Exhibit 13



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareowners



Frontier Financial Corporation



We have audited the accompanying consolidated balance sheet of Frontier Financial Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareowners
equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion of these
financial statements based on our audits.



We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frontier Financial Corporation
and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.



LOGO



Everett, Washington

January 14, 2005



-1-



---



FRONTIER FINANCIAL
CORPORATION

AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEET

(In
Thousands)



|                                                                                                                                     |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                                     |  | DECEMBER 31, |          
|                                                                                                                                     |  | 2004         |           |   | 2003 |  
|ASSETS                                                                                                                               |  |              |           |   |      |   |           |  
|Cash and due from banks                                                                                                              |  | $            | 70,851    |   |      | $ | 74,552    |  
|Federal funds sold                                                                                                                   |  |              | 5,946     |   |      |   | 8         |  
|Investment securities                                                                                                                |  |              |           |   |      |   |           |  
|Available for sale, at fair value                                                                                                    |  |              | 145,917   |   |      |   | 175,726   |  
|Held to maturity (fair value 2004: $7,912; 2003: $12,779)                                                                            |  |              | 7,534     |   |      |   | 12,189    |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|Total investment securities                                                                                                          |  |              | 153,451   |   |      |   | 187,915   |  
|Loans for resale (Fair value 2004: $3,904; 2003: $1,984)                                                                             |  |              | 3,813     |   |      |   | 1,953     |  
|Loans                                                                                                                                |  |              | 1,974,239 |   |      |   | 1,769,763 |  
|Less allowance for loan losses                                                                                                       |  |              | (32,728   | ) |      |   | (29,556   | )
|                                                                                                                                     |  |              |           |   |      |   |           |  
|Net loans                                                                                                                            |  |              | 1,945,324 |   |      |   | 1,742,160 |  
|Premises and equipment, net                                                                                                          |  |              | 29,226    |   |      |   | 28,756    |  
|Other real estate owned                                                                                                              |  |              |          |   |      |   | 4,162     |  
|Intangible assets                                                                                                                    |  |              | 6,476     |   |      |   | 6,476     |  
|Bank owned life insurance                                                                                                            |  |              | 17,400    |   |      |   | 16,653    |  
|Other assets                                                                                                                         |  |              | 14,722    |   |      |   | 14,711    |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|Total assets                                                                                                                         |  | $            | 2,243,396 |   |      | $ | 2,075,393 |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|LIABILITIES                                                                                                                          |  |              |           |   |      |   |           |  
|Deposits                                                                                                                             |  |              |           |   |      |   |           |  
|Noninterest bearing accounts                                                                                                         |  | $            | 313,275   |   |      | $ | 271,389   |  
|Interest bearing accounts                                                                                                            |  |              | 1,482,567 |   |      |   | 1,395,628 |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|Total deposits                                                                                                                       |  |              | 1,795,842 |   |      |   | 1,667,017 |  
|Federal funds purchased and securities sold under agreements to repurchase                                                           |  |              | 10,205    |   |      |   | 10,015    |  
|Federal Home Loan Bank (FHLB) advances                                                                                               |  |              | 175,088   |   |      |   | 170,104   |  
|Other liabilities                                                                                                                    |  |              | 8,031     |   |      |   | 8,851     |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|Total liabilities                                                                                                                    |  |              | 1,989,166 |   |      |   | 1,855,987 |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|SHAREOWNERS EQUITY                                                                                                                  |  |              |           |   |      |   |           |  
|Common stock, no par value; 100,000,000 shares authorized; 18,745,185 and 18,550,060 shares issued and outstanding in 2004 and
2003. |  |              | 124,617   |   |      |   | 118,693   |  
|Retained earnings                                                                                                                    |  |              | 126,216   |   |      |   | 97,221    |  
|Accumulated other comprehensive income, net of tax                                                                                   |  |              | 3,397     |   |      |   | 3,492     |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|Total shareowners equity                                                                                                            |  |              | 254,230   |   |      |   | 219,406   |  
|                                                                                                                                     |  |              |           |   |      |   |           |  
|Total liabilities and shareowners equity                                                                                            |  | $            | 2,243,396 |   |      | $ | 2,075,393 |  
|                                                                                                                                     |  |              |           |   |      |   |           |  



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



-2-



---



FRONTIER FINANCIAL
CORPORATION

AND SUBSIDIARIES



CONSOLIDATED STATEMENT OF INCOME

(In
Thousands, except for per share amounts)



|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                       |  | YEAR ENDED DECEMBER 31, |        
|                                                                                       |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|INTEREST INCOME                                                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest and fees on loans                                                             |  | $                       | 133,232 |   |      | $ | 126,555 |      |  | $ | 131,437 |  
|Interest on federal funds sold                                                         |  |                         | 170     |   |      |   | 558     |      |  |   | 389     |  
|Interest on investment securities                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Taxable                                                                                |  |                         | 6,351   |   |      |   | 7,045   |      |  |   | 5,810   |  
|Exempt from federal income tax                                                         |  |                         | 475     |   |      |   | 1,043   |      |  |   | 1,223   |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Total interest income                                                                  |  |                         | 140,228 |   |      |   | 135,201 |      |  |   | 138,859 |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|INTEREST EXPENSE                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest on deposits                                                                   |  |                         | 26,418  |   |      |   | 29,907  |      |  |   | 38,470  |  
|Interest on FHLB advances                                                              |  |                         | 8,365   |   |      |   | 7,763   |      |  |   | 6,979   |  
|Interest on federal funds purchased and securities sold under agreements to repurchase |  |                         | 156     |   |      |   | 159     |      |  |   | 132     |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Total interest expense                                                                 |  |                         | 34,939  |   |      |   | 37,829  |      |  |   | 45,581  |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Net interest income                                                                    |  |                         | 105,289 |   |      |   | 97,372  |      |  |   | 93,278  |  
|PROVISION FOR LOAN LOSSES                                                              |  |                         | (3,500  | ) |      |   | (4,250  | )    |  |   | (6,300  | )
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Net interest income after provision for loan losses                                    |  |                         | 101,789 |   |      |   | 93,122  |      |  |   | 86,978  |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|NONINTEREST INCOME                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Gain (loss) on sale of securities                                                      |  |                         | (44     | ) |      |   | 190     |      |  |   | (480    | )
|Gain on sale of secondary market loans                                                 |  |                         | 1,028   |   |      |   | 2,048   |      |  |   | 1,264   |  
|Service charges                                                                        |  |                         | 4,926   |   |      |   | 4,595   |      |  |   | 4,133   |  
|Other                                                                                  |  |                         | 8,034   |   |      |   | 5,924   |      |  |   | 5,226   |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest income                                                               |  |                         | 13,944  |   |      |   | 12,757  |      |  |   | 10,143  |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|NONINTEREST EXPENSE                                                                    |  |                         |         |   |      |   |         |      |  |   |         |  
|Salaries                                                                               |  |                         | 23,403  |   |      |   | 20,819  |      |  |   | 18,764  |  
|Employee benefits                                                                      |  |                         | 8,509   |   |      |   | 7,976   |      |  |   | 7,065   |  
|Occupancy                                                                              |  |                         | 7,035   |   |      |   | 6,255   |      |  |   | 6,158   |  
|State business taxes                                                                   |  |                         | 1,751   |   |      |   | 1,820   |      |  |   | 1,813   |  
|Other                                                                                  |  |                         | 10,027  |   |      |   | 9,349   |      |  |   | 9,060   |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Total noninterest expense                                                              |  |                         | 50,725  |   |      |   | 46,219  |      |  |   | 42,860  |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|INCOME BEFORE INCOME TAX                                                               |  |                         | 65,008  |   |      |   | 59,660  |      |  |   | 54,261  |  
|PROVISION FOR INCOME TAX                                                               |  |                         | (21,963 | ) |      |   | (20,053 | )    |  |   | (18,247 | )
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|NET INCOME                                                                             |  | $                       | 43,045  |   |      | $ | 39,607  |      |  | $ | 36,014  |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|BASIC EARNINGS PER SHARE                                                               |  | $                       | 2.31    |   |      | $ | 2.13    |      |  | $ | 1.88    |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|DILUTED EARNINGS PER SHARE                                                             |  | $                       | 2.29    |   |      | $ | 2.12    |      |  | $ | 1.87    |  
|                                                                                       |  |                         |         |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part of these financial statements



-3-



---



FRONTIER FINANCIAL
CORPORATION

AND SUBSIDIARIES



CONSOLIDATED STATEMENT OF SHAREOWNERS EQUITY

(In Thousands, except number of shares)



|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------ | - |  | -------------------- | ------- | - | ----------------- | - | ------ | ---------------------------------------------- |  | - | ------- | - |  | - | ----- | - |  | - | ------- | -
|                                                                          |  | Common Stock |   |  | Comprehensive Income |         |   | Retained Earnings |   |        | Accumulated Other Comprehensive Income/ (Loss) |  |   | Total   |  
|                                                                          |  | Shares       |   |  | Amount               |         |   |                   |   |       
|Balance, December 31, 2001                                                |  | 19,184,879   |   |  | $                    | 115,158 |   |                   |   |        |                                                |  | $ | 67,738  |   |  | $ | 634   |   |  | $ | 183,530 |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Comprehensive Income                                                      |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Net income for 2002                                                       |  |             |   |  |                      |        |   |                   | $ | 36,014 |                                                |  |   | 36,014  |   |  |   |      |   |  |   | 36,014  |  
|Other comprehensive income,                                               |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Unrealized gain (loss) on available for sale securities, net of tax $788  |  |             |   |  |                      |        |   |                   |   | 1,463  |                                                |  |   |        |   |  |   | 1,463 |   |  |   | 1,463   |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Total comprehensive income                                                |  |              |   |  |                      |         |   |                   | $ | 37,477 |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Stock options exercised                                                   |  | 87,855       |   |  |                      | 1,383   |   |                   |   |        |                                                |  |   |        |   |  |   |      |   |  |   | 1,383   |  
|Stock award plan                                                          |  | 18,450       |   |  |                      | 479     |   |                   |   |        |                                                |  |   |        |   |  |   |      |   |  |   | 479     |  
|Purchase of common shares                                                 |  | (473,500     | ) |  |                      | (95     | ) |                   |   |        |                                                |  |   | (11,966 | ) |  |   |      |   |  |   | (12,061 | )
|Cash dividend declared                                                    |  |             |   |  |                      |        |   |                   |   |        |                                                |  |   | (11,945 | ) |  |   |      |   |  |   | (11,945 | )
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Balance, December 31, 2002                                                |  | 18,817,684   |   |  |                      | 116,925 |   |                   |   |        |                                                |  |   | 79,841  |   |  |   | 2,097 |   |  |   | 198,863 |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Comprehensive Income                                                      |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Net income for 2003                                                       |  |             |   |  |                      |        |   |                   | $ | 39,607 |                                                |  |   | 39,607  |   |  |   |      |   |  |   | 39,607  |  
|Other comprehensive income,                                               |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Unrealized gain (loss) on available for sale securities, net of tax $751  |  |             |   |  |                      |        |   |                   |   | 1,395  |                                                |  |   |        |   |  |   | 1,395 |   |  |   | 1,395   |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Total comprehensive income                                                |  |              |   |  |                      |         |   |                   | $ | 41,002 |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Stock options exercised                                                   |  | 83,354       |   |  |                      | 1,559   |   |                   |   |        |                                                |  |   |        |   |  |   |      |   |  |   | 1,559   |  
|Stock award plan                                                          |  | 10,822       |   |  |                      | 281     |   |                   |   |        |                                                |  |   |        |   |  |   |      |   |  |   | 281     |  
|Purchase of common shares                                                 |  | (361,800     | ) |  |                      | (72     | ) |                   |   |        |                                                |  |   | (9,076  | ) |  |   |      |   |  |   | (9,148  | )
|Cash dividend declared                                                    |  |             |   |  |                      |        |   |                   |   |        |                                                |  |   | (13,151 | ) |  |   |      |   |  |   | (13,151 | )
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Balance, December 31, 2003                                                |  | 18,550,060   |   |  |                      | 118,693 |   |                   |   |        |                                                |  |   | 97,221  |   |  |   | 3,492 |   |  |   | 219,406 |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Comprehensive Income                                                      |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Net income for 2004                                                       |  |             |   |  |                      |        |   |                   | $ | 43,045 |                                                |  |   | 43,045  |   |  |   |      |   |  |   | 43,045  |  
|Other comprehensive income,                                               |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Unrealized gain (loss) on available for sale securities, net of tax $(51) |  |             |   |  |                      |        |   |                   |   | (95    | )                                              |  |   |        |   |  |   | (95   | ) |  |   | (95     | )
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Total comprehensive income                                                |  |              |   |  |                      |         |   |                   | $ | 42,950 |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Stock options exercised                                                   |  | 104,755      |   |  |                      | 2,393   |   |                   |   |        |                                                |  |   |        |   |  |   |      |   |  |   | 2,393   |  
|Stock award plan                                                          |  | 15,995       |   |  |                      | 528     |   |                   |   |        |                                                |  |   |        |   |  |   |      |   |  |   | 528     |  
|Issuance of common shares                                                 |  | 74,375       |   |  |                      | 3,003   |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   | 3,003   |  
|Tax benefit from stock options                                            |  |             |   |  |                      |        |   |                   |   |        |                                                |  |   | 698     |   |  |   |      |   |  |   | 698     |  
|Cash dividend declared                                                    |  |             |   |  |                      |        |   |                   |   |        |                                                |  |   | (14,748 | ) |  |   |      |   |  |   | (14,748 | )
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  
|Balance, December 31, 2004                                                |  | 18,745,185   |   |  | $                    | 124,617 |   |                   |   |        |                                                |  | $ | 126,216 |   |  | $ | 3,397 |   |  | $ | 254,230 |  
|                                                                          |  |              |   |  |                      |         |   |                   |   |        |                                                |  |   |         |   |  |   |       |   |  |   |         |  



The accompanying notes
are an integral part of these financial statements



-4-



---



FRONTIER FINANCIAL
CORPORATION

AND SUBSIDIARIES



CONSOLIDATED STATEMENT OF CASH FLOWS

(In Thousands)



