DEFS14A 1 specialmeetingproxy_2001.txt SPECIAL MEETING PROXY ALAMOGORDO FINANCIAL CORP. ALAMOGORDO FINANCIAL CORPORATION 500 10th Street Alamogordo, New Mexico 88310 (505) 437-9334 May 25, 2001 Dear Stockholder: We are pleased to invite you to attend a Special Meeting of stockholders of Alamogordo Financial Corporation (the "Company"). The Special Meeting will be held at the Company's office at 500 Tenth Street, Alamogordo, New Mexico at 10:00 a.m. (local time) on June 25, 2001. The enclosed Notice of Special Meeting and Proxy Statement describe the formal business to be transacted. The business to be conducted at the Special Meeting consists of the ratification and approval of the Company's stock benefit plans. The Board of Directors of the Company has determined that the matters to be considered at the Special Meeting are in the best interest of the Company and its stockholders, and the Board of Directors unanimously recommends a vote "FOR" each matter to be considered. On behalf of the Board of Directors, we urge you to sign, date and return the enclosed proxy card as soon as possible even if you currently plan to attend the Special Meeting. This will not prevent you from voting in person, but will assure that your vote is counted if you are unable to attend the meeting. Sincerely, /s/ R. Miles Ledgerwood R. Miles Ledgerwood President and Chief Executive Officer Alamogordo Financial Corporation 500 10th Street Alamogordo, New Mexico 88310 (505) 437-9334 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To Be Held On June 25, 2001 Notice is hereby given that a Special Meeting of Stockholders of Alamogordo Financial Corporation (the "Company") will be held at 500 Tenth Street, Alamogordo, New Mexico, on June 25, 2001 at 10:00 a.m., local time. A Proxy Card and a Proxy Statement for the Special Meeting are enclosed. The Special Meeting is for the purpose of considering and acting upon: 1. The ratification and approval of the Company's 2001 Stock Option Plan; 2. The ratification and approval of the Company's 2001 Recognition and Retention Plan; and such other matters as may properly come before the Special Meeting, or any adjournments thereof. The Board of Directors is not aware of any other business to come before the Special Meeting. Any action may be taken on the foregoing proposals at the Special Meeting on the date specified above, or on any date or dates to which the Special Meeting may be adjourned. Stockholders of record at the close of business on May 16, 2001, are the stockholders entitled to vote at the Special Meeting, and any adjournments thereof. A list of stockholders entitled to vote at the Special Meeting will be available at Alamogordo Federal Savings and Loan Association 500 10th Street, Alamogordo, New Mexico 88310 for a period of ten days prior to the Special Meeting and will also be available for inspection at the meeting itself. By Order of the Board of Directors /s/ Julia A. Eggleston Julia A. Eggleston Secretary Alamogordo, New Mexico May 25, 2001 -------------------------------------------------------------------------------- IMPORTANT: The prompt return of proxies will save the Company the expense of further requests for proxies to ensure a quorum at the Special Meeting. A self-addressed envelope is enclosed for your convenience. No postage is required if mailed within the United States. -------------------------------------------------------------------------------- Alamogordo Financial Corporation 500 10th Street Alamogordo, New Mexico 88310 (505) 437-9334 ------------------------------------- PROXY STATEMENT ------------------------------------- SPECIAL MEETING OF STOCKHOLDERS June 25, 2001 ------------------------------------- SOLICITATION AND VOTING OF PROXIES This Proxy Statement is furnished in connection with the solicitation of proxies on behalf of the Board of Directors of Alamogordo Financial Corporation (the "Company") to be used at the Special Meeting of Stockholders of the Company (the "Special Meeting"), which will be held at 500 Tenth Street, Alamogordo, New Mexico, on June 25, 2001, at 10:00 a.m., local time, and at all adjournments of the Special Meeting. The accompanying Notice of Special Meeting of Stockholders and this Proxy Statement are first being mailed to stockholders on or about May 25, 2001. Regardless of the number of shares of Common Stock owned, it is important that stockholders be represented by proxy or be present in person at the Special Meeting. Stockholders are requested to vote by completing the enclosed Proxy Card and returning it, signed and dated, in the enclosed postage-paid envelope. Stockholders are urged to indicate the way they wish to vote in the spaces provided on the proxy card. Proxies solicited by the Board of Directors of the Company will be voted in accordance with the directions given therein. Where no instructions are indicated, signed proxies will be voted FOR the ratification and approval of the Company's 2001 Stock Option Plan and 2001 Recognition and Retention Plan. The Board of Directors knows of no additional matters that will be presented for consideration at the Special Meeting. Execution of a proxy, however, confers on the designated proxyholders discretionary authority to vote the shares in accordance with their best judgment on such other business, if any, that may properly come before the Special Meeting or any adjournments thereof. Stockholders who execute proxies in the form solicited hereby retain the right to revoke them in the manner described below. Unless so revoked, the shares represented by such proxies will be voted at the Special Meeting and all adjournments thereof. Proxies solicited on behalf of the Board of Directors of the Company will be voted in accordance with the directions given thereon. Where no instructions are indicated, proxies will be voted "FOR" the proposals set forth in this Proxy Statement for consideration at the Special Meeting. Proxies may be revoked at any time prior to exercise by sending written notice of revocation to the Secretary of the Company, Julia A. Eggleston, at the address of the Company shown above, or by delivering to the Company a duly executed proxy bearing a later date. The presence at the Special Meeting of any stockholder who had given a proxy shall not revoke such proxy unless the stockholder delivers his or her ballot in person at the Special Meeting or delivers a written revocation to the Secretary of the Company prior to the voting of such proxy. The cost of solicitation of proxies in the form enclosed herewith will be borne by the Company. Proxies may also be solicited personally or by mail and telephone by the Company's Directors, officers and regular employees, without additional compensation therefor. The Company will also request persons, firms and corporations holding shares in their names, or in the name of their nominees, which are beneficially owned by others, to send proxy material to and obtain proxies from such beneficial owners, and will reimburse such holders for their reasonable expenses in doing so. 1 VOTING SECURITIES Holders of record of the Company's common stock, par value $.01 per share (the "Common Stock") as of the close of business on May 16, 2001 (the "Record Date") are entitled to one vote for each share then held, except as described below. As of the Record Date, the Company had 1,275,000 shares of Common Stock issued and outstanding, 918,000 shares of which are held by AF Mutual Holding Company. The presence, in person or by proxy, of at least a majority of the total number of shares of Common Stock outstanding and entitled to vote is necessary to constitute a quorum at this Special Meeting. In the event there are not sufficient votes for a quorum, or to approve or ratify any matter being presented, at the time of this Special Meeting, the Special Meeting may be adjourned in order to permit the further solicitation of proxies. VOTING PROCEDURES AND METHOD OF COUNTING VOTES The proxy card being provided by the Board of Directors enables a stockholder to check the appropriate box on the proxy card to (i) vote "FOR", (ii) vote "AGAINST", or (iii) vote to "ABSTAIN" from voting on the ratification and approval of the Company's Stock Option Plan (the "Stock Option Plan") and Recognition and Retention Plan (the "Recognition Plan"). An affirmative vote of the holders of a majority of the Common Stock present at the Special Meeting, in person or by proxy, and entitled to vote is required to constitute ratification and approval by stockholders. Shares as to which the "ABSTAIN" box has been selected on the proxy card will be counted as shares present and entitled to vote and will have the effect of a vote against the matter for which the "ABSTAIN" box has been selected. In contrast, broker non-votes will not be counted as shares present and entitled to vote and will have no effect on the vote on the matter presented. Proxies solicited hereby will be returned to the Company, and will be tabulated by an inspector of election designated by the Board. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Persons and groups who beneficially own in excess of 5% of the Common Stock are required to file certain reports with the Company and with the Securities and Exchange Commission (the "SEC") regarding such ownership pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"). The following table sets forth information as of May 10, 2001 regarding each person known to be beneficial owner of more than 5% of the Company's outstanding shares of Common Stock and executive officers and directors.
Amount of Shares Owned and Nature Percent of Shares Name and Address of of Beneficial of Common Stock Beneficial Owner(1) Ownership Outstanding AF Mutual Holding Company 918,000 72.0% Robert W. Hamilton, Chairman of the Board 15,000 1.2 S. Thomas Overstreet, Vice Chairman of the Board 17,000 1.3 R. Miles Ledgerwood, Director, President and Chief Executive Officer 6,575 * Jimmie D. Randall, Director 1,000 * Earl E. Wallin, Director 2,500 * Norma J. Clute, Vice President and Treasurer 2,263 * Howard M. Smith, Vice President-Lending Operations 1,383 * Julia A. Eggleston, Sr. Vice President, Chief Operating Officer and Secretary 4,207 * Kemmie D. Jeter, Vice President-Head of Teller Operations 557 * All executive officers and directors as a group (9 persons) 50,485 4.0%
----------------------- * Less than 1%. (1) The mailing address of all persons listed is 500 10th Street, Alamogordo, New Mexico 88310. The Company's directors and executive officers are also directors and executive officers of AF Mutual Holding Company and Alamogordo Federal Saving and Loan Association. 2 Director Compensation During the fiscal year ended June 30, 2000, the Company did not separately pay directors fees. Executive Compensation The following table provides information about the compensation paid for 2000 to our Chief Executive Officer. No other officer's total annual compensation for 2000 totaled $100,000 or more.
Summary Compensation Table Long-Term Compensation Annual Compensation(1) Awards Other Annual Fiscal Compensation Restricted Options/ All Other Name and Principal Position Year Salary Bonus (2) Stock Awards SARs Compensation ------------------------------- ------------------- ----------- -------------- ------------------------ --------------- R. Miles Ledgerwood, President, 2000 $120,225 $23,989 -- -- -- -- Chief Executive Officer and Director =============================== =================== =========== ============== ======================== =============== =
(1) The information provided is for the fiscal year ending June 30, 2000. In accordance with the revised rules on executive officer and director compensation disclosure adopted by the SEC, Summary Compensation information is excluded for the calendar years ended June 30, 1999 and 1998, as Alamogordo Federal was not a public company during such periods. (2) Does not include perquisites and personal benefits, the aggregate amount of which does not exceed the lesser of $50,000 or 10% of the total salary and bonus reported. Defined Benefit Pension Plan The Company maintains the Pentegra Retirement Fund, which is a qualified, tax-exempt defined benefit plan ("Retirement Plan"). All employees age 21 or older who have worked at the Company for a period of one year in which they have 1,000 or more hours of service are eligible for membership in the Plan. Once eligible, an employee receives credit for all years of employment with the Company for purposes of determining the employee's benefit service and vested percentage under the Retirement Plan. The Company annually contributes an amount to the Retirement Plan necessary to satisfy the actuarially determined minimum funding requirements in accordance with the Employee Retirement Income Security Act ("ERISA"). The regular form of all retirement benefits (i.e., normal, early or disability) is payable in monthly installments for the life of the retiree plus a retirement death benefit. An optional form of benefit may be selected instead of the normal form of benefits. These optional forms include a higher monthly installment payable for life and no further benefit upon death, a revised monthly installment during the member's life with some other benefit payable upon death and various annuity forms. Benefits payable upon death may be made in a lump sum, installments over 10 years, or a lifetime annuity. The normal retirement benefit payable annually at or after age 65, is an amount equal to 2% multiplied by years of benefit service times average compensation based on the average of the three years providing the highest average. A reduced benefit is payable as early as age 45, after the member has become vested. A member is fully vested in his account upon completion of five or more years of employment or upon attaining normal retirement age. If a member dies in active service, his beneficiary would be entitled to a lump sum death benefit equal to 100% of the member's last 12 months' salary, plus an additional 10% of the salary for each year of benefit service until a maximum of 300% of 3 such salary is reached for 20 or more years, plus refund of the member's own contributions, if any, with interest. If a member dies after becoming eligible for early retirement his beneficiary would receive the higher of the active service death benefit or the retirement death benefit. The retirement death benefit is 12 times the regular annual retirement allowance less the sum of the allowance payments made before death. The following table indicates the annual retirement benefit that would be payable under the Retirement Plan upon retirement at age 65 in calendar year 2000, expressed in the form of a single life annuity for the average salary and benefit service classifications specified below.
