<PAGE>
 
                          [LOGO OF FIRST BANK SYSTEM]

         FIRST BANK SYSTEM 1994 INTEGRATED ANNUAL REPORT AND FORM 10-K


          (See page 78 for 10-K cover page and cross-reference table)

                                    -COVER-


<PAGE>

Locations

                  [MAP OF UNITED STATES APPEARS ON THIS PAGE]



Iowa, Kansas, Nebraska and Wyoming were added as the result of the Metropolitan 
Financial Corporation acquisition in January, 1995.

ABOUT THE COMPANY

First Bank System, Inc., (FBS) is a regional bank holding company serving 11
Midwestern and Rocky Mountain states through more than 300 locations.
Headquartered in Minneapolis, FBS is the 26th largest U.S. commercial bank
holding company with $34.1 billion in assets. Our market capitalization is now
over $5 billion, placing us among the top 20 U.S. banks. This reflects our
January 24, 1995, acquisition of Metropolitan Financial Corporation (MFC).

  FBS has four core businesses and a culture that is focused on creating value
for shareholders. Our banking franchise has leading market shares in most of our
region's major markets. We are a leader in electronic payment systems, as the
nation's largest issuer of Visa Corporate and Purchasing Cards, and as the
seventh largest processor of Visa and MasterCard transactions. Our Commercial
Bank's focus on building strong client relationships has translated into
attractive returns for shareholders. We are among the 10 largest providers of
corporate trust services and our investment management services are  growing
rapidly. These attributes have made us one of the nation's top performing banks.

  The purpose of this report is to reflect FBS's financial condition at December
31, 1994, and therefore it does not include MFC. To obtain a copy of our
supplemental restated financials on Form 8-K, which include MFC, please turn to
the inside back cover for instructions.

  FBS is listed on the New York Stock Exchange under the ticker symbol FBS and
FtBkSy.

                       RETURN ON AVERAGE COMMON EQUITY
                                   (Percent)

                 [PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]


                              EARNINGS PER SHARE
                                   (Dollars)

                 [PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]


                     SHAREHOLDERS' EQUITY TO ASSETS RATIO
                                   (Percent)

                 [PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]

                             [INSIDE FRONT COVER]


<PAGE>

Financial Summary
 

<TABLE>
<CAPTION>
                                                                      % Change
(Dollars in Millions, Except Per Share Amounts)       1994      1993   1993-1994
- --------------------------------------------------------------------------------
<S>                                                <C>       <C>       <C>
FOR THE YEAR
Income before Merger-related Charges.............  $ 419.8   $ 348.0        20.6
Merger-related Charges...........................        -     (50.0)         **
                                                   -----------------
Net Income.......................................  $ 419.8   $ 298.0        40.9
                                                   =================
 
PER COMMON SHARE
Income before Merger-related Charges.............  $  3.57   $  2.83        26.1
Merger-related Charges...........................        -      (.44)         **
                                                   -----------------
Net Income.......................................  $  3.57   $  2.39        49.4
                                                   =================
Dividends Paid...................................  $  1.16   $  1.00        16.0
Common Shareholders' Equity......................  $ 19.25   $ 18.09         6.4
                                                   -----------------
 
RETURN ON AVERAGE ASSETS
Before Merger-related Charges....................     1.63%     1.36%         **
Merger-related Charges...........................        -     (0.19)         **
                                                   -----------------
Return on Average Assets.........................     1.63%     1.17%         **
                                                   =================
 
RETURN ON AVERAGE COMMON EQUITY
Before Merger-related Charges....................     19.3%     16.4%         **
Merger-related Charges...........................        -      (2.6)         **
                                                   -----------------
Return on Average Common Equity..................     19.3%     13.8%         **
                                                   =================
Net Interest Margin..............................     5.28%     5.07%         **
Efficiency Ratio before Merger-related Charges...     57.2%     59.8%         **
 
AT YEAR END
Loans............................................  $19,281   $18,779         2.7%
Allowance for Credit Losses......................      434       423         2.6
Assets...........................................   26,219    26,385         (.6)
Total Shareholders' Equity.......................    2,275     2,245         1.3
Common Equity to Total Assets....................      8.3%      7.5%         **
Shareholders' Equity to Total Assets.............      8.7       8.5          **
Tier 1 Capital Ratio.............................      8.0       9.2          **
Total Risk-based Capital Ratio...................     12.5      13.3          **
**Not meaningful
</TABLE>



<TABLE>
<S>                                            <C>
Letter to Shareholders                          2
FBS Priorities                                  4
Management's Discussion & Analysis             14
Consolidated Financial Statements              39
Five-Year Consolidated Financial Statements    70
Quarterly Consolidated Financial Data          74
Form 10-K                                      78
Executive Officers & Directors                 82
FBS Locations                                  83
Corporate Data                                 84
</TABLE>


                           RETURN ON AVERAGE ASSETS*
                                   (Percent)

                 [PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]


                               EFFICIENCY RATIO*
                                   (Percent)

                 [PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]


                ALLOWANCE COVERAGE RATIO OF NONPERFORMING LOANS
                                   (Percent)

                 [PERFORMANCE BAR GRAPH APPEARS ON THIS PAGE]


<PAGE>


To Our Shareholders
- -------------------

 
When I think about the growth prospects for First Bank System, I am optimistic
because we derive tremendous leverage from our ability to increase revenues
against a low cost structure. While this formula for earnings growth is simple
and straightforward, developing the means to execute it is not.

  Over the past several years, we have built an ingrained cost control
discipline that focuses on value in each decision. Strong, fee-generating
payment systems businesses complement our core banking franchise. Our retail
banking paradigm quickly brings new products to market through a multiple
distribution system attuned to customer needs. Innovation, speed, and
productivity permeate our culture, so that our strategic advantages translate
into daily action.

SHAREHOLDER FOCUS  As we have said consistently over the past five years, we
strive for profits, not size. We have built shareholder value analysis into our
budgeting and management processes, which provides a disciplined method for
allocating resources to high-growth businesses. Our goal is to build a quality
earnings stream - one that combines stability and diversity- to weather any
industry or economic climate. In short, we are managing First Bank System to be
a superior long-term investment.

  Our shareholder focus also guides us in deciding what we won't do. We won't
play the yield curve with bets on the direction of interest rates. Several banks
that did were hurt this past year as rates climbed. Nor will we make
acquisitions that don't make economic sense or don't create value for existing
FBS shareholders. The penalty for overpaying for acquisitions is harsh and long
in terms of lost credibility and diminished financial performance.

GROWTH POTENTIAL  First Bank System is sustaining growth in two ways. First, we
are expanding market share in key segments of our core banking businesses, which
operate in a region where employment, household incomes, and loan delinquency
rates are better than the national averages. For example, our portfolio of home
equity loans has grown an average of 26 percent annually over the past five
years. Loans to small- and medium-sized businesses have achieved strong
increases for three consecutive years. The tremendous growth of our
WorldPerks(R) credit card business has created huge cross-selling opportunities.
Investment product sales are growing rapidly. Innovative new products, improved
customer service, and a developing sales culture should fuel continued market
share growth in these core businesses.

  New businesses are contributing an important second growth stream. In just
five years, we turned our corporate and purchasing card businesses from test
products into the nation's largest Visa issuers. Merchant processing continues
to grow rapidly, placing First Bank nationally among the industry's largest
providers. This report includes separate financial information on these
increasingly important payment systems products. These and other fee-generating
businesses accounted for more than one-third of our total revenue.


OVER THE PAST FIVE YEARS, THE TOTAL RETURN OF FIRST BANK SYSTEM'S STOCK HAS
GROWN AT A COMPOUNDED ANNUAL RATE OF 19.4 PERCENT.

                            FIVE-YEAR TOTAL RETURN
                                  (Percent)

                       [PERFORMANCE GRAPH APPEARS HERE]
2
- -

<PAGE>
 


  As for acquisitions, we're content to wait for the right opportunity at the
right price. But once we make an acquisition, we move quickly. Thanks to our
standardized products and centralized operations, we can fully integrate an
acquired bank's products and operations with our own much faster than other
banks. For example, we will complete the integration of the $8 billion-asset
Metropolitan Financial Corporation within just one month of closing. Speedy
integration means we achieve a higher level of cost takeouts and see the results
faster than other banks. We will continue to pursue value-creating acquisitions.
However, if acquisition prices are too high, we will simply continue to buy back
stock, increase dividends, or both. During the past two years, we have
repurchased $700 million of common and preferred stock. In 1995, we increased
the dividend by 25 percent, to $1.45 per share, and announced our intention to
repurchase 16 million shares of common stock by the end of 1996.

COST CONTROL  We have fortified the expense side of our leverage equation with
standardized products and centralized operations. Because we support virtually
all products with a single set of systems, we can add significant new business
while adding little incremental cost. Another key factor is our compensation
system, which ties pay to profitable revenue generation. All of our employees
are eligible for variable pay, and nearly a fifth of our people have a
substantial portion of their total compensation based on the performance of FBS,
their business line, and their individual results. In addition, our top 174
managers participate in one of the industry's most aggressive management stock
ownership programs. Linking compensation - by far our largest expense - to
performance places the long-term goal of shareholder value squarely in the realm
of everyday action.

  We are among the nation's most efficient banks. Our ratio of noninterest
expenses to revenues fell to 57 percent in 1994 from nearly 80 percent five
years ago. It's still too high, but we're confident that we can drive the
efficiency ratio to the low 50s in the next few years.

  This month marks my fifth anniversary with First Bank System. I'm proud of our
accomplishments, but one stands out in my mind as being particularly important.
Our culture has changed from that of a traditional bank to one that highly
values innovation, inspires a sense of urgency, and is dedicated to increasing
productivity. That has made the achievement of every other goal possible. And
that is why I'm confident that First Bank System will continue to win the
loyalty of our customers and the trust of our investors.




/s/ John F. Grundhofer
John F. Grundhofer
Chairman, President and Chief Executive Officer
February 15, 1995




INNOVATION, SPEED, AND PRODUCTIVITY PERMEATE  OUR CULTURE, SO THAT OUR STRATEGIC
ADVANTAGES TRANSLATE INTO DAILY ACTION.

                                                                             3
                                                                             -

<PAGE>

Progress on Priorities
- ----------------------

Records. First Bank System set a lot of them in 1994. Record earnings, record
profitability, and record efficiency. The numbers are gratifying not only
because they are among the best in the banking industry, but equally important,
they reflect progress made against long-term management objectives. These
fundamentals may be familiar since we have long held them as guideposts for
creating shareholder wealth. We believe there is great value in this
consistency. Our people know what is expected of them and they in turn can drive
those values deeper into our organization. Our priorities remain: core business
focus, productivity, disciplined acquisitions, asset quality, and effective
capital management.

CORE BUSINESS FOCUS  We continue to build our core businesses while investing in
new revenue sources. Our traditional strengths in retail and community banking,
commercial banking, and trust and investment services are now joined by a
fourth: payment systems. Formerly part of retail banking, this fast-growing
collection of card and transaction processing businesses has become a major
focus of First Bank System's future. Together, these four business lines provide
earnings stability over the long term, especially in a changing interest rate
environment.

  We are continuously investing in our businesses and assessing new revenue
sources. This long-term vision is reflected in the tremendous technology
investments we've made in recent years to deepen customer relationships and
maximize product profitability.

PRODUCTIVITY  Although our stated near-term goal is a ratio of expenses to
revenues in the low 50s, there really is no end point to productivity gains. The
reason is that rapidly evolving technology is creating productivity improvements
that were unthinkable five years ago. More improvements are on the horizon. With
enhancements to our Earnings Analysis System, we are building stronger links
between our management accounting and other computer systems to generate deeper
levels of information about product cost and profitability. This also will
provide a framework for analyzing the profitability of individual customer
segments.

  In fact, technology is reshaping the way we deliver financial products and
services. Customers now have the choice of traditional bank branches, automated
teller machines, telephones, and other electronic options. Currently,
approximately half of First Bank System's consumer transactions are initiated
outside of our branch network. We will continue to invest in technology that
maximizes customer convenience and sales productivity.



                 [PHOTO OF FIRST BANK SENIOR MANAGEMENT TEAM]


FIRST BANK SENIOR MANAGEMENT TEAM:
Front from left: RICHARD A. ZONA, vice chairman and chief financial officer, and
JOHN F. GRUNDHOFER, chairman, president and chief executive officer. Back from
left: WILLIAM F. FARLEY, vice chairman, Distribution Group; J. ROBERT HOFFMANN,
executive vice president and chief credit officer; DANIEL C. ROHR, executive
vice president, Commercial Banking; PHILIP G. HEASLEY, vice chairman and
president, Retail Products Group; JOHN M. MURPHY, JR., chairman and chief
investment officer, First Trust N.A.; MICHAEL J. O'ROURKE, executive vice
president and general counsel; and ROBERT H. SAYRE, executive vice president for
human resources.

4

<PAGE>
 
  Acquisitions also present excellent opportunities for economies of scale
through branch consolidation and systems integration. We have a proven
integration model that helps us realize cost savings more quickly than anyone in
the industry. We fully integrated Metropolitan Financial Corporation, an $8
billion institution with 300,000 customer households, within one month of
closing.

DISCIPLINED ACQUISITIONS   We expanded our region and strengthened our existing
market presence through acquisitions this past year. In March we entered
Illinois with the acquisition of Boulevard Bancorp, Inc., a $1.6 billion bank
holding company in Chicago. The Metropolitan Financial Corporation acquisition -
the largest in our history - gives us a presence in Iowa, Kansas, Nebraska and
Wyoming, four states contiguous to our existing region. It also strengthened our
share in four of our current states, making Metropolitan an excellent fit both
strategically and economically.

  These new states have fragmented banking industries that offer high potential
for building market share through acquisition. We have a strong record of doing
just that. In 1994 we completed or announced five in-market acquisitions in
Colorado, Minnesota, North Dakota, and South Dakota.

  We also strengthened our national leadership position as a corporate trust
services provider with the completion of our previously announced acquisition of
J.P. Morgan's domestic corporate trust business.

ASSET QUALITY  Despite the rise in interest rates, we expect our asset quality
to continue to remain at a very high level. At year-end, the ratio of
nonperforming assets to loans and other real estate owned was .79 percent.
Higher interest rates may prompt some companies to compromise their credit
standards. First Bank System will not be one of them. Maintaining high standards
and pricing based upon risk is the only way to add profitable business.

  Our lending strategy remains unchanged. Led by people with exceptional
backgrounds in credit administration, we continue to focus locally where we can
turn our superior market knowledge into superior credit judgments. These markets
have proven more resilient than other parts of the country during recent
economic downturns.

EFFECTIVE CAPITAL MANAGEMENT  We manage our capital to maximize shareholder
value and provide a strong base for acquisitions. During the past two years
we repurchased $700 million of common and preferred stock. We also have
increased our common dividend rate for five consecutive years, including our
most current increase of 25 percent in February, 1995.

THESE FUNDAMENTALS MAY BE FAMILIAR SINCE WE HAVE LONG HELD THEM AS GUIDEPOSTS 
FOR CREATING SHAREHOLDER WEALTH. WE BELIEVE THERE IS GREAT VALUE IN THIS 
CONSISTENCY.

              [TABLE FOR FBS LEADING MARKET SHARES ON THIS PAGE]


                  [TABLE FOR RECENT ACQUISITION ON THIS PAGE]


                                                                              5

<PAGE>


                          RETAIL & COMMUNITY BANKING

                               COMMUNITY BANKING

BUSINESS DESCRIPTION
- --------------------
 
FBS serves more than 1.4 million households in seven states through 200 banking
locations, 1,055 Fastbank(R) automated teller machines, and 24-hour FastLine(SM)
telephone service. Our core customers - those with checking accounts - have an
average of 3.8 accounts with FBS.

1994 HIGHLIGHTS
- ---------------

. Achieved consumer loan growth of 17 percent to $4 billion. . Increased retail
sales of investment products 21 percent to $428 million. . Deepened core
household penetration to an average of 3.8 accounts from 3.2 accounts a year
ago. . Improved the cross-sell ratio on home equity sales to an average of 2.2
new products per customer, up from 1.8 in the 1993 promotions. . Boosted branch
productivity 17 percent over the past two years to 4,092 monthly transactions
per full-time equivalent teller.
. Serviced more than 24 million customer calls, up 34 percent over 1993, and
increased calls serviced entirely by our audio response unit to 70 percent.
. Improved customer satisfaction with branch bank service to 90 percent from 85
percent. . Opened four new private banking locations in Minnesota.

                               BUSINESS BANKING

BUSINESS DESCRIPTION
- --------------------

FBS serves approximately 150,000 small and middle-market businesses through 37
business banking hubs and three Mainstreet Loan Centers that are designed to
quickly serve the needs of this important market. At year-end, our portfolio of
$5.2 billion in business loans accounted for 27 percent of FBS's entire loan
portfolio.

1994 HIGHLIGHTS
- ---------------

. Increased business banking loans 16 percent. . Increased business checking
accounts 13 percent. . Earned approval as a Small Business Administration loan
underwriter in every market we serve.

                               MORTGAGE BANKING

BUSINESS DESCRIPTION
- --------------------

FBS Mortgage is one of the largest residential mortgage lenders in our region.
Home loan origination totaled $1.6 billion in 1994. At year-end, our mortgage
servicing portfolio was $9.8 billion.

1994 HIGHLIGHTS
- ---------------

. Introduced several products, including Combination Lock & Loan, which offers
pre-approval, three-day approval, and rate protection options; a construction-
to-perm loan that provides both construction and permanent mortgage financing
with just one closing; and a "mega-Jumbo" product for borrowers with loan needs
exceeding $1 million.
. Increased loans to low-income households 47 percent and loans to minorities 70
percent. . Improved customer satisfaction rating on loan originations and
servicing to 90 and 88 percent, respectively, from 87 and 74 percent.
. Achieved loan servicing costs that are 12 percent below those of our peer
banks.  . Maintained a delinquency rate that was less than half the national
average.



PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)
                 [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]

6
- -

<PAGE>



LOOKING AHEAD
- -------------

NEW TECHNOLOGY:  DEEPENING CUSTOMER RELATIONSHIPS

A sophisticated new management system that focuses on entire customer
relationships across product lines will improve our ability to sell and service
our customers. The Relationship Management System (RMS) leverages our existing
customer data to improve customer service, cross-selling effectiveness, and
productivity. RMS will provide detailed relationship strategies based on four
customer dimensions: profitability, risk, potential for attrition, and
propensity to buy additional products or services.

