Document:

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                                                                    EXHIBIT 10.1

                           INTERNATIONAL PAPER COMPANY
                      LONG-TERM INCENTIVE COMPENSATION PLAN

1.   PURPOSE AND EFFECTIVE DATE

     This plan shall be known as the International Paper Company Long-Term
Incentive Compensation Plan (the "Plan"). The purpose of this Plan is to provide
incentive for senior management officers and employees of the Company and its
subsidiaries (the "Company") to improve the performance of the Company on a
long-term basis, and to attract and retain in the employ of the Company persons
of outstanding competence. The terms "subsidiary" and "subsidiaries" as used
herein shall mean corporations which are owned or controlled by International
Paper Company, directly or indirectly.

     The effective date of the Plan is January 1, 1989. The Plan was amended in
1994 and 1999 by a vote of shareholders. Subject to the approval of this Plan
as amended hereby by a majority of shareholders of the Company entitled to
vote on the matter at the 2000 annual meeting of shareholders, certain
changes to the Plan will also be effective as of January 1, 2000.

2.   ADMINISTRATION OF THE PLAN

     (a)  The Plan shall be administered by a committee (the "Committee") which
shall be composed of members of the Board of Directors of the Company and which
shall be constituted so as to permit the Plan to comply with the provisions of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act")
(or any successor rule) and Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"). The Committee is authorized to administer and interpret
the Plan, to authorize, change, and waive the restrictions and conditions
imposed on awards and stock options under the Plan, to delegate the granting of
awards hereunder, and to adopt such rules and regulations for carrying out the
Plan as it may deem appropriate. Decisions of the Committee or its delegates on
all matters relating to the Plan shall be in the Committee's sole discretion and
shall be conclusive and binding on all parties, including the Company, the
shareholders and the participants.

     (b)  No member of the Committee or any employee acting on its behalf shall
incur any liability for any action or failure to act in connection with this
Plan. The Company shall indemnify each member of the Committee and any employee
acting on its behalf against any and all claims, losses, damages, expenses and
liabilities arising from any action or failure to act.

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3.   PARTICIPANTS

     (a)  Participation in this Plan shall be limited to senior managers and
other key employees of the Company as determined by the Committee or its
delegates. Awards of stock and stock appreciation rights and grants of stock
options may be made to such employees and for such respective numbers of Shares,
as the Committee or its delegates in their absolute discretion shall determine
(all such individuals to whom awards and options shall be granted being herein
called "participants").

     (b)  Members of the Board of Directors who are also employees of the
Company shall be eligible to participate in the Plan. However, members of the
Board of Directors who are not also employees of the Company shall be ineligible
for awards under this Plan. Notwithstanding the foregoing, any members of the
Board of Directors who are also retired employees of the Company shall be
entitled to the portions of their awards which are earned or vested pursuant to
the provisions of the Plan.

     (c)  A person who is compensated on the basis of a fee or retainer, as
distinguished from salary, shall not be eligible for participation in the Plan.

     (d)  Participation in this Plan, or receipt of an award or option under
this Plan, shall not give a participant any right to a subsequent award or
option, nor any right to continued employment by the Company for any period, nor
shall the granting of an award or option give the Company any right to continued
services of the participant for any period. Likewise, participation in the Plan
will not in any way affect the Company's right to terminate the employment of
the participant at any time with or without cause.

4.   DEFINITIONS

     (a)  "Stock" or "Share" shall mean a share of the common stock of $1.00 par
value of International Paper Company.

     (b)  "Performance Shares" shall mean Shares contingently awarded with
respect to an Award Period and issued with the restriction that the holder may
not sell, transfer, pledge, or assign such Shares, and with such other
restrictions as the Committee in its sole discretion may determine (including,
without limitation, restrictions with respect to forfeiture of the Shares and
with respect to reinvestment of dividends in additional restricted Shares),
which restrictions may lapse separately or in combination at such time or times
(in installments or otherwise) as the Committee may determine.

     (c)  "Stock Appreciation Right" or "SAR" shall mean a right included in an
award under this Plan to receive upon exercise of the SAR a payment equal to the
amount of the appreciation in the fair market value of a Share over the exercise
price which is set forth in the SAR provided that the exercise price is not less
than the fair market value of a Share on the date the SAR is granted. Payment
upon exercise of an SAR may be in the form of cash, or restricted stock, or
unrestricted stock, or a combination, as determined by the Committee in its sole
discretion. SARs may be awarded separately or in combination

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with other awards and stock options under this Plan pursuant to terms and
conditions contained in an award agreement as determined by the Committee.