Highest Three-Year Average Years of Service and Benefit Payable at Retirement -------------------------------------------------------------------------------------------------- Compensation 15 20 25 30 35 40 ------------ -------- -------- -------- -------- --------- --------- $50,000 $ 15,000 $20,000 $ 25,000 $ 30,000 $ 35,000 $ 40,000 $75,000 $ 22,500 $30,000 $ 37,500 $ 45,000 $ 52,500 $ 60,000 $100,000 $ 30,000 $40,000 $ 50,000 $ 60,000 $ 70,000 $ 80,000 $125,000 $ 37,500 $50,000 $ 62,500 $ 75,000 $ 87,500 $100,000 $160,000 $ 48,000 $64,000 $ 80,000 $ 96,000 $ 112,000 $128,000
As of June 30, 2000, R. Miles Ledgerwood had 16 years of benefit service under the Retirement Plan. Certain Transactions with Directors and Executive Officers Federal regulations require that all loans or extensions of credit to executive officers and directors must generally be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, unless the loan or extension of credit is made under a benefit program generally available to all other employees and does not give preference to any insider over any other employee, and must not involve more than the normal risk of repayment or present other unfavorable features. We currently do not make new loans or extensions of credit to our executive officers, directors and employees at different rates or terms than those offered to the general public. All loans to our directors, officers and employees have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions, and do not involve more than minimal risk of collectibility. S. Thomas Overstreet, who serves as a director of the Company and Alamogordo Federal, is a partner of the law firm of S. Thomas Overstreet and Associates, P.C., which represents Alamogordo Federal in mortgage loan transactions. For the fiscal year ended June 30, 2000, Alamogordo Federal paid legal fees to S. Thomas Overstreet and Associates, P.C. totaling $35,474. The terms and conditions of these fees and services are substantially the same as those for similar transactions with other parties. REQUIRED APPROVALS Stockholder Approval The Company is required to obtain stockholder approval of the Stock Option Plan in order for options issued under the plan to qualify as "Incentive Stock Options" as defined under Section 422 of the Internal Revenue Code (the "Code"). OTS Approval of Stock Benefit Plans The Company is not required to obtain OTS approval of the Stock Option Plan and Recognition Plan because the plans will be implemented more than one year following the completion on May 15, 2000 of the Company's stock offering (the "Stock Offering"). 4 OTS Approval of Stock Issuance Under the Plans The Stock Option Plan authorizes the issuance of options to purchase 63,749 shares of common stock, and the Recognition Plan authorizes the award of up to 31,874 shares of common stock. Current OTS regulations require that the OTS approve in advance any stock issuance by a mutual holding company subsidiary, such as the Company. The Stock Issuance Plan approved by the OTS in connection with the Stock Offering permits the issuance of up to 17,850 Recognition Plan shares, and options to purchase up to 35,700 shares, that is, Recognition Plan and Stock Option Plan awards in an amount equal to 5% and 10%, respectively, of the number of shares actually sold in the Stock Offering. The Company will be authorized to issue these awards immediately upon receipt of stockholder approval of the Recognition Plan and Stock Option Plan. OTS approval of the issuance pursuant to the Stock Issuance Plan does not mean that the OTS has approved or endorsed the Recognition Plan or the Stock Option Plan - the OTS has not approved or endorsed such plans. The Company has requested OTS approval of the issuance of the additional shares not authorized by the Stock Issuance Plan, based upon the maximum number of shares that could have been sold in the Stock Offering while maintaining AF Mutual Holding Company as the majority stockholder, rather than the number of shares actually sold in the Stock Offering. The Company could have sold 637,499 shares of common stock in the Stock Offering and issued 637,501 shares to AF Mutual Holding Company. Since the Company could have sold 637,499 shares in the Stock Offering, but sold only 357,000 shares, the Company is requesting OTS approval of the issuance of Recognition Plan shares and stock options in an amount equal to 5% and 10%, respectively, of the 280,499 additional shares that could have been but were not actually sold, or 14,024 Recognition Plan shares and 28,049 stock options. The OTS has issued proposed regulations that, if adopted in final form, may permit the award of the additional 14,024 Recognition Plan shares and 28,049 options without the necessity of obtaining prior OTS approval. The Company will not request OTS approval if it determines that OTS regulations in effect at the time of a proposed issuance do not require such approval. The Company will not present the plan to stockholders for approval after the receipt of OTS nonobjection or approval of the stock issuance under the plans, nor will the Company present the plans for stockholder approval of the OTS requires amendments to the plans, even if the amendments are material. PROPOSAL I--RATIFICATION AND APPROVAL OF THE COMPANY'S 2001 STOCK OPTION PLAN General Pursuant to the Company's 2001 Stock Option Plan (the "Stock Option Plan") options to purchase up to 63,749 shares of Common Stock may be granted to key employees and directors of the Company and its affiliates. Of such options, 35,700 may be awarded at any time following stockholder approval, and the remaining options may not be awarded until the OTS approves or indicates that it does not object to issuance of such options, or the Company determines that such approval or nonobjection is not required. A total of four nonemployee directors and all 43 employees (as of March 31, 2001) are eligible to participate in the Stock Option Plan. The Company's Board of Directors believes that it is appropriate to adopt a flexible and comprehensive stock option plan that permits the granting of a variety of long-term incentive awards to nonemployee directors and key employees as a means of enhancing and encouraging the recruitment and retention of those individuals on whom the Company's continued success most depends. Attached as Appendix A to this Proxy Statement is the complete text of the form of Stock Option Plan. The principal features of the Stock Option Plan are summarized below. Principal Features of the Stock Option Plan The Stock Option Plan provides for awards in the form of stock options, reload options, limited stock appreciation rights ("Limited Rights") and dividend equivalent rights. Each award will be on the terms and conditions determined by the committee administering the Stock Option Plan, consistent with the plan and applicable OTS Regulations. 5 The term of stock options generally will not exceed ten years from the date of grant. Stock options granted under the Stock Option Plan may be either "Incentive Stock Options" as defined under Section 422 of the Code or stock options not intended to qualify as such ("non-qualified stock options"). Shares issued upon the exercise of a stock option may be either authorized but unissued shares, reacquired shares held by the Company in its treasury, or shares purchased by the plan. Any shares subject to an award that expires or is terminated unexercised will again be available for issuance under the Stock Option Plan. Generally, in the discretion of the Board, all or any non-qualified stock options granted under the Stock Option Plan may be transferable by the participant but only to the persons or classes of persons determined by the Board. No other award or any right or interest therein is assignable or transferable except under certain limited exceptions set forth in the Stock Option Plan. The Stock Option Plan is administered by a committee (the "Committee") consisting of either two or more non-employee directors, or the entire Board of the Company. The members of the Committee shall be appointed by the Board of the Company. Pursuant to the terms of the Stock Option Plan, nonemployee directors and key employees of the Company and its affiliates are eligible to participate. Subject to OTS regulation and policy, the Committee will determine to whom the awards will be granted, in what amounts, and the period over which such awards will vest. In granting awards under the Stock Option Plan, the Committee will consider, among other things, position and years of service, value of the individual's services and the added responsibilities of such individuals as directors and key employees of a public company and/or its affiliates. The exercise price may be paid in cash or Common Stock. Stock Options. Incentive stock options can only be granted to key employees of the Company or an affiliate. Nonemployee directors will be granted nonstatutory stock options. No option granted to an officer in connection with the Stock Option Plan will be exercisable as an Incentive Stock Option subject to incentive tax treatment if exercised more than three months after the date on which the optionee terminates employment, except as set forth below. In the event a participant ceases to maintain continuous service by reason of normal retirement, death or disability, or coincident to or following a change in control (as defined in the plan), options still subject to restrictions will vest and be free of these restrictions and can be exercised for up to five years after cessation of service but in no event beyond the expiration of the options' original term. In the event a participant ceases to maintain continuous service for any other reason, the participant will forfeit all nonvested options, and vested options will remain exercisable for up five years but in no event beyond the expiration of the initial option term. If an optionee terminates employment, any Incentive Stock Options exercised more than three months following the date the optionee terminates employment will be treated as a nonstatutory stock option as described above; provided, however, that in the event of death or disability, incentive stock options may be exercised and receive incentive tax treatment for up to at least one year following termination of employment, subject to the requirements of the Internal Revenue Code. In the event of death or disability of an optionee, the Company, if requested by the optionee or beneficiary, may elect, in exchange for the option, to pay the optionee or beneficiary, the amount by which the fair market value of the Common Stock exceeds the exercise price of the option on the date of the optionee's termination of service for death or disability. Limited Stock Appreciation Rights. The Committee may grant Limited Rights to key employees simultaneously with the grant of any option. A Limited Right gives the option holder the right, upon a change in control of the Company or the Bank, to receive the excess of the market value of the shares represented by the Limited Rights on the date exercised over the exercise price. Limited Rights generally will be subject to the same terms and conditions and exercisable to the same extent as stock options. Payment upon exercise of a Limited Rights will be in cash, or in the event of a change in control in which pooling accounting treatment is a condition to the transaction, for shares of stock of the Company, or in the event of a merger transaction, for shares of the acquiring corporation or its parent, as applicable. Limited Rights may be granted at the time of, and must be related to, the grant of a stock option. The exercise of one will reduce to that extent the number of shares represented by the other. If a Limited Rights is granted 6 with and related to an Incentive Stock Option the Limited Rights must satisfy all the restrictions and limitations to which the related Incentive Stock Option is subject. Dividend Equivalent Rights. Dividend equivalent rights may also be granted at the time of the grant of a stock option. Dividend equivalent rights entitle the option holder to receive an amount of cash at the time that certain extraordinary dividends are declared equal to the amount of the extraordinary dividend multiplied by the number of options that the person holds. For these purposes, an extraordinary dividend is defined under the Stock Option