**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




**T** **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934**




For
      the
      Fiscal Year Ended December 31, 2006


OR


**£** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934**





**For
      the transition period from _________________ to
      __________________**





Commission
      File Number 000-15540





**Frontier
      Financial Corporation**


( *Exact
      Name of registrant as specified in its charter* )




**Washington**
            **91-1223535***(State
                of incorporation or organization)*
            *(IRS
                Employer Identification Number)***332
                S.W. Everett Mall Way****P.
                O. Box 2215****Everett,
                Washington**
            **98213**(*Address
                of Principal Executive Office)*
            *(Zip
                Code)*




Registrant’s
      telephone number, including area code: **(425)
      514-0700**





Securities
      registered pursuant to Section 12(g) of the Act:




**Title
                of each class**
            
            **Name
                of each exchange on which registered**Common
                Stock (no par value)
            
            The
                NASDAQ Stock Market LLC





Securities
      registered pursuant to Section 12(g) of the Act: None




Indicate
      by a check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes T No £




Indicate
      by a check mark if the registrant is not required to file reports pursuant
      to
      Section 13 or Section 15(d) of the Act.


Yes £ No T




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 T No £




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




Indicate
      by a check mark whether the registrant is large accelerated filer, an
      accelerated filer, or a nonaccelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filerT
            Accelerated
                Filer£
            Non-accelerated
                Filer£




Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes £ No T




As
      of
      February 21, 2007, 42,205,057 of the registrant’s common stock were outstanding.
      The aggregate market value of shares of common stock held by nonaffiliates
      at
      February 21, 2007 was $993,425,622
      (based upon the closing sales price of $27.17 per share).












**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the Annual Report to Shareowners for the fiscal year ended December 31,
      2006
      - Parts I and II.




Portions
      of the Definitive Proxy Statement to be filed with the Securities and Exchange
      Commission, relating to the 2007 Annual Meeting of Shareowners, to be held
      on
      April 18, 2007 - Part III.









To
        Our
        Shareowners, Employees, and Customers
  Message
        From the Chairman
  Once
        again, I am pleased to report record earnings and outstanding growth for
        Frontier Financial Corporation during 2006. Since our founding in 1978, it
        has
        been our pleasure to report record earnings during 27 of the 28 years.
  Frontier
        Bank’s expansion continued during 2006, and on January 31, we closed our merger
        with NorthStar Financial Corporation, acquiring offices in Ballard and Fremont,
        two new markets for the bank.
  Our
        45th
        office, located in Bellevue, opened on December 20, 2006. We are looking
        at
        further expansion, and plan to open an office in Bremerton in the second
        or
        third quarter of this year, followed by an office in Gig Harbor during the
        second half of 2007. This will give us 47 locations throughout Western
        Washington, stretching from Whatcom County to Pierce County, and west to
        Clallam
        County.
  In
        August, the Board of Directors declared a 3-for-2 stock split to shareowners
        of
        record as of September 12, 2006. Shareowners received one additional share
        for
        every two shares of stock they owned. This was equivalent to a 50% stock
        dividend. This marks the eighth time that Frontier has had a stock split
        since
        our opening in 1978. As a result of those eight splits and our 17 stock
        dividends paid since inception, an original shareowner in 1978 with 100 shares,
        would now own 113,040 shares, providing no shares were sold during that
        time.
  Directors
        continued to increase the cash dividend on our stock in each successive quarter
        during the year. The dividend of 15.5¢ per share, paid in January 2007, marked
        the 29th consecutive quarter in which the cash dividend has been increased.
        During 2006 our shareowners were rewarded with a total return of 39%, which
        includes stock price appreciation and the dividend return.
  The
        economy in our region continues to be resilient, and the housing market shows
        strength due to strong job and population growth. The Puget Sound region
        seems
        to have avoided the housing downturn we have seen in other areas of the country,
        and because of this, we look to continued growth and success in the coming
        year.
  For
        the
        past year, our results were enviable:
  • 
        Our net income for the year was $68.9 million, an increase of 33.6% over
        2005
        earnings of $51.6 million. Diluted earnings per share of $1.52 reflected
        an
        increase of $.31 or 25.6% over the $1.21 earned in 2005, split adjusted.
        The
        principal driver of earnings growth was an increase in net interest income
        of
        $36.1 million.
  • 
        At year-end 2006, Frontier’s total assets were $3.24 billion, and deposits
        totaled $2.45 billion, an increase of 22.7% and 19.0%, respectively. Net
        loans
        of $2.87 billion and investments of $114.7 million reflected an increase
        of
        21.7% and 3.7%, respectively.
  
  • 
        Return on average assets for the year was 2.27% compared to 2.09% for 2005
        and
        return on shareowners’ equity was 18.91% compared to 18.75% in the prior year.
        Frontier’s efficiency ratio was 38% compared to 41% last year. This ratio
        reflects the cost of producing a dollar of revenue, and a lower ratio reflects
        a
        more productive organization. Based on the above ratios, Frontier continues
        to
        be among the top performing financial holding companies in the
        nation.
  • 
        Nonperforming assets were .27% of total assets
  at
        year-end 2006 compared to .19% a year ago. Nonaccruing loans increased to
        $8.7
        million at year-end compared to $4.9 million at December 31, 2005. For the
        years
        ended December 31, 2006 and 2005, net charge-offs amounted to $2.9 million,
        compared to a net recovery of $147 thousand, respectively. The loan loss
        reserve
        stood at $40.6 million, or 1.40% of total loans at year-end, compared to
        $33.8
        million, or 1.41% of total loans at the end of the prior year-end. Frontier
        considers the provision for loan losses adequate to cover losses inherent
        in the
        portfolio at December 31, 2006. The bank did not have any other real estate
        owned (foreclosed properties) on the books during either of the last two
        year-ends.
  We
        sincerely thank our Board of Directors for their leadership during 2006,
        and we
        thank our employees for their dedication in providing outstanding service
        to our
        customers and to our communities. Many thanks to you, our loyal shareowners,
        for
        your continued support of our bank.
  To
        those
        customers that are featured throughout this year’s Annual Report, and to the
        hundreds of others with whom we have built loyal relationships over the past
        many years, we say “thank you” for your business and for referring others to
        Frontier Bank. You continue to “make the difference” in our
        success.
  Sincerely,
  Robert
        J.
        Dickson
  Chairman







**TABLE
      OF CONTENTS**


Item
                  Number
              
              Form
                  10-K
                Page
              
              Annual
                Shareowners’
                Report
                Page
              
              Proxy
                Statement
                PagePART
                  I1
              Business
              1
                  -
                  151A
              Risk
                  Factors
              15
                  - 221B
              Unresolved
                  Staff Comments
              22Statistical
                  Disclosure Index
              232
              Properties
              343
              Legal
                  Proceedings
              344
              Submission
                  of Matters to a Vote of
                  Shareowners
              34PART
                  II5
              Market
                  for Registrant’s Common Equity, Related Shareowner Matters and Issuer
                  Purchases of Equity Securities
              35
              
              20
                  - 23, 436
              Selected
                  Financial Data
              377
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              
              
              31
                  - 487A
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              28
                  - 31
              
              36
                  - 398
              Financial
                  Statements and Supplementary Data
              389
              Changes
                  in and Disagreements with Accountants on Accounting and
                  Financial Disclosure
              389A
              Controls
                  and Procedures
              38
                  - 399B
              Other
                  Information
              39PART
                  III10
              Directors,
                  Executive Officers Officers and Corporate
                  Governance
              4011
              Executive
                  Compensation
              4012
              Security
                  Ownership of Certain Beneficial Owners and Management
                  And Related Shareowner Matters
              4113
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              4114
              Principal
                  Accountant Fees and Services
              41PART
                  IV15
              Exhibits
                  and Financial Statement Schedules
              42Signatures
              43
                  - 44


i


**PART
      I**





*This
      report includes a number of forward-looking statements that reflect the
      Company’s current views with respect to future events and financial performance.
      Please refer to the section addressing forward-looking information on page
      14
      for further discussion. In this report, “we,” “our,” and “us” refer to Frontier
      Financial Corporation and subsidiaries, unless otherwise noted or context
      otherwise indicates.*




**ITEM
      1 - BUSINESS**





*(a)*
            *General
                Development of Business.*




Frontier
      Financial Corporation (“FFC”, “Frontier” or “the Corporation”) is a Washington
      corporation which was incorporated in 1983 and is registered as a financial
      holding company under the Bank Holding Company Act of 1956. As part of a plan
      of
      reorganization consummated following the close of business September 30, 1983,
      FFC acquired all of the stock of Frontier Bank (the “Bank”), issuing its common
      stock in an exchange for the Bank’s common stock on a share-for-share basis. FFC
      has two subsidiaries: the Bank, which is engaged in a general banking business
      and in businesses related to banking, and FFP, Inc., a nonbank corporation
      which
      leases property to the Bank. As of December 31, 2006, Frontier had total assets
      of approximately $3.24 billion, net loans receivable of approximately $2.87
      billion, total deposits of approximately $2.45 billion and shareowner’s equity
      of approximately $395.3 million.




**The
      Bank**




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





*(b)*
            *Financial
                Information About Industry
                Segments*




Not
      applicable.




*(c)*
            *Narrative
                Description of Business.*




**Location
      of Principal Market Areas**





The
      Bank
      engages in general banking business in the State of Washington, including the
      acceptance of demand, time and savings deposits and the making of loans.
      Headquartered in Everett, Washington, Frontier serves its customers from
      forty-five full service offices in 2006. In Snohomish County, four offices
      are
      located in Everett, and one office each is located in Arlington, Edmonds, Lake
      Stevens, Marysville, Mill Creek, Monroe, Lynnwood, Smokey Point, Snohomish,
      and
      Stanwood. Seven offices are located in Pierce County in the cities of Buckley,
      Edgewood-Milton, Orting, Puyallup, Sumner, Tacoma and University Place. Frontier
      has thirteen branches in King County, one each in Ballard (Seattle), Bellevue,
      Bothell, Duvall, Fremont (Seattle), Kent, Kirkland, Lake City (Seattle),
      Redmond, Renton, Seattle, Totem Lake (Kirkland) and Woodinville. In addition,
      the following eleven branches are located in Clallam, Jefferson, Kitsap, Skagit
      and Whatcom Counties: two branches each in Bellingham and Poulsbo, and one
      each
      in Bainbridge Island, Lynden, Mount Vernon, Port Angeles, Port Townsend, Sequim
      and Silverdale.





In
      February 2004, the Bank opened a full service banking office downtown Seattle,
      its only office in downtown Seattle. In April 2004, the Bank opened a real
      estate lending office in Tacoma, Pierce County, which makes commercial and
      construction loans. In 2005, the Bank opened a second full service office in
      downtown Bellingham, a Renton Office in King County and an office in Lynden,
      Whatcom County. As of February 1, 2006, Frontier completed its merger with
      NorthStar Financial Corporation and acquired two offices in the Ballard and
      Fremont communities of Seattle. Two additional offices were opened in 2006:
      a
      University Place Office in Pierce County and a Bellevue Office in King County
      for a total of 45 offices.





On
      February 1, 2006, FFC completed the acquisition of NorthStar Financial
      Corporation and its subsidiary, NorthStar Bank, a privately held financial
      institution headquartered in Seattle, Washington, with two banking offices
      in
      the Ballard and Fremont communities north of downtown Seattle. The shareowners
      of NorthStar received 1,513,707 shares of FFC common stock in exchange for
      all
      of the outstanding shares of NorthStar. The transaction was accounted for under
      the purchase method of accounting.


-1-


**Banking
      Services**





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





Frontier's
      loan portfolio consists of primarily of loans secured by real estate, although
      importance is also placed on commercial and agriculture loans, consumer
      installment loans and bankcard loans. At December 31, 2006, real estate category
      loans comprised 84.7% of the net loan portfolio, while commercial and
      agriculture loans made up 13.1% of the portfolio and installment and bankcard
      loans were 2.2%. Loans totaled $2.91 billion, and were 119% of deposits. Almost
      all of these loans were to borrowers within the Bank's principal market areas.
      See page 25 for loan category amounts for the last five years.





**Commercial
      and Agriculture Loans**





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





**Real
      Estate Loans**





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





·
            Loans
                for construction of residential and commercial income-producing properties
                that generally have terms of less than two years and typically bear
                an
                interest rate that floats with the base rate.


·
            Loans
                for construction of single-family spec and owner-occupied properties
                that
                generally have terms of one year or less and typically bear an interest
                rate that floats with the base rate.


·
            Land
                development used for either residential or commercial purposes. These
                loans generally have terms of one year or less and typically bear
                an
                interest rate that floats with the base rate.





