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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 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.

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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 NON CASH 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 three months ending March 31, 2004 are not necessarily indicative of the results that may be expected for year-end December 31, 2004.

At March 31, 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.

In Thousands

The Corporation did not grant any options in the quarters ending March 31, 2004 and 2003. As of March 31, 2004 there were outstanding options to purchase 440,770 shares under the plan, representing 2.4% 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 March 31, 2004:

AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS

(In thousands)

MATURITY SCHEDULE OF SECURITIES

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – (Continued)

We currently hold two securities in our portfolio that have had an unrealized loss for more than one year.

The first is a Washington State 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 1^st of any year. The bond is AAA rated, all coupon payments have been made and we do not anticipate the State of Washington 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.

CHANGES IN AFS AND HTM SECURITIES

NOTE 3. LOANS

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

In Thousands

NOTE 4. Please see Item 5, page 22 for dividend information.

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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 first quarter of 2004 was $10.1 million versus $9.7 million for the first quarter of 2003, or up 4.9%. Net interest income increased $1.0 million, or 4.1%; noninterest income increased $126 thousand, or 4.1% and the provision for loan losses was down $350 thousand, or 41.2% from a year ago. Earnings per diluted share were $.54 in the current quarter as compared to $.52 in the first quarter of 2003. The largest contributing factor was the increase in net interest income. In the discussion below, comparison is with the first quarter of 2004 and 2003, unless otherwise stated.

The annualized return on average assets (ROA) was 1.93% in 2004 as compared to 1.98% in 2003. Annualized return on average shareowners’ equity (ROE) in 2004 was 18.21%, as compared to 19.48% in 2003.

FINANCIAL REVIEW

MARKET AREA

Frontier Financial Corporation, headquartered in Everett, Washington, is the parent of Frontier Bank, which operates thirty-nine 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 80% 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 – March 31, 2004/December 31, 2003

Loan growth for the first quarter of 2004 was $56.7 million, or 3.2%. Investment securities for the same time period decreased $12.0 million, or 6.4%. Federal funds sold increased $38.0 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 $56.1 million, or 3.2% to a balance of $1.80 billion at March 31, 2004 compared to $1.74 billion at December 31, 2003. In the first quarter 2004 new loan originations were $268.4 million as compared to $188.8 million for the first quarter 2003. This is the third consecutive quarter of loan growth in excess of $50 million. The strong growth in the first quarter was attributable to the Seattle Office which opened in the first quarter and the Real Estate Division.

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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 March 31, 2004, 15.1% of our loan portfolio was in commercial loans, 44.6% was in real estate commercial, 29.4% was in real estate construction, 8.6% was in residential, and 2.3% installment.

On the liability side of the balance sheet, noninterest bearing deposits increased $9.4 million, or 3.5% and interest bearing deposits increased $43.5 million, or 3.1%. NOW, Money Market, and sweep accounts increased $9.1 million, or 3.6%; savings accounts increased $26.1 million, or 4.2%; and Time Deposits, (cd’s) increased $8.3 million, or 1.6%. 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. Additionally, there was one new business savings account for $10.0 million opened during the quarter.

BALANCE SHEET – March 31, 2004/March 31, 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:

(In Thousands)

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 March 31, 2004, loans were up $173.8 million, or 10.5% 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 addition of staff in our new Seattle Office and Real Estate Division. Investments increased $38.7 million, or 28.2% for the period and federal funds sold decreased $60.8 million, or 61.5%. 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, which is the lowest yielding of all interest earning assets.

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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 $39.6 million, or 16.4% to $280.8 million. The number of noninterest bearing accounts increased 801 over the past year, or 2.8%. This increase could be due to the earnings credit on their account or anticipation of tax payments due in April. Interest bearing deposits increased $61.7 million, or 4.5%, with most all of the increase attributable to growth in premium savings accounts.

At March 31, 2004, NOW, Money Market and Sweep accounts made up 18% of total interest bearing deposits. At March 31, 2003 those deposits made up 21%. In 2004, savings deposits made up 45% of total interest bearing deposits versus 40% in 2003 and time deposits made up 37% in 2004 versus 39% in 2003.

Over the last year, NOW, Money Market and Sweep deposits decreased $33.0 million, or 11.2%; savings deposits increased $106.5 million, or 19.5%; and time deposits decreased $11.8 million or 2.2%. 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 $94.3 million, or 19.1% over the last year to $588.0 million.

FHLB borrowings increased $20.0 million, or 12.5% over the year. The reason for these advances was to take advantage of the lower rates available. FHLB advance totals have remained relatively constant over the past year and have not yet been called. This is because these advances have interest rates favorable to the FHLB.

Capital has increased $30.6 million over the past year, or 15.5%. In accordance with previously approved capital management plans, 346,800 shares were purchased in the first quarter of 2003, representing $8.8 million, and 15,000 shares in the 2^nd quarter 2003, representing $371 thousand. There have been no stock purchases since the 2^nd 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:

In Thousands

FOR THE QUARTER

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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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 thousands)

In the first three months of 2004, average total earning assets as a percent of average total assets were 94.7% and 94.4% in 2003. This ratio indicates how efficiently assets are being utilized. Average loans were 85.7% and 85.2% of average assets, respectively and investments were 8.5% and 7.0%, for the same periods. Average federal funds sold were .49% and 2.1% over the period. Average total loan-to-deposits ratios were 107.9% and 105.9%. Not shown in the table are the components of interest bearing deposits. For the period ending March 31, 2004 average NOW, Sweep and Money Market accounts were 17.0% of total interest bearing liabilities (“IBL”); savings accounts were 45.5% of total IBL and time certificates were 37.5% of total IBL. Average borrowings were 10.8% of total IBL. Tax equivalent net interest income increased $3.6 million, or 3.7% on a year-to-date comparison.

