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

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

OR

For the transition period from ______ to ______

Commission File Number 000-15540

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

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

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

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)    |X| Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying notes are an integral part of these financial statements.
(Continued on next page)

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

SUPPLEMENTAL INFORMATION ABOUT NONCASH INVESTING AND FINANCING ACTIVITIES

Other real estate acquired in settlement of loans in 2004 and 2003 were $10 thousand and $869 thousand, respectively.

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. PRINCIPLES OF CONSOLIDATION — RESULTS OF OPERATIONS

The consolidated financial statements of Frontier Financial Corporation (“FFC or Corporation”) include the accounts of Frontier Financial Corporation and its subsidiaries Frontier Bank (the “Bank”) and FFP, Inc. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements have been prepared substantially consistent with the accounting principles applied in the 2003 Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of management, the consolidated financial statements reflect all adjustments necessary for a fair statement of the results for the interim periods presented. Operating results for the six months ending June 30, 2004 are not necessarily indicative of the results that may be expected for year-end December 31, 2004.

At June 30, 2004, the Corporation has a stock-based employee compensation plan. The Corporation accounts for the plan under recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock based employee compensation costs are 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. 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.

The Corporation did not grant any options in the quarters ending June 30, 2004 and 2003. As of June 30, 2004 there were outstanding options to purchase 423,102 shares under the plan, representing 2.3% of total shares outstanding.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. INVESTMENT SECURITIES

The investment portfolio of the Corporation is classified in one of two groups: 1) securities Held-to-Maturity (HTM), and 2) securities Available-For-Sale (AFS). Securities that are classified as HTM, are carried at cost, adjusted for amortization of premiums and accretion of discounts which are recognized as adjustments to income.

Securities that are classified as AFS, are carried at fair value. Unrealized gains and losses are excluded from earnings and reported as a separate component of equity capital. AFS securities may be sold at any time.

Gains and losses on both HTM and AFS securities that are disposed of prior to maturity, are based on the net proceeds and the adjusted carrying amount of the specific security sold.

The tables below display the characteristics of the AFS and HTM portfolios as of June 30, 2004:

AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS

MATURITY SCHEDULE OF SECURITIES

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — (Continued)

We currently hold four securities in our available-for-sale portfolio that have had an unrealized loss for more than one year.

The first is a Housing Finance Commission municipal bond with a book value of $45 thousand. The reason for the sub-par performance of this bond is mainly due to the underlying collateral, which is housing. This collateral will cause the bond to act like a CMO in that the prepayment speed of the underlying mortgages could increase, causing the bond to be paid off sooner than originally anticipated. The State has the right to fully redeem this bond on July 1st of any year. The bond is AAA rated, all coupon payments have been made and we do not anticipate the municipality to default paying the principal at maturity. Therefore, we do not consider any portion of this bond to be other-than-temporarily impaired, and we have the ability and intent to hold the bond until maturity.

The second security is 5,000 shares of Federal Home Loan Mortgage Corporation (Freddie Mac) preferred stock, DRD, with a book value of $250 thousand. This situation is not related to credit deterioration, but changes in interest rates. If rates were to move downward in the future, the market value would rise accordingly. The stock is rated AA- and all dividend payments have been made. We do have the ability and intent to hold the investment for a period of time sufficient for a market price recovery. Therefore we do not consider any portion of this investment to be other-than-temporarily impaired.

The third and fourth securities are corporate bonds. These two securities have a par value of $1.0 million each, and a combined book value of $2.1 million. Both bonds are investment grade securities and have 2008 maturity. One of these bonds carries a 3.25% coupon, which has been below market rate for some time. The other bond has a 6.50% coupon which has a par-to-market value of a profit. However, a premium was paid at the time the bond was purchased, so the book value exceeds the market value. Therefore, we do not consider any portion of these securities to be other than temporarily impaired and we do have the ability and intent to hold these securities until maturity.

CHANGES IN AFS AND HTM SECURITIES

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LOANS

          The following is an analysis of the loan portfolio by major type of loans:

NOTE 4. Please see Item 5, page 24 for dividend information.