  We are a bank industry leader in broadly applying customer management
practices to our retail business. This new technology will help us better
understand our customers by linking multiple account usage information to
demographics and analysis. It marks an important shift from account management
to relationship management.

DIRECT MARKETING: A POWERFUL SALES TOOL  FBS is developing marketing
alternatives to our branch bank system so that customers can conveniently bank
anytime, anywhere. Direct marketing, which includes direct origination of
customer leads for either branch or centralized fulfillment, has been a major
contributor to improved sales results. Last year we converted into new product
sales 35 percent of approximately 680,000 customer calls to our centralized
telephone bank center in response to advertising or direct mail solicitations.
Highly targeted, outbound telemarketing calls resulted in the sale of 68,000
products, a 13 percent conversion rate.

  Direct marketing is increasing our household penetration and market share
while lowering the acquisition cost per account and delivering high-quality
service. Over the past four years, retail asset balances originated through
direct marketing have grown rapidly. Last year, nearly 60 percent of our new
retail asset accounts were originated by direct marketing. The number of calls
converted into sales has increased significantly while the cost per new account
has dropped roughly one-third for inbound and outbound calls.

BUSINESS BANKING: AGGRESSIVE PURSUIT OF SALES  Aggressive marketing, expansion
of our business banking hubs, and a favorable economy helped spark solid growth
in loans over the past three years to companies with annual sales of $25 million
or less. Excluding acquisitions, our core business banking loans increased 9
percent or $350 million. Growth in loans to businesses with less than $1 million
in annual sales resulted from new performance incentives and standard loan
processing at our Mainstreet Loan Centers. These changes have empowered our
personal bankers to sell business loans. Free of loan under-writing
responsibility, bankers now focus on calling customers.

BRANCH PRODUCTIVITY: USING TECHNOLOGY EFFECTIVELY  FBS has steadily improved the
efficiency and productivity of its retail banking operations over the past five
years. Our productivity, as measured by daily transactions per teller, is among
the best at 195, which is substantially above the industry average. We've set
our sights on further productivity gains this year by placing FastLine
telephones in selected branches to shift more customer service inquiries to our
centralized phone bank. We're also encouraging greater use of automatic teller
machines (ATMs) to improve customer service and lower transaction costs. Tests
include extending hours for same-day crediting on ATM deposits and replacing
drive-up tellers with ATMs. Another initiative is the roll-out of Desktop
Expert, a two-way video conferencing system that enhances customer service and
cross-selling. It allows bankers and customers to immediately access a mortgage
or investment specialist when one is unavailable on-site.


NET INCOME (millions)

NONINTEREST INCOME (millions)

                [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]

                                                                             7
                                                                             -

<PAGE>


                               PAYMENT SYSTEMS


                              CORPORATE PAYMENT 

BUSINESS DESCRIPTION
- --------------------

FBS offers card products to help companies and government entities of all sizes
efficiently manage expenses. Three cards comprise this group:

. Corporate Card, a non-revolving Visa card issued to employees of corporations
with annual travel and entertainment expenses of $1 million or more. National
rank: second. Estimated market: $130 billion annually.

. Purchasing Card, a Visa charge card that reduces the processing cost of small-
dollar purchases and lowers the risk of inappropriate purchases through client-
specified controls. National rank: first. Estimated market: $300-$400 billion
annually.

. Business Card, a revolving Visa credit card for companies with annual travel
and entertainment expenses under $1 million. Estimated market: 8 million
companies.

1994 HIGHLIGHTS
- ---------------

. Increased the number of corporate and purchasing card relationships with
Fortune 100 companies to 43 and with Fortune 500 Industrial and Service
companies to more than 150. . Added more than 1,000 U.S. and state government
entities to our purchasing card program.
. Introduced a new Visa WorldPerks Business Card that provides frequent flier
mileage credit through Northwest Airlines. . Introduced FirstView/SM/, a desk-
top report-writing software that allows purchasing card and corporate card
customers to more closely track their company's expenses.
. Developed and piloted the relocation card product, designed and serviced in
concert with FBS Mortgage, to streamline the relocation process for Fortune 1000
customers.

                                CREDIT PRODUCTS

BUSINESS DESCRIPTION
- --------------------

FBS is one of the nation's 10 largest issuers of Visa credit cards. We have more
than 2.2 million cards, $2.4 billion in outstanding balances, and annual sales
exceeding $6 billion.

1994 HIGHLIGHTS
- ---------------

. Introduced the new FBSWorldPerks(R) Visa Card and attracted almost 400,000
cardholders and outstanding receiveables of $600 million. Annualized sales
volume is more than $4 billion.
. Increased total credit outstandings 37 percent to $2.4 billion. . Launched a
test of Direct Cash, an unsecured line of credit for low- and moderate-income
customers. . Selected as first U.S. bank to test Visa TravelMoney, an
international prepaid travel card which is an alternative to traveler's cheques.

                              MERCHANT PROCESSING

BUSINESS DESCRIPTION
- --------------------

FBS is the nation's seventh largest processor of Visa and MasterCard
transactions, serving approximately 60,000 merchant locations nationwide.

1994 HIGHLIGHTS
- ---------------

. Increased merchant processing volume 31 percent to $13.4 billion, our third
year of growth of 25 percent or more. . Completed a conversion of all processing
to an improved merchant system.

                               AGENT BUSINESSES

BUSINESS DESCRIPTION
- --------------------

FBS is the nation's third largest deployer of off-premise automated teller
machines (ATMs), with more than 1,474 locations in 14 states. FBS distributes
its retail card products through more than 800 independent financial
institutions with more than two million consumer checking accounts. FBS
currently offers two ATM network brands, Fastbank and PEAK, in the Upper Midwest
and Rocky Mountain regions, respectively.

1994 HIGHLIGHTS
- ---------------

. Expanded ATM network with an agreement to place more than 1,000 new machines
in Circle K convenience stores. . Increased ATM transaction volume 8 percent to
66 million.
. Piloted the Visa Interlink program in Colorado, which allows customers to use
their ATM cards to make purchases at selected retailers. . Launched Visa check
card program to Fastbank agents in the Upper Midwest.


PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)

                [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]



8
- -

<PAGE>


LOOKING AHEAD
- -------------

 
PAYMENT SYSTEMS: OPPORTUNITY TO GAIN MARKET SHARE
As banking's historic role as a financial intermediary moves from a physical to
an electronic environment, we see enormous opportunity to further strengthen our
position in the regional payment system. The payment system controls the
processing of transactions between consumers and businesses. It is a highly
profitable volume business with steep barriers to entry. Unlike most financial
institutions, we aggressively pursue both sides of the payment system by
providing both payment vehicles, such as credit, charge, debit, and ATM cards,
as well as payment processing and treasury management services (see page 11). In
addition to generating more fees, "closing the loop" on the payment system
creates competitive advantages by generating a unique level of information,
efficiency and control.

NEW TECHNOLOGY: INCREASING EFFICIENCY AND FLEXIBILITY  
We are developing a sophisticated computer system that will consolidate systems
that run our card and credit line products. The Cards and Lines System (CLS)
will cut operating expenses and increase flexibility to enhance or introduce
products. The development of CLS is another example of FBS's commitment to using
technology to improve productivity and profitability.

CORPORATE CARD: A RAPID GROWTH BUSINESS  Controlling information about the
business traveller is the key to success in the corporate card business. In this
regard, we have several competitive advantages that bode well for continued
strong growth. One is Visa's unmatched worldwide acceptance. More than 11
million locations means that more data is captured; data is power when managing
costs or negotiating vendor discounts. Widespread presence also allows companies
to eliminate expensive cash advances to travelling employees. Another benefit
for cost-conscious corporate customers is Visa's superior acceptance at more
low- to medium-priced restaurants and hotels. We will expand our entry into the
global market through partnerships with international institutions capable of
extending our product expertise. Development of proprietary technology and
specific product enhancements is expected to limit new competition in this
attractive market.

PURCHASING CARD: EMERGING MARKET, HUGE POTENTIAL  The $300-$400 billion annual
market for purchasing cards is still in its infancy, and we intend to continue
to market aggressively and consistently deliver the innovative products that
made us the market leader. We also expect the purchasing card to continue to
help sell our merchant processing business because the large volumes enable us
to offer incentives for signing key vendors to accept Visa. In addition to more
deeply penetrating the Fortune 100 and 500, we are successfully carving a niche
among state governments and federal agencies.

WORLDPERKS VISA CARD: STRONG FEES AND CROSS-SELLING OPPORTUNITIES  A key piece
was added to our regional payment systems strategy last year with the award of
the WorldPerks Visa Card partnership with Northwest Airlines. We have already
attracted almost 400,000 cardholders, far exceeding our initial expectations. We
expect to double the WorldPerks card sales volume in five years to approximately
$8 billion. In the meantime, we will pursue the tremendous cross-selling
opportunity that lies in the fact that only about 15 percent of our cardholders
have a pre-existing account relationship with First Bank System.


NET INCOME (Millions)

NONINTEREST INCOME (Millions)

                [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]

                                                                             9
                                                                             -

<PAGE>


                              COMMERCIAL BANKING

                              COMMERCIAL LENDING

BUSINESS DESCRIPTION
- --------------------
 
FBS's Commercial Banking Group takes and manages credit risk and markets
competitively priced products to businesses in our markets with annual revenues
greater than $25 million.

1994 HIGHLIGHTS
- ---------------

. Achieved excellent core loan growth. Average outstanding loans increased
8 percent over 1993. . Reduced nonperforming assets 36 percent to $56 million.

                           MORTGAGE BANKING SERVICES

BUSINESS DESCRIPTION
- --------------------

FBS is one of the nation's largest providers of credit and other financial
services to mortgage bankers.

1994 HIGHLIGHTS
- ---------------

. Managed business effectively during a cyclical decline in loans to mortgage
bankers and rapid industry consolidation. Previous efforts to strengthen client
relationships reduced turnover.

                              REAL ESTATE LENDING

BUSINESS DESCRIPTION
- --------------------

FBS provides credit and other financial products and services to selected real
estate developers for the development, renovation, expansion, acquisition or
refinance of their real estate projects.

1994 HIGHLIGHTS
- ---------------

. Continued to build our real estate portfolio and deepen client relationships.
. Continued to build a strong account team. Our relationship managers have an
average of more than 10 years of real estate market experience.

                         TREASURY MANAGEMENT SERVICES

BUSINESS DESCRIPTION
- --------------------

FBS, one of the region's largest treasury management services providers, helps
companies achieve effective treasury operations through a full range of domestic
and international cash management, information reporting, and trade finance
services.

1994 HIGHLIGHTS
- ---------------

. Achieved a leadership position in the evolving electronic data interchange
business through the introduction of six new EDI services. . Joined EDI Bank
Alliance Network Exchange (EDIBANX), a revolutionary new EDI service. Both moves
broaden our clients' ability to originate and receive financial EDI
transactions. . Worked closely with clients to develop Gallery(TM), an
innovative Windows-based system that enhances the delivery of domestic and
international information reporting and transaction initiation services.  
. Established Hong Kong-based subsidiary to issue import letters of credit.  
. Introduced Faxport, accelerating the delivery of letters of credit to
exporters through automation. . Enhanced ACH positive pay and cash vault
transaction reporting.

                    CORPORATE FINANCE AND LOAN SYNDICATIONS

BUSINESS  DESCRIPTION
- ---------------------

FBS meets the broad financial needs of our clients by syndicating credit
facilities and placing capital with investors.

1994 HIGHLIGHTS
- ---------------

. Originated and syndicated more than $2.5 billion in loans, meeting the full
credit needs of FBS clients while prudently managing FBS portfolio
concentrations.


PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)

                [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]

10
- --

<PAGE>


LOOKING AHEAD
- ------------- 

COMMERCIAL BANK CULTURE: VALUES FOR SUCCESS  Our goal is simple yet ambitious:
to meet our clients' expectations for a superior banking relationship. The
significant characteristics include knowledgeable people, responsiveness,
understanding the client's business, maintaining a long-term commitment to the
client, and competitive pricing.

  To accomplish this, we are building a culture that focuses on the client and
rewards initiative, innovation and teamwork. We are continuing to develop strong
leaders to advance the business, not just manage it. Using a rigorous and
disciplined process, based on facts and data, we are embedding core values into
everyday business activity. Only by continuously evaluating and shaping how we
think and act can we make lasting changes that result in consistently superior
performance.

CORPORATE BANKING: A CORE BUSINESS STRENGTH  Commercial Banking is a vital part
of FBS's overall strategy of building a balanced earnings stream. By developing
strong client relationships with businesses in our geographic region, we can
translate superior market knowledge into sound credit judgments and, ultimately,
into attractive returns for shareholders.

  This past year was one of exceptionally strong growth in our core lending
portfolio, which helped offset a cyclical decline in loans to the rapidly
consolidating mortgage banking industry. Credit quality improved significantly,
which continues a five-year trend that reflects our increasingly strong credit
culture. We will not retreat on credit quality, despite rising competitive
pressures.

  We remain committed to our long-term goal of deepening client relationships
through innovative thinking and excellence in client service. As part of these
efforts, we will continue to build our corporate finance expertise as commercial
banking continues its evolution into an advisory business.

ELECTRONIC COMMERCE: THE WAY TO DO BUSINESS  FBS has become a leader in the
rapid movement among companies of all sizes from paper-based payments to
electronic payments. Although we have provided electronic data interchange (EDI)
services for five years, we moved into an industry leadership position with our
charter membership in EDI Bank Alliance Network Exchange (EDIBANX). EDIBANX, a
strategic alliance of 13 of the country's leading treasury management banks, is
advancing the future of EDI. The network helps facilitate electronic commerce by
providing clients with an efficient means to exchange EDI transactions with
other EDI-capable businesses.

  Our leadership position in EDI ensures that FBS clients will have access to
information and services that will help them effectively implement EDI programs,
thereby taking advantage of cost and operating efficiencies. It also further
strengthens our position as a regional leader in payment systems (see pages 8
and 9 for Payment Systems discussion).

  Another important effort to help companies transact business efficiently is
Gallery(TM), one of the first Windows-based computer software services to
combine international and domestic information reporting and transaction
initiation services. Scheduled for introduction in 1995, Gallery enhances the
value of financial information by enabling clients to integrate data into their
systems through the use of client/server technology. Companies also can use
Gallery to initiate ACH transactions, domestic and international wire transfers,
foreign drafts, and letters of credit.

  FBS also is introducing image services to deliver check images to clients
through a variety of media. Clients will use these images to assist in the
verification and reconciliation of check processing functions.

NET INCOME (Millions)

NONINTEREST INCOME (Millions)

                [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]

                                                                            11
                                                                            --

<PAGE>


                           TRUST & INVESTMENT GROUP

                                CORPORATE TRUST

BUSINESS DESCRIPTION
- -------------------- 

FBS is one of the nation's 10 largest providers of domestic trusteeship, paying
agency, and custody services to debt issuers. We have in excess of $250 billion 
in administered assets and 12 offices that provide a coast-to-coast presence.

1994 HIGHLIGHTS
- ---------------

. Completed the acquisition of J.P. Morgan's domestic corporate trust
business. . Ranked first nationally in the principal amount ($13.5 billion) of
new long-term municipal issues awarded to trustees in 1994.
. Awarded $5.9 billion in corporate finance issues. . Implemented a new
bondholder recordkeeping system.

                             INVESTMENT MANAGEMENT

BUSINESS DESCRIPTION
- --------------------

FBS provides asset management services to individuals and institutions through
common, collective, and mutual funds, and individual portfolios.

1994 HIGHLIGHTS
- ---------------

. Increased assets under management 13 percent to $24.5 billion. . Grew
proprietary First American mutual fund assets more than 65 percent to $4.7
billion, despite declining market.
. Introduced five new mutual funds for a total of 27. . Launched B class or
"back-end" load mutual fund shares.

                              INVESTMENT SERVICES

BUSINESS DESCRIPTION
- --------------------

FBS's full-service brokerage company distributes municipal and government bonds,
equities, mutual funds, and annuities to correspondent banks, corporations,
public agencies, and individuals.

1994 HIGHLIGHTS
- ---------------

. Became one of the first major banks to create a unified sales force, making
one-stop shopping for investment products possible. . Increased investment sales
force to 166 from 135 people.
. Established approximately 23,000 new retail account relationships, an increase
of 83 percent over 1993.

                          PERSONAL FINANCIAL SERVICES

BUSINESS DESCRIPTION
- --------------------

FBS provides a wide range of investment advisory, administrative, and fiduciary
services for individuals, families, and charitable institutions.

1994 HIGHLIGHTS
- ---------------

. Developed new organizational structure that eliminates internal barriers to
superior client service. . Began creating teams of specialists from trust,
private banking, and investment services to serve affluent households.

                              INSTITUTIONAL TRUST

BUSINESS DESCRIPTION
- --------------------

FBS provides trustee, investment management, and custodial services, primarily
for 401(k) and other employee benefit plans.

1994 HIGHLIGHTS
- ---------------

. Nearly doubled the size of the Diamond program, our bundled 401(k) product for
small and medium-sized businesses, to 178 plans with $197 million in assets. 
. Expanded Diamond program to appeal to companies with up to 1,500 employees. 
. Implemented new accounting system and standardized traditional recordkeeping.
. Grew First Stable Fund, which invests in guaranteed investment contracts, 95
percent to $182 million in assets.
. Developed a measurement system that provides custody clients with an
independent, consistent and consolidated performance evaluation.
. Enhanced First Access, a Windows-based, on-line computer system that allows
clients to review their portfolios.
. Expanded institutional trust sales force.



PERCENT OF FBS NET INCOME
EFFICIENCY RATIO (Percent)
NET INTEREST INCOME (Millions)

                [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]



12
- --

<PAGE>
 

LOOKING AHEAD
- -------------


CORPORATE TRUST: TECHNOLOGY INCREASES PROFITABILITY  A new bondholder
recordkeeping system installed last year has significantly cut our operating
costs, making us a low-cost provider of domestic corporate trust services. This
single system enables us to handle all types of securities, eliminating the need
for multiple systems that most of our competitors use. It also enables us to
integrate acquisitions quickly and completely. Improved technology and lower
costs are essential in a scale business such as corporate trust.

