Bank opened its Stanwood Office. In November
1992, the Bank acquired through merger, Edmonds National Bank, which had one
office. In July 1993, the Bank acquired through merger, The Bank of Northshore,
which had two offices located in Bothell and Woodinville, King County,
Washington. This merger marked the first time the Bank branched outside of
Snohomish County. In June 1995, the Bank opened an office in Monroe, providing a
full range of consumer banking services. In August 1996, the Bank opened the
Lake City Office, (North Seattle) and in December 1996 opened its first office
in Skagit county, in Burlington, named the Skagit County Office. In May 1997,
the Bank opened an office in Redmond, Washington. This is the Bank's first 
office in eastern King county. In December 1998, the Bank acquired, through 
merger, the Bank of Sumner, and four of its offices, and a real estate 
origination department. These offices provide a full range of consumer and 
commercial banking services.



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Employees

At December 31, 1998, the Bank had 375 full and 36 part time employees. The Bank
considers its relations with employees to be very good.

Competition

All phases of the Bank's activities are highly competitive. The Bank competes
actively with national and state banks, mutual savings banks, savings and loan
associations, finance companies, credit unions, brokerage houses, and other
financial institutions operating in its service area. Some of these financial
institutions have greater resources than those of the Bank. On December 31,
1998, the Bank had total assets of $1.142 billion and deposits of $927.1
million.

Supervision and Regulation

The following refers to certain statutes and regulations affecting the banking
industry. These references are only intended to provide brief summaries and
therefore are not complete and are qualified by the statutes and regulations
referenced. In addition, due to the numerous statutes and regulations which
apply to and regulate the operation of the banking industry, many are not
referenced below.

FRONTIER FINANCIAL CORPORATION ("FFC")

GENERAL. FFC is a bank holding company by virtue of its ownership of Frontier
Bank (the "Bank"), and is registered as such with the Federal Reserve Bank
("FRB"). As a bank holding company, FFC is subject to the Bank Holding Company
Act of 1956, as amended ("BHCA"), which governs and subjects FFC to supervision
and examination by the FRB. Under the BHCA, FFC files with the FRB quarterly and
annual reports of its operations and such additional information as the FRB may
require.

BANK HOLDING COMPANY STRUCTURE. In general, the BHCA limits bank holding company
business to owning or controlling banks and engaging in other banking-related
activities. Certain recent legislation designed to expand interstate branching
and relax federal restrictions on interstate banking may expand opportunities
for bank holding companies (see below under "Interstate Banking and Branching").
However, the impact that this legislation may have on FFC and the Bank is
unclear at this time.

FRB REGULATION. Bank holding companies must obtain the FRB's approval before
they: (1) acquire direct or indirect ownership or control of any voting shares
of any bank if, after such acquisition, they would own or control, directly or
indirectly, more than 5 percent of the voting shares of such bank; (2) merge or
consolidate with another bank holding company; and (3) acquire substantially all
of the assets of any additional banks. Subject to certain state laws, such as 
age and contingency laws, a bank holding company that is adequately capitalized
and adequately managed may acquire the assets of an out-of-state bank.



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CONTROL OF NONBANKS. With certain exceptions, the BHCA also prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the FRB finds FFC's business to be incidental to the business of banking. When
making this determination, the FRB in part considers whether allowing a bank
holding company to engage in those activities would offer advantages to the
public that would outweigh possible adverse effects.

If a holding company is well capitalized and meets other criteria specified by
the FRB, it may engage de novo in certain permissible nonbanking activities.

Acceptable nonbanking activities include: (1) operating an industrial loan
company, mortgage company, finance company, trust company, or credit card
company; (2) performing certain data processing operations; and (3) providing
investment and financial advice. In contrast, prohibited nonbanking activities
include real estate brokerage and syndication, and land development, property
management, and the underwriting of life insurance not related to credit
transactions permissible for bank holding companies.

CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as amended,
requires a person or group of persons acquiring "control" of a bank holding
company to provide the FRB with at least 60 days' prior written notice of the
proposed acquisition. Following receipt of the notice, the FRB has 60 days to
issue a notice disapproving the proposed acquisition, but the FRB may extend
this time period for up to another 30 days. An acquisition may be completed
before the disapproval period expires if the FRB issues written notice of its
intent not to disapprove the action. Under a rebuttable presumption established
by the FRB, the acquisition of 10 percent of more of a class of voting stock of
a bank holding company with a class of securities registered under Section 12 of
the Exchange Act would, under the circumstances, set forth in the presumption,
constitute the acquisition of control. In addition, any "company" would be
required to obtain the approval of the FRB under the BHCA before acquiring 25
percent (5 percent if the "company" is a bank holding company) or more of the
outstanding shares of FFC, or otherwise obtain control over FFC.

TRANSACTIONS WITH AFFILIATES. FFC and the Bank are deemed affiliates within the
meaning of the Federal Reserve Act, and transactions between affiliates are
subject to certain restrictions. These restrictions apply to FFC and the Bank
through the BHCA, which provide that transactions between an insured subsidiary
of a holding company and its affiliates are subject to restrictions applicable
to transactions between banks that are members of the Federal Reserve System and
their affiliates in accordance with Sections 23A and 23B of the Federal Reserve
Act. Generally, Sections 23A and 23B: (1) limit the extent to which the
financial institution or its subsidiaries may engage in "covered transactions"
with an affiliate, as defined, to an amount equal to 10 percent of such
institutions capital and surplus and an aggregate limit on all such transactions
with all affiliates to an amount equal to 20 percent of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.