NOTE 5. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

None

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS

HIGHLIGHTS

Consolidated net income of Frontier Financial Corporation (the “Corporation”), for the second quarter of 2004 was $10.5 million versus $10.1 million for the second quarter of 2003, or up 3.0%. Net interest income increased $1.4 million, or 5.9%; noninterest income increased $293 thousand, or 9.0% and the provision for loan losses increased $100 thousand, or 11.1% from a year ago. Earnings per diluted share were $.56 in the current quarter as compared to $.55 in the second quarter of 2003. The largest contributing factor was the increase in net interest income. In the discussion below, comparison is with the second quarter of 2004 and 2003, unless otherwise stated.

The annualized return on average assets (ROA) was 1.94% in 2004 as compared to 2.03% in 2003. Annualized return on average shareowners’ equity (ROE) in 2004 was 18.14%, as compared to 20.18% in 2003.

FINANCIAL REVIEW

MARKET AREA

Frontier Financial Corporation, headquartered in Everett, Washington, is the parent of Frontier Bank, which operates thirty-eight banking offices in Clallam, Jefferson, King, Kitsap, Pierce, Snohomish, Skagit and Whatcom counties. These eight counties are considered the market or service area of the Corporation and comprise the area referred to as the Puget Sound Region. The Puget Sound Region is home to approximately 60% of the population of Washington State. Its economy has become more diversified over the past years with company headquarters for Amazon, Costco, Starbucks, Weyerhauser and Microsoft located in the region.

BALANCE SHEET — June 30, 2004/December 31, 2003

Loan growth for the first two quarters of 2004 was $114.3 million, or 6.5%. Investment securities for the same time period decreased $24.3 million, or 12.9%. Federal funds sold increased $29.5 million. The shift in the asset mix was due to strong loan growth and calls on securities due to continued low interest rates.

Loans, net of unearned income and allowance for loan losses, increased $112.8 million, or 6.5% to a balance of $1.85 billion at June 30, 2004 compared to $1.74 billion at December 31, 2003. For the first six months of 2004 new loan originations were $637.2 million as compared to $444.1 million for the same period 2003. This is the fourth consecutive quarter of loan growth in excess of $50 million. The growth in the second quarter was attributable to the continued strong real estate demand in the Puget Sound region along with the additional lending staff in the last three quarters.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Balance Sheet - (Continued)

The Bank’s loan mix has remained relatively unchanged in the principal areas of lending which include: installment, commercial, real estate commercial, real estate construction, and residential. At June 30, 2004, 15.6% of our loan portfolio was in commercial loans, 44.3% was in real estate commercial, 29.1% was in real estate construction, 8.6% was in residential, and 2.4% installment.

On the liability side of the balance sheet, noninterest bearing deposits increased $32.0 million, or 11.8% and interest bearing deposits increased $64.1 million, or 4.6%. NOW, Money Market, and sweep accounts increased $17.6 million, or 7.0%; savings accounts increased $41.8 million, or 6.7%; and Time Deposits, (cd’s) increased $4.7 million, or .9%. The reason for the increase in savings accounts is growth in the Corporation’s “premium” savings account whose rate is higher than that of short-term cd’s or other transaction accounts.

BALANCE SHEET — June 30, 2004/June 30, 2003

Below are abbreviated balance sheets at the end of the respective quarters which indicates the changes that have occurred in our major portfolios over the past year:

Loans, investments, and federal funds sold are the components of earning assets. One of the challenges of management is to allocate liquidity from the liability side of the balance sheet to those earning assets which maximize yield in concert with the degree of risk.

At June 30, 2004, loans were up $219.2 million, or 13.2% over the previous year. The increase in loans over the previous year’s corresponding quarter was due, for the most part, to continued emphasis on loan growth and the strong real estate demand in the Puget Sound region. Investments increased $22.6 million, or 16.1% for the period and federal funds sold decreased $84.4 million, or 74.1%. Investments were primarily purchased in the third quarter of 2003 after two quarters of slow loan growth. This shift in the asset mix enabled us to partially mitigate the continued decline in the yield of assets, by reducing federal funds sold, and increasing loans and investments.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Balance Sheet - (Continued)

Noninterest bearing deposits increased $53.2 million, or 21.3% to $303.4 million. The number of noninterest bearing accounts increased 803 over the past year, or 2.8%. This increase could be due to the earnings credit on deposit accounts. Interest bearing deposits increased $33.9 million, or 2.4%, with most of the increase attributable to growth in premium savings accounts.