     (d)  "Change of Control of the Company" shall mean a change in control of a
nature that would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14A promulgated under the 1934 Act; provided that,
without limitation, such a change in control shall be deemed to have occurred if
(i) any "person" as such term is used in Sections 13(d) and 14(d)(2) of the 1934
Act (other than employee benefit plans sponsored by the Company) is or becomes
the beneficial owner, directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of the Company's then
outstanding securities, or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Company, cease for any reason to constitute at least a majority
thereof unless the election, or the nomination for election, by the Company's
shareholders of each new director was approved by a vote of at least two-thirds
of the directors still in office who were directors at the beginning of the
period.

5.   STOCK AVAILABLE FOR THE PLAN

     Subject to the adjustments permitted by Section 6 of the Plan, an aggregate
of twenty-five million five-hundred thousand (25,500,000) Shares shall be
available under the Plan as amended by the shareholders at the 1999 Annual
Meeting for delivery pursuant to the future awards, and options granted pursuant
to the Plan, together with any Shares previously authorized by shareholders
under the Plan, as previously amended, which are not yet issued to, or are
reacquired from, participants in the Plan as previously amended. Such Shares
shall be either previously unissued Shares or reacquired Shares. Shares covered
by awards which are not earned, or which are settled in cash, or which are
forfeited or terminated for any reason, and options which expire unexercised or
which are exchanged for other awards, shall again be available for other awards
and stock options under the Plan. Shares received by the Company in connection
with the exercise of stock options by delivery of other Shares, and received in
connection with payment of withholding taxes, shall again be available for
delivery under the Plan. Shares reacquired by the Company on the open market
using the cash proceeds received by the Company from the exercise of stock
options granted under the Plan as previously amended shall be available for
awards and options up to the number of Shares issued upon option exercises which
generated such proceeds, provided any such exercise occurred on or after January
1, 1989. Notwithstanding the foregoing, the maximum number of Shares available
for delivery pursuant to future awards, options and SARs to executive officers
of the Company who, at the time of grant, are subject to the provisions of
Section 16 of the 1934 Act shall not exceed 14,600,000 Shares, subject to the
adjustments permitted by Section 6 of the Plan. Notwithstanding any other
provision of this Plan, subject, however, to the adjustments permitted by
Section 6 of the Plan, the aggregate number of Shares that can be covered by
future stock options or SARs granted to any individual in any period of three
consecutive fiscal years shall be 1,800,000 and the aggregate number of
restricted Shares issued under this Plan after the 1999 annual meeting of
shareholders may not exceed 3,000,000 Shares.

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6.   CHANGES IN STOCK AND EXERCISE PRICE OF STOCK OPTIONS AND SARS

     In the event of any stock dividend, split-up, reclassification or other
analogous change in capitalization or any distribution (other than regular cash
dividends) to holders of the Company's common stock, the Committee shall make
such adjustments, if any, as it deems to be equitable in the exercise price of
outstanding options and SARs, and in the number of Performance Shares awarded
and earned, and in the number of Shares covered by any outstanding stock options
and SARs, granted under this Plan, and in the aggregate number of Shares covered
by this Plan.

7.   TIME OF GRANTING AWARDS AND STOCK OPTIONS

     Nothing contained in this Plan, or in any resolution adopted or to be
adopted by the Board of Directors or the shareholders of the Company, shall
constitute the granting of an award or stock option under this Plan. The
granting of an award or stock option pursuant to the Plan shall take place only
when authorized by the Committee or its delegates.

8.   DEATH OR DISABILITY OF A PARTICIPANT

     In the event of the death of a participant, a stock option or an SAR may be
exercised within one year of the participant's death by the participant's
designated beneficiary or beneficiaries (or if no beneficiary has been
designated or survives the participant, by the person or persons who have
acquired the rights of the participant by will or under the laws of descent and
distribution). If a participant becomes disabled, the participant may exercise a
stock option or an SAR within one year after the date of the disability.

     For purposes of this Plan, the term "disabled" shall refer to the condition
of total disability defined in the Company's long-term disability plan.