Plan as any dividend paid on shares of Common Stock where the rate of dividend exceeds the Bank's weighted average cost of funds on interest-bearing liabilities for the current and preceding three quarters. Reload Options. Reload options may also be granted at the time of the grant of a stock option. Reload options entitle the option holder, who has delivered shares that he or she owns as payment of the exercise price for option stock, to a new option to acquire additional shares equal in amount to the shares he or she has traded in. Reload options may also be granted to replace option shares retained by the employer for payment of the option holder's withholding tax. The option price at which additional shares of stock can be purchased by the option holder through the exercise of a reload option is equal to the market value of the previously owned stock at the time it was surrendered to the employer. The option period during which the reload option may be exercised expires at the same time as that of the original option that the holder has exercised. Effect of Adjustments. Shares as to which awards may be granted under the Stock Option Plan, and shares then subject to awards, will be adjusted by the Stock Option Committee in the event of any merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination or exchange of shares or other change in the corporate structure of the Company. In the case of any merger, consolidation or combination of the Company with or into another holding company or other entity, whereby either the Company is not the continuing holding company or its outstanding shares are converted into or exchanged for securities, cash or other property, or any combination thereof, any individual to whom a stock option or Limited Right has been granted at least six months prior to such event will have the right (subject to the provisions of the Stock Option Plan and any applicable vesting period) upon exercise of the option or Limited Right to an amount equal to the excess of fair market value on the date of exercise of the consideration receivable in the merger, consolidation or combination with respect to the shares covered or represented by the stock option or Limited Right over the exercise price of the option multiplied by the number of shares with respect to which the option or Limited Right has been exercised. Amendment and Termination. The Board may at any time, amend, suspend or terminate the Stock Option Plan or any portion thereof, provided, however, that no such amendment, suspension or termination shall impair the rights of any individual, without his consent, in any award made pursuant to the plan. Unless previously terminated, the Stock Option Plan shall continue in effect for a term of ten years, after which no further awards may be granted under the Stock Option Plan. The Bank will not implement the Stock Option Plan unless such plan has been approved by a majority vote of shares of Common Stock present and voting at the Meeting. Federal Income Tax Consequences. Under present federal income tax laws, awards under the Stock Option Plan will have the following consequences: (1) The grant of an award, by itself, will neither result in the recognition of taxable income to the recipient nor entitle the Company to a deduction at the time of such grant. (2) The exercise of a stock option which is an "Incentive Stock Option" within the meaning of Section 422 of the Code will generally not, by itself, result in the recognition of taxable income to the individual nor entitle the Company to a deduction at the time of such exercise. However, the difference between the exercise price and the fair market value of the option shares on the date of exercise is an item of tax preference which may, in certain situations, trigger the alternative minimum tax. The alternative minimum tax is incurred only when 7 it exceeds the regular income tax. The alternative minimum tax will be payable at the rate of 26% to the first $175,000 of "ordinary income" in excess of $33,750 (single person) or $45,000 (married person filing jointly). This tax applies at a flat rate of 28% of so much of the taxable ordinary income in excess of $175,000. Generally, the alternative minimum tax will be payable at a maximum rate of 20% on net capital gain. If a taxpayer has alternative minimum taxable income in excess of $150,000 (married persons filing jointly) or $112,500 (single person), the $45,000 or $33,750 exemptions are reduced by an amount equal to 25% of the amount by which the alternative minimum taxable income of the taxpayer exceeds $150,000 or $112,500, respectively. The individual will recognize long term capital gain or loss upon the resale of the shares received upon such exercise, provided the individual holds the shares for more than twelve months from the date of exercise. (3) The sale of an Incentive Stock Option share prior to the applicable holding period, i.e., the longer of two years from the date of grant of the Incentive Stock Option or one year from the date of exercise, will cause any gain to be taxed at ordinary income tax rates, with respect to the spread between the exercise price and the fair market value of the share on the date of exercise and at short term capital gains rates with respect to any post exercise appreciation in the value of the share. (4) The sale of an Incentive Stock Option share after one year from the date of exercise will generally result in long term capital gain or loss. (5) The exercise of a stock option which is not an Incentive Stock Option, i.e., a non-qualified stock option, will result in the recognition of ordinary income on the date of exercise in an amount equal to the difference between the exercise price and the fair market value on the date of exercise of the shares acquired pursuant to the stock option. (6) The exercise of a Limited Right will result in the recognition of ordinary income by the individual on the date of exercise in an amount of cash, and/or the fair market value on that date of the shares acquired pursuant to the exercise. (7) Reload options are of the same type (nonstatutory or incentive stock option) as the option that the option holder exercised. Therefore, the tax consequences of the reload option are determined under the applicable tax rules for non-qualified or incentive stock options. (8) The receipt of a cash payment pursuant to a dividend equivalent right will result in the recognition of compensation or self-employment income by the recipient. (9) The Company will be allowed a deduction at the time, and in the amount, of any ordinary income recognized by the individual under the various circumstances described above, provided that the Company meets its federal withholding tax obligations. The affirmative vote of a majority of shares present in person or by proxy is required for approval of the Stock Option Plan. Unless marked to the contrary, the shares represented by the enclosed proxy card, if the proxy card is signed and returned, will be voted for the ratification and approval of the Stock Option Plan. The Board of Directors recommends a vote for the ratification and approval of the Stock Option Plan. 8 PROPOSAL II--RATIFICATION AND APPROVAL OF THE COMPANY'S 2001 RECOGNITION AND RETENTION PLAN General Subject to stockholder approval at the Special Meeting, the Company has established the 2001 Recognition and Retention Plan (the "Recognition Plan") as a method of providing certain key employees and nonemployee directors of the Company and its affiliates with a proprietary interest in the Company in a manner designed to encourage such persons to remain with the Company and/or such affiliate, and to provide further incentives to achieve corporate objectives. The following discussion is qualified in its entirety by reference to the Recognition Plan, the form of which is attached hereto as Appendix B. The Bank intends to contribute stock or sufficient funds for the Recognition Plan to acquire 31,874 authorized but unissued shares of Common Stock of the Company, which will be available to be awarded to key employees and nonemployee directors of the Company. Alternatively, such shares may be purchased in the open market. Of such awards, 17,850 shares may be awarded at any time following stockholder approval, and the remaining shares may not be awarded until the OTS approves or indicates that it does not object to issuance of such shares, or the Company determines that such approval or nonobjection is not required. Principal Features of the Recognition Plan The Recognition Plan provides for the award of shares of Common Stock ("Recognition Plan Shares") subject to the restrictions described below. Each award under the Recognition Plan will be made on terms and conditions, consistent with the Recognition Plan. The Recognition Plan is administered by a committee, which shall be appointed by the Board of Directors of the Company and shall consist of either (i) at least two non-employee directors of the Company or (ii) the entire Board of the Company (the "Committee"). The Committee will select the recipients and terms of awards pursuant to the Recognition Plan. Pursuant to the terms of the Recognition Plan, any director or key employee of the Company and/or its affiliates may be selected by the Recognition Plan Committee to participate in the Recognition Plan. In determining to whom and in what amount to grant awards, the Recognition Plan Committee will consider the position and responsibilities of eligible persons, the value of such person's services to the Company and/or its affiliates and other factors it deems relevant. All four nonemployee directors and all 43 employees (as of March 31, 2001) are eligible to participate in the Recognition Plan. In the event a recipient ceases to maintain continuous service with the Company or an affiliate by reason of normal retirement, death or disability, or coincident to or following a change in control (as defined), Recognition Plan Shares still subject to restrictions will vest and be free of these restrictions. In the event of termination for any other reason, all nonvested shares will be forfeited. Prior to vesting of the nonvested Recognition Plan shares, a recipient will have the right to vote the nonvested Recognition Plan Shares which have been awarded to the recipient and will receive any dividends declared on such Recognition Plan Shares. Recognition Plan Shares are subject to forfeiture if the recipient fails to remain in the continuous service (as defined in the Recognition Plan) as an employee, officer, or director of the Company or the Bank for a stipulated period. Effect of Adjustments. Restricted stock awarded under the Recognition Plan will be adjusted by the Committee in the event of a reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or other change in corporate structure. Federal Income Tax Consequences. Holders of restricted stock will recognize ordinary income on the date that the shares of restricted stock are no longer subject to a substantial risk of forfeiture, in an amount equal to the fair market value of the shares on that date. In certain circumstances, a holder may elect to recognize ordinary income and determine such fair market value on the date of the grant of the restricted stock. Holders of restricted 9 stock will also recognize ordinary income equal to their dividend or dividend equivalent payments when such payments are received. Generally, the amount of income recognized by individuals will be a deductible expense for tax purposes by the Company. Amendment to the Recognition Plan. The Board of Directors of the Company may at any time, amend, suspend or terminate the Recognition Plan or any portion thereof, provided, however, that no such amendment, suspension or termination shall impair the rights of any award recipient, without such person's consent, in any award therefore made pursuant to the Recognition Plan. The affirmative vote of a majority of shares present in person or by proxy is required for approval of the Recognition Plan. Unless marked to the contrary, the shares represented by the enclosed proxy card, if the proxy card is signed and returned, will be voted for the ratification and approval of the Recognition Plan. The Board of Directors recommends a vote for the ratification and approval of the Recognition Plan. STOCKHOLDER PROPOSALS In order to be eligible for inclusion in the Company's proxy materials for next year's Annual of Stockholders, any stockholder proposal to take action at such meeting must be received at the Company's executive office, 500 10th Street, Alamogordo, New Mexico 88310, no later than June 18, 2001. Any such proposals shall be subject to the requirements of the proxy rules adopted under the Exchange Act. ADVANCE NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING The Bylaws of the Company provide an advance notice procedure for certain business, or nominations to the Board of Directors, to be brought before an annual meeting. In order for a stockholder to properly bring business before an annual meeting, or to propose a nominee to the Board, the stockholder must give written notice to the Secretary of the Company not less than 90 days before the date fixed for such meeting; provided, however, that in the event that less than 100 days notice or prior public disclosure of the date of the meeting is given or made, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. The notice must include the stockholder's name, record address, and number of shares owned by the stockholder, describe briefly the proposed business, the reasons for bringing the business before the annual meeting, and any material interest of the stockholder in the proposed business. In the case of nominations to the Board, certain information regarding the nominee must be provided. Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy relating to an annual meeting any stockholder proposal which does not meet all of the requirements for inclusion established by the SEC in effect at the time such proposal is received. The date on which the 2001 Annual Meeting of Stockholders is expected to be held is November 21, 2001. Accordingly, advance written notice of business or nominations to the Board of Directors to be brought before the 2001 Annual Meeting of Stockholders must be given to the Company no later than August 22, 2001. BY ORDER OF THE BOARD OF DIRECTORS /s/ Julia A. Eggleston Julia A. Eggleston Secretary Alamogordo, New Mexico May 25, 2001 10 EXHIBIT A FORM OF ALAMOGORDO FINANCIAL CORPORATION 2001 STOCK OPTION PLAN 1. Purpose The purpose of the Alamogordo Financial Corporation 2001 Stock Option Plan (the "Plan") is to advance the interests of Alamogordo Financial Corporation and its stockholders by providing Key Employees and Outside Directors of the Company and its Affiliates, including Alamogordo Federal Savings and Loan Association, upon whose judgment, initiative and efforts the successful conduct of the business of the Company and its Affiliates largely depends, with an additional incentive to perform in a superior manner as well as to attract people of experience and ability. 2. Definitions "Affiliate" means any "parent corporation" or "subsidiary corporation" of the Company or the Association, as such terms are defined in Section 424(e) or 424(f), respectively, of the Code, or a successor to a parent corporation or subsidiary corporation. "Award" means an Award of Non-Statutory Stock Options, Incentive Stock Options, Limited Rights, Reload Options, and/or Dividend Equivalent Rights granted under the provisions of the Plan. "Association" means Alamogordo Federal Savings and Loan Association or a successor corporation. "Beneficiary" means the person or persons designated by a Participant to receive any benefits payable under the Plan in the event of such Participant's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Participant's surviving spouse, if any, or, if none, his estate. "Board" or "Board of Directors" means the board of directors of the Company, unless otherwise noted herein. "Cause" means personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, any of which results in a material loss to the Company or an Affiliate. "Change in Control" of the Association or the Company means a change in control of a nature that: (i) 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 (the "Exchange Act"); or (ii) results in a Change in Control of the Company within the meaning of the Home Owners' Loan Act of 1933, as amended, and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control (collectively, the "HOLA"); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's outstanding securities, except for any securities purchased by the Association's employee stock ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof 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 the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as A-1 though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Association or the Company or similar transaction in which the Association or the Company is not the surviving institution occurs; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the Plan are to be exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred in the event of a conversion of the Company's mutual holding company to stock form or in connection with any reorganization or action used to effect such conversion. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means a committee of the Board of the Company consisting of either (i) at least two Non- Employee Directors of the Company, or (ii) the entire Board of the Company. "Common Stock" means shares of the common stock of the Company, par value $.10 per share. "Company" means Alamogordo Financial Corporation, the stock holding company of the Association, or a successor corporation. "Continuous Service" means employment as a Key Employee and/or service as an Outside Director without any interruption or termination of such employment and/or service. Continuous Service shall also mean a continuation as a member of the Board of Directors following a cessation of employment as a Key Employee and continuation as a Director Emeritus following cessation of service as a Director, if applicable. In the case of a Key Employee, employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company or in the case of transfers between payroll locations of the Company, or between the Company, its parent, its subsidiaries or its successor. "Date of Grant" means the actual date on which an Award is granted by the Committee. "Director" means a member of the Board. "Director Emeritus" means a former member of the Board who is designated as a Director Emeritus by the Board. "Disability" means the permanent and total inability by reason of mental or physical infirmity, or both, of an employee to perform the work customarily assigned to him, or of a Director or Outside Director to serve as such. Additionally, in the case of an employee, a medical doctor selected or approved by the Board must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of said employee's lifetime. "Dividend Equivalent Rights" means the right to receive an amount of cash based upon the terms set forth in Section 11 hereof. "Effective Date" means the date of, or a date determined by the Board of Directors following, approval of the Plan by the Company's stockholders. "Fair Market Value" means, when used in connection with the Common Stock on a certain date, the reported closing price of the Common Stock as reported by the Nasdaq stock market or the OTC Bulletin Board on the day prior A-2 to such date, or if the Common Stock was not traded on the day prior to such date, on the next preceding day on which the Common Stock was traded; provided, however, that if the Common Stock is not reported on the Nasdaq stock market or the OTC Bulletin Board, Fair Market Value shall mean the average sale price of all shares of Common Stock sold during the 30-day period immediately preceding the date on which such stock option was granted, and, if no shares of stock have been sold within such 30-day period, the average sale price of the last three sales of Common Stock sold during the 90-day period immediately preceding the date on which such stock option was granted. In the event Fair Market Value cannot be determined in the manner described above, then Fair Market Value shall be determined by the Committee. The Committee is authorized, but is not required, to obtain an independent appraisal to determine the Fair Market Value of the Common Stock. "Incentive Stock Option" means an Option granted by the Committee to a Key Employee, which Option is designated as an Incentive Stock Option pursuant to Section 8. "Key Employee" means any person who is currently employed by the Company or an Affiliate who is chosen by the Committee to participate in the Plan. "Limited Right" means the right to receive an amount of cash based upon the terms set forth in Section 9. "Non-Statutory Stock Option" means an Option granted by the Committee to (i) an Outside Director or (ii) any other Participant and such Option is either (A) not designated by the Committee as an Incentive Stock Option, or (B) fails to satisfy the requirements of an Incentive Stock Option as set forth in Section 422 of the Code and the regulations thereunder. "Non-Employee Director" means, for purposes of the Plan, a Director who (a) is not employed by the Company or an Affiliate; (b) does not receive compensation directly or indirectly as a consultant (or in any other capacity than as a Director) greater than $60,000; (c) does not have an interest in a transaction requiring disclosure under Item 404(a) of Regulation S-K; or (d) is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K. "Normal Retirement" means retirement from employment or service on or after attainment of age 65. "Outside Director" means a Director of the Company or an Affiliate who is not an employee of the Company or an Affiliate. For purposes of this Plan, "Outside Director" shall also mean a Director Emeritus who continues participation in the Plan after retirement from the Board. "Option" means an Award granted under Section 7 or Section 8. "Participant" means a Key Employee or Outside Director of the Company or its Affiliates who receives or has received an Award under the Plan. "Reload Option" mean a number of options to acquire shares of Common Stock equivalent to the number of shares (i) used by a Participant to pay for an Option, or (ii) deducted from any distribution in order to satisfy income tax required to be withheld, based upon the terms set forth in Section 19. "Right" means a Limited Right or a Dividend Equivalent Right. "Termination for Cause" means the termination of employment or termination of service on the Board caused by the individual's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule or regulation (other than traffic violations or similar offenses), or a final cease-and-desist order, any of which results in material loss to the Company or one of its Affiliates. A-3 3. Plan Administration Restrictions The Plan shall be administered by the Committee. The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make whatever determinations and interpretations in connection with the Plan it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants in the Plan and on their legal representatives and beneficiaries. All transactions involving a grant, award or other acquisition from the Company shall: (a) be approved by the Company's full Board or by the Committee; or (b) be approved, or ratified, in compliance with Section 14 of the Exchange Act, by either: the affirmative vote of the holders of a majority of the securities present, or represented and entitled to vote at a meeting duly held in accordance with the laws of the state in which the Company is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote, provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or (c) result in the acquisition of an Option or Limited Right that is held by the Participant for a period of six months following the date of such acquisition. 4. Types of Awards Awards under the Plan may be granted in any one or a combination of: (a) Incentive Stock Options; (b) Non-Statutory Stock Options; (c) Limited Rights; (d) Reload Options; and (e) Dividend Equivalent Rights. 5. Stock Subject to the Plan Subject to adjustment as provided in Section 17, the maximum number of shares reserved for issuance under the Plan is 63,749 shares. Up to 35,700 options, and shares underlying the options, may be awarded at any time following stockholder approval, and the remaining options and shares may not be awarded until the OTS approves or indicates that it does not object to issuance of such options and shares, or the Company determines that such approval or nonobjection is not required. To the extent that Options or Rights granted under the Plan are exercised, the shares covered will be unavailable for future grants under the Plan; to the extent that Options, together with any related Rights granted under the Plan terminate, expire or are forfeited without having been exercised or, in the case of Limited Rights, exercised for cash, new Awards may be made with respect to these shares. 