At June 30, 2004, NOW, Money Market and Sweep accounts made up 18% of total interest bearing deposits. At June 30, 2003 those deposits made up 22%. In 2004, savings deposits made up 46% of total interest bearing deposits versus 41% in 2003 and time deposits made up 36% in 2004 versus 37% in 2003.

Over the last year, NOW, Money Market and Sweep deposits decreased $38.3 million, or 12.5%; savings deposits increased $78.8 million, or 13.4%; and time deposits decreased $6.7 million or 1.3%. The reason for the significant change in the mix over the last year was due mainly to maturing certificates of deposits moving into premium savings accounts. Premium savings accounts increased $65.9 million, or 12.4% over the last year to $598.6 million.

FHLB borrowings increased $25.0 million, or 16.1% over the year. The reason for these advances was to take advantage of the lower rates available.

Capital has increased $27.3 million over the past year, or 13.3%. There have been no stock repurchases since the 2nd quarter of 2003.

NET INTEREST INCOME

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

The earnings from certain assets are exempt from federal income tax, and it is customary in the financial services industry to analyze changes in net interest income on a “tax equivalent” (“TE”) or fully taxable basis. Under this method, nontaxable income from loans and investments is adjusted to an amount which would have been earned if such income were subject to federal income tax. The discussion below presents an analysis based on TE amounts at a 35% tax rate. (However, there are no tax equivalent additions to interest expense or noninterest income and expense amounts discussed on the next page.)

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Net Interest Income

Determination of Tax Equivalent Amounts:

TE is a non-GAAP performance measurement used by management in operating the business, which management believes that it provides financial statement users with a more accurate picture of the net interest margin for comparative purposes.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Net Interest Income

Abbreviated quarterly average balance sheets and net interest income data for the periods are shown below:

In the second quarter of 2004, average total earning assets as a percent of average total assets were 94.7% and 94.5% in 2003. This ratio indicates how efficiently assets are being utilized. Average loans were 86.1% and 83.5% of average assets, respectively and investments were 7.6% and 6.6%, for the same periods. Average federal funds sold were 1.0% and 4.4% over the period. Average total loan-to-deposits ratios were 107.5% and 103.3%. Not shown in the table are the components of interest bearing deposits. For the period ending June 30, 2004 average NOW, Sweep and Money Market accounts were 17.3% of total interest bearing liabilities (“IBL”); savings accounts were 46.1% of total IBL and time certificates were 36.6% of total IBL. Average borrowings were 11.7% of total IBL. Tax equivalent net interest income increased $4.5 million, or 4.6% on a year-to-date comparison.

Earning Assets

Using a 365-day base, the TE yield on total earning assets decreased 56 basis points in the second quarter of 2004 to 6.70% compared to 7.26% in 2003. The drop is due to high rate loan payoffs and/or loans originated or refinanced at a lower rate. Also additions to the investment portfolio were at much lower rates than before, and municipal bond calls have reduced that portion of the portfolio by approximately 50%. Most of the bonds that were called had a TE yield of 8.0% plus. The cost of total interest bearing liabilities decreased 50 basis points from 2.55% in 2003 to 2.05% in 2004. While asset yields continue to decline faster than the cost of funds, the spread is narrowing rapidly. For example, in the first quarter of 2004 and 2003, the decline in asset yield and cost of funds was 78 and 61 basis points, respectively. Additionally the net interest margin was 5.02% in the first quarter of 2004 as compared to 5.05% in the current quarter. This increase in the net interest income in the current quarter is attributable to the increased volume of loans. Our current net interest margin is considered to be very good relative to our peer commercial banks in the $1-10 billion range.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Earning Assets (continued)

On a quarterly TE basis, net interest income was $25.8 million in 2004, versus $24.4 million in 2003, for an increase in net interest income of $1.3 million, or 5.5%. This increase was the result of total interest income decreasing $.2 million, and total interest expense decreasing $1.5 million. The increase of $152.7 million in the average balance of earning assets increased interest income by $3.7 million and a decrease in interest rates decreased interest income by $3.9 million, for a net decrease of $.2 million.

