UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~WASHINGTON~~Washington, D.C. 20549

FORM 10-K

~~[ x~~ANNUAL ]REPORT ~~Annual~~PURSUANT ~~Report~~TO ~~Pursuant~~SECTION ~~to Section~~ 13 orOR 15(d) ofOF ~~the~~THE ~~Securities~~SECURITIES ~~Exchange~~EXCHANGE ~~Act of~~ACT OF 1934

For the ~~fiscal~~ ~~year~~Fiscal ~~ended:~~Year Ended December 31, ~~2008~~2009

~~[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~OR

~~For the~~ TRANSITION ~~transition~~REPORT ~~period~~PURSUANT ~~from~~TO ~~_________~~SECTION to13 ~~__________.~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission File~~For ~~Number:~~the ~~000-15540~~transition period from _________________ to __________________

~~FRONTIER FINANCIAL~~Commission ~~CORPORATION~~File Number 000-15540

~~(Exact name~~Frontier ofFinancial ~~Registrant as specified in its charter)~~Corporation

Washington		91-1223535
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

(Exact Name of registrant as specified in its charter)

Washington 91-1223535

(State of incorporation or organization) (IRS Employer Identification Number)

332 S.W. Everett Mall Way

P. O. Box 2215

Everett, WA Washington 98213

(Address of ~~principal~~Principal ~~executive~~Executive ~~offices~~Office) (~~zip code~~Zip Code)

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

(Registrant’s telephone number, including area code)

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

Title of each class Name of each exchange on which registered ~~Common Stock, no par value per share The NASDAQ Stock Market LLC~~

~~Indicate by~~Common ~~check~~Stock ~~mark~~(no ifpar ~~the registrant is a well-known seasoned issuer, as defined in~~value) The ~~Rule~~NASDAQ ~~405~~Stock ofMarket ~~the Securities Act. Yes [ x ] No [ ]~~LLC

~~Indicate by~~Securities ~~check~~registered ~~mark if the registrant is not required to file reports~~ pursuant to ~~Section~~ ~~13 or~~ Section 1512(dg) of the Act.: ~~Yes [ ] No [ x ]~~None

Indicate by a check mark ~~whether~~if the registrant: ~~(1)~~is ~~has~~a ~~filed~~well-known ~~all~~seasoned ~~reports~~issuer, ~~required~~as todefined ~~be filed~~in byRule ~~Section~~405 ~~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~~Yes check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] No [X]

Indicate by a check mark ~~whether~~if the registrant is anot ~~large~~required ~~accelerated~~to ~~filer,~~file ~~an accelerated~~reports ~~filer,~~pursuant orto aSection ~~non-accelerated~~13 ~~filer.~~or ~~See~~Section ~~definition~~15(d) of ~~“accelerated filer”, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of~~ the Act. ~~Check one:~~

~~Large Accelerated filer~~ Yes [ ] No ~~Accelerated filer~~ [ x X] ~~Non-accelerated filer [ ] Smaller reporting company [ ]~~

Indicate by check mark whether the registrant: is(1) ahas ~~shell~~filed ~~company~~all ~~(as~~reports ~~defined~~required into ~~Rule 12b-2~~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)., ~~Yes~~and [(2) ]has Nobeen [subject xto such filing requirements for the past 90 days. Yes [X] No [ ]

AsIndicate ~~of June~~by ~~30,~~check ~~2008~~mark whether the registrant has submitted electronically and posted on its corporate Web site, 47if any,~~010,131~~ ~~shares~~every ofInteractive ~~common~~Data ~~stock~~File ~~were~~required ~~owned~~to bybe ~~non-affiliates, with~~submitted anand ~~aggregate~~posted ~~market~~pursuant ~~value~~to Rule 405 of ~~$400,526,316~~Regulation S-T during the preceding 12 months (~~based~~or ~~upon~~for such shorter period that the ~~closing~~registrant ~~market price~~was ofrequired ~~$8.52~~to ~~per~~submit ~~share~~and post such files). Yes [ ] No [ ]

Indicate ~~the~~ ~~number~~by check mark if disclosure of ~~shares~~delinquent ~~outstanding~~filers ~~for~~pursuant ~~each~~to Item 405 of ~~the~~Regulation ~~issuer’s~~S-K ~~classes~~(§229.405 of ~~common stock~~this chapter) is not contained herein, asand will not be contained, to the best of the ~~latest~~registrant’s ~~practical~~knowledge, ~~date:~~in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

Large accelerated filer [ ]

Accelerated Filer [X]

Non-accelerated Filer [ ]

Small reporting company [ ]

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

Yes [ ] No [X]

As of June 30, 2009, 4,713,185 shares of common stock were owned by non-affiliates, with an aggregate market value of $55,615,587 (based upon the closing market price of $11.80 per share, adjusted for a one-for-ten reverse stock split, effective November 24, 2009).

The number of shares of the Registrant’s common stock (no par value) outstanding as of March 19, 2010 was 4,725,076.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the fiscal year ended December 31, ~~2008~~ 2009 – Parts I and II.

Portions of the Definitive Proxy Statement to be filed with the Securities and Exchange Commission, relating to the ~~2009~~2010 Annual Meeting of Shareholders, ~~to be held on April 15, 2009~~ – Part III.

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

TABLE OF CONTENTS

		Page
Part I.			1
Item 1.	Business		2
Item 1A.	Risk Factors		1315
Item 1B.	Unresolved Staff Comments		1922
Item 2.	Properties		1922
Item 3.	Legal Proceedings		1922
Item 4.	~~Submission of Matters to a Vote of Shareholders~~Reserved		1922
Part II.			2023
Item 5.	Market for Registrant's Common Equity, Related Shareholder Matters
	and Issuer Purchases of Equity Securities		2023
Item 6.	Selected Financial Data		2225
Item 7.	Management's Discussion and Analysis of Financial Condition and
	Results of Operations		2326
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		4244
Item 8.	Financial Statements and Supplementary Data		4547
Item 9.	Changes in and Disagreements With Accountants on Accounting
	and Financial Disclosure		4547
Item 9A.	Controls and Procedures		4547
Item 9B.	Other Information		4648
Part III.			4648
Item 10.	Directors and Executive Officers and Corporate Governance		4648
Item 11.	Executive Compensation		4648
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Shareholder Matters		4748
Item 13.	Certain Relationships and Related Transactions and Director Independence		4748
Item 14.	Principal Accountant Fees and Services		4749
Part IV.			4849
Item 15.	Exhibits and Financial Statement Schedules		4849
	Signatures		4950

Table of Contents

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

PART I

Forward-Looking Statements

This annual report on Form 10-K includes forward-looking statements., within the meaning of Section 27A of the Securities Act of 1933, 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, that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the ~~negative~~ negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed ~~in this report~~ below under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ~~and “Business”~~ may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations are:

· ~~changes~~management’s inability ~~general~~to ~~economic~~effectively ~~conditions,~~execute ~~either~~its ~~nationally~~business orplan ~~locally in western Washington~~ and ~~Oregon~~strategy;

· the ~~extent~~possibility ~~and~~that ~~duration~~we ofwill ~~continued~~be ~~economic,~~unable ~~credit~~to raise sufficient capital and ~~financial~~comply ~~market~~with ~~disruptions~~the ~~and~~conditions ~~governmental~~imposed upon us in regulatory actions toagainst ~~address~~us, ~~these~~which ~~disruptions~~could result in the imposition of further restrictions on our operations, penalties or other regulatory actions;

· ~~inflation~~the credit risks of lending activities, ~~interest~~including ~~rate~~changes in the level and trend of loan delinquencies, ~~market~~collections and ~~monetary~~write-offs ~~fluctuations~~and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the residential housing and commercial real estate markets;

· ~~legislative~~changes orin ~~regulatory~~general ~~changes~~economic orconditions, ~~changes~~either innationally ~~accounting~~or ~~principles,~~in ~~policies~~our ormarket ~~guidelines~~areas;

· the adequacy of our credit risk management and the allowance for loan losses, asset quality and our ability to collect on delinquent loans, including residential construction and land development loans;

·	the availability of and costs associated with sources of liquidity;

· ~~changes in real estate values generally~~inflation, ~~within~~interest ~~the markets in which we generate loans~~rates, ~~which~~market ~~could adversely affect the demand for loans~~ and ~~may~~monetary ~~adversely affect collateral held on outstanding loans~~fluctuations;

· ~~our~~legislative ~~ability to successfully defend against claims asserted against us in lawsuits arising out of,~~ or ~~related~~regulatory ~~to,~~changes ~~our lending operations~~ or ~~any~~changes ~~regulatory~~in ~~action~~accounting ~~taken against us~~principles, aspolicies ~~well as any unanticipated litigation~~ or ~~other regulatory proceedings~~guidelines;

·	the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews;

·	our ability to attract and retain deposits;

·	further increases in premiums for deposit insurance;

·	the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

·	the failure or security breach of computer systems on which we depend;

·	increased competitive pressures among financial services companies;

·	adverse changes in the securities markets;

·	technological changes;

·	the ability to increase market share and control expenses;

·	our success at managing the risks involved in the foregoing; and

· other risks which may be described in ~~our~~Frontier’s future filings with the SEC under the Securities Exchange Act of 1934.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments. In addition, we may make certain statements in future Securities and Exchange Commission (“SEC”) filings, in press releases and in oral and written statements that are not statements of historical fact and may constitute forward-looking statements.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

ITEM 1. BUSINESS

Frontier Financial Corporation (“FFC”, “Frontier”, “the Corporation”, “we”, “our” or “us”) is a Washington corporation which was incorporated in 1983 and is registered as a bank holding company under the Bank Holding Company Act of 1956. At December 31, 2008, FFC had one subsidiary, Frontier Bank, which is engaged in a general banking business and in businesses related to banking. Effective December 30, 2008, FFP, Inc., a nonbank corporation, which leased property to the Bank, was merged into the Bank.General

Frontier Financial Corporation (“FFC”, “Frontier”, “the Corporation”, “we”, “our” or “us”) is a Washington corporation which was incorporated in 1983 and is registered as a bank holding company under the Bank Holding Company Act of 1956. At December 31, 2009, FFC had one subsidiary, Frontier Bank, which is engaged in a general banking business and in businesses related to banking.

The Bank

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

We engage in general banking business in Washington and Oregon, including the acceptance of demand, savings and time deposits and the origination of loans. As of the end of ~~2008~~2009, we serve our customers from fifty~~-one~~ offices. In Snohomish County, Washington, four offices are located in Everett, and one office each is ~~located~~ located in Arlington, Edmonds, Lake Stevens, Marysville, Mill Creek, Monroe, Lynnwood, Smokey Point, Snohomish and Stanwood. Seven offices are located in Pierce County, Washington, in the cities of Buckley, Edgewood-Milton, Orting, Puyallup, Sumner, Tacoma and University Place. Frontier has thirteen branches in King County, Washington, one each in Ballard (Seattle), Bellevue, Bothell, Duvall, Fremont (Seattle), Kent, Kirkland, Lake City (Seattle), Redmond, Renton, Seattle, Totem Lake (Kirkland) and Woodinville. In addition, the following ~~fourteen~~thirteen branches are located in the Washington Counties of Clallam, Jefferson, Kitsap, Skagit, Thurston and Whatcom ~~Counties~~: two branches ~~each~~ in Bellingham ~~and Poulsbo~~, and one each in Bainbridge Island, Bremerton, Gig Harbor, Lacey, Lynden, Mount Vernon, Port Angeles, Port Townsend, Poulsbo, Sequim and Silverdale. In Oregon, we have one office each in Portland, Salem and Tigard.

On November 30, 2007, we acquired 100 percent of the outstanding shares of Bank of Salem. Bank of Salem, an Oregon chartered commercial bank headquartered in Salem, Oregon, provided commercial real estate and business lending products and related services through three locations in Portland, Salem and Tigard, Oregon. Bank of Salem shareholders received 0.99 shares of FFC common stock for each share of Bank of Salem common stock. The value of the 3,230,886 common shares issued was determined in accordance with the merger agreement at $19.07 per share. The aggregate purchase price was $61.8 million, which included $195 thousand of direct merger related costs. This acquisition was accounted for under the purchase method of accounting.

Banking Services

We provide a full range of consumer banking services including savings accounts, checking accounts, installment and commercial lending, safe deposit facilities, time deposits and other consumer and business related financial services. In addition to consumer-oriented activities, we maintain a commercial lending program, servicing individuals and businesses headquartered in our principal market areas.

Lending Activities

Historically, our focus has been on secured real estate construction lending, but we are currently in the process of diversifying our loan portfolio. Due to the downturn in the economy and the negative impact on the ~~local~~regional housing market, we are rebalancing our loan portfolio to include more commercial and industrial ~~business~~ business and consumer loans. ~~See~~Refer to page 4 for a summary of loan category amounts for the last five years.

Real Estate Loans

Real estate loans represented the largest share of our loan portfolio at December 31, ~~2008~~ 2009. These loans are comprised of commercial real estate term loans, construction loans, land development loans, completed lot loans and residential 1-4 family loans. As noted above, we are in the process of diversifying our loan portfolio. For the most part, we are not currently originating real estate construction, land development or completed lot loans. The construction loan portfolio is comprised of two types:

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

2. Loans for construction of single-family ~~speculation~~speculative and owner-occupied properties that generally have terms of one year or less and typically bear an interest rate that floats with our base rate.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

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

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

Residential 1-4 family loans include various types of loans for which residential real property is held as collateral. These loans, collateralized by 1-4 family residences, typically have maturities between one and five years with payment amortization schedules ranging from 10 to 20 years. Residential 1-4 family loans are written with both fixed and variable rates.

We also originate and sell residential 1-4 family loans into the secondary market. We offer a variety of products for refinancing and purchases and are approved to originate FHA and VA loans. The majority of loans originated in ~~2008~~2009 were fixed rate single-family loans. Total loans sold in ~~2008~~2009 were approximately $94140.84 million. Servicing is sold with the loan. Funding requirements for these loans are minimal as few of these loans are retained for investment.

Commercial and Industrial Loans

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

Installment Loans

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Concentrations of Credit

The following chart indicates the amount of loans, net of deferred fees, and as a percent of total loans, including loans held for resale, for the years ended December 31 (in thousands):

	2008			2007			2006			2005			2004
	2009			2008			2007			2006			2005
Real estate commercial loans	$	1965,~~044,833~~266		$	1,~~003~~044,~~916~~833		$	~~897~~1,~~714~~003,916		$	~~859~~897,~~251~~714		$	~~848~~859,~~737~~251
Real estate construction loans	$	~~949~~447,~~909~~879		$	1949,~~062,662~~909		$	~~735~~1,~~926~~062,662		$	~~554~~735,~~021~~926		$	~~342~~554,~~287~~021
Real estate land development loans	$	~~580~~319,~~453~~320		$	~~537~~580,~~410~~453		$	~~399~~537,~~950~~410		$	~~269~~399,~~662~~950		$	~~182~~269,~~032~~662
Total loans at end of period	$	3,778,733		$	3,612,122		$	2,908,000		$	2,389,224		$	1,977,521
Total loans at end of period (1)	$	2,869,498		$	3,778,733		$	3,612,122		$	2,908,000		$	2,389,224
Real estate commercial loans
as a percent of total loans		2733.76	%		27.87	%		3027.98	%		3630.09	%		4236.90	%
Real estate construction loans
as a percent of total loans		2515.16	%		2925.41	%		2529.34	%		2325.23	%		1723.32	%
Real estate land development loans
as a percent of total loans		1511.41	%		1415.94	%		1314.89	%		1113.38	%		911.23	%
(1) Includes loans held for resale

Investment Activities

From time to time, we acquire investment securities when funds received through deposit activities exceed loan demand or when there are collateral requirements When excess funds are considered temporary in nature by management, they are typically placed in federal funds sold on an overnight basis to correspondent banks, approved by the Board of Directors. ~~This~~When ~~type of investment is not considered desirable, as the interest rate earned on these~~ funds ~~is minimal in nature. When funds~~ are considered longer term, they are generally invested in securities purchased in the open market. At December 31, ~~2008~~2009, we had investments with an amortized cost totaling $9787.30 million. Please see Note 43 of ~~our~~the ~~2008~~ Annual Report to Shareholders for details on the makeup of the portfolio. We have an investment policy that generally permits purchasing securities rated only in one of the four highest rating categories by a nationally recognized credit rating organization. The investment policy also provides for maturity patterns, diversification of investments and avoidance of concentrations within the portfolio.

Deposit Activities and Other Funding Sources

Our primary source of funds has historically been customer deposits. We offer a variety of accounts designed to attract both short-term and long-term deposits in our market area. These accounts include demand (checking), NOW, money market, sweep, savings and certificates of deposit. Interest rates paid on these accounts vary from time to time and are based on competitive factors and liquidity needs. One of our goals is to maintain noninterest- bearing deposits at the highest level possible. These are low cost funds and help to increase the net interest margin. Noninterest- bearing accounts comprised 12.1% of total deposits at December 31, ~~2008~~2009.

We ~~have other~~intend ~~funding~~to ~~sources~~continue ~~such~~our asefforts ~~Federal~~at ~~Home~~attracting ~~Loan~~deposits ~~Bank~~from ~~(“FHLB”)~~our ~~advances,~~business ~~federal funds~~lending ~~purchased~~relationships ~~and repurchase agreements. The major source of funds~~ in ~~this~~order ~~area~~to isreduce ~~advances~~our ~~from~~cost ~~the FHLB~~ of ~~Seattle. Although this source of funding can be more costly than deposit activities, large portions of~~ funds ~~are~~and ~~available~~improve ~~very~~our ~~quickly~~net ~~for~~interest ~~meeting loan commitments~~margin. ~~Our~~ ~~line~~We ofhave ~~credit~~also ~~with~~utilized ~~the~~brokered ~~FHLB~~deposits ~~is approximately 15% of qualifying Bank assets~~ and isother ~~collateralized~~wholesale byfunding ~~qualifying~~from ~~first residential~~time ~~1-4~~to ~~family loans~~time, ~~qualifying~~which ~~commercial~~are ~~real~~now ~~estate~~restricted ~~and~~by ~~government agency securities. At December 31, 2008, we had FHLB advances totaling $429.4 million (please refer to Note 10 in~~ the ~~Annual~~FDIC ~~Report~~Directive toand ~~Shareholders~~FDIC ~~for~~Order ~~detail regarding~~described ~~these advances). These advances were collateralized with $942.3 million~~ in ~~qualifying first residential 1-4 family, other certain assets~~“Regulation and ~~FHLB~~Supervision” ~~stock~~below. No ~~commercial~~These ~~real~~regulatory ~~estate~~actions orrequire ~~government~~Frontier ~~securities were~~Bank ~~pledged~~to atreduce ~~year~~its ~~end. The~~reliance ~~unused~~on ~~portion~~brokered ofdeposits ~~this~~and ~~credit~~other ~~line~~non-core ~~at December~~funding ~~31, 2008, was $187~~sources.~~8 million.~~

We have other funding sources such as Federal Home Loan Bank (“FHLB”) advances, federal funds purchased and repurchase agreements. The major source of funds in this area is advances from the FHLB of Seattle. Our line of credit with the FHLB is approximately 10% of qualifying Bank assets and is collateralized by qualifying first residential 1-4 family loans, qualifying commercial real estate and government agency securities. At December 31, 2009, we had FHLB advances totaling $375.5 million (please refer to Note 10 in the Annual Report to Shareholders for detail regarding these advances). These advances were collateralized with $678.8 million in qualifying first residential 1-4 family loans, commercial real estate loan, other certain assets and FHLB stock.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Other Financial Services

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

Business ~~Strategy~~ Strategies

Our current business strategies are as follows:

·	Strengthening our capital position.