Earning Assets

Using a 365-day base, the TE yield on total earning assets decreased 78 basis points in the first quarter of 2004 to 6.78% compared to 7.56% in 2003. The drop is due to loan payoffs and/or loans originated or refinanced at a lower rate. Also, recent additions to the investment portfolio are 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 61 basis points from 2.76% in 2003 to 2.15% in 2004. This decline is substantial, but indicates that asset yields are declining faster than the cost of liabilities. The TE Net Interest Margin (“NIM”) for the quarter was 5.02% in 2004 as compared to 5.23% at the end of the first quarter 2003. Management is concerned that the NIM continues to drop and will continue to attempt to address this matter by focusing on our cost of funds. However, our current NIM is considered to be very good relative to our peer commercial banks in the $1-10 billion range.

On a quarterly TE basis, net interest income was $25.0 million in 2004, versus $24.1 million in 2003, for an increase in net interest income of $.9 million. This increase was the result of total interest income decreasing $.8 million, and total interest expense decreasing $1.7 million. The increase of $149.5 million in the average balance of earning assets increased interest income by $3.1 million and a decrease in interest rates decreased interest income by $3.9 million, for a net decrease of $.8 million.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Earning Assets (continued)

The annualized yield on total loans decreased from 7.84% in 2003 to 7.02% in 2004. Commercial loans decreased from 7.20% to 6.44%; real estate commercial loans decreased in yield from 7.82% to 6.80%; real estate construction loans decreased in yield from 8.02% to 7.52%; real estate residential loans decreased from 8.32% to 7.24%; and installment loans decreased from 8.73% to 8.15%.

The yield on investments decreased from 6.08% in 2003 to 4.62% in 2004 and the yield on federal funds sold decreased from 1.17% in 2003 to .90% in 2004.

Interest Bearing Liabilities

The increase in the average balance of interest bearing deposits of $69.0 million increased interest expense by $.4 million, and the rate paid on interest bearing deposits decreased interest expense by $2.2 million, for a net decrease of $1.8 million.

The increase in the average balance of other borrowings of $28.1 million increased interest expense by $186 thousand and the rates paid on these borrowings decreased interest expense by $27 thousand, for a net increase of $159 thousand.

The cost of NOW, Money Market and Sweep accounts decreased from 1.26% in 2003, to .63% in 2004. Savings account costs were 2.24% in 2003, and 1.50% in 2004. Time cd’s decreased in cost from 3.41% in 2003 to 2.82% in 2004. Short-term borrowings increased from .82% to .92%, and FHLB borrowings decreased from 4.89% in 2003 to 4.77% in 2004.

NONINTEREST INCOME AND EXPENSE – March 31, 2004/March 31, 2003

Total noninterest income increased $126 thousand in the first quarter of 2004, or 4.1% from a year ago. The gain on security sales in 2003 was due to a tender offer by the issuer. Service charges increased $204 thousand to $1.3 million, or 19.2%. The increase in service charges was due to increased business service charges of $142 thousand and increased NSF/OD fees of $60 thousand. Other noninterest income increased $13 thousand or .7% in the current quarter. Although the “other” component of other income was up only $13 thousand, or .7% during the current quarter, our Trust Department’s revenues were up $79 thousand and Insurance and Financial Services Department’s revenues were up by $144 thousand to $364 thousand from $220 thousand at March 31, 2003. Offsetting these increases was a decline in broker loan income of $49 thousand reflecting a slow down in secondary market operations. In the first quarter of 2003 there was a gain on the sale of OREO in the amount of $68 thousand. Mortgages sold with servicing released fees totals $218 thousand for 2004, down from $529 thousand in 2003, or 58.8%.

The market value of trust assets at quarter-end March 2004 was $276.0 million, as compared to $237.3 million in 2003, an increase of $38.7 million, or 16.3%. Trust department revenue for the first quarter of 2004 was $382 thousand, up $78 thousand, or 25.8%. Trust assets are not included in the Corporation’s consolidated balance sheet.

Total noninterest expenses increased $1.1 million or 9.5% for the period. Salaries and benefits increased $.8 million or 11.3%. During the past year, the number of employees increased by 7.6%, and the 3.7% represents merit raises and bonuses. There were 626 FTE employees at March 31, 2004.

Occupancy expense increased $218 thousand, or 13.5%. Depreciation expense was 32% of occupancy expense for 2004 and 37% for 2003.

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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)

Other noninterest expense increased $57 thousand, or 2.2%. Within this category, foreclosure expense was down $89 thousand to a net recovery of $15 thousand, and there was a loss on OREO during the current quarter of $54 thousand.

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 first quarter was 43% for 2004 and 41% 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:

(In thousands)

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 $1.7 million to $10.5 million as of March 31, 2004. As of quarter end this balance included 28 loans ranging in size from $4.9 million to nominal amounts. Efforts are continuing to collect these loans with many involving some measure of legal action. Ninety-four 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.

Subsequent to quarter end, a nonaccruing loan in the amount of $1.2 million was purchased by a third party at a foreclosure sale. Had this transaction taken place prior to quarter end, the total nonperforming assets would have been $9.5 million or .44% of total assets.

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 two properties totaling $222 thousand representing .01% of total assets. 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 six OREO properties have been sold and closed. The remaining properties are 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: