<PAGE>

                                                                    EXHIBIT 10.5



                              EMPLOYMENT AGREEMENT
           (Including Amendments to Reflect 2001 Bank Charter Change)


        This Agreement is made this 24th day of January, 2001, and amended
November 27, 2001, by and between CASCADE BANK, a State Chartered Banking
Institution (hereafter "Cascade" or "Employer") and CAROL KOBUKE NELSON
(hereafter called "Employee"). The effective date of this Agreement will be the
19th day of February, 2001 ("Effective Date"). Employer and Employee are
sometimes collectively referred to herein as the "Parties."

        W IT N E S S E T H:

        WHEREAS, Employer's Directors desire to employ Employee as its President
and Chief Executive Officer pursuant to the terms and conditions of this
Agreement; and

        WHEREAS, Employee desires to become and remain employed by Employer
pursuant to the terms and conditions of this Agreement;

        NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES
HEREAFTER SET FORTH, THE SUFFICIENCY OF WHICH IS ACKNOWLEDGED, THE PARTIES AGREE
AS FOLLOWS:

        1. EMPLOYMENT DUTIES. Employer hereby agrees to employ Employee and
Employee hereby agrees to be and remain employed as the President and Chief
Executive Officer of Cascade Bank under the terms and conditions hereinafter set
forth. Employee shall fully and faithfully perform all the customary and usual
duties and responsibilities of President and Chief Executive Officer of a State
Chartered, multi-branch financial institution and such additional duties and
responsibilities as may reasonably be delegated and/or directed by Employer's
Board of Directors. Included in Employee's Board delegated duties shall be the
responsibility for all personnel decisions except internal audit. The Board of
Directors in the exercise of their fiduciary duty shall be ultimately
responsible for all personnel decisions. In addition, for the consideration
herein provided, Employee shall fully and faithfully perform all of the
customary and usual duties and responsibilities of the President and Chief
Operating Officer of Cascade Financial Corporation, the sole shareholder of
Cascade Bank, and such additional duties and responsibilities as may be
delegated and/or directed by the Board of Directors of Cascade Financial
Corporation.

        Subject to any required approval by the Shareholder(s) of Cascade Bank
and/or Cascade Financial Corporation, as the case may be the Board of Directors
of Cascade Bank and Cascade Financial Corporation shall appoint or nominate and
recommend Employee for election as a member of their respective Boards of
Directors and, if so appointed or elected, Employee shall serve in that capacity
until the end of the term or until her removal therefrom.

        2. TERM OF EMPLOYMENT. The term of this Agreement shall be three (3)
years, from the Effective Date. The Board of Directors shall annually consider
whether or not to extend this Agreement for an additional year (to provide a
rolling three-year term). The decision of Employer's Board of Directors
regarding any annual extension of this Agreement and the compensation and bonus
to be paid during such extension shall remain within the sole and absolute
discretion of said Board, provided the Board of Directors may consider, among
other things, the following performance criteria: Employer's profitability;
Safety and Soundness




                                      -1-
<PAGE>

examination CAMELS ratings; Compliance examination ratings; Regulatory capital
requirements for a well-capitalized institution; Managing existing capital to
maximize return on equity; and Maintaining sufficient capital to achieve
business goals. This Agreement may be terminated prior to the expiration of its
term or any extension thereof as hereafter provided.

        3. Compensation and Bonuses. Upon execution and delivery of this
Agreement by Employee, Employer shall initially pay to Employee a signing bonus
in the gross amount of Fifty Thousand Dollars ($50,000.00).

        Employer shall pay Employee an annual base salary of Two Hundred
Thousand Dollars ($200,000.00), payable in equal installments, not less than
monthly during the term of her employment, together with bonuses to be
determined as follows:

               (a) For the fiscal year ending June 30, 2001 a bonus of Thirty
        Thousand Dollars ($30,000.00) at the first pay period in July, 2001;

               (b) For the fiscal year ending June 30, 2002, a bonus equal to
        the greater of One Hundred Thousand Dollars ($100,000.00); or seven and
        one-half percent (7-1/2%) of the amount, if any, by which the net profit
        before taxes (exclusive of all extraordinary gains and losses) according
        to Employer's audited financial statements ("NPBT") (calculated after
        deducting bonuses of all employees) for said fiscal year exceeds the
        NPBT for the fiscal year ending June 30, 2001; provided, however,
        Employer shall advance to Employee a portion of said bonus in the sum of
        Twenty-Five Thousand Dollars ($25,000.00) per quarter for the first
        three quarters of the fiscal year and the balance immediately following
        receipt of the annual audited financial statements; and