6. Eligibility Key Employees of the Company and its Affiliates shall be eligible to receive Incentive Stock Options, Non-Statutory Stock Options, Limited Rights, Reload Options, and/or Dividend Equivalent Rights under the Plan. Outside Directors shall be eligible to receive Non-Statutory Stock Options, Dividend Equivalent Rights and Reload Options under the Plan. 7. Non-Statutory Stock Options The Committee may, from time to time, grant Non-Statutory Stock Options to eligible Key Employees and Outside Directors. Non-Statutory Stock Options granted under the Plan, including Non-Statutory Stock Options granted in exchange for and upon surrender of previously granted Awards, are subject to the terms and conditions set forth in this Section 7. The maximum number of shares subject to a Non-Statutory Option that may be awarded under the Plan A-4 to any Key Employee, subject to increase for award of reload options under Section 9 or adjustment pursuant to Section 17, shall be 40,000. (a) Option Agreement. Each Option shall be evidenced by a written option agreement between the Company and the Participant specifying the number of shares of Common Stock that may be acquired through its exercise and containing such other terms and conditions that are not inconsistent with the terms of the Plan. (b) Price. The purchase price per share of Common Stock deliverable upon the exercise of each Non-Statutory Stock Option shall be the Fair Market Value of the Common Stock of the Company on the Date of Grant. Shares may be purchased only upon full payment of the purchase price. Payment of the purchase price may be made, in whole or in part, through the surrender of shares of the Common Stock of the Company at the Fair Market Value of such shares determined in the manner described in Section 2. (c) Vesting. Unless the Committee shall specifically state to the contrary at the time an Award is granted, Non-Statutory Stock Options awarded to Key Employees and Outside Directors shall vest at the rate of 20% of the initially awarded amount per year, commencing with the vesting of the first installment on the Date of Grant, and succeeding installments on each anniversary of the Date of Grant. No Options shall become vested by a Participant unless the Participant maintains Continuous Service until the vesting date of such Option, except as set forth herein. Notwithstanding any other provision of this Plan, in the event of a Change in Control of the Company or the Association, all Non-Statutory Stock Options that have been awarded shall immediately vest. (d) Exercise of Options. A vested Option may be exercised from time to time, in whole or in part, by delivering a written notice of exercise to the President of the Company, or his designee. Such notice shall be irrevocable and must be accompanied by full payment of the purchase price in cash or shares of Common Stock at the Fair Market Value of such shares, determined on the exercise date in the manner described in Section 2 hereof. If previously acquired shares of Common Stock are tendered in payment of all or part of the exercise price, the value of such shares shall be determined as of the date of such exercise. (e) Amount of Awards. Non-Statutory Stock Options may be granted to any Key Employee or Outside Director in such amounts as determined by the Committee, subject to the requirements of Section 7 above. In granting Non-Statutory Stock Options, the Committee shall consider such factors as it deems relevant, which factors may include, among others, the position and responsibility of the Key Employee or Outside Director, the length and value of his service to the Association, the Company or the Affiliate, the compensation paid to the Key Employee or Outside Director, and the Committee's evaluation of the performance of the Association, the Company or the Affiliate, according to measurements that may include, among others, key financial ratios, level of classified assets and independent audit findings. (f) Term of Options. Unless the Committee determines otherwise, the term during which Non-Statutory Stock Options granted to Outside Directors may be exercised shall not exceed ten years and one day from the Date of Grant. In no event shall a Non-Statutory Stock Option be exercisable in whole or in part more than ten years and one day from the Date of Grant. The Committee may, in its sole discretion, accelerate the time during which any Non-Statutory Stock Option vests in whole or in part to the Key Employees and/or Outside Directors. (g) Termination of Employment or Service. Upon the termination of a Key Employee's employment or upon termination of an Outside Director's service for any reason other than Normal Retirement, death, Disability, Change in Control or Termination for Cause, the Participant's Non-Statutory Stock Options shall be exercisable only as to those shares that were immediately purchasable on the date of termination and only for five years following termination. In the event of Termination for Cause, all rights under a Participant's Non-Statutory Stock Options shall expire upon termination. In the event of the Participant's termination of employment or service due to Normal Retirement, death or Disability, or coincident with or following a Change in Control, all Non-Statutory Stock Options held by the Participant, whether or not vested at such time, shall vest and become exercisable by the Participant or his A-5 legal representative or beneficiaries for five years following the date of such termination, death or cessation of employment or service, provided that in no event shall the period extend beyond the expiration of the Non-Statutory Stock Option term. (h) Transferability. In the discretion of the Board, all or any Non-Statutory Stock Option granted hereunder may be transferable by the Participant once the Option has vested in the Participant, provided, however, that the Board may limit the transferability of such Option or Options to a designated class or classes of persons. 8. Incentive Stock Options The Committee may, from time to time, grant Incentive Stock Options to Key Employees. Incentive Stock Options granted pursuant to the Plan shall be subject to the following terms and conditions: (a) Option Agreement. Each Option shall be evidenced by a written option agreement between the Company and the Key Employee specifying the number of shares of Common Stock that may be acquired through its exercise and containing such other terms and conditions that are not inconsistent with the terms of the Plan. (b) Price. Subject to Section 16 of the Plan and Section 422 of the Code, the purchase price per share of Common Stock deliverable upon the exercise of each Incentive Stock Option shall be not less than 100% of the Fair Market Value of the Company's Common Stock on the date the Incentive Stock Option is granted. However, if a Key Employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its Affiliates (or under Section 424(d) of the Code is deemed to own stock representing more than 10% of the total combined voting power of all classes of stock of the Company or its Affiliates by reason of the ownership of such classes of stock, directly or indirectly, by or for any brother, sister, spouse, ancestor or lineal descendent of such Key Employee, or by or for any corporation, partnership, estate or trust of which such Key Employee is a shareholder, partner or Beneficiary), the purchase price per share of Common Stock deliverable upon the exercise of each Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Company's Common Stock on the date the Incentive Stock Option is granted. Shares may be purchased only upon payment of the full purchase price. Payment of the purchase price may be made, in whole or in part, through the surrender of shares of the Common Stock of the Company at the Fair Market Value of such shares, determined on the exercise date, in the manner described in Section 2. (c) Vesting. Incentive Stock Options granted under the Plan shall vest in a Participant at the rate or rates determined by the Committee. Unless the Committee shall specifically state to the contrary at the time an Award is granted, Incentive Stock Options awarded to Key Employees shall vest at the rate of 20% of the initially awarded amount per year commencing with the vesting of the first installment on the Date of Grant, and succeeding installments on each anniversary of the Date of Grant. Notwithstanding any other provisions of this plan, in the event of a Change in Control of the Company or the Association, all Incentive Stock Options that have been awarded shall immediately vest. (d) Exercise of Options. Vested Options may be exercised from time to time, in whole or in part, by delivering a written notice of exercise to the President of the Company, or his designee. Such notice is irrevocable and must be accompanied by full payment of the exercise price in cash or shares of Common Stock at the Fair Market Value of such shares determined on the exercise date by the manner described in Section 2. The Options comprising each installment may be exercised in whole or in part at any time after such installment becomes vested, provided that the amount able to be first exercised in a given year is consistent with the terms of Section 422 of the Code. To the extent required by Section 422 of the Code, the aggregate Fair Market Value (determined at the time the Option is granted) of the Common Stock for which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all plans of the Company and its Affiliates) shall not exceed $100,000. A-6 The Committee may, in its sole discretion, accelerate the time at which any Incentive Stock Option may be exercised in whole or in part, provided that it is consistent with the terms of Section 422 of the Code. Notwithstanding the above, in the event of a Change in Control of the Company, all Incentive Stock Options that have been awarded shall become immediately exercisable, provided, however, that if the aggregate Fair Market Value (determined at the time the Option is granted) of Common Stock for which Options are exercisable as a result of a Change in Control, together with the aggregate Fair Market Value (determined at the time the Option is granted) of all other Common Stock for which Incentive Stock Options become exercisable during such year, exceeds $100,000, then the first $100,000 of Incentive Stock Options (determined as of the Date of Grant) shall be exercisable as Incentive Stock Options and any excess shall be exercisable as Non-Statutory Stock Options (but shall remain subject to the provisions of this Section 8 to the extent permitted). (e) Amounts of Awards. Incentive Stock Options may be granted to any eligible Key Employee in such amounts as determined by the Committee; provided that the amount granted is consistent with the terms of Section 422 of the Code. Notwithstanding the above, the maximum number of shares that may be subject to an Incentive Stock Option awarded under the Plan to any Key Employee, subject to increase for award of reload options under Section 9 or adjustment pursuant to Section 17, shall be 40,000. In granting Incentive Stock Options, the Committee shall consider such factors as it deems relevant, which factors may include, among others, the position and responsibilities of the Key Employee, the length and value of his or her service to the Association, the Company, or the Affiliate, the compensation paid to the Key Employee and the Committee's evaluation of the performance of the Association, the Company, or the Affiliate, according to measurements that may include, among others, key financial ratios, levels of classified assets, and independent audit findings. The provisions of this Section 8(e) shall be construed and applied in accordance with Section 422(d) of the Code and the regulations, if any, promulgated thereunder. (f) Terms of Options. The term during which each Incentive Stock Option may be exercised shall be determined by the Committee, provided, however, in no event shall an Incentive Stock Option be exercisable in whole or in part more than 10 years from the Date of Grant. If any Key Employee, at the time an Incentive Stock Option is granted to him, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or its Affiliate (or, under Section 424(d) of the Code, is deemed to own stock representing more than 10% of the total combined voting power of all classes of stock, by reason of the ownership of such classes of stock, directly or indirectly, by or for any brother, sister, spouse, ancestor or lineal descendent of such Key Employee, or by or for any corporation, partnership, estate or trust of which such Key Employee is a shareholder, partner or Beneficiary), the Incentive Stock Option granted to him shall not be exercisable after the expiration of five years from the Date of Grant. (g) Termination of Employment. Upon the termination of a Key Employee's service for any reason other than Normal Retirement, death, Disability, a Change in Control, or Termination for Cause, the Key Employee's Incentive Stock Options shall be exercisable only as to those shares that were immediately purchasable by such Key Employee at the date of termination for a period of five years following termination, subject to the limitations set forth in the second paragraph of this subsection. Upon termination of a Key Employee's employment due to Normal Retirement, death, Disability, or coincident with or following a Change in Control, all Incentive Stock Options held by such Key Employee, whether or not exercisable at such time, shall be exercisable for a period of five years following the date of his cessation of employment, subject to the limitations set forth in the second paragraph of this subsection. In the event of Termination for Cause, all rights under the Incentive Stock Options shall expire upon termination. An Option shall not be eligible for treatment as an Incentive Stock Option in the event such Option is exercised more than three months following the date of a Participant's Normal Retirement or termination of employment following a Change in Control. No Option shall be eligible for treatment as an Incentive Stock Option in the event such Option is exercised more than one year following termination of employment due to Disability. In order to obtain Incentive Stock Option treatment for Options exercised by heirs or devisees of an optionee, the optionee's death must have occurred while the optionee was employed or within three months of termination of employment. In no event shall the exercise period extend beyond the expiration of the Incentive Stock Option term. A-7 (h) Transferability. No Incentive Stock Option granted under the Plan is transferable except by will or the laws of descent and distribution. An Incentive Stock Option is exercisable during the optionee's lifetime only by the Key Employee to whom the Incentive Stock Option was granted. (i) Compliance with Code. The options granted under this Section 8 are intended to qualify as Incentive Stock Options within the meaning of Section 422 of the Code, but the Company makes no warranty as to the qualification of any Option as an Incentive Stock Option within the meaning of Section 422 of the Code. If an Option granted hereunder fails for whatever reason to comply with the provisions of Section 422 of the Code, and such failure is not or cannot be cured, such Option shall be a Non-Statutory Stock Option. 