                                      -3-
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REGULATION OF MANAGEMENT. Federal law: (1) sets forth circumstances under which
officers or directors of a financial institution may be removed by the
institution's federal supervisory agency; (2) places restraints on lending by an
institution to its executive officers, directors, principal shareowners, and
their related interests; and (3) prohibits management personnel from serving as
a director or in other management positions of another financial institution
whose assets exceed a specified amount or which has an office within a specified
geographic area.

FIRREA. The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial bank and savings bank deposits
and the other to insure savings association deposits; (3) for the first time,
permitted bank holding companies to acquire healthy savings associations; (4)
permitted commercial banks that meet certain housing-related assets requirements
to secure advances and other federal services from their local Federal Home Loan
Banks; and (5) greatly enhanced the regulators' enforcement powers by removing
procedural barriers and sharply increasing the civil and criminal penalties for
violating statutes and regulations.

TIE-IN ARRANGEMENTS. FFC and the Bank, are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither FFC, nor the Bank, may condition an extension of credit on either (1) a
requirement that the customer obtain additional services provided by it or (2)
an agreement by the customer to refrain from obtaining other services from a
competitor. Effective April 1997, the FRB has adopted significant amendments to
its anti-tying rules that; (1) remove FRB-imposed anti-tying restrictions on
bank holding companies and their non-bank subsidiaries; (2) create exemptions
from the statutory restriction on bank tying arrangements to allow banks greater
flexibility to package products with their affiliates; and (3) establish a safe
harbor from the tying restrictions for certain foreign transactions. These
amendments are designed to enhance competition in banking and nonbanking
products and allow banks and their affiliates to provide more efficient and
lower-cost services to customers. However, the impact of the amendments on FFC
and the Bank is unclear at this time.

STATE LAW RESTRICTIONS. As a corporation chartered under the laws of the State
of Washington, FFC may be subject to certain limitations and restrictions as
provided under applicable Washington corporate laws.

SECURITIES REGISTRATION AND REPORTING. FFC Common Stock is registered as a class
with the SEC under Section 12(g) of the Securities Exchange Act of 1934 and thus
is subject to the periodic reporting and proxy solicitation requirements and the
insider-trading restrictions of that Act. The periodic reports, proxy
statements, and other information filed by FFC under that Act can be inspected
and copied at or obtained from the Washington D.C., office of the SEC. In
addition, the securities issued by FFC are subject to the registration
requirements of the Securities Act of 1933 and applicable state securities laws
unless exemptions are available.

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



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THE BANK

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

The Bank is a state-chartered commercial bank subject to extensive regulation
and supervision by the Washington State Department of Financial Institutions
Division of Banks (the "Division"). The Bank is also subject to regulation and
examination by the FDIC which insures the deposits of the Bank to the maximum
extent permitted by law and by requirements established by the FRB. The federal
laws that apply to the Bank regulate, among other things, the scope of its
business, investments, reserves against deposits, the timing of the availability
of deposited funds and the nature and amount of and collateral for loans. The
laws and regulations governing the Bank generally have been promulgated to
protect depositors and not to protect stockowners of such institutions or their
holding companies.

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

LOANS TO ONE BORROWER. The Bank is subject to limitations on the aggregate
amount of loans that it can make to any one borrower, including related
entities. Applicable regulations generally limit loans-to-one borrower to 15 to
20 percent of unimpaired capital and surplus. As of December 31, 1998, the Bank
was in compliance with applicable loans-to-one borrower requirements.

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

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

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



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Beginning in the year 2000, BIF insured institutions will be required to pay the
FICO obligations on a pro-rata basis with all thrift institutions; annual
assessments are expected to equal approximately 2.4 basis points until 2017, to
be phased out completely by 2019.

For the remainder of 1998 and until further action by the FDIC, BIF premiums
will be maintained at their current level.

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

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

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

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

Under these guidelines, banks' assets are given risk-weights of 0 percent, 20
percent, 50 percent or 100 percent. In addition, certain off-balance sheet items
are given credit conversion factors to convert them to asset equivalent amounts
to which an appropriate risk-weight will apply. These computations result in the
total risk-weighted assets. Most loans are assigned to the 100 percent risk
category, except for first mortgage loans fully secured by residential property
and, under certain circumstances, residential construction loans (both carry a
50 percent rating). Most investment securities are assigned to the 20



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<PAGE>   9

percent category, except for municipal or state revenue bonds (which have a 50
percent rating) and direct obligations of or obligations guaranteed by the
United States Treasury or United States Government Agencies (which have a 0 and
20 percent rating, respectively).

The Agencies have also implemented a leverage ratio, which is equal to Tier 1
capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the
leverage ratio is to limit the maximum degree to which a bank may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3 percent, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points. Any institution
operating at or near the 3 percent level is expected to have well-diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity and good earnings, and in general, to be a strong banking
organization without any supervisory, financial or operational weaknesses or
deficiencies. Any institutions experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels.

PROMPT CORRECTIVE ACTION. Regulations adopted by the Agencies as required by
FDICIA impose even more stringent capital requirements. The regulators require
the FDIC and other Federal Banking Agencies to take certain "prompt corrective
action" when a bank fails to meet certain capital requirements. The regulations
establish and define five capital levels: (1) "well-capitalized," (2)
"adequately capitalized," (3) "undercapitalized," (4) significantly
undercapitalized" and (5) "critically undercapitalized." To qualify as "well
capitalized", an institution must maintain at least 10 percent total risk-based
capital, 6 percent Tier 1 risk-based capital, and a leverage ratio of no less
than 5 percent. Increasingly severe restrictions are imposed on the payment of
dividends and management fees, asset growth and other aspects of the operations
of institutions that fall below the category of being "adequately capitalized"
(which requires at least 8 percent total risk-based capital, 4 percent Tier 1
risk-based capital, and a leverage ratio of at least 4 percent).
Undercapitalized institutions are required to develop and implement capital
plans acceptable to the appropriate federal regulatory agency. Such plans must
require that any company that controls the undercapitalized institution must
provide certain guarantees that the institution will comply with the plan until
it is adequately capitalized. As of December 31, 1998, the Bank was well
capitalized and maintained a leverage ratio of 10.90 percent, a risk-based Tier
1 capital ratio of 12.67 percent, and a risk-based total capital ratio of 13.92
percent.