The annualized yield on total loans decreased from 7.71% in 2003 to 6.97% in 2004. Commercial loans decreased from 7.11% to 6.34%; real estate commercial loans decreased in yield from 7.60% to 6.76%; real estate construction loans decreased in yield from 8.01% to 7.56%; real estate residential loans decreased from 8.02% to 6.82%; and installment loans decreased from 9.39% to 8.27%.

The yield on investments decreased from 5.60% in 2003 to 4.49% in 2004 and the yield on federal funds sold decreased from 1.15% in 2003 to .94% in 2004.

Interest Bearing Liabilities

The increase in the average balance of interest bearing deposits of $65.4 million increased interest expense by $.4 million, and the rate paid on interest bearing deposits decreased interest expense by $2.0 million, for a net decrease of $1.6 million.

The increase in the average balance of other borrowings (federal funds purchased and securities sold under repurchase agreements plus Federal Home Loan Bank advances) of $20.3 million increased interest expense by $247 thousand and the rates paid on these borrowings decreased interest expense by $127 thousand, for a net increase of $120 thousand.

The cost of NOW, Money Market and Sweep accounts decreased from 1.08% in 2003, to .58% in 2004. Savings account costs were 1.97% in 2003, and 1.35% in 2004. Time cd’s decreased in cost from 3.26% in 2003 to 2.78% in 2004. Short-term borrowings decreased from .79% to .59%, and FHLB borrowings decreased from 4.90% in 2003 to 4.64% in 2004.

NONINTEREST INCOME AND EXPENSE — June 30, 2004/June 30, 2003

Total noninterest income increased $293 thousand in the second quarter of 2004, or 9.0% from a year ago. The gain on security sales in 2004 was due to a premium call on a bond. Service charges increased $144 thousand to $1.3 million, or 12.8%. The increase in service charges was due to increased business service charges of $93 thousand and increased NSF/OD fees of $51 thousand. Other noninterest income increased $132 thousand or 6.2% in the current quarter. Our Trust Department’s revenues were up $46 thousand and Insurance and Financial Services Department’s revenues were up by $314 thousand. Offsetting these increases was a decline in mortgage servicing release fees of $317 thousand reflecting a slow down in secondary market operations.

The market value of trust assets at quarter-end June 2004 was $282.8 million, as compared to $247.0 million in 2003, an increase of $35.8 million, or 14.5%. Trust assets are not included in the Corporation’s consolidated balance sheet.

Total noninterest expenses increased $.9 million or 8.1% for the period. Salaries and benefits increased $847 thousand or 12.4%. During the past year, the number of employees increased by 7.3%, and the remainder represents merit raises and incentive pay. There were 636 FTE employees at June 30, 2004.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Noninterest income and expenses (continued)

Occupancy expense increased $209 thousand, or 13.3%. Depreciation expense was 33% of occupancy expense for 2004 and 37% for 2003. The increase of $209 thousand was due mainly to the upgrade of our infrastructure. Other noninterest expense decreased $142 thousand, or 4.9%. This decline is due to a timing difference in local taxes of $48 thousand and a decrease in losses of $53 thousand when compared to a year ago.

Banks and bank holding companies use a computation called the “efficiency ratio” to measure overhead. This ratio is then compared to others in the industry. The ratio is calculated by dividing total noninterest expense, less intangible amortization expense, certain losses and other nonrecurring charges, by the sum of net interest income on a taxable equivalent basis, and other noninterest income, less the same type of non-recurring items. The lower the number, the more efficient the organization. The Corporation’s efficiency ratio for the second quarter was 41% for 2004 and 40% for 2003. The Corporation’s ratio places it among the performance leaders in the industry.