·	Proactively managing credit quality and loan collections and improving asset quality.

·	Diversifying our loan portfolio by emphasizing commercial and industrial lending through our existing branches.

·	Managing liquidity and improving our capital position in compliance with regulatory guidelines.

·	Continuing to seek out reasonable expense reduction measures.

·	Increasing core deposits to fund loan growth and maintaining net interest margins through an enhanced branch network and online banking.

The Corporation and its subsidiary, Frontier Bank, are subject to regulatory actions with respect to their operations, including the FDIC Directive and FDIC Order described in “Regulation and Supervision” below. As a result of these regulatory actions, the significant operating losses incurred in 2009 and 2008 and our needs to raise additional capital, there is substantial doubt about our ability to continue as a going concern. The report of the Corporation’s independent registered public accounting firm on our financial statements for the year ended December 31, 2009, contains an explanatory paragraph with respect to our ability to continue as a going concern. The 2009 financial statements do not include any adjustments that might result from the outcome of this uncertainty, which could affect our ability to continue as a going concern.

Competition

The banking industry is highly competitive. We face strong competition in attracting deposits and in originating loans. The most direct competition for deposits has historically come from other commercial banks, saving institutions and credit unions located in our primary market areas. As with all banking organizations, we also have competition from non-banking sources, including mutual funds, corporate and governmental debt securities and other investment alternatives. We expect increasing competition from other financial institutions and non-banking sources in the future. Many of our competitors have more significant financial resources, larger market share and greater name recognition than us. The existence of such competitors may make it difficult for us to achieve our financial goals.

Competition has further increased as a result of Washington banking laws that permit statewide branching of Washington domiciled financial institutions and acquisitions of Washington-based financial institutions by out-of-state bank holding companies. We believe that the principal competitive factors affecting our markets include interest rates paid on deposits and charged on loans, the range of banking products available and customer service and support. Although we believe that our products currently compete favorably with respect to these factors, there can be no assurance that we can maintain our competitive position against current and potential competitors, especially those with significantly greater financial resources.

Our competition for loans comes principally from other commercial banks, savings institutions, credit unions and mortgage banking companies. We compete for loans principally through the efficiency, timeliness and quality of the services we provide borrowers, ~~real estate brokers~~ and ~~home builders, and~~ the interest rates and loan fees we charge.

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

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

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

Regulation and Supervision

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

FDIC Directive

On March 16, 2010, the Federal Deposit Insurance Corporation (“FDIC”) issued a Supervisory Prompt Corrective Action Directive (the “FDIC Directive”) to Frontier Bank. As of that date, Frontier Bank was already operating subject to all of the restrictions set forth in the FDIC Order as described below, except that the FDIC Directive imposed a new requirement that Frontier Bank take one or more of the following actions to recapitalize the Bank within 30 days (by April 15, 2010): (1) sell enough voting shares or obligations of Frontier Bank so that it will be “adequately capitalized,” as defined under the Federal Deposit Insurance Act (“FDI Act”) and the related FDIC regulations, after the sale; and/or (2) accept an offer to be acquired by a depository institution holding company or combine with another insured depository institution.

The Directive states that the FDIC has categorized the Bank as being a “critically undercapitalized” depository institution at December 31, 2009, as defined under the FDI Act and FDIC rules and regulations, prohibits the acceptance, renewal or rollover of brokered deposits and restricts the interest rates that the Bank may pay on deposits to rates not more than 75 basis points higher than those paid on similar deposits in its market area. In addition, the FDIC Directive states that the Bank is not permitted to increase its average total assets or make any capital distributions to the Corporation or any affiliate or to pay bonuses to or increase the compensation of any director or officer of the Bank without the approval from the FDIC. The FDIC Directive also precludes the Bank from branching, or relocation, selling or disposing of any of its existing branches without FDIC approval. Further, the Bank is directed to comply with Section 23A of the Federal Reserve Act in connection with transactions between affiliates without regard to certain exceptions.

FDIC Order

On March 20, 2009, Frontier Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “FDIC Order”) with the FDIC and the Washington Department of Financial Institutions (the “Washington DFI”). The regulators alleged that Frontier Bank had engaged in unsafe or unsound banking practices by operating with inadequate management and board supervision; engaging in unsatisfactory lending and collection practices; operating with inadequate capital in relation to the kind and quality of assets held at Frontier Bank; operating with an inadequate loan valuation reserve; operating with a large volume of poor quality loans; operating in such a manner as to produce low earnings and operating with inadequate provisions for liquidity. By consenting to the FDIC Order, Frontier Bank neither admitted nor denied the alleged charges.

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Under the terms of the FDIC Order, Frontier Bank cannot declare dividends or pay any management, consulting or other fees or funds to the Corporation, without the prior written approval of the FDIC and the Washington DFI. Other material provisions of the FDIC Order require Frontier Bank to: (1) review the qualifications of Frontier Bank’s management, (2) provide the FDIC with 30 days written notice prior to adding any individual to the Board of Directors of Frontier Bank (the “Frontier Bank Board”) or employing any individual as a senior executive officer, (3) increase director participation and supervision of Frontier Bank affairs, (4) improve Frontier Bank’s lending and collection policies and procedures, particularly with respect to the origination and monitoring of real estate construction and land development loans, (5) develop a capital plan and increase Tier 1 leverage capital to 10% of Frontier Bank’s total assets by July 29, 2009, and maintain that capital level, in addition to maintaining a fully funded allowance for loan losses satisfactory to the regulators, (6) implement a comprehensive policy for determining the adequacy of the allowance for loan losses and limiting concentrations in commercial real estate and acquisition, development and construction loans, (7) formulate a written plan to reduce Frontier Bank’s risk exposure to adversely classified loans and nonperforming assets, (8) refrain from extending additional credit with respect to loans charged-off or classified as “loss” and uncollected, (9) refrain from extending additional credit with respect to other adversely classified loans without collecting all past due interest, without the prior approval of a majority of the directors on the Frontier Bank Board or its loan committee, (10) develop a plan to control overhead and other expenses to restore profitability, (11) implement a liquidity and funds management policy to reduce Frontier Bank’s reliance on brokered deposits and other non-core funding sources, and (12) prepare and submit progress reports to the FDIC and the Washington DFI. The FDIC Order will remain in effect until modified or terminated by the FDIC and the Washington DFI.

The FDIC Order does not restrict Frontier Bank from transacting its normal banking business. Frontier Bank has continued to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Customer deposits remain fully insured to the highest limits set by FDIC. The FDIC and Washington DFI did not impose any monetary penalties in connection with the FDIC Order.

FRB Agreement

In addition, on July 2, 2009, the Corporation entered into a Written Agreement (the “FRB Written Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). Under the terms of the FRB Written Agreement, the Corporation has agreed to: (1) refrain from declaring or paying any dividends without prior written consent of the FRB; (2) refrain from taking dividends or any other form of payment that represents a reduction in capital from Frontier Bank without prior written consent of the FRB; (3) refrain from making any distributions of interest or principal on subordinated debentures or trust preferred securities without prior written consent of the FRB; (4) refrain from incurring, increasing or guaranteeing any debt without prior written consent of the FRB; (5) refrain from purchasing or redeeming any shares of its stock without prior written consent of the FRB; (6) implement a capital plan and maintain sufficient capital; (7) comply with notice and approval requirements established by the FRB relating to the appointment of directors and senior executive officers as well as any change in the responsibility of any current senior executive officer; (8) not pay or agree to pay any indemnification and severance payments except under certain circumstances, and with the prior approval of the FRB; and (9) provide quarterly progress reports to the FRB.

General

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

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

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Compliance

In order to assure that we are in compliance with the laws and regulations that apply to our operations, including those summarized below, we employ a compliance officer and engage an independent compliance auditing firm. We are regularly reviewed or audited by the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Washington Department of Financial Institutions, Division of Banks (“DFI”), during which examinations such agencies assess our compliance with applicable laws and regulations.

Frontier Bank and the Frontier Bank Board entered into a Memorandum of Understanding with the FDIC dated August 20, 2008, relating to the correction of certain violations of applicable consumer protection and fair lending laws and regulations, principally including the failure to provide certain notices to consumers pursuant to the Flood Disaster Protection Act of 1973, and certain violations of the Truth in Lending Act (Regulation Z).

The Memorandum of Understanding requires Frontier Bank and the Frontier Bank Board to (1) correct all violations found and implement procedures to prevent their recurrence; (2) increase oversight of the Frontier Bank Board’s compliance function, including monthly reports from Frontier Bank’s compliance officer to the Frontier Bank Board detailing actions taken to comply with the Memorandum of Understanding; (3) review its compliance policies and procedures and develop and implement detailed operating procedures and controls, where necessary, to ensure compliance with all consumer protection laws and regulations; (4) establish monitoring procedures to ensure compliance with all consumer protection laws and regulations (including flood insurance), including the documentation and reporting of all exceptions to the Frontier Bank Board and its audit committee; (5) review, expand and improve the quality of such compliance with the frequency of compliance audits to be reviewed and approved annually by the Frontier Bank Board or audit committee, with a goal of auditing compliance at least annually; (6) ensure that Frontier Bank’s compliance management function has adequate staff, resources, training and authority for the size and structure of Frontier Bank; (7) establish flood insurance monitoring procedures to ensure loans are not closed without flood insurance and prior notices to customers required by law, that lapses of flood insurance do not occur, and to develop methods to ensure that adequate amounts of flood insurance are provided, with Frontier Bank agreeing to force place flood insurance when necessary; (8) provide additional training for all Frontier Bank personnel, including the Frontier Bank Board and audit and compliance staff for applicable laws and regulations and (9) furnish quarterly progress reports to the Regional Director of the FDIC detailing the actions taken to secure compliance with the Memorandum of Understanding until the Regional Director has released the institution, in writing, from submitting further reports. Frontier Bank was assessed civil monetary penalties of $48,895 for flood insurance violations and required to pay $10,974 in restitution to customers for certain violations of the Truth in Lending Act (Regulation Z) in 2008.

Federal Bank Holding Company Regulation

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

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

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

Financial Holding Company Status: Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain activities deemed financial in nature. FFC became a financial holding company as of October 28, 2000, but reverted back to a bank holding company subsequent to December 31, 2008.

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

·	acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

·	acquiring all or substantially all of the assets of any bank; or

·	merging or consolidating with any other bank holding company.

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

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

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

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

Tying Arrangements: We are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither FFC nor the Bank may condition an extension of credit to a customer on either: (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.

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

Federal and State Regulation of the Bank

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

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

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

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

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

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

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

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

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

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

Federal Laws Applicable to Credit Transactions: The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

·	Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

·	Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

·	Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

·	Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

·	Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;

·	Service Members Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and

·	Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Federal Laws Applicable to Deposit Operations: The Bank’s deposit operations are subject to:

·	the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

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Check Clearing for the 21st Century Act: Also known as Check 21, which gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check; allows check truncation without making it mandatory; requires that financial institutions communicate to accountholders in writing a description of its substitute check processing program and their rights under the law; legalizes substitutions for and replacements of paper checks without agreement from consumers; retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place; requires that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and requires recrediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

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

As a system member, the Bank is entitled to borrow from the FHLB of its region and is required to own a certain amount of capital stock in the FHLB. The Bank is in compliance with the stock ownership rules described above with respect to such advances, commitments and letters of credit and residential 1-4 family loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of its residential 1-4 loan portfolio, certain other investments and the capital stock of the FHLB held by the Bank.

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

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

Privacy

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

·	initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third-parties and affiliates;

·	annual notices of their privacy policies to current customers; and

·	a reasonable method for customers to “opt out” of disclosures to nonaffiliated third-parties.

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We have implemented privacy policies to comply with these requirements.

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Interstate Banking and Branching

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

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

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

Deposit Insurance

Our deposits are generally insured to a maximum of $250,000 per depositor through the Deposit Insurance Fund administered by the FDIC. In addition, we are participating in the FDIC Insurance Temporary Liquidity Guarantee Program, in which all noninterest bearing transaction deposit accounts are fully insured until ~~December~~June 3130, ~~2009~~2010. We are required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

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

~~Recent legislative~~Legislative reform to modernize the Federal Deposit Insurance System merged the Bank Insurance Fund and the Savings Association Insurance Fund into a new Deposit Insurance Fund, and also:

·	raised the deposit insurance limit on certain retirement accounts to $250,000 and indexes that limit for inflation;

·	required the FDIC and National Credit Union Administration boards, starting in 2010 and every succeeding five years, to consider raising the standard maximum deposit insurance; and

·	eliminated the current fixed 1.25 percent Designated Reserve Ratio (“DRR”) and provided the FDIC with the discretion to set the DRR within a range of 1.15 to 1.50 percent for any given year.

Capital Adequacy

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

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

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

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

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

As of December 31, 2009, Frontier Bank was categorized by the FDIC as “critically undercapitalized” for purposes of PCA, as a result of the FDIC Directive. Under the Federal Deposit Insurance (“FDI”) Act’s PCA capital requirements (12 U.S.C. § 1831o), depository institutions that are “critically undercapitalized”, in addition to being subject to a number of additional restrictions, must be placed into conservatorship or receivership within 90 days of becoming critically undercapitalized, unless the institution’s primary Federal regulatory authority (here, the FDIC) determines and documents that “other action” would better achieve the purposes of PCA. Refer to Note 2 of the Annual Report to Shareholders for further discussion.

State Corporate Law Restrictions

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

Corporate Governance and Accounting Legislation

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

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

As a public reporting company, we are subject to the requirements of SOX and related rules and regulations issued by the SEC and NASDAQ.

Anti-terrorism Legislation

USA Patriot Act of 2001: Among other things, the Patriot Act: (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also increased governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Patriot Act.

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Effects of Government Monetary Policy

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

Employees

At December 31, ~~2008~~2009, we had ~~799~~703 full-time equivalent (“FTE”) employees, of which ~~792~~700 were employed in our wholly-owned subsidiary, Frontier Bank, and 7 3 were engaged in our bank holding company, Frontier Financial Corporation. The employees are not represented by a collective bargaining unit. We believe we have a good relationship with our employees.

Corporate Information

We make available through our Internet website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission (“SEC”). These filings can be accessed under “Investor Relations” found on the homepage of our website at www.frontierbank.com. Our Code of Ethics for Senior Financial Officers, which includes a code of ethics applicable to our accounting and financial employees, including our Chief Executive Officer and Chief Financial Officer, is also available on our website under “Investor Relations.” These filings are also accessible on the SEC’s website at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Further, each of these documents is also available in print (at no charge) to any shareholder upon request, addressed to:

Investor Relations

Frontier Financial Corporation

332 S.W. Everett Mall Way

P.O. Box 2215

Everett, WA 98213

Our website and the information contained therein or connected thereto are not incorporated by reference into this Form 10-K.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

ITEM 1A. RISK FACTORS

In addition to general investment risks and the other information contained in this report or incorporated by reference, including the consolidated financial statements and the notes thereto, “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, before investing in our securities, you should carefully consider the risks described below. Any of these risks could significantly and adversely affect our business, prospects, financial condition and results of operations. If one or more of these risks and uncertainties is realized, the trading price of our common shares or the value of our other securities could decline, and you could lose all or part of your investment. This report is qualified in its entirety by these risk factors.

Risks Related To Our Business and Market

~~The continued~~Our ~~downturn~~capital inposition ~~our~~has ~~real~~deteriorated ~~estate~~and ~~market~~we ~~areas~~are ~~and~~now ~~weakness~~categorized inby the ~~economy could~~FDIC ~~adversely~~as ~~affect~~critically ~~our~~undercapitalized, ~~financial~~and ~~condition~~subject ~~and~~to ~~profitability~~an FDIC Directive to recapitalize the Bank.

~~Our retail~~The ~~banking~~Corporation’s and ~~lending~~the ~~are~~Bank’s ~~concentrated~~capital inpositions ~~western~~have ~~Washington~~deteriorated and ~~northwest Oregon. As~~the aBank ~~result~~is ofnow ~~this~~considered ~~geographic~~to ~~concentration,~~be ~~our~~“critically ~~financial condition~~undercapitalized” ~~and~~under ~~earnings~~the ~~largely~~prompt ~~depend~~corrective ~~upon~~action ~~economic~~provision ~~conditions~~of inthe ~~these~~FDI ~~areas~~Act and related regulations, ~~although~~ ~~they~~according ~~also~~to ~~depend~~the onFDIC ~~economic~~Directive. Refer ~~conditions~~to inItem ~~other~~1 ~~areas~~of this report captioned “Regulation and Supervision” for further discussion.

WeOn ~~are currently~~January ~~operating~~15, in2010, the Bank filed a ~~challenging~~capital ~~and~~restoration ~~uncertain~~plan ~~economic~~with ~~environment~~the FDIC, ~~both nationally~~but ~~and~~the ~~locally.~~FDIC ~~Like~~subsequently ~~other~~informed ~~financial~~the ~~institutions,~~Bank wethat ~~are~~the ~~being~~plan ~~affected by~~was ~~sharp~~not ~~declines~~acceptable. inThe ~~the~~prompt ~~real~~corrective ~~estate~~action ~~market,~~provisions ~~constrained~~of ~~financial~~the ~~markets~~FDI ~~and~~Act ~~a weak~~generally ~~economy.~~require ~~Continued~~the ~~declines~~appropriate federal banking agency (in ~~real~~the ~~estate~~case ~~values~~of the Bank, ~~home~~the ~~sales~~FDIC) ~~and~~no ~~financial stress~~later onthan ~~borrowers~~90 asdays after a ~~result~~bank becomes ofcritically ~~the~~undercapitalized ~~uncertain~~to ~~economic~~place ~~environment,~~the ~~including job~~bank ~~losses,~~into ~~could~~receivership ~~have~~or anconservatorship ~~adverse~~or ~~effect~~to ontake ~~our~~such ~~borrowers~~other oraction ~~their~~that ~~customers~~the ~~and demand~~agency ~~for~~determines ~~our~~would ~~products~~better ~~and~~achieve ~~services,~~the ~~which~~purpose ~~could~~of ~~adversely~~the ~~affect~~prompt ~~our~~corrective ~~financial condition~~action ~~and~~provisions. Such ~~earnings,~~an ~~increase~~action ~~loan~~would ~~delinquencies,~~have ~~defaults~~a ~~and~~material ~~foreclosures,~~ and ~~significantly~~adverse ~~impair~~effect on the value of our ~~collateral~~stock and ~~our~~would ~~ability~~result toin ~~sell~~it ~~the collateral~~having ~~upon~~little ~~foreclosure~~or no value.

~~We are~~Our ~~experiencing~~ability ~~deterioration~~to inraise ~~our~~additional ~~loan~~capital ~~portfolio,~~is ~~centered~~contingent inon the current capital markets and on our ~~real estate~~financial ~~construction~~performance. Available capital markets are not currently available and ~~land~~we ~~development~~have ~~loans~~not been able to raise the required capital to date and cannot be certain of our ability to raise additional capital on any terms.