In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value of
the bank's capital due to changes in interest rates. A bank may be required to
hold additional capital for interest rate risk if it has a significant exposure
or a weak interest rate risk management process.

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



                                       -7-

<PAGE>   10

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

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

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

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

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

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



                                       -8-

<PAGE>   11

Effect of Governmental Policies

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

FFP, Inc.

On April 4, 1988, the Corporation formed a new subsidiary corporation called
FFP, Inc. The purpose of this corporation is to purchase and lease real property
to the Bank. The reason for this approach was to preclude placing nonearning
assets on the books of the Bank or the Corporation. As of December 31, 1998, all
banking offices have been moved into FFP, except those offices which are leased,
and except those acquired in the 1998 merger with the Bank of Sumner. For
further details, please see page 19 of this Form 10-K Report, "Properties." It
is intended that future purchases of real property will be made by FFP, Inc. At
this time, it is not anticipated that FFP, Inc. will engage in any other type of
business.

Washington Banking Company

In April 1996, the Corporation purchased 4.99% of the common stock of Whidbey
Island Bank, located approximately 15 miles west of Everett. Shortly thereafter,
the bank converted to the holding company structure and is now called Washington
Banking Company ("WBC"). Subsequent to the initial investment, the Corporation
made application to the Board of Governors of the Federal Reserve System to
purchase up to 10.0% ownership in WBC. Approval was received, and the
Corporation has since purchased a total ownership of 6.62%, as of March 15,
1999. The Corporation intends to purchase more stock.



                                       -9-

<PAGE>   12

                          STATISTICAL DISCLOSURE INDEX

The schedules listed below set forth the statistical information relating to
Frontier Financial Corporation and subsidiaries (unless otherwise stated) in
accordance with Guide 3. This information should be read in conjunction with the
consolidated financial statements.

<TABLE>
<CAPTION>
                                                                          Annual
                                                        Form 10-K         Report
                                                          Page             Page 
                                                          ----             ---- 
<S>                                                     <C>               <C>
     I. Distribution of Assets, Liabilities
        and Stockholders' Equity; Interest
        Rates and Interest Differential:

        A.  Consolidated Average Balance
            Sheets/Interest Income and
            Expense/Rates                                                   42
        B.  Changes in Net Interest Income
            and Expense due to Rate and                                     43
            Volume

    II. Investment Portfolio:

        A.  Analysis of Investment Securities
            at Year-end                                    11               11
        B.  Maturity Distribution of Investment
            Securities                                     11               12

   III. Loan Portfolio:

        A.  Types of Loans                                 12               12
        B.  Loan Maturities and Sensitivity to
            Changes in Interest Rates                      12             13 & 38
        C.  Risk Elements                                  13
        D.  Credit Concentrations

    IV. Summary of Loan Loss Experience:

        A.  Analysis                                       15
        B.  Allocation of Allowance for Possible
            Loan Losses                                    16

     V. Deposits:

        Average Interest and Noninterest
        Bearing Deposit Balances                                            42

    VI. Return on Equity and Assets:

        Selected Financial Ratios                        18 & 20

   VII. Short-term Borrowings                              19
</TABLE>


                                      -10-

<PAGE>   13

Analysis of Investment Securities

The Aggregate amortized recorded values of investment securities at December 31
are as follows:

<TABLE>
<CAPTION>
                                  1998           1997           1996
(In thousands)               Amortized      Amortized      Amortized
                                  Cost           Cost           Cost
                              --------       --------       --------
<S>                          <C>            <C>            <C>     
U.S. Treasuries               $    252       $    754       $    758
U.S. Agencies                   74,516         44,039         46,022
Municipal Bonds                 28,144         28,881         30,491
Corporate Bonds                 25,054         28,151         40,578
Equities                        11,923          9,927          9,270
Certificates of Deposit          4,750          3,550          4,775
                              --------       --------       --------
       Totals                 $144,639       $115,302       $131,894
                              ========       ========       ========
</TABLE>

Maturity Distribution of Investment Securities

The following table sets forth the maturities of investment securities at
December 31, 1998. Taxable equivalent values are used in calculating yields
assuming a tax rate of 35%.

<TABLE>
<CAPTION>
(In thousands)                                   After 1 Yr        After 5 Yrs                        Totals &
(Amortized cost used)           Within           But Within        But Within          After          Weighted
                                1 Year/           5 Years/          10 Years/        10 Years/         Average
                                 Yield             Yield              Yield            Yield            Yield
                                 -----             -----              -----            -----            -----
<S>                           <C>               <C>               <C>               <C>              <C>        
U.S. Treasury                 $         0       $         0       $         0       $       252      $       252
                                     0.00%             0.00%             0.00%             7.16%            7.16%

U.S. Agencies                       1,851             4,516            64,004             4,145           74,516
                                     6.98%             6.18%             6.37%             7.56%            6.44%

Municipal Bonds                       350             3,918            23,389               487           28,144
                                    10.32%             9.49%             8.43%             9.40%            8.62%

Corporate Bonds                     1,579            18,707             4,768                 0           25,054
                                     8.17%             6.92%             6.87%             0.00%            6.99%

Equities                           11,923                 0                 0                 0           11,923
                                     6.77%             0.00%             0.00%             0.00%            6.77%