|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|---------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                         |  | YEAR ENDED DECEMBER 31, |         
|                                                                                         |  | 2004                    |          |   | 2003 |   |          | 2002 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net income                                                                               |  | $                       | 43,045   |   |      | $ | 39,607   |      |  | $ | 36,014   |  
|Adjustments to reconcile net income to net cash provided by operating activities         |  |                         |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                            |  |                         | 3,853    |   |      |   | 3,255    |      |  |   | 3,291    |  
|Provision for loan losses                                                                |  |                         | 3,500    |   |      |   | 4,250    |      |  |   | 6,300    |  
|Gain (loss) on sale of other real estate owned                                           |  |                         | (512     | ) |      |   |         |      |  |   | 178      |  
|Gain (loss) on sale of premises and equipment                                            |  |                         | (9       | ) |      |   | 3        |      |  |   | 12       |  
|(Gain) loss on sale of securities                                                        |  |                         | 44       |   |      |   | (190     | )    |  |   | 480      |  
|Deferred taxes                                                                           |  |                         | (199     | ) |      |   | (683     | )    |  |   | (22      | )
|Stock award plan compensation                                                            |  |                         | 528      |   |      |   | 281      |      |  |   | 479      |  
|Dividend income from Federal Home Loan Bank                                              |  |                         | (397     | ) |      |   | (781     | )    |  |   | (884     | )
|Increase in cash surrender value of BOLI                                                 |  |                         | (574     | ) |      |   | (830     | )    |  |   | (863     | )
|Changes in operating assets and liabilities                                              |  |                         |          |   |      |   |          |      |  |   |          |  
|Income taxes payable                                                                     |  |                         | (726     | ) |      |   | 633      |      |  |   | 898      |  
|Interest receivable                                                                      |  |                         | 359      |   |      |   | (243     | )    |  |   | (377     | )
|Interest payable                                                                         |  |                         | 290      |   |      |   | (853     | )    |  |   | (2,341   | )
|Proceeds from sales of mortgage loans                                                    |  |                         | 65,847   |   |      |   | 137,059  |      |  |   | 89,678   |  
|Origination of mortgage loans held for sale                                              |  |                         | (67,707  | ) |      |   | (130,249 | )    |  |   | (94,908  | )
|Other operating activities                                                               |  |                         | 520      |   |      |   | (135     | )    |  |   | (2,346   | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                |  |                         | 47,862   |   |      |   | 51,124   |      |  |   | 35,589   |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net federal funds sold                                                                   |  |                         | (5,938   | ) |      |   | 13,520   |      |  |   | 31,272   |  
|Proceeds from maturities of available for sale securities                                |  |                         | 78,368   |   |      |   | 45,548   |      |  |   | 77,728   |  
|Proceeds from maturities of held to maturity securities                                  |  |                         | 4,646    |   |      |   | 44,116   |      |  |   | 7,173    |  
|Proceeds from sales of available for sale securities                                     |  |                         | 1,086    |   |      |   | 5,051    |      |  |   | 2,013    |  
|Purchase of investment securities available for sale                                     |  |                         | (47,127  | ) |      |   | (116,985 | )    |  |   | (64,319  | )
|Purchase of investment securities held to maturity                                       |  |                         |         |   |      |   | (26,565  | )    |  |   | (75,000  | )
|Net cash flows from loan activities                                                      |  |                         | (204,804 | ) |      |   | (122,703 | )    |  |   | (92,649  | )
|Purchases of premises and equipment                                                      |  |                         | (3,052   | ) |      |   | (4,084   | )    |  |   | (1,442   | )
|Proceeds from the sale of other real estate owned                                        |  |                         | 5,721    |   |      |   | 300      |      |  |   | 3,793    |  
|Proceeds from the sale of premises and equipment                                         |  |                         | 91       |   |      |   | 31       |      |  |   |          |  
|Other investing activities                                                               |  |                         | (1,065   | ) |      |   | 3,381    |      |  |   | (796     | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash used by investing activities                                                    |  |                         | (172,074 | ) |      |   | (158,390 | )    |  |   | (112,227 | )
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |  |                         |          |   |      |   |          |      |  |   |          |  
|Net change in core deposit accounts                                                      |  |                         | 77,995   |   |      |   | 140,060  |      |  |   | 210,389  |  
|Net change in certificates of deposit                                                    |  |                         | 50,830   |   |      |   | (33,919  | )    |  |   | (147,883 | )
|Stock options exercised                                                                  |  |                         | 2,393    |   |      |   | 1,559    |      |  |   | 1,383    |  
|Cash dividends paid                                                                      |  |                         | (14,337  | ) |      |   | (12,824  | )    |  |   | (11,685  | )
|Purchase of common shares                                                                |  |                         |         |   |      |   | (9,148   | )    |  |   | (12,061  | )
|Net change in federal funds purchased and securities sold under agreements to repurchase |  |                         | (190     | ) |      |   | (1,794   | )    |  |   | 4,113    |  
|Advances from the Federal Home Loan Bank                                                 |  |                         | 55,000   |   |      |   | 45,000   |      |  |   | 55,000   |  
|Repayments to the Federal Home Loan Bank                                                 |  |                         | (50,016  | ) |      |   | (35,017  | )    |  |   | (16      | )
|Other financing activities                                                               |  |                         | (1,164   | ) |      |   | (746     | )    |  |   | 1,983    |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                |  |                         | 120,511  |   |      |   | 93,171   |      |  |   | 101,223  |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|INCREASE (DECREASE) IN CASH AND DUE FROM BANKS                                           |  |                         | (3,701   | ) |      |   | (14,095  | )    |  |   | 24,585   |  
|CASH AND DUE FROM BANKS AT BEGINNING OF YEAR                                             |  |                         | 74,552   |   |      |   | 88,647   |      |  |   | 64,062   |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|CASH AND DUE FROM BANKS AT END OF YEAR                                                   |  | $                       | 70,851   |   |      | $ | 74,552   |      |  | $ | 88,647   |  
|                                                                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                         |  |                         |          |   |      |   |          |      |  |   |          |  
|Cash paid during the year for interest                                                   |  | $                       | 34,649   |   |      | $ | 38,682   |      |  | $ | 47,948   |  
|Cash paid during the year for income taxes                                               |  | $                       | 22,505   |   |      | $ | 24,657   |      |  | $ | 17,850   |  



SUPPLEMENTAL INFORMATION ABOUT NONCASH INVESTING AND FINANCING ACTIVITIES



Other real estate acquired in settlement of loans in 2004, 2003, and 2002 were $1.0 million, $2.2 million, and $9.7 million, respectively.



Purchase of investment through issuance of common shares in 2004 of $3.0 million.



Tax benefits for disqualifying distributions of stock options were $698
thousand in 2004.



The accompanying notes are an integral part
of these financial statements



-5-



---



FRONTIER FINANCIAL
CORPORATION

AND SUBSIDIARIES



NOTES TO FINANCIAL STATEMENTS



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



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



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



Summary of Significant Accounting Policies



(a) Investment Securities- Investments in equity and debt securities are classified
into one of three categories: 1) held to maturity (HTM), 2) available for sale (AFS), or 3) trading. Investment securities are categorized as held to maturity when the Corporation has the positive intent and ability to hold those securities to
maturity. Securities which are held to maturity are stated at cost and adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Investment securities categorized as available for sale
are generally held for investment purposes (to maturity), although unanticipated future events may result in the sale of some securities. Available for sale securities are recorded at fair value, with the net unrealized gain or loss included in
comprehensive income, net of the related tax effect. Realized gains or losses on dispositions are based on the net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. The Corporation did not have
any investment securities categorized as trading securities at December 31, 2004 and 2003.



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



(b) Federal Home Loan Bank (FHLB) Stock - The Banks investment in Federal Home
Loan Bank stock is carried at par value ($100 per share), which reasonably approximates its fair value. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its
outstanding FHLB advances. The FHLB announced in December 2004 that it would not repurchase any stock until further notice. At year-end 2004 and 2003, the Bank held FHLB stock of $14.1 million and $13.7 million, respectively.



(c) Federal Reserve Bank (FRB) Stock-On October 7, 2002, the Bank was
approved as a member of the Federal Reserve System. A requirement of membership is the purchase of Federal Reserve Stock at a par value of $100, of which 50% must be purchased. The amount of stock purchased is determined by the amount of common
stock and surplus of the Bank at the time of membership and is evaluated periodically. At year-end 2004 and 2003, the Bank held FRB stock of $1.9 million and $1.9 million, respectively.



-6-



---

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



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



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



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



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



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



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



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



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



-7-



---

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



(g) Premises and Equipment - Premises and equipment are shown at cost and depreciated using the straight-line
and accelerated methods. Depreciation expense is computed over the following estimated useful lives:



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



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



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



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



(j) Retirement Plan - The Corporation has a profit sharing and salary deferral plan that covers eligible employees. The Corporations contributions to the
plan were $2.5 million in 2004, $2.4 million in 2003, and $2.3 million in 2002. Contributions to the profit sharing plan are discretionary with a minimum of 6% of employee compensation. The plan is funded during the period in which it is committed
by the Board of Directors.



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



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



(m) Stock Option Plans  At December 31, 2004, the Corporation has a stock-based
employee compensation plan, which is described more fully in Note 11. The Corporation accounts for the plan using the intrinsic value method under recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees,and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of
grant and vest immediately. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,to stock-based employee compensation.



-8-



---

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



In Thousands, except for per share amounts



|                                                        |  |      |        |      |   |        |  |   |       
|------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                        |  | 2004 |        | 2003 |   | 2002  
|Proforma disclosures                                    |  |      |        |      |   |        |  |   |       
|Net income as reported                                  |  | $    | 43,045 |      | $ | 39,607 |  | $ | 36,014
|Additional compensation for fair value of stock options |  |      | 1,091  |      |   | 1,998  |  |   | 984   
|                                                        |  |      |        |      |   |        |  |   |       
|Proforma net income                                     |  | $    | 41,954 |      | $ | 37,609 |  | $ | 35,030
|                                                        |  |      |        |      |   |        |  |   |       
|Earnings per share                                      |  |      |        |      |   |        |  |   |       
|Basic                                                   |  |      |        |      |   |        |  |   |       
|As reported                                             |  | $    | 2.31   |      | $ | 2.13   |  | $ | 1.88  
|Proforma                                                |  | $    | 2.25   |      | $ | 2.03   |  | $ | 1.83  
|                                                        |  |      |        |      |   |        |  |   |       
|Diluted                                                 |  |      |        |      |   |        |  |   |       
|As reported                                             |  | $    | 2.29   |      | $ | 2.12   |  | $ | 1.87  
|Proforma                                                |  | $    | 2.24   |      | $ | 2.02   |  | $ | 1.82  
|                                                        |  |      |        |      |   |        |  |   |       



(n) Earnings Per Share - Basic
earnings per share amounts are computed based on the weighted average number of shares outstanding during the period after giving retroactive effect to stock dividends, and stock splits. Diluted earnings per share are computed by determining the
number of additional shares that are deemed outstanding due to stock options under the treasury stock method.



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



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



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



(q) Reclassifications - Certain amounts in prior years financial statements have been reclassified to conform to the 2004
presentation.



NOTE TWO - Investments



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



-9-



---

NOTE TWO - Investments (continued)



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



|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|-------------------- |  | ------------- | ------- | -------------------- | - | --------------------------------------- |  | ----- | ------------------------------------- |  | ---- | ---------- |  | - | -------
|In Thousands 2004    |  | AmortizedCost |         | GrossUnrealizedGains |   | Less than12 monthsGrossUnrealizedLosses |  |       | 12 monthsor moreGrossUnrealizedLosses |  |      | Fair Value
|Available for sale   |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|U.S. Treasury bonds  |  | $             | 15,704  |                      | $ | 60                                      |  | ($26  | )                                     |  |     |            |  |   | 15,738 
|U.S. Agency bonds    |  |               | 49,738  |                      |   | 9                                       |  | (361  | )                                     |  |     |            |  |   | 49,386 
|Municipal securities |  |               | 45      |                      |   |                                        |  |      |                                       |  | (1   | )          |  |   | 44     
|Corporate bonds      |  |               | 42,686  |                      |   | 649                                     |  | (10   | )                                     |  | (46  | )          |  |   | 43,279 
|Equities             |  |               | 32,518  |                      |   | 5,426                                   |  | (20   | )                                     |  | (454 | )          |  |   | 37,470 
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|                     |  |               | 140,691 |                      |   | 6,144                                   |  | (417  | )                                     |  | (501 | )          |  | $ | 145,917
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|Held to maturity     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|Municipal securities |  |               | 6,006   |                      |   | 225                                     |  | (1    | )                                     |  | (1   | )          |  |   | 6,229  
|Corporate bonds      |  |               | 1,528   |                      |   | 155                                     |  |      |                                       |  |     |            |  |   | 1,683  
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|                     |  |               | 7,534   |                      |   | 380                                     |  | (1    | )                                     |  | (1   | )          |  |   | 7,912  
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|Total Securities     |  | $             | 148,225 |                      | $ | 6,524                                   |  | ($418 | )                                     |  | (502 | )          |  | $ | 153,829
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|                     |  |               |         |                      |  
|2003                 |  | AmortizedCost |         | GrossUnrealizedGains |   | Less than12 monthsGrossUnrealizedLosses |  |       | 12 monthsor moreGrossUnrealizedLosses |  |      | Fair Value
|Available for sale   |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|U.S. Treasury bonds  |  | $             | 251     |                      | $ | 64                                      |  |      |                                       |  |     |            |  | $ | 315    
|U.S. Agency bonds    |  |               | 67,903  |                      |   | 143                                     |  | ($133 | )                                     |  |     |            |  |   | 67,913 
|Municipal securities |  |               | 45      |                      |   |                                        |  | (4    | )                                     |  |     |            |  |   | 41     
|Corporate bonds      |  |               | 75,500  |                      |   | 2,128                                   |  | (48   | )                                     |  |     |            |  |   | 77,580 
|Equities             |  |               | 26,653  |                      |   | 3,501                                   |  | (277  | )                                     |  |     |            |  |   | 29,877 
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|                     |  |               | 170,352 |                      |   | 5,836                                   |  | (462  | )                                     |  |     |            |  |   | 175,726
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|Held to maturity     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|Municipal securities |  |               | 10,660  |                      |   | 473                                     |  | (30   | )                                     |  |     |            |  |   | 11,103 
|Corporate bonds      |  |               | 1,529   |                      |   | 147                                     |  |      |                                       |  |     |            |  |   | 1,676  
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|                     |  |               | 12,189  |                      |   | 620                                     |  | (30   | )                                     |  |     |            |  |   | 12,779 
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        
|Total Securities     |  | $             | 182,541 |                      | $ | 6,456                                   |  | ($492 | )                                     |  |     |            |  | $ | 188,505
|                     |  |               |         |                      |   |                                         |  |       |                                       |  |      |            |  |   |        



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



-10-



---

NOTE TWO - Investments (continued)



is temporary, and is related to the change in market interest rates since purchase. There are 15 investment securities with unrealized losses at December 31,
2004. The Corporation anticipates full recovery of amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment.



At year-end 2004 and 2003, the Bank held FHLB stock of $14.1 million and $13.7 million, respectively. In December 2004, the FHLB announced
that it would not repurchase any stock until further notice.



Contractual
maturities of investment securities as of December 31, 2004 are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call, or prepay, obligations with or without prepayment penalties.



|                   |  |                    |         |                  |   |               |  |           |       |  |   |      
|------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | --------- | ----- |  | - | -----
|In Thousands       |  | Available for Sale |         | Held to Maturity
|                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | FairValue
|Maturity           |  |                    |         |                  |   |               |  |           |       |  |   |      
|Less than one year |  | $                  | 72,720  |                  | $ | 77,884        |  | $         | 925   |  | $ | 937  
|One to five years  |  |                    | 63,156  |                  |   | 62,849        |  |           | 4,603 |  |   | 4,752
|Five to ten years  |  |                    | 2,000   |                  |   | 1,999         |  |           | 478   |  |   | 539  
|Over ten years     |  |                    | 2,815   |                  |   | 3,185         |  |           | 1,528 |  |   | 1,684
|                   |  |                    |         |                  |   |               |  |           |       |  |   |      
|                   |  | $                  | 140,691 |                  | $ | 145,917       |  | $         | 7,534 |  | $ | 7,912
|                   |  |                    |         |                  |   |               |  |           |       |  |   |      



Investments in state and political
subdivisions represent purchases of municipal bonds, with localities principally in western Washington. Investments in corporate bonds are made in companies located and doing business throughout the United States. Approximately 56% and 57% of the
investments in corporate bonds at December 31, 2004 and 2003, respectively, consisted of investments in companies doing business in the financial services sector. Approximately 44% and 35% of the investments in corporate bonds at December 31, 2004
and 2003, respectively, consisted of investments in companies doing business in the industrial sector.



As of December 31, 2004 and 2003, the Corporation held FHLB bonds that had a book value of $34.0 million and $47.0 million and a market value of $33.8 million and $46.9 million, respectively.



Proceeds from sales of available for sale securities were $1.1 million in 2004, $5.1 million
in 2003 and $2.0 million in 2002. Gross realized gain on sales of securities was $191 thousand in 2003. Gross realized losses on sales of securities were $44 thousand in 2004, $1 thousand in 2003, and $480 thousand in 2002. Investment securities,
with a book value of $29.2 million and $20.2 million with fair values of $29.2 and $20.6 million in 2004 and 2003, respectively, were pledged to secure public deposits and securities sold under agreements to repurchase as required by law.