~~At December~~As ~~31,~~a ~~2008,~~result ~~approximately 86.1%~~ of ~~our~~the ~~loan~~FDIC ~~portfolio~~Directive, ~~was~~the ~~comprised~~significant ~~of loans~~operating ~~secured~~losses byincurred ~~real~~in ~~estate,~~2009 ~~including~~and ~~construction~~2008, ~~land development, completed lots~~ and ~~residential~~our ~~real~~needs ~~estate~~to ~~loans.~~raise Weadditional ~~are~~capital, ~~experiencing deterioration~~there inis ~~our~~substantial ~~loan~~doubt ~~portfolio,~~about ~~centered in~~ our ~~real~~ability ~~estate~~to ~~construction and~~continue ~~land~~as ~~development~~a ~~loans~~going concern. The ~~Many~~report of ~~these~~our ~~loans~~independent ~~are~~registered ~~maturing~~public ~~and~~accounting ~~classified~~firm ~~as nonperforming~~on ~~assets~~our ~~while~~consolidated wefinancial ~~work~~statements ~~with~~for the ~~borrowers to maximize our recovery.~~ Ifyear ~~loan~~ended ~~payments~~December ~~from borrowers are over 90 days past due~~31, ~~the loans are placed on nonaccrual status~~2009, ~~thereby~~contains ~~reducing~~an ~~and/or~~explanatory ~~reversing~~paragraph ~~previously~~with ~~accrued interest~~respect ~~income.~~to ~~During 2008,~~ our ~~nonaccrual~~ability ~~loans increased significantly, from $20.9 million~~ to ~~$435.2~~continue ~~million, primarily~~ as a ~~result~~going ofconcern. The ~~construction~~2009 ~~and~~financial ~~land development~~statements ~~loans~~do ~~that we are choosing~~ not toinclude ~~renew~~any inadjustments ~~order~~that tomight ~~keep~~result ~~all~~from ofthe ~~our legal~~outcome ~~remedy options available. The contraction or expansion~~ of ~~our~~these ~~nonaccrual loan~~uncertainties, ~~portfolio~~which ~~and~~could ~~other~~affect ~~real estate owned properties in future periods will depend upon~~ our ~~ongoing~~ability ~~collection~~to ~~efforts~~continue ~~and~~as ~~changes~~a ingoing ~~market conditions~~concern. ~~Additional information regarding credit risk is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loans.”~~

~~Due to~~Restrictions ~~unforeseen~~imposed ~~circumstances,~~by ~~our~~regulatory ~~allowance~~actions ~~for~~could ~~loan~~have ~~losses~~an ~~may~~adverse ~~not~~effect beon ~~adequate~~ us and failure to ~~cover~~comply ~~actual~~with ~~losses~~these regulatory actions could result in further regulatory action or restrictions.

~~At December~~The ~~31,~~business ~~2008,~~and ~~our~~operations ~~allowance~~of ~~for~~the ~~loan~~Corporation ~~losses~~and asour asubsidiary, ~~percentage~~Frontier ofBank, ~~total~~are ~~loans was~~currently ~~2.98%.~~subject ~~The~~to ~~determination~~regulatory ofactions, ~~the~~which ~~appropriate~~for ~~level~~example, ofgenerally ~~loan~~prohibit ~~loss~~us ~~allowance~~from ~~is an~~paying ~~inherently~~dividends, ~~difficult~~repurchasing ~~process~~stock, ~~and~~retaining isnew ~~based~~directors onor ~~numerous~~senior ~~assumptions.~~managers ~~The~~or ~~amount of~~changing ~~future~~the ~~losses~~duties isof ~~susceptible~~senior tomanagement, ~~changes~~paying inmanagement ~~economic,~~or ~~operating~~consulting ~~and~~fees ~~other~~or ~~conditions~~other funds to the Corporation, ~~including~~and ~~changes~~extending inadditional ~~our~~credit ~~real~~with ~~estate~~respect ~~markets~~to nonperforming and ~~interest~~adversely ~~rates~~classified ~~that are~~loans, ~~beyond~~which ~~our~~management ~~control.~~believes ~~Our~~complicates ~~underwriting~~the ~~policies,~~workout ~~credit~~of ~~monitoring~~troubled ~~processes and~~loans. We ~~risk~~are ~~management~~also ~~systems~~required to raise additional capital. These and ~~controls~~other ~~may~~regulatory ~~not~~actions ~~prevent~~are ~~unexpected~~described ~~losses.~~in ~~In addition,~~more ~~bank~~detail ~~regulators~~in ~~periodically~~Item ~~review~~1 ~~our~~of ~~allowance~~this ~~for~~report ~~loan~~under ~~losses~~“Regulation and ~~may~~ ~~require~~Supervision.” Management usbelieves tothat ~~increase~~it ~~our~~is ~~provision~~in ~~for~~compliance ~~loan~~with ~~losses~~all orthe ~~recognize~~requirements ~~further~~of these regulatory actions, ~~loan~~other ~~charge-offs~~than the requirement to recapitalize the Bank. These ~~Any~~regulatory ~~required~~actions ~~increase~~and inany ~~our~~future ~~allowance~~actions ~~for~~could ~~loan~~continue ~~losses~~to ~~would~~ adversely affect our earnings, business and operations. In ~~Additional~~addition, ~~information~~failure ~~regarding~~to ~~the~~comply ~~allowance for~~with ~~loan~~these ~~losses~~regulatory isactions ~~included~~or any future actions could result in ~~“Management’s~~further ~~Discussion~~regulatory ~~and~~actions ~~Analysis~~or ~~of Financial~~restrictions, ~~Condition~~including ~~and~~monetary ~~Results~~penalties ofand ~~Operations~~the —potential ~~Allowance~~closure ~~for~~of ~~Loan Losses~~Frontier Bank.”

~~-13-~~The downturn in the real estate market and weakness in the economy continue to adversely affect our financial condition and profitability.

We are currently operating in a challenging and uncertain economic environment, both nationally and in our Washington and Oregon markets. Like many other financial institutions, we are being affected by sharp declines in residential and commercial real estate values, with rising foreclosures and unemployment, and constrained financial markets. Continued declines in residential and commercial real estate values and home sales and financial stress on borrowers as a result of the uncertain economic environment and job losses, could have an adverse effect on our borrowers or their customers and demand for our products and services, which could adversely affect our financial condition and earnings, increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

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~~Defaults and~~FRONTIER ~~related~~FINANCIAL ~~losses~~CORPORATION inAND our real estate construction and land development loan portfolios could result in a significant increase in other real estate owned (“OREO”) balances and the number of properties to be disposed of, which would adversely affect our financial results.SUBSIDIARY

AsWe ~~part of~~have ~~our~~been ~~collection~~experiencing ~~process~~significant ~~for~~deterioration ~~all~~in ~~nonperforming~~our ~~loans, we may foreclose on and take title to the real estate serving as collateral for the~~ loan. Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as other real estate owned (“OREO”) property. We expect to take additional properties into OREO. Increased OREO balances lead to greater expenses as we incur costs to manage and dispose of the properties andportfolio, ~~in certain~~centered ~~cases, complete construction of improvements prior to sale. Any decrease~~ in ~~sale prices on properties may lead to OREO write-downs with a corresponding expense in~~ our ~~income~~residential ~~statement.~~construction ~~We expect that our earnings over the next several quarters could be negatively affected by various expenses associated with OREO, including personnel costs, insurance~~ and ~~taxes,~~land ~~completion~~development ~~and repair costs, and other costs associated with property ownership, as well as by the funding costs associated with assets that are tied up in real estate during the period they are held in OREO~~loans. ~~We will also be at risk of further declines in real estate prices in the market areas in which we conduct our lending business.~~

As of December 31, 2009, approximately 84.0% of our loan portfolio was comprised of loans secured by real estate, made up of 33.7% commercial real estate loans, 15.6% construction loans, 14.8% term 1-4 family residential loans, 11.1% land development loans and 8.8% completed lot loans. We have been experiencing deterioration ~~may~~in ~~need~~our loan portfolio, centered in our residential construction and land development loans. Many of these loans are maturing and classified as nonperforming assets while we work with borrowers to ~~raise~~maximize ~~additional~~our ~~capital~~recovery. If ~~which~~loan ~~may~~payments ~~not~~from beborrowers ~~available~~are over 90 days past due, or ~~may~~sooner ~~adversely affect~~if ~~existing~~normal ~~shareholders~~repayment cannot resume, the loans are placed on nonaccrual status, thereby reducing and/or reversing previously accrued interest income. Our ~~Alternatively~~nonperforming loans increased significantly over the past year, wefrom ~~may~~$435.2 ~~have~~million to ~~take~~$705.2 million, $426.8 million of which were residential construction and land development loans, which represent 55.6% of our residential construction and land development loans. The contraction or expansion of our nonaccrual loan portfolio and other ~~steps~~real toestate owned (“OREO”) properties in future periods will depend upon our ongoing collection efforts and changes in market conditions. We have a dedicated team of 42 employees focused on the ~~preserve~~management ~~capital~~of problem loans, but there is no guarantee that this team will be able to effectively manage the amount of problem loans we may encounter in the future. Additional information regarding credit risk is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Loans.”

WeDue ~~may need~~ to ~~raise~~unforeseen ~~additional~~circumstances ~~capital~~and/or changes in ~~the future through financings to maintain desired levels of capital ratios~~estimates, ~~to improve~~ our ~~financial~~allowance ~~condition, or to increase liquidity available~~ for ~~operations.~~loan ~~Any~~losses ~~equity or debt financing, if available at all,~~ may not be ~~available~~adequate ~~on terms that are favorable~~ to ~~us.~~cover Inactual the case of equity financings, dilution to our existing shareholders could result and, in any case, securities issued may have rights, preferences and privileges that are senior to those of our current shareholderslosses. Debt financing could also negatively affect future earnings due to interest charges. If additional capital is projected to be needed and is unavailable on acceptable terms through available financing sources, we may need to take further steps to preserve capital, including further curtailing our lending activities and new loan commitments, selling certain assets, increasing loan participations, and/or other steps.

An essential element of our business is to make loans. We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio. Our loan portfolio and allowance for loan losses are assessed each quarter by management, and were subject to recent examinations ~~operate~~by inour federal and state regulators. As of December 31, 2009, our allowance for loan losses increased to $151.3 million, or 5.27% of our total loans of $2.87 billion, as a ~~highly~~result ~~regulated~~of ~~environment~~significant additional provisions for loan losses and charge-offs in 2009. See “Management’s Discussion & Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses.” The determination of the appropriate level of loan loss allowance as well as the appropriate amount of loan charge-offs (net of loan recoveries) is an inherently difficult process and is based on numerous assumptions and there may be ~~adversely~~a ~~affected~~range by of potential estimates. The amount of future losses is susceptible to changes in ~~laws~~economic, operating and ~~regulations~~other conditions, including changes in our real estate markets and interest rates that are beyond our control. Our underwriting policies, credit monitoring processes and risk management systems and controls may not prevent unexpected losses. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any such additional loan losses, should they occur, would adversely affect our financial condition and profitability.

The Corporation is subject to extensive regulation, supervision and examination by the Federal Reserve Board, its holding company regulator, and Frontier Bank is subject to extensive supervision and examination by the Washington Department of Financial Institutions, its chartering authority, and the Federal Deposit Insurance Corporation (“FDIC”), as insurer of Frontier Bank’s deposits. Such regulations and supervision govern the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and our depositors, not our shareholders. For example, the FDIC and the Federal Reserve Board recently issued joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices that sets forth supervisory criteria to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The Guidance applies to Frontier Bank, based on our current loan portfolio, and we expect that our business and operations will be subject to enhanced regulatory review for the foreseeable future. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action may have a material impact on our operations.-16-

Market and other constraints on our real estate construction loan origination volume are expected to lead to decreases in our interest and fee income that are not expected to be fully offset by reductions in our noninterest expenses.

Due to existing conditions in housing markets in the areas where we operate, the recession and other factors, we project our real estate construction loan originations to be materially constrained in 2009. This will lower interest income and fees generated from this part of our business. Unless this revenue decline is offset by other areas of our operations, our total revenues may decline relative to our total noninterest expense. We expect that it will be difficult to find new revenue sources in the near term to completely offset expected declines in our interest income.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Defaults and related losses in our residential construction and land development loan portfolio could result in a significant increase in OREO balances and the number of properties to be disposed of, which would adversely affect our financial results.

As part of our collection process for all nonperforming real estate loans, we may foreclose on and take title to the property serving as collateral for the loan. Real estate owned by us and not used in the ordinary course of our operations is referred to as other real estate owned (“OREO”) property. We expect to take additional properties into OREO. Increased OREO balances lead to greater expenses as we incurs costs to manage and dispose of the properties and, in certain cases, complete construction of improvements prior to sale. Any decrease in sale prices on properties may lead to OREO write-downs with a corresponding expense in our statement of operations. Our management expects that earnings over the next several quarters could be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, and other costs associated with property ownership, as well as by the funding costs associated with assets that are tied up in real estate during the period they are held in OREO. The management and oversight of OREO is time consuming and can be complex and can require significant resources of our management and employees. We will also be at risk of further declines in real estate prices in the market areas in which we conduct our lending business.

We may have continuing losses and continuing variation in our quarterly results.

We reported net losses of $295.1 million during the year ended December 31, 2009. This loss primarily resulted from our high level of nonperforming assets and the resultant reduction in interest income and increased provision for loan losses. We may continue to suffer further losses as a result of credit-related factors. In addition, several other factors affecting our business can cause significant variations in our quarterly results of operations. In particular, variations in the volume of our loan originations and sales, the differences between our costs of funds and the average interest rate earned on investments and other-than-temporary impairment charges in our investment securities portfolio could have a material adverse affect on our results of operations and financial condition.

Our future earnings may be adversely affected by legal and regulatory actions taken against us, as well as those legal actions that Frontier has and may pursue.

Frontier and Frontier Bank are involved in the regulatory, collection and potential foreclosure actions and proceedings referenced in “Item 3: Legal Proceedings,” which, if adversely determined, could have a material adverse effect on our consolidated financial position, results of operations or cash flows and our ability to raise capital. Moreover, the expenses of pending legal proceedings will adversely affect our results of operations until they are resolved.

Our profitability and the value of shareholders’ investments may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.

We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels in the financial services area. Recently enacted, proposed and future legislation and regulations have had, and will continue to have, or may have a significant impact on the financial services industry. These regulations, which are generally intended to protect depositors and not stockholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably and can be expected to influence earnings and growth. For example, the FDIC and the Federal Reserve recently issued joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices that sets forth supervisory criteria to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The Guidance applies to Frontier Bank, based on our current loan portfolio, and our management expects that our business and operations will be subject to enhanced regulatory review for the foreseeable future. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of allowance for loan losses. Our success depends on our continued ability to maintain compliance with these regulations. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Market and other constraints on our construction loan origination volume are expected to lead to decreases in our interest and fee income that are not expected to be fully offset by reductions in our noninterest expenses.

Due to existing conditions in housing markets in the areas where we operate, the recession and other factors, we project construction loan originations to be materially constrained in 2010 and beyond. Additionally, management’s revised business plan will de-emphasize the origination of construction loans. This will lower interest income and fees generated from this part of our business. Unless this revenue decline is offset by other areas of operations, our total revenues may decline relative to our total noninterest expense. We expect that it will be difficult to find new revenue sources in the near term to completely offset expected declines in our interest income. In that regard, the adverse economic conditions that began in 2007 and that have continued into 2010 have significantly reduced our origination of all new loans, and management cannot give assurance that our total loans or assets will increase or not decline in 2010.

The value of certain securities in our portfolio may be negatively affected by disruptions in the market for these securities.

The market for certain securities held within our portfolio has become more volatile over the past year. These volatile markets may affect the value of these securities, such as through reduced valuations due to the perception of heightened credit and liquidity risks, in addition to interest rate risk typically associated with these securities. There can be no assurance that the declines in market value associated with these disruptions will not result in impairments of these assets, which would lead to accounting charges that could have a material adverse ~~effect~~affect on our net income, equity and capital ratios.

Fluctuations in interest rates could reduce our profitability and affect the value of our assets.

Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest- earning assets such as loans and securities and interest expense paid on interest- bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including but not limited to; general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the amount of interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits as well as the fair value of our financial assets and liabilities. If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, our net interest income, and therefore earnings, could be adversely ~~effected~~affected. Earnings could also be adversely affected if the interest we receive on loans and other investments fall more quickly than the interest we pay on deposits and other borrowings. Additional information regarding how we manage our interest rate risk is included in Item 7A of this report captioned “Quantitative and Qualitative Disclosures about Market Risk.”

Concern of customers over ~~deposit~~the ~~insurance~~safety of their deposits may cause a decrease in deposits.

With recent increased concerns about bank failures, customers increasingly are concerned about the safety of their deposits and the extent to which their deposits are insured by the FDIC. Customers may not believe Frontier Bank is a safe place to keep their deposit accounts and they may remove their deposit accounts. Additionally, customers may withdraw deposits from Frontier Bank in an effort to ensure that the amount they have on deposit at ~~the~~Frontier Bank is fully insured. Decreases in deposits may adversely affect our funding costs, liquidity and net income.

We depend on key personnel for success.

Our operating results and ability to adequately manage our growth and minimize loan and lease losses are highly dependent on the services, managerial abilities and performance of our current executive officers and other key personnel. We have an experienced management team that the Board of Directors believes is capable of managing and growing our operations. However, losses of or changes in our current executive officers or other key personnel and their responsibilities may disrupt our business and could adversely affect financial condition, results of operations and liquidity. We may not be successful in retaining our current executive officers or other key personnel.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us ~~could~~ could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of weak economic conditions in the western Washington and northwest Oregon markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the turmoil currently faced by financial institutions and the continued deterioration in credit markets and the economy. Additional information regarding liquidity risk is included inon this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —- Liquidity Resources and Capital Requirements.”

Our ability to service our debt, pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from Frontier Bank, and these distributions are subject to regulatory limits and other restrictions.

A substantial source of our income from which we service our debt, pay our obligations and from which we can pay dividends is the receipt of dividends from Frontier Bank. The availability of dividends from Frontier Bank is limited by various statutes and regulations., and under the FDIC Order the Bank is currently prohibited from paying cash dividends without the prior consent of the FDIC and the DFI. It is possible; depending upon the financial condition of Frontier Bank, and other factors, that the applicable regulatory authorities could assert that payment of dividends or other payments is an unsafe or unsound practice. If Frontier Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on our common stock. The inability to receive dividends from Frontier Bank would adversely affect our business, financial condition, results of operations and prospects. Additional information regarding dividend restrictions is included in Item 1 of this report captioned “Regulation and Supervision.”

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Strong competition within our market areas may limit our growth and adversely affect our operating results.

The banking and financial services industry is highly competitive. We compete in our market areas with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of of these competitors have substantially greater resources and lending limits than we do, have greater name recognition and market presence that benefit them in attracting business and deposits, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our results of operations depend upon our continued ability to successfully compete in our market area. The greater ~~resources~~ resources and deposit and loan products offered by some of our competitors may limit our ability to increase or maintain our interest earning assets. In that regard, the adverse economic conditions that began in 2007 and that have continued into ~~2009~~2010 have significantly reduced our origination of new loans, and we ~~cannot~~there ~~assure~~is ~~you~~no assurance that our total loans or assets will increase or not decline in ~~2009~~2010.

