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Zions Bancorporation ESOARS

Summary prepared for: Office of the Chief Accountant Securities and Exchange Commission

Prepared by: James G. Livingston Vice President Zions Bank One South Main Street Salt Lake City, UT 84111 (801) 524 8680 [email protected]

September 22, 2006

INTRODUCTION

This document summarizes Zions Bancorporation's recent issuance of Employee Stock Option Appreciation Rights Securities (ESOARS) and describes its plan to use a future issuance of these securities as a basis for valuation of employee stock options (ESOs). Zions conducted a public on-line auction on June 28 and 29, 2006 to sell 93,610 ESOARS units. The instrument is designed to provide a market-based measure of the value of an employee stock option grant. Our June auction was based on a grant of 936,024 ESOs. This sale of ESOARS was done as an experiment to test the viability of the instrument design, the auction mechanism, and the information disclosure plan prior to an issue that would actually be used for reporting the expense of a grant for financial disclosure under Statement of Financial Accounting Standards No. 123(R) (FAS 123R). It is Zions Bancorporation's intent to use ESOARS as a basis for valuation of future employee stock option grants for FAS 123R purposes and to offer this product to other Securities and Exchange Commission (SEC) registrants. This summary report will describe the recent experimental ESOARS issuance, the rationale for the security design and its means of distribution, how ESOARS aligns with FAS 123R and published SEC guidance on market-based ESO valuation, our plans for improvement of the security and its future use for FAS 123R. This report will follow the outline set forth in the SEC document "Guidance for Consulting with the Office of the Chief Accountant" under the heading "Content of Correspondence."

OVERVIEW OF ZIONS BANCORPORATION

Zions Bancorporation is a financial holding company organized under the laws of the State of Utah in 1955, and is registered under the Bank Holding Company Act of 1956, as amended. We own and operate eight commercial banks, with a total of 475 offices at year-end 2005. We provide a full range of banking and related services through our banking and other subsidiaries, primarily in Utah, California, Texas, Arizona, Nevada, Colorado, Idaho, Washington, and Oregon. We focus on maintaining community-minded banking services by continuously strengthening our core business lines of retail banking, small and medium-sized business

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lending, residential mortgage and investment activities. We operate eight different banks in ten Western states, with each bank operating under a different name and each having its own chief executive officer and management team. The banks provide a wide variety of commercial and retail banking and mortgage lending products and services. We provide commercial loans, lease financing, cash management, electronic check clearing, lockbox, customized draft processing and other special financial services for business and other commercial banking customers. We also provide a wide range of personal banking services to individuals, including home mortgages, bankcard, student and other installment loans, home equity lines of credit, checking accounts, savings accounts, time certificates of various types and maturities, trust services, safe deposit facilities, direct deposit and 24-hour ATM access. In addition, some of our banking subsidiaries provide services to key market segments through their Women's Financial, Private Client Services, and Executive Banking Groups. We also offer wealth management services through a subsidiary, Contango Capital Advisors, Inc., which was formed in 2004. In addition to these core businesses, we have built specialized lines of business in capital markets and public finance. We are also a national leader in U.S. Small Business Administration lending. Through our eight banking subsidiaries, we provide Small Business Administration ("SBA") 7(a) loans to small businesses throughout the United States and are also one of the largest providers of SBA 504 financing in the nation. We own an equity interest in the Federal Agricultural Mortgage Corporation ("Farmer Mac") and are the nation's top originator of secondary market agricultural real estate mortgage loans through Farmer Mac. We are a leader in municipal finance advisory and underwriting services. We also control four venture capital companies that provide early-stage capital, primarily for start-up companies located in the Western United States. The company's common shares are traded on the Nasdaq Stock Market under the symbol ZION. The Company had 105,147,562 shares of common stock outstanding at the close of business on December 31, 2005. The total market value of Zions' common equity as of September 20, 2006 was approximately $8.4 billion. Zions Direct, a wholly-owned non-banking, broker-dealer subsidiary of Zions First National Bank acts as the auction agent in ESOARS transactions. Zions First National Bank is

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the ESOARS issuing and paying agent. Zions First National Bank is a wholly-owned subsidiary of Zions Bancorporation. Presented below is a summary of Zions Bancorporation's financial condition and operating performance:

Balance Sheet (dollars in thousands)