NOTE THREE - Loans



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



-11-



---

NOTE THREE - Loans (continued)



Major classifications of loans at December 31 are as follows:



|                                              |  |      |           |   |      |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|In Thousands                                  |  | 2004 |           |   | 2003 |  
|Commercial and agriculture                    |  | $    | 302,986   |   |      | $ | 269,354   |  
|Real estate commercial                        |  |      | 850,107   |   |      |   | 809,799   |  
|Real estate construction and land development |  |      | 617,515   |   |      |   | 516,131   |  
|Real estate mortgage                          |  |      | 166,527   |   |      |   | 144,501   |  
|Installment                                   |  |      | 50,023    |   |      |   | 40,132    |  
|                                              |  |      |           |   |      |   |           |  
|                                              |  |      | 1,987,158 |   |      |   | 1,779,917 |  
|Less deferred loan fees                       |  |      | (12,919   | ) |      |   | (10,154   | )
|                                              |  |      |           |   |      |   |           |  
|                                              |  | $    | 1,974,239 |   |      | $ | 1,769,763 |  
|                                              |  |      |           |   |      |   |           |  



Contractual maturities of loans as of
December 31, 2004 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay loans with or without prepayment penalties. For repricing information please see table on page 34.



|                                              |  |              |         |           |   |              |  |       |         |  |   |          
|--------------------------------------------- |  | ------------ | ------- | --------- | - | ------------ |  | ----- | ------- |  | - | ---------
|In Thousands                                  |  | Within 1Year |         | 1-5 Years |   | After 5Years |  | Total
|Commercial and agriculture                    |  | $            | 168,821 |           | $ | 124,332      |  | $     | 8,808   |  | $ | 301,961  
|Real estate commercial                        |  |              | 50,566  |           |   | 486,282      |  |       | 311,889 |  |   | 848,737  
|Real estate construction and land development |  |              | 465,456 |           |   | 134,162      |  |       | 8,803   |  |   | 608,421  
|Real estate mortgage                          |  |              | 43,984  |           |   | 90,776       |  |       | 30,303  |  |   | 165,063  
|Installment                                   |  |              | 13,969  |           |   | 14,579       |  |       | 21,509  |  |   | 50,057   
|                                              |  |              |         |           |   |              |  |       |         |  |   |          
|                                              |  | $            | 742,796 |           | $ | 850,131      |  | $     | 381,312 |  | $ | 1,974,239
|                                              |  |              |         |           |   |              |  |       |         |  |   |          



|                                    |  |           |         |              |   |        
|----------------------------------- |  | --------- | ------- | ------------ | - | -------
|                                    |  | 1-5 Years |         | After 5Years
|Loans maturing after one year with: |  |           |         |              |   |        
|Fixed rates                         |  | $         | 668,319 |              | $ | 90,245 
|Variable rates                      |  |           | 181,812 |              |   | 291,067
|                                    |  |           |         |              |   |        
|                                    |  | $         | 850,131 |              | $ | 381,312
|                                    |  |           |         |              |   |        



LOAN LOSS RESERVE



Changes in the allowance for loan losses are summarized below:



|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|In Thousands                           |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Balance at beginning of year           |  | $    | 29,556 |   |      | $ | 28,175 |      |  | $ | 26,358 |  
|Provision charged to operating expense |  |      | 3,500  |   |      |   | 4,250  |      |  |   | 6,300  |  
|Loans charged-off                      |  |      | (1,412 | ) |      |   | (3,622 | )    |  |   | (5,109 | )
|Less recoveries                        |  |      | 1,084  |   |      |   | 753    |      |  |   | 626    |  
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net recoveries (charge-offs)           |  |      | (328   | ) |      |   | (2,869 | )    |  |   | (4,483 | )
|                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Balance at end of year                 |  | $    | 32,728 |   |      | $ | 29,556 |      |  | $ | 28,175 |  
|                                       |  |      |        |   |      |   |        |      |  |   |        |  



The Bank had loans amounting to $14.1
at December 31, 2004, $12.9 million at December 31, 2003, and $18.6 million at December 31, 2002 that were specifically classified as impaired with an average balance during the year of $14.1 million, $12.9 million, and $19.8 million, respectively.
The allowance for loan losses related to these



-12-



---

NOTE THREE - Loans (continued)



loans was approximately $3.6 million in 2004, $1.0 million in 2003, and $4.0 million in 2002. Interest collected on these loans in cash and included in
income amounted to $350 thousand in 2004, $429 thousand in 2003, and $774 thousand in 2002. If interest on these loans had been accrued the additional amount of such income would have approximated $925 thousand in 2004, $443 thousand in 2003, and
$1.4 million in 2002. At December 31, 2004 there were no commitments to lend additional funds to borrowers whose loans were classified as impaired.



NONPERFORMING ASSETS



The Banks nonperforming assets (NPAs) (includes loans in nonaccrual and other real estate owned) total .63% and .52% of total assets at December 31, 2004 and 2003, respectively.



OTHER REAL ESTATE OWNED



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



NOTE FOUR - Premises And Equipment



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



|                                  |  |      |         |   |      |   |         |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|In Thousands                      |  | 2004 |         |   | 2003 |  
|Premises                          |  | $    | 26,516  |   |      | $ | 23,850  |  
|Furniture, fixtures and equipment |  |      | 16,889  |   |      |   | 15,315  |  
|Land                              |  |      | 8,965   |   |      |   | 8,885   |  
|Construction in progress          |  |      | 514     |   |      |   | 2,034   |  
|                                  |  |      |         |   |      |   |         |  
|                                  |  |      | 52,884  |   |      |   | 50,084  |  
|Less accumulated depreciation     |  |      | (23,658 | ) |      |   | (21,328 | )
|                                  |  |      |         |   |      |   |         |  
|                                  |  | $    | 29,226  |   |      | $ | 28,756  |  
|                                  |  |      |         |   |      |   |         |  



Depreciation expense on premises and
equipment totaled $2.5 million in 2004 and $2.3 million in 2003 and 2002.



NOTE FIVE - Interest Bearing Deposits



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



|                                     |  |      |           |      |   |          
|------------------------------------ |  | ---- | --------- | ---- | - | ---------
|In Thousands                         |  | 2004 |           | 2003
|Money market, sweep and NOW accounts |  | $    | 270,894   |      | $ | 251,376  
|Savings                              |  |      | 642,434   |      |   | 625,843  
|Time deposits, $100,000 and over     |  |      | 283,472   |      |   | 235,089  
|Other time deposits                  |  |      | 285,767   |      |   | 283,320  
|                                     |  |      |           |      |   |          
|                                     |  | $    | 1,482,567 |      | $ | 1,395,628
|                                     |  |      |           |      |   |          



-13-



---

NOTE FIVE - Interest Bearing Deposits (continued)



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



|                          |  |   |        
|------------------------- |  | - | -------
|In Thousands December 31, |  |  
|2005                      |  | $ | 370,722
|2006                      |  |   | 38,548 
|2007                      |  |   | 67,362 
|2008                      |  |   | 49,758 
|2009                      |  |   | 40,721 
|Thereafter                |  |   | 2,128  
|                          |  |   |        
|                          |  | $ | 569,239
|                          |  |   |        



NOTE SIX - Credit Arrangements



The Bank is a member of the Federal Home Loan Bank (FHLB) of Seattle.
As a member, the Bank has a committed line of credit up to 15% of total assets. At December 31, 2004, committed lines of credit agreements totaling approximately $55 million were available to the Bank from unaffiliated banks. Such lines generally
provide for interest at the lending banks federal funds rate or other money market rates.



NOTE SEVEN - Federal Home Loan Bank (FHLB) Advances



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



|                          |  |        |         |                |             |        |   |                |  |            
|------------------------- |  | ------ | ------- | -------------- | ----------- | ------ | - | -------------- |  | -----------
|                          |  | 2004   |         | 2003          
|In Thousands              |  | Amount |         | Interest Rates |             | Amount |   | Interest Rates
|Within one year           |  | $      | 25,000  |                | 1.28%-3.83% |        | $ | 15,000         |  | 1.47%-3.00%
|Two through three years   |  |        | 60,030  |                | 3.05%-7.32% |        |   | 20,000         |  | 3.05%-4.84%
|Four through nine years   |  |        | 90,058  |                | 4.77%-6.77% |        |   | 135,040        |  | 3.53%-7.32%
|Ten through fifteen years |  |        |        |                | N/A         |        |   | 64             |  | 5.67%      
|                          |  |        |         |                |             |        |   |                |  |            
|                          |  | $      | 175,088 |                |             |        | $ | 170,104        |  |            
|                          |  |        |         |                |             |        |   |                |  |            



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



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



|                                     |  |      |         |   |      |   |         |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|In Thousands                         |  | 2004 |         |   | 2003 |  
|Maximum outstanding at any month-end |  | $    | 185,093 |   |      | $ | 170,107 |  
|Average outstanding                  |  |      | 180,860 |   |      |   | 156,427 |  
|Weighted average interest rates:     |  |      |         |   |      |   |         |  
|Annual                               |  |      | 4.63    | % |      |   | 4.96    | %
|End of year                          |  |      | 4.66    | % |      |   | 4.77    | %



-14-



---

NOTE EIGHT - Securities Sold Under Agreements To Repurchase



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



Securities sold under agreement to repurchase were $4.5 million in 2004 and $3.2 million in 2003. The average daily balance of outstanding
agreements during the period was $4.7 million in 2004 and $4.0 million in 2003, with maximum outstanding agreements at any month-end of $4.5 million and $4.6 million, respectively.



NOTE NINE - Income Tax



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



|             |  |      |        |   |      |   |        |      |  |   |        |  
|------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|In Thousands |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Current      |  | $    | 22,162 |   |      | $ | 20,736 |      |  | $ | 18,269 |  
|Deferred     |  |      | (199   | ) |      |   | (683   | )    |  |   | (22    | )
|             |  |      |        |   |      |   |        |      |  |   |        |  
|             |  | $    | 21,963 |   |      | $ | 20,053 |      |  | $ | 18,247 |  
|             |  |      |        |   |      |   |        |      |  |   |        |  

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



|                                                              |  |      |        |   |      |   |        |  
|------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|In Thousands                                                  |  | 2004 |        |   | 2003 |  
|Deferred tax assets                                           |  |      |        |   |      |   |        |  
|Allowance for possible loan losses, in excess of tax reserves |  | $    | 11,455 |   |      | $ | 10,335 |  
|Other deferred tax assets                                     |  |      | 813    |   |      |   | 987    |  
|                                                              |  |      |        |   |      |   |        |  
|Total deferred tax assets                                     |  |      | 12,268 |   |      |   | 11,322 |  
|                                                              |  |      |        |   |      |   |        |  
|Deferred tax liabilities                                      |  |      |        |   |      |   |        |  
|FHLB stock dividends                                          |  |      | (2,449 | ) |      |   | (2,310 | )
|Other deferred tax liabilities                                |  |      | (2,547 | ) |      |   | (1,939 | )
|                                                              |  |      |        |   |      |   |        |  
|Total deferred tax liabilities                                |  |      | (4,996 | ) |      |   | (4,249 | )
|                                                              |  |      |        |   |      |   |        |  
|Net deferred tax assets                                       |  | $    | 7,272  |   |      | $ | 7,073  |  
|                                                              |  |      |        |   |      |   |        |  



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



-15-



---

NOTE NINE - Income Tax (continued)



A reconciliation of the effective income tax rate with the federal statutory tax rate is as follows:



|                                       |        |      |        |      |      |    |        |      |   |        |   |  |        |    |  |      |        |   |  |    |   
|-------------------------------------- | ------ | ---- | ------ | ---- | ---- | -- | ------ | ---- | - | ------ | - |  | ------ | -- |  | ---- | ------ | - |  | -- | --
|In Thousands                           |        | 2004 |        |      | 2003 |    |        | 2002 |  
|                                       | Amount |      |        | Rate |      |    | Amount |      |   | Rate   |   |  | Amount |    |  | Rate |       
|Income tax provision at statutory rate |        | $    | 22,753 |      |      | 35 | %      |      | $ | 20,881 |   |  | 35     | %  |  | $    | 18,991 |   |  | 35 | % 
|Effect of nontaxable interest income   |        |      | (576   | )    |      | (1 | %)     |      |   | (543   | ) |  | (1     | %) |  |      | (584   | ) |  | (1 | %)
|Other                                  |        |      | (214   | )    |      |   |        |      |   | (285   | ) |  |       |    |  |      | (160   | ) |  |   |   
|                                       |        |      |        |      |      |    |        |      |   |        |   |  |        |    |  |      |        |   |  |    |   
|                                       |        | $    | 21,963 |      |      | 34 | %      |      | $ | 20,053 |   |  | 34     | %  |  | $    | 18,247 |   |  | 34 | % 
|                                       |        |      |        |      |      |    |        |      |   |        |   |  |        |    |  |      |        |   |  |    |   



NOTE TEN - Shareowners
Equity And Regulatory Matters



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



In December 2004, the Board
of Directors declared a $.205 per share cash dividend to shareowners of record as of January 10, 2005, and payable on January 25, 2005.



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 the Board of Directors authorized to repurchase an additional 5% of outstanding common stock under the plan. On October 17, 2002 the Board of Directors authorized to repurchase an additional 5% of outstanding common stock
under the plan. On September 16, 2004 the Board of Directors authorized to repurchase an additional 5% of common stock under the plan. The plan expires September 2006. The Corporation has repurchased 361,800 in 2003 and 473,500 shares in 2002. There
were 932,270 shares remaining under the current plan at December 31, 2004.



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



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



Quantitative measures established by regulation
to ensure capital adequacy require maintenance of minimum amounts and ratios (set forth in the following table). Tier I capital includes common stock, surplus, retained earnings and undivided profits less goodwill. Total capital includes Tier I
capital and a portion of the loan loss reserve. Tier I capital to average risk weighted assets is referred to as the Tier I ratio. Management believes, as of December 31, 2004 and 2003 that the Corporation and Bank meet capital adequacy requirements
to which they are subject.



-16-



---

NOTE TEN - Shareowners Equity And Regulatory Matters (continued)



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



|                                         |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|---------------------------------------- |  | ------ | ------- | ----- | ------------------------------------------------------------- | - | ------ | ---------------------------- | ----- | ----- | - | ------ | - | ------- |  | ---- | -
|                                         |  | Actual |         |       | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |   |        | For CapitalAdequacy Purposes |      
|In Thousands                             |  | Amount |         | Ratio |                                                               |   | Amount |                              | Ratio |       |   | Amount |   | Ratio   | 
|2004                                     |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Total Capital (to risk weighted assets)  |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Consolidated                             |  | $      | 273,139 |       | 11.76                                                         | % |        | N/A                          |       | N/A   |   |        | $ | 185,885 |  | 8.00 | %
|Frontier Bank                            |  |        | 252,645 |       | 10.97                                                         | % |        | 230,290                      |       | 10.00 | % |        |   | 184,232 |  | 8.00 | %
|Tier I Capital (to risk weighted assets) |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Consolidated                             |  |        | 244,049 |       | 10.50                                                         | % |        | N/A                          |       | N/A   |   |        |   | 92,942  |  | 4.00 | %
|Frontier Bank                            |  |        | 233,810 |       | 9.72                                                          | % |        | 138,174                      |       | 6.00  | % |        |   | 92,116  |  | 4.00 | %
|Tier I Capital (to average assets)       |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Consolidated                             |  |        | 244,049 |       | 10.85                                                         | % |        | N/A                          |       | N/A   |   |        |   | 90,010  |  | 4.00 | %
|Frontier Bank                            |  |        | 233,810 |       | 10.03                                                         | % |        | 111,566                      |       | 5.00  | % |        |   | 89,253  |  | 4.00 | %
|2003                                     |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Total Capital (to risk weighted assets)  |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Consolidated                             |  | $      | 234,828 |       | 11.51                                                         | % |        | N/A                          |       | N/A   |   |        | $ | 163,225 |  | 8.00 | %
|Frontier Bank                            |  |        | 218,340 |       | 10.79                                                         | % |        | 201,987                      |       | 10.00 | % |        |   | 161,589 |  | 8.00 | %
|Tier I Capital (to risk weighted assets) |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Consolidated                             |  |        | 209,274 |       | 10.26                                                         | % |        | N/A                          |       | N/A   |   |        |   | 81,612  |  | 4.00 | %
|Frontier Bank                            |  |        | 192,994 |       | 9.54                                                          | % |        | 121,192                      |       | 6.00  | % |        |   | 80,795  |  | 4.00 | %
|Tier I Capital (to average assets)       |  |        |         |       |                                                               |   |        |                              |       |       |   |        |   |         |  |      |  
|Consolidated                             |  |        | 209,274 |       | 10.15                                                         | % |        | N/A                          |       | N/A   |   |        |   | 82,437  |  | 4.00 | %
|Frontier Bank                            |  |        | 192,994 |       | 9.44                                                          | % |        | 102,215                      |       | 5.00  | % |        |   | 81,772  |  | 4.00 | %



Under federal regulations, the Bank is
limited, unless previously approved, as to the amount it may loan the holding company and other affiliates to 10% of its capital stock (approximately $5.6 million at December 31, 2004 and $5.3 million at December 31, 2003).



Federal Reserve Board regulations require maintenance of certain minimum reserve balances on
deposit with the Federal Reserve Bank. The average amount of such balances was $16.3 million in 2004 and $12.4 million in 2003.



-17-



---

NOTE ELEVEN - Benefit Plans



On January 2, 2001 the Corporation adopted a 2001 Stock Award Plan for selected employees, officers and directors to advance the best
interest of the Corporation by providing persons who have substantial responsibility for the management and growth of the Corporation and its subsidiaries. The maximum number of shares that may be issued is 100,000 and is adjusted to reflect any
future common share dividends, splits, recapitalization or reorganization.



During fiscal 2004, 2003 and 2002, there were 15,205, 10,510 and 18,288 shares with a market value of $504 thousand, $273 thousand and $475 thousand, respectively were awarded under this plan. The stock awards vest immediately when granted.
The plan is effective for ten years from adoption. There are currently 36,729 shares remaining under this plan.



On February 17, 1999 the Corporation adopted the 1999 Employee Stock Award Plan to recognize, motivate, and reward eligible employees for longstanding performance with
the Corporation and its subsidiaries. The employees eligible to receive stock awards under this plan must have been employees of the Corporation for at least 20 years, or some other tenure as determined from time to time by the Board of Directors.
The maximum number of shares that may be issued is 20,000 and are adjusted to reflect future common share dividends, splits, recapitalization or reorganization. During fiscal year 2004, 2003, and 2002, there were 790, 312 and 156 shares with a
market value of $24 thousand, $8 thousand and $4 thousand, respectively were awarded under this plan. Currently there have been 2,182 shares issued under this plan. The stock awards vest immediately when granted. The plan is effective for ten years
from adoption. There are currently 17,818 shares remaining under this plan.



