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, housing 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 raise capital and comply with the conditions imposed upon us in the FDIC Order or the FRB Agreement, which could result in the imposition of further restrictions on our operations, penalties or other regulatory actions;

· 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;

· the possibility that we may be required to pay significantly higher FDIC insurance premiums in the future;

· 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 results for the first nine months of 2009 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 September 30, 2009, we reported a net loss of $141.1 million, or ($2.99) per diluted share, compared to a net loss of $17.8 million, or ($0.38) per diluted share, for the three months ended September 30, 2008. For the nine months ended September 30, 2009, net losses totaled $224.9 million, or ($4.77) per diluted share, compared to a net loss of $221 thousand, or ($0.00) per diluted share for the same period in 2008. Contributing to the net losses for the three and nine months ended September 30, 2009, were provisions for loan losses of $140.0 million and $275.0 million, respectively.

The following table presents the basic and diluted losses per share, cash dividends declared per common share, the dividend payout ratio, the returns on average assets and average shareholders' equity for the three and nine months ended September 30, 2009 and 2008 (in thousands):

                                   Three Months Ended          Nine Months Ended
                                     September 30,               September 30,
                                   2009          2008           2009         2008
Net loss                        $ (141,088 )   $ (17,796 )   $ (224,893 )   $  (221 )
Basic losses per share          $    (2.99 )   $   (0.38 )   $    (4.77 )   $ (0.00 )
Diluted losses per share        $    (2.99 )   $   (0.38 )   $    (4.77 )   $ (0.00 )
Cash dividends declared
per common share                $        -     $    0.06     $        -     $  0.30
Dividend payout ratio                    -        -15.79 %            -          NM
Return on Average
Assets                              -14.39 %       -1.69 %        -7.38 %     -0.01 %
Equity                             -234.71 %      -15.32 %      -100.06 %     -0.06 %
Average equity/average assets         6.13 %       11.00 %         7.37 %     11.45 %

NM - Not meaningful.

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 has successfully reduced these portfolios by $537.4 million, or 35.1%, from December 31, 2008 to September 30, 2009. In addition, undisbursed loan commitments related to these portfolios decreased $158.1 million, or 88.2%, for the same period.

We continue to proactively manage credit quality and loan collections and address work out strategies. In addition, we continue to charge-off confirmed losses against specific reserves in the allowance for loan losses. For the nine months ended September 30, 2009, net charge-offs totaled $246.3 million.

As of September 30, 2009, Frontier Bank's total risk-based capital ratio was less than 6.0%, and therefore, Frontier Bank is considered "significantly undercapitalized" under federal regulatory guidelines, as a result of significant additional provisions for loan losses and charge-offs in the third quarter of 2009. In addition, Frontier Bank's Tier 1 leverage capital ratio remains less than the 10% required by the terms of the FDIC Order. See "Regulatory Actions" above.

We continue to take steps to strengthen our capital position. Efforts to raise additional capital began in the third quarter of 2008, when the Board of Directors retained an investment banking firm to assist in raising capital and deleveraging our balance sheet. Our ability to raise additional capital has been adversely affected by unfavorable conditions in the capital markets and our financial performance, and we have not been able to raise additional capital to date. If we cannot raise additional capital, continue to shrink our balance sheet and/or enter into a strategic merger or sale, we may not be able to sustain further deterioration in our financial condition and further regulatory actions or restrictions may be taken against us.

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. Noninterest bearing deposits increased $8.1 million, or 2.0%, from December 31, 2008 to September 30, 2009.

During the third quarter 2009, we announced our continued participation in the Federal Deposit Insurance Corporation's ("FDIC") voluntary Transaction Account Guarantee ("TAG") portion of the Temporary Liquidity Guarantee Program through June 30, 2010. Under this program, noninterest bearing transaction accounts and qualified NOW checking accounts are fully guaranteed by the FDIC for an unlimited amount of coverage. The coverage under the TAG program is in addition to, and separate from, the coverage available under the FDIC's general deposit insurance protection.

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 nine months ended September 30, 2009, total loans decreased $627.7 million, or 16.6%, compared to December 31, 2008. Additionally, we have increased our federal funds sold balances to $363.1 million at September 30, 2009, an increase of $245.3 million from December 31, 2008.

Expense Reduction Measures

We continue to seek out feasible expense reduction measures. Previously announced expense reduction measures include: a six percent reduction in workforce, the suspension of the Corporation's matching of employee 401(K) Plan contributions, effective May 1, 2009, and reductions to executive compensation, salary freezes and the elimination of performance bonuses and discretionary profit sharing contributions to the 401(K) Plan. Additionally, full time equivalents ("FTE") employees are down 158, or 18.5%, from the peek in May 2008 to September 30, 2009.

Regulatory Actions

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 Federal Deposit Insurance Corporation (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.

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 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 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.

Compliance Memorandum of Understanding

Frontier Bank and the Frontier Bank Board also 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 and 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 and Regulation Z.

We have been actively engaged in responding to the concerns raised in the FDIC Order, the FRB Agreement and the Memorandum of Understanding and believes we have addressed all the regulators' requirements and that we are in compliance with all the terms of these regulatory actions, with the exception of increasing Tier 1 leverage capital to 10% of the Bank's total assets. See "Strategic Plan - Capital Preservation" below.