9. Limited Rights The Committee may grant a Limited Right simultaneously with the grant of any Option to any Key Employee with respect to all or some of the shares covered by such Option. Limited Rights granted under the Plan are subject to the following terms and conditions: (a) Terms of Rights. In no event shall a Limited Right be exercisable in whole or in part before the expiration of six months from the date of grant of the Limited Right. A Limited Right may be exercised only in the event of a Change in Control. The Limited Right may be exercised only when the underlying Option is eligible to be exercised, provided that the Fair Market Value of the underlying shares on the day of exercise is greater than the exercise price of the related Option. Upon exercise of a Limited Right, the related Option shall cease to be exercisable. Upon exercise or termination of an Option, any related Limited Rights shall terminate. The Limited Rights may be for no more than 100% of the difference between the exercise price and the Fair Market Value of the Common Stock subject to the underlying Option. The Limited Right is transferable only when the underlying Option is transferable and under the same conditions. (b) Payment. Upon exercise of a Limited Right, the holder shall promptly receive from the Company an amount of cash equal to the difference between the Fair Market Value on the Date of Grant of the related Option and the Fair Market Value of the underlying shares on the date the Limited Right is exercised, multiplied by the number of shares with respect to which such Limited Right is being exercised. In the event of a Change in Control in which pooling of interests accounting treatment is a condition to the transaction, the Limited Right shall be exercisable solely for shares of stock of the Company, or in the event of a merger transaction, for shares of the acquiring corporation or its parent, as applicable. The number of shares to be received on the exercise of such Limited Right shall be determined by dividing the amount of cash that would have been available under the first sentence above, by the Fair Market Value at the time of exercise of the shares underlying the Option subject to the Limited Right. 10. Reload Option Simultaneously with the grant of any Option to a Participant, the Committee may grant a Reload Option with respect to all or some of the shares covered by such Option. A Reload Option may be granted to a Participant who satisfies all or part of the exercise price of the Option with shares of Common Stock (as described in Section 12(c) below). The Reload Option represents an additional Option to acquire the same number of shares of Common Stock as is used by the Participant to pay for the original Option. Reload Options may also be granted to replace Common Stock withheld by the Company for payment of a Participant's withholding tax under Section 19. A Reload Option is subject to all of the same terms and conditions as the original Option, including the remaining Option exercise term, except that (i) the exercise price of the shares of Common Stock subject to the Reload Option will be determined at the time the original Option is exercised and (ii) such Reload Option will conform to all provisions of the Plan at the time the original Option is exercised. A-8 11. Dividend Equivalent Rights Simultaneously with the grant of any Option to a Participant, the Committee may grant a Dividend Equivalent Right with respect to all or some of the shares covered by such Option. Dividend Equivalent Rights granted under this Plan are subject to the following terms and conditions: (a) Terms of Rights. The Dividend Equivalent Right provides the Participant with a cash benefit per share for each share underlying the unexercised portion of the related Option equal to the amount of any extraordinary dividend (as defined in Section 11(c)) per share of Common Stock declared by the Company. The terms and conditions of any Dividend Equivalent Right shall be evidenced in the Option agreement entered into with the Participant and shall be subject to the terms and conditions of the Plan. The Dividend Equivalent Right is transferable only when the related Option is transferable and under the same conditions. (b) Payment. Upon the payment of an extraordinary dividend, the Participant holding a Dividend Equivalent Right with respect to Options or portions thereof which have vested shall promptly receive from the Company or the Association the amount of cash equal to the amount of the extraordinary dividend per share of Common Stock, multiplied by the number of shares of Common Stock underlying the unexercised portion of the related Option. With respect to Options or portions thereof which have not vested, the amount that would have been received pursuant to the Dividend Equivalent Right with respect to the shares underlying such unvested Option or portion thereof shall be paid to the Participant holding such Dividend Equivalent Right together with earnings thereon, on such date as the Option or portion thereof becomes vested. Payments shall be decreased by the amount of any applicable tax withholding prior to distribution to the Participant as set forth in Section 19. (c) Extraordinary Dividend. For purposes of this Section 11, an extraordinary dividend is any dividend paid on shares of Common Stock where the rate of the dividend exceeds the Association's weighted average cost of funds on interest-bearing liabilities for the current and preceding three quarters. 12. Surrender of Option In the event of a Participant's termination of employment or termination of service as a result of death or Disability, the Participant (or his or her personal representative(s), heir(s), or devisee(s)) may, in a form acceptable to the Committee, make application to surrender all or part of the Options held by such Participant in exchange for a cash payment from the Company of an amount equal to the difference between the Fair Market Value of the Common Stock on the date of termination of employment or the date of termination of service on the Board and the exercise price per share of the Option. Whether the Company accepts such application or determines to make payment, in whole or part, is within its absolute and sole discretion, it being expressly understood that the Company is under no obligation to any Participant whatsoever to make such payments. In the event that the Company accepts such application and determines to make payment, such payment shall be in lieu of the exercise of the underlying Option and such Option shall cease to be exercisable. 13. Alternate Option Payment Mechanism The Committee has sole discretion to determine what form of payment it will accept for the exercise of an Option. The Committee may indicate acceptable forms in the agreement with the Participant covering such Options or may reserve its decision to the time of exercise. No Option is to be considered exercised until payment in full is accepted by the Committee or its agent. (a) Cash Payment. The exercise price may be paid in cash or by certified check. To the extent permitted by law, the Committee may permit all or a portion of the exercise price of an Option to be paid through borrowed funds. A-9 (b) Cashless Exercise. Subject to vesting requirements, if applicable, a Participant may engage in a "cashless exercise" of the Option. Upon a cashless exercise, the Participant shall give the Association written notice of the exercise of the Option, together with an order to a registered broker-dealer or equivalent third party, to sell part or all of the Common Stock subject to the Option and to deliver enough of the proceeds to the Company to pay the Option exercise price and any applicable withholding taxes. If the Participant does not sell the Common Stock subject to the Option through a registered broker-dealer or equivalent third party, the Participant may give the Company written notice of the exercise of the Option and the third-party purchaser of the Common Stock subject to the Option shall pay the Option exercise price plus applicable withholding taxes to the Company. (c) Exchange of Common Stock. The Committee may permit payment of the Option exercise price by the tendering of previously acquired shares of Common Stock. All shares of Common Stock tendered in payment of the exercise price of an Option shall be valued at the Fair Market Value of the Common Stock. No tendered shares of Common Stock which were acquired by the Participant upon the previous exercise of an Option or as awards under a stock award plan (such as the Company's Recognition and Retention Plan) shall be accepted for exchange unless the Participant has held such shares (without restrictions imposed by said plan or award) for at least six months prior to the exchange. 14. Rights of a Stockholder A Participant shall have no rights as a stockholder with respect to any shares covered by a Non-Statutory and/or Incentive Stock Option until the date of issuance of a stock certificate for such shares. Nothing in the Plan or in any Award granted confers on any person any right to continue in the employ of the Company or its Affiliates or to continue to perform services for the Company or its Affiliates or interferes in any way with the right of the Company or its Affiliates to terminate his services as an officer, director or employee at any time. 15. Agreement with Participants Each Award of Options, Reload Options, Limited Rights, and/or Dividend Equivalent Rights will be evidenced by a written agreement, executed by the Participant and the Company or its Affiliates that describes the conditions for receiving the Awards, including the date of Award, the purchase price, applicable periods, and any other terms and conditions as may be required by the Board or applicable securities laws. 16. Designation of Beneficiary A Participant may, with the consent of the Committee, designate a person or persons to receive, in the event of death, any Option, Reload Option, Limited Rights Award or Dividend Equivalent Rights to which he would then be entitled. Such designation will be made upon forms supplied by and delivered to the Company and may be revoked in writing. If a Participant fails effectively to designate a Beneficiary, then his estate will be deemed to be the Beneficiary. 17. Dilution and Other Adjustments In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, pro-rata return of capital to all shareholders, recapitalization, or any merger, consolidation, spin-off, reorganization, combination or exchange of shares, or other similar corporate change, or other increase or decrease in such shares, without receipt or payment of consideration by the Company, the Committee will make such adjustments to previously granted Awards, to prevent dilution or enlargement of the rights of the Participant, including any or all of the following: (a) adjustments in the aggregate number or kind of shares of Common Stock that may be awarded under the Plan; (b) adjustments in the aggregate number or kind of shares of Common Stock covered by Awards already made under the Plan; or A-10 (c) adjustments in the purchase price of outstanding Incentive and/or Non-Statutory Stock Options, or any Limited Rights attached to such Options. No such adjustments may, however, materially change the value of benefits available to a Participant under a previously granted Award. With respect to Incentive Stock Options, no such adjustment shall be made if it would be deemed a "modification" of the Award under Section 424 of the Code. 18. Effect of a Change in Control on Option Awards In the event of a Change in Control, the Committee and the Board of Directors will take one or more of the following actions to be effective as of the date of such Change in Control: (a) provide that such Options shall be assumed, or equivalent options shall be substituted ("Substitute Options") by the acquiring or succeeding corporation (or an affiliate thereof), provided that: (A) any such Substitute Options exchanged for Incentive Stock Options shall meet the requirements of Section 424(a) of the Code, and (B) the shares of stock issuable upon the exercise of such Substitute Options shall be registered in accordance with the Securities Act of 1933, as amended ("1933 Act") or such securities shall be exempt from such registration in accordance with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively, "Registered Securities"), or in the alternative, if the securities issuable upon the exercise of such Substitute Options shall not constitute Registered Securities, then the Participant will receive upon consummation of the Change in Control a cash payment for each Option surrendered equal to the difference between the (1) fair market value of the consideration to be received for each share of Common Stock in the Change in Control times the number of shares of Common Stock subject to such surrendered Options, and (2) the aggregate exercise price of all such surrendered Options; or (b) in the event of a transaction under the terms of which the holders of Common Stock will receive upon consummation thereof a cash payment (the "Merger Price") for each share of Common Stock exchanged in the Change in Control transaction, make or provide for a cash payment to the Participants equal to the difference between (1) the Merger Price times the number of shares of Common Stock subject to such Options held by each Participant (to the extent then exercisable at prices not in excess of the Merger Price) and (2) the aggregate exercise price of all such surrendered Options. 