     A participant may file with the Committee a designation of a beneficiary or
beneficiaries on a form approved by the Committee, which designation may be
changed or revoked by the participant's sole action, provided that the change or
revocation is filed with the Committee on a form approved by it. In case of the
death of the participant, before termination of employment or after retirement
or disability, any portions of the participant's award to which the
participant's designated beneficiary or estate is entitled under the Plan and
the award agreement, shall be paid to the beneficiary or beneficiaries so
designated or, if no beneficiary has been designated or survives such
participant, shall be delivered as directed by the executor or administrator of
the participant's estate.

9.   RETIREMENT OF HOLDER OF STOCK OPTION OR SAR

     If a participant retires under a Company pension plan, the participant may
exercise a stock option or an SAR within its remaining term unless otherwise
provided in the award agreement. Retirement under any of the Company's pension
plans shall cause

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incentive stock options to be treated for federal income tax purposes as
non-qualified stock options on a date which is three months after the date of
retirement. For purposes of this section, retirement shall be given the meaning
used under the Company's pension plan for salaried employees.

10.  NON-TRANSFERABILITY OF AWARDS

     No award, stock option or SAR under this Plan, and no rights or interests
therein, shall be assignable or transferable by a participant (or legal
representative), except at death by will or by the laws of descent and
distribution unless otherwise permitted by the Committee and by law and, in the
case of incentive stock options, to the extent consistent with Section 422 of
the Code.

11.  MODIFICATION OF THE PLAN

     The Board of Directors, without further approval of the shareholders, may
at any time amend the Plan to take into account and comply with any changes in
applicable securities or federal income tax laws and regulations, or other
applicable laws and regulations, including without limitation, any modifications
to Rule 16b-3 under the 1934 Act or Section 162(m) of the Code (or any successor
rule, provision or regulation), terminate or modify or suspend (and if
suspended, may reinstate) any or all of the provisions of this Plan, except that
no modification of this Plan shall without the approval of the Company's
shareholders increase the total number of Shares for which awards, stock options
and SARs may be granted under the Plan (except pursuant to Section 6).

RESTRICTED PERFORMANCE SHARE AWARDS

12.  TERMS AND CONDITIONS OF AWARDS OF PERFORMANCE SHARES

     (a)  Each award of Performance Shares under this Plan shall be contingently
awarded with respect to a period of consecutive calendar years as determined by
the Committee (herein called an "Award Period") and shall be made from
reacquired Shares. The first complete Award Period under this Plan began with
the year 1989. A new Award Period shall commence at the beginning of each
calendar year.

     (b)  The Performance Shares awarded under this Plan will be earned by a
participant on the basis of the Company's financial performance over the Award
Period for which it was awarded, on the basis of pre-established performance
goals determined by the Committee in its sole discretion. The Performance
measurement criteria used for Performance Shares shall be limited to one or more
of: earnings per share, return on stockholders equity, return on investment,
return on assets, growth in earnings, growth in sales revenue, and shareholder
returns. Such criteria may be measured based on the Company's results or on the
Company's performance as measured against a group of peer companies selected by
the Committee. In applying such criteria, earnings may be calculated based on
the exclusion of discontinued operations and extraordinary items. Subject to the
adjustments permitted by Section 6 of the Plan, the maximum number of

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Performance Shares that can be earned for any one individual for any future
Award Period is 100,000. Subject to such maximum number of Shares, the amount,
if any, that may be earned by a participant receiving Performance Shares may
vary in accordance with the level of achievement of the performance goal or
goals established by the Committee.

     (c)  A participant's rights with respect to all unearned Performance Shares
shall terminate at the end of each Award Period.

     (d)  The number of Shares determined by the Committee to have been earned
with respect to any Award Period shall be final, conclusive and binding upon all
parties, including the Company, the shareholders and the participants.

     (e)  All dividend equivalents credited on Performance Shares during an
Award Period shall be reinvested in additional Performance Shares (which shall
be allocated to the same Award Period, and shall be subject to being earned by
the participant on the same basis as the original award).

     (f)  All dividends paid on earned restricted Shares under this part of the
Plan shall be paid in cash.

     (g)  As a condition of any award of Performance Shares under this Plan,
each participant shall enter into an award agreement authorized by the
Committee. The Committee may in its sole discretion, include additional
conditions and restrictions in the award agreement entered into under this Plan.
Settlements in Shares may be subject to forfeiture and other contingencies as
the Committee may determine.