In
1998, the shareowners of the Corporation approved an Incentive Stock Option Plan (the Plan) to promote the best interest of the Corporation, its subsidiaries and its shareowners, by providing an incentive to those key employees who contribute to the
operating success of the Corporation. The maximum number of shares that may be issued under the Plan is 750,000 common shares of the Corporation. Options issued and outstanding are adjusted to reflect any future common stock dividends, splits,
recapitalization, or reorganization. The Board of Directors make available sufficient shares for each option granted. Options are granted at fair market value and generally vest immediately. Options expire ten years from the date of grant, and are
subject to certain restrictions and limitations.



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



For the most part, variables and assumptions are used in the model. For the periods 2004,
2003, and 2002 the risk-free interest rate is 3.25%, 2.90% and 2.53%; the dividend yield rate is 2.20%, 2.37% and 2.29%; the price volatility is 35.51%, 77.04% and 74.98%; and the weighted average expected life of the options has been measured at
3.1 years, 5.1 years and 4.3 years, respectively.



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



-18-



---

NOTE ELEVEN  Benefit Plans (continued)



Stock option transactions were:



|                           |  |                           |   |  |                                                           |   |  |   |      
|-------------------------- |  | ------------------------- | - |  | --------------------------------------------------------- | - |  | - | -----
|                           |  | Shares of Common Stock    |   |  | WeightedAverage ofExercisable Price of Shares Under
Plans
|                           |  | Available forOption/Award |   |  | UnderPlans                                                |   | 
|Balance, December 31, 2001 |  | 605,336                   |   |  | 411,079                                                   |   |  | $ | 19.76
|Authorized                 |  |                          |   |  |                                                          |   |  |   |      
|Granted                    |  | (109,146                  | ) |  | 109,146                                                   |   |  |   | 26.00
|Exercised                  |  |                           |   |  | (87,855                                                   | ) |  |   | 15.74
|Forfeited/Expired          |  | 7,295                     |   |  | (7,295                                                    | ) |  |   | N/M  
|                           |  |                           |   |  |                                                           |   |  |   |      
|Balance, December 31, 2002 |  | 503,485                   |   |  | 425,075                                                   |   |  |   | 22.07
|Authorized                 |  |                          |   |  |                                                          |   |  |   |      
|Granted                    |  | (156,700                  | ) |  | 156,700                                                   |   |  |   | 33.00
|Exercised                  |  |                           |   |  | (83,354                                                   | ) |  |   | 18.70
|Forfeited/Expired          |  | 10,932                    |   |  | (10,932                                                   | ) |  |   | N/M  
|                           |  |                           |   |  |                                                           |   |  |   |      
|Balance, December 31, 2003 |  | 357,717                   |   |  | 487,489                                                   |   |  |   | 26.06
|Authorized                 |  |                          |   |  |                                                          |   |  |   |      
|Granted                    |  | (180,642                  | ) |  | 180,642                                                   |   |  |   | 40.00
|Exercised                  |  |                           |   |  | (104,762                                                  | ) |  |   | 22.84
|Forfeited/Expired          |  | 10,181                    |   |  | (10,181                                                   | ) |  |   | 31.50
|                           |  |                           |   |  |                                                           |   |  |   |      
|Balance, December 31, 2004 |  | 187,256                   |   |  | 553,188                                                   |   |  | $ | 30.87
|                           |  |                           |   |  |                                                           |   |  |   |      



The numbers of shares under option for
the plans represent 3.0% of the total shares outstanding as of December 31, 2004. The following table summarizes information concerning currently outstanding and exercisable options:



|                         |  |                    |  |                                           |  |                                |  |                    |  |                               
|------------------------ |  | ------------------ |  | ----------------------------------------- |  | ------------------------------ |  | ------------------ |  | ------------------------------
|                         |  |                    |  | Options Outstanding                       |  | Options Exercisable           
|Range of Exercise Prices |  | Number Outstanding |  | Weighted AverageRemaining ContractualLife |  | Weighted AverageExercise Price |  | Number Exercisable |  | Weighted AverageExercise Price
|$ 1-10                   |  |                   |  |                                          |  |                               |  |                   |  |                              
|10-20                    |  | 52,205             |  | 2.53                                      |  | $16.24                         |  | 52,205             |  | $16.24                        
|20-30                    |  | 191,003            |  | 6.90                                      |  | 25.04                          |  | 191,003            |  | 25.04                         
|30-40                    |  | 311,980            |  | 9.52                                      |  | 36.94                          |  | 309,980            |  | 36.92                         



-19-



---

NOTE TWELVE - Earnings Per Share



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



|                                             |  |      |        |      |   |        |  |   |       
|-------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|In Thousands, except for per share amounts   |  | 2004 |        | 2003 |   | 2002  
|Net income (numerator)                       |  | $    | 43,045 |      | $ | 39,607 |  | $ | 36,014
|                                             |  |      |        |      |   |        |  |   |       
|Shares used in the calculation (denominator) |  |      |        |      |   |        |  |   |       
|Weighted average shares outstanding          |  |      | 18,634 |      |   | 18,553 |  |   | 19,107
|Effect of dilutive stock options             |  |      | 124    |      |   | 101    |  |   | 107   
|                                             |  |      |        |      |   |        |  |   |       
|                                             |  |      |        |      |   |        |  |   |       
|Diluted shares                               |  |      | 18,758 |      |   | 18,654 |  |   | 19,214
|                                             |  |      |        |      |   |        |  |   |       
|Basic Earnings per share                     |  | $    | 2.31   |      | $ | 2.13   |  | $ | 1.88  
|                                             |  |      |        |      |   |        |  |   |       
|Diluted Earnings per share                   |  | $    | 2.29   |      | $ | 2.12   |  | $ | 1.87  
|                                             |  |      |        |      |   |        |  |   |       



NOTE THIRTEEN - Related Party
Transactions



Loans to directors, executive officers and their
affiliates are subject to regulatory limitations. Such loans had aggregate balances and activity during 2004, 2003 and 2002 as follows and were within regulatory limitations:



|                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|In Thousands                 |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Balance at beginning of year |  | $    | 49,496  |   |      | $ | 40,782  |      |  | $ | 27,422  |  
|New loans or advances        |  |      | 22,804  |   |      |   | 24,646  |      |  |   | 36,650  |  
|Repayments                   |  |      | (16,538 | ) |      |   | (15,932 | )    |  |   | (23,290 | )
|                             |  |      |         |   |      |   |         |      |  |   |         |  
|Balance at end of year       |  | $    | 55,762  |   |      | $ | 49,496  |      |  | $ | 40,782  |  
|                             |  |      |         |   |      |   |         |      |  |   |         |  



Total deposits beneficially owned by
related parties were $4.5 million, $5.3 million, and $10.9 million at December 31, 2004, 2003, and 2002, respectively.



NOTE FOURTEEN - Commitments and Contingent Liabilities



The Bank leases various branch offices under agreements, which expire between 2005 and 2020. The agreements contain various renewal options and require the Bank to
maintain the properties.



The total future minimum rental commitment through
2009 and thereafter is as follows:



|                              |  |   |       
|----------------------------- |  | - | ------
|In Thousands                  |  |  
|Year ending December 31, 2005 |  | $ | 1,323 
|2006                          |  |   | 1,294 
|2007                          |  |   | 1,260 
|2008                          |  |   | 1,226 
|2009                          |  |   | 1,021 
|Thereafter                    |  |   | 4,046 
|                              |  |   |       
|                              |  | $ | 10,170
|                              |  |   |       



Rental expense charged to operations
was $1.3 million in 2004, $1.1 million in 2003, and $1.1 million in 2002.



-20-



---

NOTE FOURTEEN - Commitments and Contingent Liabilities (continued)



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



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



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



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



A summary of the notional amount of the Banks financial
instruments with off-balance sheet risk at December 31, 2004 follows:



|                             |  |        |        
|---------------------------- |  | ------ | -------
|                             |  | Amount
|Commitments to extend credit |  | $      | 580,096
|Credit card arrangements     |  |        | 29,799 
|Standby letters of credit    |  |        | 26,910 



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



In December
2004, the Corporation entered into an agreement to purchase a total of 80,000 shares Skagit State Bank (SSB) stock, headquartered in Burlington, Washington. An initial purchase of 35,000 shares representing 4.95% of SSB total outstanding shares was
made in December 2004 through an issuance of common shares with a market value of $3.0 million and cash of $2.5 million. A second purchase of 22,500 shares was made in February 2005 through the issuance of common shares with a market value of $1.8
million and cash of $1.6 million for a cumulative ownership percentage of 8.13%. In July 2005, a third installment of 22,500 additional shares will be purchased through the issuance of 47,812 of Frontier common shares and cash of $1.6 million for a
cumulative ownership of 11.3%.



-21-



---

NOTE FIFTEEN - Fair Value of Financial Instruments



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



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



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



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



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



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



(f) Off-Balance sheet financial instruments - Commitments to extend credit and letters of credit represent the principal categories
of off-balance sheet financial instruments (see Note 14). The fair value of these commitments is not material since they are for a short period of time and subject to customary credit terms.



|                                                                           |  |               |           |            |   |               |  |            |           |  |   |          
|-------------------------------------------------------------------------- |  | ------------- | --------- | ---------- | - | ------------- |  | ---------- | --------- |  | - | ---------
|                                                                           |  | 2004          |           | 2003      
|In Thousands                                                               |  | CarryingValue |           | Fair Value |   | CarryingValue |  | Fair Value
|Assets                                                                     |  |               |           |            |   |               |  |            |           |  |   |          
|Cash and due from banks                                                    |  | $             | 70,851    |            | $ | 70,851        |  | $          | 74,552    |  | $ | 74,552   
|Federal funds sold                                                         |  |               | 5,946     |            |   | 5,946         |  |            | 8         |  |   | 8        
|Investment securities                                                      |  |               |           |            |   |               |  |            |           |  |   |          
|Available for sale                                                         |  |               | 145,917   |            |   | 145,917       |  |            | 175,726   |  |   | 175,726  
|Held to maturity                                                           |  |               | 7,534     |            |   | 7,912         |  |            | 12,189    |  |   | 12,779   
|Net loans                                                                  |  |               | 1,945,324 |            |   | 1,942,456     |  |            | 1,742,160 |  |   | 1,767,885
|Liabilities                                                                |  |               |           |            |   |               |  |            |           |  |   |          
|Noninterest bearing deposits                                               |  |               | 313,275   |            |   | 313,275       |  |            | 271,389   |  |   | 271,389  
|Interest bearing deposits                                                  |  |               | 1,482,567 |            |   | 1,486,629     |  |            | 1,395,628 |  |   | 1,403,670
|Federal funds purchased and securities sold under agreements to repurchase |  |               | 10,205    |            |   | 10,205        |  |            | 10,015    |  |   | 10,015   
|FHLB Advances                                                              |  |               | 175,088   |            |   | 182,059       |  |            | 170,104   |  |   | 178,667  



-22-



---

NOTE SIXTEEN - Parent Company (Only) Financial Information



Condensed balance sheets at December 31:



|                                                          |  |      |         |      |   |        
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|In Thousands                                              |  | 2004 |         | 2003
|ASSETS                                                    |  |      |         |      |   |        
|Cash                                                      |  | $    | 899     |      | $ | 1,450  
|Investment in subsidiaries:                               |  |      |         |      |   |        
|Bank                                                      |  |      | 224,629 |      |   | 194,354
|Nonbank                                                   |  |      | 9,694   |      |   | 10,482 
|Investment securities                                     |  |      |         |      |   |        
|Available for sale, at fair value                         |  |      | 17,625  |      |   | 10,651 
|Other assets                                              |  |      | 5,227   |      |   | 5,903  
|                                                          |  |      |         |      |   |        
|                                                          |  | $    | 258,074 |      | $ | 222,840
|                                                          |  |      |         |      |   |        
|LIABILITIES                                               |  |      |         |      |   |        
|Other liabilities                                         |  | $    | 3,844   |      | $ | 3,434  
|                                                          |  |      |         |      |   |        
|SHAREOWNERS EQUITY                                       |  |      |         |      |   |        
|Common stock                                              |  |      | 124,617 |      |   | 118,693
|Retained earnings                                         |  |      | 126,216 |      |   | 97,221 
|Accumulated other comprehensive income (loss), net of tax |  |      | 3,397   |      |   | 3,492  
|                                                          |  |      |         |      |   |        
|Total Shareowners equity                                 |  |      | 254,230 |      |   | 219,406
|                                                          |  |      |         |      |   |        
|                                                          |  | $    | 258,074 |      | $ | 222,840
|                                                          |  |      |         |      |   |        



Condensed statements of income for the
years ended December 31:



|                                                                                                  |  |      |        |      |   |        |  |   |       
|------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|In Thousands                                                                                      |  | 2004 |        | 2003 |   | 2002  
|Income                                                                                            |  |      |        |      |   |        |  |   |       
|Dividends from Bank                                                                               |  | $    | 12,322 |      | $ | 21,662 |  | $ | 22,898
|Dividend from FFP                                                                                 |  |      | 1,200  |      |   | 1,564  |  |   |      
|Other dividends                                                                                   |  |      | 214    |      |   | 163    |  |   | 102   
|Rental                                                                                            |  |      |       |      |   |       |  |   | 346   
|Other income                                                                                      |  |      | 14     |      |   |       |  |   |      
|Interest                                                                                          |  |      | 187    |      |   | 229    |  |   | 351   
|                                                                                                  |  |      |        |      |   |        |  |   |       
|Total income                                                                                      |  |      | 13,937 |      |   | 23,618 |  |   | 23,697
|                                                                                                  |  |      |        |      |   |        |  |   |       
|Expenses                                                                                          |  |      |        |      |   |        |  |   |       
|Interest                                                                                          |  |      |       |      |   |       |  |   | 2     
|Personnel                                                                                         |  |      | 688    |      |   | 700    |  |   | 427   
|Depreciation and amortization                                                                     |  |      | 25     |      |   | 10     |  |   | 720   
|Other                                                                                             |  |      | 804    |      |   | 761    |  |   | 220   
|                                                                                                  |  |      |        |      |   |        |  |   |       
|Total expenses                                                                                    |  |      | 1,517  |      |   | 1,471  |  |   | 1,369 
|                                                                                                  |  |      |        |      |   |        |  |   |       
|Income before equity in undistributed income of subsidiaries and benefit equivalent to income tax |  |      | 12,420 |      |   | 22,147 |  |   | 22,328
|Benefit equivalent to income tax                                                                  |  |      | 438    |      |   | 378    |  |   | 136   
|                                                                                                  |  |      |        |      |   |        |  |   |       
|Income before equity in undistributed income of subsidiaries                                      |  |      | 12,858 |      |   | 22,525 |  |   | 22,464
|Equity in undistributed income of subsidiaries                                                    |  |      | 30,187 |      |   | 17,082 |  |   | 13,550
|                                                                                                  |  |      |        |      |   |        |  |   |       
|Net income                                                                                        |  | $    | 43,045 |      | $ | 39,607 |  | $ | 36,014
|                                                                                                  |  |      |        |      |   |        |  |   |       



-23-



---

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



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



|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|In Thousands                                                                     |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Cash flows from operating activities                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                       |  | $    | 43,045  |   |      | $ | 39,607  |      |  | $ | 36,014  |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |      |         |   |      |   |         |      |  |   |         |  
|Equity in undistributed income of subsidiaries                                   |  |      | (30,187 | ) |      |   | (17,082 | )    |  |   | (13,550 | )
|Depreciation and amortization                                                    |  |      | 25      |   |      |   | 10      |      |  |   | 720     |  
|Other operating activities                                                       |  |      | 543     |   |      |   | 7       |      |  |   | (315    | )
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash flows from operating activities                                         |  |      | 13,426  |   |      |   | 22,542  |      |  |   | 22,869  |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Purchase of available for sale securities                                        |  |      | (2,485  | ) |      |   | (2,529  | )    |  |   |        |  
|Other investment activities                                                      |  |      | 452     |   |      |   | 49      |      |  |   | 1,001   |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash flows from investing activities                                         |  |      | (2,033  | ) |      |   | (2,480  | )    |  |   | 1,001   |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Stock options exercised                                                          |  |      | 2,393   |   |      |   | 1,559   |      |  |   | 1,383   |  
|Purchase of common shares                                                        |  |      |        |   |      |   | (9,148  | )    |  |   | (12,061 | )
|Cash dividends paid to shareowners                                               |  |      | (14,337 | ) |      |   | (12,824 | )    |  |   | (11,685 | )
|Other financing activities                                                       |  |      |        |   |      |   | (18     | )    |  |   | (797    | )
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash flows from financing activities                                         |  |      | (11,944 | ) |      |   | (20,431 | )    |  |   | (23,160 | )
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash                                                      |  |      | (551    | ) |      |   | (369    | )    |  |   | 710     |  
|Cash at beginning of year                                                        |  |      | 1,450   |   |      |   | 1,819   |      |  |   | 1,109   |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Cash at end of year                                                              |  | $    | 899     |   |      | $ | 1,450   |      |  | $ | 1,819   |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |         |  