~~We will~~Further beincreases ~~required~~in toFDIC ~~pay~~insurance ~~significantly~~premiums ~~higher~~or ~~Federal~~special ~~Deposit~~assessments ~~Insurance Corporation~~could ~~(“FDIC”)~~adversely ~~premiums~~impact inour ~~the future~~earnings.

Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects a higher rate of insured institution failures in the next few years compared to ~~recent~~ recent years; thus, the reserve ratio may continue to decline. In addition, the Emergency Economic Stabilization Act of 2008 (“EESA”) temporarily increased the limit on FDIC coverage to $250,000 through December 31, 2009. These developments will cause the premiums assessed to us by the FDIC to increase. Under the final rule adopted December 16, 2008, Frontier Bank’s assessment rate will increase from 5 to 7 basis points per $100 of deposits to approximately 14 to 30 basis points in 2009. The increased deposit insurance premiums are expected to result in a significant increase in our noninterest expense, which will have a material impact on our results of operations beginning in 2009.

On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. We recorded an expense of $1.9 million for the fiscal year ended December 31, 2009, to reflect the special assessment. In addition, the FDIC increased the general assessment rate and the rate is scheduled to increase again by 3 basis points in 2011.

Should the FDIC find it necessary to impose any further special assessments or further increase assessment rates, or to revise the risk-based assessment system, our FDIC general insurance premium expense could increase compared to prior periods.

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Our controls and procedures may fail or be circumvented.

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

We continually encounter technological change.

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

We are subject to operational risk, which may result in incurring financial and reputation losses.

We are exposed to many types of operational risk, including the risk of fraud by employees or outsiders, the risk of operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Given our high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully corrected. Our dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering with or manipulation of those systems will result in losses that are difficult to detect.

We may be subject to disruptions of our systems, arising from events that are wholly or partially beyond our control (including, for example, computer viruses or electrical or telecommunications outages), which may give rise to losses in service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate.

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We are exposed to risk of environmental liabilities with respect to properties to which we take title.

Approximately 86 84.10% of our outstanding loan portfolio, at December 31, ~~2008~~2009, was secured by real estate. In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third-parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third-parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

We may not be able to attract and retain skilled people.

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

Our earnings may be affected by changes in accounting principles and tax laws.

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

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, interrupt our information systems, and/or cause us to incur additional expenses. Although management has established disaster recovery plans and procedures, the occurrence of any such event could have a material adverse ~~effect~~affect on our business, which, in turn, could have a material adverse ~~effect~~affect on our financial condition and results of operations.

Risks Associated With Our ~~Common Shares~~Securities

The market price and trading volume of our common shares may be volatile and the value of our other securities may decline as a result of adverse changes in our financial performance, the economy, market conditions and other factors.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility ~~recently.~~in recent years. As a result, the market price of our common shares may be volatile. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. The trading price of the shares of our common shares and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity-related securities, and other factors, including those identified above in “Forward-Looking Statements.”

Current levels of market volatility are unprecedented.

The capital and credit markets have been experiencing volatility and disruption for more than a year. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

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Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system or economy or benefit us.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”) in response to the financial crises affecting the banking system and financial markets. The U.S. Department of the Treasury and banking regulators are implementing a number of programs under this legislation to address capital and liquidity issues in the banking system. Subsequently, on February 17, 2009, President Obama signed the American Recovery and Reinvestment Act, to stimulate the economy. There can be no assurance, however, as to the actual impact that these programs and legislation or any other governmental program will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced, or on the economy. The failure of any such program or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions and the national and regional economy is expected to materially and adversely affect our business, financial condition, results of operations, access to credit and the trading price of our common stock.

Pursuant to the EESA, the Treasury has the authority to, among other things, purchase up to $700 billion (of which $250 billion is currently available) of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Shortly following the enactment of EESA, the Treasury created a capital purchase program, pursuant to which it is providing access to capital to financial institutions through a standardized program to acquire preferred stock (accompanied by warrants) from eligible financial institutions that will serve as Tier I capital, and the FDIC approved the temporary liquidity guaranty program, which is intended to strengthen confidence and encourage liquidity in the banking system by permitting the FDIC to (1) guarantee certain newly-issued senior unsecured debt issued by participating institutions and (2) fully insure noninterest bearing transaction deposit accounts held at participating FDIC-insured institutions. There can be no assurance regarding the specific impact that such measures may have on us – or whether (or to what extent) we will be able to benefit from such programs.

We expect to face increased regulation and supervision of our industry as a result of the existing financial crisis, and there will be additional requirements and conditions imposed on us to the extent that we participate in any of the programs established or to be established by the Treasury under the EESA or by the federal bank regulatory agencies. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities.

Shareholders’ interests may be diluted by future equity offerings or transactions.

In the future, we may attempt to increase our capital resources or, ~~if the Corporation’s or Frontier Bank’s capital ratios fall below the required minimums,~~ we could be forced to raise additional capital by making additional offerings of common stock, debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. In ~~Upon~~the event of liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings ~~will~~would receive distributions of our available assets prior to the holders of our common shares. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Holders of our common shares are not entitled to preemptive rights or other protections against dilution.

~~You may not receive any dividends on Frontier common shares.~~-21-

Holders of our common shares are entitled to receive dividends only when, and if declared by our board of directors. The board of directors recently decided to suspend the payment of dividends on our common shares indefinitely in order to preserve capital.

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Shareholders’ may not receive any dividends on Frontier common shares.

On December 19, 2008, we announced that we had suspended payment of cash dividends on our common stock. Commencing with the interest payments due February 23, 2009, we exercised our right to defer regularly scheduled interest payments on our outstanding junior subordinated debentures related to trust preferred securities. We may not pay any cash dividends on our common stock until we are current on interest payments on our outstanding junior subordinated debentures. In addition, cash dividends from the Bank are the primary source of funds for payment of cash dividends to our shareholders, and under the FDIC Order the Bank is currently prohibited from paying cash dividends without the prior consent of the FDIC and the DFI. We are also prohibited from paying dividends under the FRB Written Agreement without the prior consent of the Reserve Bank and the DFI.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

~~The~~Our ~~Bank owns the properties and buildings housing our~~ principal office, ~~data~~is ~~processing and~~located ~~operations~~in ~~center~~a ~~and~~ninety 29thousand ofsquare ~~our~~foot ~~branch~~facility ~~facilities, including the branch~~ in ~~our~~ ~~principal~~Everett, ~~office~~Washington. ~~The~~Our ~~Bank~~data ~~also~~processing ~~owns~~and ~~the~~operations ~~buildings~~center ~~for~~are 3located ofin ~~our branches~~a ~~which~~sixteen ~~are~~thousand square foot facility located onin ~~leased~~Everett, ~~land~~Washington. WeIn ~~lease~~addition ~~the~~to ~~land~~our principal and ~~buildings~~ ~~for~~administrative 19facilities, ofwe ~~our~~operate ~~branch~~50 offices~~. The~~ ~~leases~~in ~~on our branch~~western ~~offices~~Washington ~~have~~and ~~expiration~~northwestern ~~dates ranging from 2009 to 2034~~Oregon.

The ~~aggregate~~ ~~monthly~~Bank ~~rental~~owns onthe properties and buildings housing our principal office, data processing and operations center and 29 of our branch facilities, including the branch in our principal office. The Bank also owns the buildings for 3 of our branches which are located on leased ~~properties~~land. We islease ~~approximately~~the land and buildings for 18 ~~$173 thousand~~of our branch offices. The leases on our branch offices have expiration dates ranging from 2010 to 2024.

The aggregate monthly rental on our leased properties is approximately $193 thousand.

ITEM 3. LEGAL PROCEEDINGS

~~ITEM~~We 4are periodically a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of business, such as claims to enforce liens, foreclose on loan defaults, and other issues incident to its business. ~~SUBMISSION~~As OFof ~~MATTERS~~December TO31, A2009, ~~VOTE~~Frontier OFBank ~~SHAREHOLDERS~~had commenced collection proceedings on approximately 507 real estate loans, and there may be additional lawsuits or claims arising out of or related to the impaired loans.

We are unable to predict the outcome of these matters. Our cash expenditures, including legal fees, associated with the pending litigation described above, and the regulatory proceedings described in Item 1 of this report under the caption “Regulation and Supervision,” cannot be reasonably predicted at this time. Litigation and any potential regulatory actions or proceedings can be time-~~19-~~consuming and expensive and could divert management time and attention from our business, which could have a material adverse affect on our business, results of operations and financial condition.

Other than the regulatory proceedings described or referenced above and the anticipated institution of additional lawsuits or claims arising out of or related to the impaired loans, including lender liability claims and counterclaims, management does not believe that there are any proceedings threatened or pending against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.

ITEM 4. RESERVED

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

PART II

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Our common stock is traded on the NASDAQ Stock Market LLC under the symbol “FTBK.” The high and low sales prices of our common stock, by quarter, during the years ended December 31, ~~2008~~2009 and ~~2007~~2008, are as follows:

	Year Ended December 31,
	2008				2007
	2009				2008
	High		Low		High		Low
First Quarter	$	2050.2120	$	1511.0620	$	29202.9710	$	24150.7155
Second Quarter		1925.90		811.2840		26198.9295		2282.2180
Third Quarter		17.8910		86.7255		26178.1785		2087.1720
Fourth Quarter		139.1090		23.1841		25130.1495		1721.5080

(b) We only have one class of stock outstanding, which is common stock. At March 219, ~~2009~~2010, there were 474,~~131~~725,~~853~~076 shares outstanding and there were 11 approximately 10,~~471~~601 holders of record of our common stock. The principal market for our common stock is The NASDAQ Stock Market LLC.

(c) We did not pay quarterly cash dividends in 2009. The ~~table~~ ~~below~~payment ~~indicates~~of ~~the~~future cash dividends ~~paid~~is onat ~~each~~the ~~share~~discretion of ~~our~~the ~~common~~Board ~~stock~~of Directors and is subject to a number of factors, including results of operations, general business conditions, growth, financial condition and other factors deemed relevant. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in Note 2 of the ~~years~~Annual ~~ended~~Report ~~December~~to ~~31,~~Shareholders. Given ~~2008~~our current operating results and ~~2007:~~need to raise additional capital, it is highly unlikely that dividends will be paid in the foreseeable future.

Dividend Declared		Record Date	Payment Date
$	0.175	January 7, 2008	January 21, 2008
	0.180	April 7, 2008	April 21, 2008
	0.060	July 8, 2008	July 22, 2008
	0.060	October 7, 2008	October 21, 2008
$	0.155	January 9, 2007	January 22, 2007
	0.160	April 10, 2007	April 24, 2007
	0.165	July 10, 2007	July 24, 2007
	0.170	October 9, 2007	October 23, 2007

Additionally, our junior subordinated debt agreement prohibits us from paying dividends on shares of our common stock if we defer payment of interest on outstanding trust preferred securities. Commencing with the interest payments due in the first quarter of 2009, we elected to defer our quarterly interest payments on the junior subordinated debentures, as permitted by the indenture agreement.

~~On December~~The ~~19,~~table ~~2008,~~below ~~the~~indicates ~~Board of Directors voted to suspend~~ the ~~payment of the quarterly~~ cash ~~dividend,~~dividends ~~beginning~~paid inon ~~the~~each ~~first~~share ~~quarter~~ of ~~2009. The Board~~our ofcommon ~~Directors~~stock ~~determined~~in ~~that~~ the ~~suspension~~year ofended ~~the~~December ~~cash~~31, ~~dividend~~2008, ~~was prudent~~adjusted tofor ~~preserve capital in light of current economic conditions. The payment of dividends is within~~ the ~~discretion~~one-for-ten ofreverse ~~the Board~~stock ~~of Directors and will depend upon our earnings~~split, ~~capital~~effective ~~requirements~~November ~~and liquidity~~24, ~~among other factors.~~2009:

Additionally, our junior subordinated debt agreement prohibits us from paying dividends on shares of our common stock if we defer payment of interest on outstanding trust preferred securities. We are current on our interest payments on our trust preferred securities at December 31, 2008.

Dividend Declared		Record Date	Payment Date
$	1.75	January 7, 2008	January 21, 2008
	1.80	April 7, 2008	April 21, 2008
	0.60	July 8, 2008	July 22, 2008
	0.60	October 7, 2008	October 21, 2008

(d) ~~On August~~The ~~16,~~following ~~2006,~~table ~~the~~sets ~~Board~~forth ofinformation ~~Directors~~regarding ~~announced~~outstanding ~~the~~options ~~adoption~~and ~~of a stock repurchase plan authorizing us to repurchase 2,263,323~~ shares ofreserved ~~common~~for ~~stock outstanding. This~~issuance ~~plan~~under ~~expired~~our ~~in August 2008. There were no~~ stock-based ~~repurchases~~compensation ~~in the fourth quarter of 2008 or for the year ended December 31, 2008.~~plans:

We also have certain stock option and restricted stock plans which provide for the payment of the option exercise price or withholding taxes by tendering previously owned or recently vested shares. There were no shares tendered in connection with options exercised for the year ended December 31, 2008. For the year ended December 31, 2007, 2,760 shares were tendered in connection with options exercised. Restricted shares cancelled to pay withholding taxes totaled 17,123 shares and 7,184 shares for the years ended December 31, 2008 and 2007, respectively.

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by
security holders (A)		231,724	$	84.65		322,357
Equity compensation plans not approved by
security holders (B)		926		N/A		-
		232,650				322,357

(A) Consists of FFC Incentive Stock Options Plan
(B) Consists of FFC 1999 Employee Stock Award Plan, which expired in 2009

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Five-Year Stock Performance Graph

Total Cumulative Return to Shareholders

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

Index	~~12/31/2003~~	12/31/2004	~~12/31/2005~~	~~12/31/2006~~	~~12/31/2007~~	12/31/~~2008~~2005		12/31/2006		12/31/2007		12/31/2008		12/31/2009
Frontier Financial Corporation	~~$ 100.00~~	$ ~~118.61~~	~~$ 150~~100.2800	~~$ 208.48~~	~~$ 137.08~~	$ ~~35.69~~	126.70	$	175.77	$	115.57	$	30.09	$	2.42
NASDAQ Bank Index	~~$ 100.00~~	$ ~~114.44~~	~~$ 111~~100.8100	~~$ 125.46~~	~~$ 151.48~~	$ ~~110.44~~	97.70	$	109.63	$	132.37	$	96.51	$	80.86
S&P 500 Index	~~$ 100.00~~	$ ~~110.97~~	~~$ 114~~100.3000	~~$ 132.35~~	~~$ 139.61~~	$ ~~87.96~~	103.00	$	119.26	$	125.81	$	79.26	$	100.24

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ITEM 6. SELECTED FINANCIAL DATA

In thousands, except per share amounts
																% Change
AT YEAR END	2008			2007			2006			2005			2004				2008-2007
Total assets	$	4,104,445		$	3,995,689		$	3,238,464		$	2,640,275		$	2,243,396			2.7	%
Net loans		3,666,177			3,558,127			2,867,351			2,355,419			1,945,324			3.0	%
Securities		93,691			135,121			114,711			110,617			153,451			-30.7	%
Deposits		3,275,165			2,943,236			2,453,632			2,061,380			1,795,842			11.3	%
Shareholders' equity		352,043			459,612			395,283			296,097			254,230			-23.4	%
FOR THE YEAR
Interest income	$	279,055		$	299,672		$	250,144		$	178,886		$	140,228			-6.9	%
Interest expense		112,185			113,041			86,942			51,736			34,939			-0.8	%
Net interest income		166,870			186,631			163,202			127,150			105,289			-10.6	%
Securities gains (losses)		4,570			(937	)		(25	)		(211	)		(44	)		-587.7	%
Provision for loan losses		120,000			11,400			7,500			4,200			3,500			952.6	%
Net income (loss)		(89,737	)		73,938			68,910			51,584			43,045			-221.4	%
Basic earnings (loss) per share	$	(1.91	)	$	1.63		$	1.53		$	1.21		$	1.03			-217.2	%
Diluted earnings (loss) per share	$	(1.91	)	$	1.62		$	1.52		$	1.21		$	1.02			-217.9	%
Cash dividends declared
per common share	$	0.48		$	0.65		$	0.50		$	0.40		$	0.34			-26.9	%
Dividend payout ratio		-25.1	%		40.1	%		32.9	%		33.1	%		33.3	%		-162.6	%
Return on Average
Assets		-2.18	%		2.13	%		2.27	%		2.09	%		1.98	%		-202.3	%
Equity		-19.42	%		18.76	%		18.91	%		18.75	%		18.35	%		-203.5	%
Avg. equity/avg. assets		11.25	%		11.36	%		11.98	%		11.16	%		10.76	%		-1.0	%
Efficiency Ratio		45	%		37	%		38	%		41	%		42	%		21.6	%

FINANCIAL HIGHLIGHTS

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In thousands, except per share amounts and percentages
																% Change
AT YEAR END	2009			2008			2007			2006			2005				2009-2008
Total assets	$	3,594,984		$	4,104,445		$	3,995,689		$	3,238,464		$	2,640,275			-12.4	%
Net loans		2,718,149			3,666,177			3,558,127			2,867,351			2,355,419			-25.9	%
Securities		87,194			93,691			135,121			114,711			110,617			-6.9	%
Deposits		3,122,476			3,275,165			2,943,236			2,453,632			2,061,380			-4.7	%
Shareholders' equity		61,486			352,043			459,612			395,283			296,097			-82.5	%

FOR THE YEAR
Interest income	$	177,533		$	279,055		$	299,672		$	250,144		$	178,886			-36.4	%
Interest expense		93,462			112,185			113,041			86,942			51,736			-16.7	%
Net interest income		84,071			166,870			186,631			163,202			127,150			-49.6	%
Provision for loan losses		375,000			120,000			11,400			7,500			4,200			212.5	%
Securities gains (losses)		(102	)		4,570			(937	)		(25	)		(211	)		-102.2	%
Net income (loss)		(295,094	)		(89,737	)		73,938			68,910			51,584			228.8	%
Basic earnings (loss) per share	$	(62.61	)	$	(19.10	)	$	16.33		$	15.31		$	12.14			227.8	%
Diluted earnings (loss) per share	$	(62.61	)	$	(19.10	)	$	16.21		$	15.15		$	12.07			227.8	%
Cash dividends declared
per common share	$	-		$	4.75		$	6.50		$	5.00		$	4.00			-100.0	%
Dividend payout ratio		0.0	%		-25.1	%		40.1	%		33.0	%		33.1	%		-100.0	%
Return on Average
Assets		-6.51	%		-2.18	%		2.13	%		2.27	%		2.09	%		198.6	%
Equity		-101.36	%		-19.42	%		18.76	%		18.91	%		18.75	%		421.9	%
Avg. equity/avg. assets		6.42	%		11.25	%		11.36	%		11.98	%		11.16	%		-42.9	%
Efficiency Ratio		98	%		45	%		37	%		38	%		41	%		117.8	%

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

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

Frontier Financial Corporation (the “Corporation”), a Washington corporation, is a bank holding company owning all of the equity of its wholly owned subsidiary, Frontier Bank (the "Bank").