     (h)  At the discretion of the Committee, SARs may be awarded separately or
in combination with other awards or grants under this portion of the Plan.

     (i)  In the event a Change of Control of the Company occurs, then

          (A)  all restrictions shall be immediately removed with respect to all
     earned Performance Shares and

          (B)  a pro rata portion of each outstanding Award that would have been
     earned were Company performance to reach the goals established by the
     Committee for each uncompleted Award Period shall be deemed earned (based
     on the number of months of the total Award Period which have been completed
     prior to the Change of Control), and all restrictions shall be immediately
     removed with respect to that number of shares; the remaining portion of
     each Award shall remain outstanding as Performance Shares subject to the
     provisions of this Plan and the participant's award agreements.

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STOCK OPTION AWARDS

13.  TERMS AND CONDITIONS OF STOCK OPTIONS

     (a)  The Committee and its delegates shall have the sole authority to grant
stock options under this Plan. Such grants may consist of non-qualified stock
options, or Incentive Stock Options, or any combination thereof, as the
Committee shall decide from time to time. The aggregate fair market value
(determined at the time the option is granted) of the Stock with respect to
which Incentive Stock Options are exercisable for the first time by an
individual during a calendar year shall not exceed $100,000 as determined under
Section 422A of the Internal Revenue Code or comparable legislation. The maximum
number of Shares for which stock options can be awarded to any one individual
over any consecutive three-year period commencing on the effective date of the
amendment to the Plan is 1,800,000 Shares, subject to the adjustments permitted
by Section 6 of the Plan.

     (b)  The term of each option granted under the Plan shall be set by the
Committee, but in no event shall an Incentive Stock Option be exercised after
ten years following the date of its grant under this Plan.

     (c)  The exercise price of each option granted under the Plan shall be no
less than the fair market value of the underlying Stock at the time the option
is granted as determined by the Committee.

     (d)  Prior to the exercise of the option and delivery of the Stock
represented thereby, the participant shall have no rights to any dividends nor
be entitled to any voting rights on any Stock represented by outstanding
options.

     (e)  As a condition of any grant of a stock option under this Plan, each
participant shall enter into an award agreement authorized by the Committee. The
Committee may, in its sole discretion, include additional conditions and
restrictions in the award agreement entered into under this Plan.

     (f)  At the discretion of the Committee, SARs may be awarded separately or
in combination with other awards or grants under this part of the Plan.

14.  EXERCISE OF STOCK OPTIONS

     (a)  Each stock option granted under this Plan shall be exercisable as
provided in accordance with the document evidencing the option by full payment
of the option price in cash or at the discretion of the Committee in Stock owned
by the participant (including Performance Shares and other restricted Shares
awarded under this Plan). Unless otherwise provided herein, a participant may
exercise a stock option only if he or she is an employee of the Company and has
continuously been an employee of the Company since the date the option was
granted.

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     (b)  If a stock option under this Plan is exercised by a participant, then,
at the discretion of the Committee, the participant may receive a replacement
option under this part of the Plan to purchase a number of Shares equal to the
number of Shares which the participant purchased on the exercise of the option,
with an exercise price equal to the current fair market value, and with a term
extending to the expiration date of the original stock option. If a stock option
is exercised by delivery of restricted Shares, then the participant shall
receive an equal number of identically restricted Shares; the remaining option
exercise Shares shall contain any applicable restrictions which are set forth in
the participant's award agreement and shall otherwise be unrestricted.

     (c)  In the event a Change of Control of the Company occurs, all stock
options granted under this part of the Plan shall be immediately exercisable,
and all restrictions on Shares issued under this plan pursuant to the exercise
of stock option shall be immediately removed.

CONTINUITY AWARDS

15.  TERMS AND CONDITIONS OF EXECUTIVE CONTINUITY AWARDS

     (a)  Executive Continuity Awards may be made from time to time under this
Plan at the discretion of the Committee, in such amounts and upon such terms and
conditions as are established by the Committee under this portion of the Plan.

