Forward-Looking Statements

This quarterly report on Form 10-Q 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 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 our December 31, 2008 Form 10-K, filed with the Securities and Exchange Commission, under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and those discussed in this Form 10-Q under Part II, Item 1A "Risk Factors" below, 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 in general economic conditions, either nationally or locally in western Washington and Oregon;

· the extent and duration of continued economic, credit and financial market disruptions and governmental actions to address these disruptions;

· inflation, interest rate, market and monetary fluctuations;

· legislative or regulatory changes or changes in accounting principles, policies or guidelines;

· 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, within the markets in which we generate loans, which could adversely affect the demand for loans and may adversely affect collateral held on outstanding loans;

· the possibility that we will be unable to comply with the conditions imposed upon us in the Order to Cease and Desist, which could result in the imposition of further restrictions on our operations or penalties;

· fluctuations in loan demand, the number of unsold homes, other properties and real estate values;

· our ability to manage loan delinquency rates, which may be impacted by deterioration in the housing and commercial real estate markets that may lead to increased losses and non-performing assts in our loan portfolios, and may result in our allowance for loan losses not being adequate to cover actual losses and may require us to materially increase our reserves;

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

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

· other risks which may be described in our 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.

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

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

Financial Overview

The first quarter 2009 results reflect continued pressure from an uncertain economy and the negative impact of the economy on the local housing market in Washington and Oregon. For the three months ended March 31, 2009, we reported a net loss of $33.8 million, or ($0.72) per diluted share, compared to net income of $15.5 million, or $0.33 per diluted share, for the three months ended March 31, 2008. Contributing to the first quarter 2009 net loss was a $58.0 million provision for loan losses.

Despite these challenging times, the Board of Directors and management continue to take important steps to strengthen the Corporation. Management has been diligently working to reduce the concentration in real estate construction and land development loans; improve asset quality, capital and on-balance sheet liquidity and reduce expenses.

Management has been diligently working to reduce the concentration in real estate construction and land development loans, and on a linked quarter basis, successfully reduced these portfolios by $147.4 million, or 9.6%, from December 31, 2008 to March 31, 2009. In addition, undisbursed loan commitments related to these portfolios decreased $75.0 million, or 41.9%, for the same period. Our newly formed Business Banking team continues to focus on generating commercial and industrial loans and deposits to small to medium-sized business.

Our recently expanded special assets group continues to focus on reducing nonperforming assets. We continue our aggressive approach of recognizing problem loans and continue to charge-off specific reserves in the allowance for loan losses. For the three months ended March 31, 2009, net charge-offs totaled $59.5 million.

We are currently taking steps to strengthen our capital position. We continue to look at adding capital through a private equity investment and have engaged an investment banking firm to help facilitate this process. Emphasis has also been placed on shifting higher risk weighted assets into lower risk weighted categories for the purpose of calculating capital ratios. At March 31, 2009, our total risk-based capital and Tier 1 leverage capital ratios were 10.4% and 7.6%, respectively, and continue to be above the established minimum regulatory capital levels.

We continue to closely monitor and manage our liquidity position, understanding that this is of critical importance in the current economic environment. Attracting and retaining customer deposits remains our primary source of liquidity. Total deposits increased $78.5 million on a linked quarter basis and $190.5 million year-over-year. In an effort to increase on-balance sheet liquidity, we have been focused on restructuring our balance sheet, and in particular, reducing the loan portfolio. For the first quarter of 2009, total loans decreased $119.2 million, compared to the fourth quarter of 2008, and $57.4 million compared to the first quarter of 2008. Additionally, we have increased our federal funds sold balances on a linked quarter and year-over-year basis.

As part of our ongoing strategy to reduce noninterest expense, the Board of Directors voted to suspend the Corporation's matching of employee 401(K) Plan contributions, effective May 1, 2009. This cost saving measure is expected to reduce noninterest expense by approximately $1.7 million annually. This is in addition to other previously announced expense reduction measures; including reductions to executive compensation, salary freezes and the elimination of performance bonuses and discretionary profit sharing contributions to the Employee Benefit Plan for the year ended December 31, 2008.

Regulatory Actions

FDIC Order

As noted in our March 25, 2009, Form 8-K filing, Frontier Bank ("Bank") entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist ("FDIC Order") on March 20, 2009 with the Federal Deposit Insurance Corporation ("FDIC") and the Washington Department of Financial Institutions, Division of Banks ("DFI") resulting from a June 30, 2008 examination.

The regulators alleged that the 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 the 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, the Bank neither admitted nor denied the alleged charges.