ASSET MANAGEMENT: THE KEY TO GROWTH  One of our long-term goals is to
significantly increase the Trust & Investment Group's revenue contribution to
First Bank System. To help accomplish this, we completed a major study last year
that identified initiatives for quickly growing assets managed for both
individuals and institutions. We intend to leverage our 105 years of money
management experience to capture a larger slice of this rapidly growing
industry:

  . RETAIL MARKET.  Last year our 83 percent growth in new investment product
accounts easily outpaced the industry. We will continue to strengthen the sales
efforts and build recognition for the 27 First American Investment Funds, our
proprietary mutual fund family. New products, mutual fund wholesaling, and a
significant technology investment in a new workstation for brokers will fuel
future growth.

  . AFFLUENT MARKET.  FBS is moving toward a fully integrated approach to
serving the complex needs of our most affluent clients with household incomes of
at least $150,000. Our new Private Financial Services group creates client teams
whose expertise spans our traditional trust, private banking, and investment
areas. These teams are designed to satisfy client desire for easy access to a
broad range of financial products and services through a single relationship
manager. Focusing on each client's entire relationship with FBS provides
superior service and cross-selling opportunities in this rapidly growing market.

  . INSTITUTIONAL MARKET.  We see enormous opportunity in the fact that only 9
percent of U.S. companies with fewer than 100 employees have 401(k) plans. Our
Diamond 401(k) plan, with its standard features, overcomes the primary barrier
of cost. Diamond plan sales nearly doubled last year almost exclusively on
referrals from business banking. We've only begun to tap the cross-selling
potential of FBS's deep regional penetration in the business banking market. We
have begun marketing our ability to customize the Diamond program to appeal to
larger companies, those with up to 1,500 employees. We also are strengthening
our distribution system by training business bankers to sell the Diamond plan,
doubling our sales force, and developing aggressive marketing and advertising
campaigns.

INVESTMENT PERFORMANCE: A COMPETITIVE ADVANTAGE  

Despite the dismal year in 1994 for the mutual fund industry, all 12 First
American Investment Funds with a track record of longer than one year
outperformed their peer group average. Nine of those funds ranked among the top
20 percent of their investment category, according to Lipper Analytical
Services, Inc. In addition, our core institutional equity product has
outperformed the Standard & Poor's Index of 500 stocks over the past one, three
and five years. Superior investment performance and a diverse range of
investment styles give us a distinct competitive advantage over other asset
managers.

NET INCOME (Millions)
NONINTEREST INCOME (Millions)

                [THESE PERFORMANCE GRAPHS APPEAR ON THIS PAGE]

                                                                           13
                                                                           --

<PAGE>



MANAGEMENT'S DISCUSSION AND ANALYSIS

Overview
- --------

EARNINGS SUMMARY - First Bank System, Inc. (the "Company") reported net income
in 1994 of $419.8 million ($3.57 per share), an increase of $121.8 million, or
40.9 percent, from 1993. Net income for 1993 of $298.0 million ($2.39 per share)
included after-tax merger-related charges of $50.0 million ($.44 per share)
recorded in connection with the acquisition of Colorado National Bankshares,
Inc. ("CNB"). Earnings in 1994 increased $71.8 million, or 20.6 percent, from
1993, excluding merger-related charges. Net income for 1992 of $311.8 million
($2.67 per share) included after-tax merger-related charges of $81.8 million
($.78 per share) related to the acquisitions of Western Capital Investment
Corporation ("WCIC") and Bank Shares Incorporated ("BSI"), in addition to $157.3
million of income related to the cumulative effect of changes in accounting
principles.

  Return on average common equity increased to 19.3 percent in 1994 from 13.8
percent in 1993 and return on average assets increased to 1.63 percent from 1.17
percent for the same periods. Excluding merger-related charges, return on
average common equity was 16.4 percent and return on average assets was 1.36 in
1993. The efficiency ratio improved to 57.2 percent in 1994 from 59.8 percent in
1993, excluding merger-related charges.

  The improvement in earnings reflects increases in net interest income on a
taxable-equivalent basis of $59.3 million, or 5.2 percent, and noninterest
income of $58.4 million, or 10.3 percent, together with a reduction in provision
for credit losses of $32.2 million, or 25.7 percent, and controlled noninterest
expense growth of $24.8 million, or 2.4 percent (excluding merger-related
charges in 1993). Compared with noninterest expense for 1993, adjusted to
include the operations of Boulevard Bancorp, Inc. ("Boulevard") and the acquired
corporate trust unit of J.P. Morgan and Co., Incorporated, ("J.P. Morgan") on a
pro forma basis, noninterest expense in 1994 declined $33.2 million, or 3.1
percent. For further information on the specific components of the 1994
operating results, see the "Statement of Income Analysis" on page 18.

  Nonperforming assets dropped to $153.0 million at December 31, 1994, a
decrease of $73.0 million, or 32.3 percent, from December 31, 1993, despite the
addition of $29.3 million in nonperforming assets from the acquisition of
Boulevard in the first quarter of 1994. The ratio of the allowance for credit
losses to nonperforming loans increased to 385 percent, from 269 percent at
December 31, 1993.

ACQUISITIONS - On January 24, 1995, the Company issued approximately 21.7
million shares in connection with the acquisition of Metropolitan Financial
Corporation ("MFC"), a regional financial services holding company headquartered
in Minneapolis, Minnesota. As of December 31, 1994, MFC had approximately $7.9
billion in assets, $5.5 billion in deposits and 211 offices principally in North
Dakota, Minnesota, Nebraska, lowa, Kansas, South Dakota, Wisconsin, and Wyoming.
The transaction will be accounted for as a pooling-of-interests.

  On September 2, 1994, the Company completed the acquisition of the domestic
corporate trust business of J. P. Morgan. This business unit provides trust
services for approximately 650 clients with 3,800 bond issues in the areas of
municipal, revenue, housing and corporate bond indenture trusteeships.

  On March 25, 1994, the Company completed the acquisition of Boulevard Bancorp,
Inc., a commercial bank holding company based in Chicago, Illinois, with $1.6
billion in assets and $1.2 billion in deposits. The Company exchanged
approximately 6.2 million shares of its common stock for all of the outstanding
common stock of Boulevard and accounted for the transaction as a purchase. The
Company also repurchased existing shares of its common stock approximately equal
to the number of shares issued at the time of closing of the Boulevard
acquisition.



14  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
TABLE 1.  Selected Financial Data


<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)                            1994       1993       1992       1991      1990
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>        <C>        <C>        <C>       <C>
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis).........................  $1,209.9   $1,150.6   $1,017.8   $ 941.2   $ 872.7
Provision for credit losses............................................      93.0      125.2      183.4     202.2     215.4
                                                                         --------------------------------------------------
  Net interest income after provision for credit losses................   1,116.9    1,025.4      834.4     739.0     657.3
Noninterest income.....................................................     628.0      569.6      535.7     497.7     437.6
Merger-related charges (including $26.4 related to ORE in 1992)........         -       72.2      110.4         -         -
Other noninterest expense..............................................   1,053.1    1,028.3    1,003.9     969.3     981.0
                                                                         --------------------------------------------------
  Income before income taxes and cumulative effect
    of changes in accounting principles................................     691.8      494.5      255.8     267.4     113.9
Taxable-equivalent adjustment..........................................      15.1       17.7       22.7      34.4      48.1
Income taxes...........................................................     256.9      178.8       78.6      25.9       8.5
                                                                         --------------------------------------------------
  Income before cumulative effect of changes in accounting principles..     419.8      298.0      154.5     207.1      57.3
Cumulative effect of changes in accounting principles..................         -          -      157.3         -         -
                                                                         --------------------------------------------------
  Net income...........................................................  $  419.8   $  298.0   $  311.8   $ 207.1   $  57.3
                                                                         ==================================================
Return on average assets...............................................      1.63%      1.17%      1.32%      .90%      .22%
Return on average common equity........................................      19.3       13.8       16.4      13.1       2.7
Net interest margin....................................................      5.28       5.07       4.85      4.50      3.70
Efficiency ratio.......................................................      57.2       64.0       71.8      67.8      75.1
Efficiency ratio, excluding merger-related charges.....................      57.2       59.8       64.7      67.8      75.1

PER SHARE DATA:
Primary income before cumulative effect of accounting changes..........  $   3.57   $   2.39   $   1.18   $  1.79   $   .36
  Cumulative effect of accounting changes..............................         -          -       1.49         -         -
                                                                         --------------------------------------------------
Primary net income.....................................................  $   3.57   $   2.39   $   2.67   $  1.79   $   .36
                                                                         ==================================================
Fully diluted income before cumulative effect of accounting changes....  $   3.52   $   2.38   $   1.21   $  1.78   $   .36
  Cumulative effect of accounting changes..............................         -          -       1.43         -         -
                                                                         --------------------------------------------------
  Fully diluted net income.............................................  $   3.52   $   2.38   $   2.64   $  1.78   $   .36
                                                                         ==================================================
Common dividends paid*.................................................  $   1.16   $   1.00   $    .88   $   .82   $   .82
                                                                         --------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Total loans............................................................  $ 18,562   $ 17,756   $ 16,257   $16,341   $18,104
Total earning assets...................................................    22,901     22,695     20,983    20,916    23,597
Total assets...........................................................    25,762     25,575     23,592    23,075    25,856
Total deposits.........................................................    19,142     20,347     18,774    18,215    19,564
Long-term debt.........................................................     1,232        913        927     1,214     1,652
Common equity..........................................................     2,121      1,957      1,720     1,402     1,246
Total shareholders' equity.............................................     2,252      2,305      2,099     1,684     1,510

YEAR-END BALANCE SHEET DATA:
Total loans............................................................  $ 19,281   $ 18,779   $ 17,076   $16,365   $16,829
Total assets...........................................................    26,219     26,385     26,625    23,851    24,804
Total deposits.........................................................    18,791     21,031     21,188    19,145    19,378
Long-term debt.........................................................     1,483      1,015        822       948     1,506
Common equity..........................................................     2,169      1,979      1,939     1,474     1,336
Total shareholders' equity.............................................     2,275      2,245      2,318     1,852     1,600
                                                                         --------------------------------------------------
</TABLE>


*Dividends per share have not been restated for the WCIC or CNB mergers. CNB
paid common dividends of $3.2 million in 1992 ($.28 per CNB share), and $1.8
million in 1991 and 1990 ($.16 per CNB share). WCIC did not pay dividends in the
years shown.

                                   First Bank System, Inc. and Subsidiaries   15
                                                                              --


<PAGE>


 
  The Company completed the acquisition of four additional institutions and
announced the planned acquisition of a fifth in markets in which the Company has
an existing presence, serving to strengthen the Company's retail banking market
shares in these communities. On October 18, 1994, the Company announced an
agreement to acquire First Western Corporation ("FWC"), a $323 million bank
holding company based in Sioux Falls, South Dakota. FWC owns Western Bank, which
has nine branches in South Dakota. The acquisition received regulatory approvals
in January 1995 and is expected to close in the first quarter of 1995. On
February 28, 1994, the Company completed the acquisition of American Bancshares
of Mankato, a $116 million bank holding company. On April 29, 1994, the Company
completed the acquisition of First Financial Investors, Inc., which had
approximately $200 million in assets. The United Bank of Bismarck acquisition,
with approximately $121 million in assets, closed on September 9, 1994. Green
Mountain Bancorporation, Inc., located in Lakewood, Colorado, with approximately
$35 million in assets, was acquired on September 30, 1994. For further
information regarding acquisitions, refer to Note C on page 45.

Line of Business Financial Review
- ---------------------------------

Each of the Company's four business lines -- Retail and Community Banking,
Payment Systems, Commercial Banking, and Trust and Investment Group --
contributed to the strong financial performance in 1994. Compared with 1993
results, before merger-related expenses, earnings increases for the four
business lines were 28.6 percent, 32.7 percent, 7.9 percent, and 3.6 percent,
respectively. Each business line made significant productivity improvements, as
measured by its efficiency ratio, and includes the operating results of
Boulevard since its acquisition date.

  The Company's business unit profitability reporting system derives business
line results by specifically attributing most assets, deposits and income
statement items to a business line. The Company's internal Funds Transfer
Pricing system allocates a standard cost for funds used or credit for funds
provided to all business line assets and liabilities using a matched funding
concept. Expenses which directly support business line operations are charged to
the business lines based on a standard unit cost and actual volume measurements.
Expenses that indirectly support the business line operations, as well as the
expenses of those departments that primarily support the holding company, are
allocated based on the ratio of the business line's noninterest expense to total
consolidated noninterest expense. The Company calculates business line income
taxes based upon the consolidated effective tax rate.

  The business unit profitability system allocates capital based upon credit,
operational and business risks. Asset components subject to credit risk are
assigned risk factors based upon historic loss experience after taking into
consideration changes in business practice which may introduce more or less risk
into the portfolio. Capital is assigned to certain lines of business, such as
the Trust and Investment Group, which have no significant balance sheet
components, after taking into consideration operational risk, capital levels of
independent organizations operating similar businesses and regulatory minimum
requirements. Management accounting system enhancements or product line changes
may affect designations, assignments, and allocations from time to time. During
1994 certain methodologies were changed, and accordingly, results for 1993 have
been restated to conform to the current presentation basis.

RETAIL AND COMMUNITY BANKING - Retail and Community Banking, which includes
consumer, small business and middle market banking services, and residential
mortgage lending, achieved strong revenue growth while containing costs. Net
income increased 28.6 percent to $177.0 million in 1994, with a return on assets
of 1.15 percent compared with .88 percent in 1993. Return on equity increased to
14.9 percent from 12.7 percent for the previous year.




16  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

TABLE 2.  Line of Business Financial Performance


<TABLE>
<CAPTION>
                                 Retail and                                                 Trust and
                                  Community            Payment          Commercial         Investment           Consolidated
                                   Banking             Systems            Banking             Group                Company
                             -----------------------------------------------------------------------------------------------------
(Dollars in Millions)          1994       1993      1994     1993      1994     1993      1994     1993        1994         1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>        <C>       <C>       <C>      <C>       <C>      <C>       <C>      <C>            <C>
CONDENSED INCOME STATEMENT:
Net interest income
 (taxable-equivalent basis)   $ 780.5   $ 743.9    $184.7   $147.7    $218.5   $227.3    $ 26.2   $ 31.7       $1,209.9   $1,150.6
Provision for credit losses      20.6      42.8      69.4     61.9       3.0     20.5         -        -           93.0      125.2
Noninterest income.........     187.1     179.1     195.7    157.2      59.5     60.3     185.7    173.0          628.0      569.6
Noninterest expense*.......     655.3     656.3     158.5    129.2      89.1     97.0     150.2    145.8        1,053.1    1,028.3
Income taxes and
 taxable-equivalent
 adjustment                     114.7      86.3      59.9     44.0      73.1     65.6      24.3     22.8          272.0      218.7
                             -----------------------------------------------------------------------------------------------------
Income before
 merger-related charges....   $ 177.0   $ 137.6    $ 92.6   $ 69.8    $112.8   $104.5    $ 37.4   $ 36.1          419.8      348.0
                             ================================================================================                     
Merger-related charges                                                                                                            
 (after tax)...............                                                                                           -       50.0
                                                                                                             ---------------------
    Net income.............                                                                                    $  419.8   $  298.0
                                                                                                             =====================
AVERAGE BALANCE SHEET DATA:
Commercial loans...........   $ 4,755   $ 4,172    $  505   $  255    $4,842   $4,902    $    -   $    -       $ 10,102   $  9,329
Consumer loans.............     6,406     6,694     2,054    1,733         -        -         -        -          8,460      8,427
Assets.....................    15,417    15,676     3,274    2,649     6,233    6,516       838      734         25,762     25,575
Deposits...................    15,905    16,720        26       16     2,299    2,692       912      919         19,142     20,347
Common equity                   1,191     1,087       320      283       437      456       173      131          2,121      1,957
                             -----------------------------------------------------------------------------------------------------
Return on average assets*        1.15%      .88%     2.83%    2.63%     1.81%    1.60%  **        **               1.63%      1.36%
Return on average common
 equity*...................      14.9      12.7      28.9     24.7      25.8     22.9      21.6%    27.6%          19.3       16.4
Efficiency ratio*..........      67.7      71.1      41.7     42.4      32.1     33.7      70.9     71.2           57.2       59.8
                             =====================================================================================================
</TABLE>


 *Excluding merger-related charges
**Not meaningful
  Note:  Preferred dividends are not allocated to the business lines.


  Both revenue growth and cost savings contributed to the improved earnings. The
increases in net interest income and noninterest income are attributable to
strong home equity loan promotions, aggressive small- and middle-market business
lending, and growth in mutual fund sales. The decline in average consumer loans
reflects the run off of residential mortgage loans of $204 million and the
reduction in residential mortgages held for sale of $595 million. The decrease
in the provision for credit losses reflects improved credit quality. Noninterest
expense decreased slightly, despite the acquisition of Boulevard in the first
quarter of 1994. The efficiency ratio improved to 67.7 percent in 1994 from 71.1
percent in 1993.

PAYMENT SYSTEMS - Payment Systems, which includes consumer credit card,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing, achieved net earnings
of $92.6 million in 1994, up 32.7 percent over 1993. Return on assets increased
to 2.83 percent from 2.63 percent in 1993. Return on equity increased to 28.9
percent from 24.7 percent for the previous year.

  The strong growth in earnings is due to higher net interest income and
noninterest income, partially offset by increases in the provision for credit
losses and noninterest expense. The increases in net interest income and fee-
based noninterest income are attributable to growth in the Corporate Card, the
Purchasing Card, the Northwest Airlines WorldPerks credit card, and merchant
processing. The increase in the provision for credit losses reflects growth in
the loan portfolios and an acceleration of the timing of charge-offs for fraud
losses on credit card and other consumer loan balances. Noninterest expense
increased due to the overall growth in the sales volumes and number of products
offered by this business line. Payment Systems continues to be cost effective as
measured by its efficiency ratios of 41.7 percent in 1994 and 42.4 percent in
1993.



                                 First Bank System, Inc. and Subsidiaries  17
                                                                           --

<PAGE>



COMMERCIAL BANKING - Commercial Banking, which provides lending, treasury
management, and other financial services to middle market, large corporate, and
mortgage banking companies, contributed net earnings of $112.8 million in 1994,
a 7.9 percent increase over 1993. Return on assets rose to 1.81 percent in 1994
from 1.60 percent in 1993. Similarly, return on equity increased to 25.8 percent
in 1994 from 22.9 percent in the previous year.

  The earnings increase reflects continuing improvement in credit quality and
further reduction of noninterest expense. Commercial Banking's average loans,
excluding loans to mortgage banking companies, increased $319 million, or 9.0
percent from 1993. The efficiency ratio improved to 32.1 percent compared with
33.7 percent in 1993.

TRUST AND INVESTMENT GROUP - Net income for the Trust and Investment Group,
which includes personal, institutional and corporate trust services, investment
management services, and a full-service brokerage company, increased 3.6
percent to $37.4 million in 1994. The return on average equity declined to 21.6
percent in 1994 from 27.6 percent in 1993 due to additional equity assigned to
the business line for 1994 acquisitions.

  Much of the gain resulted from stronger noninterest income, which increased
primarily due to growth in corporate trust, investment sales and management
fees. Assets under management totaled $24.5 billion at year-end 1994, up from
$21.6 billion at the previous year-end. Net interest income decreased,
reflecting a reduction in balances from mortgage custody accounts. The increase
in noninterest expense reflects costs associated with recent acquisitions;
however, the efficiency ratio improved to 70.9 percent in 1994 from 71.2 percent
in 1993.

Statement of Income Analysis
- ----------------------------

NET INTEREST INCOME - Net interest income on a taxable-equivalent basis was
$1.21 billion in 1994, compared with $1.15 billion in 1993 and $1.02 billion in
1992. The improvement in net interest income reflects increases in average loan
yields and average loan balances. The average yield on loans for 1994 was 8.19
percent, or 25 basis points higher than the average yield of 7.94 percent in
1993, reflecting the rising rate environment which increased rates on variable
rate loans. Average loans totaled $18.6 billion in 1994, an increase of $806
million, or 4.5 percent, from 1993, reflecting significant growth in both
consumer and commercial loans, partially offset by decreases in the balance of
loans to mortgage bankers and residential first mortgage loans. Excluding these
first mortgage-related balances, average loans for the year increased by $2.0
billion, or 15.7 percent from 1993, reflecting increases in credit cards, home
equity loans, and consumer lines of credit, as well as small business
and middle-market commercial loans, including loans acquired with Boulevard.
The average balance of interest-bearing liabilities in 1994 increased $574
million, or 3.6 percent, over 1993, as short-term borrowings replaced
noninterest-bearing deposits related to loans to mortgage bankers.

  The improvement in net interest income from 1992 to 1993 reflects increases in
average earning assets of $1.7 billion, or 8.2 percent, and average noninterest-
bearing deposits of $1.6 billion, or 33.4 percent. The increases in earning
assets and noninterest-bearing deposits were largely a result of the Bank Shares
Incorporated ("BSI") acquisition, higher production in residential mortgage
banking and increases in secured loans to mortgage banking companies. The
decline in nonperforming assets also contributed to the growth in net interest
income in both years.



















18  First Bank System, Inc. and Subsidiaries 
- --

<PAGE>



TABLE 3.  Analysis of Net Interest Income

<TABLE> 
<CAPTION> 
(Dollars in Millions)                                                        1994       1993       1992
- --------------------------------------------------------------------------------------------------------
<S>                                                                      <C>        <C>        <C>
Net interest income (taxable-equivalent basis).......................    $1,209.9   $1,150.6   $1,017.8
                                                                         ===============================
Average balances of earning assets supported by:
  Interest-bearing liabilities.......................................    $ 16,688   $ 16,114   $ 15,997
  Noninterest-bearing liabilities....................................       6,213      6,581      4,986
                                                                         -------------------------------
    Total earning assets.............................................    $ 22,901   $ 22,695   $ 20,983
                                                                         ===============================
Average yields and weighted average rates (taxable-equivalent basis):
  Earning assets yield...............................................        7.69%      7.40%      8.12%
  Rate paid on interest-bearing liabilities..........................        3.31       3.28       4.29
                                                                        --------------------------------
Gross interest margin................................................        4.38%      4.12%      3.83%
                                                                        ================================
Net interest margin..................................................        5.28%      5.07%      4.85%
                                                                        ================================
Net interest margin without taxable-equivalent increments............        5.22%      4.99%      4.74%
                                                                        ================================
</TABLE>


  The net interest margin, on a taxable-equivalent basis, was 5.28 percent in
1994, an increase of 21 basis points from 5.07 percent in 1993 and 43 basis
points from 4.85 percent in 1992. The improvement in the net interest margin in
1994 over 1993 resulted from both a shift in the mix of loans and increases in
the reference rate on variable-rate loans. There was a decrease in lower-margin
mortgage-related loans and an increase in higher yield consumer and commercial
loans. The improvement from 1992 to 1993 is attributable to two factors having
approximately equal effects on the Company's ratios. The Company's balance sheet
mix changed, including a decrease in lower yielding short-term investments and a
shift in the loan portfolio mix toward consumer loans, as a result of the BSI
acquisition, and promotional campaigns for the Company's home equity product. In
addition, cyclical economic factors resulted in lower interest rates, increasing
the level of noninterest-bearing deposits and allowing for wider spreads between
prime rates and short-term funding costs.

TABLE 4.  Changes in Rate and Volume

<TABLE>
<CAPTION>

                                            1994 COMPARED WITH 1993               1993 COMPARED WITH 1992
                                         ---------------------------------------------------------------------
(In Millions)                            Volume    Yield/Rate   Total          Volume    Yield/Rate   Total
- --------------------------------------------------------------------------------------------------------------
<S>                                      <C>       <C>          <C>            <C>       <C>          <C>
Increase (decrease) in:
  Interest income:
    Loans...........................     $ 65.2    $ 44.7       $109.9         $126.0    $(151.5)     $ (25.5)
    Taxable securities..............       (9.8)     (4.6)       (14.4)          59.5      (27.5)        32.0
    Nontaxable securities...........       (1.9)     (1.1)        (3.0)           3.2        (.3)         2.9
    Federal funds sold and
      resale agreements.............      (12.5)      6.7         (5.8)         (17.3)      (5.5)       (22.8)
    Other...........................       (2.7)     (1.3)        (4.0)         (12.5)       1.4        (11.1)
                                         ---------------------------------------------------------------------
      Total.........................       38.3      44.4         82.7          158.9     (183.4)       (24.5)
  Interest expense:
    Savings deposits and time
      deposits less than $100,000...      (16.4)    (22.6)       (39.0)           9.2     (123.9)      (114.7)
    Time deposits over $100,000.....      (14.5)      2.9        (11.6)         (17.6)     (12.7)       (30.3)
    Short-term borrowings...........       49.8       9.1         58.9            7.1       (7.7)         (.6)
    Long-term debt..................       18.1      (3.0)        15.1           (1.0)     (10.7)       (11.7)
                                         ---------------------------------------------------------------------
      Total.........................       37.0     (13.6)        23.4           (2.3)    (155.0)      (157.3)
                                         ---------------------------------------------------------------------
    Increase (decrease) in net
      interest income...............     $  1.3       $ 58.0    $ 59.3         $161.2    $ (28.4)     $ 132.8
                                         =====================================================================
</TABLE>


This table shows the components of the change in net interest income by volume
and rate on a taxable-equivalent basis. The effect of changes in rates on volume
changes is allocated based on the percentage relationship of changes in volume
and changes in rate. This table does not take into account the level of
noninterest-bearing funding, nor does it fully reflect changes in the mix of
assets and liabilities.


                                 First Bank System, Inc. and Subsidiaries  19
                                                                           --

<PAGE> 
 
 


PROVISION FOR CREDIT LOSSES - The provision for credit losses was $93.0 million
in 1994, down $32.2 million from the provision of $125.2 million in 1993, and
$90.4 million from the provision of $183.4 million in 1992. Improved credit
quality caused the decrease in the provision. Nonperforming assets declined to
$153.0 million at December 31, 1994, from $226.0 million at December 31, 1993,
and $412.1 million at December 31, 1992. Net charge-offs declined to $104.6
million in 1994 from $150.0 million in 1993, and $203.1 million in 1992.
Included in the 1992 provision for credit losses is a merger-related provision
of $13.6 million related principally to the Company's valuation of WCIC's $70
million mobile home loan portfolio.

NONINTEREST INCOME - Noninterest income was $628.0 million in 1994, compared
with $569.6 million in 1993, an increase of $58.4 million, or 10.3 percent.
Noninterest income was $535.7 million in 1992. The increases in both 1994 and
1993 were primarily due to higher credit card and trust fees. Credit card and
trust fees increased $55.0 million, or 19.4 percent, from 1993. From 1992 to
1993, these fees increased by $38.5 million, or 15.7 percent.

  Credit card fees were $179.0 million in 1994, up $41.9 million, or 30.6
percent, from $137.1 million in 1993. Credit card fees in 1993 were up $20.2
million, or 17.3 percent higher than 1992 credit card fees which totaled $116.9
million. Most of the 1994 increase in credit card fees is attributable to
increased volumes for the Company's payment systems products, including the
Corporate Card, the Purchasing Card, the Northwest Airlines WorldPerks credit
card, and merchant processing. Most of the 1993 increase is attributable to
increased volumes for the Corporate Card product.

  Trust fees in 1994 were $159.2 million, up $13.1 million, or 9.0 percent, from
$146.1 million in 1993. Trust fees in 1994 reflect growth in corporate and
institutional trust fees, including income from the March acquisition of
Boulevard and the September acquisition of the domestic corporate trust business
of J.P. Morgan. Trust fees in 1993 increased $18.3 million, or 14.3 percent,
from $127.8 million in 1992. Trust fees for 1993 reflect growth from the BSI
acquisition and the corporate trust business units purchased from U.S. Bancorp
in March of 1993 and Bankers Trust Company of California in July of 1992. Trust
assets under management were $24.5 billion at December 31, 1994, compared with
$21.6 billion in 1993 and $19.1 billion in 1992.

  Service charges on deposit accounts totaled $115.6 million in 1994, compared
with $115.3 million in 1993 and $108.4 million in 1992.

TABLE 5.  Noninterest Income


<TABLE> 
<CAPTION>                   
(Dollars in Millions)                                        1994     1993    1992
- ------------------------------------------------------------------------------------
<S>                                                         <C>      <C>     <C>
Credit card fees........................................    $179.0   $137.1  $116.9
Trust fees..............................................     159.2    146.1   127.8
Services charges on deposit accounts....................     115.6    115.3   108.4
Insurance commissions...................................      23.8     20.9    27.3
Trading account profits and commissions.................       9.3     10.1    10.5
Securities gains (losses)...............................      (3.8)      .3     1.9
Other...................................................     144.9    139.8   142.9
                                                            ------------------------ 
  Total noninterest income..............................    $628.0   $569.6  $535.7
                                                            ========================
</TABLE>


  Insurance commissions were $23.8 million in 1994, compared with $20.9 million
in 1993, reflecting increased commission income on annuity sales. In 1992, the
Company decided to reduce its focus on traditional insurance products and
concentrate on other retail and community banking efforts in the regions,
including annuities. The Company sold its Montana insurance agencies in December
1992, and in the first quarter of 1993, the Company sold its Twin Cities Metro
insurance agency.

  Trading account profits were $9.3 million in 1994, down slightly from $10.1
million in 1993 and $10.5 million in 1992. Sales of securities resulted in net
losses of $3.8 million in 1994, and sales of investment securities resulted in
net gains of $.3 million in 1993 and $1.9 million in 1992. Sales of available-
for-sale securities are effected to improve the overall return of the portfolio
through the reinvestment of the proceeds at higher rates.




20  First Bank System, Inc. and Subsidiaries
- --

<PAGE>




  Other noninterest income increased 3.6 percent to $144.9 million in 1994 from
$139.8 million in 1993. Included in 1993 were net charges of approximately $28
million related to the accelerated amortization of mortgage loan servicing
rights due to prepayments in the Company's mortgage servicing portfolio,
partially offset by $11 million in one-time gains from the sale of assets. Other
noninterest income totaled $142.9 million in 1992.

NONINTEREST EXPENSE - Noninterest expense was $1.05 billion, a decrease of $47.4
million, or 4.3 percent, from 1993. Included in 1993 noninterest expense are
merger and integration charges totaling $72.2 million relating to the CNB
acquisition. Noninterest expense in 1992 also included merger-related charges of
$110.4 million associated with the acquisition of WCIC and BSI. These accruals
were made to reflect the disposal of problem assets and to provide for other
merger-related costs.

  Excluding the effects of the 1993 merger-related provisions, noninterest
expense for the year increased $24.8 million, or 2.4 percent. The modest
increase in expenses reflects the addition of the operations of Boulevard and
J.P. Morgan domestic corporate trust business, offset by the benefits realized
through integrating recent acquisitions. Compared with noninterest expense for
1993, adjusted to include the expenses of Boulevard and the acquired corporate
trust business on a pro forma basis and excluding merger-related charges,
noninterest expense for the year declined by $33.2 million, or 3.1 percent.
Excluding merger-related charges, noninterest expense in 1993 increased $24.4
million, or 2.4 percent, from $1.00 billion in 1992 due to the December 31,
1992, acquisition of BSI. Compared with noninterest expense for 1992, adjusted
to include the operations of BSI on a pro forma basis, and excluding merger-
related charges, noninterest expense for 1993 declined $76.7 million, or 6.9
percent. This decline reflects the successful integration of the CNB, WCIC and
BSI acquisitions in 1993.


TABLE 6.  Noninterest Expense


<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Employee Data)                         1994       1993       1992
- ---------------------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>        <C>
Salaries.........................................................   $  395.7   $  389.1   $  388.7
Employee benefits................................................       91.6       86.3       85.5
                                                                    -------------------------------
  Total personnel expense........................................      487.3      475.4      474.2
Net occupancy....................................................       86.3       93.4       87.9
Furniture and equipment..........................................       78.3       72.7       67.2
FDIC insurance...................................................       46.0       46.4       42.2
Advertising......................................................       29.7       20.5       20.0
Amortization of goodwill and other intangible assets.............       39.6       30.6       25.2
Other personnel costs............................................       32.2       27.5       20.2
Professional services............................................       33.8       36.7       38.7
Data processing..................................................       13.9       21.3       22.4
Printing, stationery and supplies................................       20.0       21.9       21.0
Postage..........................................................       19.1       19.4       19.1
Telephone........................................................       21.1       18.7       16.5
Other real estate (includes $26.4 merger-related charge in 1992).       (2.9)       2.2       41.2
Merger and integration...........................................          -       72.2       84.0
Other............................................................      148.7      141.6      134.5
                                                                    -------------------------------
  Total noninterest expense......................................   $1,053.1   $1,100.5   $1,114.3
                                                                    ===============================
Efficiency ratio*................................................       57.2%      64.0%      71.8%
Efficiency ratio, excluding merger-related charges...............       57.2       59.8       64.7
Average number of full-time equivalent employees**...............     11,997     12,300     12,553
Personnel expense per employee...................................   $ 40,619   $ 38,650   $ 37,776
                                                                    ===============================
</TABLE>


*Computed as noninterest expense divided by the sum of net interest income on a
 taxable-equivalent basis and noninterest income net of securities gains and
 losses.


 



                                 First Bank System, Inc. and Subsidiaries  21
                                                                           --

<PAGE>
 


  The efficiency ratio improved to 57.2 percent in 1994 from 59.8 percent in
1993 and 64.7 percent in 1992, excluding merger-related charges. The Company's
efficiency ratio now ranks among the top five banks of its peer group. The keys
to the high productivity are the tight cost control culture throughout the
organization and the successful integration of acquisitions. Each acquisition
completed has been integrated at a progressively faster pace, enabling the
Company to realize substantial cost reductions.

  Salaries and employee benefits expenses in 1994 were $487.3 million, up only
slightly from 1993's total of $475.4 million. Including the operations of
Boulevard and the corporate trust unit of J.P. Morgan on a pro forma basis in
1993, salaries and benefits expense in 1994 decreased $17.6 million, or 3.5
percent. In 1992, salaries and employee benefits expenses were $474.2 million.
Including BSI on a pro forma basis in 1992, salaries and benefits expense in
1993 decreased $36.3 million, or 7.1 percent.

  Net occupancy expense totaled $86.3 million in 1994, a decrease of $7.1
million, or 7.6 percent, from 1993, reflecting efforts to improve productivity
in the Company's distribution network by subleasing excess office space.
Furniture and equipment expense increased $5.6 million, or 7.7 percent, from
1993. This increase included costs associated with acquisitions and recent
investments in communication and data processing technology.

  FDIC insurance premiums remained relatively constant at $46.0 million in 1994,
compared with $46.4 million and $42.2 million in 1993 and 1992, respectively.
The increase in premiums of $4.2 million, or 10.0 percent, during 1993 resulted
from generally higher deposit levels, primarily related to BSI.

  Advertising expense was $29.7 million in 1994, compared with $20.5 million in
1993 and $20.0 million in 1992, reflecting expanded marketing efforts in the
growing consumer asset businesses.

  Amortization of goodwill and other intangible assets was $39.6 million in
1994, $30.6 million in 1993, and $25.2 million in 1992. The increases are
primarily attributable to the additional goodwill and intangible assets
resulting from the Boulevard and J.P. Morgan acquisitions in 1994 and the BSI
and the corporate trust unit acquisitions in 1993 and 1992.

  Other personnel costs were $32.2 million in 1994, $27.5 million in 1993, and
$20.2 million in 1992. The increased use of temporary labor related to system
improvements and conversions caused the increases in both 1994 and 1993.

 The Company recorded merger-related charges of $72.2 million relating to the
CNB acquisition in 1993. The charges relate to the closing of redundant
facilities and consolidation of operations and include $29.7 million in
conversion and required customer communications costs, $22.8 million in
severance, $14.3 million in premises and equipment write-downs, and $5.4 million
in other merger-related costs. Merger-related charges of $84.0 million relating
primarily to the acquisition of WCIC were recorded in 1992. The charges include
$31.2 million in premises and equipment write-downs, $12.6 million in securities
and interest rate swap write-downs, and $40.2 million in severance, system
conversions, and required customer communications costs.

INCOME TAX EXPENSE - The provision for income taxes was $256.9 million in 1994,
compared with $178.8 million in 1993 and $78.6 million in 1992. The increase is
primarily a result of the higher level of taxable income along with a continued
decline in tax-exempt interest income. The provision for 1993 reflects a one
percent increase in the corporate income tax rate, but the effect was partially
offset by the favorable impact of recording the related increase in deferred tax
assets.

  At December 31, 1994, the Company's net deferred tax asset was $220.2 million,
net of valuation allowances of $14.0 million, compared with a net deferred tax
asset of $160.0 million, net of valuation allowances of $19.6 million, at
December 31, 1993. The acquisition of Boulevard caused most of the increase over
last year. In determining that realization of the deferred tax asset was more
likely than not, the Company gave consideration to a number of factors,
including its recent earnings history, its expectations for earnings in the
future and, where applicable, the expiration dates associated with tax
carryforwards. For further information on income taxes, refer to Note L on page
57.

Balance Sheet Analysis
- -----------------------

LOANS - On an aggregate basis, the Company's loan portfolio increased $502
million, or 2.7 percent, to $19.3 billion at year-end 1994 from $18.8 billion at
year-end 1993. An increase of $2.8 billion primarily in the commercial, credit
card, and home equity and second mortgage portfolios was offset by a $2.3
billion decrease in loans to mortgage bankers and residential mortgages.




22  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

<TABLE>
<CAPTION>
TABLE 7.  Loan Portfolio Distribution

                                      1994                1993                1992                1991                1990
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31 (Dollars                   Percent             Percent             Percent             Percent             Percent  
in Millions)                     Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
COMMERCIAL:
 Commercial....................  $ 7,196      37.3%  $ 6,176      32.8%  $ 5,675      33.3%  $ 5,842      35.8%  $ 6,898      41.0%
 Financial institutions........      787       4.1     2,004      10.7     1,132       6.6     1,001       6.1       568       3.4
 Real estate:
  Commercial mortgage..........    1,822       9.4     1,495       8.0     1,539       9.0     1,445       8.8     1,438       8.5
  Construction.................      327       1.7       231       1.2       234       1.4       295       1.8       358       2.1
 HLTs..........................      283       1.5       183       1.0       284       1.7       334       2.0       577       3.4
                                 -------------------------------------------------------------------------------------------------
   Total commercial............   10,415      54.0    10,089      53.7     8,864      52.0     8,917      54.5     9,839      58.4
CONSUMER:
 Residential mortgage..........    2,273      11.8     2,422      12.9     2,568      15.0     2,006      12.3     1,967      11.7
 Residential mortgage held for
  sale.........................      162        .8     1,088       5.8       705       4.1       758       4.6       643       3.8
 Home equity and second
  mortgage.....................    2,199      11.4     1,755       9.3     1,362       8.0       992       6.1       884       5.3
 Credit card...................    2,409      12.5     1,757       9.4     1,782      10.5     1,709      10.4     1,232       7.3
 Revolving credit..............      694       3.6       690       3.7       600       3.5       573       3.5       350       2.1
 Automobile....................      392       2.0       342       1.8       519       3.0       726       4.4     1,124       6.7
 Installment...................      401       2.1       376       2.0       430       2.5       444       2.7       572       3.4
 Student loans held for sale...      336       1.8       260       1.4       246       1.4       240       1.5       218       1.3
                                 -------------------------------------------------------------------------------------------------
   Total consumer..............    8,866      46.0     8,690      46.3     8,212      48.0     7,448      45.5     6,990      41.6
                                 -------------------------------------------------------------------------------------------------
   Total loans.................  $19,281     100.0%  $18,779     100.0%  $17,076     100.0%  $16,365     100.0%  $16,829     100.0%
                                 =================================================================================================
</TABLE>


COMMERCIAL: Commercial loans totaled $7.2 billion at year-end 1994, up $1.0
billion, or 16.5 percent, from year-end 1993. Year-end 1993 commercial loans
were $6.2 billion, up $.5 billion, or 8.8 percent from year-end 1992. The
increase in commercial loans includes growth of $583 million in small and middle
market business lending and $250 million in the Corporate Payment System which
issues Visa corporate, business and purchasing cards to businesses.

  At December 31, 1994, the significant industry groups based on commercial
loans outstanding were consumer product manufacturers (29 percent), service
industries, including both business and consumer services (26 percent), and
wholesalers (20 percent). This mix is similar to those in 1993 and 1992.

  The geographical distribution of the commercial portfolio is concentrated in
the Company's operating region, with approximately 80 percent of amounts
outstanding to borrowers located in Minnesota, Colorado, Wisconsin, Illinois,
Montana, North Dakota, and South Dakota.

FINANCIAL INSTITUTIONS: The portfolio of loans to financial institutions dropped
to $.8 billion at December 31, 1994, from $2.0 billion at December 31, 1993, and
$1.1 billion at December 31, 1992. The significant decrease from prior years is
attributable to the cyclical nature of the Company's secured loans to mortgage
banking firms. The mortgage banking firms' loan volume has decreased due to a
decline in refinancings related to a rise in market interest rates.

  The financial institutions group provides financing to customer institutions
headquartered throughout the United States. Many of these institutions originate
residential mortgages on a national basis. The Company secures these loans
primarily with first liens on single family residences.

COMMERCIAL REAL ESTATE: The Company's portfolio of commercial real estate
mortgages and construction loans grew approximately $400 million to $2.1 billion
at December 31, 1994, compared with $1.7 billion at December 31, 1993, and $1.8
billion at December 31, 1992. The Company has seen increased activity in
commercial real estate loans as market prices stabilized and vacant space
declined, allowing more projects to meet the Company's high credit standards.


                                    First Bank System, Inc. and Subsidiaries  23
                                                                              --


<PAGE>
 
     Commercial mortgages outstanding were $1.8 billion at December 31, 1994,
compared with $1.5 billion at December 31, 1993. Real estate construction loans
outstanding at December 31, 1994, totaled $327 million, compared with $231
million from year-end 1993. The Company maintains the real estate construction
designation on a loan until the project is producing sufficient cash flow to
service traditional mortgage financing, at which time the loan is transferred to
the commercial mortgage portfolio. Approximately $23 million of construction
loans were transferred to the commercial mortgage portfolio in 1994.

     The Company's commercial real estate mortgages and construction loans had
combined unfunded commitments of $355 million at December 31, 1994, and $206
million at December 31, 1993. At year-end 1994, real estate interests secured
$176 million of tax-exempt industrial development loans and commitments and $295
million of standby letters of credit. At year-end 1993, these exposures totaled
$218 million and $301 million, respectively. Table 8 shows the breakdown of
these real estate exposures by property type and geographic location.

TABLE 8.  Commercial Real Estate Exposure by Property Type and Geography


<TABLE> 
<CAPTION> 
                                         Percentage of Total
                                           at December 31
                                         -------------------
PROPERTY TYPE                                1994    1993
- ------------------------------------------------------------
<S>                                         <C>     <C> 
Mixed-use office........................     19.3%   18.0%
Retail..................................     18.8    15.0
Office building.........................     17.2    14.6
Multi-family............................     10.9    11.3
Hotel/motel.............................      5.8     6.0
Single-family residential...............      5.2     5.4
Land....................................      2.3     2.5
Other, primarily owner-occupied.........     20.5    27.2
                                         -------------------
                                            100.0%  100.0%
                                         -------------------

GEOGRAPHY
- ------------------------------------------------------------
Minnesota...............................     31.2%   32.5%
Colorado................................     23.8    28.0
Montana, North Dakota and South Dakota..     11.9    11.8
Wisconsin...............................     10.5    12.8
Illinois................................      5.3      .4
                                         -------------------
  Total FBS region......................     82.7    85.5
Other West..............................      8.3     3.7
Southeast...............................      3.1     3.0
Other Southwest.........................      3.0     3.5
Other Midwest...........................      2.6     4.1
Mid-Atlantic............................       .3      .2
                                         -------------------
                                            100.0%  100.0%
                                         -------------------
</TABLE>


     Other real estate totaled $39.9 million at December 31, 1994. These
properties are valued at estimated market value, and year-end 1994 book value
represents approximately 32 percent of the aggregate original investment. In-
substance foreclosures, which are included in the other real estate balance at
year-end 1994, are properties held as collateral over which the Company
possesses economic control due to the borrower's inability to repay the related
loan or rebuild equity in the property. The Company does not possess legal title
to these properties. The adoption of SFAS 114,

24   First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

"Accounting by Creditors for Impairment of a Loan," effective January 1, 1995,
will require the reclassification of certain of the in-substance foreclosure
assets to nonperforming loans. These amounts are not material.
     The Company also finances the operations of real estate developers and
other entities with operations related to real estate. These loans are not
secured directly by real estate and are subject to terms and conditions similar
to commercial loans. These loans are included in the commercial category and
totaled $342 million at December 31, 1994, and $286 million at December 31,
1993.

HIGHLY LEVERAGED TRANSACTIONS: The Company's exposure to commercial loans
involving the buyout, recapitalization or acquisition of an existing business,
called highly leveraged transactions ("HLTs"), remained at relatively low
levels. At December 31, 1994, the Company had HLT outstandings totaling $283
million and was committed under definitive loan agreements to lend an additional
amount of approximately $179 million. Total exposure was $233 million at
December 31, 1993, and $375 million at December 31, 1992. The increase in HLT
originations is consistent with industry and economic trends. The Company
continues to have stringent underwriting criteria and monitoring procedures for
its HLT lending.

CONSUMER: Consistent with the Company's strategy, growth in retail lending is of
continuing importance to the Company. Total consumer loan outstandings were $8.9
billion at December 31, 1994, up $176 million from $8.7 billion at year-end
1993. Excluding a $1.1 billion decrease in first mortgage residential loans and
residential mortgage loans held for sale, the other consumer loans increased
$1.3 billion, or 24.2 percent.
     Home equity and second mortgages increased $444 million, or 25.3 percent,
primarily due to successful promotions. In addition, credit card loans,
including the new Northwest Airlines WorldPerks credit card, grew $652 million,
or 37.1 percent. Revolving credit loans remained relatively constant at $.7
billion at December 31, 1994, and 1993. During 1994, automobile loans increased
$50 million, or 14.6 percent, to $392 million and installment loans increased
$25 million, or 6.6 percent, to $401 million. At December 31, 1994, student
loans totaled $336 million, up $76 million from the prior year.
     The rising interest rate environment in 1994 resulted in decreased activity
in the Company's residential mortgage loan portfolio. Residential mortgage
outstandings decreased $149 million, or 6.2 percent, to $2.3 billion, and
residential mortgages held for sale decreased $926 million, or 85.1 percent.
Loan production was approximately $1.6 billion in 1994, a 76.5 percent decrease
from 1993. Included in 1993 loan production was $3.1 billion related to
correspondent business and $2.0 billion more in refinance business than occurred
in 1994. The Company's decision to exit the correspondent business contributed
to approximately half of the 1994 loan production decline. The effect of this
decision on net income was not material. Table 7 on page 23 shows the breakdown
of the Company's consumer loan portfolio by type of loan.
     Consumer lending is based primarily in the Company's operating region of
Minnesota, Colorado, Montana, North Dakota, South Dakota, Illinois, and
Wisconsin. Of total consumer balances outstanding, approximately 80 percent are
to customers located in the Company's operating region. See page 27 for a
discussion of the general economic conditions within the Company's operating
region.

ALLOWANCE FOR CREDIT LOSSES--At December 31, 1994, the allowance for credit
losses was $433.8 million, compared with an allowance of $423.2 million at year-
end 1993 and $448.0 million at year-end 1992. The ratio of the allowance for
credit losses to nonperforming loans increased to 385 percent at December 31,
1994, from 269 percent at December 31, 1993, and 179 percent at December 31,
1992. For further information on the allowance for credit losses, refer to
"Corporate Risk Profile," beginning on page 27.

SECURITIES--At December 31, 1994, the Company's available-for-sale securities
portfolio was $3.15 billion compared with $3.32 billion at December 31, 1993.
Securities sales and attrition more than offset the growth related to
acquisitions, including the $770 million portfolio acquired with the Boulevard
purchase. The relative mix of the securities portfolio has not changed
significantly from the prior years with U.S. Treasury and mortgage-backed
securities representing the majority of the portfolio.


                                   First Bank System, Inc. and Subsidiaries   25
                                                                              --



<PAGE>
 
TABLE 9.  Available-for-sale Securities Portfolio Average Maturity

<TABLE> 
<CAPTION> 
At December 31, 1994                          Average Maturity
- ---------------------------------------------------------------
<S>                                         <C> 
U.S. Treasury.............................   3 years, 2 months
Other U.S. Agencies.......................   3 years, 0 months
State and Political.......................  14 years, 2 months
Other*....................................   4 years, 7 months
 Total....................................   4 years, 5 months
                                           ====================
</TABLE>
 
*Excludes equity securities which have no stated maturity.

  The average effective life of the holdings is expected to be less than the
average contractual maturities shown in the table because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. The table above does not reflect the average contractual maturity of
mortgage-backed securities.

TABLE 10.  Available-for-sale Securities Portfolio Amortized Cost, Fair Value
           and Yield by Maturity Date

<TABLE> 
<CAPTION> 
MATURING:                            WITHIN 1 YEAR                       1-5 YEARS                     5-10 YEARS
- -----------------------------------------------------------------------------------------------------------------------------
                              Amor-                             Amor-                             Amor-             
At December 31, 1994          tized       Fair                  tized         Fair                tized       Fair    
(Dollars in Millions)          Cost      Value     Yield         Cost        Value     Yield       Cost      Value     Yield
- -----------------------------------------------------------------------------------------------------------------------------
<S>                          <C>        <C>        <C>       <C>          <C>          <C>       <C>        <C>        <C>   
U.S. Treasury..............  $ 61.8     $ 61.5     5.06%     $  892.9     $  863.0     6.24%     $207.2     $173.8     5.22%  
Mortgage-backed            
  securities*..............       -          -        -             -            -        -           -          -        -      
Other U.S. Agencies........    31.0       30.9     5.27         117.4        111.0     5.55        41.8       38.6     6.86    
State and Political***.....     3.1        3.1     7.86          20.1         20.2     9.79        39.2       39.1     9.02   
Other......................    13.6       13.5     5.89          83.7         82.5     7.67        39.9       38.8     6.18 
                           --------------------------------------------------------------------------------------------------
                             $109.5     $109.0     5.30%     $1,114.1     $1,076.7     6.34%     $328.1     $290.3     6.00% 
                           ==================================================================================================
</TABLE>
 

<TABLE> 
<CAPTION>
                                                                    MORTGAGE-BACKED
MATURING:                            OVER 10 YEARS                     SECURITIES                         TOTAL   
- -----------------------------------------------------------------------------------------------------------------------------
                              Amor-                             Amor-                             Amor-             
At December 31, 1994          tized       Fair                  tized         Fair                tized       Fair    
(Dollars in Millions)          Cost      Value     Yield         Cost        Value     Yield       Cost      Value     Yield
- -----------------------------------------------------------------------------------------------------------------------------
<S>                          <C>        <C>        <C>       <C>          <C>          <C>       <C>        <C>        <C>   
U.S. Treasury..............  $    -     $    -        -%     $      -     $      -        -%   $1,161.9   $1,098.3     6.00%
Mortgage-backed            
  securities*..............       -          -        -       1,497.4      1,414.3     6.47     1,497.4    1,414.3     6.47
Other U.S. Agencies........      .6         .6     9.51             -            -        -       190.8      181.1     5.81
State and Political***.....   112.8      116.0    11.35             -            -        -       175.2      178.4    10.59
Other......................   137.6      141.4     6.86**           -            -        -       274.8      276.2     7.04**
                           --------------------------------------------------------------------------------------------------
                             $251.0     $258.0    10.81%**   $1,497.4     $1,414.3     6.47%   $3,300.1   $3,148.3     6.51%**
                           ==================================================================================================
</TABLE>
 
  *Adjustable rate mortgage securities (ARMs) represent 46% of the balance of
   mortgage-backed securities.
 **Excludes equity securities which have no stated yield.
***Yields on state and political obligations that are not subject to federal
   income tax have been adjusted to taxable-equivalent using a 35% tax rate.

  Trading account assets are purchased for resale to customers. Trading account
assets consist primarily of securities of the U.S. Treasury and its agencies,
state and political subdivisions, and short-term obligations of banks. Other
earning assets consist of federal funds sold, reverse repurchase agreements,
deposits with banks, and equity securities that do not have readily determinable
fair values. Trading account and other earning assets averaged $.6 billion in
1994 compared with $1.0 billion in 1993.

DEPOSITS - Noninterest-bearing deposits averaged $6.1 billion in 1994, down $359
million from the 1993 average of $6.4 billion. The decrease in noninterest-
bearing deposits resulted from reduced loan production at mortgage banking firms
that generate noninterest-bearing deposits.

  Average interest-bearing deposits include certificates of deposit, savings
certificates, and money market and interest checking products. These deposits
averaged $13.1 billion in 1994 compared with $13.9 billion in 1993. The
relatively low market interest rate environment throughout 1994 caused deposits
to decline.

SHORT-TERM BORROWINGS - Short-term borrowings, which include federal funds
purchased, securities sold under agreements to repurchase and other short-term
borrowings, averaged $2.4 billion in 1994, or $1.1 billion more than in the
prior year. These borrowings were obtained at competitive rates during 1994 and
replaced the lower level of deposits in 1994.

LONG-TERM DEBT - Intermediate- and long-term debt averaged $1.2 billion in 1994,
up from $913 million in 1993. In October 1994, First Bank National Association
("FBNA"), the Company's lead bank, completed a $100 million subordinated debt
issuance in the form of 10-year noncallable notes. The notes were priced at 8.35
percent, or 70 basis points over the 10-year Treasury note. In June 1994, the
Company placed $100 million in subordinated debt in the form of 10-year
noncallable notes. The notes

26  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 


were priced at 7.55 percent, or 64 basis points over the 10-year Treasury note.
During 1993, the Company placed three $100 million subordinated debt issuances.

  Medium-term notes outstanding totaled $514 million at December 31, 1994,
compared with $248 million at December 31, 1993. During 1994, the Company issued
$355 million of medium-term notes with maturities of one to three years and $50
million of notes with maturities of less than one year. Maturities and
retirement of medium-term notes during 1994 totaled $139 million.

Corporate Risk Profile
- ----------------------

OVERALL RISK PROFILE - Managing risk is an essential part of the operation of a
financial services institution. The most prominent risk exposures are credit
quality, interest rate sensitivity and liquidity risk. Credit quality risk
involves the risk of either not collecting interest when it is due or not
receiving the principal balance of the loan or investment when it matures or
otherwise is due. Interest rate sensitivity risk is the risk of reduced net
interest income because of differences in the repricing characteristics of
assets and liabilities, as well as the change in the market value of assets and
liabilities as interest rates fluctuate. Liquidity risk is the risk that the
Company will not be able to fund its obligations and is largely a function of
how effectively the Company manages its other risks.

CREDIT MANAGEMENT - The Company continued to maintain its high level of credit
quality in 1994. Nonperforming assets declined for the fifth consecutive year
during 1994, reflecting the Company's disciplined credit culture characterized
by individual lender accountability and prudent credit policies, the reduced
risk profile of the loan portfolio, and improved economic conditions in the
Company's lending region. The ratio of nonperforming assets to loans plus other
real estate declined to .79 percent at year-end 1994 from 1.20 percent at year-
end 1993 and 2.39 percent at year-end 1992. The risk reduction in the portfolio
is a result of the Company's focus on middle market lending in its region and a
shift toward more consumer lending. Consistent with the Company's strategy, the
acquisitions made during the past three years have enhanced middle market and
consumer loan portfolios. The ratio of the allowance for credit losses to
nonperforming loans increased to 385 percent indicating strong reserve coverage.
This coverage ratio was 269 percent at year-end 1993 and 179 percent at year-end
1992.

  In evaluating credit risk, the Company takes into consideration the
composition of its loan portfolio, its level of allowance coverage,
macroeconomic concerns such as the level of debt outstanding in the public and
private sectors, the effects of domestic and international economic conditions,
regional economic conditions, and other issues.

  The Company's credit management process includes central credit policy and
administration functions and standard underwriting criteria for specialized
lending categories, such as mortgage banking, real estate construction, and
consumer credit. Regular credit examinations conducted by the credit
administration function support the Company's credit management process.
Quarterly, management reviews large loans and all loans experiencing
deterioration of credit quality. A standard credit scoring system is used to
assess consumer credit risks and to price consumer products relative to their
assigned risk rating.

  The Company operates principally in Minnesota, Colorado, Illinois, Montana,
Wisconsin, North Dakota, and South Dakota. Most economic indicators in the
Company's operating regions compare favorably with national indicators.
Approximately 60 percent of the Company's loan portfolio consists of extensions
of credit to companies and consumers in Minnesota and Colorado. According to
federal and state government agencies, unemployment rates in Minnesota and
Colorado were 3.5 percent and 3.3 percent, respectively, compared to the
national unemployment rate of 5.1 percent at December 31, 1994. Through
September 30, 1994, the national foreclosure rate was .92 percent, compared with
.58 percent in Minnesota and .36 percent in Colorado.

  The Company engages in various non-lending activities which may give rise to
credit risk, including interest rate swap contracts, foreign exchange
transactions for the benefit of customers, and the processing of credit card
transactions for merchants' activities. These activities are subject to the same
credit review, analysis and approval processes as those applied to commercial
loans. For additional information on the Company's interest rate swap positions
see "Interest Rate Risk Management" on page 31.





                                First Bank System, Inc. and Subsidiaries  27
                                                                          --

<PAGE>
 
TABLE 11. Summary of Allowance for Credit Losses


<TABLE> 
<CAPTION> 
(Dollars in Millions)                                 1994    1993    1992    1991    1990
- --------------------------------------------------------------------------------------------
<S>                                                  <C>     <C>     <C>     <C>     <C> 
Balance at beginning of period.....................  $423.2  $448.0  $426.9  $454.0  $480.0
CHARGE-OFFS
  Commercial:
    Commercial.....................................    53.3    45.5    58.8    93.3    96.8
    Financial institutions.........................     1.1     6.5     --      2.0     3.0 
    Real estate:
      Commercial mortgage..........................    16.0    55.5    45.6    72.0    66.3
      Construction.................................      .2      .4     6.1     6.3    32.0
    HLTs...........................................     3.8     8.0    27.0    11.5    15.9
                                                     ---------------------------------------
        Total commercial...........................    74.4   115.9   137.5   185.1   214.0
  Consumer:
    Residential mortgage...........................     3.0     1.9     5.1     5.1     6.9
    Credit card....................................    78.5    71.6    85.5    68.4    43.7
    Other..........................................    31.9    35.6    45.6    47.1    37.2
                                                     ---------------------------------------
        Total consumer.............................   113.4   109.1   136.2   120.6    87.8
                                                     ---------------------------------------
        Total......................................   187.8   225.0   273.7   305.7   301.8
RECOVERIES:
  Commercial:
    Commercial.....................................    36.4    31.0    37.1    27.6    30.4
    Financial institutions.........................      .4     7.0     --      --       .7
    Real estate:
      Commercial mortgage..........................    17.5    10.3     5.9    11.7     4.2
      Construction.................................      .9     1.3     1.9     1.2     4.7
    HLTs...........................................     6.4     2.4     3.0     5.3     3.1
                                                     ---------------------------------------
        Total commercial...........................    61.6    52.0    47.9    45.8    43.1
  Consumer:
    Residential mortgage...........................      .9     1.4     2.1     1.6     2.0
    Credit card....................................     9.1     9.7     8.0     6.0     4.3
    Other..........................................    11.6    11.9    12.6    10.0    10.5
                                                     ---------------------------------------
        Total consumer.............................    21.6    23.0    22.7    17.6    16.8
                                                     ---------------------------------------
        Total......................................    83.2    75.0    70.6    63.4    59.9
NET CHARGE-OFFS
  Commercial:
    Commercial.....................................    16.9    14.5    21.7    65.7    66.4
    Financial institutions.........................      .7     (.5)    --      2.0     2.3
    Real estate:
      Commercial mortgage..........................    (1.5)   45.2    39.7    60.3    62.1
      Construction.................................     (.7)    (.9)    4.2     5.1    27.3
    HLTs...........................................    (2.6)    5.6    24.0     6.2    12.8
                                                     ---------------------------------------
        Total commercial...........................    12.8    63.9    89.6   139.3   170.9
  Consumer:
    Residential mortgage...........................     2.1      .5     3.0     3.5     4.9
    Credit card....................................    69.4    61.9    77.5    62.4    39.4
    Other..........................................    20.3    23.7    33.0    37.1    26.7
                                                     ---------------------------------------
        Total consumer.............................    91.8    86.1   113.5   103.0    71.0
                                                     ---------------------------------------
        Total......................................   104.6   150.0   203.1   242.3   241.9
Provision charged to operating expense.............    93.0   125.2   183.4   202.2   215.4
Additions related to acquisitions..................    22.2     --     40.8    13.0      .5
                                                     ---------------------------------------
Balance at end of period...........................  $433.8  $423.2  $448.0  $426.9  $454.0
                                                     ---------------------------------------
Allowance as a percentage of period-end loans......    2.25%   2.25%   2.62%   2.61%   2.70%
Allowance as a percentage of nonperforming loans...     385     269     179     142     104
Allowance as a percentage of nonperforming assets..     284     187     109      78      68
                                                     ---------------------------------------
</TABLE>
 


28   First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
ANALYSIS AND ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES--The allowance for
credit losses provides for credit losses inherent in the Company's loan
portfolio and related off-balance sheet commitments. The provision for credit
losses increases and net charge-offs decrease the allowance. Management has
determined that the allowance for credit losses is adequate based on a
continuing evaluation of the loan portfolio and off-balance sheet commitments,
economic conditions and expectations, historical experience and the risk
evaluation of individual credits. Although the recent trend of slow steady
economic growth may contribute to the continued improvement in the credit
portfolio, any stagnation or reversals in the economy could cause an increase in
the required level of the allowance for credit losses.

  Management reviews the adequacy of the allowance each quarter based on the
status of problem loans and related off-balance sheet commitments, recent loss
experience and other pertinent factors, including current and anticipated
economic conditions. As a result of these assessments, management determines
whether an additional allowance above specified allocations should be provided
for the inherent loss in loans concentrated in certain industries.

  Management allocates components of the allowance to certain industry sectors
based on its assessment of the relative risk characteristics of the loan
portfolio. Table 12 shows the allocation of the allowance for credit losses by
loan category. Commercial allocations are based on a quarterly review of
individual loans outstanding and binding commitments to lend, including standby
letters of credit. Consumer allocations are based on an analysis of historical
and expected delinquency and charge-off statistics.

  At December 31, 1994, the allowance for credit losses was $433.8 million, or
2.25 percent of loans. This compares with an allowance of $423.2 million, or
2.25 percent of loans, at year-end 1993 and $448.0 million, or 2.62 percent of
loans, at December 31, 1992. The allowance increased to 385 percent of
nonperforming loans at December 31, 1994, compared with 269 percent at December
31, 1993, and 179 percent at December 31, 1992.

  The unallocated allowance increased to $268.1 million at year-end 1994 from
$254.9 million and $202.7 million at December 31, 1993, and 1992, respectively.
Generally, the increase in the unallocated allowance reflects the trend of
improving credit quality in the portfolio and the lower level of charge-offs.
Although the allocation of the allowance is an important tool in credit
management, the entire allowance for credit losses is available for the entire
loan portfolio.


<TABLE>
<CAPTION>
TABLE 12.  Allocation of Allowance for Credit Losses
                                       Allocation Amount at December 31              Allocation as a Percent of Loans Outstanding 
                             ------------------------------------------------------------------------------------------------------
(Dollars in Millions)          1994      1993        1992       1991       1990     1994      1993       1992       1991       1990
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>       <C>         <C>        <C>        <C>      <C>       <C>        <C>        <C>        <C>
COMMERCIAL:
  Commercial and financial
   institutions............  $ 74.4    $ 70.8      $ 83.7     $102.6     $133.9      .93%     .87%       1.23%      1.50%      1.79%
  Real estate:
    Commercial mortgage....    18.7      36.8        52.8       77.2      127.5     1.03     2.46        3.43       5.34       8.87
    Construction...........     1.9       1.0         7.3        5.3        3.6      .58      .43        3.12       1.80       1.01
  HLTs.....................     4.3       9.0        21.8       23.1       31.5     1.52     4.92        7.68       6.92       5.46
                             ------------------------------------------------------------------------------------------------------
    Total commercial.......    99.3     117.6       165.6      208.2      296.5      .95     1.17        1.87       2.33       3.01
CONSUMER:                                                                                         
  Residential mortgage.....     8.9      11.9        13.0       13.9       12.1      .37      .34         .40        .50        .46
  Credit card..............    32.5      22.0        38.9       39.7       31.0     1.35     1.25        2.18       2.32       2.52
  Other....................    25.0      16.8        27.8       15.0       24.1      .62      .49         .88        .50        .77
                             ------------------------------------------------------------------------------------------------------
    Total consumer.........    66.4      50.7        79.7       68.6       67.2      .75      .58         .97        .92        .96
                             ------------------------------------------------------------------------------------------------------
  Total allocated..........   165.7     168.3       245.3      276.8      363.7      .86      .90        1.44       1.69       2.16
  Unallocated portion......   268.1     254.9       202.7      150.1       90.3     1.39     1.35        1.18        .92        .54
                             ------------------------------------------------------------------------------------------------------
    Total allowance........  $433.8    $423.2      $448.0     $426.9     $454.0     2.25%    2.25%       2.62%      2.61%      2.70%
</TABLE>
                                                    

                                    First Bank System, Inc. and Subsidiaries  29
                                                                              --


<PAGE>

ANALYSIS OF NET LOAN CHARGE-OFFS - As shown in Table 11 on page 28, net loan
charge-offs decreased $45.4 million to $104.6 million from the $150.0 million
reported in 1993 primarily due to decreases in commercial mortgage net charge-
offs. Consumer loan net charge-offs in 1994 were $5.7 million higher than in
1993, reflecting an acceleration of the timing of charge-offs for fraud losses
on credit card and other consumer loan balances. Net charge-offs were $203.1
million in 1992. Table 13 shows net charge-offs as a percentage of average loans
outstanding by industry.

TABLE 13.  Net Charge-offs as a Percentage of Average Loans Outstanding by
           Industry


<TABLE>
<CAPTION>
                                                1994          1993          1992         1991         1990
- -------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>           <C>          <C>           <C>
COMMERCIAL:
 Commercial................................       .20%          .33%         .78%        1.06%          .95%
 Financial institutions....................       .06          (.03)           -           .28           .41
 Real Estate:
  Commercial mortgage......................      (.09)         2.99         2.64         4.34          4.84
  Construction.............................      (.27)         (.43)        1.63         1.55          5.87
                                                -----------------------------------------------------------
  Total commercial.........................       .13           .68         1.03         1.51          1.60

CONSUMER:
 Residential mortgage......................       .08           .01          .11          .13           .13
 Credit card...............................      3.38          3.57         4.53         4.17          3.61
 Other.....................................       .55           .74         1.11         1.26          1.01
                                                -----------------------------------------------------------
  Total consumer...........................      1.09          1.02         1.51         1.44           .96
                                                -----------------------------------------------------------
  Total....................................       .56%          .84%        1.25%        1.48%         1.34%
                                                ===========================================================
</TABLE>


ANALYSIS OF NONPERFORMING ASSETS - Nonperforming assets include all nonaccrual
loans, restructured loans, other real estate and other nonperforming assets
owned by the Company. At December 31, 1994, nonperforming assets totaled $153.0
million, a decrease of $73.0 million, or 32.3 percent, from year-end 1993. The
ratio of nonperforming assets to loans plus other real estate improved to .79
percent at December 31, 1994, compared with 1.20 percent at year-end 1993 and
2.39 percent at year-end 1992. The most significant reductions in nonperforming
assets occurred in commercial, HLT, and residential mortgage nonperforming loans
and other real estate. Commercial nonperforming loans declined $16.1 million, or
38.2 percent, HLT nonperforming loans declined $10.2 million, or 50.7 percent,
residential mortgage nonperforming loans declined $13.6 million, or 30.4
percent, and other real estate declined $27.5 million, or 40.8 percent.

  At December 31, 1993, nonperforming assets were $226.0 million, down $186.1
million, or 45.2 percent, from year-end 1992. The most significant reduction
occurred in other real estate, which declined $90.8 million, or 57.4 percent,
primarily due to sales of properties. The decrease in HLT nonperforming loans
was related to one credit totaling $37.5 million which was paid in 1993.
Residential mortgage nonperforming loans increased to $44.8 million at December
31, 1993, from $20.5 million at December 31, 1992, due to the purchase of $24.0
million of delinquent residential mortgages in connection with a sale of
mortgage loan servicing rights. Government-sponsored mortgage insurance supports
these loans, and the Company does not anticipate any significant losses related
to these loans.

  Interest payments are currently received on approximately 20 percent of the
Company's nonperforming assets. The payments are typically applied against
principal and not recorded as income.

30 First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
TABLE 14.  Nonperforming Assets


<TABLE>
<CAPTION>
                                                          At December 31
                                            -----------------------------------------
(Dollars in Millions)                        1994     1993     1992     1991     1990
- -------------------------------------------------------------------------------------
<S>                                         <C>      <C>      <C>      <C>      <C>
Nonaccrual loans........................... $112.6   $157.6   $246.7   $284.8   $412.1
Restructured loans.........................     .1        -      3.5     16.7     25.7
                                            ------------------------------------------
 Nonperforming loans.......................  112.7    157.6    250.2    301.5    437.8
Other real estate..........................   39.9     67.4    158.2    229.9    207.1
Other nonperforming assets.................     .4      1.0      3.7     18.3     20.3
                                            ------------------------------------------
 Nonperforming assets...................... $153.0   $226.0   $412.1   $549.7   $665.2
                                            ------------------------------------------
Accruing loans 90 days or more past due.... $ 26.0   $ 31.2   $ 30.2   $ 43.4   $ 33.0
Nonperforming loans to total loans.........    .59%     .84%    1.47%    1.84%    2.60%
Nonperforming assets to total loans
 plus other real estate....................    .79     1.20     2.39     3.31     3.90
Net interest lost on nonperforming loans... $  7.6   $ 10.2   $ 13.8   $ 22.3   $ 31.1
                                            ------------------------------------------
</TABLE>


  Accruing loans 90 days or more past due at December 31, 1994, totaled $26.0
million, compared with $31.2 million at December 31, 1993, and $30.2 million at
December 31, 1992. Consumer loans 30 days or more past due were 1.8 percent of
the total consumer portfolio at December 31, 1994, compared with 2.1 percent at
December 31, 1993. Consumer loans 90 days or more past due at December 31, 1994,
totaled .7 percent of the total consumer loan portfolio, compared to 1.0 percent
at December 31, 1993. The decreases were primarily due to the improvement in
delinquent residential mortgages purchased in 1993 in connection with a sale of
mortgage loan servicing rights. Government-sponsored mortgage insurance supports
all of these loans.

TABLE 15.  Nonperforming Assets by Industry


<TABLE>
<CAPTION>
                                                              1994 Compared
                                    At December 31              with 1993
                                  -------------------------------------------
(Dollars in Millions)             1994          1993        Amount    Percent
- -----------------------------------------------------------------------------
<S>                               <C>           <C>         <C>       <C>
COMMERCIAL:
   Commercial....................  $ 26.1       $ 42.2      $(16.1)    (38.2)%
   Financial institutions........       -           .9         (.9)   (100.0)
   Real estate:
     Commercial mortgage.........    33.6         36.9        (3.3)     (8.9)
     Construction................     1.6          2.2         (.6)    (27.3)
   HLTs..........................     9.9         20.1       (10.2)    (50.7)
                                   -------------------      -------
     Total commercial............    71.2        102.3       (31.1)    (30.4)

CONSUMER:
   Residential mortgage..........    31.2         44.8       (13.6)    (30.4)
   Credit card...................     9.9         10.3         (.4)     (3.9)
   Other.........................      .4           .2          .2     100.0
                                   -------------------      -------
     Total consumer..............    41.5         55.3       (13.8)    (25.0)
                                   -------------------      -------
     Total nonperforming loans...   112.7        157.6       (44.9)    (28.5)
 OTHER REAL ESTATE...............    39.9         67.4       (27.5)    (40.8)
 OTHER NONPERFORMING ASSETS......      .4          1.0         (.6)    (60.0)
                                   -------------------      -------
     Total nonperforming assets..  $153.0       $226.0      $(73.0)   (32.3)%
                                   -------------------      -------   -------
</TABLE>


INTEREST RATE RISK MANAGEMENT - The Company's principal objective for interest
rate risk management is to control exposure of net interest income to risks
associated with interest rate movements. The Company uses derivative financial
instruments ("derivatives") to hedge on-balance sheet items and, to a lesser
extent, in connection with intermediated transactions for customers. The market
risk on intermediated transactions is limited by entering into generally
matching or offsetting positions. The Company does

                                    First Bank System, Inc. and Subsidiaries  31
                                                                              --

<PAGE>

                   
not enter into derivative contracts for speculative purposes.

  Interest rate risk is measured and reported to the Company's Asset and
Liability Management Committee ("ALCO") through the use of traditional gap
analysis which measures the difference between assets and liabilities that
reprice in a given time period, simulation modeling which produces projections
of net interest income under various interest rate scenarios and balance sheet
strategies, and valuation modeling which measures the sensitivity of various
components of the balance sheet under various interest rate scenarios. The
significant assumptions include rate sensitivities, prepayment risks, and the
timing of changes in prime and deposit rates compared with changes in money
market rates.

  Table 16 shows the Company's interest rate repricing gap position at several
repricing maturities. As of December 31, 1994, the Company had a cumulative
positive repricing gap position at one year of $869 million, indicating that
more assets than liabilities reprice within that period. This analysis is useful
as a point-in-time measurement of interest rate risk. However, the gap analysis
is unable to capture prepayment risk, the changing relationships between asset
rates and liability rates of similar maturity (basis risk), option risk
represented by interest rate caps and floors, and timing differences in
adjusting the interest rates of certain assets and liabilities that have varying
sensitivities to market interest rates. As a result, management places a greater
reliance on simulation and valuation modeling to measure and manage interest
rate risk.

  It is the Company's policy to maintain a low interest rate risk position by
limiting the amount of forecasted net interest income at risk over a 12-month
period assuming an immediate and sustained 100 basis point change in interest
rates. Forecasted results are sensitive to many assumptions, including estimates
of the timing of changes in rates which are determined by reference to market
indices, such as prime or LIBOR, relative to each other and relative to rates
which are determined by the Company subject to competitive factors. The Company
assumes that the timing of the changes in these rates will follow historic
patterns, adjusted as necessary for current competitive factors and market
conditions.


TABLE 16.  Interest Rate Sensitivity Gap Analysis

<TABLE>
<CAPTION>
                                                                                 REPRICING MATURITIES
                                                        -------------------------------------------------------------------------
                                                          Less Than      3-6     6-12         1-5   More Than   Non-Rate
At December 31, 1994 (In Millions)                         3 Months   Months   Months       Years     5 Years  Sensitive   Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>        <C>      <C>        <C>        <C>       <C>        <C>
Assets:
 Loans...................................................   $11,125    $ 800   $1,457      $3,662    $2,121    $   116   $19,281
 Available-for-sale securities...........................       654      190      202       1,470       773       (141)    3,148
 Other earning assets....................................       548        -        -           -         -          -       548
 Nonearning assets.......................................       217        -        -         270     1,397      1,358     3,242
                                                          -----------------------------------------------------------------------
  Total assets...........................................   $12,544    $ 990   $1,659      $5,402    $4,291    $ 1,333   $26,219
                                                          =======================================================================
Liabilities and Equity:
 Deposits................................................   $ 6,576    $ 802   $1,156      $6,169    $4,052    $    36   $18,791
 Other purchased funds...................................     2,798        -        -           4        20          -     2,822
 Long-term debt..........................................       749        1        -          21       712          -     1,483
 Other liabilities.......................................        28        -        -           -         -        820       848
 Equity..................................................         -        -        -           -         -      2,275     2,275
                                                          -----------------------------------------------------------------------
  Total liabilities and equity...........................   $10,151    $ 803   $1,156      $6,194    $4,784    $ 3,131   $26,219
                                                          =======================================================================
Effect of off-balance sheet hedging instruments:
 Receiving fixed.........................................   $   115    $ 130   $  215      $1,489    $  725    $     -   $ 2,674
 Paying floating.........................................    (2,499)     (25)    (150)          -         -          -    (2,674)
                                                          -----------------------------------------------------------------------
  Total effect of off-balance sheet hedging instruments..   $(2,384)   $ 105   $   65      $1,489    $  725    $     -   $     -
                                                          =======================================================================
Repricing gap............................................   $     9    $ 292   $  568      $  697    $  232    $(1,798)  $    -
Cumulative repricing gap.................................         9      301      869       1,566     1,798          -
                                                          =======================================================================
</TABLE>


This table estimates the repricing maturities of the Company's assets,
liabilities and hedging instruments based upon the Company's assessment of the
repricing characteristics of contractual and non-contractual instruments. Non-
contractual deposit liabilities are allocated among the various maturity
categories as follows: approximately fifty percent of regular savings, interest-
bearing checking, and money market checking balances and sixty-eight percent of
money market savings balances are reflected in the Less Than 3 Months category,
with the remainder placed in the 1-5 Years category. Approximately seventy-three
percent of demand deposits and related nonearning asset accounts is allocated in
the More Than 5 Years category, fifteen percent is allocated in the 1-5 Years
category with the remaining allocated in the Less Than 3 Months category.

 
32  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
The Company invests in fixed rate assets or receives the fixed rate on interest
rate swaps as a hedge to maintain acceptable rate risk levels. The derivatives
the Company uses to achieve its hedging objectives are primarily interest rate
swaps, caps, and floors. Interest rate swap agreements involve the exchange of
fixed and floating rate interest payments without the exchange of the underlying
notional amount on which the interest payments are calculated. As of December
31, 1994, the Company receives payments on $2.7 billion notional amount of
interest rate swap agreements, based on fixed interest rates, and makes payments
based on variable interest rates. These swaps have an average fixed rate of 6.91
percent and an average variable rate, which is tied to various LIBOR rates, of
6.09 percent. The maturity of these agreements ranges from one month to 10 years
with an average remaining maturity of 4.0 years.


<TABLE>
<CAPTION>
TABLE 17. Interest Rate Swap Hedging Portfolio Notional Balances and Yields by
 Maturity Date

At December 31, 1994 (Dollars in Millions)
- ---------------------------------------------------------------------------
                                                   Weighted        Weighted
                                                    Average         Average
Receive Fixed Swaps*               Notional   Interest Rate   Interest Rate
Maturity Date                        Amount        Received            Paid
- ---------------------------------------------------------------------------
<S>                                <C>        <C>             <C>
1995............................     $  460            7.36%           6.17%
1996............................        433            7.96            6.17
1997............................        250            6.36            5.95
1998............................        356            5.77            6.06
1999............................        550            6.83            6.20
After 1999**....................        625            6.80            5.94
                                     ------
Total...........................     $2,674            6.91%           6.09%
                                     ======================================
</TABLE>

*At December 31, 1994, the Company did not have any swaps in its portfolio which
required it to pay fixed-rate interest.

**At December 31, 1994, all swaps with a maturity after 1999 hedge fixed rate
subordinated notes.

Swaps contributed to the Company's net interest margin by reducing interest
expense for the years ended December 31, 1994, 1993, and 1992, by $63.6 million,
$88.8 million, and $80.6 million, respectively.

The Company also uses interest rate caps and floors to minimize the impact of
fluctuating interest rates on earnings. Interest rate floor counterparties will
pay the Company the difference between a certain short-term rate and the strike
level of the agreement should the short-term rate fall below the strike level.
The total notional amount of floor agreements purchased as of December 31, 1994,
was $950 million with an average strike level of 3-month LIBOR at 3.50 percent
and an average remaining maturity of 3.0 years. The impact of floors on net
interest income was not material for the year ended December 31, 1994. Note M on
page 59 has further information on interest rate swaps and options.

Forward contracts, totaling $196 million at December 31, 1994, hedge the
interest rate risk of the fixed rate mortgage loans originated and held for sale
by the Company's mortgage subsidiary. The Company enters into foreign currency
commitments primarily as an intermediary for customers. Derivative contracts
which are not hedges are primarily customer-driven. The Company limits its
exposure to market risk on these contracts by entering into generally matching
or offsetting positions. The Company also manages its credit risk on all
derivative contracts through counterparty and credit limit approvals and
monitoring credit concentration risks.

Another objective of the interest rate risk measurement and management process
is to quantify the sensitivity of the market value of the Corporation's balance
sheet components to changes in interest rates. SFAS 107, "Disclosures about Fair
Value of Financial Instruments," requires the disclosure of the fair value of
all financial instruments for which it is practicable to estimate that value.
The general definition of financial instruments is cash, equity instruments or
investments and contractual obligations to pay or receive cash or other
financial instruments. The Statement indicates quoted market prices are the
preferred means of estimating the fair value of a specific instrument, but in
the cases where market quotes are not available, various valuation techniques,
such as discounted cash flow 



                                    First Bank System, Inc. and Subsidiaries  33
                                                                              --



<PAGE>
 
calculations, or pricing models or services, should be used to determine fair
values. Due to the nature of its business and the financing needs of its
customers, the Company uses a large number of financial instruments, the
majority of which are not actively traded. Accordingly, the Company uses various
valuation techniques to estimate the fair value of its financial instruments.
For further information on fair values of financial instruments refer to Note N
on page 61. 

LIQUIDITY MANAGEMENT -- The objective of liquidity management is to
ensure the continuous availability of funds to meet the demands of depositors,
investors and borrowers. ALCO is responsible for managing these needs while
achieving the Company's financial objectives. ALCO meets regularly to review
funding capacity, current and forecasted loan demand and investment
opportunities. With this information, ALCO supervises the funding needs and
excess funding positions, as well as the maintenance of contingent funding
sources, to achieve a balance sheet structure that provides sufficient
liquidity.

  Several rating agencies recognized the sustained improvement in the Company's
credit quality, liquidity, capital and earnings. As of December 31, 1994,
Moody's Investors Service, Standard & Poors, and Thomson BankWatch rated the
Company's senior debt as "A2," "A," and "A+," respectively. The strong debt
ratings allowed the Company to obtain negotiated funding, which includes term
certificates of deposit, foreign branch time deposits, national federal funds
purchased, bank notes, and medium-term notes, at competitive rates. Negotiated
funding increased to $3.1 billion at year-end 1994, compared with $.7 billion at
year-end 1993 and $.8 billion at year-end 1992. Although negotiated funding has
increased, the Company continues to focus its funding opportunities primarily on
deposits within its operating region. Approximately 82 percent of the Company's
funding comes from retail deposits within its operating region. The Company's
purchased funds index, calculated as negotiated funding and repurchase
agreements, net of federal funds sold and resale agreements, divided by loans
and securities, remains relatively low at 12.7 percent at December 31, 1994,
compared with a peer group average of 20.2 percent.

  Holding company assets totaled $3.5 billion at December 31, 1994, compared
with $3.1 billion at December 31, 1993, and $3.2 billion at December 31, 1992.
The increase in holding company assets during 1994 relates primarily to the
acquisitions which were made during the year.

  The funding for the holding company consists primarily of long-term debt and
equity, while funding for the Company's bank subsidiaries consists primarily of
customer deposits. During 1994, holding company long-term debt, including 
medium-term notes, increased to $1.0 billion from $.7 billion at year-end 1993.
The Company placed subordinated debt issuances of $100 million during both 1994
and 1993. FBNA, the Company's lead bank, placed subordinated debt issuances of
$100 million during 1994 and $200 million during 1993. In 1994, three of the
Company's bank subsidiaries registered a $2 billion medium-term bank note
program. Notes issued under this program may mature from 30 days to 15 years
after issuance and bear fixed or floating interest rates. Proceeds from the sale
of the notes will be used for general corporate purposes. At December 31, 1994,
there were no notes issued under this program.

  Long-term debt maturing in 1995 is approximately $195 million. These debt
obligations will be met through medium-term note or subordinated debt issuance,
as well as from the approximately $374 million of holding company cash and cash
equivalents on hand at December 31, 1994. It is the Company's operating practice
to maintain liquid assets at the holding company sufficient to fund its
operating cash needs, including debt repayment. 

Capital Management
- ------------------ 

  At December 31, 1994, total shareholders' equity was $2.275 billion, or 8.7
percent of assets, compared with 8.5 percent at year-end 1993 and 8.7 percent at
year-end 1992. Common shareholders' equity at December 31, 1994, was $2.169
billion, or $19.25 per share, compared with $1.979 billion, or $18.09 per share,
at year-end 1993 and $1.939 billion, or $17.09 per share, at year-end 1992. The
common equity-to-assets ratio increased 77 basis points from year-end 1993 to
8.3 percent at December 31, 1994. The common equity-to-assets ratio increased 20
basis points to 7.5 percent at year-end 1993 from 7.3 percent at year-end 1992.
Compared to 1993, earnings retention has offset the decrease caused by stock
repurchases.

34  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
TABLE 18.  Capital Ratios


<TABLE>
<CAPTION>
At December 31 (Dollars in Millions)            1994        1993        1992
- ------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>
Common equity...............................   $2,169      $1,979      $1,939
  As a percent of assets....................      8.3%        7.5%        7.3%
Tangible common equity*.....................   $1,844      $1,811      $1,764
  As a percent of assets....................      7.1%        6.9%        6.7%
Total shareholders' equity..................   $2,275      $2,245      $2,318
  As a percent of assets....................      8.7%        8.5%        8.7%
Tier 1 capital..............................   $1,902      $1,971      $2,008
  As a percent of risk-adjusted assets......      8.0%        9.2%        9.5%
Total risk-based capital....................   $2,962      $2,863      $2,669
  As a percent of risk-adjusted assets......     12.5%       13.3%       12.6%
Leverage ratio..............................      7.5         7.6         7.8
                                               -------------------------------
</TABLE>

 *Defined as common equity less goodwill.

  During 1994, the Company repurchased approximately 6.3 million shares of its
common stock, of which 4.4 million shares related to acquisitions. On January
18, 1995, and February 15, 1995, the Board of Directors authorized additional
repurchase programs of 2.0 million and 14.0 million shares of common stock,
respectively. The Company will use those shares in connection with previously
announced acquisitions, stock option plans, dividend reinvestment plans,
employee stock purchase plans, and other corporate purposes.

  On April 1, 1994, the Company completed the redemption of $159.3 million of
its preferred stock, consisting of $89 million of Preferred Stock Series 1989A
and $70.3 million of Preferred Stock Series 1989B. During 1993, the Company
redeemed its $100 million Series 1983A Adjustable Rate Cumulative Preferred
Stock.

  The Company's risk-based capital ratios, which take into account the different
credit risks among banking organizations' assets, have remained strong over the
past three years. Tier 1 and total risk-based capital ratios were 8.0 percent
and 12.5 percent, respectively, on December 31, 1994, compared with 9.2 percent
and 13.3 percent at December 31, 1993, and 9.5 percent and 12.6 percent at
December 31, 1992. The decrease in the ratios was due to the preferred stock
redemptions and common stock repurchases discussed above. In accordance with the
regulatory guidelines, unrealized gains and losses on the securities portfolio
are excluded from the risk-based capital calculations, and equity capital
created by the adoption of SFAS 109, related to deferred tax assets, is subject
to limitations for inclusion in risk-based capital.

  At December 31, 1994, the Company's leverage ratio, the ratio of Tier 1
capital to total quarterly average assets, was 7.5 percent compared with 7.6
percent and 7.8 percent at December 31, 1993, and 1992, respectively.

  The Federal Deposit Insurance Corporation ("FDIC") typically defines a bank to
be "well capitalized" if it maintains a Tier 1 capital ratio of at least 6.0
percent, a total risk-based capital ratio of at least 10.0 percent and a
leverage ratio of at least 5.0 percent. Generally, it is the Company's intention
to maintain sufficient capital in each of its bank subsidiaries to permit them
to maintain a "well capitalized" designation. As shown by Table 19 on page 36,
all of the Company's bank subsidiaries met the "well capitalized" designation at
December 31, 1994.

                                    First Bank System, Inc. and Subsidiaries  35
                                                                              --

<PAGE>

Table 19.  Bank Subsidiary Capital Ratios


<TABLE>
<CAPTION>

                                                                        At December 31, 1994          
                                                              ----------------------------------------
                                                                          Total
                                                              Tier 1    Risk-based              Total
(Dollars in Millions)                                         Capital    Capital     Leverage   Assets
- -------------------------------------------------------------------------------------------------------
<S>                                                           <C>       <C>          <C>        <C>
Regulatory Capital Requirements:
Minimum..................................................       4.0%        8.0%         3.0%
Well-capitalized.........................................       6.0        10.0          5.0
Bank Subsidiaries:
First Bank National Association (Minnesota)..............       7.4        11.6          7.3    $14,567
Colorado National Bank...................................      10.6        12.6          7.5      6,702
First Bank National Association (Illinois)...............      18.1        19.4         10.4      1,383
First Bank of South Dakota (National Association)........       8.1        11.7          8.1      1,290
First Bank Montana, National Association.................      10.2        12.1          9.7      1,214
First Bank (N.A.) (Wisconsin)............................       8.7        11.1          9.0      1,166
First Bank of North Dakota, National Association.........       9.6        12.8          9.4        881
Colorado National Bank Aspen.............................      25.4        26.7         12.6         54
First National Bank of East Grand Forks..................      15.7        18.5          9.8         42
</TABLE>


Note: These balances and ratios were prepared in accordance with regulatory
accounting principles as disclosed in the banks' Call Reports.

    During 1994, total dividends on common stock were $130.9 million compared 
with $109.7 million in 1993 and $73.1 million in 1992. On a per share basis,
dividends paid to common shareholders totaled $1.16 in 1994, $1.00 in 1993, and
$.88 in 1992. On February 15, 1995, the Board of Directors increased the
quarterly dividend rate paid to common shareholders from $.29 to $.3625. At this
dividend rate, the annual dividend is equivalent to $1.45 per share.