2006 Q2 Loans Held for Investment, before Reserves Loans Held for Sale, before Reserves Loan Loss Reserve Net Loans Receivable Intangible Assets Total Assets Deposits Debt, Senior and Subordinated Common Equity Total Shareholders' Equity Shares Outstanding (actual) 32,433,387 248,948 348,475 32,333,860 2,058,948 45,142,086 33,254,210 6,622,705 4,447,330 4,447,330 106,611,731 2005 Q2 23,614,440 207,123 281,428 23,540,135 690,330 32,875,294 24,398,535 4,969,495 2,937,908 2,937,908 90,062,646 Y-Y Ch (%) 37.35 20.19 23.82 37.36 198.26 37.31 36.30 33.27 51.38 51.38 18.38 2006 Q1 30,828,671 311,655 341,261 30,799,065 2,072,609 43,318,029 32,872,708 5,395,115 4,343,816 4,343,816 106,070,045 Q-Q Ch (%) 20.82 (80.48) 8.46 19.93 (2.64) 16.84 4.64 91.01 9.53 9.53 2.04

Income Statement (dollars in thousands)

2006 Q2 Net Interest Income Provision for Loan Losses Net Income Before Taxes Provision for Taxes Net Income 436,327 17,022 223,788 78,821 145,310 2005 Q2 330,928 11,417 183,397 66,330 118,810 Y-Y Ch (%) 31.85 49.09 22.02 18.83 22.30 2006 Q1 422,847 14,512 212,368 75,258 137,633 Q-Q Ch (%) 12.75 69.18 21.51 18.94 22.31

Per Share Items ($)

2006 Q2 Book Value per Share Diluted EPS Before Extraordinary Items Diluted EPS After Extraordinary Items Dividends Declared 41.72 1.35 1.35 0.3600 2005 Q2 32.62 1.30 1.30 0.3600 Y-Y Ch (%) 27.90 3.85 3.85 0.00 2006 Q1 40.95 1.28 1.28 0.3600 Q-Q Ch (%) 7.52 21.88 21.88 0.00

Performance Ratios (%)

2006 Q2 ROAA 1.33 2005 Q2 1.47 Y-Y Ch (bp) (14) 2006 Q1 1.31 Q-Q Ch (bp) 2

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ROAE Net Interest Margin Efficiency Ratio

13.20 4.64 57.46

16.56 4.60 54.76

(336) 4 270

12.92 4.69 58.22

28 (5) (76)

Asset Quality Ratios (%)

2006 Q2 Nonperforming Assets/ Assets Loan Loss Reserves/ Gross Loans Loan Loss Reserves/ NPAs 0.16 1.07 474.28 2005 Q2 0.22 1.18 381.96 Y-Y Ch (bp) (6) (12) 9,232 2006 Q1 0.22 1.10 353.43 Q-Q Ch (bp) (6) (3) 12,084

Q-Q Ch(%)= most recent quarter minus prior quarter annualized e.g. [(Q4-Q3)/Q3]*4 * Percentages presented for individual quarters are annualized by taking the quarter amount and multiplying by four.

TIMING CONSIDERATIONS

On June 28 ­ 29, 2006, we conducted an auction of ESOARS. Our primary purpose in doing so was as a proof of concept. It was not our intention to use the results of that auction directly in our valuation of our May 1, 2006 employee stock option grant. It is our intent, subject to the concurrence of our independent auditors, Ernst & Young, and of the SEC to use ESOARS as the valuation method for our 2007 employee stock option grant, expected to be made in April or May of that year. Based on numerous inquiries we have received, we believe that other companies will want to use ESOARS as the valuation method for employee stock option grants. One prospective client has contacted us regarding the use of ESOARS for an option grant planned for December 20, 2006. It is our intent to begin working with that client under the presumption that the Office of the Chief Accountant (OCA) will be able to render an opinion regarding ESOARS in time for an ESOARS auction to be scheduled and the public notified. In order to accomplish this, it would be helpful to receive guidance from the OCA sometime in October, 2006. We respectfully request a timely response to our proposal from the OCA so that we can begin the work necessary to hold the auction on the December 20 grant date.

FACTS AND CIRCUMSTANCES

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FAS 123R, paragraph 22 states, in part, "The fair value of an equity share option or similar instrument shall be measured based on the observable market price of an option with similar terms and conditions, if one is available." Paragraph A7 states, in part, "Observable market prices of identical or similar equity or liability instruments in active markets are the best evidence of fair value, and if available, should be used as the basis for the measurement of equity and liability instruments awarded in a share-based payment transaction with employees." The Office of Economic Analysis (OEA) memorandum released to the public in September, 2005 argues persuasively that attempts to measure the value of an ESO grant based on an instrument with similar terms and conditions to the ESO is intractable. They describe a tracking approach that employs an instrument that effectively mirrors the cost of the ESO grant to the company. This is the approach that we take with ESOARS. The OEA memo notes three key considerations in the creation of an instrument that could be used to estimate the fair market value of an employee stock option grant: Instrument design, information plan and market pricing mechanism. This section describes our efforts in each these three areas. Throughout the process of developing ESOARS and designing the method of their distribution, we followed two primary guidelines. First, where the SEC has given guidance on a particular aspect of the security and its distribution, we followed it to the best of our understanding. Second, where the SEC did not speak specifically on an issue, we attempted to make the security and its distribution as transparent and open as possible in order to ensure that a true fair market value is obtained in a competitive market.