Financial Overview

For the year ended December 31, ~~2008~~2009, we had a net loss of $89295.71 million, or ($162.9161) per diluted share, compared to a net ~~income~~loss of $7389.97 million, or ($119.6210) per diluted share, for the year ended December 31, ~~2007~~2008, and net income of $6873.9 million, or $116.5221 per diluted share, for the year ended December 31, ~~2006~~2007. ~~The 2008~~All ~~net~~prior ~~loss~~period results isreflect ~~primarily attributable to~~ the ~~increase in the provision~~ one-for ~~loan~~-ten ~~losses~~reverse asstock ~~compared to 2007 and 2006~~split, ~~and~~which awas ~~$77.1~~effective ~~million~~November ~~non-cash~~24, ~~goodwill impairment charge~~2009.

~~For~~The ~~the year~~results ~~ended December 31, 2008, the provision~~ for ~~loan~~2009 ~~losses~~reflect ~~totaled~~continued ~~$120.0 million,~~pressure ~~compared~~from toan ~~$11.4~~uncertain ~~million~~economy ~~for the year ended December 31, 2007,~~ and ~~$7.5~~ ~~million for~~ the ~~year~~negative ~~ended~~impact ~~December 31, 2006. The increase in the provision for loan losses is largely attributable to the deterioration in the credit quality~~ of ~~our loan portfolio due to~~ the ~~downturn~~regional ~~in the economy and the adverse effects on the~~ housing market. AtThe ~~December~~impact ~~31, 2008, nonperforming assets were 10.87%~~ of ~~total assets, compared to 0.53% at December 31, 2007, and 0.27% at December 31, 2006. Net charge-offs totaled $63.0 million, $920 thousand and $2.9 million for~~ the ~~three~~economic ~~years~~downturn ~~ended~~resulted ~~December 31, 2008, 2007 and 2006, respectively.~~in:

~~At December~~· ~~31,~~Allowance ~~2008,~~for ~~assets~~loan ~~totaled~~losses of $4151.103 ~~billion~~million, ~~compared~~or ~~to $4~~5.0027%, ~~billion~~of total loans outstanding at December 31, ~~2007. The~~2009, ~~increase~~compared ofto $~~108~~112.86 million, or 2.798%, ~~is attributable~~at ~~to an increase in net loans during the period. At~~ December 31, 2008, ~~net~~and ~~loans totaled~~ $354.670 ~~billion~~million, ~~compared~~or ~~to $3~~1.5649%, ~~billion~~ at December 31, 2007.

~~At December~~· ~~31,~~Net ~~2008,~~charge-offs ~~capital~~of ~~totaled~~ $~~352~~337.03 million, ~~compared~~for ~~to $459.6 million at December 31~~2009, ~~2007. Total tangible capital at December 31, 2008, was $351.2 million,~~ compared to $~~381~~63.~~5 million at December 31, 2007. For the year ended December 31, 2008, we paid cash dividends totaling $22.4 million, compared to $29.~~0 million ~~for the year ended December 31, 2007. For the third~~ and ~~fourth quarters of 2008, the Board of Directors declared a~~ $~~0.06 per~~920 ~~share~~thousand ~~quarterly cash dividend. This compares to quarterly cash dividends of $0.165 and $0.17 per share~~ for ~~the~~2008 ~~third~~ and ~~fourth quarters of~~ 2007, respectively. The decision to reduce the quarterly cash dividend came as a result of our concern over the continuing deterioration in the economy and housing market and the need to preserve capital. Beginning in the first quarter of 2009, the Board of Directors decided to suspend payment of a quarterly cash dividend to further preserve capital.

~~Recent Developments~~· Nonperforming assets totaling $874.9 million, or 24.34% of total assets at December 31, 2009, compared to $446.0 million, or 10.87% of total assets at December 31, 2008.

~~Change in~~Despite ~~Management~~these challenging times, the Board of Directors and management continue to take important steps to strengthen the Corporation. During the year, we:

~~On December~~· 8,Successfully ~~2008,~~reduced weour ~~announced~~concentrations ~~that~~in ~~Robert~~real J.estate ~~Dickson,~~construction ~~founder, long-time Chief Executive Officer (“CEO”)~~ and ~~Chairman~~land ofdevelopment ~~the Board of Directors~~loans, ~~was~~including ~~retiring from~~undisbursed ~~his~~loan ~~position~~commitments as ~~Chairman~~defined ~~and~~by ~~would~~the ~~retire~~FDIC, ~~from~~by ~~the~~$979.7 ~~Board~~million, ofor ~~Directors~~48.7%, on from December 31, 2008~~. Mr.~~ ~~Dickson~~to ~~was~~December ~~the President and CEO of Frontier Bank since its founding in 1978 until 2003~~31, ~~and President and CEO of Frontier Financial Corporation from 1983 until 2003~~2009.

~~Director Patrick~~· M.Continued ~~Fahey~~to ~~replaced~~closely ~~Mr.~~monitor ~~Dickson~~and asmanage ~~Chairman~~our ofliquidity ~~the~~position ~~Board of Directors of Frontier Financial Corporation~~ and ~~Frontier~~at ~~Bank. Mr.~~December ~~Fahey~~31, ~~joined the~~2009, ~~Board~~total inliquidity, ~~2006 after retiring~~ as ~~Chairman~~a percentage of ~~Regional Banking at Wells Fargo Bank. Prior to that~~assets, ~~Mr. Fahey~~ was ~~Founder,~~at ~~President~~its ~~and~~highest ~~CEO~~level ~~of Pacific Northwest Bank~~ for 162009, ~~years~~totaling 13.5%.

~~Additionally, we~~· ~~also~~Successfully ~~announced~~reduced ~~two~~other ~~important~~targeted ~~changes~~noninterest ~~to the executive management team~~expenses. ~~Mr.~~ ~~Fahey~~Management ~~was~~set ~~named~~a ~~CEO~~goal of ~~Frontier~~reducing ~~Financial~~targeted ~~Corporation~~noninterest ~~and Director~~expense ~~Michael~~categories Jby $8.5 ~~Clementz~~million ~~was~~for ~~named~~2009. ~~President~~The ofcost ~~Frontier~~containment ~~Financial Corporation~~efforts ~~and~~resulted ~~CEO~~in ofa ~~Frontier~~reduction ~~Bank. Mr.~~of ~~Fahey~~targeted ~~brings~~expense ~~significant experience~~categories toby ~~his~~$10.2 ~~role~~million asin ~~CEO~~2009. ~~and~~Those iscategories ~~charged~~included ~~with~~salaries ~~implementing~~and abenefits, ~~revised business~~consulting, ~~plan~~marketing, ~~focused on growing a business banking franchise~~advertising, ~~rebalancing~~director ~~the loan~~fees ~~portfolio~~ and ~~cultivating~~expenses ~~business~~related ~~banking~~to furniture and ~~consumer deposits~~equipment.

~~-23-~~The results for the year ended December 31, 2009, also reflect a $90.7 million income tax benefit primarily related to newly enacted legislation that allows banks, such as Frontier Bank, which had not received government assistance in the form of TARP, to carryback losses incurred in 2008 or 2009 for a period of five years. We expect to receive an income tax refund of approximately $82.4 million in 2010.

Recent Events

On March 16, 2010, the Federal Deposit Insurance Corporation (“FDIC”) issued a Supervisory Prompt Corrective Action Directive (the “FDIC Directive”) to Frontier Bank. Refer to Note 2 of the Annual Report to Shareholders for further discussion.

On July 2, 2009, the Corporation entered into a Written Agreement (the “FRB Written Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). Refer to Note 2 of the Annual Report to Shareholders for further discussion.

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Table of Contents

~~John~~FRONTIER ~~J. Dickson~~FINANCIAL ~~transitioned~~CORPORATION ~~from~~AND his role as President and CEO of Frontier Financial Corporation to become President of Frontier Bank charged primarily with the ongoing operation of Frontier’s core business. Mr. Dickson will continue in his role as a Director of Frontier Financial Corporation and Frontier Bank.SUBSIDIARY

Having previously served as President and CEO of Frontier Financial Corporation for three years, Mr. Clementz will assist Mr. Fahey and Mr. Dickson in the ongoing operations of the business and the implementation of the new business banking operations. Mr. Clementz will continue to serve as a Director of Frontier Financial Corporation and Frontier Bank.

Merger of FFP into Frontier Bank

Effective December 30, 2008, Frontier Financial Corporation merged its wholly-owned subsidiary, FFP, Inc. (“FFP”) into Frontier Bank in a non-cash transaction. FFP owned certain real property leased to Frontier Bank for use in its operations. At December 30, 2008, FFP had assets totaling approximately $40.9 million and total equity of approximately $17.6 million. On a consolidated basis, this transaction had no effect on the financial statements of the Corporation for the year ended December 31, 2008.

Termination of Washington Banking Company Merger

On September 27, 2007, we announced that we had entered into an Agreement and Plan of Merger, dated September 26, 2007, with Washington Banking Company (“WBCO”), the parent company of Whidbey Island Bank, pursuant to which WBCO would merge with and into our organization. Both Boards of Directors approved the merger agreement on September 26, 2007, and the shareholders of WBCO approved the principal terms of the merger agreement at a special meeting of shareholders held on March 27, 2008.

Pursuant to the terms of the merger agreement, either party was entitled to terminate the merger agreement if the proposed merger was not consummated by June 30, 2008. We received a notice from WBCO on May 29, 2008, purporting to terminate the merger agreement, because in their opinion, the required regulatory approvals by federal banking authorities, which was a condition precedent to the merger, could not be obtained by June 30, 2008, and they were unwilling to extend the merger agreement.

In connection with the termination of the merger agreement, each party asserted they were entitled to a $5.0 million termination fee from the other party. On November 25, 2008, we announced that we had entered into an agreement providing for the settlement and mutual release of all claims against each other related to the termination of the merger agreement. The terms of the settlement have not been disclosed; however, neither party was required to make any payment to the other party.

Business Combinations

On November 30, 2007, we completed our merger with Bank of Salem. The year-over-year growth comparison includes the Bank of Salem impact. At closing, the Bank of Salem additions to our balance sheet included $199.8 million in loans, $8.6 million in securities, $169.5 million in deposits and $27.0 million in capital.

Branch Expansion

During 2007, we opened branches in Lacey, Bremerton, Gig Harbor and a loan production office in Vancouver, Washington. In addition, we acquired branches in Portland, Salem and Tigard, Oregon as a result of our merger with Bank of Salem. These activities resulted in 51 offices throughout Washington and Oregon.

During the third quarter of 2008, we closed a loan production office in Vancouver, Washington, due to the decline in new loan originations and our unsuccessful efforts to locate a suitable permanent location. No new branches were opened during 2008 and we do not anticipating opening any in the near term.

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Table of Contents

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 and the accompanying notes. 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. We consider the allowance for loan loss a critical accounting policy subject to estimate. For additional information regarding the allowance for loan losses, ~~see~~refer to Allowance for Loan Losses in this Management’s Discussion and Analysis and Allowance for Loan Losses in Note 1 inof the ~~Notes~~Annual Report to ~~the Consolidated Financial Statements~~Shareholders.

Our 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 toof the ~~Consolidated~~Annual ~~Financial~~Report ~~Statements~~to Shareholders). We believe that the allowance for loan losses is one of the more critical judgment areas in the application of our accounting policies that affect financial condition and results of operations.

Material estimates particularly susceptible to significant change relate to the determination of the allowance for loan losses, the assessment of impaired loans, deferred income taxes, fair value measurements, the valuation of stock options and 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.

Review of Financial Condition

Securities

At December 31, ~~2008~~2009, securities totaled $9387.72 million, compared to $~~135~~93.17 million at December 31, ~~2007~~2008, a decrease of $416.45 million, or 30 6.79%. The ~~decrease is primarily attributable to the sale and maturity of securities, the write~~year-~~down of securities deemed other~~over-~~than-temporarily~~year ~~impaired~~decrease ~~and decreases~~ in ~~the~~securities ~~fair~~is ~~value~~primarily ofattributable ~~available~~to ~~for sale securities. During 2008, security~~ sales and maturities ~~totaled~~ totaling $~~334~~64.45 million, ~~which~~principal ~~was~~repayments ~~partially~~on ~~offset~~mortgage-backed bysecurities ~~purchases~~ totaling $~~306~~8.12 million~~. Also during 2008~~, ~~we wrote-off $6.4 million related to the other-than-temporary~~ ~~impairment~~amortization of ~~our~~net ~~investments~~purchase inprice ~~Fannie~~premiums ~~Mae,~~of ~~Freddie~~$848 ~~Mac~~thousand and ~~Lehman Brothers. For~~a ~~the~~decrease ~~year~~in ~~ended~~the ~~December~~fair ~~31,~~value ~~2008,~~of ~~net unrealized losses on~~ available for sale securities ~~totaled~~of $3472 thousand.6 These ~~million,~~were ~~compared~~partially tooffset ~~net unrealized~~by ~~gains~~the purchase of $767.56 million ~~for the year ended December 31, 2007. Because we have the ability and intent to hold these securities until a market price recovery or until maturity, none~~ of ~~the~~available ~~remaining~~for ~~securities~~sale ~~are considered other-than-temporarily impaired at December 31, 2008. Additional information about the~~ securities ~~portfolio is provided in Note 4 of the Consolidated Financial Statements~~.

~~The aggregate~~Additional ~~amortized~~information ~~costs~~about ~~and~~the ~~fair~~securities ~~values~~portfolio ofis ~~securities~~provided atin ~~December~~Note 313 ~~are~~of ~~as follows~~the ~~(in~~Annual ~~thousands):~~Report to Shareholders.

	2008				2007				2006
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Equities	$	6,107	$	1,930	$	27,606	$	34,575	$	29,052	$	39,507
U.S. Treasuries		6,304		6,457		6,223		6,311		4,204		4,248
U.S. Agencies		51,594		52,055		71,385		72,167		50,004		49,207
Corporate securities		6,052		6,192		17,062		16,704		18,198		18,002
Mortgage-backed securities		22,791		22,791		-		-		-		-
Municipal securities		4,416		4,521		5,352		5,387		3,753		3,771
	$	97,264	$	93,946	$	127,628	$	135,144	$	105,211	$	114,735

The following table presents the available for sale and held to maturity securities by major type as of December 31 for each of the last three years (in thousands):

-25-

	2009				2008				2007
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
AFS Securities
Equities	$	1,818	$	2,099	$	6,107	$	1,930	$	27,606	$	34,575
U.S. Treasuries		250		311		6,304		6,457		6,223		6,311
U.S. Agencies		39,786		39,877		51,594		52,055		71,385		72,167
Corporate securities		7,841		6,882		4,528		4,439		15,537		15,180
Mortgage-backed securities		32,653		33,336		22,791		22,791		-		-
Municipal securities		2,500		2,587		2,855		2,934		3,134		3,145
		84,848		85,092		94,179		90,606		123,885		131,378

HTM Securities
Corporate securities		1,524		1,435		1,524		1,753		1,525		1,524
Municipal securities		578		589		1,561		1,587		2,218		2,242
		2,102		2,024		3,085		3,340		3,743		3,766
Total	$	86,950	$	87,116	$	97,264	$	93,946	$	127,628	$	135,144

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Table of Contents

~~The following~~FRONTIER ~~table~~FINANCIAL ~~sets~~CORPORATION ~~forth~~AND ~~the maturities of securities at amortized cost (in thousands) at December 31, 2008. Tax equivalent values are used in calculating weighted average yields, assuming a 35% tax rate.~~SUBSIDIARY

				After 1 Yr			After 5 Yrs						Total &
	Within			But Within			But Within			After			Weighted
	1 Year/			5 Years/			10 Years/			10 Years/			Average
	Yield			Yield			Yield			Yield			Yield
Equities	$	-		$	-		$	-		$	6,107		$	6,107
		-			-			-			5.58	%		5.58	%
U.S. Treasury		6,053			-			251			-			6,304
		2.06	%		-			7.20	%		-			2.27	%
U.S. Agencies		5,000			46,594			-			-			51,594
		1.65	%		3.43	%		-			-			3.26	%
Corporate securities		-			2,011			-			4,041			6,052
		-			3.64	%		-			9.69	%		7.68	%
Mortgage-backed securities		-			-			-			22,791			22,791
		-			-			-			5.30	%		5.30	%
Municipal securities		744			1,322			1,374			976			4,416
		5.09	%		6.19	%		5.02	%		6.67	%		5.76	%
	$	11,797		$	49,927		$	1,625		$	33,915		$	97,264
		2.08	%		3.51	%		5.36	%		5.91	%		4.21	%

The following table sets forth the maturities of available for sale and held to maturity securities, at amortized cost, at December 31, 2009 (in thousands). Tax equivalent values are used in calculating weighted average yields, assuming a 35% tax rate.

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				After 1 Yr			After 5 Yrs						Total &
	Within			But Within			But Within			After			Weighted
	1 Year/			5 Years/			10 Years/			10 Years/			Average
	Yield			Yield			Yield			Yield			Yield
Equities	$	-		$	-		$	-		$	1,818		$	1,818
		-			-			-			0.42	%		0.42	%

U.S. Treasury		-			-			250			-			250
		-			-			7.20	%		-			7.20	%

U.S. Agencies		1,508			38,278			-			-			39,786
		3.86	%		1.38	%		-			-			1.48	%

Corporate securities		5,325			-			-			4,040			9,365
		0.38	%		-			-			10.13	%		4.59	%

Mortgage-backed securities		-			-			-			32,653			32,653
		-			-			-			4.16	%		4.16	%

Municipal securities		753			-			1,354			971			3,078
		5.32	%		-			5.15	%		7.24	%		5.85	%
	$	7,586		$	38,278		$	1,604		$	39,482		$	86,950
		1.56	%		1.38	%		5.47	%		4.26	%		2.85	%

Table of Contents

Loans

The major classifications of loans, excluding loans held for resale and net of deferred loan fees, at December 31 are as follows (in thousands):

2008

2007

2006

2005

2004

2009

2008

2007

2006

2005

Commercial and industrial

~~457~~388,~~215~~548

~~402~~457,~~569~~215

~~380~~402,~~939~~569

~~321~~380,~~303~~939

~~301~~321,~~961~~303

Real Estate:

Commercial

1965,~~044,833~~266

1,~~003~~044,~~916~~833

~~897~~1,~~714~~003,916

~~859~~897,~~251~~714

~~848~~859,~~737~~251

Construction

~~949~~447,~~909~~879

1949,~~062,662~~909

~~735~~1,~~926~~062,662

~~554~~735,~~021~~926

~~342~~554,~~287~~021

Land development

~~580~~319,~~453~~320

~~537~~580,~~410~~453

~~399~~537,~~950~~410

~~269~~399,~~662~~950

~~182~~269,~~032~~662

Completed lots

~~249~~252,~~685~~492

249,~~573~~685

~~188~~249,~~032~~573

~~143~~188,~~652~~032

84143,~~102~~652

Residential 1-4 family

~~424~~423,~~492~~032

~~282~~424,~~344~~492

~~235~~282,~~169~~344

~~188~~235,~~772~~169

~~165~~188,~~063~~772

Installment and other loans

6569,~~468~~740

6765,~~421~~468

6367,~~050~~421

4663,~~852~~050

5046,~~057~~852

Total loans

32,~~772~~866,~~055~~277

3,~~605~~772,~~895~~055

23,~~900~~605,~~780~~895

2,~~383~~900,~~513~~780

12,~~974~~383,~~239~~513

~~At December~~Total ~~31, 2008,~~ loans, excluding loans held for resale, ~~totaled~~decreased $3905.~~77 billion~~8 million, ~~compared~~or 24.0%, to $32.6187 billion at December 31, ~~2007~~2009, anfrom ~~increase of~~ $~~166~~3.~~2 million,~~77 orbillion 4a year ago.~~6%.~~ ~~The~~Management ~~increase~~has inbeen ~~total~~diligently ~~loans~~working ~~is primarily attributable~~ to reduce the ~~decrease~~concentration in ~~undisbursed~~real ~~commitments~~estate asconstruction ~~opposed~~and toland ~~new loan~~development ~~originations. At December 31~~loans, ~~2008,~~as ~~total~~defined ~~undisbursed~~by ~~commitments~~the ~~to lend were $484.4 million~~FDIC, ~~compared~~and tohas ~~$873.2~~successfully ~~million~~reduced atthese ~~December~~portfolios ~~31,~~by ~~2007, a decrease of~~ $~~388~~979.87 million, or 4448.57%~~. With few exceptions~~, wefrom ~~have suspended~~December ~~the origination of new real estate construction~~31, ~~land~~2008 ~~development~~to ~~and completed lot loans. New loan originations for the year ended~~ December 31, ~~2008~~2009, ~~totaled~~including ~~$833.5~~undisbursed ~~million,~~loan ~~down from $1~~commitments.~~75 billion for the year ended December 31, 2007.~~

~~Contractual maturities~~Despite ofthe ~~loans~~increase in outstanding balance, ~~excluding~~there ~~loans~~were ~~held~~no ~~for~~new ~~resale~~completed ~~and~~lot ~~net~~loans oforiginated ~~deferred~~from ~~fees~~December 31, at 2008 to December 31, ~~2008~~2009. In certain circumstances, where real estate construction projects will not be completed, they are ~~shown~~reclassified ~~below~~as ~~(in~~real ~~thousands)~~estate completed lot loans. We ~~Expected~~reclassified ~~maturities~~$22.6 ~~may~~million ~~differ~~of ~~from~~residential ~~contractual~~construction ~~maturities~~loans ~~because~~to ~~borrowers~~residential ~~may~~completed ~~have~~lot ~~the~~loans ~~right~~as of December 31, 2009. Reclassification of a residential construction loan to a residential lot loan eliminates any remaining unadvanced funds originally intended for construction. The background loan loss reserve is adjusted on subject loans to the new loan type and grade, and if placed into nonperforming status, a specific reserve is assigned. There were no changes in the related loan agreements resulting ~~prepay~~in credits that would be considered troubled debt restructurings. At December 31, 2009, $13.7 million of residential construction loans ~~with~~converted orto ~~without~~residential ~~prepayment~~lot ~~penalties~~loans were nonperforming.