Our
      real
      estate commercial term loans finance the purchase and/or ownership of income
      producing properties. These loans are generally mature in one to ten years
      with
      a payment amortization schedule ranging from 15 to 25 years. Interest rates
      may
      be fixed or variable. The interest rate on fixed rate loans typically reprice
      between the first and fifth year.





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


-2-


In
      addition to home mortgages held in our portfolio, the Bank is active in
      originating and selling mortgages into the secondary market. The Bank offers
      a
      variety of products for refinancing and purchases and is approved to originate
      FHA and VA loans. The majority of loans originated in 2006 were fixed rate
      single-family loans. Total loans sold in 2006 were approximately $111.7 million.
      Servicing is sold with the loan. Funding requirements for these loans is very
      minimal as few of these loans originated through this operation are retained
      for
      investment.





**Installment
      Loans**





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





**Investments**





From
      time
      to time, the Bank acquires investment securities when funds acquired through
      deposit activities exceed loan demand. When excess funds are considered
      temporary in nature by management, they are typically placed in federal funds
      sold on an overnight basis to correspondent banks, approved by the Board of
      Directors. This type of investment is not considered desirable, as the interest
      rate earned on these funds is minimal in nature. When funds are considered
      longer term, they are generally invested in securities purchased in the open
      market. At December 31, 2006, the Bank had investments totaling $105.2 million
      at amortized cost. U.S. Agency bonds comprised 47.5% of the portfolio, equities
      comprised 27.6%, corporate bonds made up 17.3%, municipals made up 3.6% and
      U.S.
      Treasury bonds made up 4.0%. Please see Note 3, page 13 of our 2006 Annual
      Report for details on the makeup of the portfolio. The Bank has an investment
      policy that generally permits purchasing securities rated only in one of the
      four highest rating categories by a nationally recognized credit rating
      organization. The policy also provides for maturity patterns, diversification
      of
      investments and avoidance of concentrations within the portfolio.





**Deposit
      Activities**





The
      Bank's primary source of funds has historically been customer deposits. The
      Bank
      offers a variety of accounts designed to attract both short-term and long-term
      deposits from its market area. These accounts include NOW, money market, sweep,
      savings and certificates of deposit. Interest rates paid on these account vary
      from time to time and are based on competitive factors and liquidity needs.
      One
      of the goals of management is to maintain noninterest-bearing deposits at the
      highest level possible. These are low cost funds and help to increase the net
      interest margin. Noninterest-bearing accounts comprised for 16.6% of total
      deposits at the end of 2006.





**Other
      Funding Sources/FHLB Advances**





The
      Bank
      has other funding sources such as FHLB advances, federal funds purchased and
      repurchase agreements. The major source of funds in this area is advances from
      the FHLB of Seattle. Although this source of funding can be more costly than
      deposit activities, large portions of funds are available very quickly for
      meeting loan commitments. The Bank's line of credit with the FHLB is 19% of
      qualifying assets and is collateralized by qualifying first mortgage loans,
      qualifying commercial real estate and government agency securities. The Bank,
      as
      of December 31, 2006, had FHLB advances totaling $282.0 million (please refer
      to
      page 17 of the Annual Report to Shareowners for detail regarding these
      advances). These advances were collateralized with $597.8 million in qualifying
      first mortgages, other certain assets, a blanket filing on our commercial real
      estate portfolio and the remainder was secured by stock in FHLB. No commercial
      real estate or government securities were pledged at year-end. The unused
      portion of this credit line at December 31, 2006 was $247.8
      million.




-3-




**Business
      Strategy**




Frontier
      is attempting to pursue the following strategies:




·
            increasing
                the percentage of its assets consisting of business, construction,
                and
                commercial real estate loans with higher risk-adjusted returns, shorter
                maturities and greater sensitivity to interest rate
                fluctuations;




·
            increasing
                deposits by attracting lower cost transaction accounts (such as checking,
                savings and money market accounts) through an enhanced branch network
                and
                online banking;




·
            maintaining
                cost-effective operations by efficiently offering products and
                services;




·
            maintaining
                its capital position at or above the “well-capitalized” (as defined for
                regulatory purposes) levels; and




·
            exploring
                prudent means to grow the business internally and/or through
                acquisitions.




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




**Facilities**




Frontier
      owns its administrative offices and operations centers in Everett, and 24 of
      its
      branches, through its wholly-owned bank premises holding corporation subsidiary,
      FFP, Inc., which leases the properties to the Bank. Owned offices range in
      size
      from 1,000 to 45,000 square feet and have a total net book value at
      December 31, 2006, including leasehold improvements, furniture, fixtures
      and equipment of $30.0 million.




**Other
      Financial Services**




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




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




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




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




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


-4-




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




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





**Employees**





At
      December 31, 2006, the Bank had 721 full time equivalent employees. None of
      the
      Bank’s employees are covered by a collective bargaining agreement. The Bank
      considers its relations with employees to be good.





**REGULATION
      AND SUPERVISION**




The
      following discussion is only intended to provide summaries of significant
      statutes and regulations that affect the banking industry and is therefore
      not
      complete. Changes in applicable laws or regulations, and in the policies of
      regulators, may have a material effect on our business and prospects. We cannot
      accurately predict the nature or extent of the effects on our business and
      earnings that fiscal or monetary policies, or new federal or state laws, may
      have in the future.




**General**




We
      are
      extensively regulated under federal and state law. These laws and regulations
      are primarily intended to protect depositors, not shareholders. The discussion
      below describes and summarizes certain statutes and regulations. These
      descriptions and summaries are qualified in their entirety by reference to
      the
      particular statute or regulation. Changes in applicable laws or regulations
      may
      have a material effect on our business and prospects. Our operations may also
      be
      affected by changes in the policies of banking and other government regulators.
      We cannot accurately predict the nature or extent of the possible future effects
      on our business and earnings of changes in fiscal or monetary policies, or
      new
      federal or state laws and regulations.




**Compliance**




In
      order
      to assure that we are in compliance with the laws and regulations that apply
      to
      our operations, including those summarized below, we employ a compliance
      officer, and we engage an independent compliance auditing firm. We are regularly
      reviewed by the Federal Reserve, the Federal Deposit Insurance Corporation,
      or
      FDIC, and the Washington Department of Financial Institutions, Division of
      Banks, or DFI, during which reviews such agencies assess our compliance with
      applicable laws and regulations. Based on the assessments of our outside
      compliance consultants and the FDIC, we believe that we materially comply with
      all of the laws and regulations that apply to our operations.




-5-




**Federal
      Bank Holding Company Regulation**




*General.* Frontier
      Financial Corporation, Inc. is a registered financial holding company as defined
      in the Bank Holding Company Act of 1956, as amended, or the Bank Holding Company
      Act, and is therefore subject to regulation, supervision and examination by
      the
      Federal Reserve. In general, the Bank Holding Company Act limits the business
      of
      bank holding companies to owning or controlling banks and engaging in other
      activities closely related to banking. FFC must file reports with the Federal
      Reserve and must provide it with such additional information as it may
      require.




The
      Federal Reserve may require FFC to terminate an activity or terminate control
      or
      liquidate or divest certain subsidiaries, affiliates or investments when the
      Federal Reserve believes the activity or the control of the subsidiary or
      affiliates constitutes a significant risk to the financial safety, soundness
      or
      stability of any of its banking subsidiaries.




The
      Federal Reserve also has the authority to regulate provisions of certain bank
      holding company debt, including the authority to impose interest ceilings and
      reserve requirements on such debt. Under certain circumstances, FFC must file
      written notice and obtain Federal Reserve approval prior to purchasing or
      redeeming its equity securities. Additionally, FFC is required by the Federal
      Reserve to maintain certain levels of capital. See “Capital Adequacy” below for
      a discussion of the applicable federal capital requirements.




*Financial
      Holding Company Status.* Under
      the
      Financial Services Modernization Act of 1999, a bank holding company may apply
      to the Federal Reserve to become a financial holding company, and thereby engage
      (directly or through a subsidiary) in certain activities deemed financial in
      nature. FFC’s election of financial holding company status was effective October
      28, 2000.




As
      a
      financial holding company, FFC may affiliate with securities firms and insurance
      companies and engage in other activities that are financial in nature or are
      incidental or complementary to activities that are financial in nature.
“Financial in nature” activities include:




•
              securities
                  underwriting;
  •
              dealing
                  and market making;
  •
              sponsoring
                  mutual funds and investment companies;
  •
              insurance
                  underwriting and brokerage;
  •
              merchant
                  banking; and
  •
              activities
                  that the Federal Reserve, in consultation with the Secretary of
                  the
                  Treasury, determines from time to time to be so closely related
                  to banking
                  or managing or controlling banks as to be a proper incident
                  thereto.


In
      order
      to become or remain a financial holding company, the Bank must be well
      capitalized, well managed, and, except in limited circumstances, in satisfactory
      compliance with the Community Reinvestment Act. Failure to sustain compliance
      with such requirements or correct any non-compliance within a fixed time period
      could lead to divesture of subsidiary banks or require us to conform all of
      our
      activities to those permissible for a bank holding company. A bank holding
      company that is not also a financial holding company can only engage in banking
      and such other activities determined by the Federal Reserve to be so closely
      related to banking or managing or controlling banks as to be a proper incident
      thereto.




We
      do not
      believe that the Financial Services Modernization Act will negatively affect
      our
      operations in the short term. However, to the extent the legislation permits
      banks, securities firms and insurance companies to affiliate, the financial
      services industry may experience further consolidation. This consolidation
      could
      result in a growing number of larger financial institutions that offer a wider
      variety of financial services than we currently offer, and these companies
      may
      be able to aggressively compete in the markets we currently serve.




-6-


*Acquisition
      of Banks.* The
      Bank
      Holding Company Act requires every bank holding company to obtain the Federal
      Reserve Board’s prior approval before:


•
              acquiring
                  direct or indirect ownership or control of any voting shares of
                  any bank
                  if, after the acquisition, the bank holding company will directly
                  or
                  indirectly own or control more than 5% of the bank’s voting
                  shares;
  •
              acquiring
                  all or substantially all of the assets of any bank;
                  or
  •
              merging
                  or consolidating with any other bank holding
                  company.


Additionally,
      the Bank Holding Company Act provides that the Federal Reserve Board may not
      approve any of these transactions if it would result in or tend to create a
      monopoly, substantially lessen competition or otherwise function as a restraint
      of trade, unless the anti-competitive effects of the proposed transaction are
      clearly outweighed by the public interest in meeting the convenience and needs
      of the community to be served. The Federal Reserve Board is also required to
      consider the financial and managerial resources and future prospects of the
      bank
      holding companies and banks concerned and the convenience and needs of the
      community to be served. The Federal Reserve Board’s consideration of financial
      resources generally focuses on capital adequacy, which is discussed
      below.




*Restrictions
      on Ownership of FFC.* The
      Bank
      Holding Company Act requires any “bank holding company” (as defined in that Act)
      to obtain the approval of the Board of Governors of the Federal Reserve System
      prior to acquiring more than 5% of FFC’s outstanding common stock. Any person
      other than a bank holding company is required to obtain prior approval of the
      Federal Reserve Board to acquire 10% or more of FFC’s outstanding common stock
      under the Change in Bank Control Act. Any holder of 25% or more of FFC’s
      outstanding common stock, other than an individual, is subject to regulation
      as
      a bank holding company under the Bank Holding Company Act.




*Holding
      Company Control of Nonbanks.* With
      some
      exceptions, the Bank Holding Company Act also prohibits a bank holding company
      from acquiring or retaining direct or indirect ownership or control of more
      than
      5% of the voting shares of any company which is not a bank or bank holding
      company, or from engaging directly or indirectly in activities other than those
      of banking, managing or controlling banks, or providing services for its
      subsidiaries. The principal exceptions to these prohibitions involve certain
      non-bank activities which, by statute or by Federal Reserve regulation or order,
      have been identified as activities closely related to the business of banking
      or
      of managing or controlling banks.




*Transactions
      with Affiliates.* Subsidiary
      banks of a bank holding company are subject to restrictions imposed by the
      Federal Reserve Act on extensions of credit to the holding company or its
      subsidiaries, on investments in their securities and on the use of their
      securities as collateral for loans to any borrower. These regulations and
      restrictions may limit FFC’s ability to obtain funds from the Bank for its cash
      needs, including funds for payment of dividends, interest and operational
      expenses.




*Tying
      Arrangements.* We
      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 to a customer on either (i) a requirement that the customer
      obtain additional services provided by us or (ii) an agreement by the customer
      to refrain from obtaining other services from a competitor.