Instrument design The OEA suggests that the instrument used for ESO valuation should be "A market instrument that confers net payments on its holder that are equal in value to the fair value of all or part of the employee stock option grant." Accordingly, each holder of an ESOARS unit will receive a pro rata share of the net value of reference options realized by employees when they are exercised. The total payments to ESOARS owners will equal an aggregate of ten percent of the employees' net realized value upon the exercise, if any, of reference options during a certain payment period. Ten percent is chosen for simplicity of calculations and explanation and as the midpoint of the range mentioned in the Office of Economic Analysis memo issued in September,

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2005 and found on the SEC website. Obviously, a different percentage could be chosen in future auctions. The net realized value is calculated as the difference between the trading price per share of Zions' common stock at the time employees exercise their ESOs and the exercise price of the reference options, multiplied by the number of shares of common stock obtained by ESO holders on exercise. Payments to ESOARS holders will be made quarterly. ESOARS securities are fully registered and were issued under Zions' existing WKSI (Well-Known Seasoned Issuer) shelf registration (S-3), filed March 31, 2006. There are no restrictions on the aftermarket trading or hedging of ESOARS. The securities are deposited with Depository Trust Corporation (DTC) and all clearing takes place using well-established mechanisms. The Zions First National Bank Corporate Trust Department serves as issuing and paying agent. Pre-vesting Forfeitures - Under FAS 123R, the final total expense recognized for an ESO grant is the grant-date value per option multiplied by the number of options that actually vest. In other words, the ESOs that are forfeited before they vest are not included in the total expense. Investors in ESOARS purchased the right to payments that are based on the entire ESO grant, including options granted that do not vest. Our method of adjusting for this is to publish our expected pre-vesting forfeiture rate and allow investors to incorporate this assumption into their pricing. We can then back out the implied valuation effect of the forfeiture rate on each ESOARS. This calculation is shown below in the section describing the auction results. An alternative approach that we considered is described below in the section "Possible Modifications to ESOARS." Size of a unit ­ We considered having one ESOARS unit equate to approximately one or 100 employee stock options. While traditional stock options are traded in units of 100, we determined that having one unit approximately equal to one employee stock option would be easier to explain to potential investors and that some smaller investors may prefer to purchase fewer than 100 units, thereby facilitating a more active auction.

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Number of units ­ In order to maintain the notion of one ESOARS unit approximately equaling one employee stock option, we decided that this issue of ESOARS, in terms of number of units, would be 10% of the number of employee stock options. We also determined that in the event our tie-bid allocation mechanism results in fractional units, we would round up to the next ESOARS unit. This may result in slightly more units being sold. In that case, the payment per ESOARS unit will not change. In the auction held in June, 2006, we offered 93,603 units and actually sold 93,610 units due to rounding.

Frequency of payments to holders ­ We considered making payments to holders on either a monthly, quarterly, semi-annual or annual basis. We decided to make distributions once per quarter as this frequency strikes a good balance between payment processing costs and liquidity concerns for the holders and is similar to the payment frequency for equity securities (dividends). Modifications of option grants ­ FAS 123R states that a modification of the grant should be treated as a cancellation of the old grant and the issuance of a new grant. The incremental accounting expense is the difference in value between the new grant and the cancelled grant, measured at the modification date. ESOARS track the cost to the option-granting company. Therefore, payments to ESOARS holders need to capture the cost to the company of the modification. This requires the value at the modification date of the cancelled grant on which ESOARS are based. Since we cannot hold an auction to determine the value, we determined that the best solution is to hire an independent valuation agent to measure the value of the cancelled options. This is also in accordance with the principle outlined in FAS 123R stating that if a market value cannot be used, a model is the next best alternative. Secondary Market for ESOARS ­ We intend to facilitate an aftermarket in ESOARS. We will act on a best-efforts basis to cross trades between ESOARS holders wanting to sell and investors wanting to buy ESOARS. In the event that a large holder of ESOARS wants to divest its holdings, if the holder so chooses we can schedule and run an auction on the auction web site that we continue to develop and that was used for the initial ESOARS auction. However, like most developing markets, we do not expect a significant amount of secondary market depth initially.