Under the terms of the FDIC Order, the Bank cannot declare dividends without the prior written approval of the FDIC and the DFI. Other material provisions of the order require the Bank to: (1) review the qualifications of the Bank's executive officers, (2) increase director participation and supervision of Bank affairs,
(3) improve the Bank's lending and collection policies and procedures, particularly with respect to the origination and monitoring of real estate construction and land development loans, (4) develop a capital plan and increase Tier 1 capital, (5) implement a comprehensive policy for determining the adequacy of the allowance for loan losses, (6) formulate a written plan to reduce the Bank's risk exposure to nonperforming assets, (7) develop a plan to control overhead and other expenses to restore profitability, (8) implement a liquidity and funds management policy to reduce the Bank's reliance on non-core funding sources and (9) prepare and submit progress reports to the FDIC and the DFI. The FDIC Order will remain in effect until modified or terminated by the FDIC and the DFI.

The Order does not restrict the Bank from transacting its normal banking business. The Bank will continue 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 DFI did not impose any monetary penalties.

The Corporation and the Bank have been actively engaged in responding to the concerns raised in the FDIC Order, and we believe we have already addressed all the regulators' requirements, with the exception of increasing Tier 1 capital, in which efforts are currently underway.

FRB Notice

The Federal Reserve Bank of San Francisco, or FRB, has notified Frontier Financial Corporation (the "Corporation") and the Bank that neither the Corporation nor the Bank may appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the FRB. In addition, neither the Corporation nor the Bank may make indemnification and severance payments without complying with certain statutory restrictions including prior written approval of the FRB and concurrence from the FDIC. Further, the Corporation is generally prohibited from making any payments to any entity, including dividends and interest payments (including dividends on its trust preferred securities and interest at the holding company level) or any other significant operating expenses, without notifying the FRB for prior approval of such payments.

Capital

Although as previously reported, the Corporation and the Bank were "well capitalized" at December 31, 2008, based on our financial statements prepared in accordance with generally accepted accounting principles in the United States and the general percentages in the regulatory guidelines, the FRB and the FDIC have advised the Corporation and the Bank that they will no longer be regarded as "well capitalized" for federal regulatory purposes, as a result of the deficiencies cited in the FDIC Order. Frontier Bank has been reclassified from "well capitalized" to "adequately capitalized." As a result of this reclassification, the Bank's borrowing costs and terms from the FRB, the FHLB and other financial institutions, as well as the Bank's premiums to the Deposit Insurance Fund administered by the FDIC to insure bank and savings association deposits, are expected to increase.

Review of Financial Condition - March 31, 2009 and December 31, 2008

Federal Funds Sold

At March 31, 2009, federal funds sold totaled $290.3 million, compared to $117.7 million at December 31, 2008, an increase of $172.6 million, or 146.6%. Federal funds sold fluctuate on a daily basis depending on our net cash position for the day. In addition, increased federal fund sold balances improves on-balance sheet liquidity, which is an ongoing focus of management.

Securities

At March 31, 2009, securities totaled $83.2 million, compared to $93.7 million at December 31, 2008, a decrease of $10.5 million, or 11.2%. During the first quarter of 2009, $20.0 million of FHLB securities were called with rates ranging from 3.15% to 3.75% and a $5.0 million FHLB CD matured with a rate of 1.65%. Based on pledging requirements, these called/matured securities were replaced with $14.9 million of Government National Mortgage Association ("GNMA") securities with yields of 4.50% and 6.00%.

Loans

The following table represents the loan portfolio by type, excluding loans held
for resale and net of unearned income, at March 31, 2009 and December 31, 2008
(in thousands):

                                   March 31, 2009                 December 31, 2008
                              Amount         % of total        Amount         % of total
Commercial and industrial   $   444,681             12.2 %   $   457,215             12.1 %
Real estate loans:
Commercial                    1,020,530             27.9 %     1,044,833             27.7 %
Construction                    870,201             23.8 %       949,909             25.2 %
Land development                512,804             14.0 %       580,453             15.4 %
Completed lots                  297,702              8.1 %       249,685              6.6 %
Residential 1-4 family          437,170             12.0 %       424,492             11.3 %
Installment and other            70,231              2.0 %        65,468              1.7 %
Total                       $ 3,653,319            100.0 %   $ 3,772,055            100.0 %

Total loans, excluding loans held for resale, decreased $118.7 million, or 3.2%, to a balance of $3.65 billion at March 31, 2009, from $3.77 billion at December 31, 2008. With few exceptions, we have suspended the origination of new real estate construction, land development and completed lot loans. For the first three months of 2009, new loan origination totaled $23.3 million, compared to $74.2 million for the three months ended December 31, 2008, a decrease of $50.9 million, or 68.6%. In addition, for the three months ended March 31, 2009, undisbursed loan commitments decreased $108.9 million, or 22.5%, from December 31, 2008. For the same period, completed lot loans increased $48.0 million, or 19.2%. In certain circumstances in which real estate construction and land development loans are no longer performing and will not be completed, they are reclassified as real estate completed lot loans.