               (c) For the fiscal year ending June 30, 2003, a bonus equal to
        the greater of One Hundred Thousand Dollars ($100,000.00); or one and
        one-half percent (1-1/2%) of the NPBT (calculated after deducting
        bonuses of all employees) for said fiscal year ending June 30, 2003;
        provided however Employer shall advance to Employee a portion of said
        bonus in the sum of Twenty-Five Thousand Dollars ($25,000.00) per
        quarter for each of the first three quarters of said fiscal year, and
        the balance paid immediately following receipt of the audited financial
        statements.

               (d) For the portion of the Term of this Agreement extending from
        July 1, 2003 through February 19, 2004, a bonus equal to one and
        one-half percent (1-1/2%) of the NPBT (calculated after deducting
        bonuses for all employees) for said period ending with the end of the
        term of this Agreement; provided Employer shall advance to Employee as a
        loan against the potential bonus to be earned, for said period, the sum
        of Twenty-Five Thousand Dollars ($25,000.00) per quarter. The remainder
        of such bonus, if any, shall be paid immediately following the
        expiration of said term. Provided further, if Employee has received
        advance payments which exceed the total bonus earned hereunder, Employee
        shall immediately repay to Employer the amount of the excess.




                                      -2-
<PAGE>

        Employer's Board of Directors shall annually review Employee's base
salary. All compensation paid shall be subject to deduction for required Social
Security, Federal Income Tax withholding and other mandated deductions.

        4. STOCK OPTIONS. Employer herewith grants to Employee this 24th day of
January, 2001, contemporaneously with the execution and delivery of this
Agreement, the option to acquire One Hundred Thousand (100,000) shares of
capital stock in Cascade Financial Corporation in accordance with the terms and
conditions of its 1997 Stock Option Plan as set forth below: Employee's options
shall vest in accordance with the terms and provisions of said Stock Option
Plan. Employee will be eligible for annual grants of additional option shares
based on performance. In the event of a "Change in Control" (as defined in said
Stock Option Plan), all options that have been granted to Employee shall
automatically vest.

        The foregoing Option shall be divided into two parts as follows:

               (a) Incentive Stock Option. Of the One Hundred Thousand (100,000)
        option shares, 65,573 shares shall be Incentive Stock Option shares as
        defined in said Stock Option Plan; and

               (b) Non-Qualified Stock Options Shares. Of the One Hundred
        Thousand (100,000) option shares, the remainder (34,427 shares), after
        deducting the Incentive Stock Option shares granted pursuant to
        subparagraph 4(a) above, shall be granted to Employee in her capacity as
        a Director as a "Director Option" and Non-Qualified Stock Option as
        defined in said Stock Option Plan.

        5. EMPLOYEE BENEFITS. Employee shall be entitled to the following paid
benefits:

               (a) A contribution to a 401(k) plan acceptable to Cascade Bank at
        a rate equivalent to the offering to similar employees, subject to the
        same terms and conditions as similar employees, and subject to maximums
        as allowed by federal law. Terms of this Agreement are subject to the
        provisions of the formal Plan Document and subject to vesting provisions
        of the current plan;

               (b) An allowance of Twenty-Five (25) benefit days (for vacation
        and sick leave) (accrued at a monthly rate) per year. A maximum of
        twelve and one-half days of unused benefit days allowed may be cashed in
        at the end of each year;

               (c) Health insurance under a plan selected by Cascade Bank, for
        single, individual coverage;

               (d) Dental insurance under a plan selected by Cascade Bank, for
        single, individual coverage;

               (e) Life insurance in the amount of the approved benefit offering
        of the applicable year; provided Employee shall have the option to pay
        additional premiums for increased coverage;




                                      -3-
<PAGE>

               (f) Voluntary participation (paid by Employee), as eligible, in
        all approved benefit offerings of the applicable year, subject to the
        terms of formal Plan Documents; and

               (g) Voluntary participation (paid by Employee), as eligible, in
        all approved disability insurance offerings selected by Cascade Bank in
        its sole discretion.