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Information Distribution Plan (Marketing) The OEA memo recommends "A credible information plan that enables prospective buyers and sellers to price the instrument. For example, the plan should provide information about the exercise behavior of the employees in the grant. It should be easily accessible to all market participants to reduce the potential for adverse selection." We provided in the Prospectus Supplement summarized information and graphs showing the exercise pattern of our employees for past option grants beginning with our 1994 option grant. For those bidders wanting to complete a more detailed analysis of exercise patterns, we provided in a Free Writing Prospectus filed on June 14, 2006, the exercise-by-exercise data that underlies the summarized information. This information is available on the SEC Edgar web site. We also provided our estimates for pre-vesting forfeitures for the reference option grant (see page S-43 of the Prospectus Supplement). Zions Bancorporation makes these estimates on the basis of past experience. Unfortunately, due to unforeseen problems with our employee stock option record-keeping system, we were unable to provide information on the number of our reference options categorized as incentive and as non-qualified. Should we elect to use a market-based approach for handling the pre-vesting forfeiture issue in future ESOARS issuances (versus one of the methods proposed in the section "Possible Modifications to ESOARS"), we will provide information on expected pre-vesting forfeiture rates and include information on the number of options that are incentive versus non-qualified. In addition to providing information potentially useful to prospective bidders for valuation purposes, the ESOARS information distribution plan had the secondary objective of informing a sufficient number of bidders of the opportunity to participate in the ESOARS auction. In order to ensure competitive pricing, a sufficient number of bidders must be brought into the auction process. For a market price to be used to determine fair market value, the FASB requires that the price be derived from an active market. We attempted to attract as many bidders as possible through national and local advertising, press releases, working with reporters from national publications in order to get news articles published and personal contact with known potential bidders. We spent in excess of $100,000 on advertising. The following table presents ESOARS-related disclosures and advertising:

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Document Type

Preliminary Prospectus Supplement Press Release Zions

Author

June 12 June 12

Date

Topic

Preliminary information on ESOARS "Zions Bancorporation Offers a New Employee Stock Option Valuation Method" ESOARS FAQ Early Bid Submittal Form Announcement of new valuation method via auction "Another Stab at `Public' Options" Historical Stock Option Exercise Data

PRNewswire

Free Writing Prospectus Free Writing Prospectus Free Writing Prospectus

Zions Zions Zions

June 13 June 13 June 13

Free Writing Prospectus

Original author Wall Street Journal; Reproduced by Zions Zions Zions, published by Wall Street Journal Zions

June 13 (Zions); June 8 (Wall Street Journal) June 14 June 14 June 19, 22, 26

Free Writing Prospectus Advertisement Free Writing Prospectus, email to Zions Direct clients Free Writing Prospectus

"Invitation to Bid in Securities Auction" "Zions Proposal To Value Options Faces Regulatory Hurdles" "Zions Aims At `Huge' Market For Option Valuation Method"

Original author Dow Jones Newswires; Reproduced by Zions Original author Dow Jones Newswires; Reproduced by Zions Zions, published by Investor's Business Daily Zions, published by The Mercury News Zions, published by The Mercury News Zions, published by The Mercury News Zions, published by Barron's SNL Financial

June 22 (Zions); June 20 (Dow Jones Newswire) June 22 (Zions); June 16 (Dow Jones Newswire) June 24 June 24 June 25 June 26 June 26 June 28

Free Writing Prospectus

Advertisement Advertisement Advertisement Advertisement Advertisement Article

"Zions' ESOARS could yield lower employee stock option expense, but will they soar with SEC?" "Zions Seeks Bidders In Bid To Change Options Accounting"

Free Writing Prospectus

Original author Dow Jones Newswires; Reproduced by Zions

June 29 (Zions); June 27 (Dow Jones Newswire)

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Document Type

Banner advertisement Banner advertisement Prospectus Press Release

Author

Zions, published by HedgeWorld Zions, published by The Alternative Advantage Zions PRNewswire n/a n/a June 29 June 29

Date

Topic

Prospectus Supplement with Auction Results Auction results

We filed with the SEC our Preliminary Prospectus Supplement for ESOARS on June 12, 2006. We filed nine Free Writing Prospectuses (FWPs) in June 2006. In these, we delivered information related to ESOARS. In some of the FWPs we reproduced articles reported in the press and added clarifications and corrections as needed. In addition to the Prospectus and FWPs, we placed advertisements about ESOARS in national financial publications The Wall Street Journal, Barrons and Investor's Business Daily as well as local Salt Lake City newspapers and The San Jose Mercury News. We sent a broadcast email of the invitation to bid that appeared in the Wall Street Journal to over 7,000 Zions Direct account holders on June 19th, June 22nd and June 26th. We placed a banner ad linking to our website (www.esoars.com) on Lipper Hedgeworld's website and in their daily email newsletter The Alternative Advantage from June 19th until June 30th. Articles discussing ESOARS were published in or on The Wall Street Journal, PRNewswire, Dow Jones Newswire and SNL Financial. Bidders who contacted Zions were given a standard briefing directly. Customer service was available 24 hours a day and 7 days a week on a dedicated toll-free line. After the auction, we filed a final Prospectus Supplement with auction results on June 29, 2006. Our marketing efforts resulted in 82 registered bidders (discussed further below in section on auction results) with approved maximum bid limits totaling over $4.1 million.

Market Pricing Mechanism The OEA memo suggests that valid market-based ESO valuation method will also have "A market pricing mechanism through which the instrument can be traded to generate a price. It should encourage participation in the market in order to promote competition among willing buyers and sellers." ESOARS were priced and allocated through an auction held using the

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internet (website: www.esoars.com). We contracted with Grant Street Group, a provider of online auction platforms, to customize their platform for our use. Since 1997 Grant Street Group has conducted nearly 52,000 online auctions totaling $7.2 trillion for over 1,500 issuers. We describe below some of the key decisions made regarding the auction mechanism: Modified Dutch auction ­ This format was chosen because it is similar to the auction format used by the U.S. Treasury. In this auction format, the market-clearing price is the price that is sufficient to sell of the units, much like the intersection of a supply curve and a demand curve. All winning bidders pay the market-clearing price. Feedback - One key difference between our auction and that of the U.S. Treasury is that the Treasury uses a sealed-bid auction while ours is an open auction with feedback. Open means that during the course of the auction bidders may raise their bids. Feedback means that at any point in time the auction platform displays whether or not a bidder's bid is "in the money." In the money means that if the auction ended at that time, the bid would be a winning bid. We decided to add these features to our auction to help ensure that we have an active, dynamic market and to ensure that a fair market value is attained. Our concern with sealed bids is that many or even all bidders would submit bids significantly below their reservation price. Length of auction - We considered holding the auction open for periods ranging from 30 minutes up to several days. The standard auction period for municipal securities is 30 minutes while for IPOs it is several weeks. We weighed investor attention span (favoring a shorter auction) against increasing the likelihood the auction was open when an investor would be able to bid (favoring a longer auction window). We decided to hold the first auction open for approximately 30 hours. Based on our experience, we anticipate shorter auction periods in the future, perhaps beginning after the close of the market on the grant date and ending before the open of the market on the next trading day. The frequency of bidding increased dramatically as the close of the auction approached. Fifty-six percent of all bids submitted were received in the final hour, 50% in the final 30 minutes and 32% in the final 15 minutes. Early bids - Feedback received from some potential investors indicated that they would be unavailable during our auction period. In order to attract as many bidders as possible we decided to allow submission of early bids. We created a standardized early bid form that is posted on the

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auction platform web site and can be submitted via email, fax or letter. We received two early bid submissions. Bids binding ­ After discussion with Grant Street Group as well as employees of Zions who regularly bid in online public auctions of municipal securities, we determined that allowing bidders to retract or lower bids is not compatible with giving feedback in the auction. If we allowed bidders to lower or retract bids, a bidder may be out of the money at one point in time only to go back in the money later if another bidder retracts a bid. This would make any feedback potentially misleading. Contingency plans ­ We considered contingency plans from an overall platform failure perspective and from an individual bidder perspective. If the platform was unavailable due to technical malfunction we planned to postpone the auction. If an individual bidder was unable to access the platform for whatever reason, that bidder would be unable to bid. We decided that we could not be in a position of accepting bids during the auction by any means other than the auction platform because there may not have been sufficient personnel to deal with all bidders trying to bid by other means. Bidder confidentiality - The Grant Street auction platform on which the ESOARS platform is based originally displayed a bidder's user ID. Sensitive that some bidders would prefer to protect their identity in this and future auctions, we had Grant Street Group modify their platform so that bidders are identified only by a bidder number that changes with each auction and can not be tied to any bidder identification. Tie bids at stop price ­ Similar to the U.S. Treasury auctions, multiple bids at the stop price (market-clearing price) are pro rated based on the amount of the bid. We chose to round up to the nearest unit in the event the pro ration is a non-integer. This decision was primarily driven by the mechanics of the Grant Street auction platform. They had already built the platform to operate in this way and didn't feel there was time to modify it. While this rounding up might slightly increase the number of units sold, the security is designed so that the payment received for each unit is unaffected. Price range and maximum bid price ­ We did not include a price range or maximum bid price. We had extensive discussion about whether to include in our offering documents an expected price range and also whether to include in the auction platform mechanism a maximum bid price.

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It was argued that from marketing perspective, because this is such a new and unusual instrument, bidders might be more comfortable participating in our auction if they had some expectation about pricing. It was argued that building a maximum bid price into the auction mechanism would serve as an additional layer of protection against failure due to manipulation or irrational bidding. The primary argument against having a bid range or maximum is that they would interfere with the fair and open determination of the fair value by the market. We were concerned that these mechanisms would unduly influence or otherwise limit bidders with respect to pricing. Suitability - ESOARS are complex, risky securities that do not have direct analogs in the marketplace frequented by most investors. Therefore, it was important that we devise a screening mechanism to filter out investors for which ESOARS are not suitable. We started with the NASD suitability questionnaire that individuals complete when applying for a brokerage account. We also considered the suitability questionnaire used by our affiliate, Contango. Our questionnaire asks potential bidders to identify their risk tolerance, investment time horizon, and investment objectives. We only accepted investors who agreed that they have high risk tolerance, a moderate or long investing time horizon and chose speculative trading as one of their investment objectives. In addition to these questions, we felt it was important to assess potential bidders' understanding of the risks of ESOARS. To do so, we asked how much investors were willing to invest as well as how much they were willing to lose. The minimum of these two answers was used to set their maximum bid amount. Finally, we asked how much an investor could lose on a $100,000 investment in ESOARS. If the investor did not answer $100,000, they were contacted to determine whether they understood the nature of the risks of investing in ESOARS. Bidding by Zions Employees ­ We had significant interest on the part of Zions executives and employees. While we considered the positive aspects of having more bidders participating, we decided to exclude Zions' SEC insiders, employees of Zions Direct, and other employees who worked on the ESOARS project, to avoid any potential appearance of self-dealing by insiders. Nineteen employees who were not excluded submitted bids with seven employees in the money for 0.9% of the total ESOARS units.

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Maximum bid amounts - To protect the integrity of the auction from manipulation and from the auction-determined valuation being invalid due to false bids, Zions Direct evaluated each bidder's ability to pay and set a maximum bid amount. The maximum bid amount for any bidder was set at $350,000. This amount was chosen as an estimate of 35% of the total value to be issued and is modeled after the limit used by the U.S. Treasury in its auctions. In order to minimize the possibility that Zions employees influenced the auction in a meaningful way, we limited employees to a maximum bid amount of $10,000.

Results of Auction Bidders - There were a total of 82 registered bidders and 57 bidders actually made bids. These 57 bidders submitted a total of 1,041 bids. There were 21 winning bidders. The winning price determined by the auction was $7.50 per ESOARS unit. A total of 93,610 ESOARS units were assigned to the winning bidders, resulting in $702,075 of proceeds from the auction. Among the 82 registered bidders, there were five institutions, 25 individuals who had Wall Street experience and seven individuals who were other sophisticated bidders, as determined by one-on-one discussions with the bidders. "Other sophisticated investors" include those having financial training, including several Ph.D.s and/or individuals with significant nonWall Street finance or investing experience. These three groups represented 45% of registered bidders. The level of financial acumen of many of the remaining bidders is unknown as they preferred to not disclose it to us. A total 24 of 82 registered bidders were employees or family members of employees of Zions. Of the 93,610 ESOARS units sold, investors having identified themselves as having Wall Street experience purchased 53.2%, institutions purchased 44.5%, and other sophisticated investors purchased 0.5% for a total of 98.2%. The degree of investing knowledge possessed by the purchasers of the remaining 1.8% of ESOARS is unknown. Zions employees and family of employees purchased 0.9% of the total units. Pricing - As noted above, our method of dealing with pre-vesting forfeitures is to disclose to potential bidders our estimated forfeiture rates and allow the market to take that into account in their bidding. Under commonly-assumed risk neutrality, we can then back out the implied

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option valuation. While acknowledging that we were unable to provide the incentive versus nonqualified stock option breakdown to potential bidders for the June, 2006 auction, the adjustment for pre-vesting forfeitures would be computed as follows: Options Granted 181,479 754,545 936,024 Expected Forfeiture Rate 18.5% 11.0% Expected Forfeitures 33,574 83,000 116,574

Option type Incentive Non-qualified Total

"Expected Forfeiture Rate" are the assumed rates used by Zions Bancorporation in computing reported share-based compensation expense for the May 1, 2006 grant of reference employee stock options. The weighted expected forfeiture rate is 12.5%, which implies that 87.5% of options are expected to vest. This implies a per vested option valuation of $8.57. During the final 22 minutes of our auction we experienced an unfortunate technology problem. At Grant Street Group, primary and secondary automatic load balancers repeatedly crashed and rebooted. As a consequence, bidders experienced outages and poor connectivity. It is our view that in the absence of this malfunction, the market-clearing price would likely have exceeded $8.00. This is based on post-auction discussions with certain large bidders who were unable to submit last-minute bids. In other words, there was unmet demand. (Grant Street Group's two-minute rule, described below, will be used in future auctions in part to protect against this type of event.) If we calculate the pre-vesting adjustment using an $8.00 clearing price for ESOARS, the implied option valuation is $9.14. Due to various factors we were unable to hold our test auction on the grant date. Our reference options were granted on May 1 and our auction closed on June 29. In the future it is our intention to hold ESOARS auctions on the ESO grant date. (This has the ancillary benefit of eliminating the possibility of backdating of ESOs.) The strike price of our reference options is $81.15. On June 29, our stock price at the close of trading, which preceded the close of the ESOARS auction, was $78.22. Our accounting department has used the following assumptions as inputs to the Black-Scholes-Merton model to determine the value of our May 1, 2006 option grant:

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Expected Life Volatility Dividend Yield Risk-free Rate

4 years 18.0% 2.00% 4.949%

Using the stock price on the auction date and adjusting for the passage of time, the BlackScholes-Merton model gives an option valuation of $12.65 per option on the auction date. In summary, and recognizing the minor, but readily correctible deficiencies in the auction process, we consider the first ESOARS auction a success. In our view, we attracted a sufficient number of sophisticated bidders and those bidders submitted enough bids to constitute an active market. The auction was fair, competitive and open to all qualified bidders. The valuation derived from the auction suggests a value of $8.57 per ESO, which is 68% of the value of $12.65 given by the Black-Scholes-Merton model. If we assume that absent the technical malfunction the ESOARS price could have gotten as high as $8.00, the option valuation is $9.14, which is 72% of the Black-Scholes-Merton model. There are a number of factors that, in our view, will lead to greater investor participation and better pricing in future ESOARS auctions, including: · This was the first-ever sale of ESOARS. ESOARS are a relatively complex, unusual security that will probably require more time than usual for investors to fully understand. · There was a distinct possibility that our auction could have failed to generate sufficient interest and/or produce adequate pricing, opening up the possibility that the first ESOARS auction would be the last. Investors may demand a discount for such a potential one-of-a-kind investment. · The implementation of Grant Street's two-minute rule mechanism will help ensure that the market clears and the highest possible price is obtained. The two-minute rule is an auction mechanism used by Grant Street Group that extends the auction by two minutes if a bid that improves the stop price is submitted in the final 30 seconds of the auction. These extensions are repeated under the same rule until the market clears, or for a predetermined maximum length of time.

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·

As the market for ESOARS develops we expect a greater number of and more sophisticated investors to participate. Many sophisticated investors such as hedge funds may have been reluctant to invest in developing pricing models for one auction but will do so as more auctions are held.

·

Investors may be more inclined to purchase ESOARS if they can hold a diversified portfolio. As the market develops and more ESOARS issues are available, more investors may participate. Given the well-publicized criticisms of the Black-Scholes-Merton model, we expected

the market value to be somewhat lower than the modeled price and generally are pleased with the pricing obtained in our first-ever ESOARS auction. Over time, the market for ESOARS should grow more efficient.

SPECIFIC ACCOUNTING QUESTION

Is the current ESOARS design sufficient for a market-based approach to employee stock option valuation?

CONCLUSIONS REACHED

The ESOARS security design, information dissemination plan and market-pricing mechanism as described above can be used to provide a credible alternative to model-based valuation. We acknowledge that we may need to make some slight modifications, as discussed below. However, in our opinion, our experimental issuance of ESOARS successfully demonstrated the viability of market-based ESO valuation. Given that FAS 123R expresses a preference for market-based valuation, we hope to use ESOARS as the basis for valuation of our 2007 employee stock option grant. In our design of the ESOARS instrument, auction and information plan, we carefully followed the guidance given by the SEC Office of Economic Analysis in September, 2005. Our instrument is designed to capture the cost borne by the option-granting company. In order to enable potential bidders to value the securities, we provided a long history of past option grants

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and their exercise patterns, even going so far as to make available the full set of option exercise data. To attract as many sophisticated bidders as possible, we spent heavily to advertise in multiple national publications and worked with the national media to get news articles about our program published. By pricing the securities in an active, open, transparent auction with dynamic feedback we ensured that the price is as close as possible to a fair, competitively priced market value.

Possible Modifications to ESOARS We have considered some possible improvements to the ESOARS security design and information plan and are interested in discussing them with the SEC. · Pre-vesting Forfeiture Mechanism ­ As mentioned above, we followed a market-based approach to dealing with pre-vesting forfeitures. Alternatively, the instrument could be designed to explicitly remove from valuation consideration by bidders the ESOs that do not vest. There are at least two simple methods that could be used. The first method is to publish the pre-vesting forfeiture estimate in the offering documents and structure the payments to holders of ESOARS to reflect deviations from the estimate. That way, bidders do not need to consider payment for options that do not vest in their valuation models. For example, suppose our estimate of pre-vesting forfeitures is 10% and the actual rate is 15%. Payments to bidders will be 90 / 85 = $1.06 for every dollar of realized value. The second method is to refund to holders of ESOARS their share of the ESOARS purchase price paid for ESOs that do not vest. These payments would be made quarterly during the vesting period as ESOs are forfeited and might include payment of interest for the time the funds are held. Again, the idea is to remove from the bidders' consideration any pre-vesting forfeitures so that they only bid on and receive distributions for units that actually vest.

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·

Additional disclosure about past grants and exercises ­ Some past option-grant information that we wanted to disclose to investors was unavailable. Unfortunately, we switched employee stock option tracking software during the same time we were preparing our ESOARS offering documents. The conversion did not go as smoothly as planned and some parts of the historical database could not be accessed in time for our auction. In Zions' next offering we anticipate that additional disclosures will include the breakdown between incentive and non-qualified stock options and data regarding postvesting cancellations, broken down into incentive and non-qualified categories. Other SEC registrants wanting to use ESOARS as a valuation method may have more or less historical ESO grant and exercise information available than does Zions.

ALTERNATIVES

The model-based alternatives to ESO valuation are well documented and do not require additional discussion. Zions Bancorporation currently uses the Black-Scholes-Merton model to estimate the value of employee stock option grants.

FINANCIAL STATEMENT EFFECT OF ALTERNATIVES

There are two main financial statement differences between a market-based valuation and model-based valuation. First, the valuation obtained will likely differ. The direction and magnitude of the difference is impossible to estimate. This difference will affect the amount of compensation expense that the company reports. The second difference relates to the fact that with a market-based approach, the ESOgranting company issues securities that would not be issued using a model-based approach. We expect to account for future ESOARS issuances as equity. For simplicity, we determined that we would not try to design the ESOARS securities auctioned in our June, 2006 test auction to get equity accounting treatment. The securities as currently designed are most similar to cash-settled call options with the ESO pool as the underlying instrument and will be accounted as derivatives.

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In our view, in accordance with EITF 00-19, equity accounting is required when the ESOARSissuing company has the option and ability to settle payments to ESOARS holders in shares of the company's stock. We intend to add a share-settlement option to future ESOARS securities. Equity treatment for ESOARS is sensible, as economically all the issuing company has done is to increase the size of the ESO grant by whatever pro rata payout rate they choose and have exchanged cash for the shares rather than employee labor.

INTENDED DISCLOSURES

In addition to the normal share-based compensation disclosures made in our financial statements, when we use ESOARS as the basis for valuation of ESOs we will disclose details of our market-based valuation method and the valuation obtained. The details of the method to be disclosed include security design, information plan and method of distribution.

AUDIT COMMITTEE'S VIEWS

On May 1, 2006 the ESOARS program was presented to the entire Zions Bancorporation Board of Directors, including the Audit Committee. They approved the initial issuance of ESOARS and are in agreement with the development and use of ESOARS for valuation of ESO grants.

PRIOR SEC STAFF POSITIONS

In September, 2005 SEC Chairman Christopher Cox, Chief Accountant Donald Nicolaisen and the Office of Economic Analysis released a statement, speech and memo, respectively, regarding the use of market-based methods for valuation of ESOs for FAS 123R purposes. We have attempted to follow the concepts outlined in those releases. In March 2005, the Commission released Staff Accounting Bulletin No. 107 "regarding the valuation of sharebased payment arrangements for public companies."

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CONCLUSION OF ZIONS' AUDITOR

The national office of Ernst & Young, our independent auditor, is presently reviewing the concept of ESOARS as a valuation method for share-based payments under FAS 123R for use by Zions Bancorporation in its financial statements.

PREVIOUS DISCUSSIONS WITH THE COMMISSION

We have only communicated with the SEC informally. · In July 2005 James Livingston had a telephone conversation with SEC Office of Economic Analysis Deputy Chief Economist Jonathan Sokobin, a former colleague of his at Southern Methodist University. Mr. Sokobin suggested James speak with Scott Taub, which he did. We discussed the role of the Office of the Chief Accountant. Mr. Taub noted that it would be much easier for the OCA to opine on an actual rather than a hypothetical transaction. Partially on the basis of this conversation, we decided to conduct an experimental auction before approaching the SEC. · On June 14, 2006 James Livingston received a phone call from Alison Spivey, Associate Chief Accountant and Joe Ucuzoglu, Professional Accounting Fellow, both from the Office of the Chief Accountant. We discussed our recently-filed Preliminary Prospectus Supplement, our security design and the OCA's interest in our project. James Livingston offered for the OCA to observe our auction and they declined. We also discussed the protocol for meeting with the OCA. · On June 23, 2006, James Livingston received a phone call from Scott Taub, then Acting Chief Accountant. He noted that ESOARS had been discussed at a senior-level meeting at the SEC and that the SEC was interested in Zions' project. He inquired whether there were any new developments since the call from his staff on June 14th. We discussed presenting the results of our auction to the OCA.

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·

On September 9, 2006, George Oldfield, a former member of the Office of Economic Analysis and now a consultant engaged by us, contacted on an informal basis Alison Spivey. The purpose of his call was to seek guidance about the logistics of Zions approaching the OCA regarding ESOARS. Ms. Spivey directed him to the document on the SEC webpage entitled "Guidance for Consulting with the Office of the Chief Accountant" under the heading "Content of Correspondence."

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