ASSET QUALITY

The Corporation manages its credit risk through diversification of its loan portfolio and the application of prudent underwriting policies, procedures, and monitoring practices. Delinquent and problem loans, however, are a part of any lending enterprise. When a borrower fails to make payments, the Corporation implements procedures with an organized practical approach to collection of delinquent loans.

IMPAIRED ASSETS

Loans are considered impaired, based on current information and events when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments.

The assessment of impairment occurs when and while such loans are on nonaccrual, or the loan has been restructured. When a loan with unique characteristics has been identified as being impaired, the Corporation will measure the amount of the impairment. If the measurement is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. In cases where a borrower experiences financial difficulties and the Corporation makes certain concessionary modifications to the contractual terms, the loan is classified as a restructured accruing loan. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified may be excluded from the impairment assessment and may cease to be considered impaired.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Impaired Assets (continued)

Nonperforming loans and impaired assets are summarized as follows:

For nonaccrual loans, it is the Corporation’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 and some loans will remain in nonaccrual even after improved performance until a consistent timely payment pattern is exhibited and/or timely performance is considered to be reliable.

The table above reflects nonaccrual loans increased by $10.6 million to $15.7 million as of June 30, 2004. As of quarter end this balance included 17 loans ranging in size from $6.0 million to nominal amounts. Efforts are continuing to collect these loans with many involving some measure of legal action. Ninety-nine percent of these loans are real estate secured and, while there is always some risk of loss present, management feels it is not substantial as a proportion of the overall portfolio.

Other real estate owned (OREO) is carried at the lesser of book value or market value less selling costs. 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 expense.

OTHER REAL ESTATE OWNED

OREO ended the quarter with a portfolio of one property totaling $69 thousand. The significant decrease over the previous year’s OREO balance reflects the transition of troubled assets through an orderly collection process. Since December 31, 2003 seven OREO properties have been sold and closed. The remaining property is being actively managed for timely sale.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Other Real Estate Owned (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. Management views this as an ordinary part of the collection process and efforts are maintained to reduce and minimize such non-performing assets.

CREDIT CONCENTRATIONS

The table below indicates the changes to the loan portfolio mix as of the dates indicated, net of deferred loan fees:

As shown in the table above the Corporation emphasizes commercial and commercial real estate related lending. The commercial real estate portfolio generally 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 3 to 10 years and original loan to value ratios generally from 65% to 75%. A substantial number of these properties are owner occupied. While we have had significant balances within this lending category, we believe that our lending policies and underwriting standards are sufficient to minimize risk even during these uncertain economic times. To date, our lending activities have avoided those real estate sectors that have been most impacted by the current economic slump. We devote considerable time and attention to the risks associated with the loan portfolio and continually monitor the effects of current and expected market conditions, and other factors that may influence the repayment of these loans.

At June 30, 2004 and 2003, we had a small amount of foreign loans and no loans related to highly leveraged transactions.

ALLOWANCE FOR POSSIBLE LOAN LOSSES — QUALITATIVE FACTORS

For the six months ending June 30, 2004, the reserve for possible loan loss balance totaled $31.1 million, or 1.65% of total loans, as compared to $29.6 million, or 1.67% of total loans at year-end 2003. Year-to-date net loan losses were a net recovery of $43 thousand.

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Allowance for Possible Loan Losses (continued)

Taken into consideration when the analysis is performed is the national and local economic trends and conditions. The analysis also takes into consideration the level of, or trends in, delinquencies and non-accruing loans. Management monitors delinquencies monthly and reports are prepared for the Board of Directors to review. Delinquencies for commercial, personal and real estate loans are charted separately by their types and by portfolio geographic locations.

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

Conclusion of Qualitative Factors

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

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

LIQUIDITY AND INTEREST RATE RISK
LIQUIDITY

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

The statement of cash flows on pages 3 and 4 of this report provides information on the sources and uses of cash for the respective year-to-date periods ending June 30, 2004 and 2003. This discussion addresses those periods of time.