        6. BUSINESS EXPENSES. Cascade Bank will pay or reimburse Employee for
reasonable and necessary business expenses incurred by Employee, which are
directly related to the performance of her duties of employment, including
travel, professional memberships and professional development, subject to
documentation by Employee and approval by Cascade Bank's Board of Directors or
its Chairperson. Employer will pay Employee's current club monthly membership
dues at the Everett Golf and Country Club.

        7. NO CONFLICTS OF INTERESTS/CONFIDENTIALITY. Employee shall devote
full-time and attention to Employer's business, shall fully and faithfully abide
by Employer's conflict of interest and code of ethics policies and directives
and shall maintain the confidentiality of the Employer's confidential and/or
proprietary information possessed by, accessible or known to Employee. To the
extent that such activities do not interfere with her duties under Section 1 of
this Agreement, Employee may participate in other businesses as a passive
investor, but (a) Employee may not actively participate in the operation or
management of those businesses, and (b) Employee may not, without Employer's
prior written consent, make or maintain any investment in a business with which
Employer has now or in the future a competitive or commercial relationship.
Irrespective of anything hereinabove set forth, Employee may not, without
Employer's prior written consent, engage in any activity or have an ownership
interest in any entity that creates a conflict of interest with Employer.

        8. FEDERAL REGULATORY PROVISIONS.

               (a) If Employee is suspended and/or temporarily prohibited from
        participating in the conduct of the bank's affairs by a notice served
        under section 8 (e)(3) or (g)(l) of Federal Deposit Insurance Act (12
        U.S.C. 1818 (e)(3) and (g)(1)) the Employer's obligations under the
        contract shall be suspended as of the date of service unless staved by
        appropriate proceedings. If the charges in the notice are dismissed,
        Employer may in its discretion (i) pay the Employee all or part of the
        compensation withheld while its contract obligations were suspended, and
        (ii) reinstate (in whole or in part) any of its obligations which were
        suspended.

               (b) If Employee is removed and/or permanently prohibited from
        participating in the conduct of the Employer's affairs by an order
        issued under section 8 (e)(4) or (g)(l) of the U.S.C. 1818 (e)(4) or
        (g)(1)), all obligations of Employer under the contract shall terminate
        as of the effective date of the order, but vested rights of the
        contracting Parties shall not be affected.




                                      -4-
<PAGE>

               (c) If Cascade Bank is in default (as defined in section 3(x)(l)
        of the Federal Deposit Insurance Act), all obligations under the
        contract shall terminate as of the date of default, but this paragraph
        (d) shall not affect any vested rights of the contracting parties.

               (d) All obligations under this Agreement shall be terminated,
        except to the extent determined that continuation of the contract is
        necessary to the continued operation of Cascade Bank:

                      (i) By the Director of the Federal Deposit Insurance
               Corporation ("Director") or his or her designee, at the time the
               Federal Deposit Insurance Corporation enters into an agreement to
               provide assistance to or on behalf of Cascade Bank under the
               authority contained in 13(c) of the Federal Deposit Insurance
               Act; or

                      (ii) By the Director or his or her designee, at the time
               the Director or his or her designee approves a supervisory merger
               to resolve problems related to operation of Cascade Bank or when
               Cascade Bank is determined by the Director to be in an unsafe or
               unsound condition.

        9. TERMINATION/SEVERANCE.

               (a) In the event (i) Employer terminates this Agreement prior to
        the expiration of its term or any extension thereof, other than
        termination for Cause (as defined in Section 9(c) below), or (ii)
        Employee terminates this Agreement with Good Reason (as defined in
        Section (d) below), Employee shall immediately receive the annual
        compensation and bonuses provided for in Section 3 of this Agreement for
        the balance of the term of this Agreement, or two times the amount of
        her then current year base salary and bonus whichever is greater;
        provided, however, the extent that said severance benefit or pay
        constitutes a "golden parachute payment" or a "prohibited
        indemnification payment" as defined in 12 U.S.C. Section 1828 (k), said
        payment shall be made only to the extent permitted under such
        regulations; provided, further, Employer shall seek all required
        approvals and/or consents to permit payment of said severance benefit to
        the maximum extent.