*Support
      of Subsidiary Banks.* Under
      Federal Reserve policy, FFC is expected to act as a source of financial and
      managerial strength to the Bank. This means that FFC is required to commit,
      as
      necessary, resources to support the Bank. Any capital loans a bank holding
      company makes to its subsidiary banks are subordinate to deposits and to certain
      other indebtedness of those subsidiary banks.




-7-




**Federal
      and State Regulation of the Bank**




*General.* The
      Bank
      is a Washington chartered commercial bank with deposits insured by the FDIC.
      As
      a result, the Bank is subject to supervision and regulation by the Washington
      DFI and the FDIC. These agencies have the authority to prohibit banks from
      engaging in what they believe constitute unsafe or unsound banking
      practices.




*Lending
      Limits.* Washington
      banking law generally limits the amount of funds that a bank may lend to a
      single borrower to 20% of stockholders’ equity.




*Control
      of Financial Institutions.* The
      acquisition of 25% or more of a state chartered bank’s voting power by any
      individual, group or entity, is deemed a change in control under Washington
      banking law, requiring notice and application and prior approval of the
      DFI.




*Community
      Reinvestment.* The
      Community Reinvestment Act requires that, in connection with examinations of
      financial institutions within their jurisdiction, the FDIC evaluate the record
      of the financial institution in meeting the credit needs of its local
      communities, including low and moderate income neighborhoods, consistent with
      the safe and sound operation of the institution. These factors are also
      considered in evaluating mergers, acquisitions and applications to open a branch
      or facility.




*Insider
      Credit Transactions.* Banks
      are
      also subject to certain FDIC restrictions on extensions of credit to executive
      officers, directors, principal shareholders or any related interests of such
      persons (i.e., insiders). Extensions of credit (i) must be made on substantially
      the same terms and pursuant to the same credit underwriting procedures as those
      for comparable transactions with persons who are neither insiders nor employees,
      and (ii) must not involve more than the normal risk of repayment or present
      other unfavorable features. Banks are also subject to certain lending limits
      and
      restrictions on overdrafts to insiders. A violation of these restrictions may
      result in regulatory sanctions on the bank or its insiders.




*Regulation
      of Management.* Federal
      law sets forth circumstances under which officers or directors of a bank may
      be
      removed by the institution’s federal supervisory agency. Federal law also
      prohibits management personnel of a bank from serving as a director or in a
      management position of another financial institution whose assets exceed a
      specified amount or which has an office within a specified geographic
      area.




*Safety
      and Soundness Standards.* Federal
      law imposes upon banks certain non-capital safety and soundness standards.
      These
      standards cover internal controls, information systems, internal audit systems,
      loan documentation, credit underwriting, interest rate exposure, asset growth,
      compensation and benefits. Additional standards apply to asset quality, earnings
      and stock valuation. An institution that fails to meet these standards must
      develop a plan acceptable to its regulators, specifying the steps that the
      institution will take to meet the standards. Failure to submit or implement
      such
      a plan may subject the institution to regulatory sanctions. Under Washington
      state law, if the stockholders’ equity of a Washington state-chartered bank
      becomes impaired, the Commissioner of the Washington DFI will require the bank
      to make the impairment good. Failure to make the impairment good may result
      in
      the Commissioner’s taking possession of the bank and liquidating
      it.




*Dividends* .
      The
      principal source of FFC’s cash reserves will be dividends received from the
      Bank. Washington law limits the Bank’s ability to pay cash dividends. Under
      these restrictions, a bank may not declare or pay any dividend greater than
      its
      retained earnings without approval of the Washington DFI. The Washington DFI
      has
      the power to require any state-chartered bank to suspend the payment of any
      and
      all dividends.




In
      addition, a bank may not pay cash dividends if doing so would reduce its capital
      below minimum applicable federal capital requirements. See “Capital Adequacy”
below for a discussion of the applicable federal capital
      requirements.




*Other
      Regulations.* The
      loan
      operations of the Bank are subject to state usury laws and federal laws
      concerning interest rates.




-8-




*Federal
        Laws Applicable to Credit Transactions.* The
        loan
        operations of the Bank are also subject to federal laws applicable to credit
        transactions, such as the:
  •
              Truth-In-Lending
                  Act, governing disclosures of credit terms to consumer
                  borrowers;
  •
              Home
                  Mortgage Disclosure Act of 1975, requiring financial institutions
                  to
                  provide information to enable the public and public officials to
                  determine
                  whether a financial institution is fulfilling its obligation to
                  help meet
                  the housing needs of the community it
                  serves;
  •
              Equal
                  Credit Opportunity Act, prohibiting discrimination on the basis
                  of race,
                  creed or other prohibited factors in extending
                  credit;
  •
              Fair
                  Credit Reporting Act of 1978, governing the use and provision of
                  information to credit reporting
                  agencies;
  •
              Fair
                  Debt Collection Practices Act, governing the manner in which consumer
                  debts may be collected by collection
                  agencies;
  •
              Servicemembers
                  Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief
                  Act of 1940, governing the repayment terms of, and property rights
                  underlying, secured obligations of persons in military service;
                  and
  •
              the
                  rules and regulations of the various federal agencies charged with
                  the
                  responsibility of implementing these federal
                  laws.
  *Federal
        Laws Applicable to Deposit Operations.* The
        deposit operations of the Bank are subject to:
  •
              the
                  Right to Financial Privacy Act, which imposes a duty to maintain
                  confidentiality of consumer financial records and prescribes procedures
                  for complying with administrative subpoenas of financial records;
                  and
  •
              the
                  Electronic Funds Transfer Act and Regulation E issued by the Federal
                  Reserve Board to implement that act, which govern automatic deposits
                  to
                  and withdrawals from deposit accounts and customers’ rights and
                  liabilities arising from the use of automated teller machines and
                  other
                  electronic banking services.
  *Check
        Clearing for the 21st Century Act.* On
        October 28, 2003, President Bush signed into law the Check Clearing for the
        21st
        Century Act, also known as Check 21. The new law gives “substitute checks,” such
        as a digital image of a check and copies made from that image, the same legal
        standing as the original paper check. Some of the major provisions
        include:
  •
              allowing
                  check truncation without making it
                  mandatory;
  •
              demanding
                  that every financial institution communicate to accountholders
                  in writing
                  a description of its substitute check processing program and their
                  rights
                  under the law;
  •
              legalizing
                  substitutions for and replacements of paper checks without agreement
                  from
                  consumers;
  •
              retaining
                  in place the previously mandated electronic collection and return
                  of
                  checks between financial institutions only when individual agreements
                  are
                  in place;
  •
              requiring
                  that when accountholders request verification, financial institutions
                  produce the original check (or a copy that accurately represents
                  the
                  original) and demonstrate that the account debit was accurate and
                  valid;
                  and
  -9-
  •
              requiring
                  recrediting of funds to an individual’s account on the next business day
                  after a consumer proves that the financial institution has
                  erred.


This
      new
      legislation will likely affect bank capital spending as many financial
      institutions assess whether technological or operational changes are necessary
      to stay competitive and take advantage of the new opportunities presented by
      Check 21.




*Federal
      Home Loan Bank System.* The
      Federal Home Loan Bank system, of which the Bank is a member, consists of 12
      regional FHLBs governed and regulated by the Federal Housing Finance Board,
      or
      FHFB. The FHLBs serve as reserve or credit facilities for member institutions
      within their assigned regions. They are funded primarily from proceeds derived
      from the sale of consolidated obligations of the FHLB system. They make loans
      (i.e., advances) to members in accordance with policies and procedures
      established by the FHLB and the boards of directors of each regional
      FHLB.




As
      a
      system member, Frontier Bank is entitled to borrow from the FHLB of its region
      and is required to own a certain amount of capital stock in the FHLB. The Bank
      is in compliance with the stock ownership rules described above with respect
      to
      such advances, commitments and letters of credit and home mortgage loans and
      similar obligations. All loans, advances and other extensions of credit made
      by
      the FHLB to the Bank are secured by a portion of its mortgage loan portfolio,
      certain other investments and the capital stock of the FHLB held by the
      Bank.




*Mortgage
      Banking Operations.* The
      Bank
      is subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with
      respect to originating, processing, selling and servicing mortgage loans and
      the
      issuance and sale of mortgage-backed securities. Those rules and regulations,
      among other things, prohibit discrimination and establish underwriting
      guidelines which include provisions for inspections and appraisals, require
      credit reports on prospective borrowers and fix maximum loan amounts, and,
      with
      respect to VA loans, fix maximum interest rates. Mortgage origination activities
      are subject to, among others, the Equal Credit Opportunity Act, Federal
      Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
      regulations promulgated thereunder which, among other things, prohibit
      discrimination and require the disclosure of certain basic information to
      mortgagors concerning credit terms and settlement costs.




*Commercial
      Real Estate Guidance.* The
      FDIC
      and the Federal Reserve Board issued joint Guidance on Concentrations in
      Commercial Real Estate Lending, Sound Risk Management Practices on December
      6,
      2006. The Guidance provides supervisory criteria, including the following
      numerical indicators, to assist bank examiners in identifying banks with
      potentially significant commercial real estate loan concentrations that may
      warrant greater supervisory scrutiny: (1) commercial real estate loans exceed
      300% of capital and increased 50% or more in the preceding three years, or
      (2)
      construction and land development loans exceed 100% of capital. The Guidance
      does not limit banks’ levels of commercial real estate lending activities. The
      Guidance applies to the Bank, based on our current loan portfolio. We believe
      that our loan portfolio has been subject to rigorous examination by banking
      regulators and that we have taken appropriate precautions to address the risks
      associated with our concentrations in commercial real estate lending. We do
      not
      expect the Guidance to adversely affect our operations or our ability to execute
      our growth strategy.




**Privacy**




Federal
      banking rules limit the ability of banks and other financial institutions to
      disclose non-public information about consumers to nonaffiliated third-parties.
      Pursuant to these rules, financial institutions must provide:




•
              initial
                  notices to customers about their privacy policies, describing the
                  conditions under which they may disclose nonpublic personal information
                  to
                  nonaffiliated third-parties and
                  affiliates;
  •
              annual
                  notices of their privacy policies to current customers;
                  and
  •
              a
                  reasonable method for customers to “opt out” of disclosures to
                  nonaffiliated third-parties.


-10-




These
      privacy provisions affect how consumer information is transmitted through
      diversified financial companies and conveyed to outside vendors. We have
      implemented privacy policies in accordance with the law.




**Interstate
      Banking And Branching**




The
      Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate
      Act”) permits nationwide interstate banking and branching under certain
      circumstances. This legislation generally authorizes interstate branching and
      relaxes federal law restrictions on interstate banking. Currently, bank holding
      companies may purchase banks in any state, and states may not prohibit these
      purchases. Additionally, banks are permitted to merge with banks in other
      states, as long as the home state of neither merging bank has opted out under
      the legislation. The Interstate Act requires regulators to consult with
      community organizations before permitting an interstate institution to close
      a
      branch in a low-income area.




FDIC
      regulations prohibit banks from using their interstate branches primarily for
      deposit production. The FDIC has implemented a loan-to-deposit ratio screen
      to
      ensure compliance with this prohibition.




Washington
      enacted “opting in” legislation in accordance with the Interstate Act, allowing
      banks to engage in interstate merger transactions, subject to certain “aging”
requirements. Until recently, Washington restricted out-of-state banks from
      opening de novo branches; however, in 2005, Washington interstate branching
      laws
      were amended so that an out-of-state bank may, subject to the DFI’s approval,
      open de novo branches in Washington or acquire an in-state branch so long as
      the
      home state of the out-of-state bank has reciprocal laws with respect to de
      novo
      branching or branch acquisitions. Once an out-of-state bank has acquired a
      bank
      within Washington, either through merger or acquisition of all or substantially
      all of the bank’s assets or through authorized de novo branching, the
      out-of-state bank may open additional branches within the state.




**Deposit
      Insurance**




The
      Bank’s deposits are currently insured to a maximum of $100,000 per depositor
      through the Bank Insurance Fund administered by the FDIC. The Bank is required
      to pay deposit insurance premiums, which are assessed semiannually and paid
      quarterly. The premium amount is based upon a risk classification system
      established by the FDIC. Banks with higher levels of capital and a low degree
      of
      supervisory concern are assessed lower premiums than banks with lower levels
      of
      capital or a higher degree of supervisory concern.




The
      FDIC
      is also empowered to make special assessments on insured depository institutions
      in amounts determined by the FDIC to be necessary to give it adequate assessment
      income to repay amounts borrowed from the U.S. Treasury and other sources or
      for
      any other purpose the FDIC deems necessary.