	Within 1 Year		1 -5 Years		After 5 Years		Total
Commercial and industrial	$	272,955	$	154,565	$	29,695	$	457,215
Real Estate:
Commercial		124,502		630,986		289,345		1,044,833
Construction		861,079		84,970		3,860		949,909
Land development		544,019		36,434		-		580,453
Completed lots		207,124		40,819		1,742		249,685
Residential 1-4 family		164,406		203,399		56,687		424,492
Installment and other loans		15,883		15,384		34,201		65,468
Total loans	$	2,189,968	$	1,166,557	$	415,530	$	3,772,055
			1 -5 Years		After 5 Years
Fixed rates			$	818,792	$	79,270
Variable rates				347,765		336,260
			$	1,166,557	$	415,530

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Table of Contents

FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Contractual maturities of loans, excluding loans held for resale and net of deferred fees, at December 31, 2009, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to prepay loans with or without prepayment penalties.

	Within 1 Year		1 -5 Years		After 5 Years		Total
Commercial and industrial	$	240,476	$	102,185	$	45,887	$	388,548
Real Estate:
Commercial		115,682		558,693		290,891		965,266
Construction		399,646		48,233		-		447,879
Land development		293,038		26,282		-		319,320
Completed lots		196,795		53,661		2,036		252,492
Residential 1-4 family		136,187		209,410		77,435		423,032
Installment and other loans		18,401		14,113		37,226		69,740
Total loans	$	1,400,225	$	1,012,577	$	453,475	$	2,866,277

			1 -5 Years		After 5 Years
Fixed rates			$	781,942	$	102,894
Variable rates				230,635		350,581
			$	1,012,577	$	453,475

Allowance for Loan Losses

The allowance for loan losses is the amount which, in the opinion of management, is necessary to absorb future probable 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 our ongoing internal credit review staff. Management also reviews the growth and terms of loans so that the allowance can be adjusted for probable losses. 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.

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

The allowance for loan losses totaled $~~112~~151.63 million, or 25.9827%, of total loans outstanding at December 31, ~~2008~~2009. This compares to the allowance for loan losses of $54112.06 million, or 12.4998%, of total loans outstanding at December 31, ~~2007~~2008, and $4054.60 million, or 1.4049%, at December 31, ~~2006~~2007. The increase in the allowance for loan loss for ~~2008~~2009, as compared to ~~2007~~2008 and ~~2006~~2007, is primarily attributable to the downturn in the economy and the negative impact on the ~~local~~regional housing market, which significantly affected our real estate construction, land development and completed lot portfolios.

For the year ended December 31, ~~2008~~2009, net charge-offs totaled $63337.03 million, compared to $~~920~~63.0 ~~thousand~~million for the year ended December 31, ~~2007~~2008, and $~~2.9~~920 ~~million~~thousand for the year ended December 31, ~~2006~~2007.

Our allowance for loan losses, as a percentage of total loans, is impacted by nonperforming loans as a significant portion of our nonperforming loans are collateral dependent. Nonperforming loans result in the assignment of a specific reserve that adjusts the net book value of the loan’s principal balance to reflect the estimated fair value of supporting collateral or result in no assignment of a specific reserve if the loans collateral value is in excess of its book value. Our customary practice is to charge-28off the amount of impairment representing the excess of the loan’s net book value over the estimated fair value within the quarter a loan is identified as nonperforming and a confirmed loss (“partial charge-off”). For nonperforming loans not immediately charged-off as a result of the determination of a confirmed loss, a specific reserve representing the amount of estimated impairment is applied. Impaired loans are assessed for valuation on a recurring basis. Once a partial charge-off is taken no additional reserve is required, unless as a result of our recurring impairment analysis, new information becomes available that would necessitate further adjustment to the allowance for loan losses and subsequent write downs. As a result, many of the nonperforming loans are collateral-based loans measured at fair value and the balance in excess of collateral value is charged-off during the same quarter, thus resulting in a lower coverage ratio (total allowance for loan losses divided by total nonperforming loans).

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

The following table includes information pertaining to the allowance for loan losses and nonperforming loans at December 31 (in thousands):

	2009			2008
Total loans	$	2,869,498		$	3,778,733

General reserves	$	96,531		$	99,671
Specific reserves		54,818			12,885
Total allowance for loan losses	$	151,349		$	112,556

Nonperforming loans with specific reserves
included in the allowance for loan losses		361,541		$	96,238
Nonperforming loans without specific reserves
included in the allowance for loan losses		343,652			338,987
Total nonperforming loans	$	705,193		$	435,225

Total charge-offs related to nonperforming loans	$	185,306		$	48,168

Nonperforming loans recorded at carrying
value to total loans		11.98	%		8.97	%
Nonperforming loans recorded at carrying value
to total nonperforming loans		48.73	%		77.89	%

Coverage ratio (total allowance for loan losses divided
by total nonperforming loans)		21.46	%		25.86	%
Coverage ratio after considering effects of charge-offs		37.81	%		33.25	%
Coverage ratio net of nonperforming loans carried at
carrying value		41.86	%		116.96	%
Total loans less nonperforming loans at carrying value	$	2,525,846		$	3,439,746

Total allowance for loan losses/total loans		5.27	%		2.98	%
Total allowance for loan losses/total loans less nonperforming
loans at carrying value		5.99	%		3.27	%
Specific reserves/balance of nonperforming loans with
specific reserves		15.16	%		13.39	%

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

The following table provides an analysis of the allowance for loan losses and the net losses, by loan type, for the years ended December 31 (in thousands):

	2008			2007			2006			2005			2004
	2009			2008			2007			2006			2005
Balance at beginning of year	$	57114,~~658~~638		$	4457,~~195~~658		$	3744,~~075~~195		$	3237,~~728~~075		$	2932,~~556~~728
Provision for loan losses		~~120~~375,000			11120,~~400~~000			711,~~500~~400			47,~~200~~500			34,~~500~~200
Loans charged-off:
Commercial and industrial		(339,~~101~~044	)		(13,~~183~~101	)		(21,~~283~~183	)		(~~342~~2,283	)		(~~612~~342	)
Real estate:
Commercial		(110,~~264~~477	)		-(1,264	)		-			(4-	)		-(4	)
Construction		(31117,~~968~~258	)		(~~201~~31,968	)		(~~855~~201	)		-(855	)		-
Land development		(12109,~~165~~651	)		-(12,165	)		-			-			-
Completed lots		(1344,~~839~~031	)		-(13,839	)		-			-			-
Residential 1-4 family		(~~846~~18,708	)		(~~300~~846	)		-(300	)		~~(116~~-	)		(~~387~~116	)
Installment and other		(~~343~~2,362	)		(~~222~~343	)		(~~156~~222	)		(~~244~~156	)		(~~413~~244	)
Total charged-off loans		(63341,~~526~~531	)		(163,~~906~~526	)		(31,~~294~~906	)		(~~706~~3,294	)		(~~1,412~~706	)
Recoveries:
Commercial and industrial		~~308~~715			~~845~~308			~~353~~845			~~623~~353			~~741~~623
Real estate:
Commercial		-2			-			-			-			~~176~~-
Construction		~~161~~2,705			-161			-			~~142~~-			60142
Land development		-12			-			-			-			-
Completed lots		9665			-9			-			-			-
Residential 1-4 family		-62			-			-			27-			5127
Installment and other		2872			~~141~~28			60141			6160			5661
Total recoveries		~~506~~4,233			~~986~~506			~~413~~986			~~853~~413			~~1,084~~853
Net (charge-offs) recoveries		(63337,~~020~~298	)		(~~920~~63,020	)		(~~2,881~~920	)		~~147~~(2,881	)		~~(328~~147	)
Balance before portion identified
for undisbursed loans		~~114~~152,~~638~~340			54114,~~675~~638			4154,~~694~~675			3741,~~075~~694			3237,~~728~~075
Reserve acquired in merger		-			~~2,983~~-			2,~~501~~983			-2,501			-
Portion of reserve identified for
undisbursed loans and
reclassified as a liability		(~~2,082~~991	)		(32,~~663~~082	)		(3,~~546~~663	)		(3,~~270~~546	)		(23,~~307~~270	)
Balance at end of year	$	~~112~~151,~~556~~349		$	53112,~~995~~556		$	4053,~~649~~995		$	3340,~~805~~649		$	3033,~~421~~805
Total loans at end of period (1)	$	32,~~778~~869,~~733~~498		$	3,~~612~~778,~~122~~733		$	23,~~908~~612,~~000~~122		$	2,~~389~~908,~~224~~000		$	12,~~978~~389,~~052~~224
Daily average loans	$	3,~~774~~430,~~501~~885		$	3,~~185~~774,~~751~~501		$	23,~~731~~185,~~257~~751		$	2,~~200~~731,~~344~~257		$	12,~~887~~200,~~528~~344
Ratio of net charged-offs
(recoveries) during the period
to average loans outstanding		19.6783	%		01.0367	%		0.1103	%		-0.0111	%		-0.0201	%
Loan loss reserve as a
percentage of total loans		25.9827	%		12.4998	%		1.4049	%		1.4140	%		1.5441	%
(1) Includes loans held for resale

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Based on certain characteristics of the portfolio, potential losses can be anticipated by major loan categories. In the following table, the allowance for loan losses for the years ended December 31, has been allocated among the major loan categories based primarily on their historical net charge-off experience, along with consideration of factors such as quality, volume, anticipated economic conditions and other business considerations (in thousands).

			Loan					Loan					Loan
	2008		Category			2007		Category			2006		Category
	2009		Category			2008		Category			2007		Category
	Reserve		Percent			Reserve		Percent			Reserve		Percent
Commercial and industrial	$	1519,~~127~~856		1213.16	%	$	915,~~856~~127		1112.21	%	$	9,~~726~~856		1311.12	%
Real estate:
Commercial		1117,~~388~~557		2733.7	%		1211,~~373~~388		27.87	%		1112,~~040~~373		3027.98	%
Construction		2731,~~636~~997		2515.26	%		~~824~~27,636		2925.52	%		~~809~~824		2529.45	%
Land development		2224,~~701~~437		1511.41	%		522,~~257~~701		1415.94	%		45,~~123~~257		1314.89	%
Completed lots		919,~~054~~447		68.68	%		39,~~443~~054		6.96	%		13,~~560~~443		6.59	%
Residential 1-4 family		1426,~~056~~128		1114.38	%		1614,~~900~~056		711.83	%		716,~~168~~900		87.18	%
Installment and other		13,~~071~~132		12.74	%		1,~~060~~071		1.97	%		1,~~012~~060		21.29	%
Unallocated		118,~~523~~795					411,~~282~~523					54,~~211~~282
		112,556					53,995					40,649
		151,349					112,556					53,995
Portion of reserve identified for undisbursed
loans and reclassifed as a liability		~~2,082~~991					32,~~663~~082					3,~~546~~663
	$	~~114~~152,~~638~~340		100.0	%	$	57114,~~658~~638		100.0	%	$	4457,~~195~~658		100.0	%
			Loan					Loan
	2005		Category			2004		Category
		2006	Category				2005	Category
	Reserve		Percent			Reserve		Percent
Commercial and industrial	$	119,~~061~~726		13.51	%	$	911,~~658~~061		1513.35	%
Real estate:
Commercial		1211,~~622~~040		3630.09	%		1012,~~843~~622		4336.0	%
Construction		~~504~~809		2325.24	%		~~473~~504		1723.32	%
Land development		14,~~699~~123		1113.38	%		1,~~194~~699		911.23	%
Completed lots		~~907~~1,560		6.05	%		~~1,142~~907		46.30	%
Residential 1-4 family		47,~~088~~168		78.91	%		34,~~846~~088		87.49	%
Installment and other		~~724~~1,012		2.12	%		~~461~~724		2.51	%
Unallocated		25,~~200~~211					2,~~804~~200
		33,805					30,421
		40,649					33,805
Portion of reserve identified for undisbursed
loans and reclassifed as a liability		3,270					2,307
loans and reclassified as a liability		3,546					3,270
	$	3744,~~075~~195		100.0	%	$	3237,~~728~~075		100.0	%

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

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Nonperforming Assets

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

	2008			2007			2006			2005			2004
	2009			2008			2007			2006			2005
Commercial and industrial	$	1231,~~908~~401		$	~~159~~12,908		$	~~574~~159		$	~~4,939~~574		$	-4,939
Real estate:
Commercial		1089,~~937~~708			-10,937			-			-			~~6,847~~-
Construction		~~181~~192,~~905~~215			19181,~~842~~905			4719,842			-47			-
Land development		~~177~~234,~~139~~627			-177,139			~~7,143~~-			-7,143			-
Completed lots		3487,~~005~~632			~~804~~34,005			-804			-			~~356~~-
Residential 1-4 family		1768,~~686~~178			9317,686			~~889~~93			-889			~~6,904~~-
Installment and other		~~645~~1,432			10645			-10			10-			-10
Total nonaccruing loans		~~435~~705,~~225~~193			20435,~~908~~225			820,~~653~~908			48,~~949~~653			144,~~107~~949
Other real estate owned		10169,~~803~~674			~~367~~10,803			-367			-			-
Total nonperforming assets	$	~~446~~874,~~028~~867		$	21446,~~275~~028		$	821,~~653~~275		$	48,~~949~~653		$	144,~~107~~949
Restructured loans	$	-		$	-		$	-		$	-		$	-
Total loans at end of period (1)	$	32,~~778~~869,~~733~~498		$	3,~~612~~778,~~122~~733		$	23,~~908~~612,~~000~~122		$	2,~~389~~908,~~224~~000		$	12,~~978~~389,~~052~~224
Total assets at end of period	$	43,~~104~~594,~~445~~984		$	34,~~995~~104,~~689~~445		$	3,~~238~~995,~~464~~689		$	23,~~640~~238,~~275~~464		$	2,~~243~~640,~~396~~275
Total nonperforming loans to total loans		1124.5258	%		011.5852	%		0.3058	%		0.2130	%		0.7121	%
Total nonperforming assets to total assets		1024.8734	%		010.5387	%		0.2753	%		0.1927	%		0.6319	%
(1) Includes loans held for resale

For the years ended December 31, there are certain amounts of interest collected on nonaccrual loans that is included in income, and amounts that have not been accrued, which are indicated in the following table (in thousands):

	2008		2007		2006		2005		2004
	2009		2008		2007		2006		2005
Additional interest income which
would have been recorded during the
period under original loan terms	$	1865,~~915~~790	$	~~757~~18,915	$	~~761~~757	$	67761	$	~~925~~67
Interest collected and included in
net income for the period	$	2118,~~004~~100	$	121,~~131~~004	$	~~344~~1,131	$	~~327~~344	$	~~350~~327
Commitments for additional funds
related to loans above	$	-	$	-	$	-	$	-	$	-

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

~~This assessment~~A ~~for impairment occurs when and while such loans are on nonaccrual or the~~ loan ~~has~~is ~~been~~considered ~~restructured. When~~impaired awhen ~~loan~~management ~~with~~determines ~~unique~~it ~~risk characteristics~~is ~~has~~probable ~~been~~that ~~identified~~all ascontractual ~~being~~amounts ~~impaired,~~of ~~the~~principal ~~amount~~and ofinterest ~~impairment~~ will not be ~~measured~~paid byas ~~the~~scheduled ~~Corporation. If~~in the ~~current value of the impaired~~ loan isagreement. ~~less~~These ~~than~~loans ~~the~~include ~~recorded~~all ~~investment~~nonaccrual inloans, ~~the~~restructured ~~loan~~loans ~~impairment~~and ~~is recognized~~other byloans ~~creating~~that ormanagement ~~adjusting~~considers anto ~~existing~~be ~~allocation~~at ~~of the allowance for loan losses~~risk.

~~-31-~~This assessment for impairment occurs when and while such loans are on nonaccrual or the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Bank. If the current value of the impaired loan 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.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

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.

At December 31, ~~2008~~2009, ~~nonaccruing~~nonaccrual loans totaled $~~435~~705.2 million, compared to $20435.9 2 million ~~for~~at ~~the~~December ~~year~~31, ~~ended~~2008, and $20.9 million at December 31, 2007. The increase in nonaccruing loans for the period is primarily attributable to the slow down in the housing market and general economy, which significantly impacted our real ~~estate~~ estate construction and land development portfolios. Of the total nonaccrual loans at December 31, ~~2008~~2009, 9073.30% relate to our real estate construction, land development and completed lot portfolios.

At December 31, 2009 and 2008, nonaccruing loans totaling $361.5 million and $96.2 million had related specific reserves in the allowance for loan losses of $54.8 million and $12.9 million, respectively. Nonaccruing loans without related specific reserves in the allowance for loan losses at December 31, 2009 and 2008, totaled $343.7 million and $339.0 million, respectively.