     (b)  An executive Continuity Award shall consist of a tandem grant of
restricted Shares together with a related non-qualified stock option (options to
be granted in accordance with the provisions of sections 13-14 of this Plan) to
purchase a specified number of Shares, in such amounts as may be determined by
the Committee. All dividends paid on the restricted Shares shall be reinvested
in additional shares of restricted Shares (subject to the same restrictions,
terms and conditions). Upon attainment of age 65, (or death or the executive's
becoming disabled) or such other age as is determined in the sole discretion of
the Committee, or upon a Change of Control of the Company (as limited under
subsection (h) below), the restrictions on the award will be removed, and the
award will vest in the following manner:

          (i)  If the current realizable gain on a tandem stock option is
     greater than the current market value of the related restricted Shares
     (including re-invested dividends), then all such shares of restricted
     Shares shall be canceled and the term of the stock option shall continue
     for the term set forth in the award agreement.

          (ii) If the current market value of the restricted Shares (including
     re-invested dividends) is greater than the current realizable gain on any
     related tandem stock option, then the option shall be canceled and the
     restrictions shall be removed from all of the related restricted Shares.

     (c)  If a stock option granted under this portion of the Plan is exercised
prior to the executive's attainment of an age determined by the Committee, the
related shares of

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restricted Shares shall be canceled, and the additional Shares issued upon the
exercise of the stock option shall be restricted and subject to either
forfeiture or repurchase by the Company at the option exercise price for a
period ranging up to 12 years from the date of the grant of the option, or
longer, as determined by the Committee and set forth in the award agreement.

     (d)  A stock option granted under this portion of the Plan shall be
exercisable as provided in accordance with the document evidencing the option by
full payment of the option price in cash or, at the discretion of the Committee,
in Stock owned by the participant (including Performance Shares awarded under
this Plan). At the discretion of the Committee, the participant may receive a
replacement stock option to purchase a number of shares equal to the number of
shares purchased by the participant in exercising the option, with an exercise
price equal to the current market value, and with a term extending to the
expiration date of the original stock option. If an option is exercised by
delivery of restricted Shares, then the participant shall receive an equal
number of identically restricted Shares; the remaining option exercise Shares
shall be subject to the Company's right to impose restrictions on such Shares as
described in subsection (c) above.

     (e)  As a condition of any executive Continuity Award under this Plan, each
participant shall enter into an award agreement authorized by the Committee. The
Committee may, in its sole discretion, include additional conditions and
restrictions in the award agreement.

     (f)  At the discretion of the Committee, SARs may be awarded separately or
in combination with other awards or grants under this portion of the Plan.

     (g)  In the event a Change of Control of the Company occurs, all
restrictions shall be immediately removed with respect to the exercise of stock
options under this part of the Plan and with respect to Shares issued upon the
exercise of any stock option. A Change of Control, for these purposes, shall not
include a transaction initiated by management such as a management led buyout or
recapitalization except where such transaction (i) is in response to the
acquisition of 10% or more of the Company's stock or the announcement of a
tender offer for 20% or more of the Company's stock (other than by employee
benefit plans sponsored by the Company); or (ii) is approved by the Board in
accordance with the standards set forth in Section 717 of the New York Business
Corporation Law or any successor provision.

16.  TERMS AND CONDITIONS OF OTHER CONTINUITY AWARDS

     (a)  Awards of restricted stock, hereinafter called "continuity awards" may
be made from time to time under the Plan at the discretion of the Committee or
its delegates, in such amounts and upon such terms and conditions as are
established by the Committee or its delegates under this portion of the Plan.

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     (b)  As a condition of any such continuity award under this Plan, each
participant shall enter into an award agreement authorized by the Committee or
its delegates. The Committee or its delegates, in their sole discretion, may
include additional conditions or restrictions in the award agreement.

     (c)  In the event a Change of Control of the Company occurs, all
restrictions shall be immediately removed with respect to Shares issued as a
continuity award. A Change of Control, for these purposes, shall not include a
transaction initiated by management, such as a management led buyout or
recapitalization except where such transaction (i) is in response to the
acquisition of 10% or more of the Company's stock or the announcement of a
tender offer for 20% or more of the Company's stock (other than by employee
benefit plans sponsored by the Company); or (ii) is approved by the Board in
accordance with the standards set forth in Section 717 of the New York Business
Corporation Law or any successor provision.

MISCELLANEOUS

17.  PRIOR AWARDS

     Awards of stock options and Performance Shares made under the Plan prior to
the amendments approved by shareholders at the 1994 annual meeting continued to
be subject to the terms of the Plan and the instruments evidencing such awards
prior to such amendments becoming effective.