NOTE SEVENTEEN-Recent Accounting
Pronouncements



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



-24-



---

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



|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ----------------------------- | ---------- | - | ------------ | - | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | 2004 Quarter Ended(Unaudited) |           
|In Thousands                                        |  | December 31                   |            |   | September 30 |   |            | June 30 |  |   | March 31   |  
|Interest income                                     |  | $                             | 37,576     |   |              | $ | 35,356     |         |  | $ | 33,911     |   |  | $ | 33,385     |  
|Interest expense                                    |  |                               | 9,379      |   |              |   | 8,712      |         |  |   | 8,291      |   |  |   | 8,557      |  
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                               | 28,197     |   |              |   | 26,644     |         |  |   | 25,620     |   |  |   | 24,828     |  
|Provision for loan losses                           |  |                               | (1,000     | ) |              |   | (1,000     | )       |  |   | (1,000     | ) |  |   | (500       | )
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                               | 27,197     |   |              |   | 25,644     |         |  |   | 24,620     |   |  |   | 24,328     |  
|Non interest income                                 |  |                               | 3,996      |   |              |   | 3,236      |         |  |   | 3,532      |   |  |   | 3,180      |  
|Non interest expense                                |  |                               | 13,985     |   |              |   | 12,349     |         |  |   | 12,170     |   |  |   | 12,221     |  
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Income before income tax                            |  |                               | 17,208     |   |              |   | 16,531     |         |  |   | 15,982     |   |  |   | 15,287     |  
|Provision for income tax                            |  |                               | (5,749     | ) |              |   | (5,534     | )       |  |   | (5,530     | ) |  |   | (5,150     | )
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Net income                                          |  | $                             | 11,459     |   |              | $ | 10,997     |         |  | $ | 10,452     |   |  | $ | 10,137     |  
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Basic earnings per share                            |  | $                             | 0.61       |   |              | $ | 0.59       |         |  | $ | 0.56       |   |  | $ | 0.55       |  
|Diluted earnings per share                          |  | $                             | 0.61       |   |              | $ | 0.59       |         |  | $ | 0.56       |   |  | $ | 0.54       |  
|Weighted average basic shares outstanding           |  |                               | 18,681,292 |   |              |   | 18,635,445 |         |  |   | 18,606,192 |   |  |   | 18,596,961 |  
|Weighted average diluted shares outstanding         |  |                               | 18,835,075 |   |              |   | 18,752,550 |         |  |   | 18,716,710 |   |  |   | 18,708,087 |  



|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ----------------------------- | ---------- | - | ------------ | - | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | 2003 Quarter Ended(Unaudited) |           
|In Thousands                                        |  | December 31                   |            |   | September 30 |   |            | June 30 |  |   | March 31   |  
|Interest income                                     |  | $                             | 33,651     |   |              | $ | 33,490     |         |  | $ | 33,989     |   |  | $ | 34,071     |  
|Interest expense                                    |  |                               | 8,697      |   |              |   | 9,110      |         |  |   | 9,793      |   |  |   | 10,229     |  
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Net interest income                                 |  |                               | 24,954     |   |              |   | 24,380     |         |  |   | 24,196     |   |  |   | 23,842     |  
|Provision for loan losses                           |  |                               | (1,650     | ) |              |   | (850       | )       |  |   | (900       | ) |  |   | (850       | )
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Net interest income after provision for loan losses |  |                               | 23,304     |   |              |   | 23,530     |         |  |   | 23,296     |   |  |   | 22,992     |  
|Non interest income                                 |  |                               | 3,024      |   |              |   | 3,440      |         |  |   | 3,239      |   |  |   | 3,054      |  
|Non interest expense                                |  |                               | 12,518     |   |              |   | 11,285     |         |  |   | 11,256     |   |  |   | 11,160     |  
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Income before income tax                            |  |                               | 13,810     |   |              |   | 15,685     |         |  |   | 15,279     |   |  |   | 14,886     |  
|Provision for income tax                            |  |                               | (4,489     | ) |              |   | (5,208     | )       |  |   | (5,131     | ) |  |   | (5,225     | )
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Net income                                          |  | $                             | 9,321      |   |              | $ | 10,477     |         |  | $ | 10,148     |   |  | $ | 9,661      |  
|                                                    |  |                               |            |   |              |   |            |         |  |   |            |   |  |   |            |  
|Basic earnings per share                            |  | $                             | 0.50       |   |              | $ | 0.57       |         |  | $ | 0.55       |   |  | $ | 0.52       |  
|Diluted earnings per share                          |  | $                             | 0.50       |   |              | $ | 0.56       |         |  | $ | 0.55       |   |  | $ | 0.52       |  
|Weighted average basic shares outstanding           |  |                               | 18,530,345 |   |              |   | 18,505,346 |         |  |   | 18,493,353 |   |  |   | 18,688,364 |  
|Weighted average diluted shares outstanding         |  |                               | 18,667,501 |   |              |   | 18,619,111 |         |  |   | 18,577,748 |   |  |   | 18,749,355 |  



-25-



---



FRONTIER FINANCIAL
CORPORATION

AND SUBSIDIARIES



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATION



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



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



FINANCIAL HIGHLIGHTS



Frontier Financial Corporations performance in 2004 reflects another year of record earnings, continued asset growth, and good credit quality.



Net income was up 8.7%, totaling $43.0 million, or $2.29 per diluted share, which compares to $39.6 million, $2.12 per diluted share, in
2003 and $36.0 million, or $1.87 per diluted share in 2002. Net income in 2004 was influenced by a favorable increase in net interest income and an improvement in asset quality allowing for a smaller loan loss provision. Our net interest income in
2004 improved to $105.3 million from $97.4 million in 2003, an increase of 8.1% and increased to $97.4 million from $93.3 million in 2002, an increase of 4.4% as compared to an increase of $9.7 million, or 11.6%, from 2001 to 2002.



Contributing to our record earnings for 2004 was the growth in total assets, which increased
$168.0 million, or 8.1% and increased $131.7 million, or 6.8% in 2003. By comparison, the increase in assets in 2002 was $137 million, or 7.6%. The growth in our assets occurred principally in the loan portfolio. Portfolio loans (loans receivable)
in 2004 increased to $1.98 billion, or 11.6% and in 2003 increased to $1.77 billion, a growth of 6.8% from 2002s balance of $1.66 billion. The comparative increase in the prior year was 5.3%, or $83.7 million.



Nonperforming assets were .63% of total assets at December 31, 2004, up from .52% at December
31, 2003 and down from .98% at year-end 2002. Nonaccruing loans increased to $14.1 million at year-end, up from $6.7 million at December 31, 2003. The year ended 2002 was up from $11.5 million at year-end 2001. For the years ended December 31, 2004,
2003 and 2002, net loan charge offs amounted to $.3 million, $2.9 million and $4.5 million, respectively. This represents 2 basis points for 2004, 17 basis points for 2003 and 28 basis points for 2002 of average loans outstanding. The total
allowance for loan losses stood at $32.7 million, or 1.65% of total loans outstanding in 2004 compared to $29.6 million, or 1.67% of total loans outstanding in 2003 compared to $28.2 million or 1.70% of total loans at year-end 2002.



During the year cash dividends of $14.7 million were paid to shareowners and the Corporation
did not purchase any common stock in the open market under the stock repurchase program. There were 361,800 shares repurchased in 2003 and 473,500 shares repurchased in 2002, totaling $12.1 million and $36.9 million, respectively.



RESULTS OF OPERATIONS



Net Interest Income



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



Net interest income is adjusted to a taxable equivalent basis to present income earned on
taxable and tax-exempt assets on a comparable basis. Reference to net interest income and net interest margin (NIM), in this discussion, represents taxable



-26-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



equivalent (TE) amounts using a tax rate of 35%, and applies to loans and investments as no other assets or liabilities are affected by the adjustment.



The level of growth in our earning assets and the repricing characteristics of
our assets and liabilities influenced net interest income, which increased 8.1% from the prior year. The latter, repricing of assets and liabilities, is in turn influenced by the direction of interest rates. In the second half of 2004, we benefited
from FRBs five rate increases totaling 125 basis points. These increases caused the yield on assets to increase, while the cost on interest bearing liabilities increased at a slower rate. In years 2003 and 2002, although earning assets
increased, interest income declined. The tables on pages 42 and 43 include a breakdown of the change in earning assets and liabilities, referred to as volume, and the repricing of assets and liabilities labeled rate.



Average earning assets rose $160.7 million, or 8.4%, in 2004, following
increases of 8.7% and 1.2% in 2003 and 2002, respectively. The growth over the past year in earning assets has come mainly from the increase in the loan portfolio. Loans rose $196.5 million, or 11.6% this past year, $90.0 million, or 5.6%, in 2003
and $76.9 million in 2002, which was up by $196.5 million from 2001, or 5.0% and 14.8% respectively. Investments increased $2.8 million, or 1.8% for the year and increased $47.9 million, or 34.2% in 2003 and increased $58.3 million, or 71.3% in
2002. The increase in earning assets contributed $14.4 million to net interest income in 2004. In 2003 and 2002 the growth in assets increased net interest income by $9.9 million and $4.8 million, respectively. The reduction in income from the
change in interest rates totaled $9.6 million for the year and totaled $13.7 million and $15.1 million for 2003 and 2002 respectively.



Interest bearing liabilities rose $92.5 million during the year, following increases of $128.1 million and $34.3 million in 2003 and 2002, respectively. The growth over
the past year has been from interest bearing deposits, which increased $70.4 million. The increase in interest bearing liabilities contributed $2.9 million to interest expense in 2004. The effect of changing interest rates decreased interest expense
$5.8 million in 2004. In 2003, increased balances of interest bearing liabilities increased interest expense by $2.7 million, while decreasing rates decreased interest expense by $10.4 million. In 2002, increased volume of deposits decreased
interest expense by $2.6 million and declining rates decreased interest expense by $17.2 million. The reason why an increase in the balances in 2002 decreased interest expense is that the mix of deposits changed so that the overall cost was less.



The net interest margin declined in 2004 to 5.14% from 5.16% the previous
year, and 5.38% in 2002. The decrease in the net interest margin in 2004 is attributable to the interest income ratio decreasing faster than interest expense ratio. The interest expense ratio (interest expense/average deposits and borrowings) fell
from 2.45% in 2003 to 2.14% in 2004, a decrease of 31 basis points. During the same period the interest income ratio (interest income/average earning assets) declined 32 basis points. Several factors contributed to the movement in ratios, including
the effect of interest rates and the repricing characteristics of loans and deposits.



The Federal Reserve Bank (FRB) increased short-term interest rates five times in 2004, 25 basis points each time. All increases came in the second half of the year. The FRB did not move interest rates in 2003, but dropped rates once in
2002. Although rates were increased in 2004, the 25 basis point increases were not substantial enough to bring many loans off of their floors, and not until the fourth quarter did we see a meaningful movement of the net interest margin, which was
5.32%, for the fourth quarter 2004. In 2003, the flat interest rate environment allowed the interest bearing liabilities, due to the lag effect, to catch up to the interest bearing assets. During 2002, with only one rate drop by the FRB
in November, the adverse effect on the interest bearing assets was less than the previous year. However, interest-bearing liabilities continued to lag throughout the year, thus having a negative impact on the net interest margin.



Interest bearing liabilities are mainly comprised of deposits, which make up 83.0% of all
liabilities. In contrast to adjustable-rate loans, deposit rates are not directly governed by indexes. We set our rates as often as weekly depending on the general rates in effect for competing financial institutions. When interest rates drop
quickly, there is a tendency for deposit rates to decline more slowly, because of local competitive factors, than loan rates.



-27-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



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



|                   |  |                    |   |  |                               |   |  |                                  |  
|------------------ |  | ------------------ | - |  | ----------------------------- | - |  | -------------------------------- | -
|Quarter Ended      |  | Net InterestMargin |   |  | Tax EquivalentEffect onMargin |   |  | Tax EquivalentNet InterestMargin |  
|December 31, 2003  |  | 5.07               | % |  | 0.05                          | % |  | 5.12                             | %
|March 31, 2004     |  | 4.99               | % |  | 0.03                          | % |  | 5.02                             | %
|June 30, 2004      |  | 5.01               | % |  | 0.04                          | % |  | 5.05                             | %
|September 30, 2004 |  | 5.11               | % |  | 0.04                          | % |  | 5.15                             | %
|December 31, 2004  |  | 5.27               | % |  | 0.05                          | % |  | 5.32                             | %



A review of the past 12 months shows
that the tax equivalent net interest margin began year 2004 at 5.12% (quarter ended December 31, 2003). The margin then declined to 5.02% for the first quarter but increased to 5.05% in the second quarter, increased in the third quarter to 5.15% and
5.32% in the fourth quarter. The Corporation increased its key lending index 25 basis points in August, September, November, and December. However, the improvement in the net interest margin was more attributed to continued decline in the cost of
funds during the first three quarters of the year. The Corporation dropped its key lending index 25 basis points in the third quarter 2003 and the FRB dropped interest rates only once during the year 2002 in November. The impact of these movements
contributed to the narrowing of the margin in all but the fourth quarter of 2003 and the second, third, and fourth quarters of 2004. In the two years previous to 2003 we saw the net interest margin increase from 4.90% in 2001 to 5.38% in 2002.



We attempt to measure the effect of changing interest rates with our interest
rate simulation model. The simulation model suggests that rising rates would be to our advantage. At December 31, 2004 if rates were to raise 200 basis points ratably over the next 12 months, our net interest income would improve by 7.9%, or $9.0
million. If rates were to fall 100 basis points, our net interest income would decrease .3%, or $309 thousand. The model indicates that we are currently negatively gapped, meaning that more liabilities will reprice within a one-year period than
assets. However, a further discussion of the model results, under the headings Market Risk Sensitivity Instruments and Asset/Liability Management, pages 31 and 32 further explains why this is not so.



OTHER OPERATING INCOME



Service Charges



Deposit fee income has increased over the last three years, from $4.1 million in year 2002 to $4.6 million last year, and this year to $4.9 million. Virtually all that
income is attributable to checking accounts. Our growth in checking account balances has been solid this year, increasing from $271.4 million last year to $313.3 million this year, or 15.4%. Checking account deposits increased $33.4 million in 2003,
or 14.0% and decreased $.4 million in 2002, or .2%.



Other Income



Other income is comprised of a variety of sources. Other income increased
in 2004 to $9.1 million from $8.0 million in 2003. The comparable figure for 2002 was $6.5 million. The increase in the current year was largely due to increased insurance and financial services fees of $648 thousand, followed by an increase in the
sale of other real estate owned of $512 thousand over last year and an increase in trust department fees of $273 thousand for the period.



-28-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



The major increases in other income for 2003 were letter of credit fees and trust department fees, which were up $130
thousand and $107 thousand, respectively. Other income was up $1.0 million in 2002 from 2001. This increase was attributable to an investment in bank owned life insurance in December 2001, which produced $863 thousand in 2002.



Gain (Loss) On The Sale Of Investments



In 2004, we had a small loss on the sale of a security of $44 thousand due to credit
concerns. In 2003 our gains amounted to $190 thousand as compared to a loss of $480 thousand in 2002. The investment sales in 2003 consisted of accepting a tender offer from the issuer of a security and a bond that offered a premium as compensation
for allowing early retirement of the bond. The loss of $480 thousand in 2002 was due to the sale of bonds, which fell below the level of investment grade.



OTHER OPERATING EXPENSES



Salaries And Employee Benefits



Salaries and benefits expense rose 10.8% for 2004, increasing $3.1 million to $31.9 million. Those costs rose $3.0 million or 11.5% in 2003 and $2.2 million or 9.4% in
2002. Salaries and employee benefits costs were affected by an increase in staff, merit raises and a rise in commissions and bonuses.



The staffing level, referred to as full-time equivalent (FTE), totaled 643 at year-end 2004, an increase of 5.1%. That figure compares to 622 at December 2003, and 573
the previous year. The staffing increase this year was evenly focused in our lending and operations departments.



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



Occupancy Expense



Occupancy expense totaled $7.0 million for 2004, an increase of $780 thousand or 12.5%. Depreciation expense comprised $205 thousand of the increase and infrastructure
improvements, mainly related to network security improvements were $319 thousand. Depreciation and other increased expenses were related to new or relocated offices in Seattle, Kent, and Bellingham. Occupancy expense of $6.3 million in 2003 was up
1.6% from $6.2 million in the previous year. The increase in 2003 is mainly due to normal operations. Occupancy expense was down $33 thousand in 2002.