Certificates of Deposit             4,750                 0                 0                 0            4,750
                                     5.16%             0.00%             0.00%             0.00%            5.16%
                              -----------       -----------       -----------       -----------      -----------
TOTALS                        $    20,453       $    27,141       $    92,161       $     4,884      $   144,639
                              ===========       ===========       ===========       ===========      ===========
                                     6.58%             7.17%             6.92%             7.72%            6.95%
                              ===========       ===========       ===========       ===========      ===========
</TABLE>


                                      -11-

<PAGE>   14

Types of Loans

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

<TABLE>
<CAPTION>
(In thousands)                           1998           1997           1996           1995            1994
--------------                           ----           ----           ----           ----            ----
<S>                                    <C>            <C>            <C>            <C>            <C>     
Commercial                             $207,439       $157,319       $129,457       $137,618       $130,164
Real Estate Commercial                  382,203        293,243        255,807        192,104        170,939
Real Estate Construction                173,192        151,793        144,028        102,426        107,533
Real Estate Mortgage                    103,205        106,438        103,810         98,404         86,149
Installment                              32,103         28,153         24,575         21,567         20,136
                                       --------       --------       --------       --------       --------
             TOTAL                     $898,142       $736,946       $657,677       $552,119       $514,921
                                       ========       ========       ========       ========       ========
</TABLE>

Loan Maturities and Sensitivity to Changes in Interest Rates

The following table shows the amounts and maturity analysis of loans outstanding
as of December 31, 1998. Also, the amounts are classified as to fixed and
variable rate sensitivity for amounts due after one year.

<TABLE>
<CAPTION>
                                                        Maturity
                                   ---------------------------------------------------
(In thousands)                     Within          1 - 5         After
                                   1 Year          Years        5 Years          Total
                                   ------          -----        -------          -----
<S>                               <C>            <C>            <C>            <C>     
Commercial                        $121,013       $ 75,605       $ 10,741       $207,359
Real Estate Commercial              48,685        262,850         70,691        382,226
Real Estate Construction           125,017         42,169          6,039        173,225
Real Estate Mortgage                31,133         62,607          9,476        103,216
Installment                          8,634         13,566          9,916         32,116
                                  --------       --------       --------       --------
             TOTAL                $334,482       $456,797       $106,863       $898,142
                                  ========       ========       ========       ========
</TABLE>

Loans maturing after one year with:

<TABLE>
<CAPTION>
                      1 - 5           After
                      Years          5 Years
                     --------       --------
<S>                  <C>            <C>     
Fixed Rates          $403,992       $ 75,837
Variable Rates         52,805         31,026
                     --------       --------
       TOTAL         $456,797       $106,863
                     ========       ========
</TABLE>

It is not uncommon to rollover loans at the maturity period, provided that the
rate and terms of the loan conform to the current policy.



                                      -12-

<PAGE>   15

Loan Administration

The Bank provides revolving lines of credit to many of its borrowers. Such lines
are approved by the Director's Loan Committee ("Loan Committee") or other
administrative level committee or person if the amount exceeds the lending units
authorized loan limit.

Credit Review personnel, under the direction of the Credit Administrator,
examine the loan portfolio regularly. Reports are made by the Senior Vice
President/Credit Administrator to senior management and the Loan Committee, and
follow-up corrective action is monitored. Problem loan reports are prepared for
management review on a regular basis.

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

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

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

Risk Elements - Impaired Assets

Loans are placed in a nonaccrual status when, in the opinion of management, the
collection of additional interest is doubtful, or when the loan becomes ninety
(90) days past due in principal or interest. When a loan is placed in a
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 on a regular basis. As
a consequence, some of these loans are current in their payments at this time.

The dollar amount of loans past due 90 days or more and still accruing,
nonaccrual loans, restructured loans and other real estate owned as a percentage
of total loans was .26%, .78%, and .64% for year-end 1998, 1997 and 1996,
respectively. These loans have a variety of situations, some of which may lead
to foreclosure or involve a bankruptcy case. Others may continue payment as the
borrower's financial situation improves. A very small amount represents
federally insured loans. At year-end 1996, two borrowers comprise 72% of the
totals, the majority of which is real estate secured. At year-end 1997, the
total represented 21 different loans, 8 out of those 21 were real estate in
nature. However, there does not appear to be any trend developing. At year-end
1998, the number of loans in nonaccrual was 15, totaling slightly more than $1
million, or .12% of total loans.

Management monitors these loans on a frequent basis and conducts aggressive
collection efforts, unless constraints are placed on the Bank by the bankruptcy
courts. These efforts are directed toward the best long-term results for the
Bank, and to the extent reasonable, to the borrower as well. If, in the opinion
of management, it is felt, or if it can be determined, that full collection of
these loans or their payment streams will not occur, then they are charged off
against the loan loss reserve.



                                      -13-

<PAGE>   16

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

(In thousands)
<TABLE>
<CAPTION>
                                   1998            1997            1996            1995            1994
                                 --------        --------        --------        --------        --------
<S>                              <C>             <C>             <C>             <C>             <C>     
Commercial                       $    112        $    327        $    478        $    175        $    877
Real Estate                           932           4,097           3,144           4,402           1,872
Installment                            21              17               4              14             107
Restructured                            0             109             121             122             126
                                 --------        --------        --------        --------        --------
Total Non-Performing Loans          1,065           4,550           3,747           4,713           2,982
                                 --------        --------        --------        --------        --------
Other real estate owned             1,287           1,200             444             590           1,118
                                 --------        --------        --------        --------        --------
Total Impaired Assets            $  2,352        $  5,750        $  4,191        $  5,303        $  4,100
                                 ========        ========        ========        ========        ========