18.  TAX WITHHOLDING

     The Company shall have the right to deduct from any settlement of an award
made under the Plan, including the delivery or vesting of Shares, a sufficient
amount to cover withholding of any federal, state, local or foreign jurisdiction
taxes required by law, or to take such other action as may be necessary to
satisfy any such withholding obligations. The Committee may permit or require
Shares to be used to satisfy required tax withholding and such Shares shall be
valued at the fair market value as of the settlement date of the applicable
award.<PAGE>

                                  EXHIBIT 10.1

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                             INTERWEST BANCORP, INC.
                              EMPLOYMENT AGREEMENT

                                STEPHEN M. WALDEN

     This Employment Agreement ("Agreement") is made and entered into this 19th
day of May, 2000, by and between InterWest Bancorp, Inc., a Washington
corporation (the "Company") and Stephen M. Walden ("Walden"), who agree as
follows:

     1. EMPLOYMENT.  The Company agrees to employ Walden, and Walden agrees
to accept employment with the Company, on the terms and conditions set forth
herein. Walden's title with the Company shall be Chairman of the Board
("Chairman"). The position of Chairman is a non-executive position.

     2. TERM. The term of this Agreement began on April 17, 2000, and shall
terminate on April 17, 2003, unless earlier terminated as provided in Paragraph
5 hereof (the "Term").

     3. DUTIES. Walden will serve as Chairman and will conduct the meetings of
the Board of Directors (the "Board") and the Annual Meeting of Shareholders, and
will provide such other services as requested by the President and/or the Board.
Walden will maintain relationships with community bankers, assist if requested
with possible future acquisitions, and attend bank conferences deemed beneficial
to the Company.

     4. COMPENSATION. Commencing October 17, 2000, (following completion of his
transitional salary continuation of three months at full salary and three months
at one-half salary), the Company shall pay Walden, as compensation for services
to be rendered under paragraph 3, $5,500 per month (partial months prorated)
("Base Salary"), to be paid in accordance with the Company's regular payroll
schedule, together with reimbursement for reasonable and necessary out-of-pocket
expenses incurred in providing the services outlined in paragraph 3. In
addition, Walden, subject to eligibility requirements, shall be covered by and
entitled to participate in employee benefit plans available to all non-executive
officers of the Company. Walden shall receive no additional compensation for
serving as a member of the Board without Board approval.

     5. TERMINATION.

        (a) TERMINATION BY COMPANY FOR CAUSE. If Walden is removed for Cause as
Chairman prior to the expiration of the Term, the Company will pay Walden his
Base Salary and reimbursable expenses through the date of termination, together
with the entire severance pay benefit he was entitled to receive under the
Severance Pay Plan ($486,500) (the "Severance Benefit"), subject to any
reduction under Paragraph 6 hereof. For the purposes of this Agreement, the term
"Cause" shall mean fraudulent or dishonest acts, a gross abuse of authority in
discharge of duties to the Company, or acts that are detrimental or hostile to
the interests of the Company, as determined in good faith by a majority of the
other members of the Board.

                                       -1-

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        (b) OTHER TERMINATION BY COMPANY. If Walden is removed as Chairman prior
to the expiration of the Term, without Cause, the Company will pay Walden his
Base Salary and reimbursable expenses through the date of termination, together
with the Severance Benefit, increased by .75% a month (compounded annually) for
the full Term, for a total severance payment of $630,032, subject to any
reduction under Paragraph 6 hereof.

        (c) TERMINATION BY WALDEN. If Walden resigns as Chairman prior to the
expiration of the Term, Walden shall be entitled to receive his Base Salary and
reimbursable expenses incurred through the date of termination, together with
the Severance Benefit, increased by .75% a month (compounded annually) for each
month of service during the Term prior to the date of termination, with partial
months to be prorated, subject to any reduction under Paragraph 6 hereof.

        (d) TERMINATION BY DEATH OR DISABILITY. This Agreement terminates (1) if
Walden dies, or (2) if Walden is unable to perform his duties and obligations
for a period of ninety (90) days as a result of a physical or mental disability
arising at anytime during the Term, unless with reasonable accommodation Walden
could continue to perform his duties under this Agreement. If termination occurs
under this Paragraph 5(d), Walden or his estate shall be entitled to receive the
Severance Benefit, increased by .75% a month (compounded annually) for each
month of service during the Term prior to the date of termination, with partial
months to be prorated, subject to any reduction under Paragraph 6 hereof.