Other Expenses



Other expense increased $895 thousand in 2004, or 9.9%. The largest increase in this category was consulting fees, which increased $846 thousand over the previous year. This increase was primarily related to the
documentation and testing of internal controls for compliance with SOX 404. Other expense increased slightly to $9.0 million, or 3.0% in 2003. The nominal increase in 2003 was due to normal growth and in 2002, other expense decreased $679 thousand,
or 7.2%.



Reserve And Provision For Loan Losses



Managements determination of the level of the provision for loan losses is based on
various judgments and assumptions, including; general economic conditions, loan portfolio composition, prior loan loss experience, the evaluation of credit risk related to specific credits and market segments, and monitoring results from the
Corporations ongoing internal credit review staff. Management believes our methodology for assessing credit risk is adequate and reflected in the resulting



-29-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



allowance calculation. The allowance methodology takes into account that the loan loss reserve will change at different points in time based on economic
conditions, credit performance, loan mix and collateral values.



The allowance
for loan losses increased to $32.7 million as of December 31, 2004. At year-end 2003, the reserve balance was $29.6 million, which was an increase of $1.4 million over year-end 2002 balance of $28.2 million. The allowance for loan loss reserve was
1.65% of totals loans as of year-end December 31, 2004. For year-end December 31, 2003 our reserve ratio was 1.67% and was 1.70% for year-end 2002. The year-end 2004 reserve was 232% of nonperforming loans. At year-end December 31, 2003 this ratio
was 272% and was 149% for year-end 2002.



An improving economy, and positive
credit performance trends, is reflected in year-end 2004 reserves of 1.65% and net charge offs of $328 thousand. An uncertain economic environment and increasing delinquencies supported the higher loan loss reserve for year-end 2003 and 2002.



The Bank considers the reserve for loan losses adequate to cover losses
inherent in the portfolio at December 31, 2004.



REVIEW OF FINANCIAL
CONDITION



Investment Securities



During 2004, we had a run off of investment securities totaling $34.4 million or 18.3%.
Almost all of this run off was due to maturities and calls prior to maturity. During 2004, management used these cash flows for funding growth in the loan portfolio. Investment securities increased from $140.0 million at year-end 2002 to $187.9
million as of December 31, 2003, a rise of 34.2%. There was considerable activity within the securities portfolio during 2003. In the first two quarters of 2003, the Federal Funds sold balance had grown to over $113.0 million. Early in the third
quarter, in order to take advantage of higher yields, a concentrated effort was made to purchase investment securities. Security purchases for year 2003 totaled $143.5 million, sales of securities amounted to $5.1 million, while approximately $90.0
million in securities matured. The securities sales were executed to take advantage of a tender offer by the issuer. Investment securities increased $58.3 million, or 71.3% in 2002.



Loans



Loans increased 11.6% in 2004, from $1.77 billion at December 31, 2003, to $1.98 billion at year-end 2004. In 2002, loans grew to $1.66 billion from $1.58 billion in
2001. Please see page 39 of this report and Form 10-K for the year-ended December 31, 2004 for a further discussion of loans.



Deposits



Deposits increased $128.8 million, or 7.7%, in 2004, and $106.1 million, or 6.8% in 2003 and $62.5 million, or 4.2% in 2002. The shift in deposits was characterized by a changing interest rate environment.



Interest bearing deposits at December 31,



|                              |  |      |           |      |   |           |  |   |          
|----------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|In Thousands                  |  | 2004 |           | 2003 |   | 2002     
|NOW and money market accounts |  | $    | 270,894   |      | $ | 251,376   |  | $ | 296,999  
|Savings accounts              |  |      | 642,434   |      |   | 625,843   |  |   | 473,577  
|Time deposits                 |  |      | 569,239   |      |   | 518,409   |  |   | 552,328  
|                              |  |      |           |      |   |           |  |   |          
|Total                         |  | $    | 1,482,567 |      | $ | 1,395,628 |  | $ | 1,322,904
|                              |  |      |           |      |   |           |  |   |          



The trend for the three years prior to
2004 has been declining time deposits and increasing savings balances, due to the aversion of customers wanting to lock into low rate CDs. Total interest bearing deposits increased $87.0 million, or 6.2% in 2004, $72.7 million, or 5.5% in 2003
and $62.9 million, or 5.0% in 2002. NOW and money market accounts



-30-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



declined in 2003, but increased in prior years. In the second half of 2004, interest rates began to increase and CDs became more attractive to
investors. Balances increased to $569.2 million in 2004, $50.8 million over 2003, and $33.9 million over 2002. Prior to 2004, the type of savings accounts having the largest increase over the last 3 years was our premium savings account, which
increased from $415.4 million in 2002 to $577.8 million in 2004. This account was created as an alternative to certificates of deposit and pays a higher annual percentage yield than other core deposits. The change in the mix is attributable to the
rates paid on the various deposits products.



MARKET RISK SENSITIVE
INSTRUMENTS



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



A number of measures are utilized to monitor and manage interest rate risk, including income
simulation and gap analysis (further discussed under the subheading Asset and Liability Management on page 32). An income simulation model is primarily used to assess the impact on earnings changes that interest rates may
produce. Key assumptions in the model include, cash flows and maturities of financial instruments, changes in market conditions, loan volumes and pricing, deposit sensitivity, consumer preferences, and managements capital leverage plans. These
assumptions are inherently uncertain; therefore, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results may significantly differ from simulated
results due to timing, magnitude and frequency of interest rate changes, and changes in market conditions and specific strategies, among other factors.



We use a simulation model to estimate the impact of changing interest rates on the Corporations earnings and capital. The model calculates the change in net
interest income under various rate shocks. As of December 31, 2004, the model predicted that net income would increase about $5.6 million if rates increased 2%, and decrease about $71 thousand if rates fell 1%.



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



|                    |  |                      |      |   |                      |   |       |                      |  |   |      |   |  |   |       |   |  |   |       |   |  |   |       |  
|------------------- |  | -------------------- | ---- | - | -------------------- | - | ----- | -------------------- |  | - | ---- | - |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|December 31,        |  | 2005 EstimatedChange |      |   | 2004 EstimatedChange |   |       | 2003 EstimatedChange | 
|Rate shock          |  |                      | -1.0 | % |                      |   | 2.0   | %                    |  |   | -1.0 | % |  |   | 2.0   | % |  |   | -1.0  | % |  |   | 2.0   | %
|                    |  |                      |      |   |                      |   |       |                      |  |   |      |   |  |   |       |   |  |   |       |   |  |   |       |  
|Net interest income |  | ($                   | 309  | ) |                      | $ | 8,969 |                      |  | $ | 242  |   |  | $ | 6,548 |   |  | $ | 1,375 |   |  | $ | 2,450 |  
|Net income          |  |                      | (71  | ) |                      |   | 5,597 |                      |  |   | 157  |   |  |   | 4,256 |   |  |   | 921   |   |  |   | 809   |  



The interest rate scenarios reflected
above represent the results of possible near-term interest rate movements. Approximately 41% of the loan portfolio is tied to rate indexes that are one year or less in duration. These indexes include our Base rate, Federal Home Loan Bank of Seattle
(FHLB) Advance Rate, Wall Street Journal prime, London Interbank Offering Rate (LIBOR), and Constant Maturity Treasury (CMT). In 2004 and 2003, the model indicates that declining rates would increase net interest income and net income. This is due
to a significant portion of variable rate loans that are at or near their floors, and the multiplier effect that will be discussed later.



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



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



-31-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



ASSET AND LIABILITY MANAGEMENT



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



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



In the following table the expected maturities for financial liabilities with no stated maturity, reflect assumptions based on historical run-off rates. The run-off rates for noninterest bearing deposits is 6% per
year; for NOW, sweep and money market accounts it is 8% per year and for savings accounts it is 10% per year. The weighted average interest rates for financial instruments presented are at year-end for 2004. Please refer to page 22 of this report
for details regarding estimated fair value.



-32-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



MARKET RISK



|                                               |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|---------------------------------------------- |  | ---------------------- | ------- | - | ---- | ------ | - | ---- | ------- | - | ---------- | ------- | - | ---- | ------- | - | ---------- | ------- | - | ----- | - | --------- | - |  | - | ---------
|                                               |  | Expected Maturity Date |         |   |      |        |   |      |         |   | Fair Value
|In Thousands                                   |  | 2005                   |         |   | 2006 |        |   | 2007 |         |   | 2008       |         |   | 2009 |         |   | Thereafter |         |   | Total |   |          
|Financial Assets                               |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Cash and due from banks                        |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Noninterest bearing                            |  | $                      | 70,851  |   |      |       |   |      |        |   |            |        |   |      |        |   |            |        |   |       | $ | 70,851    |   |  | $ | 70,851   
|Fed Funds Sold                                 |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Variable Rate                                  |  |                        | 5,946   |   |      |       |   |      |        |   |            |        |   |      |        |   |            |        |   |       |   | 5,946     |   |  |   | 5,946    
|Weighted average interest rate                 |  |                        | 1.87    | % |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   | 1.87      | % |  |   |          
|Securities available for sale                  |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Fixed Rate                                     |  |                        | 72,720  |   |      | 3,548  |   |      | 9,297   |   |            | 32,311  |   |      | 18,000  |   |            | 4,815   |   |       |   | 140,691   |   |  |   | 145,917  
|Weighted average interest rate                 |  |                        | 3.80    | % |      | 2.86   | % |      | 3.12    | % |            | 3.60    | % |      | 3.87    | % |            | 7.16    | % |       |   | 3.81      | % |  |   |          
|Securities held to maturity                    |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Fixed Rate                                     |  |                        | 925     |   |      | 2,446  |   |      | 714     |   |            | 1,243   |   |      | 200     |   |            | 2,006   |   |       |   | 7,534     |   |  |   | 7,912    
|Weighted average interest rate (1)             |  |                        | 7.90    | % |      | 6.26   | % |      | 8.03    | % |            | 8.20    | % |      | 8.09    | % |            | 9.43    | % |       |   | 7.84      | % |  |   |          
|Loans Receivable, net                          |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Fixed Rate                                     |  |                        | 121,263 |   |      | 90,546 |   |      | 157,333 |   |            | 250,783 |   |      | 169,657 |   |            | 90,245  |   |       |   | 879,827   |   |  |   | 876,952  
|Weighted average interest rate (2)             |  |                        | 6.87    | % |      | 7.09   | % |      | 7.04    | % |            | 6.42    | % |      | 6.67    | % |            | 6.30    | % |       |   | 6.70      | % |  |   |          
|Variable Rate                                  |  |                        | 621,533 |   |      | 97,623 |   |      | 23,964  |   |            | 21,285  |   |      | 38,940  |   |            | 291,067 |   |       |   | 1,094,412 |   |  |   | 1,065,504
|Weighted average interest rate (2)             |  |                        | 6.59    | % |      | 6.57   | % |      | 6.31    | % |            | 6.77    | % |      | 5.74    | % |            | 6.32    | % |       |   | 6.48      | % |  |   |          
|                                               |  |                        |         |   |      |        |   |     
|Financial Liabilities                          |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Noninterest bearing deposits                   |  |                        | 18,797  |   |      | 17,669 |   |      | 16,609  |   |            | 15,612  |   |      | 14,675  |   |            | 229,913 |   |       |   | 313,275   |   |  |   | 313,275  
|NOW, Sweep and Money Market accounts           |  |                        | 21,672  |   |      | 19,938 |   |      | 18,343  |   |            | 16,875  |   |      | 15,525  |   |            | 178,541 |   |       |   | 270,894   |   |  |   | 271,671  
|Weighted average interest rate                 |  |                        | 0.91    | % |      | 0.91   | % |      | 0.91    | % |            | 0.91    | % |      | 0.91    | % |            | 0.91    | % |       |   | 0.91      | % |  |   |          
|Savings accounts                               |  |                        | 64,245  |   |      | 57,820 |   |      | 52,038  |   |            | 46,834  |   |      | 42,151  |   |            | 379,346 |   |       |   | 642,434   |   |  |   | 644,181  
|Weighted average interest rate                 |  |                        | 1.53    | % |      | 1.53   | % |      | 1.53    | % |            | 1.53    | % |      | 1.53    | % |            | 1.53    | % |       |   | 1.53      | % |  |   |          
|Time Certificates                              |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Fixed Rate                                     |  |                        | 370,722 |   |      | 38,548 |   |      | 67,362  |   |            | 49,758  |   |      | 40,721  |   |            | 2,128   |   |       |   | 569,239   |   |  |   | 570,777  
|Weighted average interest rate                 |  |                        | 2.52    | % |      | 3.78   | % |      | 4.57    | % |            | 3.84    | % |      | 3.78    | % |            | 3.98    | % |       |   | 3.06      | % |  |   |          
|Federal funds purchased                        |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Variable rate                                  |  |                        | 5,711   |   |      |       |   |      |        |   |            |        |   |      |        |   |            |        |   |       |   | 5,711     |   |  |   | 5,711    
|Weighted average interest rate                 |  |                        | 1.88    | % |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   | 1.88      | % |  |   |          
|Securities sold under agreements to repurchase |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Variable rate                                  |  |                        | 4,494   |   |      |       |   |      |        |   |            |        |   |      |        |   |            |        |   |       |   | 4,494     |   |  |   | 4,494    
|Weighted average interest rate                 |  |                        | 1.66    | % |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   | 1.66      | % |  |   |          
|FHLB advances                                  |  |                        |         |   |      |        |   |      |         |   |            |         |   |      |         |   |            |         |   |       |   |           |   |  |   |          
|Fixed Rate                                     |  |                        | 25,000  |   |      | 20,000 |   |      | 40,030  |   |            | 10,000  |   |      |        |   |            | 80,058  |   |       |   | 175,088   |   |  |   | 182,059  
|Weighted average interest rate                 |  |                        | 2.15    | % |      | 3.89   | % |      | 4.45    | % |            | 5.54    | % |      |         |   |            | 5.59    | % |       |   | 4.66      | % |  |   |          



|(1) | Represents tax equivalent yield
|--- | -------------------------------



|(2) | Represents weighted note rates exclusive of loan fees
|--- | -----------------------------------------------------



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



-33-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



REPRICING OPPORTUNITIES FOR ASSETS AND LIABILITIES

(Amortized cost used for investments)



|                                              |  |          |           |   |           |   |            |  |    |               |   |       |   |       |  |   |          
|--------------------------------------------- |  | -------- | --------- | - | --------- | - | ---------- |  | -- | ------------- | - | ----- | - | ----- |  | - | ---------
|In Thousands, at December 31, 2004            |  | 0-1 Year |           |   | 1-5 Years |   | 5-10 Years |  |    | Over 10 Years |   | Total
|ASSETS                                        |  |          |           |   |           |   |            |  |    |               |   |       |   |       |  |   |          
|Loans                                         |  | $        | 1,004,948 |   |           | $ | 910,233    |  | $  | 55,453        |   |       | $ | 3,605 |  | $ | 1,974,239
|Investments                                   |  |          | 73,645    |   |           |   | 67,759     |  |    | 2,478         |   |       |   | 4,343 |  |   | 148,225  
|Fed funds sold                                |  |          | 5,946     |   |           |   |           |  |    |              |   |       |   |      |  |   | 5,946    
|                                              |  |          |           |   |           |   |            |  |    |               |   |       |   |       |  |   |          
|Total earning assets                          |  | $        | 1,084,539 |   |           | $ | 977,992    |  | $  | 57,931        |   |       | $ | 7,948 |  | $ | 2,128,410
|                                              |  |          |           |   |           |   |            |  |    |               |   |       |   |       |  |   |          
|LIABILITIES                                   |  |          |           |   |           |   |            |  |    |               |   |       |   |       |  |   |          
|NOW, money market, and sweep accounts         |  | $        | 270,894   |   |           |   |           |  |    |              |   |       |   |      |  | $ | 270,894  
|Savings                                       |  |          | 642,434   |   |           |   |           |  |    |              |   |       |   |      |  |   | 642,434  
|Time deposits                                 |  |          | 370,722   |   |           | $ | 196,389    |  | $  | 2,128         |   |       |   |      |  |   | 569,239  
|Fed funds purchased and repurchase agreements |  |          | 10,205    |   |           |   |           |  |    |              |   |       |   |      |  |   | 10,205   
|FHLB borrowings                               |  |          | 25,000    |   |           |   | 70,030     |  |    | 80,058        |   |       |   |      |  |   | 175,088  
|                                              |  |          |           |   |           |   |            |  |    |               |   |       |   |       |  |   |          
|Total interest bearing liabilities            |  | $        | 1,319,255 |   |           | $ | 266,419    |  | $  | 82,186        |   |       |   |      |  | $ | 1,667,860
|                                              |  |          |           |   |           |   |            |  |    |               |   |       |   |       |  |   |          
|GAP                                           |  |          | ($234,716 | ) |           | $ | 711,573    |  | ($ | 24,255        | ) |       | $ | 7,948 |  | $ | 460,550  



It is generally assumed that during a
period of rising interest rates, the net earnings of an institution with a negative gap may be adversely affected due to its interest bearing liabilities repricing to a greater extent than its interest-earning assets. Conversely, during a period of
falling interest rates, net earnings may increase. That assumption, however, is based on the premise that assets/liabilities within a one-year time frame will generally move in the same direction at approximately the same rate. However, historical
data reflects that the relationship between one-year asset/liabilities may not be as strongly correlated as assumed. Loans with one-year repricing characteristics are tied to a number of indexes to include our base rate, the Wall Street Journal
prime, the one-year constant maturity treasury, LIBOR, and FHLB rates. Those indexes are subject to the movement of the one-year market rates. On the other hand, savings accounts, which constitute the bulk of the one-year repricing liabilities, are
subject to the local financial institutions market. Pricing for savings is dependent on customer preferences and the subjective pricing influence of local banks, credit unions, etc. Thus, while a good portion of our loans are tied to national
and international money markets, deposits are subject to the conditions of the Puget Sound area. Additionally, when interest rates change, different rates change by different amounts. The use of multipliers is used that represent the
change of each asset/liability rate compared to the change in the federal funds rate. For example, the prime rate has a factor of 1 indicating it changes the same amount as any federal funds rate change. Core deposit sectors may have a factor of
..25, indicating those rates move only 25% as much. Applying the multipliers to the balance sheet, at December 31, 2004, the bank had a positive gap of $150.0 million. At December 31, 2003, the gap was a positive $106.0 million. At December 31, 2002,
the gap was a negative $2.0 million.