19. Withholding There may be deducted from each distribution of cash and/or Common Stock under the Plan the minimum amount of any federal or state taxes, including payroll taxes, that are applicable to such supplemental taxable income and that are required by any governmental authority to be withheld. Shares of Common Stock will be withheld where required from any distribution of Common Stock. 20. Amendment of the Plan The Board may at any time, and from time to time, modify or amend the Plan in any respect, or modify or amend an Award received by Key Employees and/or Outside Directors; provided, however, that no such termination, modification or amendment may affect the rights of a Participant, without his consent, under an outstanding Award. Any amendment or modification of the Plan or an outstanding Award under the Plan, including but not limited to the acceleration of vesting of an outstanding Award for reasons other than the death, Disability, Normal Retirement, or a Change in Control, shall be approved by the Committee or the full Board of the Company. The Company may request OTS approval of the issuance of shares and options under the Plan. The Company shall not be required to present the Plan to stockholders for approval after the receipt of OTS nonobjection or approval of the stock issuance under the Plan, nor will shall the Company be required to present the Plan for stockholder approval if the OTS requires amendments to the plan, even if the amendments are material. A-11 21. Effective Date of Plan The Plan shall become effective upon the date of, or a date determined by the Board of Directors following, approval of the Plan by the Company's stockholders. 22. Termination of the Plan The right to grant Awards under the Plan will terminate upon the earlier of (i) 10 years after the Effective Date, or (ii) the date on which the exercise of Options or related rights equaling the maximum number of shares reserved under the Plan occurs, as set forth in Section 5. The Board may suspend or terminate the Plan at any time, provided that no such action will, without the consent of a Participant, adversely affect his rights under a previously granted Award. 23. Applicable Law The Plan will be administered in accordance with the laws of the State of New Mexico. IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized officers and the corporate seal to be affixed and duly attested, as of the ____ day of _________________, 2001. Date Approved by Stockholders:_____________ Effective Date: ____________________________ ATTEST: ALAMOGORDO FINANCIAL CORPORATION Secretary President A-12 EXHIBIT B FORM OF ALAMOGORDO FINANCIAL CORPORATION 2001 RECOGNITION AND RETENTION PLAN 1. Establishment of the Plan; Creation of Separate Trust (a) Alamogordo Financial Corporation hereby establishes the Alamogordo Financial Corporation 2001 Recognition and Retention Plan (the "Plan") upon the terms and conditions hereinafter stated in the Plan. (b) A separate trust or trusts may be established to purchase shares of the Common Stock that will be awarded hereunder (the "Trust"). If a trust is established and a Recipient hereunder fails to satisfy the conditions of the Plan and forfeits all or any portion of the Common Stock awarded to him or her, such forfeited shares will be returned to said Trust. If no trust is established, forfeited shares shall be cancelled or held in treasury, as determined by the Committee. 2. Purpose of the Plan The purpose of the Plan is to advance the interests of the Company and Alamogordo Federal Savings and Loan Association and the Company's stockholders by providing Key Employees and Outside Directors of the Company and its Affiliates, including the Association, upon whose judgment, initiative and efforts the successful conduct of the business of the Company and its Affiliates largely depends, with compensation for their contributions to the Company and its Affiliates and an additional incentive to perform in a superior manner, as well as to attract people of experience and ability. 3. Definitions The following words and phrases, when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meanings set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. "Affiliate" means any "parent corporation" or "subsidiary corporation" of the Company, as such terms are defined in Section 424(e) and (f), respectively, of the Code, or a successor to a parent corporation or subsidiary corporation. "Association" means Alamogordo Federal Savings and Loan Association, or a successor corporation. "Award" means the grant by the Committee of Restricted Stock, as provided in the Plan. "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under the Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's surviving spouse, if any, or, if none, his estate. "Board" or "Board of Directors" means the Board of Directors of the Company, unless otherwise noted. "Cause" means personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, or the willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, any of which results in a material loss to the Company or an Affiliate. B-1 "Change in Control" of the Company or the Association means a change in control of a nature that: (i) 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 (the "Exchange Act"); or (ii) results in a Change in Control of the Company within the meaning of the Home Owners' Loan Act of 1933, as amended, and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control (collectively, the "HOLA"); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's outstanding securities except for any securities purchased by the Association's employee stock ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof 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 the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or the Association or similar transaction in which the Company or the Association is not the surviving institution occurs; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the Plan are to be exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred in the event of a conversion of the Company's mutual holding company to stock form or in connection with any reorganization or action used to effect such conversion. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means a committee of the Board of the Company consisting of either (i) at least two Non- Employee Directors of the Company, or (ii) the entire Board of the Company. "Common Stock" means shares of the common stock of the Company, par value $.10 per share. "Company" means Alamogordo Financial Corporation, the stock holding company of the Association, or a successor corporation. "Continuous Service" means employment as a Key Employee and/or service as an Outside Director without any interruption or termination of such employment and/or service. Continuous Service shall also mean a continuation as a member of the Board of Directors following a cessation of employment as a Key Employee and continuation as a Director Emeritus following cessation of service as a Director, if applicable. In the case of a Key Employee, employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Company or in the case of transfers between payroll locations of the Company, or between the Company, its parent, its subsidiaries or its successor. "Director" means a member of the Board, and includes persons who were members of the Board on the date the Plan was initially approved by the Board. "Director Emeritus" means a former member of the Board who is designated as a Director Emeritus by the Board. B-2 "Disability" means the permanent and total inability, by reason of mental or physical infirmity, or both, of an employee to perform the work customarily assigned to him, or of a Director or Outside Director to serve as such. Additionally, in the case of an employee, a medical doctor selected or approved by the Board must advise the Committee that it is either not possible to determine when such Disability will terminate or that it appears probable that such Disability will be permanent during the remainder of such employee's lifetime. "Effective Date" means the date of, or a date determined by the Board following, approval of the Plan by the Company's stockholders. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Key Employee" means any person who is currently employed by the Company or an Affiliate who is chosen by the Committee to participate in the Plan. "Non-Employee Director" means, for purposes of the Plan, a Director who (a) is not employed by the Company or an Affiliate; (b) does not receive compensation directly or indirectly as a consultant (or in any other capacity than as a Director) greater than $60,000; (c) does not have an interest in a transaction requiring disclosure under Item 404(a) of Regulation S-K; or (d) is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K. "Normal Retirement" means retirement by a Key Employee or Outside Director from employment or service on or after attainment of age 65. "Outside Director" means a Director of the Company or an Affiliate who is not an employee of the Company or an Affiliate. For purposes of this Plan, "Outside Director" shall also mean a Director Emeritus who continues participation in the Plan after retirement from the Board. "Recipient" means a Key Employee or Outside Director of the Company or its Affiliates who receives or has received an Award under the Plan. "Restricted Period" means the period of time selected by the Committee for the purpose of determining when restrictions are in effect under Section 6 with respect to Restricted Stock awarded under the Plan. "Restricted Stock" means shares of Common Stock that have been contingently awarded to a Recipient by the Committee subject to the restrictions referred to in Section 6, so long as such restrictions are in effect. 4. Administration of the Plan. (a) Role of the Committee. The Plan shall be administered and interpreted by the Committee, which shall have all of the powers allocated to it in the Plan. The interpretation and construction by the Committee of any provisions of the Plan or of any Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. (b) Role of the Board. The members of the Committee shall be appointed or approved by, and will serve at the pleasure of, the Board of the Company. The Company Board may in its discretion from time to time remove members from, or add members to, the Committee. The Board of the Company shall have all of the powers allocated to it in the Plan, may take any action under or with respect to the Plan that the Committee is authorized to take, and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan, provided, however, that except as provided in Section 6(b), the Board may not revoke any Award except in the event of revocation B-3 for Cause or with respect to unearned Awards in the event the Recipient of an Award voluntarily terminates employment with the Company prior to Normal Retirement. (c) Plan Administration Restrictions. All transactions involving a grant, award or other acquisitions from the Company shall: (i) be approved by the Company's full Board or by the Committee; (ii) be approved, or ratified, in compliance with Section 14 of the Exchange Act, by either: the affirmative vote of the holders of a majority of the shares present, or represented and entitled to vote at a meeting duly held in accordance with the laws under which the Company is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote, provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or (iii)result in the acquisition of common stock that is held by the Recipient for a period of six months following the date of such acquisition. (d) Limitation on Liability. No member of the Board or the Committee shall be liable for any determination made in good faith with respect to the Plan or any Awards granted under it. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Company or the Association shall indemnify such member against expense (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Company and the Association and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 5. Eligibility; Awards (a) Eligibility. Key Employees and Outside Directors are eligible to receive Awards. (b) Number of shares subject to Plan. The aggregate number of shares that may be issued under the Plan, subject to adjustment pursuant to Section 7, is 31,874. Of such awards, 17,850 shares may be awarded at any time following stockholder approval, and the remaining shares may not be awarded until the OTS approves or indicates that it does not object to issuance of such shares, or the Company determines that such approval or nonobjection is not required. (c) Awards to Key Employees and Outside Directors. The Committee may determine which of the Key Employees and Outside Directors referenced in Section 5(a) will be granted Awards and the number of shares covered by each Award; provided, however, that in no event shall any Awards be made that will violate the Company's Charter and Bylaws, the Association's Charter and Bylaws, or any applicable federal or state law or regulation. Shares of Restricted Stock that are awarded by the Committee shall, on the date of the Award, be registered in the name of the Recipient and transferred to the Recipient, in accordance with the terms and conditions established under the Plan. In the event Restricted Stock is forfeited for any reason, the Committee, from time to time, may determine which of the Key Employees and Outside Directors will be granted additional Awards to be awarded from forfeited Restricted Stock. In selecting those Key Employees and Outside Directors to whom Awards will be granted and the amount of Restricted Stock covered by such Awards, the Committee shall consider such factors as it deems relevant, which factors B-4 may include, among others, the position and responsibilities of the Key Employees and Outside Directors, the length and value of their services to the Company and its Affiliates, the compensation paid to the Key Employees or fees paid to the Outside Directors, and the Committee may request the written recommendation of the Chief Executive Officer and other senior executive officers of the Association, the Company and its Affiliates or the recommendation of the full Board. All allocations by the Committee shall be subject to review, and approval or rejection, by the Board. No Restricted Stock shall be earned unless the Recipient maintains Continuous Service with the Company or an Affiliate until the restrictions lapse. (d) Manner of Award. As promptly as practicable after a determination is made pursuant to Section 5(c) to grant an Award, the Committee shall notify the Recipient in writing of the grant of the Award, the number of shares of Restricted Stock covered by the Award, and the terms upon which the Restricted Stock subject to the Award may be earned. Upon notification of an Award of Restricted Stock, the Recipient shall execute and return to the Company a restricted stock agreement (the "Restricted Stock Agreement") setting forth the terms and conditions under which the Recipient shall earn the Restricted Stock, together with a stock power or stock powers endorsed in blank. Thereafter, the Recipient's Restricted Stock and stock power shall be deposited with an escrow agent specified by the Company ("Escrow Agent") who shall hold such Restricted Stock under the terms and conditions set forth in the Restricted Stock Agreement. Each certificate in respect of shares of Restricted Stock Awarded under the Plan shall be registered in the name of the Recipient. (e) Treatment of Forfeited Shares. In the event shares of Restricted Stock are forfeited by a Recipient, such shares shall be returned to the Company and shall be held and accounted for pursuant to the terms of the Plan until such time as the Restricted Stock is re-awarded to another Recipient, in accordance with the terms of the Plan and the applicable state and federal laws, rules and regulations. 6. Terms and Conditions of Restricted Stock The Committee shall have full and complete authority, subject to the limitations of the Plan, to grant awards of Restricted Stock to Key Employees and Outside Directors and, in addition to the terms and conditions contained in Sections 6(a) through 6(h), to provide such other terms and conditions (which need not be identical among Recipients) in respect of such Awards, and the vesting thereof, as the Committee shall determine. (a) General Rules. Unless the Committee shall specifically state to the contrary at the time an Award is granted, Restricted Stock shall be earned by a Recipient at the rate of 20% of the initially awarded amount per year, commencing with the first installment being earned on the first anniversary of the Date of Grant and succeeding installments being earned on the following anniversaries, provided that such Recipient maintains Continuous Service. Subject to any such other terms and conditions as the Committee shall provide with respect to Awards, shares of Restricted Stock may not be sold, assigned, transferred (within the meaning of Code Section 83), pledged or otherwise encumbered by the Recipient, except as hereinafter provided, during the Restricted Period. The Committee shall have the authority, in its discretion, to accelerate the time at which any or all of the restrictions shall lapse with respect to a Restricted Stock Award, or to remove any or all of such restrictions. (b) Continuous Service; Forfeiture. Except as provided in Section 6(c), if a Recipient ceases to maintain Continuous Service for any reason (other than death, Disability, Change in Control or Normal Retirement), unless the Committee shall otherwise determine, all shares of Restricted Stock theretofore awarded to such Recipient and which at the time of such termination of Continuous Service are subject to the restrictions imposed by Section 6(a) shall, upon such termination of Continuous Service, be forfeited. Any stock dividends or declared but unpaid cash dividends attributable to such shares of Restricted Stock shall also be forfeited. (c) Exception for Termination Due to Death, Disability, Following a Change in Control, or Normal Retirement. Notwithstanding the general rule contained in Section 6(a), Restricted Stock awarded to a Recipient whose B-5 employment with the Company or an Affiliate or service on the Board terminates due to death, Disability, following a Change in Control, or Normal Retirement, shall be deemed earned as of the Recipient's last day of employment with the Company or an Affiliate, or last day of service on the Board of the Company or an Affiliate; provided that Restricted Stock awarded to a Key Employee who at any time also serves as a Director shall not be deemed earned due to Normal Retirement until both employment and service as a Director have been terminated, and provided further that Restricted Stock awarded to a Director shall not be deemed earned due to Normal Retirement until service both as a Director and Director Emeritus has ended. (d) Revocation for Cause. Notwithstanding anything hereinafter to the contrary, the Board may by resolution immediately revoke, rescind and terminate any Award, or portion thereof, previously awarded under the Plan, to the extent Restricted Stock has not been redelivered by the Escrow Agent to the Recipient, whether or not yet earned, in the case of a Key Employee whose employment is terminated by the Company or an Affiliate, or an Outside Director whose service is terminated by the Company or an Affiliate for Cause, or who is discovered after termination of employment or service on the Board to have engaged in conduct that would have justified termination for Cause. (e) Restricted Stock Legend. Each certificate in respect of shares of Restricted Stock awarded under the Plan shall be registered in the name of the Recipient and deposited by the Recipient, together with a stock power endorsed in blank, with the Escrow Agent, and shall bear the following (or a similar) legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in the Alamogordo Financial Corporation 2001 Recognition and Retention Plan. Copies of such Plan are on file in the offices of the Secretary of Alamogordo Financial Corporation, 500 10th Street, Alamogordo, New Mexico 88310." (f) Payment of Dividends and Return of Capital. After an Award has been granted but before such Award has been earned, the Recipient shall receive any cash dividends paid with respect to such shares, or shall share in any pro-rata return of capital to all shareholders with respect to the Common Stock. Stock dividends declared by the Company and paid on Awards that have not yet been earned shall be subject to the same restrictions as the Restricted Stock and the certificate(s) or other instruments representing or evidencing such shares shall be legended in the manner provided in Section 6(e) and shall be delivered to the Escrow Agent for distribution to the Recipient when the Restricted Stock upon which such dividends were paid are earned. Unless the Recipient has made an election under Section 83(b) of the Code, cash dividends or other amounts so paid on shares that have not yet been earned by the Recipient shall be treated as compensation income to the Recipient when paid. If dividends are paid with respect to shares of Restricted Stock under the Plan that have been forfeited and returned to the Company or to a trust established to hold issued and unawarded or forfeited shares, the Committee can determine to award such dividends to any Recipient or Recipients under the Plan, to any other employee or director of the Company or the Association, or can return such dividends to the Company. (g) Voting of Restricted Shares. After an Award has been granted, the Recipient as conditional owner of the Restricted Stock shall have the right to vote such shares. (h) Delivery of Earned Shares. At the expiration of the restrictions imposed by Section 6(a), the Escrow Agent shall redeliver to the Recipient (or, where the relevant provision of Section 6(c) applies, in the case of a deceased Recipient, to his Beneficiary) the certificate(s) and any remaining stock power deposited with it pursuant to Section 5(d) and the shares represented by such certificate(s) shall be free of the restrictions referred to Section 6(a). 7. Adjustments upon Changes in Capitalization In the event of any change in the outstanding shares subsequent to the Effective Date by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, or any merger, B-6 consolidation or any change in the corporate structure or shares of the Company, without receipt or payment of consideration by the Company, the maximum aggregate number and class of shares as to which Awards may be granted under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Any shares of stock or other securities received, as a result of any of the foregoing, by a Recipient with respect to Restricted Stock shall be subject to the same restrictions and the certificate(s) or other instruments representing or evidencing such shares or securities shall be legended and deposited with the Escrow Agent in the manner provided in Section 6(e). 8. Assignments and Transfers No Award nor any right or interest of a Recipient under the Plan in any instrument evidencing any Award under the Plan may be assigned, encumbered or transferred (within the meaning of Code Section 83) except, in the event of the death of a Recipient, by will or the laws of descent and distribution until such Award is earned. 9. Key Employee Rights under the Plan No Key Employee shall have a right to be selected as a Recipient nor, having been so selected, to be selected again as a Recipient and no Key Employee or other person shall have any claim or right to be granted an Award under the Plan or under any other incentive or similar plan of the Company or any Affiliate. Neither the Plan nor any action taken thereunder shall be construed as giving any Key Employee any right to be retained in the employ of the Company or any Affiliate. 10. Outside Director Rights under the Plan Neither the Plan nor any action taken thereunder shall be construed as giving any Outside Director any right to be retained in the service of the Company or any Affiliate. 11. Withholding Tax Upon the termination of the Restricted Period with respect to any shares of Restricted Stock (or at any such earlier time that an election is made by the Recipient under Section 83(b) of the Code, or any successor provision thereto, to include the value of such shares in taxable income), the Company or the Association shall have the right to require the Recipient or other person receiving such shares to pay the Company or the Association the minimum amount of any federal or state taxes, including payroll taxes, that are applicable to such supplemental income and that the Company or the Association is required to withhold with respect to such shares, or, in lieu thereof, to retain or sell without notice, a sufficient number of shares held by it to cover the amount required to be withheld. The Company or the Association shall have the right to deduct from all dividends paid with respect to shares of Restricted Stock the amount of any taxes which the Company or the Association is required to withhold with respect to such dividend payments. 12. Amendment or Termination The Board of the Company may amend, suspend or terminate the Plan or any portion thereof at any time, provided, however, that no such amendment, suspension or termination shall impair the rights of any Recipient, without his consent, in any Award theretofore made pursuant to the Plan. Any amendment or modification of the Plan or an outstanding Award under the Plan, including but not limited to the acceleration of vesting of an outstanding Award for reasons other than death, Disability, Normal Retirement or termination following a Change in Control, shall be approved by the Committee, or the full Board of the Company. The Company may request OTS approval of the issuance of shares under the Plan. The Company shall not be required to present the Plan to stockholders for approval after the receipt of OTS nonobjection or approval of the stock B-7 issuance under the Plan, nor will shall the Company be required to present the Plan for stockholder approval if the OTS requires amendments to the plan, even if the amendments are material. 13. Governing Law The Plan shall be governed by the laws of the State of New Mexico. 14. Term of Plan The Plan shall become effective on the date of, or a date determined by the Board of Directors following, approval of the Plan by the Company's stockholders. It shall continue in effect until the earlier of (i) ten years from the Effective Date, unless sooner terminated under Section 12 hereof, or (ii) the date on which all shares of Common Stock available for award hereunder have vested in the Recipients of such Awards. IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized officers and the corporate seal to be affixed and duly attested, as of the ___________ day of __________________, 2001. Date Approved by Shareholders: _________________ Effective Date: _______________________________ ATTEST: ALAMOGORDO FINANCIAL CORPORATION ------------------------------- ---------------------------------- Secretary President B-8