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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, 2005

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

(In thousands, except shares)

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

(In thousands, except for per share amounts)

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

(In thousands)

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 was $10 thousand.

Purchase of an investment through the issuance of common shares in 2005 was $1.6 million.

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 the “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 2004 Annual Report on Form 10-K for the year ended December 31, 2004. 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, 2005 are not necessarily indicative of the results that may be expected for year-end December 31, 2005.

At March 31, 2005, 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 option 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, 2005 and 2004. As of March 31, 2005 there were outstanding options to purchase 505,306 shares under the plan, representing 2.7% 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.

As of March 31, 2005, the Corporation held FHLB bonds that had a book value of $34.0 million and a market value of $33.4 million.

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 displays the characteristics of the AFS and HTM portfolios as of March 31, 2005:

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)

As of March 31, 2005 and 2004, the Bank held FHLB of Seattle stock of $14.2 million and $13.8 million, respectively. In December 2004, the FHLB of Seattle announced it would not repurchase any stock until further notice. On April 5, 2005, the FHLB of Seattle submitted a proposed business and capital plan to its regulator, the Federal Housing Finance Board. The development of a three-year plan acceptable to the Finance Board is a requirement of the written agreement the Seattle Bank signed with the Finance Board in December 2004. Implementing the three-year plan will involve significant transitional challenges and costs. The FHLB of Seattle projects very low net income over the next few years, and there is a possibility the FHLB of Seattle may report a net loss for some financial reporting periods. During the next few years while it implements the new business model, the FHLB of Seattle anticipates minimal to no dividends for its members.

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

The first involves FFCB, FNMA and FHLB bonds. The book value of these bonds is $24.7 million which have coupons ranging from 2.73% to 5.0% and a market value of $24.0 million. The three agencies, sponsored by the U.S. government, are rated AAA by both of the nationally recognized rating organizations. These bonds are medium term instruments ranging in maturities from 2006 to 2009, of which $19.0 million will mature by December 2008. In spite of the negative disclosures regarding some of these agencies over the past year, we believe that the increase in interest rates since the purchase of the bonds is responsible for their declining value. All interest payments have been made on time, and therefore, we do not consider any part of this investment to be other-than-temporarily impaired and we have the ability and intent to hold these bonds until maturity.

The next type of security is 41,600 shares of Federal Home Loan Mortgage Corporation (Freddie Mac) preferred stock, dividend received deduction (DRD), with a book value of $2.2 million and a market value of $2.0 million and 37,300 shares of Federal National Mortgage Association (FNMA) preferred stock, DRD, with a book value of $2.0 million and a market value of $1.7 million. These securities yield 5.00% to 5.79% and are callable in 2007, 2008 and 2009. They are rated Aa3/AA- by two nationally recognized rating organizations and all dividend payments have been made on time. As stated above, although financial controversies have surface in the past regarding these government sponsored agencies, we believe the main driver of depreciation in these bonds has been higher interest rates. We also hold 18,600 shares of two corporate issues with a book value of $970 thousand and a market value of $935 thousand and are investment grade. These two securities were issued by brokerage institutions which are well seasoned. Therefore we do not consider any portion of these investments to be other-than-temporarily impaired and we have the ability and intent to hold these securities until maturity.

The next type is corporate bonds. There are two securities that have a par value of $1.0 million each, and a combined book value of $2.1 million and a market 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. 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.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – (Continued)

The last type of security the Corporation holds is an equity investment in a financial services holding company with a cost of $477 thousand and a book value of $327 thousand. During the first quarter 2005, the Bank determined that the stock was impaired and made a provision of $152 thousand on this investment and is considered to be other-than-temporary.

CHANGES IN AFS AND HTM SECURITIES

(In thousands)

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 27 for dividend information.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued a replacement of Statement No. 123, Accounting for Stock-Based Compensation and supercedes 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 next fiscal year-end. The Corporation is in the process of evaluating the impact of FAS 123R. See Note 1 for proforma disclosures as required by FAS 123.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

HIGHLIGHTS

Consolidated net income of Frontier Financial Corporation (the “Corporation”), for the first quarter of 2005 was $10.9 million versus $10.1 million for the first quarter of 2004, or up 7.6%. Net interest income increased $3.0 million, or 12.1%; noninterest income decreased $38 thousand, or 1.2% and the provision for loan losses increased $350 thousand, or 70.0% from a year ago. Earnings per diluted share were $.58 in the current quarter as compared to $.54 in the first quarter of 2004. The largest contributing factor to net income was the increase in net interest income. In the discussion below, comparison is with the first quarter of 2005 and 2004, unless otherwise stated.