Total Loans at end
    of period                    $898,142        $736,946        $657,677        $552,119        $514,921
                                 ========        ========        ========        ========        ========
As a percent of
    total loans                      0.26%           0.78%           0.64%           0.96%           0.80%
                                 ========        ========        ========        ========        ========
</TABLE>

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

(In thousands)
<TABLE>
<CAPTION>
At December 31,                     1998       1997       1996       1995       1994
---------------                     ----       ----       ----       ----       ----
<S>                                 <C>        <C>        <C>        <C>        <C>
Total interest income which
would have been recorded
during the period under
original terms of loans above       $ 42       $289       $289       $518       $280

Portion of interest
income included in
net income for the
period                                41        384       $264       $378       $207

Commitments for additional
funds related to loans
above                                -0-        -0-        -0-        -0-        -0-
</TABLE>

Restructured loans are those loans that had problems in the past, and a
concession was made in the interest rate, principal amount, and/or the repayment
schedule has been modified to the extent that there has been tangible impairment
of value. These loans are monitored on a regular basis for performance.

The Bank originates commercial, commercial real estate, real estate
construction, residential mortgage and installment loans primarily in Snohomish,
Pierce, King and Skagit Counties. Total loans as of December 31, 1998, 1997 and
1996 were $898.1, $736.9 and $657.7 million, respectively.



                                      -14-
<PAGE>   17

Other Real Estate Owned

As of December 31, 1998, the Bank had seven parcels of other real estate owned
(OREO) on its books, which totaled $1.3 million. No losses are expected on sales
of OREO which are recorded at the lower of cost or fair value, less estimated
costs to sell. The current levels are felt to be nominal, and no particular
trends are noted at this time.

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

<TABLE>
<CAPTION>
(In thousands)                         1998         1997         1996         1995         1994
                                       ----         ----         ----         ----         ----
<S>                                   <C>          <C>          <C>          <C>          <C>   
Other Real Estate Owned               $1,287       $1,200        $444         $590        $1,118
</TABLE>

Summary of Loan Loss Experience

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

<TABLE>
<CAPTION>
(In thousands)                     1998             1997              1996              1995              1994
                                 --------         --------          --------          --------          --------
<S>                             <C>              <C>               <C>               <C>               <C>      
Balance at beginning
of year                          $ 15,824         $ 14,033          $ 12,601          $ 11,019          $  7,850

Provision charged to
operating expense                   1,800            2,095             2,133             1,621             4,059

  Loans charged-off:

         Commercial                  (438)            (393)             (621)           (1,257)           (1,120)
         Real Estate                 (778)          (1,324)           (1,336)             (875)             (892)
         Installment                  (66)             (81)              (84)              (88)             (120)
                                 --------         --------          --------          --------          --------
  Total charged-off loans          (1,282)          (1,798)           (2,041)           (2,220)           (2,132)

  Less recoveries:
         Commercial                   653              283               752             1,245               614
         Real Estate                1,082            1,161               535               902               557
         Installment                   21               50                53                34                71
                                 --------         --------          --------          --------          --------
  Total recoveries                  1,756            1,494             1,340             2,181             1,242

Net charge-offs                       474             (304)             (701)              (39)             (890)

Balance at end of year           $ 18,098         $ 15,824          $ 14,033          $ 12,601          $ 11,019
                                 ========         ========          ========          ========          ========

Total loans at
end of period                    $898,142         $736,946          $657,677          $552,119          $514,921

Daily average loans              $811,866         $703,275          $608,190          $531,297          $472,198

Ratio of net charged-off
loans during period to
average loans outstanding          -0.06%             0.04%             0.12%             0.01%             0.19%
                                 ========         ========          ========          ========          ========
</TABLE>



                                      -15-

<PAGE>   18

It is the policy of Frontier Financial Corporation and its subsidiary to
charge-off any loan or portion of a loan that is deemed uncollectible in the
ordinary course of business. The entire allowance for possible loan losses is
available to absorb such charge-offs.

Allocation of Allowance for Possible Loan Losses

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

(In thousands, except percents)
<TABLE>
<CAPTION>
                                        Loan                       Loan                      Loan        
                          1998        Category       1997       Category        1996       Category      
                         Reserve      Percent       Reserve      Percent       Reserve      Percent      
                         -------       -----        -------       -----        -------       -----       
<S>                      <C>            <C>         <C>            <C>         <C>            <C>        
Commercial               $ 9,592        23.1%       $ 8,920        21.4%       $ 8,702        19.7%      
Real Estate                8,144        73.3%         6,485        74.8%         4,976        76.6%      
Installment                  362         3.6%           419         3.8%           355         3.7%      
                         -------       -----        -------       -----        -------       -----       
   TOTAL                 $18,098       100.0%       $15,824       100.0%       $14,033       100.0%      
                         =======       =====        =======       =====        =======       =====       
</TABLE>

<TABLE>
<CAPTION>
                                       Loan                       Loan
                          1995       Category        1994       Category
                         Reserve      Percent       Reserve      Percent
                         -------       -----        -------       ----- 
<S>                      <C>            <C>         <C>            <C>  
Commercial               $ 7,758        24.9%       $ 6,374        25.3%
Real Estate                4,283        71.2%         3,937        70.8%
Installment                  560         3.9%           708         3.9%
                         -------       -----        -------       ----- 
   TOTAL                 $12,601       100.0%       $11,019       100.0%
                         =======       =====        =======       ===== 
</TABLE>

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

Determination of the Reserve for Loan Losses - Qualitative Factors

The loan portfolio is separated by quality and then by loan type. Loans of
acceptable quality are evaluated as a group, by loan type, with a specific
reserve percent assigned to the total loans in each type, but unallocated to any
individual loan. Conversely, each adversely classified loan is individually
analyzed, to determine a "worst case" loss. A valuation allowance is also
assigned to these adversely classified loans, but at a higher percent due to the
greater risk of loss. Those loans where the "worse case" loss is greater than
the background percentage, that amount is considered specifically allocated to
the reserve.

Based on actual historical results (over the past 5 years, which average
approximately $600 thousand per year net losses), Frontier has an excess of the
necessary reserves required. However, this does not take into consideration the
inherent risks of a loan portfolio, the current or expected local economic
conditions, so management believes that the reserve is adequate, based on those
inherent risks.

National and Local Economic Trends and Conditions

In addition to the economic discussion in Managements Discussion and Analysis of
Financial Condition and Results of Operations (page 27-29, 1998 Annual Report to
Shareowners), there are other qualitative factors considered when analyzing the
adequacy of the loan loss reserve.



                                      -16-

<PAGE>   19

Year 2000 Risk

As part of Year 2000 due diligence, a specific loan loss allowance is maintained
to offset any potential losses incurred due to business failures or setbacks
caused by the millennium change. Although actual losses are impossible to
predict, we are in the process of risk rating our loan portfolio and assigning a
specific loan loss reserve of .1% of the loan balance to the loans assigned a
high risk rating. A background reserve amount of $500 thousand is set aside and
is adjusted as information is updated from time to time. However, there can be
no guarantee that this estimate is accurate and actual results could differ
materially from those anticipated. Also, because of the merger with the Bank of
Sumner, an additional $100 thousand background amount was added to the Y2K
reserve to mitigate the unknown risk assumed.

Effects of Changing Interest Rates

The three recent decreases in the discount rate by the Federal Reserve and the
subsequent Prime rate reductions, totaling .75%, bring the Prime rate down to
7.75%. The "pipeline" is filling up again with another round of residential real
estate refinances. Inflation remains low and adds some stability to an economy
that is anticipated to slow.

The majority of the bank's loans have short term maturities of up to 5 years,
and typically, 47% of the loan portfolio reprices within 1 year, which decreases
the interest rate risk.

Concentrations of Credit

At year-end 1998, 16.8% of the Bank's loan portfolio was in residential and
commercial construction and land development projects centered in Snohomish,
Pierce, King and Skagit Counties. Management has established a Real Estate
Review Committee which meets periodically to monitor local economic conditions,
and the performance of borrowers in this industry. The chart below indicates the
amount of those loans, and as a percent of total loans for the period:

<TABLE>
<CAPTION>
At December 31,
(In thousands)                       1998            1997            1996            1995           1994
                                   --------        --------        --------        --------        --------
<S>                                <C>             <C>             <C>             <C>             <C>     
Construction                       $ 99,312        $ 80,233        $ 70,201        $ 54,341        $ 60,173
Land Development                     51,902          43,015          52,186          33,946          38,582
                                   --------        --------        --------        --------        --------
  TOTAL                            $151,214        $123,248        $122,387        $ 88,287        $ 98,755
                                   ========        ========        ========        ========        ========

Total Loans at end of period       $898,142        $736,946        $657,677        $552,119        $514,921
                                   ========        ========        ========        ========        ========

Construction and Land
Development loans as a
percent of total loans                 16.8%           16.7%           18.6%           16.0%           19.2%
                                   ========        ========        ========        ========        ========
</TABLE>


At this time, management considers the loan portfolio reasonably diversified,
providing the proper mix of risk and return. However, the quality of many of the
loans is related to the strength and stability of real estate values, which
could be affected by several factors.



                                      -17-

<PAGE>   20

Levels of, and Trends in, Delinquencies and Nonaccruals

Nonperforming loans and other real estate declined significantly in the fourth
quarter of 1998, when compared to the end of the third quarter, due to the
resolution of two well secured problem loans. Management monitors delinquencies
monthly and reports are prepared for the Board of Directors review.
Delinquencies for the commercial, personal, real estate and credit lines
categories are charted separately when presented to the Board. At this time, the
data indicates a generally stable to declining trend.

Trends in Volume and Terms of Loans

The rate of loan growth was consistent in the second, third and fourth quarters
of 1998. Total loans increased $39 million in the fourth quarter, or 5% to
$898.1 million. The merger with the Bank of Sumner added approximately $92
thousand in loans.

Conclusion of Qualitative Factors

The allowance for loan losses is the amount which, in the opinion of management,
is necessary to absorb inherent loan losses regardless of source. Management's
evaluation of the adequacy of the allowance is based on the market area served,
local economic conditions, the growth and mix of the portfolio and their related
risk characteristics.

The loan loss reserve may be somewhat larger than the indicated amount based on
formulas, however, based on upcoming cutbacks at the Boeing Company, and an
anticipated slowing of the economy, any excess reserve is not considered by
management to be material.

Deposits

For the average amount of deposits and rates paid on such deposits for years
ended December 31, 1998, 1997, and 1996 please refer to page 42 of 1998 Annual
Report to Shareowners.

Maturities of time certificates of deposit $100,000 and over at year-end 1998,
are shown below:

(In thousands)

<TABLE>
<S>                                  <C>     
3 months or less                     $ 62,137
Over 3 months through 6 months         35,128
6 months through 12 months             46,564
Over 12 months                         21,000
                                     --------
   TOTAL                             $164,829
                                     ========
</TABLE>

Significant Financial Ratios

Ratios for the years ended December 31, 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                             1998           1997           1996
                                             ----           ----           ----
<S>                                        <C>            <C>            <C>  
Return on Average Assets                     2.06%          2.03%          1.96%
Return on Average Equity                    18.27%         18.84%         20.15%
Cash dividends paid/dividend payout          14.9%          15.3%          16.0%
Average Equity to Average Assets            11.30%         10.78%          9.71%
</TABLE>



                                      -18-

<PAGE>   21

Borrowings

<TABLE>
<CAPTION>
Short-Term Borrowings                Weighted                   Weighted                    Weighted
(In thousands)                        Average                    Average                     Average
                                     Interest                   Interest                    Interest
At December 31,            1998          Rate       1997            Rate       1996             Rate
                        -------      -------     -------        --------     -------        ------- 
<S>                     <C>          <C>         <C>            <C>          <C>            <C>  
Year-end balance:       $31,858         4.88%    $17,962            5.01%    $12,011           4.88%

Highest month end
balance during
the period:             $31,858                  $22,245                     $12,390
</TABLE>

For information regarding average balances and yields, please refer to page 42
of 1998 Annual Report to Shareowners.