Restructured Loans

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

Interest income on restructured loans is recognized pursuant to the terms of the new loan agreement. Interest income on 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. There were no restructured loans at December 31, ~~2008~~2009 or ~~2007~~2008.

Other Real Estate Owned

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 shortfalls from the ultimate sale of OREO being shown as other income or other expense.

The following table presents the activity related to OREO for the years ended December 31 (in thousands):

	December 31, 2008						December 31, 2007
	2009						2008
	Amount			Number			Amount			Number
Beginning balance	$	~~367~~10,803			164		$	-367			-1
Additions to OREO		12217,~~992~~720			76618			~~367~~12,992			176
Capitalized improvements		~~623~~884						-623
Valuation adjustments		(689,702	)					-(68	)
Disposition of OREO		(350,~~111~~031	)		(13188	)		-(3,111	)		-(13	)
Ending balance	$	10169,~~803~~674			64494		$	~~367~~10,803			164

At December 31, 2008, OREO totaled $10.8 million and consisted of 64 properties in Washington (53) and Oregon (11), with balances ranging from $76 thousand to $478 thousand. At December 31, 2007, we had one OREO property totaling $367 thousand. Certain other loans, currently in nonaccrual, are in the process of foreclosure and potentially could become OREO. Efforts, however, are constantly underway to reduce and minimize such nonperforming assets. During 2008 and 2009, we expanded our special assets group ~~from 5~~ to ~~30 individuals, all selected from within the company, to~~ focus on reducing nonperforming assets.

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~~Intangible Assets~~FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

~~At December~~The ~~31,~~decision ~~2008,~~to ~~intangible~~begin ~~assets~~a ~~totaled~~foreclosure ~~$794~~action ~~thousand,~~generally ~~compared~~occurs toafter ~~$78~~all other reasonable collection efforts have been found ineffective.~~2 million~~ We atcomply ~~December~~with ~~31,~~all ~~2007~~applicable state statues regarding foreclosure proceedings. ~~During~~Loans ~~the~~in ~~fourth~~foreclosure ~~quarter~~are ofalways ~~2008~~categorized as nonperforming assets, weand as such, have been assigned a ~~recorded~~specific loan loss reserve based on the most current property valuations available, discounted to reflect foreclosure expense, holding time and sales costs. Assuming no other legal actions, the statutory processing period for a ~~non~~so-~~cash~~called ~~charge~~nonjudicial foreclosure in the state of ~~$77.1~~Washington ~~million~~is ~~related~~a tominimum of 120 days or 190 days after the ~~impairment~~date of ~~goodwill~~ default. ~~This~~ The ~~write~~first ~~down~~step ~~resulted~~is ~~from~~a ~~goodwill~~notice ~~impairment~~of ~~testing performed~~default inthat ~~accordance~~is ~~with~~mailed ~~SFAS~~to ~~142,~~the ~~Goodwill~~borrower and ~~Other~~posted ~~Intangible~~at the property or the notice is delivered ~~Assets,~~to ~~which~~the ~~was~~borrower ~~performed~~in ~~due~~person. The borrower is given 30 days to respond to the ~~quarterly~~notice ~~decline~~of indefault. If the ~~stock price~~borrower ~~and~~does not stop the ~~resulting~~foreclosure ~~difference~~within ~~between~~30 days after receiving the ~~market~~notice ~~capitalization~~of ~~and~~default, ~~book value~~we record a notice of sale with the ~~Corporation~~appropriate county recorder. The ~~results~~notice of sale is recorded at least 90 days before the ~~goodwill~~sale ~~impairment testing~~date ~~demonstrated~~and ~~that~~is mailed to the ~~estimated~~borrower ~~fair~~and ~~value~~any other lien holders. The notice of sale is also published twice in a local newspaper. A notice of foreclosure is also required to be sent to the ~~Corporation,~~borrower and/or ~~reporting~~ ~~unit,~~guarantors ~~was~~if ~~less~~we ~~than~~want to retain the ~~book~~right ~~value~~to a deficiency. We are required to publish the notice of sale once between the 32nd and 28th days prior to the sale, ~~resulting~~and inonce ~~full impairment~~between the 11th and 7th days before the sale. Foreclosure sales are by public auction with the property going to the highest bidder.

We will bid up to the amount of our loan balance. If we do not have a buyer for the collateral by the sale date, and there is no other or higher bidder, then we acquire ownership of the property for the amount of our credit bid, and the property becomes an OREO property of the Bank. The obligations of the guarantors (but not the borrower) of a commercial loan for any deficiency (the amount by which the loan balance exceeds the foreclosure sale price), generally survives the sale and we may bring a lawsuit against the guarantors to collect the deficiency if we determine a judgment against the guarantors may be collectible and cost-effective.

A judicial foreclosure action may also be brought to collect a real estate loan in the state of Washington, and is used by Frontier Bank in certain cases; however, nonjudicial foreclosure is usually the preferred remedy because it is normally faster and less expensive than litigation, which can take from 6 months for summary judgment, to 2 years for trial.

Foreclosure proceedings in the state of Oregon are similar to Washington’s in most material respects.

In addition, where appropriate, instead of foreclosure, we may negotiate a settlement agreement with the borrower, with a deed in lieu of foreclosure conveying the property to the Bank, to enable the Bank to acquire possession of the property faster than pursuing the normal foreclosure process.

The transition of loans from performing to nonperforming status will generally result in the assignment of a specific reserve that adjusts the net book value of the loan’s principal balance to reflect the estimated fair value of supporting collateral or result in no assignment of a specific reserve if the loans collateral value is in excess of its book value. Subsequent write-downs, requiring additional loan loss provisioning, could occur as a loan moves through the foreclosure process into OREO based on recurring impairment analysis up to and until a property becomes an OREO.

Deposits

Interest bearing deposits at December 31 are as follows (in thousands):

	2008		%			2007		%			2006		%
	2009		%			2008		%			2007		%
Money market, sweep and NOW accounts	$	~~325~~497,~~554~~952		1118.31	%	$	~~745~~325,~~780~~554		2911.23	%	$	~~683~~745,~~948~~780		3329.42	%
Savings		~~365~~241,~~114~~261		128.78	%		~~254~~365,~~722~~114		1012.07	%		~~305~~254,~~669~~722		1410.90	%
Time deposits, $100,000 and over		1830,~~430,685~~508		4930.73	%		~~832~~1,~~373~~430,685		3249.67	%		~~545~~832,~~173~~373		2632.6	%
Other time deposits		~~758~~1,~~361~~175,497		2642.38	%		~~719~~758,~~835~~361		2826.23	%		~~512~~719,~~221~~835		2528.12	%
Total interest bearing deposits	$	2,~~879~~745,~~714~~218		100.0	%	$	2,~~552~~879,~~710~~714		100.0	%	$	2,~~047~~552,~~011~~710		100.0	%

~~Total interest~~Maturities ~~bearing~~of ~~deposits~~time ~~increased~~certificates ~~$327.0~~of ~~million,~~deposit orof ~~12.8%, to~~ $~~2.88 billion at December 31~~100,000 ~~2008,~~and ~~compared~~over ~~to $2.55 billion~~ at December 31, ~~2007. For~~ ~~the~~2009 ~~period,~~are ~~time~~shown ~~deposits~~below ~~experienced the most growth at $636.8 million, or 41.0%. The increase~~ (in time deposits can be primarily attributed to several 2008 Bank deposit promotions. For the year ended December 31, 2008, the total number of time deposits increased by approximately 11.7%, compared to the prior year ended.thousands):

Maturities of time certificates of deposit of $100,000 and over at December 31, 2008 are shown below (in thousands):

3 months or less	$	179,533
Over 3 months through 6 months		134,425
Over 6 months through 12 months		352,894
Over 12 months		163,656
Total	$	830,508

3 months or less	$	349,747
Over 3 months through 6 months		270,766
Over 6 months through 12 months		499,763
Over 12 months		310,409
Total	$	1,430,685

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Federal Funds Purchases and Securities Sold Under Agreements to Repurchase

The amount of federal funds purchased and securities sold under agreement to repurchase for the years ended December 31 are as follows (in thousands):

			Weighted					Weighted					Weighted
			Average					Average					Average
			Interest					Interest					Interest
	2008		Rate			2007		Rate			2006		Rate
	2009		Rate			2008		Rate			2007		Rate
Year end balance	$	2111,~~616~~107		0.1009	%	$	~~258~~21,~~145~~616		40.9210	%	$	81258,~~673~~145		54.2492	%
Highest month end balance
during the period	$	~~198~~25,~~200~~259				$	~~260~~198,~~554~~200				$	81260,~~673~~554

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Federal Home Loan Bank Advances

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

	2008			2007			2006
	2009			2008			2007
Maximum outstanding at any month end	$	429,~~417~~279		$	~~341~~429,~~704~~417		$	~~282~~341,~~017~~704
Average outstanding		~~340~~407,~~350~~015			~~294~~340,~~169~~350			~~258~~294,~~991~~169
Weighted average interest rates
Annual		43.0978	%		4.1509	%		4.7215	%
End of year		3.91	%		43.4391	%		4.6943	%

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Results of Operations

Net Interest Income

Net interest income is our 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 equivalent (“TE”) amounts using a tax rate of 35%, and applies only to loans and investments as no other assets or liabilities are affected by the adjustment.

TE net interest income for 2009 was $85.4 million, compared to $168.4 million in 2008, and $187.9 million in 2007. For all periods, the decrease in TE net interest income was primarily attributable to increases in net loan charge-~~34-~~offs and nonperforming loans placed on nonaccrual status. TE net interest income for 2009 was negatively impacted by the $17.0 million reversal of interest income on loans during the year. This compared to reversals of interest income on loans of $9.5 million in 2008 and $1.3 million in 2007.

The TE net interest margin was 2.23% for 2009, a decrease of 203 basis points as compared to 2008. The reversal of $17.0 million of interest income on nonaccrual loans in 2009 lowered the tax equivalent net interest margin by approximately 43 basis points. The year-over-year decrease in the TE net interest margin can also be attributed to increases in total nonaccruing loans and net charge-offs, as well as a decrease in new loan originations. For the year ended December 31, 2009, new loan originations decreased 84.8%, compared to the same period a year ago, resulting in lower loan fees.

Also contributing to the decrease in the TE net interest margin for 2009, compared to 2008, was the change in mix of earning assets. As previously mentioned, in an effort to increase on-balance sheet liquidity, we have increased federal funds sold balances. For the years ended December 31, 2009 and 2008, average federal funds sold accounted for approximately 7.8% and 0.7% of total average earning assets, respectively. Typically, federal funds sold are a lower earning asset and currently yield a rate of 0.25%.

The TE net interest margin was 4.26% for 2008, a decrease of 141 basis points as compared to 2007. The reversal of $9.5 million of interest income on nonaccrual loans in 2008 lowered the tax equivalent net interest margin by approximately 24 basis points. Also contributing the decrease in the TE net interest margin for the period, were decreases in market index rates, such as prime and the fed funds rates. For the period, changes in interest rate decreased the yield on interest earning assets by 197 basis points and rates paid on interest bearing liabilities by 81 basis points.

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~~The average~~FRONTIER ~~balances~~FINANCIAL ofCORPORATION ~~interest~~AND ~~earning assets and interest bearing liabilities, along with tax equivalent interest income and expense and average rates earned and paid for the following years are as follows (in thousands):~~SUBSIDIARY

	Year Ended December 31,
	2008								2007								2006
				TE		Average						TE		Average						TE		Average
				Interest		Rates						Interest		Rates						Interest		Rates
	Average			Income/		Earned/			Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense		Paid			Balance			Expense		Paid			Balance			Expense		Paid
Interest Earning Assets
Taxable investments	$	139,753		$	5,054		3.62	%	$	109,798		$	4,585		4.18	%	$	102,488		$	4,097		4.00	%
Nontaxable investments (1)		5,018			309		6.16	%		2,907			209		7.19	%		4,872			306		6.28	%
Total		144,771			5,363		3.70	%		112,705			4,794		4.25	%		107,360			4,403		4.10	%
Federal funds sold		29,197			457		1.57	%		18,405			958		5.21	%		28,534			1,448		5.07	%
Loans (1) (2)
Installment		68,562			5,813		8.48	%		62,841			6,083		9.68	%		60,871			5,764		9.47	%
Commercial(1)		437,481			32,064		7.33	%		383,242			33,776		8.81	%		366,601			31,013		8.46	%
Real estate
Commercial (1)		1,036,171			79,573		7.68	%		919,028			72,313		7.87	%		897,258			68,350		7.62	%
Construction		1,056,159			73,315		6.94	%		890,404			91,963		10.33	%		698,777			72,152		10.33	%
Land development		585,508			40,313		6.89	%		457,116			48,310		10.57	%		299,604			31,429		10.49	%
Completed lots		244,575			17,400		7.11	%		209,916			20,784		9.90	%		182,105			17,738		9.74	%
Residential 1-4 family		346,045			26,238		7.58	%		263,204			21,965		8.35	%		226,041			18,826		8.33	%
Total loans		3,774,501			274,716		7.28	%		3,185,751			295,194		9.27	%		2,731,257			245,272		8.98	%
Total earning assets/total
interest income		3,948,469			280,536		7.10	%		3,316,861			300,946		9.07	%		2,867,151			251,123		8.76	%
Reserve for loan losses		(82,529	)							(43,972	)							(38,766	)
Cash and due from banks		50,410								68,285								83,351
Other assets		191,221								129,390								129,836
TOTAL ASSETS	$	4,107,571							$	3,470,564							$	3,041,572
Interest Bearing Liabilities
Money Market, Sweep &
NOW accounts	$	586,943		$	8,950		1.52	%	$	716,777		$	23,990		3.35	%	$	542,335		$	17,123		3.16	%
Savings accounts		349,318			7,405		2.12	%		268,017			6,207		2.32	%		374,167			8,718		2.33	%
Other time deposits		1,894,455			79,736		4.21	%		1,325,777			66,883		5.04	%		1,063,229			47,685		4.48	%
Total interest bearing
deposits		2,830,716			96,091		3.39	%		2,310,571			97,080		4.20	%		1,979,731			73,526		3.71	%
Short-term borrowings		73,460			1,562		2.13	%		42,542			2,212		5.20	%		20,089			910		4.53	%
FHLB borrowings		338,268			14,244		4.21	%		294,169			13,402		4.56	%		258,991			12,195		4.71	%
Subordinated debt		5,156			288		5.59	%		5,156			347		6.73	%		4,726			311		6.58	%
Total interest bearing
liabilities/total
interest expense		3,247,600			112,185		3.45	%		2,652,438			113,041		4.26	%		2,263,537			86,942		3.84	%
Noninterest bearing
deposits		379,766								396,293								389,945
Other liabilities		18,224								27,657								23,722
Shareholders' equity		461,981								394,176								364,368
TOTAL LIABILITIES
AND CAPITAL	$	4,107,571							$	3,470,564							$	3,041,572
NET INTEREST INCOME				$	168,351							$	187,905							$	164,181
NET YIELD ON INTEREST
EARNING ASSETS							4.26	%							5.67	%							5.73	%
(1) Includes amounts to convert nontaxable amounts to a fully taxable equivalent basis at a 35% tax rate.
(2) Includes nonaccruing loans.

Our net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, as well as, changes in the yields earned on interest earning assets and rates paid on deposits and borrowed funds. The average balances of interest earning assets and interest bearing liabilities, along with tax equivalent interest income and expense and average rates earned and paid for the following years are as follows (in thousands):

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	Year Ended December 31,
	2009								2008								2007
				TE		Average						TE		Average						TE		Average
				Interest		Rates						Interest		Rates						Interest		Rates
	Average			Income/		Earned/			Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense		Paid			Balance			Expense		Paid			Balance			Expense		Paid
Interest Earning Assets
Taxable investments	$	97,301		$	2,663		2.74	%	$	139,753		$	5,054		3.62	%	$	109,798		$	4,585		4.18	%
Nontaxable investments (1)		4,218			258		6.12	%		5,018			309		6.16	%		2,907			209		7.19	%
Total		101,519			2,921		2.88	%		144,771			5,363		3.70	%		112,705			4,794		4.25	%
Federal funds sold		300,617			766		0.25	%		29,197			457		1.57	%		18,405			958		5.21	%
Loans (1) (2)
Installment		69,851			5,004		7.16	%		68,562			5,813		8.48	%		62,841			6,083		9.68	%
Commercial(1)		429,256			26,616		6.20	%		437,481			32,064		7.33	%		383,242			33,776		8.81	%
Real estate
Commercial (1)		1,008,493			71,044		7.04	%		1,036,171			79,573		7.68	%		919,028			72,313		7.87	%
Construction		738,100			25,652		3.48	%		1,056,159			73,315		6.94	%		890,404			91,963		10.33	%
Land development		474,046			10,585		2.23	%		585,508			40,313		6.89	%		457,116			48,310		10.57	%
Completed lots		275,010			10,255		3.73	%		244,575			17,400		7.11	%		209,916			20,784		9.90	%
Residential 1-4 family		436,129			26,014		5.96	%		346,045			26,238		7.58	%		263,204			21,965		8.35	%
Total loans		3,430,885			175,170		5.11	%		3,774,501			274,716		7.28	%		3,185,751			295,194		9.27	%
Total earning assets/total
interest income		3,833,021			178,857		4.67	%		3,948,469			280,536		7.10	%		3,316,861			300,946		9.07	%
Reserve for loan losses		(120,733	)							(82,529	)							(43,972	)
Cash and due from banks		44,680								50,410								68,285
Other assets		218,946								191,221								129,390
TOTAL ASSETS	$	3,975,914							$	4,107,571							$	3,470,564
Interest Bearing Liabilities
Money Market, Sweep &
NOW accounts	$	396,287		$	2,753		0.69	%	$	586,943		$	8,950		1.52	%	$	716,777		$	23,990		3.35	%
Savings accounts		298,370			3,293		1.10	%		349,318			7,405		2.12	%		268,017			6,207		2.32	%
Other time deposits		2,177,546			71,615		3.29	%		1,894,455			79,736		4.21	%		1,325,777			66,883		5.04	%
Total interest bearing
deposits		2,872,203			77,661		2.70	%		2,830,716			96,091		3.39	%		2,310,571			97,080		4.20	%
Short-term borrowings		16,226			15		0.09	%		73,460			1,562		2.13	%		42,542			2,212		5.20	%
FHLB borrowings		407,015			15,555		3.82	%		338,268			14,244		4.21	%		294,169			13,402		4.56	%
Subordinated debt		5,156			231		4.48	%		5,156			288		5.59	%		5,156			347		6.73	%
Total interest bearing
liabilities/total
interest expense		3,300,600			93,462		2.83	%		3,247,600			112,185		3.45	%		2,652,438			113,041		4.26	%
Noninterest bearing
deposits		397,533								379,766								396,293
Other liabilities		22,424								18,224								27,657
Shareholders' equity		255,357								461,981								394,176
TOTAL LIABILITIES
AND CAPITAL	$	3,975,914							$	4,107,571							$	3,470,564
NET INTEREST INCOME				$	85,395							$	168,351							$	187,905
NET YIELD ON INTEREST
EARNING ASSETS							2.23	%							4.26	%							5.67	%
(1) Includes amounts to convert nontaxable amounts to a fully taxable equivalent basis at a 35% tax rate.
(2) Includes nonaccruing loans.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

The following table (in thousands) includes a breakdown of the change in earning assets and liabilities, referred to as "volume," and the repricing of assets and liabilities referred to as "rate."