Allowance for Loan Losses

The allowance for loan losses is the amount which, in the opinion of management, is necessary to absorb 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 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, loan charge-offs and loan recoveries are summarized as follows (in thousands):

Three Months Twelve Ended Months Ended March 31, December 31, 2009 2008 Beginning balance $ 114,638 $ 57,658

Provision for loan losses 58,000 120,000

Charge-offs:
Commercial and industrial (5,355 ) (3,101 ) Real estate:
Commercial (149 ) (1,264 ) Construction (29,448 ) (31,968 ) Land development (19,057 ) (12,165 ) Completed lots (3,504 ) (13,839 ) Residential 1-4 family (2,127 ) (846 ) Installment and other (205 ) (343 ) Total charge-offs (59,845 ) (63,526 )

Recoveries:
Commercial and industrial 211 308 Real estate:
Commercial - - Construction 51 161 Land development 57 - Completed lots 16 9 Residential 1-4 family - - Installment and other 2 28 Total recoveries 337 506

Net charge-offs (59,508 ) (63,020 ) Balance before portion identified for
undisbursed loans 113,130 114,638 Portion of reserve identified for
undisbursed loans and
reclassified as a liability (1,646 ) (2,082 ) Balance at end of period $ 111,484 $ 112,556

Average loans for the period $ 3,746,035 $ 3,774,501

Ratio of net charge-offs to average
loans outstanding during the period 1.59 % 1.67 %

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)


The allocation of the allowance for loan losses at March 31, 2009 and December
31, 2008 are as follows (in thousands):

                             March 31, 2009      December 31, 2008
Commercial and industrial   $         14,866     $            15,127
Real Estate:
Commercial                            13,842                  11,388
Construction                          34,190                  27,636
Land development                      19,115                  22,701
Completed lots                         6,776                   9,054
Residential 1-4 family                13,483                  14,056
Installment and other                  1,203                   1,071
Unallocated                            8,009                  11,523
Total                       $        111,484     $           112,556

The allowance for loan losses totaled $111.5 million, or 3.05%, of total loans outstanding at March 31, 2009, compared to $112.6 million, or 2.98%, of total loans outstanding at December 31, 2008. Including the allocation for undisbursed loans of $1.6 million, would result in a total allowance of $113.1 million, or 3.09%, of total loans outstanding at March 31, 2009. This compares to the undisbursed allocation of $2.1 million, for a total allowance of $114.6 million, or 3.03%, of total loans outstanding at December 31, 2008.

Nonperforming Assets

Nonaccruing loans, restructured loans and other real estate owned ("OREO"), are
as follows (in thousands):

                                              March 31, 2009       December 31, 2008
Commercial and industrial                    $         12,745     $            12,908
Real estate:
Commercial                                             14,527                  10,937
Construction                                          286,342                 181,905
Land development                                      217,082                 177,139
Completed lots                                         94,438                  34,005
Residential 1-4 family                                 30,521                  17,686
Installment and other                                     718                     645
Total nonaccruing loans                               656,373                 435,225

Other real estate owned                                18,874                  10,803
Total nonperforming assets                   $        675,247     $           446,028

Restructured loans                           $              -     $                 -

Total loans at end of period (1)             $      3,659,510     $         3,778,733
Total assets at end of period                $      4,154,267     $         4,104,445

Total nonaccruing loans to total loans                  17.94 %                 11.52 %
Total nonperforming assets to total assets              16.25 %                 10.87 %

(1) Includes loans held for resale.

Impaired Loans

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

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.

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 March 31, 2009, nonaccruing loans totaled $656.4 million, compared to $435.2 million at December 31, 2008. The increase in nonaccruing loans for the period is primarily attributable to the continued downturn in the local housing market and economy, which significantly impacted our real estate construction, land development and completed lot portfolios. Of the total nonaccrual loans at March 31, 2009, 91.1% relate to our real estate construction, land development and completed lot portfolios.

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 . . .