               Notwithstanding the foregoing, to the extent that any portion of
        said severance benefit or pay constitutes an "excess parachute payment"
        under Section 280G of the United States Internal Revenue Code, said
        severance benefit or pay shall be reduced by the amount of the tax
        deduction disallowed to Employer as a result of such excess parachute
        payment.

               (b) Employer's Board of Directors may terminate Employee's
        employment at any time, but any termination by the Employer's Board of
        Directors other than termination for Cause, shall not prejudice
        Employee's right to compensation or other benefits under the contract.
        The Employee shall have no right to receive compensation or other
        benefits for any period after termination for Cause.




                                      -5-
<PAGE>

               (c) "Cause" means any one or more of the following: termination
        because of Employee's personal dishonesty, incompetence, willful
        misconduct, breach of fiduciary duty involving personal profit,
        intentional failure to perform stated duties, insubordination, willful
        violation of any law, rule, or regulation (other than traffic violations
        or similar offenses) or final cease-and-desist order, or material breach
        of any provision of this Agreement.

               (d) "Good Reason" means any one or more of the following:
        Reduction of the base salary or an alteration of the bonus formulas set
        forth in Section 3 of this Agreement during the term of this Agreement
        without Employee's consent; the assignment of Employee without her
        consent of any duties materially inconsistent with Employee's position
        as of the date of this Agreement; or a relocation or transfer of
        Employee's principal place of employment that would require Employee to
        commute on a regular basis more than 30 miles each way from the
        Employer's main office as of the date of this Agreement; during the
        period within three (3) years following a "change in control" (as
        defined in Section 10 below), any change by the Employer in the exact
        title and/or responsibilities of the Employee.

               (e) In the event Employee voluntarily terminates her employment
        prior to expiration of the initial term of this Agreement, to enable her
        to enter into any business or arrangement with another person or entity
        in competition with Cascade Bank or Cascade Financial Corporation
        whether as an employee, owner, partner, joint venturer, or otherwise,
        Employee shall immediately pay to Employer as liquidated damages, the
        sum of One Hundred Thousand Dollars ($100,000.00) and Employer shall
        have the right to offset said liquidated damages against any amount
        otherwise owing to Employee by Employer at the time of such termination.
        Additionally, Employee agrees not to actively solicit or offer jobs on
        behalf of herself or any competing person or entity to any employees of
        Cascade Bank or Cascade Financial Corporation. The parties agree that
        Cascade Bank and Cascade Financial Corporation would be substantially
        damaged in the event Employee terminated her employment prior to the
        expiration of this Agreement and that said damages are and would be
        extremely difficult if not impossible to calculate and that the
        foregoing liquidated damage provision is a reasonable estimate of the
        amount of such damages.

        10. CHANGE IN CONTROL. If, at any time within three (3) years after a
change in control (as defined below) of Cascade Bank or Cascade Financial
Corporation, the Employee is terminated without Cause or Employee terminates for
good reason, the Employee shall receive severance benefit/pay as follows: (i) if
the termination is within 12 months after the change in control, the severance
benefit/pay will be three times the Employee's annual compensation and bonus for
the prior year paid pursuant to Section 3, otherwise; (ii) if the termination
occurs more than 12 months after the change in control, the severance
benefit/pay will be as provided in Section 9(a) above.

        Except in the event Employee is terminated by Employer, the severance
benefit/pay provided for in this section 10, shall not be payable under either
of the following circumstances:




                                      -6-
<PAGE>

        Employee fails to remain employed and fully and faithfully carry out and
discharge her duties and responsibilities including duties and responsibilities
assigned in connection with any change of control transaction(s) until thirty
(30) days following the closing of such change of control transaction(s) or
until relieved of said duties and responsibilities by Employer's Board of
Directors, whichever occurs first; or a change of control is effectuated through
a transaction or combination of transactions while Cascade Bank and/or Cascade
Financial Corporation is financially distressed and/or said transactions are
undertaken pursuant to regulatory mandate, or with regulatory assistance.

        For purposes of this Section 10, for a period of one (1) year following
any change in control, any change in the exact title and/or responsibilities of
Employee will be deemed an involuntary termination of Employee without cause.