Legislative
      reforms to modernize the Federal Deposit Insurance System, including merging
      the
      Bank Insurance Fund and the Savings Association Insurance Fund into a new
      Deposit Insurance Fund, were approved by Congress on February 15, 2006. In
      addition to merging the insurance funds, the legislation:




•
              raised
                  the deposit insurance limit on certain retirement accounts to $250,000
                  and
                  indexes that limit for inflation;
  •
              requires
                  the FDIC and National Credit Union Administration boards, starting
                  in 2010
                  and every succeeding five years, to consider raising the standard
                  maximum
                  deposit insurance; and
  •
              eliminated
                  the current fixed 1.25 percent Designated Reserve Ratio and provides
                  the
                  FDIC with the discretion to set the DRR within a range of 1.15
                  to 1.50
                  percent for any given year.


-11-




**Capital
      Adequacy**




*Regulatory
      Capital Guidelines.* Federal
      bank regulatory agencies use capital adequacy guidelines in the examination
      and
      regulation of bank holding companies and banks. The guidelines are “risk-based,”
meaning that they are designed to make capital requirements more sensitive
      to
      differences in risk profiles among banks and bank holding
      companies.




*Tier
      I and Tier II Capital.* Under
      the
      guidelines, an institution’s capital is divided into two broad categories, Tier
      I capital and Tier II capital. Tier I capital generally consists of common
      stockholders’ equity, surplus and undivided profits. Tier II capital generally
      consists of the allowance for loan losses, hybrid capital instruments, and
      subordinated debt. The sum of Tier I capital and Tier II capital represents
      an
      institution’s total capital. The guidelines require that at least 50% of an
      institution’s total capital consist of Tier I capital.




*Risk-based
      Capital Ratios.* The
      adequacy of an institution’s capital is gauged primarily with reference to the
      institution’s risk weighted assets. The guidelines assign risk weightings to an
      institution’s assets in an effort to quantify the relative risk of each asset
      and to determine the minimum capital required to support that risk. An
      institution’s risk weighted assets are then compared with its Tier I capital and
      total capital to arrive at a Tier I risk-based ratio and a total risk-based
      ratio, respectively. The guidelines provide that an institution must have a
      minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio
      of
      8%.




*Leverage
      Ratio.* The
      guidelines also employ a leverage ratio, which is Tier I capital as a percentage
      of total assets less intangibles, to be used as a supplement to risk-based
      guidelines. The principal objective of the leverage ratio is to constrain the
      maximum degree to which a bank holding company may leverage its equity capital
      base. The minimum leverage ratio is 3%; however, for all but the most highly
      rated bank holding companies and for bank holding companies seeking to expand,
      regulators generally expect an additional cushion of at least 1% to
      2%.




*Prompt
      Corrective Action.* Under
      the
      guidelines, an institution is assigned to one of five capital categories
      depending on its total risk-based capital ratio, Tier I risk-based capital
      ratio, and leverage ratio, together with certain subjective factors. The
      categories range from “well capitalized” to “critically undercapitalized.”
Institutions that are deemed to be “undercapitalized,” depending on the category
      to which they are assigned, are subject to certain mandatory supervisory
      corrective actions.




**State
      Corporate Law Restrictions**




As
      a
      Washington corporation, FFC is subject to certain limitations and restrictions
      under applicable Washington corporate law. For example, state law restrictions
      in Washington include limitations and restrictions relating to indemnification
      of directors; distributions to shareholders; transactions involving directors,
      officers, or interested shareholders; maintenance of books, records, and
      minutes; and observance of certain corporate formalities.




**Corporate
      Governance and Accounting Legislation**




*Sarbanes-Oxley
      Act of 2002.* On
      July
      30, 2002, the Sarbanes-Oxley Act of 2002, or SOX, was signed into law to address
      corporate and accounting fraud. SOX establishes a new accounting oversight
      board
      that will enforce auditing standards and restricts the scope of services that
      accounting firms may provide to their public company audit clients. Among other
      things, SOX also (i) requires chief executive officers and chief financial
      officers to certify to the accuracy of periodic reports filed with the SEC;
      (ii)
      imposes new disclosure requirements regarding internal controls,
      off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii)
      accelerates the time frame for reporting of insider transactions and periodic
      disclosures by public companies; and (iv) requires companies to disclose whether
      or not they have adopted a code of ethics for senior financial officers and
      whether the audit committee includes at least one “audit committee financial
      expert.”




Under
      SOX, the SEC is required to regularly and systematically review corporate
      filings, based on certain enumerated factors. To deter wrongdoing, SOX (i)
      subjects bonuses issued to top executives to disgorgement if a restatement
      of a
      company’s financial statements was due to corporate misconduct; (ii) prohibits
      an officer or director from misleading or coercing an auditor; (iii) prohibits
      insider trades during pension fund “blackout periods”; (iv) imposes new criminal
      penalties for fraud and other wrongful acts; and (v) extends the period during
      which certain securities fraud lawsuits can be brought against a company or
      its
      officers.




-12-


As
      a
      public reporting company, we are subject to the requirements of SOX and related
      rules and regulations issued by the SEC and NASDAQ. We anticipate that we will
      incur additional expense as a result of the Act, but we do not expect that
      such
      compliance will have a material impact on our business.




**Anti-terrorism
      Legislation**




*USA
      Patriot Act of 2001.* On
      March
      9, 2006, President Bush signed the renewal of the Uniting and Strengthening
      America by Providing Appropriate Tools Required to Intercept and Obstruct
      Terrorism, or the Patriot Act, of 2001. Among other things, the Patriot Act
      (i)
      prohibits banks from providing correspondent accounts directly to foreign shell
      banks; (ii) imposes due diligence requirements on banks opening or holding
      accounts for foreign financial institutions or wealthy foreign individuals;
      (iii) requires financial institutions to establish an anti-money-laundering
      compliance program; and (iv) eliminates civil liability for persons who file
      suspicious activity reports. The Patriot Act also increases governmental powers
      to investigate terrorism, including expanded government access to account
      records. The Department of the Treasury is empowered to administer and make
      rules to implement the Patriot Act. While we believe the Patriot Act may, to
      some degree, affect our recordkeeping and reporting expenses, we do not believe
      that it will have a material adverse effect on our business and
      operations.




**Effects
      of Government Monetary Policy**




Our
      earnings and growth are affected not only by general economic conditions, but
      also by the fiscal and monetary policies of the federal government, particularly
      the Federal Reserve. The Federal Reserve can and does implement national
      monetary policy for such purposes as curbing inflation and combating recession.
      The nature and impact of future changes in monetary policies and their impact
      on
      us cannot be predicted with certainty.




**Nonbank
      Subsidiary**




Our
      non-bank subsidiary, FFP, Inc., a Washington corporation, is subject to the
      laws
      and regulations of both the federal government and the state in which it
      conducts business.




*(d)
      Financial Information About Foreign and Domestic Operations and Export Sales.*




Not
      applicable.




*(e)
      Available Information of the Registrant.*




We
      make
      available through our Internet website, free of charge, copies of our annual
      report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
      8-K
      and amendments to those reports filed or furnished pursuant to Section 13(a)
      or
      Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
      reasonably practicable after filing such material electronically or otherwise
      furnishing it to the Securities and Exchange Commission. These filings can
      be
      accessed under “Investor Relations” found on the homepage of our website at
      www.frontierbank.com. Our Code of Ethics for Senior Financial Officers, which
      includes a code of ethics applicable to our accounting and financial employees,
      including our Chief Executive Officer and Chief Financial Officer, is also
      available on our website under “Investor Relations.” These filings are also
      accessible on the SEC’s website at www.sec.gov. The public may read and copy any
      materials we file with the SEC at the SEC’s Public Reference Room at 100 F
      Street, N.E., Washington, D.C. 20549. The public may obtain information on
      the
      operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
      Further, each of these documents is also available in print (at no charge)
      to
      any shareholder upon request, addressed to Investor Relations, Frontier
      Financial Corporation, 332 S.W. Everett Mall Way, P.O. Box 2215, Everett, WA
      98213. Our website and the information contained therein or connected thereto
      are not incorporated by reference into this Form 10-K.


-13-


**FFP,
      Inc.**





On
      April
      4, 1988, the Corporation formed a new subsidiary corporation called FFP, Inc.
      The purpose of this corporation is to purchase and lease improved real property
      to the Bank and acquire future branch sites. For further details, please see
      page 34 of this Form 10-K Report, "Properties." It is intended that future
      purchases of real property will be made by FFP, Inc. At this time, it is not
      anticipated that FFP, Inc. will engage in any other type of business.





**Recent
      Stock Purchase**





In
      December 2004, the Corporation purchased 4.95% of the common stock of Skagit
      State Bank, headquartered in Burlington, Washington, which is approximately
      44
      miles north of Everett in Skagit County. Subsequent to this investment, the
      Corporation applied to the Board of Governors of the Federal Reserve System
      to
      purchase up to 20% of Skagit State. Approval was received in February 2005
      and
      the Corporation made additional purchases raising total ownership to 11.3%
      as of
      December 31, 2005. In January 2006, the Corporation purchased an additional
      5,022 shares for $653 thousand, bringing total ownership to 12.62%.




**Share
      Repurchase Program**





In
      January 2001, the Board announced the adoption of a stock repurchase program
      authorizing the Corporation to repurchase up to 5% of its outstanding stock
      in
      the open market. On October 17, 2001 and 2002, September 16, 2004 and August
      16,
      2006 the Board of Directors authorized four plans that permitted purchases
      of 5%
      of the outstanding common stock under the repurchase program. The current
      repurchase program expires in August 2008. There were 2,263,323 shares remaining
      under the current plan at December 31, 2006. Subsequent to year-end, the
      Corporation repurchased 218,940 shares at an average cost of $26.85 through
      February 21, 2007.





**Treatment
      of Goodwill**





The
      Corporation has goodwill which was recorded in connection with acquisitions
      over
      the years. Prior to January 1, 2002, the Corporation amortized goodwill over
      20
      years. Upon the implementation of Statement of Financial Standards No. 142
      (SFAS
      142), *Goodwill
      and*  *Other
      Intangible Assets,* on
      January 1, 2002, the Company ceased amortization of goodwill. SFAS 142 requires
      the Corporation to test the goodwill for impairment at least annually. The
      Corporation tested its goodwill and found no impairment during 2006. The
      Corporation uses the fair market value approach to determine if there has been
      any impairment.





**Forward-Looking
      Statements**





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





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


-14-


•
              Forward-looking
                  statements are subject to risks and uncertainties that may cause
                  actual
                  future results to differ materially from estimated or projected
                  results.
                  Factors that could cause this difference—many of which are beyond the
                  Corporation’s control—include the following, without limitation: changes
                  in general economic conditions, either nationally or in Washington
                  state;
  •
              inflation,
                  interest rate, market and monetary
                  fluctuations;
  •
              changes
                  in consumer spending habits and savings
                  habits;
  •
              increases
                  in competitive pressures among financial institutions and businesses
                  offering similar products and
                  services;
  •
              higher
                  defaults on our loan portfolio than we
                  expect;
  •
              changes
                  in management’s estimate of the adequacy of the allowance for loan
                  losses;
  •
              risks
                  associated with our growth strategy and related
                  costs;
  •
              increased
                  lending risks associated with our high concentrations of real estate
                  loans, including construction and land development
                  loans;
  •
              legislative
                  or regulatory changes or changes in accounting principles, policies
                  or
                  guidelines;
  •
              technological
                  changes; and
  •
              regulatory
                  or judicial proceedings.


Given
      these risks and uncertainties, you are cautioned not to place undue reliance
      on
      such forward-looking statements. The forward-looking statements included or
      incorporated by reference into this report are made only as of the date hereof.
      We do not undertake and specifically decline any obligation to update any such
      statements or to publicly announce the results of any revisions to any such
      statements to reflect future events or developments.




**ITEM
      1A. RISK FACTORS**




An
      investment in our common shares is subject to risks inherent to our business.
      The material risks and uncertainties that management believes affect us are
      described below. Before making an investment decision, one should carefully
      consider the risks and uncertainties described below as well
      as the other information contained in this report or incorporated by reference,
      including the consolidated financial statements and the notes thereto and
“Management Discussion and Analysis of Financial Condition and Results of
      Operations.” The
      risks and uncertainties described below are not the only ones we face. Although
      we have significant risk management policies, procedures and verification
      processes in place, additional risks and uncertainties that management is not
      aware of or focused on or that management currently deems immaterial may also
      impair our business operations. This report is qualified in its entirety by
      these risk factors.




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


-15-




**Risks
      Related To Our Business**





***We
      Are Subject To Interest Rate Risk***




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




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





***We
      Are Subject To Credit Risk*** ***,
      Particularly With Respect To Our High Concentration of Construction, Land
      Development and Other Real Estate Loans***




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




As
      of
      December 31, 2006, approximately 84.7% of our loan portfolio consisted
      primarily of loans secured by real estate, including commercial, construction,
      land development and mortgage loans. Approximately
      45.5% of these real estate loans as of December 31, 2006 consisted of real
      estate construction and land development loans, which generally have a higher
      degree of risk than long-term financing of existing properties because repayment
      depends on the completion of the project and usually on the sale of the
      property. A downturn in the real estate market could increase loan
      delinquencies, defaults and foreclosures, and significantly impair the value
      of
      our collateral and our ability to sell the collateral upon foreclosure. The
      real
      estate collateral in each case provides an alternate source of repayment in
      the
      event of default by the borrower and may deteriorate in value during the time
      the credit is extended. If real estate values decline, it is also more likely
      that we would be required to increase our allowance for loan losses. If during
      a
      period of reduced real estate values we are required to liquidate the property
      collateralizing a loan to satisfy the debt or to increase our allowance for
      loan
      losses, it could materially reduce our profitability and adversely affect our
      financial condition .
      Although we closely monitor and manage risk concentrations and utilize various
      portfolio management practices, our loan portfolio contains a number of real
      estate loans with relatively large balances. The deterioration of one or a
      few
      of these loans could cause a significant increase in nonperforming loans, and
      an
      increase in overall nonperforming loans could result in a net loss of earnings,
      an increase in the provision for probable loan losses and an increase in loan
      charge-offs, all of which could have a material adverse effect on our financial
      condition and results of operations. Additional information regarding credit
      risk is included in Management’s Discussion and Analysis of Financial Condition
      and Results of Operations on page 44 and 45 of Frontier Financial Corporation’s
      2006 Annual report to Shareowners.




***Various
      Factors May Cause Our Allowance For Loan Losses To
      Increase***





We
      maintain an allowance for loan losses, which is a reserve established through
      a
      provision for loan losses charged to expense, which represents management’s
      estimate of losses within the existing portfolio of loans. The allowance, in
      the
      judgment of management, is necessary to reserve for estimated loan losses and
      risks inherent in the loan portfolio. The level of the allowance reflects
      management’s continuing evaluation of industry concentrations; specific credit
      risks; loan loss experience; current loan portfolio quality; present and future
      economic, political and regulatory conditions; and unexpected losses inherent
      in
      the current loan portfolio. The determination of the appropriate level of the
      allowance for loan losses inherently involves a degree of subjectivity and
      requires that we make significant estimates of current credit risks and future
      trends, all of which may undergo material changes. Changes in economic
      conditions affecting borrowers, new information regarding existing loans,
      identification of additional problem loans and other factors, both within and
      outside of our control, may require an increase in the allowance for loan
      losses. In addition, bank regulatory agencies and our independent auditors
      periodically review our allowance for loan losses and may require an increase
      in
      the provision for loan losses or the recognition of further loan charge-offs,
      based on judgments that can differ somewhat from those of our own management.
      In
      addition, if charge-offs in future periods exceed the allowance for loan losses,
      we will need additional provisions to increase the allowance for loan losses,
      which should they become necessary, would result in a decrease in net income
      and
      capital, and may have a material adverse effect on our financial condition
      and
      results of operations. Additional information regarding the allowance for loan
      losses is included in the section Allowance for Loan Losses on pages 34 and
      35
      of the Management’s Discussion and Analysis of Financial Condition and Results
      of Operations section of Frontier Financial Corporation’s 2006 Annual Report to
      Shareowners.


-16-


***We
      Are Subject To Liquidity Risk***




Market
      conditions or other events could negatively affect the level or cost of
      liquidity, affecting our ongoing ability to accommodate liability maturities
      and
      deposit withdrawals, meet contractual obligations, and fund asset growth and
      new
      business transactions at a reasonable cost, in a timely manner and without
      adverse consequences. Management has implemented strategies to maintain
      sufficient and diverse sources of funding to accommodate planned as well as
      unanticipated changes in assets and liabilities under both normal and adverse
      conditions. However, substantial, unexpected and/or prolonged changes in the
      level or cost of liquidity could have a material adverse effect on our financial
      condition and results of operations. Additional information regarding liquidity
      risk is included in the section captioned “Liquidity” beginning on page 41 of
      the
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations section of Frontier Financial Corporation’s 2006 Annual Report to
      Shareowners.





***We
      Are Subject To Operational Risk***




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





***Our
      Profitability Depends Significantly On Economic Conditions In The Geographic
      Regions In Which We Operate***




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





***We
      Operate In A Highly Competitive Industry And Market
      Areas***




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


-17-




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





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





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





·
            Our
                ability to expand our market
                position.





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





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





·
            Industry
                and general economic trends.





·
            Our
                ability to attract and retain qualified employees.





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




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





***We
      are Subject to Extensive Government Regulation and
      Supervision***





We
      are
      subject to extensive regulation by federal, state and local governmental
      authorities and are subject to various laws and judicial and administrative
      decisions imposing requirements and restrictions on part or all of our
      operations. Because our business is highly regulated, the laws, rules and
      regulations applicable to us are subject to regular modification and change.
      For
      example, the FDIC and the Federal Reserve Board recently issued joint Guidance
      on Concentrations in Commercial Real Estate Lending, Sound Risk Management
      Practices, that sets forth supervisory criteria to assist bank examiners in
      identifying banks with potentially significant commercial real estate loan
      concentrations that may warrant greater supervisory scrutiny. The Guidance
      applies to the Bank, based on our current loan portfolio, and we expect that
      our
      business and operations will be subject to enhanced regulatory review for the
      foreseeable future. Our failure to comply with applicable laws and regulations,
      or changes to the existing regulatory structure, could adversely affect our
      business, financial condition, results of operations or cash flows.





***We
      Could Be Held Responsible For Environmental Liabilities of Real Estate Acquired
      Through Foreclosure***





In
      the
      event we foreclose on a defaulted real estate loan to recover our investment,
      we
      may be subject to environmental liabilities in connection with the underlying
      real property, which could exceed the value of the real property. Although
      we
      exercise due diligence to discover potential environmental liabilities prior
      to
      acquiring any property through foreclosure, hazardous substances or wastes,
      contaminants, pollutants, or their sources may be discovered on properties
      during our ownership or after a sale to a third party. There can be no assurance
      that we would not incur full recourse liability for the entire cost of any
      removal and clean-up on an acquired property, that the cost of removal and
      clean-up would not exceed the value of the property, or that we could recover
      any of the costs from any third party.





***Our
      Controls And Procedures May Fail Or Be Circumvented***




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


-18-


***We
      Rely On Dividends From Our Subsidiaries For Most Of Our
      Revenue***




Frontier
      Financial Corporation is a legal entity separate and distinct from its
      subsidiaries. It receives substantially all of its revenue from dividends from
      its subsidiaries. These dividends are the principal source of funds to pay
      dividends on our common shares. Various laws and regulations limit the amount
      of
      dividends that Frontier Bank may pay to Frontier Financial Corporation. In
      the
      event Frontier Bank is unable to pay dividends to Frontier Financial
      Corporation, we may not be able pay dividends on our common shares. The
      inability to receive dividends from Frontier Bank could have a material adverse
      effect on our business, financial condition and results of operations.
      Additional information regarding dividend restrictions is included in the
      section captioned “Regulation and Supervision” in Item 1, Business, on
      page 8 of this report.




***Potential
      Acquisitions May Disrupt Our Business And Dilute Shareowner
      Value***




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





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





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





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





•
            Potential
                disruption to our business.





•
            Potential
                diversion of our management’s time and
                attention.





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





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





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





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




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





***We
      May Not Be Able To Attract And Retain Skilled People***




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


-19-




***Our
      Information Systems May Experience An Interruption Or Breach In
      Security***




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




***We
      Continually Encounter Technological Change***




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




***We
      Are Subject To Claims And Litigation***




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




***Our
      Earnings May Be Affected By Changes In Accounting Principles And In Tax
      Laws***




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




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




***Severe
      Weather, Natural Disasters, Acts Of War Or Terrorism And Other External Events
      Could Significantly Impact Our Business***




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


-20-




**Risks
      Associated With Our Common Shares**




***Our
      Share Price Can Be Volatile***




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





·
            Actual
                or anticipated variations in quarterly results of
                operations.





·
            Recommendations
                by securities analysts.





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





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





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





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





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





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





·
            Changes
                in government regulations.





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




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





***An
      Investment In Our Common Shares Is Not Insured or An Insured
      Deposit***




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





***Our
      Articles Of Incorporation, Regulations And Shareowners Rights Plan As Well
      As Certain Banking Laws May Have An Anti-Takeover
      Effect***




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


-21-




**Risks
      Associated With Our Industry**




***The
      Earnings Of Financial Services Companies Are Significantly Affected By General
      Business And Economic Conditions***




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




***Financial
      Services Companies Depend On The Accuracy And Completeness Of Information About
      Customers And Counterparties***




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




***Consumers
      May Decide Not To Use Banks To Complete Their Financial
      Transactions***




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





**ITEM
      1B. UNRESOLVEDSTAFF COMMENTS**




There
      are
      no unresolved SEC staff comments.




-22-


**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.




I.
            Distribution
                of Assets, Liabilities and Shareowners' Equity; Interest Rates and
                Interest Differential:
            Form
                10-K
              Page
            
            Annual
              Report
              PageA.
            Consolidated
                Average Balance Sheets/Interest Income and Expense/Rates
            
            
            47B.
            Changes
                in Net Interest Income and Expense due to Rate and Volume
            
            
            48II.
            Investment
                PortfolioA.
            Analysis
                of Investment Securities at Year-end
            24
            
            13B.
            Maturity
                Distribution of Investment Securities
            24
            
            14III.
            Loan
                PortfolioA.
            Types
                of Loans
            25
            
            15B.
            Loan
                Maturities and Sensitivity to Changes in Interest Rates
            25
            
            15,
                36, 38 - 40, 42C.
            Risk
                Elements
            26
                - 27D.
            Concentrations
                of Credit
            32IV
            .
                Summary of Loan Loss ExperienceA.
            Analysis
            30B.
            Allocation
                of Allowance for Possible Loan Losses
            31V.
            DepositsAverage
                Interest and Noninterest Bearing Deposit Balances
            
            
            47VI.
            Return
                on Equity and AssetsSignificant
                Financial Ratios
            37VII.
            Short-term
                Borrowings
            34




-23-


**Analysis
      of Investment Securities**





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





(In
                Thousands)
            
            2006
              Amoritized
              Cost
            
            2005
              Amortized
              Cost
            
            2004
              Amortized
              CostU.S.
                Treasuries
            
            $
            4,204
            
            $
            7,232
            
            $
            15,704U.S.
                Agencies
            
            
            50,004
            
            
            49,621
            
            
            49,738Municipal
                Bonds
            
            
            3,753
            
            
            4,231
            
            
            6,051Corporate
                Bonds
            
            
            18,198
            
            
            19,326
            
            
            44,214Equities
            
            
            29,052
            
            
            23,400
            
            
            32,518$
            105,211
            
            $
            103,810
            
            $
            148,225





**Maturity
      Distribution of Investment Securities**





The
      following table sets forth the maturities of investment securities at amortized
      cost as of December 31, 2006. Taxable equivalent values are used in calculating
      weighted average yields assuming a tax rate of 35%.




(In
                  Thousands)
              
              Within
                1
                  Year/
                Yield
              
              After
                  1 Yr
                But
                  Within
                5
                  Years/
                Yield
              
              After
                  5 Yrs
                But
                  Within
                10
                  Years/
                Yield
              
              After
                10
                  Years/
                Yield
              
              Totals
                  &
                Weighted
                Average
                YieldU.S.
                  Treasury
              
              $
              3,954
              
              
              -
              
              $
              250
              
              
              -
              
              $
              4,2045.00
              %
              
              -
              
              
              7.16
              %
              
              -
              
              
              5.13
              %U.S.
                  Agencies
              
              
              10,504
              
              $
              39,500
              
              
              -
              
              
              -
              
              
              50,0043.04
              %
              
              3.53
              %
              
              -
              
              
              -
              
              
              3.43
              %Municipal
                  Bonds
              
              
              1,007
              
              
              2,716
              
              
              -
              
              $
              30
              
              
              3,7536.63
              %
              
              6.60
              %
              
              -
              
              
              7.77
              %
              
              6.63
              %Corporate
                  Bonds
              
              
              1,022
              
              
              13,133
              
              
              -
              
              
              4,043
              
              
              18,1983.65
              %
              
              4.05
              %
              
              -
              
              
              10.20
              %
              
              5.39
              %Equities
              
              
              29,052
              
              
              -
              
              
              -
              
              
              -
              
              
              29,0523.35
              %
              
              -
              
              
              -
              
              
              -
              
              
              3.35
              %$
              45,539
              
              $
              55,349
              
              $
              250
              
              $
              4,073
              
              $
              105,2113.52
              %
              
              3.80
              %
              
              7.16
              %
              
              10.19
              %
              
              3.93
              %





As
      of
      December 31, 2006 and 2005, the Corporation held FHLB bonds that had a book
      value of $35.0 million and $34.0 million and a market value of $34.4 million
      and
      $33.2 million, respectively.