These regulatory actions may adversely affect our ability to obtain regulatory approval for future initiatives requiring regulatory action, such as acquisitions. The regulatory actions will remain in effect until modified or terminated by the regulators.

Compliance Efforts in Response to Regulatory Actions

We are actively engaged in responding to the concerns raised by the regulators and have acted promptly on directions received from by taking the following actions:

• Engaged Patrick M. Fahey as chairman of the board and chief executive officer of Frontier, and Michael J. Clementz as president, on December 4, 2008;

• Retained an independent consultant to review and evaluate the loan portfolio in the Fall of 2008, and again in July, 2009;

• Organized a special assets group staffed by 37 managers and employees, to accelerate the collection and resolution of delinquent and adversely classified loans;

• Developed capital management, liquidity and funds management plans;

• Increased board and senior management oversight of Frontier Bank, its lending and operations, including special weekly board meetings;

• Established a communications procedure for reporting progress in all areas to the FDIC, Washington DFI and FRB.

Continuing Operations

In connection with continuing turmoil in the economy, and more specifically, within the local real estate market, we recorded net losses of $141.1 million and $224.9 million for the three and nine months ended September 30, 2009, respectively. These losses were primarily the result of necessary increases in our provision for loan losses during these periods, and declining net interest margins caused by increased amounts of nonperforming loans. These losses, the FDIC Order, and the high level of risk associated with our real estate loan portfolio have resulted in Frontier Bank being regarded by our regulators as "significantly undercapitalized" at September 30, 2009. The net losses for the periods have had a negative impact on our operations, liquidity and capital adequacy and could result in further actions by our regulators to restrict our operations as discussed below.

On July 31, 2009, we announced the signing of an agreement and plan of merger with SP Acquisition Holdings ("SPAH"). The merger was expected to close in the fourth quarter of 2009. SPAH was a special purpose acquisition company with nearly $429 million in assets. On October 5, 2009, we mutually agreed to terminate the agreement and plan of merger with SPAH due to the fact that certain closing conditions contained in the merger agreement could not be met.

In order to achieve compliance with the risk-based capital requirement of the FDIC Order, we will need to either raise capital, sell assets to deleverage, or both. Our ability to accomplish these goals is significantly constricted by the current economic environment, in which access to capital markets has been limited, and we can give no assurances that we will be able to access any such capital or sell more assets.

Our ability to decrease our levels of nonperforming assets is also vulnerable to market conditions as many of our borrowers rely on an active real estate market as a source of repayment, particularly our real estate construction and real estate development loan borrowers. If the real estate market does not improve or declines further, our level of nonperforming assets may continue to increase.

As a result of the asset quality and capital concerns affecting us, we have been aggressively addressing our liquidity needs to maintain an adequate cash flow position to sustain operations. At September 30, 2009, we maintained approximately $363.1 million of federal funds sold to increase on-balance sheet liquidity.

We have ceased originating new real estate construction development loans and completed lot loans, although we continue to selectively fund on commitments previously issued. Finally, our special assets group has been aggressively marketing foreclosed real estate in an effort to sell noninterest earning assets at sales prices that do not further deteriorate our capital position.

We have determined that significant additional sources of capital will be required for us to continue operations through 2009 and beyond. We have engaged financial advisors to assist us in our efforts to raise additional capital and explore other strategic alternatives to address our current and expected capital deficiencies. Based on their assessment of our ability to continue to operate in compliance with the FDIC Order, our regulators may take other and further actions, including the assessment of civil money penalties against the Bank or the Corporation and their respective officers, directors and other interested parties or they may seek to enforce the order or agreement in federal court. If the Bank or the Corporation were to engage in other unsafe and unsound banking practices, the regulators have various enforcement tools available to them including the issuance of capital directives, orders to cease engaging in certain business activities and the issuance of modified or additional orders or agreements.

Review of Financial Condition - September 30, 2009 and December 31, 2008

Federal Funds Sold

At September 30, 2009, federal funds sold totaled $363.1 million, compared to $117.7 million at December 31, 2008, an increase of $245.3 million, or 208.4%. 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

The following table represents the available for sale and held to maturity
securities portfolios by type at September 30, 2009 and December 31, 2008 (in
thousands):

                                             Securities Available for Sale
                                  September 30, 2009               December 31, 2008
                             Fair Value       % of total      Fair Value       % of total
Equities                     $     2,478              3.4 %   $     1,930              2.1 %
U.S. Treasuries                      315              0.4 %         6,457              7.1 %
U.S. Agencies                     29,965             40.6 %        52,055             57.5 %
Corporate securities               2,189              3.0 %         4,439              4.9 %
Mortgage-backed securities        36,127             48.9 %        22,791             25.2 %
Municipal securities               2,760              3.7 %         2,934              3.2 %
Total                        $    73,834            100.0 %   $    90,606            100.0 %



                                                                 Securities Held to Maturity
                                                   September 30, 2009                     December 31, 2008
                                            Amortized Cost        % of total       Amortized Cost       % of total
. . .