Long-Term Debt

For detailed information relating to long-term debt, please refer to Note 10,
page 16, of 1998 Annual Report to Shareowners.

ITEM 2 - PROPERTIES

FFC's main office, which is owned by FFP, is located in Everett, Washington. At
December 31, 1998, the Bank had 23 offices, including the main office, all of
which are located in the state of Washington. These offices are located in
Arlington, Bothell, Buckley, Burlington, Edmonds, Everett (4), Lake City (North
Seattle), Lake Stevens, Lynnwood, Marysville, Mill Creek, Monroe, Orting,
Meridian Place (Puyallup), Redmond, Smokey Point, Snohomish, Stanwood, Sumner
and Woodinville. All of its branches are located in properties owned by FFP,
Inc., a real estate holding subsidiary, except for the offices located in
Burlington (lease expires May 1999), Edmonds, (lease expires July 31, 2004), one
office in Everett (lease expires October 2014), Lake Stevens (lease expires May
2001), Mill Creek (lease expires November 2000). Additionally, three of the four
offices recently acquired by merger with the Bank of Sumner (Valley
Bancorporation) have not yet been transferred to FFP, and the fourth, Meridian
Place Office, is leased (which lease expires in September 1999).

The Bank has leased property in Mt. Vernon, which will become the 24th office
during 1999. The total net book value of the investment in premises and
equipment at December 31, 1998, totaled $15.6 million.



                                      -19-

<PAGE>   22

ITEM 3 - LEGAL PROCEEDINGS

                    There are no material legal proceedings.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to security holders during the fourth quarter of 1998.

                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

              Please see 1998 Annual Report to  Shareowners,  page 39.

ITEM 6 - SELECTED FINANCIAL DATA
(In thousands, except per share data)

                              FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
                                                                                                                  % Change
AT YEAR-END                                1998            1997          1996           1995           1994      1997-1998
                                           ----            ----          ----           ----           ----      ---------
<S>                                    <C>             <C>            <C>            <C>            <C>            <C>  
Total assets                           $1,147,873      $  973,052     $  874,946     $  796,730     $  704,115       18.0%
Net loans                                 880,044         721,122        643,644        539,517        506,528       22.0%
Deposits                                  926,642         810,348        732,389        694,278        592,663       14.4%
Long-term debt                                  0             695          1,059          1,394          1,823     -100.0%
Investment securities                     145,601         115,999        132,340        146,645        137,995       25.5%
Shareowners' equity                       129,249         107,384         88,351         72,214         57,321       20.4%
FOR THE YEAR
Interest income                            93,562          83,324         73,971         68,443         58,302       12.3%
Interest expense                           37,890          34,369         32,062         31,091         22,383       10.2%
Securities gains(losses)                        0               0              0             (4)          (355)        nm
Provision for loan losses                   1,800           2,095          2,133          1,621          3,996      -14.1%
Net income                                 21,649          18,594         16,012         13,837         11,620       16.4%
Basic earnings per share               $     2.49      $     2.15     $     1.87     $     1.62     $     1.37       15.8%
Fully diluted earnings per share       $     2.46      $     2.14     $     1.84     $     1.59     $     1.34       15.0%
Return on Average
  Assets                                    2.06%           2.03%          1.96%           1.84%          1.82%
  Equity                                   18.27%          18.84%         20.15%          21.34%         22.26%
Avg. equity/avg. assets                    11.30%          10.78%          9.71%           8.63%          8.18%
</TABLE>
nm=Not meaningful

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

     Please see 1998 Annual Report to Shareowners, pages 27 through 43.



                                      -20-

<PAGE>   23

ITEM 7a - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     Please see 1998 Annual Report to Shareowners, page 36-39.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                            Annual
                                                                   Form                    Report to
                                                                   10-K                  Shareholders
                                                                   Page                      Page
                                                                   ----                  ------------
<S>                                                                <C>                   <C>
Independent Auditors Report                                         25

Report of Management                                                                           1

Consolidated Balance Sheet at
December 31, 1998 and 1997                                                                     3

Consolidated Statement of Income for the Years
Ended December 31, 1998, 1997 and 1996                                                         4

Consolidated Statement of Changes in
Shareowners' Equity                                                                            5

Consolidated Statement of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996                                                   6

Condensed Balance Sheet (Parent Only) at
December 31, 1998 and 1997                                                                    24

Condensed Statement of Income (Parent Only) for the
Years Ended December 31, 1998, 1997 and 1996                                                  24

Condensed Statement of Cash Flows (Parent Only)
for Years Ended December 31, 1998, 1997 and 1996                                              25

Notes to Consolidated Financial Statements                                                   7-26
</TABLE>

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

     None.



                                      -21-

<PAGE>   24

                                    PART III


ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF FRONTIER FINANCIAL
          CORPORATION

     Please see pages 2-8 of 1999 Proxy Statement.


ITEM 11 - EXECUTIVE COMPENSATION

     Please see pages 6-8 of 1999 Proxy Statement.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

     Please see pages 5, 6 and 10 of 1999 Proxy Statement.