        (e) TERMINATION BY CHANGE OF CONTROL.

            (1) In the event a Change of Control (as defined in 5(e)(3) herein)
                of the Company is publicly announced within one year from the
                date of the execution of this Agreement, and prior to the date
                of the announcement Walden's employment has not been terminated
                under Paragraph 5(a), (c) or (d) above, and the announced
                Change of Control occurs, on the effective date of the Change
                of Control, Walden shall receive the Severance Benefit,
                increased by .75% a month (compounded annually) for each month
                of service during the Term prior to the effective date of the
                Change of Control, with partial months to be prorated. If this
                Paragraph 5(e)(1) applies, Paragraph 6, REDUCTION IN TOTAL
                SEVERANCE PAYMENT/STOCK OPTIONS, shall not apply.

            (2) In the event a Change of Control of the Company is publicly
                announced and occurs after the  expiration of the first year,
                but prior to the end of the third year, from the date of
                execution of this Agreement, and Walden's employment has not
                been terminated under Paragraph 5(a), (c) or (d) above,
                Walden's employment shall terminate upon the effective date
                of the Change of Control. If termination occurs under this
                Paragraph 5(e)(2), Walden shall receive the Severance
                Benefit, increased by .75% a month, compounded annually, for
                each month of service during the Term prior to the effective
                date of the Change of Control, with partial months to be
                prorated, subject to any reduction under Paragraph 6 hereof.

                                       -2-

<PAGE>

            (3) For the purposes of this paragraph "change in control" means
                a change "in the ownership or effective control" or "in the
                ownership of a substantial portion of the assets" of the
                Company, within the meaning of Section 280G of the Internal
                Revenue Code.

     6.  REDUCTION IN TOTAL SEVERANCE PAYMENT/STOCK OPTIONS. Walden currently
has the following stock options outstanding, which are "out of the money."

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
         Grant Date              Options           Exercise Price     Expiration Date
-----------------------------------------------------------------------------------------
<S>                              <C>               <C>                <C>
           12/17/96                  3,000              $21.83               12/16/06
-----------------------------------------------------------------------------------------
             1/9/98                  3,000              $24.92                 1/8/08
------------------------------------------------------------------------------------------
            3/17/98                 37,500              $27.73                3/16/03
------------------------------------------------------------------------------------------
           12/16/98                 30,000              $20.75               12/15/03
------------------------------------------------------------------------------------------
           12/21/99                 45,000              $17.50               12/20/04
------------------------------------------------------------------------------------------
</TABLE>

     If Walden exercises any of the options described in the above chart
("Applicable Options"), his total severance payment shall be reduced by any Gain
on Exercise. For the purposes of this Agreement, Gain on Exercise shall be
determined by subtracting the exercise price from the closing price on the date
of exercise, and multiplying that number by the number of options exercised.

     The following example is provided for illustrative purposes only.

          Assume Walden exercised 45,000 options with an exercise price
          of $17.25, and the closing price on the date of exercise was $20.00.
          Further assume that on the date of exercise, Walden's total severance
          payment would, prior to adjustment, be $575,000.00 as calculated under
          Paragraph 5 hereof. The gain on the exercise would be $2.75 ($20.00
          minus $17.25) x 45,000 or $123,750.00. This amount would be
          subtracted from the $575,000.00, reducing the total severance payment
          to $451,250.00 ($575,000.00 minus $123,750.00).

     Adjustment to the severance payment will be made on the date(s) the
option(s) are exercised. Adjustments could occur at any time during the term and
following the expiration of the term of this Agreement until all Applicable
Options have either been exercised or have expired.

     7. PAYMENT OF TOTAL SEVERANCE PAYMENT. Unless Paragraph 5(e)(1) applies,
the total severance payment shall be paid on the last to occur of (1) the day
following the exercise of the last of the Applicable Options, (2) the day
following the date of the expiration of the last of the Applicable Options, or
(3) the termination of this Agreement. If all the Applicable Options have not
been exercised or expired on the date of termination of this Agreement, the
right to adjustment of the total severance payment shall survive the termination
of this Agreement, and

                                       -3-

<PAGE>

expire on the date following the last day on which the last Applicable Options
must be exercised or expire.

     8. CONFIDENTIALITY. Walden will not, after signing this Agreement,
including during and after its term, use for his own purposes or disclose to any
other person or entity any confidential information concerning the Company or
its subsidiaries or their business operations or customers, unless: (1) the
Company consents to the use or disclosure of their respective confidential
information; (2) the use or disclosure is consistent with Walden's duties under
this Agreement; or (3) disclosure is required by law or court order.

     9. ARBITRATION.

        (a) ARBITRATION. At either party's request, the parties must submit any
dispute, controversy or claim arising out of or in connection with, or relating
to, this Agreement or any breach or alleged breach of this Agreement, to
arbitration under the American Arbitration Association's rules then in effect
(or under any other form of arbitration mutually acceptable to the parties). A
single arbitrator agreed on by the parties will conduct the arbitration. If the
parties cannot agree on a single arbitrator, each party must select one
arbitrator and those two arbitrators will select a third arbitrator. This third
arbitrator will hear the dispute. The arbitrator's decision is final (except as
otherwise specifically provided by law) and binds the parties, and either party
may request any court having jurisdiction to enter a judgment and to enforce the
arbitrator's decision. The arbitrator will provide the parties with a written
decision naming the substantially prevailing party in the action. This
prevailing party is entitled to reimbursement from the other party for its costs
and expenses, including reasonable attorney's fees.

        (b) GOVERNING LAW. All proceedings will be held at a place designated
by the arbitrator in King County, Washington. The arbitrator, in rendering a
decision as to any state law claims, will apply Washington law.

                                       -4-

<PAGE>

    10. MISCELLANEOUS PROVISIONS.

        (a) ENTIRE AGREEMENT. With the exception of the Deferred Compensation
Agreement discussed hereafter, this Agreement constitutes the entire
understanding between the parties concerning employment and executive benefits
of any kind whatsoever and supersedes all prior agreements. Accordingly, Walden
specifically waives the terms of and all of his rights under all employment,
change-in-control and salary continuation agreements and any other similar
benefit agreements, whether written or oral, he has entered into with the
Company or any of its subsidiaries or affiliates. These agreements include, but
are not limited to, the Severance Pay Plan dated January 31, 2000, and the
Change in Control Agreement dated January 21, 2000. The Deferred Compensation
Agreement dated October 11, 1989, and amended in 1993 and 1995, shall continue
in place and its terms honored, with deferrals of $2,500 a month to continue
through July 17, 2000, and deferrals of $1,250 a month from July 18 through
October 17, 2000, with partial months prorated, after which salary deferrals
will be discontinued. Pay-outs under the Deferred Compensation Agreement shall
be made in accordance with the options available therein.

        (b) BINDING EFFECT. This Agreement will bind and inure to the benefit
of the Company's and Walden's heirs, and legal representatives, successors and
permitted assigns.

        (c) LITIGATION EXPENSES. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due under
it, this party will be entitled to reimbursement from the other party for any
and all of its out-of-pocket expenses and costs including, without limitation,
reasonable attorneys' fees and costs incurred in connection with the enforcement
or collection.

        (d) WAIVER. Any waiver by a party of its rights under this Agreement
must be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not operate as
a waiver of any other breach by the breaching party.

        (e) COUNSEL REVIEW. Walden acknowledges that he has had the opportunity
to consult with independent counsel with respect to the negotiation,
preparation, and execution of this Agreement.

        (f) ASSIGNMENT. The services to be rendered by Walden under this
Agreement are unique and personal. Accordingly, Walden may not assign any of
his rights or duties under this Agreement.

        (g) AMENDMENT. This Agreement may not be modified or amended except by a
written instrument signed by both parties with the prior written consent of the
Company.

        (h) SEVERABILITY. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other provisions of
this Agreement.

                                       -5-

<PAGE>

        (i) GOVERNING LAW AND VENUE. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that certain
matters may be governed by federal law. Any legal proceeding arising out of this
Agreement shall be brought in King County, Washington, and the parties will
submit to jurisdiction in that county.

        (j) COUNTERPARTS. This Agreement may be executed in one or more
facsimile counterparts, each of which will be deemed an original, but all of
which taken together will constitute one and the same document.

     Executed as of the date first above written.

                                      INTERWEST BANCORP, INC.

                                      By: /s/
                                          -----------------------------------
                                          Patrick M. Fahey, President and CEO

                                          /s/
                                          -----------------------------------
                                          STEPHEN M. WALDEN

                                       -6-

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