The year to date return on average assets (ROA) was 1.89% in 2005 as compared to 1.93% in 2004. Annualized return on average shareowners’ equity (ROE) in 2005 was 16.79%, as compared to 18.21% in 2004.

FINANCIAL REVIEW

MARKET AREA

Frontier Financial Corporation, headquartered in Everett, Washington, located approximately 20 miles north of Seattle, is the parent of Frontier Bank, which operates thirty-nine banking offices in Clallam, Jefferson and Kitsap counties located on the Olympic Peninsula, King, Pierce, Snohomish, Skagit and Whatcom counties, located on the east side of Puget Sound. 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 – March 31, 2005/December 31, 2004

Loan growth for the first quarter of 2005 was $116.8 million, or 5.9%. Investment securities for the same time period increased $1.8 million, or 1.2%. Federal funds sold increased $27.4 million. The growth in loans reflects a very strong first quarter at an annualized growth rate of 23.6%. Although it appears there was a substantial increase in federal funds sold for the first quarter, average federal funds sold for the period were $7.7 million.

Loans, net of unearned income and allowance for loan losses, increased $115.6 million, or 5.9% to a balance of $2.06 billion at March 31, 2005 compared to $1.95 billion at December 31, 2004. For the first three months of 2005, new loan originations were $348.2 million as compared to $268.4 million for the same period 2004, representing a 29.7% increase. The growth in the first quarter is again attributable to the strong real estate market in the Puget Sound region along with the additions to lending staff.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

The Bank’s loan mix has remained relatively unchanged in the principal areas of lending which include: commercial and agriculture, real estate commercial, real estate construction, residential, and installment. At March 31, 2005, 15.0% of our loan portfolio was in commercial and agriculture loans, 41.6% was in real estate commercial, 32.8% was in real estate construction, 8.3% was in residential, and 2.3% installment.

On the liability side of the balance sheet, noninterest bearing deposits increased $664 thousand, or .2% and interest bearing deposits increased $89.2 million, or 6.0%. NOW, Money Market, and sweep accounts increased $47.0 million, or 17.4%; savings accounts decreased $38.2 million, or 5.9%; and Time Deposits, (cd’s) increased $80.4 million, or 14.1%. These numbers indicate that the deposit mix is changing. As general interest rates have risen, investors are moving out of lower rate liquid deposit accounts and into, mainly, sweep accounts and time deposits for a higher return.

BALANCE SHEET – March 31, 2005/March 31, 2004

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)

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES

At March 31, 2005, loans were up $266.5 million, or 14.6% 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 housing market in the Puget Sound region. Investments decreased $20.7 million, or 11.7% for the period and federal funds sold decreased $4.8 million, or 12.5%.

Noninterest bearing deposits increased $33.1 million, or 11.8% to $313.9 million. Interest bearing deposits increased $132.7 million, or 9.2%, with most of the increase attributable to growth in time certificates.

At March 31, 2005, NOW, Money Market and Sweep accounts made up 20.2% of total interest bearing deposits. At March 31, 2004 those deposits made up 18.1%. In 2005, savings deposits made up 38.5% of total interest bearing deposits versus 45.3% in 2004 and time deposits made up 41.3% in 2005 versus 36.6% in 2004.

Over the last year, NOW, Money Market and Sweep deposits increased $57.4 million, or 22.0%; savings deposits decreased $47.7 million, or 7.3%; and time deposits increased $122.9 million or 23.3%. The reason for the significant change in the mix over the last year was due mainly to the higher rates being paid on sweep accounts and certificates of deposits.

FHLB borrowings increased $40.0 million, or 22.2% over the year. The reason for these advances was to fund loan growth and lock in longer-term liabilities as interest rates increased.

Capital has increased $35.1 million over the past year, or 15.4%. Almost all of the increase was due to retained earnings. Please see page 26 for information regarding cash dividends paid.

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

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 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

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

(In thousands)