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Please see page 8 & 11 of 1999 Proxy Statement; and, Note 15, page 21 of
     1998 Annual Report to Shareowners; and, Page 24 of this Form 10-K report.


                                      -22-


 
<PAGE>   25

                                     PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

                1.      Financial Statements.

                        Financial statements required by Item 8 of this report
                        are incorporated by reference, from the 1998 Annual
                        Report to Shareowners, attached hereto as an exhibit.

                2.      Financial Statement Schedules.

                        Financial Statement Schedule is included in the notes
                        to consolidated financial statements.

                3.      Exhibits.

                        (3a)    Articles of Incorporation are incorporated
                                herein by reference to Appendix A to the 
                                registrant's definitive Proxy Statement on 
                                Schedule 14A filed on March 20, 1998 in 
                                connection with its 1998 Annual Meeting.

                        (3b)    By-Laws are incorporated herein by reference to
                                Exhibit 3(b) to Registration on Form S-14, 
                                File No. 2-82420.

                        (10a)   Amended and Restated Frontier Financial
                                Corporation Incentive Stock Option Plan
                                
                        (10b)   Frontier Financial Corporation 1999 Employee
                                Stock Award Plan, is incorporated herein by
                                reference to Exhibit 99.1 to registration
                                statement on Form S-8, filed March 2, 1999.

                        (11)    Statement Regarding Computation of Earnings Per
                                Share.

                        (13)    Annual Report to Shareowners for the year ended
                                December 31, 1998. 

                        (21)    Subsidiaries of Registrant is incorporated by
                                reference from Part I, page 1 through 9 of this
                                report.

The following exhibit is included only in the electronic EDGAR filing version
of this Form 10-K: 

                        (27)    Financial Data Schedule for fiscal year ended
                                December 31, 1998.

        (b)     Reports on Form 8-K:

                Form 8-K was filed on December 30, 1998, announcing that the
                merger with Valley Bancorporation (Bank of Sumner) was completed
                December 21, 1998. No financials were included.

        


                                      -23-
<PAGE>   26

                                                                      SCHEDULE I
                 FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
                     AMOUNTS RECEIVABLE FROM CERTAIN PERSONS

(In thousands)

<TABLE>
<CAPTION>
                                                                      Balance at
Year Ended     Balance at                        Deductions           December 31
December 31    January 1     Additions     Collections   Write-offs   all current
-----------    ---------     ---------     -----------   ----------   -----------
<S>            <C>           <C>           <C>           <C>          <C>    
  1998          $21,960       $ 8,630       ($8,471)       $0          $22,119
 Twelve
Directors
 and two
Officers

  1997
 Eleven           7,028        22,219        (7,287)        0           21,960
Directors
 and Two
Officers

  1996
  Nine          $ 9,475       $ 3,808       ($6,255)       $0          $ 7,028
Directors
 and Two
Officers
</TABLE>



                                      -24-
<PAGE>   27



                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors and Shareowners
Frontier Financial Corporation

We have audited the consolidated financial statements and related financial
statement schedule of Frontier Financial Corporation and subsidiaries listed in
item 14(a)1 and 2 of the Annual Report on Form 10-K of Frontier Financial
Corporation for the year ended December 31, 1998. 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 from
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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly the information required to be
included therein.

/s/ Moss Adams LLP

Everett, Washington
January 19, 1999





                                      -25-
<PAGE>   28

                                   SIGNATURES

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

                            FRONTIER FINANCIAL CORPORATION

March 17, 1998              /s/ ROBERT J. DICKSON
--------------              -------------------------------------------
Date                        Robert J. Dickson
                            President & Chief Executive Officer

March 17, 1998              /s/ JAMES F. FELICETTY
--------------              -------------------------------------------
Date                        James F. Felicetty
                            Secretary/Treasurer

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

March 17, 1999              /s/ GEORGE E. BARBER
--------------              -------------------------------------------
                            George E. Barber, Director

March 17, 1999              /s/ MICHAEL J. CORLISS
--------------              -------------------------------------------
                            Michael J. Corliss, Director

March 17, 1999              /s/ LUCY DEYOUNG
--------------              -------------------------------------------
                            Lucy DeYoung, Director

March 17, 1999              /s/ ROBERT J. DICKSON
--------------              -------------------------------------------
                            Robert J. Dickson, Director

March 17, 1999              /s/ DAVID A DUJARDIN
--------------              -------------------------------------------
                            David A. Dujardin, Director

March 17, 1999              /s/ EDWARD D. HANSEN
--------------              -------------------------------------------
                            Edward D. Hansen, Secretary of the Board

March 17, 1999              /s/ WILLIAM H. LUCAS
--------------              -------------------------------------------
                            William H. Lucas, Director

March 17, 1999              /s/ JAMES H. MULLIGAN
--------------              -------------------------------------------
                            James H. Mulligan, Director

March 17, 1999              /s/ J. DONALD REGAN
--------------              -------------------------------------------
                            J. Donald Regan, Chairman of the Board

March 17, 1999              /s/ ROGER L. RICE
--------------              -------------------------------------------
                            Roger L. Rice, Director

March 17, 1999              /s/ ROY A. ROBINSON
--------------              -------------------------------------------
                            Roy A. Robinson, Director

March 17, 1999              /s/ WILLIAM J. ROBINSON
--------------              -------------------------------------------
                            William J. Robinson, Director

March 17, 1999              /s/ EDWARD C. RUBATINO
--------------              -------------------------------------------
                            Edward C. Rubatino, Director

March 17, 1999              /s/ DARRELL J. STORKSON
--------------              -------------------------------------------
                            Darrell J. Storkson, Director



                                      -26-