-24-


**Types
      of Loans**





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





(In
                Thousands)
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Commercial
                and agriculture
            
            $
            380,940
            
            $
            321,303
            
            $
            301,961
            
            $
            268,963
            
            $
            272,440Real
                estate commercial
            
            
            897,717
            
            
            859,251
            
            
            848,737
            
            
            809,307
            
            
            758,826Real
                estate construction and land development
            
            
            1,323,906
            
            
            967,335
            
            
            608,421
            
            
            507,872
            
            
            443,461Real
                estate mortgage
            
            
            235,168
            
            
            188,772
            
            
            165,063
            
            
            143,420
            
            
            127,976Installment
            
            
            63,049
            
            
            46,852
            
            
            50,057
            
            
            40,201
            
            
            47,217$
            2,900,780
            
            $
            2,383,513
            
            $
            1,974,239
            
            $
            1,769,763
            
            $
            1,649,920





**Loan
      Maturities and Sensitivity to Changes in Interest Rates**





The
      following table shows the contractual maturity amounts and maturity analysis
      of
      loans outstanding as of December 31, 2006. Also, the amounts are classified
      as
      to fixed and variable rate sensitivity for amounts due after one
      year.





Maturity(In
                Thousands)
            
            Within
              1
                Year
            
            1
                -
                5
              Years
            
            After
              5
                Years
            
            TotalCommercial
                and agriculture
            
            $
            219,942
            
            $
            136,070
            
            $
            24,928
            
            $
            380,940Real
                estate commercial
            
            
            94,416
            
            
            473,063
            
            
            330,238
            
            
            897,717Real
                estate construction and land development
            
            
            1,230,744
            
            
            82,221
            
            
            10,941
            
            
            1,323,906Real
                estate mortgage
            
            
            94,285
            
            
            90,969
            
            
            49,914
            
            
            235,168Installment
            
            
            11,638
            
            
            15,853
            
            
            35,558
            
            
            63,049$
            1,651,025
            
            $
            798,176
            
            $
            451,579
            
            $
            2,900,780





Loans
      maturing after one year with:





1
                -
                5
              Years
            
            After
              5
                YearsFixed
                Rates
            
            $
            638,560
            
            $
            56,385Variable
                Rates
            
            
            159,616
            
            
            395,194$
            798,176
            
            $
            451,579





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





**Loan
      Administration**





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


-25-


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





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





Management
      performs and in depth analysis of the loan loss reserve four times a year and
      closely monitors the adequacy of the loan loss reserve. Management’s analysis is
      reviewed each quarter by the Board of Directors. The allowance is maintained
      at
      a level deemed sufficient to meet estimated potential losses.





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





**RISK
      ELEMENTS - IMPAIRED ASSETS**





**Nonaccruing/Impaired
      Loans**





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





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





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





**Restructured
      Loans**





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





**Delinquent
      and Problem Loans**





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


-26-


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





**Levels
      of, and Trends in, Delinquencies and Nonaccruals**





Nonperforming
      loans and other real estate increased in 2006 to $8.7 million, from $4.9 million
      in 2005. Management monitors delinquencies monthly and reports are reviewed
      by
      the Board of Directors. Delinquencies for the commercial, personal, real estate
      and credit lines categories are charted separately. One loan totaling $7.1
      million makes up 82.5% of the nonaccrual balance.





The
      dollar amount of loans past due 90 days or more nonaccruing and other real
      estate owned as a percentage of total loans was .30%, .21%, and .71%, at
      year-end 2006, 2005, and 2004, respectively. These loans have or had a variety
      of situations, some of which may lead to foreclosure or involve a bankruptcy
      case and while some of these loans are in active legal collection processes,
      others are under active repayment plans and may continue payment as the
      borrower’s financial situation improves.





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





(In
                Thousands)2006
            
            2005
            
            2004
            
            2003
            
            2002Commercial
                and agriculture
            
            $
            574
            
            $
            4,939
            
            
            -
            
            $
            120
            
            $
            909Real
                estate commercial
            
            
            -
            
            
            -
            
            $
            6,847
            
            
            6,187
            
            
            6,898Real
                estate construction and land development
            
            
            7,190
            
            
            -
            
            
            356
            
            
            -
            
            
            1,783Real
                estate mortgage
            
            
            889
            
            
            -
            
            
            6,904
            
            
            344
            
            
            2,291Installment
            
            
            -
            
            
            10
            
            
            -
            
            
            43
            
            
            554Total
                nonaccruing loans
            
            
            8,653
            
            
            4,949
            
            
            14,107
            
            
            6,694
            
            
            12,435Other
                real estate owned
            
            
            -
            
            
            -
            
            
            -
            
            
            4,162
            
            
            6,532Total
                nonperforming assets
            
            $
            8,653
            
            $
            4,949
            
            $
            14,107
            
            $
            10,856
            
            $
            18,967Restructured
            
            
            -
            
            
            -
            
            
            -
            
            $
            6,178
            
            $
            6,178Total
                loans at end of period(1)
            
            $
            2,908,000
            
            $
            2,389,224
            
            $
            1,978,052
            
            $
            1,771,716
            
            $
            1,658,684Total
                assets at end of period
            
            $
            3,238,464
            
            $
            2,640,275
            
            $
            2,243,396
            
            $
            2,075,393
            
            $
            1,943,727Total
                nonperforming assetsto
                total loans
            
            
            0.30
            %
            
            0.21
            %
            
            0.71
            %
            
            0.61
            %
            
            1.14
            %Total
                nonperforming assets to total assets
            
            
            0.27
            %
            
            0.19
            %
            
            0.63
            %
            
            0.52
            %
            
            0.98
            %Total
                impaired assets to total assets
            
            
            0.27
            %
            
            0.19
            %
            
            0.63
            %
            
            0.82
            %
            
            1.29
            %


(1)
      Includes loans held for resale




-27-


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





(In
                Thousands)At
                December 31,
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Additional
                interest income which would have been recorded during the period
                under
                original terms of loans above
            
            $
            761
            
            $
            67
            
            $
            925
            
            $
            443
            
            $
            1,400Interest
                collected and included in net income for the period
            
            $
            344
            
            $
            327
            
            $
            350
            
            $
            429
            
            $
            774Commitments
                for additional funds related to loans above
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-





**Loan
      Charge Off's**





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





**Other
      Real Estate Owned (OREO)**





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




The
      Bank
      had no OREO totals to report at year-end December 31, 2006 and
      2005.




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




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





(In
                Thousands)
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Other
                real estate owned
            
            
            -
            
            
            -
            
            
            -
            
            $
            4,162
            
            $
            6,532





**Allowance
      For Loan Losses - Qualitative Factors**





The
      allowance for loan losses was $40.6 million, or 1.40% of loans at December
      31,
      2006. This compares to $33.8 million, or 1.41% at December 31, 2005, and $30.4
      million, or 1.54% at December 31, 2004. Net charge-off’s as a percentage of
      average loans was .11% in 2006, a net recovery of (.01%) in 2005 and a net
      charge-off of .02% in 2004. An improving economy, and positive credit
      performance trends, is reflected in year-end 2006 and 2005 reserves of 1.40%
      and
      1.41%, respectively. An uncertain economic environment and increasing
      delinquencies supported the higher loan loss reserve percentages for year-end
      2004.




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


-28-




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




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





**Quantitative
      Factors**





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





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





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





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





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




-29-


**Summary
      of Loan Loss Experience**





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





(In
                Thousands)
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Balance
                at beginning of year
            
            $
            37,075
            
            $
            32,728
            
            $
            29,556
            
            $
            28,175
            
            $
            26,358Provision
                charged to operating expense
            
            
            7,500
            
            
            4,200
            
            
            3,500
            
            
            4,250
            
            
            6,300Loans
                charged-off:Commercial
                and agriculture
            
            
            (2,283
            )
            
            (342
            )
            
            (612
            )
            
            (1,617
            )
            
            (2,564
            )Real
                estate commercial
            
            
            -
            
            
            (4
            )
            
            -
            
            
            (1,486
            )
            
            (1,774
            )Real
                estate construction and land development
            
            
            (855
            )
            
            -
            
            
            -
            
            
            (48
            )
            
            (23
            )Real
                estate mortgage
            
            
            -
            
            
            (116
            )
            
            (387
            )
            
            (120
            )
            
            (211
            )Installment
            
            
            (156
            )
            
            (244
            )
            
            (413
            )
            
            (351
            )
            
            (537
            )Total
                charged-off loans
            
            
            (3,294
            )
            
            (706
            )
            
            (1,412
            )
            
            (3,622
            )
            
            (5,109
            )Less
                recoveries:Commercial
                and agriculture
            
            
            353
            
            
            623
            
            
            741
            
            
            620
            
            
            482Real
                estate commercial
            
            
            -
            
            
            -
            
            
            176
            
            
            6
            
            
            -Real
                estate construction and land development
            
            
            -
            
            
            142
            
            
            60
            
            
            -
            
            
            49Real
                estate mortgage
            
            
            -
            
            
            27
            
            
            51
            
            
            62
            
            
            22Installment
            
            
            60
            
            
            61
            
            
            56
            
            
            65
            
            
            73Total
                recoveries
            
            
            413
            
            
            853
            
            
            1,084
            
            
            753
            
            
            626Net
                (charge-offs) recoveries
            
            
            (2,881
            )
            
            147
            
            
            (328
            )
            
            (2,869
            )
            
            (4,483
            )Balance
                before portion identified for undisbursed loans
            
            
            41,694
            
            
            37,075
            
            
            32,728
            
            
            29,556
            
            
            28,175Reserve
                acquired in merger
            
            
            2,501
            
            
            -
            
            
            -
            
            
            -
            
            
            -Portion
                of reserve identified for undisbursed loans
            
            
            (3,546
            )
            
            (3,270
            )
            
            (2,307
            )
            
            (1,768
            )
            
            (1,555
            )Balance
                at end of year
            
            $
            40,649
            
            $
            33,805
            
            $
            30,421
            
            $
            27,788
            
            $
            26,620Total
                loans atend
                of period(1)
            
            $
            2,908,000
            
            $
            2,389,224
            
            $
            1,978,052
            
            $
            1,771,716
            
            $
            1,658,684Daily
                average loans
            
            $
            2,731,257
            
            $
            2,200,344
            
            $
            1,887,528
            
            $
            1,691,051
            
            $
            1,601,037Ratio
                of net charged-off loans during period to average loans
                outstanding
            
            
            0.11
            %
            
            -0.01
            %
            
            0.02
            %
            
            0.17
            %
            
            0.28
            %Loan
                loss reserve as a percentage of total loans
            
            
            1.40
            %
            
            1.41
            %
            
            1.54
            %
            
            1.57
            %
            
            1.60
            %




(1)
      Includes loans held for resale




-30-


**Allocation
      of Allowance for Loan Losses**





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





(In
                Thousands, except percentages)2006
              Reserve
            
            Loan
              Category
              Percent
            
            2005
              Reserve
            
            Loan
              Category
              Percent
            
            2004
              Reserve
            
            Loan
              Category
              Percent
            
            2003
              Reserve
            
            Loan
              Category
              Percent
            
            2002
              Reserve
            
            Loan
              Category
              PercentCommercial
                and agriculture
            
            $
            9,726
            
            
            13.1
            %
            $
            11,061
            
            
            14.6
            %
            $
            9,658
            
            
            15.3
            %
            $
            13,465
            
            
            15.2
            %
            $
            14,728
            
            
            16.4
            %Real
                estate commercial
            
            
            11,400
            
            
            30.9
            %
            
            12,884
            
            
            39.4
            %
            
            11,489
            
            
            43.0
            %
            
            8,948
            
            
            45.7
            %
            
            7,472
            
            
            45.8
            %Real
                estate construction land development
            
            
            4,932
            
            
            45.5
            %
            
            2,203
            
            
            35.4
            %
            
            1,668
            
            
            30.8
            %
            
            937
            
            
            28.6
            %
            
            813
            
            
            26.7
            %Real
                estate mortgage
            
            
            8,368
            
            
            8.3
            %
            
            4,733
            
            
            8.4
            %
            
            4,341
            
            
            8.4
            %
            
            2,084
            
            
            8.2
            %
            
            1,631
            
            
            8.2
            %Installment
            
            
            1,012
            
            
            2.2
            %
            
            724
            
            
            2.2
            %
            
            461
            
            
            2.5
            %
            
            376
            
            
            2.3
            %
            
            235
            
            
            2.9
            %Unallocated
            
            
            5,211
            
            
            
            
            
            2,200
            
            
            
            
            
            2,804
            
            
            
            
            
            1,978
            
            
            
            
            
            1,74140,649
            
            
            
            
            
            33,805
            
            
            
            
            
            30,421
            
            
            
            
            
            27,788
            
            
            
            
            
            26,620Standby
                and letters of credit
            
            
            216
            
            
            
            
            
            240
            
            
            
            
            
            215
            
            
            
            
            
            157
            
            
            
            
            
            138Undisbursed
            
            
            3,330
            
            
            
            
            
            3,030
            
            
            
            
            
            2,092
            
            
            
            
            
            1,611
            
            
            
            
            
            1,417$
            44,195
            
            
            100.0
            %
            $
            37,075
            
            
            100.0
            %
            $
            32,728
            
            
            100.0
            %
            $
            29,556
            
            
            100.0
            %
            $
            28,175
            
            
            100.0
            %





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





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





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





**Effects
      of Changing Interest Rates**





A
      review
      of the past 12 months shows that the tax equivalent net interest margin began
      year 2006 at 5.80% (quarter ended December 31, 2005). The margin then declined
      to 5.61% for the first quarter and then increased to 5.66% in the second
      quarter. The increase continued in the third quarter to 5.82% and decreased
      slightly to 5.81% in the fourth quarter. The Corporation increased its key
      lending index 25 basis points in January, March, May, and June. The movement
      in
      the net interest margin was attributed to these rate increases. During 2005,
      the
      Corporation increased its index eight times. In 2004, the Corporation increased
      its key lending index 25 basis points in August, September, November and
      December.


-31-


**Concentrations
      of Credit**





The
      most
      significant portion of the loan portfolio consists of real estate construction
      and land development loans. Total loans within this category grew by $356.6
      million or 37%, in 2006. Continued demand for housing and favorable interest
      rates continued to fuel this growth. Real estate construction loans are
      generally composed of commitments to customers within our market area for
      construction purposes. Loans within this category are used for construction
      projects that range from residential and commercial land development to
      residential and commercial building projects. They are generally secured by
      first trust deeds with well-defined repayment sources following project
      completion. Maturities are set to match the time required for project
      completion, which typically run from 12 to 18 months depending on complexity.
      While the Bank has significant balances within this lending category, management
      believes that its lending policies and underwriting standards are sufficient
      to
      minimize risk even during these uncertain economic times. Management closely
      monitors the effects of current and expected market conditions and other factors
      that may influence the repayment of these loans.





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




(In
                Thousands)At
                December 31,
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Real
                estate commercial
            
            $
            897,717
            
            $
            859,251
            
            $
            848,737
            
            $
            809,307
            
            $
            758,826Real
                estate construction and land development
            
            
            1,323,906
            
            
            967,335
            
            
            608,421
            
            
            507,872
            
            
            443,461Total
                loans at end of period
            
            $
            2,908,000
            
            $
            2,389,224
            
            $
            1,978,052
            
            $
            1,771,716
            
            $
            1,658,684Real
                estate commercial loans as a percent of total loans
            
            
            30.9
            %
            
            36.0
            %
            
            42.9
            %
            
            45.7
            %
            
            45.7
            %Real
                estate construction loans as a percent of total loans
            
            
            45.5
            %
            
            40.5
            %
            
            30.8
            %
            
            28.7
            %
            
            26.7
            %





**Trends
      in Volume and Terms of Loans**





Average
      loans for the year 2006 were $2.73 billion, representing an increase of $530.9
      million, or 24.1% over the average balance for 2005. Average loans for the
      year
      2005 were $2.20 billion, representing an increase of $312.8 million, or 16.6%
      over the average balance for 2004. Average loans for the year 2004 were $1.89
      billion, representing an increase of $196.5, or 11.6% over the average balance
      for 2003. In 2006, the rate of growth increased over prior year’s increases due
      to favorable market conditions and additional lending staff. Terms of loans
      have
      remained competitive and within policy guidelines.





**Conclusion
      of Qualitative Factors**





The
      allowance for loan losses is the amount, which, in the opinion of management,
      is
      necessary to absorb inherent loan losses regardless of source. Management’s
      evaluation of the adequacy of the allowance is based on the market area served,
      local economic conditions, the growth and mix of the portfolio and their related
      risk characteristics. Our analysis included important subjective factors that
      cause us to believe the reserve is adequate to absorb anticipated and known
      losses.





**Off
      Balance Sheet Arrangements**





In
      the
      ordinary course of business, Frontier has entered into off-balance sheet
      financial instruments consisting of commitments for the extension of credit,
      credit card commitments, letter of credit commitments, home equity lines and
      standby letters of credit. These instruments are recorded in the financial
      statements only when they are funded or related fees are incurred or received.
      The following table summarizes the amount of commitments as of December 31,
      2006:


-32-





(In
                Thousands)Standby
                letters of credit
            
            $
            27,035Credit
                card arrangements
            
            
            37,051Commitments
                to fund loans secured by real estate
            
            
            902,701





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





**Deposits**





For
      the
      average amount of deposits and rates paid on such deposits for years ended
      December 31, 2006, 2005, and 2004 please refer to page 47 of 2006 Annual Report
      to Shareowners.





Maturities
      of time certificates of deposit $100,000 and over at year-end 2006 are shown
      below:





In
                Thousands3
                months or less
            
            $
            184,560Over
                3 months through 6 months
            
            
            133,3086
                months through 12 months
            
            
            144,510Over
                12 months
            
            
            82,795$
            545,173





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





(In
                Thousands)
            
            2006
            
            2005
            
            Dollar
              Change
            
            Percent
              ChangeDemand
                deposits
            
            $
            406,621
            
            $
            395,852
            
            $
            10,769
            
            
            2.7
            %Now,
                money market and sweep accounts
            
            
            683,948
            
            
            322,283
            
            
            361,665
            
            
            112.2
            %Savings
            
            
            305,669
            
            
            495,108
            
            
            (189,439
            )
            
            -38.3
            %Time
                deposits
            
            
            906,406
            
            
            611,553
            
            
            294,853
            
            
            48.2
            %








Although
      86% of our time deposit portfolio will mature within the next year, we feel
      that
      cash flows are sufficient to support operations for the foreseeable future.
      Over
      the past year, we have had the ability to retain and grow each category of
      our
      deposit accounts. If liquidity was needed going forward, sources would consist
      of maturing securities, increased customer deposits or loan maturities. If
      need
      be, lines of credit are available or we could issue additional capital stock.
      Cash flows from operations also contribute significantly to liquidity
      needs.


-33-


**Borrowings**





**Short-Term
                Borrowings**(In
                Thousands)At
                December 31,
            
            2006
            
            Weighted
              Average
              Interest
              Rate
            
            2005
            
            Weighted
              Average
              Interest
              Rate
            
            2004
            
            Weighted
              Average
              Interest
              RateYear-end
                balance:
            
            $
            81,673
            
            
            5.24
            %
            $
            20,813
            
            
            2.72
            %
            $
            10,205
            
            
            1.71
            %Highest
                month end balance during the period:
            
            $
            81,673
            
            
            
            
            $
            52,444
            
            
            
            
            $
            39,906





For
      information regarding average balances and yields, please refer to page 47
      of
      2006 Annual Report to Shareowners.





**ITEM
      2 - PROPERTIES**





Our
      principal office is located in a forty-five thousand square foot facility in
      Everett, Washington. Our data processing and operations center are located
      in a
      sixteen thousand square foot facility located in Everett, Washington. In
      addition to our principal and administrative facilities, we operate 45 branches
      in Western Washington.





FFP,
      Inc., a real estate holding subsidiary, owns the properties and buildings
      housing our principal office, data processing and operations center, and 27
      of
      our branch facilities, including the branch in our principal office. FFP, Inc.
      also owns the buildings in which 2 of our branches are located in while the
      land
      is leased. We lease the land and buildings for 16 of our branch offices. The
      leases on our branch offices have expiration dates ranging from 2007 to
      2021.





The
      aggregate monthly rental on our leased properties is $ 152 thousand.





We
      are in
      the early stages of construction of a forty-five thousand square foot office
      facility adjacent to our principal office which will be used to consolidate
      our
      administrative functions. We plan to occupy this new space in late
      2008.





**ITEM3
      - LEGAL PROCEEDINGS**





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





**ITEM4
      - SUBMISSION OF MATTERS TO A VOTE OF
      SHAREOWNERS**





No
      matters were submitted to shareowners during the fourth quarter of
      2006.


-34-


**PART
      II**





**ITEM
      5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
      SHAREOWNER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**





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





High
            
            Low1stquarter 2005
            
            $
            17.78
            
            $
            16.222ndquarter 2005
            
            
            17.38
            
            
            15.663rdquarter 2005
            
            
            20.17
            
            
            16.884thquarter 2005
            
            
            22.33
            
            
            17.331stquarter 2006
            
            $
            22.43
            
            $
            20.382ndquarter 2006
            
            
            23.96
            
            
            20.823rdquarter 2006
            
            
            28.00
            
            
            21.784thquarter 2006
            
            
            31.33
            
            
            25.36





(b)
      Frontier Financial Corporation has only one class of stock outstanding, which
      is
      common stock. At February 21, 2007 there were 45,205,057 shares outstanding
      and
      there were 3,556 holders of record of our common stock. The principal market
      for
      our common stock is The NASDAQ Stock Market LLC.








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





Dividend
                  Declared
              
              Record
                  Date
              
              Payment
                  Date$.091
              
              January
                  10, 2005
              
              January
                  25, 2005.093
              
              April
                  11, 2005
              
              April
                  25, 2005.107
              
              July
                  11, 2005
              
              July
                  25, 2005.110
              
              October
                  11, 2005
              
              October
                  24, 2005.113
              
              January
                  9, 2006
              
              January
                  24, 2006.117
              
              April
                  11, 2006
              
              April
                  24, 2006.12
              
              July
                  10, 2006
              
              July
                  24, 2006.15
              
              October
                  10, 2006
              
              October
                  24, 2006





(d)
      During the quarter ended December 31, 2006, there were no issuer repurchases
      of
      its equity securities. Subsequent to year-end, the Corporation repurchased
      218,940 shares at an average cost of $26.85 through February 21,
      2007.




-35-


**Five-Year
      Stock Performance Graph**


**Total
      Cumulative return to Shareowners**





The
      graph
      below provides an indicator of cumulative shareowner returns for the Corporation
      as compared with the Nasdaq Bank Index and the S&P 500 Index.









Index
            12/31/02
            12/31/03
            12/31/04
            12/31/05
            12/31/06Frontier
                Financial Corporation
            100.11
            132.65
            157.33
            199.34
            276.54NASDAQ
                Bank Index
            102.40
            131.73
            150.75
            147.28
            165.26S&P
                500 Index
            77.56
            99.84
            110.79
            114.11
            132.13





The
      above
      presentation assumes $100 was invested on December 31, 2001, in the
      Corporation’s common stock and each of the above indexes.


-36-


**ITEM
      6 - SELECTED FINANCIAL DATA**





**FINANCIAL
      HIGHLIGHTS**




In
                Thousands**AT
                YEAR-END**
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002
            
            %
                Change
              2006-2005Total
                assets
            
            $
            3,238,464
            
            $
            2,640,275
            
            $
            2,243,396
            
            $
            2,075,393
            
            $
            1,943,727
            
            
            22.7
            %Net
                loans
            
            
            2,867,351
            
            
            2,355,419
            
            
            1,945,324
            
            
            1,742,160
            
            
            1,630,509
            
            
            21.7
            %Investment
                securities
            
            
            114,711
            
            
            110,617
            
            
            153,451
            
            
            187,915
            
            
            140,037
            
            
            3.7
            %Deposits
            
            
            2,453,632
            
            
            2,061,380
            
            
            1,795,842
            
            
            1,667,017
            
            
            1,560,876
            
            
            19.0
            %Shareowners'
                equity
            
            
            395,283
            
            
            296,097
            
            
            254,230
            
            
            219,406
            
            
            198,863
            
            
            33.5
            %**FOR
                THE YEAR**Interest
                income
            
            $
            250,144
            
            $
            178,886
            
            $
            140,228
            
            $
            135,201
            
            $
            138,859
            
            
            39.8
            %Interest
                expense
            
            
            86,942
            
            
            51,736
            
            
            34,939
            
            
            37,829
            
            
            45,581
            
            
            68.0
            %Net
                interest income
            
            
            163,202
            
            
            127,150
            
            
            105,289
            
            
            97,372
            
            
            93,278
            
            
            28.4
            %Securities
                gains (losses)
            
            
            (25
            )
            
            (211
            )
            
            (44
            )
            
            190
            
            
            (480
            )
            
            NMProvision
                for loan losses
            
            
            7,500
            
            
            4,200
            
            
            3,500
            
            
            4,250
            
            
            6,300
            
            
            78.6
            %Net
                income
            
            
            68,910
            
            
            51,584
            
            
            43,045
            
            
            39,607
            
            
            36,014
            
            
            33.6
            %Basic
                earnings per share
            
            $
            1.53
            
            $
            1.21
            
            $
            1.03
            
            $
            0.95
            
            $
            0.84
            
            
            26.4
            %Diluted
                earnings per share
            
            $
            1.52
            
            $
            1.21
            
            $
            1.02
            
            $
            0.94
            
            $
            0.83
            
            
            25.6
            %Cash
                dividends declared per common share
            
            $
            0.50
            
            $
            0.40
            
            $
            0.34
            
            $
            0.31
            
            $
            0.27
            
            
            25.0
            %Dividend
                payout ratio
            
            
            32.9
            %
            
            33.1
            %
            
            33.3
            %
            
            33.0
            %
            
            32.5
            %Return
                on AverageAssets
            
            
            2.27
            %
            
            2.09
            %
            
            1.98
            %
            
            1.96
            %
            
            1.94
            %Equity
            
            
            18.91
            %
            
            18.75
            %
            
            18.35
            %
            
            19.23
            %
            
            18.36
            %Avg.
                equity/avg. assets
            
            
            11.98
            %
            
            11.16
            %
            
            10.76
            %
            
            10.21
            %
            
            10.57
            %Efficiency
                Ratio
            
            
            38
            %
            
            41
            %
            
            42
            %
            
            41
            %
            
            40
            %





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





Please
      see 2006 Annual Report to Shareowners, page 31 through 48.





**ITEM
      7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Please
      see 2006 Annual Report to Shareowners, pages 35-39.


Please
      see this Form 10-K, pages 28-32.


-37-


**ITEM
      8 - FINANCIALSTATEMENTS AND SUPPLEMENTARY
      DATA**





**INDEX
      TO FINANCIAL STATEMENTS**





Form
              10-KPage
            
            Annual
              Report
                to
              Shareowners
              PageReport
                of Independent Registered Public Accounting Firm
            
            
            1Consolidated
                Balance Sheet at December 31, 2006 and 2005
            
            
            2Consolidated
                Statement of Income for the years Ended December 31, 2006, 2005 and
                2004
            
            
            3Consolidated
                Statement of Shareowners’ Equity
            
            
            4Consolidated
                Statement of Cash Flows for the Years ended December 31, 2006, 2005
                and
                2004
            
            
            5Condensed
                Balance Sheet (Parent Only) at December 31, 2006 and 2005
            
            
            27Condensed
                Statement of Income (Parent Only) for the Years Ended December 31,
                2006,
                2005 and 2004
            
            
            27Condensed
                Statement of Cash Flows (Parent Only)for Years Ended December 31,
                2006,
                2005 and 2004
            
            
            28Notes
                to Consolidated Financial Statements
            
            
            6
                -
                30





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





None.





**ITEM9A
      - CONTROLS AND PROCEDURES**





The
      Corporation’s management, including the Corporation’s Chief Executive Officer
      and Chief Financial Officer, evaluated the effectiveness of its disclosure
      controls and procedures as of December 31, 2006. Based on this evaluation,
      the
      Chief Executive Officer and the Chief Financial Officer each concluded that
      as
      of December 31, 2006, the Corporation maintained effective disclosure controls
      and procedures in all material respects, including those to ensure that
      information required to be disclosed in reports filed or submitted with the
      SEC
      is recorded, processed, and reported within the time periods specified by the
      SEC, and is accumulated and communicated to management, including the Chief
      Executive Officer and the Chief Financial Officer, as appropriate to allow
      for
      timely decisions regarding required disclosure.





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


-38-


**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**





Management
      of Frontier Financial Corporation and its subsidiaries (“the Corporation”) is
      responsible for establishing and maintaining adequate internal control over
      financial reporting, and for performing an assessment of the effectiveness
      of
      internal control over financial reporting as of December 31, 2006. The
      Corporation’s internal control over financial reporting is a process designed
      under the supervision of the Corporation’s management, including the Chief
      Executive Officer and Chief Financial Officer, to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external purposes in accordance with accounting
      principles generally accepted in the United States of America.





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





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





Under
      the
      supervision and with the participation of the Corporation’s management,
      including the Corporation’s Chief Executive Officer and Chief Financial Officer,
      the Corporation performed an assessment of the effectiveness of the
      Corporation’s internal control over financial reporting as of December 31, 2006
      based upon criteria in *Internal Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission
      (“COSO”). Based on this assessment, Management determined that the Corporation’s
      internal control over financial reporting was effective as of December 31,
      2006.





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





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





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





**ITEM
      9B- OTHER INFORMATION**





Not
      applicable.


-39-


**PART
      III**





**ITEM
      10 -DIRECTORS AND EXECUTIVE OFFICERS** **OF
      FRONTIER FINANCIAL CORPORATION**





Biographical
      and business experience information about the directors and director nominees
      of
      FFC included in Frontier Financial Corporation’s Proxy Statement for the Annual
      Meeting of Shareowners to be held on April 18, 2007 (the Proxy Statement) under
      the caption “Election of Directors” and the information incorporated by
      reference pursuant to Item 13 below are hereby incorporated herein by reference.
      Information on FFC’s executive officers is also included in the Proxy
      Statement.





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





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





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





**ITEM11- EXECUTIVE COMPENSATION**





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





**Equity
      Compensation Plans**





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





Number
                of securities
              to
                be issued upon
              exercise
                of outstanding
              options,
                warrants andrights
            
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
            
            Number
                of securities
              remaining
                available for
              future
                issuance under
              equity
                compensation plans
              (excluding
                securities)
              reflected
                in first column)Equity
                compensation plans approved by security holders (A)
            
            
            1,349,128
            
            $
            17.78
            
            
            4,997,711Equity
                compensation plans not approved by security holders (B)
            
            
            45,000
            
            
            N/A
            
            
            37,7871,394,128
            
            
            
            
            
            5,035,498





( A)
      Consists of FFC Incentive Stock Options Plan


(B)
      Consists of FFC 1999 Employee Stock Award Plan


-40-


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





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





**ITEM13
      - CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS**





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





**ITEM14- PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      information set forth in the Proxy Statement under the caption “Independent
      Registered Public Accounting Firm” is hereby incorporated herein by
      reference.


-41-


**PART
      IV**





**ITEM
      15- EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES**





*(a)(1)
      Financial Statements.*




Financial
      statements required by Item 8 of this report are incorporated by reference,
      from
      the 2006 Annual Report to Shareowners.




*(a)(2)
      Financial Statement Schedules.*




All
      financial schedules for which provision is made in the applicable accounting
      regulations of the Securities and Exchange Commission are not required under
      the
      related instructions or are inapplicable and therefore have been omitted.




*(a)(3)
      Exhibits.*




See
      Exhibit Index on page 45.




-42-


**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 CORPORATIONFebruary
                21, 2007
            
            /s/
                John J. DicksonJohn
                J. DicksonPresident
                and Chief Executive Officer





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





February
                21, 2007
            
            /s/
                John J. DicksonJohn
                J. DicksonPresident
                and Chief Executive Officer(Principal
                Executive Officer)February
                21, 2007
            
            /s/
                Carol E. WheelerCarol
                E. WheelerChief
                Financial Officer(Principal
                Financial and Accounting Officer)February
                21, 2007
            
            /s/
                George E. BarberGeorge
                E. Barber, DirectorFebruary
                21, 2007
            
            /s/
                Michael J. ClementzMichael
                J. Clementz, DirectorFebruary
                21, 2007
            
            /s/
                David M. CuthillDavid
                M. Cuthill, DirectorFebruary
                21, 2007
            
            /s/
                Lucy DeYoungLucy
                DeYoung, DirectorFebruary
                21, 2007
            
            /s/
                John J. DicksonJohn
                J. Dickson, DirectorFebruary
                21, 2007
            
            /s/
                Robert J. DicksonRobert
                J. Dickson, Chairman of the BoardFebruary
                21, 2007
            
            /s/
                Patrick M. FaheyPatrick
                M. Fahey, DirectorFebruary
                21, 2007
            
            /s/
                Edward D. HansenEdward
                D. Hansen, DirectorFebruary
                21, 2007
            
            /s/
                William H. LucasWilliam
                H. Lucas, DirectorFebruary
                21, 2007
            
            /s/
                James H. MulliganJames
                H. Mulligan, DirectorFebruary
                21, 2007
            
            /s/
                William J. RobinsonWilliam
                J. Robinson, DirectorFebruary
                21, 2007
            
            /s/
                Edward C. RubatinoEdward
                C. Rubatino, DirectorFebruary
                21, 2007
            
            /s/
                Darrell J. StorksonDarrell
                J. Storkson, DirectorFebruary
                21, 2007
            
            /s/
                Mark O. ZengerMark
                O. Zenger, Director


-43-




**EXHIBIT
      INDEX**


(3)(a)
              Articles
                  of Incorporation of Frontier Financial Corporation are incorporated
                  herein
                  by reference to Appendix A to the registrant’s definitive Proxy Statement
                  on Schedule 14A filed on March 20, 1998 (File No.
                  000-15540).(3)(b)
              By-Laws
                  of Frontier Financial Corporation are incorporated herein by reference
                  to
                  Exhibit 3(ii) to Form 10Q filed on October 29, 2003.*(10)(a)
              Amended
                  and Restated Frontier Financial Corporation Incentive Stock Option
                  Plan
                  incorporated by reference to Exhibit 99.1 to Registration Statement
                  on
                  Form S-8, filed March 27, 1998 (File No. 333-48805).*(10)(b)
              Frontier
                  Financial Corporation 1999 Employee Stock Award Plan is incorporated
                  herein by reference to Exhibit 99.1 to Registration Statement on
                  Form S-8,
                  filed March 2, 1999 (File No. 333-73217).*(10)(c)
              Frontier
                  Financial Corporation 2001 Stock Award Plan, is incorporated herein
                  by
                  reference to Exhibit 99.1 to Registration Statement on Form S-8,
                  filed
                  January 26, 2001, (File No. 333-54362).*(10)(d)
              Frontier
                  Financial Corporation Employee Stock Option Plan and Interbancorp,
                  Inc.
                  Director Stock Option Plan, is incorporated herein by reference
                  to Exhibit
                  10.1 to Registration Statement on Form S-8, filed January 26, 2001
                  (File
                  No. 333-37242).*(10)(e)
              Interbancorp,
                  Inc. Employee Stock Option Plan and Interbancorp, Inc. Director
                  Stock
                  Option Plan, is incorporated herein by reference to Exhibit 10.1
                  to
                  Registration Statement on Form S-8, filed February 13, 2001 (File
                  No.
                  333-50882).*(10)(f)
              Frontier
                  Financial Corporation Employee Stock Option Plan and NorthStar
                  Bank
                  Employee Stock Option Plan, NorthStar Bank 1994 Employee Stock
                  Option
                  Plan, and NorthStar Bank Director Nonqualified Stock Option Plan,
                  is
                  incorporated herein by reference to Exhibit 10.1 to Registration
                  Statement
                  on Form S-8, filed March 16, 2006 (File No.
                  333-132487).*(10)(g)
              Frontier
                  Financial Corporation 2006 Stock Incentive Plan, is incorporated
                  herein by
                  reference to Exhibit 99.1 to Registration Statement on Form S-8,
                  filed
                  August 4, 2006, (File No. 333-136298).*(10)(h)
              Change
                  of Control Agreement with John J. Dickson is incorporated by reference
                  to
                  Exhibit 10.1 to Current Report on Form 8-K, filed January 19, 2006
                  (File
                  No. 000-15540).*(10)(i)
              Form
                  of Change of Control Agreement with other Executive
                  Officers.(11)
              Statement
                  Regarding Computation of Earnings Per Share.(13)
              Portions
                  of the Annual Report to Shareowners for the year ended December
                  31, 2006,
                  are incorporated by reference herein.(14)
              Code
                  of Ethics for Senior Financial Officers.(21)
              Subsidiaries
                  of Registrant.(23.1)
              Consent
                  of Moss Adams LLP, independent registered public accounting
                  firm.(31.1)
              Certification
                  of Chief Executive Officer.(31.2)
              Certification
                  of Chief Financial Officer.(32)
              Certification
                  pursuant to 28 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act




*
      Compensatory plan or arrangement.






-44-