When comparing the cash flows from operating activities for the two quarters, the most prominent items are mortgage loans originated and sold. This function is dependent on the level of long-term interest rates and represents refinancing activity and as indicated, the activity in this area was approximately 40% less in 2004. The slowing of the secondary real estate market activity so far this year is expected to continue.

Cash flows from investment activities had a major change in 2004. Federal funds sold, which stood at $113.9 million in 2003, had a substantial runoff in 2004, dropping to $29.5 million. All of this runoff was absorbed by the loan portfolio which required cash flows of $114.3 million. Helping to fund loan growth also was a runoff of securities from the investment portfolio.

Financing activities for 2003 and 2004 centered in the growth of core deposits, providing $137.7 million and $91.5 million in 2003 and 2004, respectively.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Liquidity and Interest Rate Risk (continued)

Management has the ability to access many sources of liquidity, such as the sale of AFS securities, additional borrowings from the FHLB, increased participation in the Treasury department’s short-term note program, borrowings from the Federal Reserve Bank, or additional borrowings at correspondent banks. The Corporation has a policy that liquidity to total assets of 12.5% be maintained as a minimum and has done so.

INTEREST RATE RISK

Interest rate risk refers to the exposure of earnings and capital arising from changes in interest rates. Management’s objectives are to control interest rate risk and to ensure predictable and consistent growth of earnings and capital. Interest rate risk management focuses on fluctuations in net interest income identified through computer simulations to evaluate volatility under varying interest rate, spread and volume assumptions. The risk is quantified and compared against tolerance levels.

The Corporation uses 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 March 31, 2004 the model predicted that net interest income will increase if interest rates rise and decline if rates fall. This behavior is heavily influenced by loans going on and off interest rate floors. On a one-year horizon, if rates decline by 1%, net interest income would decrease by approximately .8%. If rates increase by 1%, net interest income will increase by 1.5% and 7.2% if rates increased 2%. The actual change in earnings will be dependent upon the dynamic changes that occur when rates change. Many of these changes are predictable, but the exact amount is difficult to predict and actual events may vary substantially from the simulation model results.

Management does not use interest rate risk management products such as interest rate swaps, options, hedges, or derivatives, nor does management currently have any intention to use such products in the future.

CAPITAL — June 30, 2004/December 31, 2003

Consolidated capital of the Corporation for financial statement purposes at second quarter end 2004 was $233.0 million. This amount compares to $219.4 million at December 31, 2003, an increase of $13.6 million, or 6.2%. During the second quarter of 2004 the Corporation did not repurchase shares of common stock in the open market, but paid a second quarter dividend of $3.5 million. Please see page 11, paragraph 5, for information regarding stock repurchases.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
                 Capital (continued)

The Corporation’s regulatory capital ratios were as follows:

It is the policy of the Corporation that capital be maintained above the point where, for regulatory purposes, it would continue to be classified as “well capitalized”.

Management constantly monitors the level of capital of the Corporation, considering, among other things, the present and anticipated needs of the Corporation, current market conditions, and other relevant factors, including regulatory requirements which may necessitate changes in the level of capital.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Item 3.  Quantitative and Qualitative Disclosures about Market Risk

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management considers interest rate risk to be a market risk that could have a significant effect on the financial condition of the Corporation. There have been no material changes in the reported market risks faced by the Corporation since the end of the most recent fiscal year-end that have not been included in this discussion.

ITEM 4. CONTROLS AND PROCEDURES

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Item 4.  Controls and Procedures

FORWARD-LOOKING INFORMATION

Except for historical financial information contained herein, the matters discussed in this 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 statements. The Corporation may have used these statements to describe expectations and estimates in various areas, including, but not limited to: changes in the economy of the markets in which it operates; interest rate movements; future acquisition and growth strategies; system conversions and integration activities; the impact of competitive products, services and pricing; and legislative, regulatory and accounting changes affecting the banking and financial service industry. 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. The Corporation shall not be responsible to update any such forward-looking statements.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Item 4. Submission of Matters to a Vote of Security Holders

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
PART II — OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders (continued)

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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