        For purposes of this Agreement, a "change in control" shall mean:

               (a) An event of a nature that would be required to be reported in
        response to Item 1(a) of the current report on Form 8-K, as in effect on
        the date hereof, pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934, as amended (the "Exchange Act");

               (b) Any "person", as such term is used in Sections 13(d) and
        14(d) of the Exchange Act, other than Cascade Financial Corporation or
        any subsidiary or subsidiaries of Cascade Financial Corporation that are
        part of the affiliated group (as defined in Section 1504 of the Internal
        Revenue Code of 1986, as amended, without regard to subsection (b)
        thereof), is or becomes the beneficial owner (as defined in Rule 13d-3
        under the Exchange Act) directly or indirectly of securities of Cascade
        Bank or Cascade Financial Corporation representing 25% or more of the
        combined voting power of Cascade Bank's or Cascade Financial
        Corporation's outstanding securities;

               (c) Individuals who are members of the Board of Directors of
        Cascade Financial Corporation (the "Board") on the Commencement Date
        (the "Incumbent Board") cease for any reason to constitute at least a
        majority thereof, provided that any person becoming a director
        subsequent to the Commencement Date whose election was approved by a
        vote of at least three-quarters of the directors comprising the
        Incumbent Board or whose nomination for election by Cascade Financial
        Corporation's stockholders was approved by the nominating committee
        serving under an Incumbent Board or who was appointed as a result of a
        change at the direction of the Federal Reserve Board or the Federal
        Deposit Insurance Corporation ("FDIC"), shall be considered a member of
        the Incumbent Board;

        (d) The stockholders of Cascade Financial Corporation approve a merger,
        consolidation or acquisition of Cascade Financial Corporation or Cascade
        Bank, with or by any other corporation or entity, other than (1) a
        merger, consolidation or acquisition which would result in the voting
        securities of Cascade Financial Corporation outstanding immediately
        prior thereto continuing to represent (either by remaining outstanding
        or by being converted into voting securities of the surviving entity)
        more than 50% of the




                                      -7-
<PAGE>

        combined voting power of the voting securities of Cascade Financial
        Corporation or such surviving entity outstanding immediately after such
        merger or consolidation or (2) a merger or consolidation effected to
        implement a recapitalization of Cascade Financial Corporation or Cascade
        Bank (or similar transaction) in which no person (as hereinabove
        defined) acquires more than 25% of the combined voting power of Cascade
        Financial Corporation's then outstanding securities; or

               (e) The stockholders of Cascade Financial Corporation approve a
        plan of complete liquidation of Cascade Financial Corporation or Cascade
        Bank or an agreement for the sale or disposition by Cascade Financial
        Corporation of all or substantially all of Cascade Financial
        Corporation's or Cascade Bank's assets (or any transaction having a
        similar effect); provided that the term "Change of Control" shall not
        include an acquisition of securities by an employee benefit plan of
        Cascade Bank or Cascade Financial Corporation or a change in the
        composition of the Board at the direction of the Federal Reserve Board
        or the FDIC.

        11. INDEPENDENT LEGAL COUNSEL. Employee acknowledges that she has had
the opportunity to review and consult with her own personal legal counsel
regarding this Agreement.

        12. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be resolve exclusively by binding
arbitration in accordance with the Commercial Rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction.

        13. GOVERNING LAW. This Agreement shall be governed by the law of the
State of Washington and shall be subject to applicable federal laws and
regulations.

        14. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the Parties hereto. The Parties intend that the terms of this Agreement shall be
the final expression of their Agreement with respect to the subject matter
hereof and may not be contradicted by evidence of any prior or contemporaneous
agreement or understanding. The Parties further intend that this Agreement shall
constitute the complete and exclusive statement of its terms and that no
extrinsic evidence whatsoever may be introduced in any judicial, administrative,
arbitral, or other legal proceeding involving this Agreement. This Agreement may
not be changed orally, but may only be changed by an Agreement in writing,
proved by the Employer's Board of Directors and the Employee executed and
delivered by their duly authorized representatives. The provisions of this
Agreement are severable; the invalidity of any provision will not affect the
validity of other provisions of this Agreement.




                                      -8-
<PAGE>

        IN WITNESS WHEREOF, Employer has caused this Agreement to be executed by
its duly authorized Board Representative and Employee has signed this Agreement.



EMPLOYER                                    EMPLOYEE

CASCADE BANK


By:__________________________________       __________________________________

Its:_________________________________




                                      -9-