Management does not use interest rate
risk management products such as interest rate swaps, hedges or other derivatives.



-34-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



ASSET QUALITY



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



|                                           |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|In Thousands at December
31                |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Total nonaccruing loans                    |  | $    | 14,107 |   |      | $ | 6,694  |      |  | $ | 12,435 |  
|Other real estate owned                    |  |      |       |   |      |   | 4,162  |      |  |   | 6,532  |  
|                                           |  |      |        |   |      |   |        |      |  |   |        |  
|Total nonperforming assets                 |  | $    | 14,107 |   |      | $ | 10,856 |      |  | $ | 18,967 |  
|                                           |  |      |        |   |      |   |        |      |  |   |        |  
|Restructured loans                         |  | $    | 0      |   |      | $ | 6,178  |      |  | $ | 6,178  |  
|                                           |  |      |        |   |      |   |        |      |  |   |        |  
|NPAs to total loans                       |  |      | 0.71   | % |      |   | 0.61   | %    |  |   | 1.14   | %
|NPAs to total assets                      |  |      | 0.63   | % |      |   | 0.52   | %    |  |   | 0.98   | %
|NPAs to total capital                     |  |      | 5.55   | % |      |   | 4.95   | %    |  |   | 9.54   | %
|NPAs & restructured loans to total assets |  |      | 0.63   | % |      |   | 0.82   | %    |  |   | 1.29   | %



As shown in the chart above, our ratio
of nonperforming assets to total assets ended the year at .63% as compared to .52% at December 31, 2003. This increase was due primarily to one real estate residential loan in the amount of $6.0 million being moved to nonaccrual status during the
third quarter.



NONACCRUAL LOANS



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



The Bank ended the year with six nonaccruing loans with a combined balance of $14.1 million.
This compares to previous year-end balance of $6.7 million consisting of 13 loans. Two loans, totaling $11.1 million, make up 79% of our year-end balance. One of these two loans, totaling $5.1 million, has been restructured and has resumed repayment
under the new terms. All of the nonaccrual loans are secured by real estate.



OTHER REAL ESTATE OWNED



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



The Bank had no OREO totals to report at
year-end December 31, 2004. Previous year-end OREO balance totaled $6.5 million, or .3% of total assets. The change in OREO totals is a reflection of our aggressive collection efforts resulting in an orderly transition of assets from acquisition,
through foreclosure, and sale.



-35-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



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



LIQUIDITY



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



The principal use of funds is to invest in securities and loans. Security purchases amounted to $47.1 million in 2004, down 67% from $143.6 million in purchases in 2003, and purchases totaled $139.3 million in 2002.
The reason for the decline in 2004 was the stronger loan demand. Net cash flows from loan originations totaled $204.8 million, $122.7 million, and $92.6 million during 2004, 2003, and 2002, respectively. The origination of mortgage loans held for
sale totaled $67.7 million, $130.2 million, and $94.9 million during 2004, 2003, and 2002, respectively. Proceeds from the sales of mortgage loans amounted to $65.8 million in 2004, $137.1 million in 2003, $89.7 million in 2002.



Our line of credit with the FHLB has been established at 15% of assets. Borrowings totaled
$175.1 million, $170.1 million, $160.1 million, at December 31, 2004, 2003, and 2002, respectively. These borrowings represented 7.8% of year-end assets in 2004, 8.2% in 2003, and 8.2% in 2002.



Unused lines of credit available to us include $157 million available at FHLB and $55 million
available from correspondent banks. We also have the option of funding asset growth or funding withdrawals with brokered deposits. At year-end 2004, broker deposits were $8.3 million.



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



-36-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



MATURITY SCHEDULE FOR EARNING ASSETS



(Amortized cost used for investments)



|                               |  |          |         |           |   |               |  |                   |         |                  |   |                          |  |   |           |  |       |  
|------------------------------ |  | -------- | ------- | --------- | - | ------------- |  | ----------------- | ------- | ---------------- | - | ------------------------ |  | - | --------- |  | ----- | -
|In Thousands December 31,
2004 |  | 0-1 Year |         | 1-5 Years |   | After 5 Years |  | TotalCarryingCost |         | Total Fair Value |   | Percentof TotalFairValue | 
|Investments                    |  | $        | 73,645  |           | $ | 67,759        |  | $                 | 6,821   |                  | $ | 148,225                  |  | $ | 153,829   |  | 7.3   | %
|Loans                          |  |          | 742,796 |           |   | 850,131       |  |                   | 381,312 |                  |   | 1,974,239                |  |   | 1,942,456 |  | 92.4  | %
|Federal funds sold             |  |          | 5,946   |           |   |              |  |                   |        |                  |   | 5,946                    |  |   | 5,946     |  | 0.3   | %
|                               |  |          |         |           |   |               |  |                   |         |                  |   |                          |  |   |           |  |       |  
|Total                          |  | $        | 822,387 |           | $ | 917,890       |  | $                 | 388,133 |                  | $ | 2,128,410                |  | $ | 2,102,231 |  | 100.0 | %
|                               |  |          |         |           |   |               |  |                   |         |                  |   |                          |  |   |           |  |       |  
|                               |  |          |         |           |   |              
|In Thousands December 31,
2003 |  | 0-1 Year |         | 1-5 Years |   | After 5 Years |  | TotalCarryingCost |         | Total Fair Value |   | Percentof TotalFairValue | 
|Investments                    |  | $        | 57,018  |           | $ | 91,419        |  | $                 | 34,104  |                  | $ | 182,541                  |  | $ | 188,505   |  | 9.6   | %
|Loans                          |  |          | 634,902 |           |   | 801,267       |  |                   | 333,594 |                  |   | 1,769,763                |  |   | 1,767,885 |  | 90.4  | %
|Federal funds sold             |  |          | 8       |           |   |              |  |                   |        |                  |   | 8                        |  |   | 8         |  | 0.0   | %
|                               |  |          |         |           |   |               |  |                   |         |                  |   |                          |  |   |           |  |       |  
|Total                          |  | $        | 691,928 |           | $ | 892,686       |  | $                 | 367,698 |                  | $ | 1,952,312                |  | $ | 1,956,398 |  | 100.0 | %
|                               |  |          |         |           |   |               |  |                   |         |                  |   |                          |  |   |           |  |       |  



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



CAPITAL



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



|                                          |  |                              |   |  |               |   |  |                        |  
|----------------------------------------- |  | ---------------------------- | - |  | ------------- | - |  | ---------------------- | -
|                                          |  | FrontierFinancialCorporation |   |  | Frontier Bank |   |  | WellCapitalizedMinimum |  
|CAPITAL RATIOS                            |  |                              |   |  |               |   |  |                        |  
|Total capital to risk-weighted assets     |  | 11.76                        | % |  | 10.97         | % |  | 10.00                  | %
|Tier 1 capital to risk-weighted assets    |  | 10.50                        | % |  | 9.72          | % |  | 6.00                   | %
|Tier 1 leverage capital to average assets |  | 10.85                        | % |  | 10.03         | % |  | 5.00                   | %



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



-37-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



The capital of the Corporation at year-end was $254.2 million, up from $219.4 million a year ago, or an increase of
15.9%. Frontier began paying cash dividends to shareowners in 1999 and approved a stock repurchase plan in 2000. During 2004, cash dividends of $14.7 million were paid to shareowners and the Corporation did not purchase any common stock in the open
market in 2004.



CONTRACTUAL OBLIGATIONS AND COMMITMENTS



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



|                 |  |                         |         |           |   |           |  |            |         |       |   |        |  |   |        
|---------------- |  | ----------------------- | ------- | --------- | - | --------- |  | ---------- | ------- | ----- | - | ------ |  | - | -------
|                 |  | Payments due per period
|In Thousands     |  | Less ThanOne Year       |         | 1-3 Years |   | 3-5 Years |  | Thereafter |         | Total
|Time deposits    |  | $                       | 370,722 |           | $ | 105,910   |  | $          | 90,479  |       | $ | 2,128  |  | $ | 569,239
|FHLB borrowings  |  |                         | 25,000  |           |   | 60,030    |  |            | 10,000  |       |   | 80,058 |  |   | 175,088
|Operating leases |  |                         | 1,323   |           |   | 2,554     |  |            | 2,247   |       |   | 4,046  |  |   | 10,170 
|                 |  |                         |         |           |   |           |  |            |         |       |   |        |  |   |        
|Total            |  | $                       | 397,045 |           | $ | 168,494   |  | $          | 102,726 |       | $ | 86,232 |  | $ | 754,497
|                 |  |                         |         |           |   |           |  |            |         |       |   |        |  |   |        

See additional discussion under Notes 5, 7 and 14.



The Corporation also has operating leases comprised of leases for office space. See Note 14.



OFF-BALANCE SHEET ARRANGEMENTS



See Note 14 for discussion.



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



Frontier Financial Corporations common stock began trading on the National Association
of Securities Dealers Automated Quotation System (Nasdaq) on April 16, 1998. Nasdaq reported the 2004 daily average trade volume was 20,166 shares and a total trade volume of 5,464,252. During 2004, the market price of our common stock ranged
from $31.00 to $41.51. The average price for the year was $34.86.



At December
31, 2004, the total number of shareowners of record of Frontier Financial Corporations common stock was 3,335 and there were 18,745,185 shares outstanding, which includes 9,121,048 shares registered in street name.



Prior to 1999 the Corporation had always paid stock dividends, which ranged from 7% to 10%
and the Corporation has had six stock splits since the Bank opened in 1978. In 1999, the Board of Directors declared the first annual cash dividend of $.25 per share on post two-for-one split shares. On January 19, 2000, the Board declared the first
quarterly cash dividend. Please see the table below for the detail of the year 2004 dividends.



|                 |      |             |                  |              |                 
|---------------- | ---- | ----------- | ---------------- | ------------ | ----------------
|Dividend Payable |      | Record Date |                  | Payable Date
|$                | .185 |             | January 7, 2004  |              | January 20, 2004
|$                | . 19 |             | April 12, 2004   |              | April 26, 2004  
|$                | .195 |             | July 12, 2004    |              | July 26, 2004   
|$                | .20  |             | October 12, 2004 |              | October 25, 2004



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



-38-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



STOCK REPURCHASE PROGRAM



There was no stock repurchase activity in 2004. On September 16, 2004 the Corporation authorized a new plan to repurchase 5% of the
authorized outstanding stock. There are currently 932,270 authorized under this plan.



LOAN PORTFOLIO



The Banks classifies its lending
activities in the following principal areas: installment, commercial and agriculture, real estate commercial, real estate construction and land development, and residential. As of December 31, 2004, these categories accounted for approximately 2.3%,
15.2%, 44.1%, 29.9% and 8.5% respectively of the Banks loan portfolio. This mix was relatively unchanged compared to the previous year.



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



|                                              |  |        |           |            |       |   |        |      |            |  |       |        |  |            |           |  |       |  
|--------------------------------------------- |  | ------ | --------- | ---------- | ----- | - | ------ | ---- | ---------- |  | ----- | ------ |  | ---------- | --------- |  | ----- | -
|                                              |  | 2004   |           |            | 2003  |   |        | 2002 |           
|In Thousands                                  |  | Amount |           | Percentage |       |   | Amount |      | Percentage |  |       | Amount |  | Percentage |          
|Installment                                   |  | $      | 44,111    |            | 2.3   | % |        | $    | 42,731     |  | 2.6   | %      |  | $          | 45,625    |  | 2.8   | %
|Commercial and agriculture                    |  |        | 287,180   |            | 15.2  | % |        |      | 275,429    |  | 16.3  | %      |  |            | 293,414   |  | 18.3  | %
|Real estate commercial                        |  |        | 831,823   |            | 44.1  | % |        |      | 761,782    |  | 45.0  | %      |  |            | 718,638   |  | 45.0  | %
|Real estate construction and land development |  |        | 564,726   |            | 29.9  | % |        |      | 473,647    |  | 28.0  | %      |  |            | 417,005   |  | 26.0  | %
|Real estate residential                       |  |        | 159,688   |            | 8.5   | % |        |      | 137,462    |  | 8.1   | %      |  |            | 126,355   |  | 7.9   | %
|                                              |  |        |           |            |       |   |        |      |            |  |       |        |  |            |           |  |       |  
|Total                                         |  | $      | 1,887,528 |            | 100.0 | % |        | $    | 1,691,051  |  | 100.0 | %      |  | $          | 1,601,037 |  | 100.0 | %
|                                              |  |        |           |            |       |   |        |      |            |  |       |        |  |            |           |  |       |  



Total average loan balances ended the
year 2004 at $1.9 billion, representing an increase of $196.5 million, or 11.6% over the average balance for 2003. Average loan balances for 2003 were $1.7 billion representing an increase of $90.0 million, or 5.6% increase over 2002 average loans
outstanding. 2002 average loans increased $74.7 million, or 4.9% over 2001.



Commercial real estate and construction and land development loans have historically represented the largest portion of the Banks loan portfolio. In 2004, the average balances of commercial real estate and construction loans comprised
74% of the portfolio totaling $1.4 billion versus $1.2 billion in 2003. In 2002 they totaled $1.1 billion.



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



Real estate
construction and land development loans also represent a significant piece of the Corporations loan mix in 2004. Loans within this category grew by $91.1 million or 19.2%. Continued demand for housing and favorable interest rates continue to
fuel this growth. Real estate construction loans are generally composed of commitments to customers within our market area for construction purposes. Loans within this category are used for construction projects that range from residential and
commercial land development to residential and commercial building projects. They are generally secured by first trust deeds with well-defined repayment sources following project completion. Maturities are set to match the time required for project
completion, which typically run from 12 to 18 months depending on complexity.



-39-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



Commercial and agriculture loans increased $11.8 million, or 4.3% in 2004. Expanding our branch network and the
recruitment of seasoned local lenders provided strong support for favorable growth in commercial loan totals.



At 2.3% of total loans, our installment lending continues to be the smallest portion of our overall loan portfolio. Loans within this category remained relatively unchanged for the year. This area of consumer lending
continues a shift toward credit card, factory-lending programs for automobiles and home equity lines of credit. While the Corporation does offer credit cards and home equity lines, emphasis has not been placed on these product offerings.



Real estate residential loans averaged $159.7 million at year-end 2004. Loans within this
category are used to finance individual owner and nonowner occupied residences. These loans will generally be repaid at maturity as they move into lower interest rate term mortgage loans available through secondary market programs.



The loan portfolio yield declined to 7.08% in 2004 from 7.51% in 2003 and 8.24% in 2002.
Although FRB increased rates five times in the second half of 2004, many variable rate loans in our portfolio had floors which slowed down the increase in interest income. The portfolio yield increased from 7.04 % at September quarter end to 7.30%
at December quarter end, or increased 26 basis points.



With respect to 2003,
although we reduced our prime rate .25% in the third quarter, most of the decline was attributable to market competition. The yield on loans decreased to 8.24% from 9.09% in 2002. In 2002, the Corporation decreased the prime (base) rate three times.
Although 41% of the loan portfolio was variable rate, many of those loans were already at their floor, which lessened the impact of the 100 basis point reduction during the year. This, coupled with a continued run off of high cost CDs, was
responsible for the increase in the NIM during the year. In addition, many fixed rate loans were refinanced and replaced with lower rate loans in 2003 and 2002.