	Year ended December 31,
	2008 versus 2007									2007 versus 2006
	2009 versus 2008									2008 versus 2007
	Increase (Decrease) Due									Increase (Decrease) Due
	to Change in									to Change in
							Total									Total
	Average			Average			Increase			Average			Average			Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
INTEREST INCOME
Taxable investments	$	(1,~~263~~535	)	$	(~~794~~856	)	$	~~469~~(2,391	)	$	~~292~~1,263		$	~~196~~(794	)	$	~~488~~469
Nontaxable investments		~~152~~(49	)		(522	)		~~100~~(51	)		~~(123~~152	)		26(52	)		~~(97~~100	)
Total		(1,~~415~~584	)		(~~846~~858	)		~~569~~(2,442	)		~~169~~1,415			~~222~~(846	)		~~391~~569
Federal funds sold		~~562~~4,248			(13,~~063~~939	)		~~(501~~309	)		~~(514~~562	)		24(1,063	)		(~~490~~501	)
Loans
Installment		~~554~~109			(~~824~~918	)		(~~270~~809	)		~~187~~554			~~132~~(824	)		~~319~~(270	)
Commercial		~~4,780~~(603	)		(64,~~492~~845	)		(15,~~712~~448	)		14,~~408~~780			1(6,~~355~~492	)		2(1,~~763~~712	)
Real estate								-									-
Commercial		9(2,~~217~~126	)		(16,~~957~~428	)		7(8,~~260~~554	)		19,~~658~~217			2(1,~~305~~957	)		37,~~963~~260
Construction		17(22,~~120~~079	)		(3525,~~768~~544	)		(1847,~~648~~623	)		1917,~~786~~120			25(35,768	)		19(18,~~811~~648	)
Land development		13(7,~~569~~674	)		(2122,~~566~~056	)		(729,~~997~~730	)		1613,~~523~~569			~~358~~(21,566	)		16(7,~~881~~997	)
Completed lots		32,~~432~~165			(69,~~816~~314	)		(37,~~384~~149	)		23,~~709~~432			~~337~~(6,816	)		(3,~~046~~384	)
Residential 1-4 family		6,~~913~~830			(27,~~640~~063	)		~~4,273~~(233	)		36,~~095~~913			44(2,640	)		34,~~139~~273
Total loans		55(23,~~585~~378	)		(76,~~063~~168	)		(2099,~~478~~546	)		4555,~~366~~585			4(76,~~556~~063	)		49(20,~~922~~478	)
TOTAL INTEREST INCOME		57(20,~~562~~714	)		(7780,~~972~~965	)		(20101,~~410~~679	)		4557,~~021~~562			4(77,~~802~~972	)		49(20,~~823~~410	)
INTEREST EXPENSE
Money Market, Sweep &
NOW accounts		(42,~~345~~907	)		(103,~~695~~290	)		(156,~~040~~197	)		5(4,~~508~~345	)		1(10,~~359~~695	)		6(15,~~867~~040	)
Savings accounts		(1,~~883~~080	)		(~~685~~3,032	)		1(4,~~198~~112	)		(21,~~473~~883	)		(38685	)		(21,~~511~~198	)
Other time deposits		2811,~~689~~915			(1520,~~836~~036	)		12(8,~~853~~121	)		1128,~~775~~689			7(15,~~423~~836	)		1912,~~198~~853
Total interest bearing deposits		267,~~227~~928			(2726,~~216~~358	)		(~~989~~18,430	)		1426,~~810~~227			8(27,~~744~~216	)		~~23,554~~(989	)
Short-term borrowings		(1,~~608~~217	)		(~~2,258~~330	)		(~~650~~1,547	)		1,~~017~~608			~~285~~(2,258	)		~~1,302~~(650	)
FHLB borrowing		2,~~009~~895			(1,~~167~~584	)		~~842~~1,311			12,~~656~~009			(~~449~~1,167	)		~~1,207~~842
Subordinated debt		-			(5957	)		(5957	)		28-			8(59	)		36(59	)
TOTAL INTEREST EXPENSE		299,~~844~~606			(3028,~~700~~329	)		(~~856~~18,723	)		1729,~~511~~844			8(30,~~588~~700	)		~~26,099~~(856	)
CHANGE IN NET INTEREST INCOME	$	27(30,~~718~~320	)	$	(4752,~~272~~636	)	$	(1982,~~554~~956	)	$	27,~~510~~718		$	(347,~~786~~272	)	$	23(19,~~724~~554	)

For the year ended December 31, 2008, tax equivalent net interest income decreased $19.6 million, or 10.4%, to $168.4 million, compared to $187.9 million for year ended December 31, 2007. Over the same period, tax equivalent interest income decreased $20.4 million, or 6.8%. An increase in volume contributed an additional $57.6 million to tax equivalent interest income, whereas interest rate changes decreased tax equivalent interest income by $78.0 million. For the same period, the average yield on earning assets decreased 197 basis points to 7.10% from 9.07% a year ago.-39-

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~~For~~FRONTIER ~~the year~~FINANCIAL ~~ended~~CORPORATION ~~December~~AND 31, 2008, total interest expense decreased $856 thousand, or 0.8%, to $112.2 million, compared to $113.0 million for the year ended December 31, 2007. An increase in volume resulted in an additional $29.8 million of interest expense, whereas changes in interest rates decreased interest expense by $30.7 million. The average cost of funds decreased 81 basis points to 3.45% for the year ended December 31, 2008, from 4.26% for the year ended December 31, 2007.SUBSIDIARY

Tax equivalent net interest income increased $23.7 million, or 14.4%, for the year ended December 31, 2007, compared to the year ended December 31, 2006. For the same period, tax equivalent interest income increased $49.8 million. Volume increases contributed an additional $45.0 million and changes in interest rates contributed an additional $4.8 million. Also for the period, the average yield on earning assets increased 31 basis points.

Total interest expense increased $26.1 million, or 30.0%, for the year ended December 31, 2007, compared to the year ended December 31, 2006. Average interest bearing liabilities increased $388.9 million, resulting in an additional $17.5 million of interest expense. Changes in interest rates resulted in an additional $8.6 million of interest expense for the period, as the average cost of funds increased 42 basis points.

Provision for Loan Losses

The provision for loan losses totaled $~~120~~375.0 million for the year ended December 31, ~~2008~~ 2009, compared to $11120.40 million for the year ended December 31, 2008, and $711.54 million for the ~~years~~year ended December 31, 2007 ~~and 2006, respectively~~.

The increase in the provision for loan losses in ~~2008~~2009, as compared to ~~2007~~2008 and ~~2006~~2007, is primarily attributable to the overall decline in the economy, the downturn in the ~~local~~regional housing market and its impact on our real estate construction, land development and completed lot portfolios and an increase in nonperforming loans. At December 31, ~~2008~~2009, nonperforming loans totaled $~~435~~705.2 million, compared to $20435.92 million at December 31, ~~2007~~2008, and $820.79 million at December 31, ~~2006~~2007.

The provision for loan losses is based on management’s evaluation of inherent risks in the loan portfolio and a corresponding analysis of the allowance for loan losses. Additional discussion on the allowance for loan losses is provided under the heading Allowance for Loan Losses above.

Noninterest Income

~~Provision~~ Noninterest income for ~~loss~~2009 ontotaled ~~impairment~~$4.9 million, a decrease of ~~securities~~$9.9 million, or 66.9%, compared to 2008. Noninterest income for 2008 totaled $14.8 million, an increase of $1.5 million, or 11.4%, compared to 2007. The following table presents the key components of noninterest income for the years ended December 31 (in thousands):

For the year ended December 31, 2008, provision for loss on securities totaled $6.4 million. During the third quarter of 2008, we wrote down other-than-temporarily impaired securities totaling $6.4 million. This included Fannie Mae and Freddie Mac of $5.0 million and Lehman Brothers of $1.4 million. There were no such provisions for losses on securities for the years ended December 31, 2007 or 2006.

										2009 compared to 2008						2008 compared to 2007
	2009			2008			2007			$ Change			% Change			$ Change			% Change
Other-than-temporary loss on securities	$	(4,289	)	$	(6,430	)	$	-		$	2,141			-33.3	%	$	(6,430	)	NM
Gain (loss) on sale of securities		(102	)		4,570			(937	)		(4,672	)		-102.2	%		5,507			-587.7	%
Gain on sale of secondary mortgage loans		1,675			1,321			1,586			354			26.8	%		(265	)		-16.7	%
Gain on sale of premises and equipment		136			30			24			106			353.3	%		6			25.0	%
Net gain (loss) on OREO		(7,054	)		97			-			(7,151	)	NM				97		NM
Service charges on deposit accounts		6,154			5,421			4,721			733			13.5	%		700			14.8	%
Other noninterest income		8,394			9,821			7,915			(1,427	)		-14.5	%		1,906			24.1	%
Total noninterest income	$	4,914		$	14,830		$	13,309		$	(9,916	)		-66.9	%	$	1,521			11.4	%

Other-than-temporary loss on securities

Management evaluates securities and FHLB stock for other-than-temporary impairment (“OTTI”) at least on an annual basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) our intent and ability to retain a security for a period of time sufficient to allow for any anticipated recovery in fair value and (4) whether we expect to recover the amortized cost basis of the security. For the years ended December 31, 2009 and 2008, OTTI losses totaling $4.3 million and $6.4 million, respectively, were recognized through earnings. No OTTI losses were recognized in the year ended December 31, 2007.

Gain (loss) on sale of securities

For the year ended December 31, 2008, gain on sale of securities totaled $4.6 million, compared to a loss of $937 thousand for the year ended December 31, 2007, and a loss of $25 thousand for the year ended December 31, 2006.

During 2008, we sold our interests in Skagit State Bank and Washington Banking Company and recorded pre-tax gains of $2.0 million and $2.5 million, respectively. We also recorded a one-time gain of $274 thousand related to the required liquidation in our stake of VISA, Inc. In addition, we sold Fannie Mae and Freddie Mac preferred stock that we had previously written down for a pre-tax gain of $68 thousand. Partially offsetting these gains was a pre-tax loss of $1.0 million related to the sale of a Washington Mutual bond.

During 2007, we recorded a loss of $937 thousand as part of a balance sheet restructure in which we sold securities with less attractive yields and purchased new securities with higher yields.

~~-37-~~Net gain (loss) on other real estate owned

During 2009, we recognized a net loss on other real estate owned of $7.1 million, primarily due to valuation adjustments totaling $9.7 million, resulting from declines in the market value of these properties subsequent to foreclosure. Valuation adjustment totaled $68 thousand in 2008 and there were no such valuation adjustments in 2007.

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~~Gain on~~FRONTIER ~~sale~~FINANCIAL ofCORPORATION ~~premises~~AND ~~and equipment~~SUBSIDIARY

For the years ended December 31, 2008 and 2007, we recognized nominal gains on the sale of premises and equipment. For the year ended December 31, 2006, gain on sale of premises and equipment totaled $2.4 million, of which $2.1 million, related to the sale of property originally acquired for branch expansion, but was no longer needed.

Other noninterest income

~~Other noninterest~~For ~~income totaled $9.8 million for~~ the year ended December 31, ~~2008~~2009, ~~compared~~ toother noninterest income decreased $71.94 million, ~~for~~or ~~the~~14.5%, ~~year~~compared ~~ended~~to ~~December~~a ~~31,~~year ~~2007~~ago, and ~~$7.5~~was ~~million for~~primarily attributable to the ~~year~~decrease ~~ended~~in ~~December~~revenues ~~31,~~from ~~2006~~our Insurance and Investment Center.

The increase in other noninterest income of $1.9 million, or 24.1%, for the year ended December 31, 2008, compared to the prior year ended, iswas primarily attributable to a $506 thousand gain on sale of consumer credit cards, a $613 thousand increase in debit card fee income, a $306 thousand increase in time deposit early withdrawal penalties, a $293 thousand increase in ATM fees and a $196 thousand increase in trust fees.

For the year ended December 31, 2007, other noninterest income increased $417 thousand, or 5.6%, compared to the year ended December 31, 2006.

Noninterest Expense

Noninterest expense for 2009 totaled $99.7 million, a decrease of $60.3 million, or 37.7%, compared to 2008. Noninterest expense for 2008 totaled $160.1 million, an increase of $83.1 million, or 107.8%, compared to 2007. The following table presents the key components of noninterest expense for the years ended December 31 (in thousands):

							2009 compared to 2008						2008 compared to 2007
	2009		2008		2007		$ Change			% Change			$ Change			% Change
Salaries and employee benefits	$	46,985	$	48,403	$	48,297	$	(1,418	)		-2.9	%	$	106			0.2	%
Occupancy expense		10,953		11,148		9,956		(195	)		-1.7	%		1,192			12.0	%
State business taxes		1,068		2,013		2,066		(945	)		-46.9	%		(53	)		-2.6	%
FHLB prepayment penalty		-		-		1,534		-			-			(1,534	)		-100.0	%
FDIC insurance		15,962		2,650		362		13,312			502.3	%		2,288			632.0	%
Other noninterest expense		24,766		18,785		14,801		5,981			31.8	%		3,984			26.9	%
		99,734		82,999		77,016		16,735			20.2	%		5,983			7.8	%
Goodwill impairment		-		77,073		-		(77,073	)		-100.0	%		77,073		NM
Total noninterest expense	$	99,734	$	160,072	$	77,016	$	(60,338	)		-37.7	%	$	83,056			107.8	%

Salaries and employee benefits

~~Salaries~~ The decrease in salaries and employee benefits ~~totaled~~for ~~$48.4~~2009, ~~million~~compared ~~for~~to ~~the~~a year ~~ended~~ago, was primarily the result of the elimination of bonus and incentive pay, a reduction in executive compensation, a moratorium on hiring and a reduction in force, partially offset by a reduction in deferred loan costs. At December 31, ~~2008~~ 2009, ~~compared~~full totime equivalent ~~$48.3~~employees ~~million~~totaled ~~for~~703, ~~the~~down ~~year~~from ~~ended~~799 at December 31, ~~2007~~2008, ~~and~~a ~~$42~~decrease of 12.0%. In addition, the Board of Directors voted to suspend the Corporation’s matching of employee 401(K) Plan contributions, effective May 1 ~~million~~, ~~for~~2009. Excluding the ~~year~~impact ~~ended~~of ~~December~~the 31lower deferred loan costs in 2009, ~~2006~~resulting from lower loan originations, the reduction in salaries and benefits would have been $6.2 million.

Salaries and employee benefits remained relatively unchanged, increasing $106 thousand, for the year ended December 31, 2008, compared to the year ended December 31, 2007. For the year ended December 31, 2008, there were no discretionary bonuses or contributions made to the employee profit sharing plan as a result of expense reduction measures employed at the end of the third quarter 2008.

Salaries and employee benefits increased $6.2 million, or 14.7%, for the year ended December 31, 2007, compared to the year ended December 31, 2006. Of this increase, approximately 9.6% related to staff additions and 5.1% related to salary and incentive increases, including an additional $1.4 million related to SFAS 123(R) stock-based compensation expense.

The staffing level, referred to as full-time equivalent (“FTE”), totaled 799 at December 31, 2008, compared to 809 at December 31, 2007, and 721 at December 31, 2006.

FHLB prepayment penalty

For the year ended December 31, 2007, we incurred a pre-tax prepayment penalty of $1.5 million on the prepayment of $60.0 million of FHLB advances as part of our second quarter 2007 balance sheet restructure. The advances chosen to be paid off early were those having the least attractive cost and interest rate risk characteristics. New advances of $60.0 million were purchased at a rate 126 basis points lower than the blended rates of the advances that were prepaid. There were no such prepayment penalties incurred for the years ended December 31, ~~2008~~2009 or ~~2006~~2008.

~~-38-~~FDIC insurance

On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. We recorded an expense of $1.9 million for the year ended December 31, 2009, to reflect the special assessment. In addition, the FDIC increased the general assessment rate and, therefore, our FDIC general insurance premium expense increased in 2009 as compared to 2008 and 2007.

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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARY

Other noninterest expense

~~Other~~ The increase in other noninterest expense ~~totaled~~for ~~$21.4~~2009, ~~million~~compared ~~for~~to ~~the~~2008, ~~year~~was ~~ended~~primarily ~~December~~attributable ~~31,~~to ~~2008~~increases in collection expense, ~~compared~~ toforeclosure ~~$15.2~~expense ~~million~~and legal fees resulting from an increase in nonperforming assets for the ~~year~~period. Despite ~~ended~~these ~~December 31~~increases, ~~2007~~however, ~~and~~management ~~$13.6~~has been successful in reducing other targeted ~~million~~noninterest ~~for~~expenses, ~~the~~such ~~year~~as ~~ended~~consulting, ~~December~~marketing, 31advertising, ~~2006~~director fees and expenses related to furniture and equipment.

The $64.3 0 million, or 4126.49%, increase in other noninterest expense for the year ended December 31, 2008, compared to the prior year ended, iswas primarily ~~attributed~~attributable ~~to the increase in the FDIC insurance assessment, which increased $2.3 million for the period. The increase in the FDIC assessment resulted from~~ a ~~one-time~~ ~~credit of approximately~~ $1.25 million inincrease ~~2007 and premium increases~~ in ~~2008. Consulting~~ ~~fees~~consulting ~~increased $1~~fees.~~5 million for the period.~~ Additionally, foreclosure expense increased $447 thousand, legal fees increased $367 thousand and collection expense increased $226 thousand. These increases directly correspond to the increase in nonperforming assets over the period. Director expense also decreased $143 thousand as the directors elected to forego their monthly meeting fee beginning in the fourth quarter 2008.

~~Other noninterest~~Goodwill expense increased $1.5 million, or 11.3%, for the year ended December 31, 2007, compared to the year ended December 31, 2006. The increase in other noninterest expense was primarily attributable to increases in directors’ fees of $512 thousand, telephone expense of $134 thousand, marketing expense of $128 thousand, postage expense of $123 thousand, consulting fees of $110 thousand and data processing fees of $109 thousand.impairment

During the fourth quarter of 2008, we recorded a non-cash charge of $77.1 million related to the impairment of goodwill. This write down resulted from goodwill impairment testing that was performed at the end of the fourth quarter due to the quarterly decline in the stock price and the resulting difference between the market capitalization and book value of the Corporation. The results of the goodwill impairment testing demonstrated that the estimated fair value of the Corporation, or reporting unit, was less than the book value, resulting in full impairment. This impairment charge had no effect on our cash balances or liquidity. In addition, because goodwill is not included in the calculation of regulatory capital, the Corporation’s and Bank’s regulatory ratios were not affected by this non-cash expense.

Liquidity Resources

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 payment of operating expenses. The need for liquidity is affected by loan demand, net changes in deposit levels and the scheduled maturities of borrowings. We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. 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 advances from the FHLB and other short and long term borrowings.~~

~~At December~~We ~~31,~~continue ~~2008,~~to ~~the~~closely ~~Bank~~monitor ~~had~~and ~~available~~manage ~~lines~~our ofliquidity ~~credit with the FHLB totaling $187.8 million. At December 31~~position, ~~2008,~~understanding ~~committed~~that

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