In 2004 we saw an increase in tax equivalent loan interest and fees, which totaled $133.7 million and increased $6.8 million, or 5.3%. Tax equivalent interest and fee
income from loans decreased $4.9 million in 2003, or 3.7% and in 2002 it decreased $6.6 million, or 5.5%. The increase of $196.5 million in the average balance of loans in 2004 increased interest income $15.0 million and the decline in rates
decreased interest income by $8.2 million, for a net increase of $6.8 million. The increase of $90.0 million in the average balance of loans in 2003 increased interest income by $7.7 million and the decline in rates reduced interest income by $12.6
million. The $76.9 million increase in the 2002 average balance of loans increased interest income by $7.1 million and a decline in rates decreased interest income by $13.7 million.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



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



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



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



-40-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



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



FORWARD LOOKING STATEMENTS



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



-41-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



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



|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|--------------------------------------------------------- |  | ----------------------- | --------- | - | ---------------------- | - | ----------------------- | ---- | ---- | -------------- |  | - | ---------------------- | - | ----------------------- | - | ------- | -------------- | ---- | - | ---------------------- | - | ----------------------- | - |  | - | ------- |  | ---- | -
|                                                          |  | Year Ended December 31, |          
|                                                          |  | 2004                    |           |   | 2003                   |   |                         | 2002 |     
|In Thousands                                              |  | AverageBalance          |           |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |      |      | AverageBalance |  |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |   |         | AverageBalance |      |   | InterestIncome/Expense |   | AverageRatesEarned/Paid |  
|Interest Earning Assets                                   |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Taxable investments                                       |  | $                       | 154,381   |   |                        | $ | 6,411                   |      | 4.15 | %              |  | $ | 141,256                |   |                         | $ | 7,045   |                | 4.99 | % |                        | $ | 104,511                 |   |  | $ | 5,810   |  | 5.56 | %
|Nontaxable investments (1)                                |  |                         | 9,438     |   |                        |   | 731                     |      | 7.75 | %              |  |   | 19,719                 |   |                         |   | 1,604   |                | 8.13 | % |                        |   | 23,007                  |   |  |   | 1,882   |  | 8.18 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Total                                                     |  |                         | 163,819   |   |                        |   | 7,142                   |      | 4.36 | %              |  |   | 160,975                |   |                         |   | 8,649   |                | 5.37 | % |                        |   | 127,518                 |   |  |   | 7,692   |  | 6.03 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Federal funds sold                                        |  |                         | 13,779    |   |                        |   | 170                     |      | 1.23 | %              |  |   | 52,398                 |   |                         |   | 558     |                | 1.06 | % |                        |   | 23,931                  |   |  |   | 389     |  | 1.63 | %
|Loans(2)                                                  |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Installment                                               |  |                         | 44,111    |   |                        |   | 3,626                   |      | 8.22 | %              |  |   | 42,731                 |   |                         |   | 3,732   |                | 8.73 | % |                        |   | 45,625                  |   |  |   | 4,215   |  | 9.24 | %
|Commercial(1)                                             |  |                         | 287,180   |   |                        |   | 18,383                  |      | 6.40 | %              |  |   | 275,429                |   |                         |   | 18,905  |                | 6.86 | % |                        |   | 293,414                 |   |  |   | 22,403  |  | 7.64 | %
|Real estate                                               |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Commercial                                                |  |                         | 831,823   |   |                        |   | 56,868                  |      | 6.84 | %              |  |   | 761,782                |   |                         |   | 56,150  |                | 7.37 | % |                        |   | 718,638                 |   |  |   | 58,879  |  | 8.19 | %
|Construction                                              |  |                         | 564,726   |   |                        |   | 43,110                  |      | 7.63 | %              |  |   | 473,647                |   |                         |   | 37,302  |                | 7.88 | % |                        |   | 417,005                 |   |  |   | 35,466  |  | 8.50 | %
|Residential                                               |  |                         | 159,688   |   |                        |   | 11,718                  |      | 7.34 | %              |  |   | 137,462                |   |                         |   | 10,855  |                | 7.90 | % |                        |   | 126,355                 |   |  |   | 10,902  |  | 8.63 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Total                                                     |  |                         | 1,887,528 |   |                        |   | 133,705                 |      | 7.08 | %              |  |   | 1,691,051              |   |                         |   | 126,944 |                | 7.51 | % |                        |   | 1,601,037               |   |  |   | 131,865 |  | 8.24 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Total earning assets/total interest income                |  |                         | 2,065,126 |   |                        | $ | 141,017                 |      | 6.83 | %              |  |   | 1,904,424              |   |                         | $ | 136,151 |                | 7.15 | % |                        |   | 1,752,486               |   |  | $ | 139,946 |  | 7.99 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Reserve for loan losses                                   |  |                         | (30,946   | ) |                        |   |                         |      |      |                |  |   | (28,851                | ) |                         |   |         |                |      |   |                        |   | (26,929                 | ) |  |   |         |  |      |  
|Cash and due from banks                                   |  |                         | 75,768    |   |                        |   |                         |      |      |                |  |   | 68,657                 |   |                         |   |         |                |      |   |                        |   | 61,900                  |   |  |   |         |  |      |  
|Other assets                                              |  |                         | 69,260    |   |                        |   |                         |      |      |                |  |   | 72,000                 |   |                         |   |         |                |      |   |                        |   | 68,620                  |   |  |   |         |  |      |  
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|TOTAL ASSETS                                              |  | $                       | 2,179,208 |   |                        |   |                         |      |      |                |  | $ | 2,016,230              |   |                         |   |         |                |      |   |                        | $ | 1,856,077               |   |  |   |         |  |      |  
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Interest Bearing Liabilities                              |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Money Market, Sweep & NOW accounts                        |  | $                       | 249,789   |   |                        | $ | 1,707                   |      | 0.68 | %              |  | $ | 269,531                |   |                         | $ | 2,611   |                | 0.97 | % |                        | $ | 280,100                 |   |  | $ | 4,352   |  | 1.55 | %
|Savings accounts                                          |  |                         | 649,678   |   |                        |   | 9,246                   |      | 1.42 | %              |  |   | 579,430                |   |                         |   | 10,590  |                | 1.83 | % |                        |   | 374,004                 |   |  |   | 9,790   |  | 2.62 | %
|Other time deposits                                       |  |                         | 539,784   |   |                        |   | 15,465                  |      | 2.87 | %              |  |   | 519,841                |   |                         |   | 16,706  |                | 3.21 | % |                        |   | 616,464                 |   |  |   | 24,328  |  | 3.95 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Total interest bearing deposits                           |  |                         | 1,439,251 |   |                        |   | 26,418                  |      | 1.84 | %              |  |   | 1,368,802              |   |                         |   | 29,907  |                | 2.18 | % |                        |   | 1,270,568               |   |  |   | 38,470  |  | 3.03 | %
|Short-term borrowings                                     |  |                         | 15,400    |   |                        |   | 156                     |      | 1.01 | %              |  |   | 17,828                 |   |                         |   | 159     |                | 0.89 | % |                        |   | 11,024                  |   |  |   | 132     |  | 1.20 | %
|FHLB borrowings                                           |  |                         | 180,860   |   |                        |   | 8,365                   |      | 4.63 | %              |  |   | 156,427                |   |                         |   | 7,763   |                | 4.96 | % |                        |   | 133,320                 |   |  |   | 6,979   |  | 5.23 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Total interest bearing liabilities/total interest expense |  |                         | 1,635,511 |   |                        |   | 34,939                  |      | 2.14 | %              |  |   | 1,543,057              |   |                         |   | 37,829  |                | 2.45 | % |                        |   | 1,414,912               |   |  |   | 45,581  |  | 3.22 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|Noninterest bearing deposits                              |  |                         | 298,711   |   |                        |   |                         |      |      |                |  |   | 255,455                |   |                         |   |         |                |      |   |                        |   | 232,715                 |   |  |   |         |  |      |  
|Other liabilities                                         |  |                         | 10,443    |   |                        |   |                         |      |      |                |  |   | 11,799                 |   |                         |   |         |                |      |   |                        |   | 12,315                  |   |  |   |         |  |      |  
|Shareowners equity                                       |  |                         | 234,543   |   |                        |   |                         |      |      |                |  |   | 205,919                |   |                         |   |         |                |      |   |                        |   | 196,135                 |   |  |   |         |  |      |  
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|TOTAL LIABILITIES AND CAPITAL                             |  | $                       | 2,179,208 |   |                        |   |                         |      |      |                |  | $ | 2,016,230              |   |                         |   |         |                |      |   |                        | $ | 1,856,077               |   |  |   |         |  |      |  
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|NET INTEREST INCOME                                       |  |                         |           |   |                        | $ | 106,078                 |      |      |                |  |   |                        |   |                         | $ | 98,322  |                |      |   |                        |   |                         |   |  | $ | 94,365  |  |      |  
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  
|NET YIELD ON INTEREST EARNING ASSETS                      |  |                         |           |   |                        |   |                         |      | 5.14 | %              |  |   |                        |   |                         |   |         |                | 5.16 | % |                        |   |                         |   |  |   |         |  | 5.38 | %
|                                                          |  |                         |           |   |                        |   |                         |      |      |                |  |   |                        |   |                         |   |         |                |      |   |                        |   |                         |   |  |   |         |  |      |  



|(1) | Includes amounts to convert nontaxable amounts to a fully taxable equivalent basis at a 35% tax rate.
|--- | -----------------------------------------------------------------------------------------------------



|(2) | Includes nonaccruing loans.
|--- | ---------------------------



-42-



---

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

Managements Discussion and Analysis of Financial Condition and Results of Operations  Continued



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



|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|---------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------ | -- | ------ | ------------------------------------ |  | -- | ------------- | - |  | ----------- | ------ | - | ----------------------- | -- | ------- | ------------- |  | - | ----------- | - |  | ----------------------- | ------- | - |  | -- | ------- | - |  | -- | ------- | -
|                                   |  | Year ended December 31,              |       
|                                   |  | 2004 versus 2003                     |        |   | 2003 versus 2002                     |    |        | 2002 versus 2001                     | 
|                                   |  | Increase (Decrease) Due to Change in |        |   | Increase (Decrease) Due to Change in |    |        | Increase (Decrease) Due to Change in | 
|In Thousands                       |  | AverageVolume                        |        |   | AverageRate                          |    |        | TotalIncrease(Decrease)              |  |    | AverageVolume |   |  | AverageRate |        |   | TotalIncrease(Decrease) |    |         | AverageVolume |  |   | AverageRate |   |  | TotalIncrease(Decrease) |        
|INTEREST INCOME                    |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|Taxable investments                |  | $                                    | 659    |   |                                      | ($ | 1,293  | )                                    |  | ($ | 634           | ) |  | $           | 2,043  |   |                         | ($ | 808     | )             |  | $ | 1,235       |   |  | $                       | 603     |   |  | ($ | 823     | ) |  | ($ | 220     | )
|Nontaxable investments             |  |                                      | (837   | ) |                                      |    | (36    | )                                    |  |    | (873          | ) |  |             | (269   | ) |                         |    | (9      | )             |  |   | (278        | ) |  |                         | (204    | ) |  |    | (8      | ) |  |    | (212    | )
|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|Total                              |  |                                      | (178   | ) |                                      |    | (1,329 | )                                    |  |    | (1,507        | ) |  |             | 1,774  |   |                         |    | (817    | )             |  |   | 957         |   |  |                         | 399     |   |  |    | (831    | ) |  |    | (432    | )
|Federal funds sold                 |  |                                      | (412   | ) |                                      |    | 24     |                                      |  |    | (388          | ) |  |             | 463    |   |                         |    | (294    | )             |  |   | 169         |   |  |                         | (2,635  | ) |  |    | (621    | ) |  |    | (3,256  | )
|Loans                              |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|Installment                        |  |                                      | 119    |   |                                      |    | (225   | )                                    |  |    | (106          | ) |  |             | (267   | ) |                         |    | (216    | )             |  |   | (483        | ) |  |                         | (428    | ) |  |    | (227    | ) |  |    | (655    | )
|Commercial                         |  |                                      | 796    |   |                                      |    | (1,318 | )                                    |  |    | (522          | ) |  |             | (1,373 | ) |                         |    | (2,125  | )             |  |   | (3,498      | ) |  |                         | (2,485  | ) |  |    | (2,774  | ) |  |    | (5,259  | )
|Real estate                        |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|Commercial                         |  |                                      | 5,155  |   |                                      |    | (4,437 | )                                    |  |    | 718           |   |  |             | 3,535  |   |                         |    | (6,264  | )             |  |   | (2,729      | ) |  |                         | 7,045   |   |  |    | (4,848  | ) |  |    | 2,197   |  
|Construction                       |  |                                      | 7,198  |   |                                      |    | (1,390 | )                                    |  |    | 5,808         |   |  |             | 4,817  |   |                         |    | (2,981  | )             |  |   | 1,836       |   |  |                         | 3,938   |   |  |    | (4,534  | ) |  |    | (596    | )
|Residential                        |  |                                      | 1,760  |   |                                      |    | (897   | )                                    |  |    | 863           |   |  |             | 958    |   |                         |    | (1,005  | )             |  |   | (47         | ) |  |                         | (998    | ) |  |    | (1,359  | ) |  |    | (2,357  | )
|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|Total                              |  |                                      | 15,028 |   |                                      |    | (8,267 | )                                    |  |    | 6,761         |   |  |             | 7,670  |   |                         |    | (12,591 | )             |  |   | (4,921      | ) |  |                         | 7,072   |   |  |    | (13,742 | ) |  |    | (6,670  | )
|TOTAL INTEREST INCOME              |  |                                      | 14,438 |   |                                      |    | (9,572 | )                                    |  |    | 4,866         |   |  |             | 9,907  |   |                         |    | (13,702 | )             |  |   | (3,795      | ) |  |                         | 4,836   |   |  |    | (15,194 | ) |  |    | (10,358 | )
|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|INTEREST EXPENSE                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|Money Market, Sweep & NOW accounts |  |                                      | (188   | ) |                                      |    | (716   | )                                    |  |    | (904          | ) |  |             | (164   | ) |                         |    | (1,577  | )             |  |   | (1,741      | ) |  |                         | (70     | ) |  |    | (2,761  | ) |  |    | (2,831  | )
|Savings accounts                   |  |                                      | 1,299  |   |                                      |    | (2,643 | )                                    |  |    | (1,344        | ) |  |             | 5,377  |   |                         |    | (4,577  | )             |  |   | 800         |   |  |                         | 5,894   |   |  |    | (2,246  | ) |  |    | 3,648   |  
|Other time deposits                |  |                                      | 621    |   |                                      |    | (1,862 | )                                    |  |    | (1,241        | ) |  |             | (3,813 | ) |                         |    | (3,809  | )             |  |   | (7,622      | ) |  |                         | (10,021 | ) |  |    | (11,423 | ) |  |    | (21,444 | )
|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|Total interest bearing deposits    |  |                                      | 1,732  |   |                                      |    | (5,221 | )                                    |  |    | (3,489        | ) |  |             | 1,400  |   |                         |    | (9,963  | )             |  |   | (8,563      | ) |  |                         | (4,197  | ) |  |    | (16,430 | ) |  |    | (20,627 | )
|Short-term borrowings              |  |                                      | (22    | ) |                                      |    | 19     |                                      |  |    | (3            | ) |  |             | 81     |   |                         |    | (54     | )             |  |   | 27          |   |  |                         | (50     | ) |  |    | (227    | ) |  |    | (277    | )
|FHLB borrowing                     |  |                                      | 1,208  |   |                                      |    | (606   | )                                    |  |    | 602           |   |  |             | 1,210  |   |                         |    | (426    | )             |  |   | 784         |   |  |                         | 1,598   |   |  |    | (569    | ) |  |    | 1,029   |  
|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|TOTAL INTEREST EXPENSE             |  |                                      | 2,918  |   |                                      |    | (5,808 | )                                    |  |    | (2,890        | ) |  |             | 2,691  |   |                         |    | (10,443 | )             |  |   | (7,752      | ) |  |                         | (2,649  | ) |  |    | (17,226 | ) |  |    | (19,875 | )
|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  
|CHANGE IN NET INTEREST INCOME      |  | $                                    | 11,520 |   |                                      | ($ | 3,764  | )                                    |  | $  | 7,756         |   |  | $           | 7,216  |   |                         | ($ | 3,259   | )             |  | $ | 3,957       |   |  | $                       | 7,485   |   |  | $  | 2,032   |   |  | $  | 9,517   |  
|                                   |  |                                      |        |   |                                      |    |        |                                      |  |    |               |   |  |             |        |   |                         |    |         |               |  |   |             |   |  |                         |         |   |  |    |         |   |  |    |         |  



-43-