    The primary sources of funds for the dividends paid by the Company to its
shareholders are dividends received from its bank and nonbank subsidiaries.
Payment of dividends to the Company by its subsidiary banks is subject to
ongoing review by banking regulators and to various statutory limitations. For
further information, see Note Q of Notes to Consolidated Financial Statements on
page 66.

Accounting Changes

    The Company will adopt SFAS 114, "Accounting by Creditors for Impairment of
a Loan," in January 1995. This Statement requires creditors to establish a
valuation allowance when it is probable that all the principal and interest due
under the contractual terms of a loan will not be collected. The impairment is
measured based on the present value of expected future cash flows based on the
effective interest rate of the loan, observable market price or fair value of a
collateral dependent loan. This differs from the Company's current policy in
that it requires establishing a valuation allowance for uncollectible interest
in addition to the uncollectible principal amounts of impaired loans. The
Statement also requires the reclassification of in-substance foreclosures from
other real estate to nonperforming loans. The adoption of SFAS 114 is not
expected to have a material effect on the Company.

   Effective December 31, 1993, the Company adopted the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," and reported
its entire $3.3 billion of investment securities as available for sale. SFAS 115
requires that investments in debt securities and equity securities with readily
determinable fair values be classified into three categories which then
establish the accounting treatment. The accounting for two of the categories,
trading securities and held-to-maturity securities, is essentially the same as
prior practice. The other category, available-for-sale securities, is accounted
for at fair value with unrealized holding gains or losses being reported in
shareholders' equity. At December 31, 1994, the Company's available for sale
securities portfolio was $3.1 billion, with an after-tax loss of $94.1 million
recorded in shareholders' equity.



36 First Bank System, Inc. and Subsidiaries
- --


<PAGE>

Impact of Inflation

The assets and liabilities of a financial institution are primarily monetary in
nature. As such, future changes in prices do not affect the obligations to pay
or receive fixed and determinable amounts of money. During periods of inflation,
monetary assets lose value in terms of purchasing power while monetary
liabilities have corresponding purchasing power gains. Since banks generally
have an excess of monetary assets over monetary liabilities, inflation will, in
theory, cause a loss of purchasing power in the value of shareholders' equity.
However, the concept of purchasing power is not an adequate indicator of the
effect of inflation on banks because it does not take into account changes in
interest rates, which are a more important determinant of bank earnings.

    Other sections of the Management's Discussion and Analysis provide the
information necessary for an understanding of the Company's ability to react to
changing interest rates.

Fourth Quarter Summary

In the fourth quarter of 1994, the Company reported net income of $110.5
million, or $.95 per share, compared with $95.9 million, or $.81 per share, in
the fourth quarter of 1993. Return on average assets and return on average
common equity in the fourth quarter of 1994 were 1.69 percent and 19.9 percent,
respectively, compared with returns of 1.45 percent and 18.3 percent in the
fourth quarter of 1993. The strong results for the fourth quarter reflect a
higher net interest margin, growth in fee income, ongoing expense control,
continued improvement in credit quality and effective capital management.

Table 20.  Fourth Quarter Summary


<TABLE>
<CAPTION>

                                                          Three Months Ended
                                                              December 31  
                                                          ------------------
<S>                                                       <C>         <C>
(Dollars in Millions)                                     1994         1993
- ----------------------------------------------------------------------------
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis).........   $314.6      $293.3
Provision for credit losses............................     23.0        27.0
                                                          ------------------
  Net interest income after provision for credit losses    291.6       266.3
Noninterest income.....................................    163.1       145.9
Noninterest expense....................................    270.7       255.3
                                                          ------------------
 Income before income taxes............................    184.0       156.9
Taxable-equivalent adjustment..........................      3.6         3.7
Income taxes...........................................     69.9        57.3
                                                          ------------------
 Net income............................................   $110.5      $ 95.9
                                                          ==================
Return on average assets...............................     1.69%       1.45%
Return on average common equity........................     19.9        18.3
Net interest margin (taxable-equivalent basis).........     5.42        5.00
Efficiency ratio.......................................     56.5        58.1
PER SHARE DATA:
Net income.............................................   $  .95      $  .81
Common dividends paid..................................      .29         .25
                                                          ------------------
</TABLE>


                                    First Bank System, Inc. and Subsidiaries  37
                                                                              --

<PAGE>

    Net interest income on a taxable equivalent basis was $314.6 million in the
fourth quarter of 1994, an increase of $21.3 million, or 7.3 percent, from the
fourth quarter of 1993. The net interest margin on a taxable-equivalent basis
was 5.42 percent compared with 5.00 percent a year ago. Net interest income and
the margin improved principally due to increases in the average loan yield,
resulting from increases in the Company's reference rate on variable rate loans
during 1994, and a shift in the mix of loans from lower-margin mortgage-related
balances to higher yield consumer and commercial loans. Total average earning
assets were $23.0 billion during the fourth quarter of 1994, down $.3 billion
from the level of $23.3 billion in the same period of 1993.

    The provision for credit losses was $23.0 million in the fourth quarter of
1994 compared with $27.0 million in the fourth quarter of 1993. The reduction in
the provision was driven by continued declines in net charge-offs and
nonperforming assets. See "Provision for Credit Losses" on page 20 and "Credit
Management" on page 27 for further information regarding the provision, net
charge-offs and the allowance for credit losses.

    Noninterest income was $163.1 million in the fourth quarter of 1994, an 
increase of $17.2 million, or 11.8 percent, from the same quarter a year ago.
The increase reflects higher trust and credit card fees. Credit card fees were
up as a result of higher sales volume for Corporate Card, Purchasing Card,
merchant processing, and the Northwest Airlines WorldPerks credit card. Trust
fees increased due to the growth in corporate and institutional trust fees,
including the J.P. Morgan corporate trust unit and Boulevard acquisitions.

    Fourth quarter noninterest expense in 1994 was $270.7 million, an increase
of only $15.4 million, from the fourth quarter of 1993, despite the addition of
expenses associated with Boulevard and the domestic corporate trust business of
J.P. Morgan. Compared with noninterest expense for the fourth quarter of 1993,
adjusted to include the expenses of Boulevard and the acquired corporate trust
business on a pro forma basis, noninterest expense for the fourth quarter of
1994 declined by $6.4 million, or 2.3 percent. The efficiency ratio for the
fourth quarter of 1994 improved to 56.5 percent from 58.1 percent for the same
quarter last year.







38  First Bank System, Inc. and Subsidiaries
- --


<PAGE>
CONSOLIDATED BALANCE SHEET
 

<TABLE>
<CAPTION>
At December 31 (In Millions, Except Shares)                     1994      1993
- -------------------------------------------------------------------------------
<S>                                                            <C>       <C>
ASSETS
Cash and due from banks.....................................   $ 1,621   $ 1,682
Federal funds sold..........................................       135     1,032
Securities purchased under agreements to resell.............       336       306
Trading account securities..................................        77        55
Available-for-sale securities...............................     3,148     3,319
Loans.......................................................    19,281    18,779
  Less allowance for credit losses..........................       434       423
                                                               -----------------
  Net loans.................................................    18,847    18,356
Bank premises and equipment.................................       391       382
Interest receivable..........................................      153       129
Customers' liability on acceptances..........................      178       186
Other assets.................................................    1,333       938
                                                               -----------------
      Total assets...........................................  $26,219   $26,385
                                                               -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
  Noninterest-bearing........................................  $ 5,777   $ 7,489
  Interest-bearing...........................................   13,014    13,542
                                                               -----------------
      Total deposits.........................................   18,791    21,031
Federal funds purchased......................................    1,630       553
Securities sold under agreements to repurchase...............      534       369
Other short-term funds borrowed..............................      658       412
Long-term debt...............................................    1,483     1,015
Acceptances outstanding......................................      178       186
Other liabilities............................................      670       574
                                                               -----------------
      Total liabilities......................................   23,944    24,140
Shareholders' equity:
  Preferred stock............................................      106       266
  Common stock, par value $1.25 a share-authorized 
  200,000,000 shares; issued: 1994 - 116,300,108 shares; 
  1993 - 114,793,547 shares..................................      145       144 
  Capital surplus............................................      721       676
  Retained earnings..........................................    1,429     1,328
  Less cost of common stock in treasury: 1994 - 3,621,450 
  shares; 1993 - 5,391,883 shares............................     (126)     (169)
                                                               -----------------
      Total shareholders' equity.............................    2,275     2,245
                                                               -----------------
      Total liabilities and shareholders' equity.............  $26,219   $26,385
                                                               -----------------

See Notes to Consolidated Financial Statements.
</TABLE>




                                     First Bank System, Inc. and Subsidiaries 39
                                                                              --

<PAGE>
 
CONSOLIDATED STATEMENT OF INCOME


<TABLE>
<CAPTION>

Year Ended December 31 (In Millions, Except Per-Share Data)                                 1994           1993          1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>            <C>           <C>
INTEREST INCOME
Loans.................................................................................  $    1,510.7   $    1,398.6  $    1,418.8
Securities:
  Taxable.............................................................................         199.2          218.2         186.4
  Exempt from federal income taxes....................................................          12.0           14.6          12.0
Other interest income.................................................................          25.2           30.4          64.1
                                                                                        -----------------------------------------
      Total interest income...........................................................       1,747.1        1,661.8       1,681.3
INTEREST EXPENSE
Deposits..............................................................................         373.1          423.7         568.7
Federal funds purchased and repurchase agreements.....................................          91.2           31.8          37.1
Other short-term funds borrowed.......................................................          18.5           19.0          14.3
Long-term debt........................................................................          69.5           54.4          66.1
                                                                                        -----------------------------------------
      Total interest expense..........................................................         552.3          528.9         686.2
                                                                                        -----------------------------------------
Net interest income...................................................................       1,194.8        1,132.9         995.1
Provision for credit losses...........................................................          93.0          125.2         183.4
                                                                                        -----------------------------------------
Net interest income after provision for credit losses.................................       1,101.8        1,007.7         811.7
NONINTEREST INCOME
Credit card fees......................................................................         179.0          137.1         116.9
Trust fees............................................................................         159.2          146.1         127.8
Service charges on deposit accounts...................................................         115.6          115.3         108.4
Securities gains (losses).............................................................          (3.8)            .3           1.9
Other.................................................................................         178.0          170.8         180.7
                                                                                        -----------------------------------------
      Total noninterest income........................................................         628.0          569.6         535.7
NONINTEREST EXPENSE
Salaries..............................................................................         395.7          389.1         388.7
Employee benefits.....................................................................          91.6           86.3          85.5
Net occupancy.........................................................................          86.3           93.4          87.9
Furniture and equipment...............................................................          78.3           72.7          67.2
FDIC insurance........................................................................          46.0           46.4          42.2
Advertising...........................................................................          29.7           20.5          20.0
Amortization of goodwill and other intangible assets..................................          39.6           30.6          25.2
Other personnel costs.................................................................          32.2           27.5          20.2
Professional services.................................................................          33.8           36.7          38.7
Data processing.......................................................................          13.9           21.3          22.4
Other real estate.....................................................................          (2.9)           2.2          41.2
Merger and integration................................................................             -           72.2          84.0
Other.................................................................................         208.9          201.6         191.1
                                                                                        -----------------------------------------
      Total noninterest expense.......................................................       1,053.1        1,100.5       1,114.3
                                                                                        -----------------------------------------
Income before income taxes and cumulative effect of changes in accounting principles..         676.7          476.8         233.1
Applicable income taxes...............................................................         256.9          178.8          78.6
                                                                                        -----------------------------------------
Income before cumulative effect of changes in accounting principles...................         419.8          298.0         154.5
Cumulative effect of changes in accounting principles.................................             -              -         157.3
                                                                                        -----------------------------------------
Net income............................................................................  $      419.8   $      298.0  $      311.8
                                                                                        =========================================
Net income applicable to common equity................................................  $      408.6   $      270.2  $      281.6
                                                                                        =========================================
EARNINGS PER COMMON SHARE
Average common and common equivalent shares...........................................   114,544,806    113,075,429   105,361,022
  Income before cumulative effect of changes in accounting principles.................  $       3.57   $       2.39  $       1.18
  Cumulative effect of changes in accounting principles...............................             -              -          1.49
                                                                                        -----------------------------------------
  Net income..........................................................................  $       3.57   $       2.39  $       2.67
                                                                                        =========================================
</TABLE>


See Notes to Consolidated Financial Statements.

40  First Bank System, Inc. and Subsidiaries
- --


<PAGE>
 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY


<TABLE> 
<CAPTION> 
                                                                                                     Unrealized   
                                                     Common                                        Gains/(Losses)
                                                     Shares   Preferred  Common  Capital  Retained on Securities, Treasury
(In Millions, Except Shares)                      Outstanding*  Stock     Stock  Surplus  Earnings  Net of Taxes   Stock**   Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>        <C>     <C>     <C>       <C>            <C>      <C> 
BALANCE DECEMBER 31, 1991........................ 102,536,867  $ 378.5   $128.5  $417.6  $  931.8    $   --       $  (4.3) $1,852.1
Net income.......................................                                           311.8                             311.8
Dividends declared:
  Preferred......................................                                           (30.2)                            (30.2)
  Common.........................................                                           (73.1)                            (73.1)
Retirement of stock acquired in mergers..........    (290,129)              (.4)   (5.9)                                       (6.3)
Issuance of common stock:
  Acquisition of Bank Shares Incorporated........   8,163,265              10.2   200.3                                .7     211.2
  Acquisition of Siouxland Bank Holding Company..     994,117               1.2    20.6                                        21.8
  Dividend reinvestment..........................     508,397                .5     7.8                               2.0      10.3
  Stock option and stock purchase plans..........   1,537,908               1.8    17.3                               1.6      20.7
                                                  ----------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1992........................ 113,450,425    378.5    141.8   657.7   1,140.3        --           --    2,318.3
Net income.......................................                                           298.0                             298.0
Dividends declared:
  Preferred......................................                                           (27.8)                            (27.8)
  Common.........................................                                          (109.7)                           (109.7)
Repurchase of common stock for treasury..........  (6,181,290)                                                     (187.1)   (187.1)
Issuance of common stock:
  Dividend reinvestment..........................     227,287                        .3                               6.4       6.7
  Stock option and stock purchase plans..........   1,905,242               1.7    18.4      (3.6)                   11.3      27.8
Redemption of preferred stock....................               (112.6)                      (2.6)                           (115.2)
Unrealized gain on available-for-sale securities.                                                       34.0                   34.0
                                                  ----------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993........................ 109,401,664    265.9    143.5   676.4   1,294.6       34.0       (169.4)  2,245.0
Net income.......................................                                           419.8                             419.8
Dividends declared:
  Preferred......................................                                           (11.2)                            (11.2)
  Common.........................................                                          (130.9)                           (130.9)
Purchase of treasury stock.......................  (6,305,882)                                                     (220.4)   (220.4)
Repurchase of stock warrants.....................                                  (2.3)                                       (2.3)
Acquisition of Boulevard Bancorp, Inc. for
 common stock, warrants, and stock options.......   6,227,649               1.9    54.9                             149.4     206.2
Other acquisitions...............................   1,385,806                               (13.9)                   48.1      34.2
Issuance of common stock:
  Dividend reinvestment..........................     185,890                        .2                               6.3       6.5
  Stock option and stock purchase plans..........   1,285,965                      (8.7)    (17.6)                   42.7      16.4
  Stock warrants exercised.......................     497,566                               (10.4)                   17.0       6.6
Redemption of preferred stock....................               (160.0)                      (7.0)                           (167.0)
Change in unrealized gains/(losses)..............                                                     (128.1)                (128.1)
                                                  ----------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994........................ 112,678,658  $ 105.9   $145.4  $720.5  $1,523.4    $ (94.1)     $(126.3) $2,274.8
                                                  ==================================================================================
</TABLE>
 

 *Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 3,621,450 at December 31, 1994, 5,391,883 at 
  December 31, 1993, and 253,920 at December 31, 1991.
  See Notes to Consolidated Financial Statements.



                                   First Bank System, Inc. and Subsidiaries   41
                                                                              --

<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS
 

<TABLE>
<CAPTION>
Year Ended December 31 (In Millions)                                                                 1994        1993        1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>         <C>         <C>
Operating Activities
Net income......................................................................................  $   419.8   $   298.0   $   311.8
Adjustments to reconcile net income to net cash provided by operating activities:
  Provision for credit losses...................................................................       93.0       125.2       183.4
  Depreciation and amortization of bank premises and equipment..................................       63.1        58.4        48.6
  Provision for deferred income taxes...........................................................       75.7        64.0        22.2
  Amortization of goodwill and other intangible assets..........................................       39.6        30.6        25.2
  Amortization and write-downs of loan servicing related intangibles............................       13.5        55.5        14.3
  Write-downs of other real estate..............................................................        2.5        18.1        47.5
  Provision for merger and integration..........................................................        --         72.2        84.0
  Cumulative effect of accounting changes.......................................................        --          --       (157.3)
  Changes in operating assets and liabilities, excluding the effects of purchase acquisitions:
    (Increase) decrease in trading account securities...........................................      (22.6)       39.3        57.2
    Decrease (increase) in loans held for sale..................................................      854.1      (379.8)     (191.4)
    Decrease in securities held for sale........................................................        --        429.9       183.4
    Decrease (increase) in accrued receivables..................................................       47.6       (10.2)       23.3
    (Decrease) increase in accrued liabilities..................................................      (22.5)     (152.3)        1.0
    Other--net..................................................................................      (37.6)      (81.6)       15.0
                                                                                                  ----------------------------------
      Net cash provided by operating activities.................................................    1,526.2       567.3       668.2

INVESTING ACTIVITIES
Net cash provided (used) by:
  Interest-bearing deposits with banks..........................................................        9.1       322.5        85.7
  Loans outstanding.............................................................................     (556.1)   (1,428.3)      160.8
  Securities purchased under agreements to resell...............................................      (30.5)      (93.4)      (76.7)
Securities transactions:
  Sales.........................................................................................    1,090.1        46.8        35.5
  Maturities....................................................................................      730.5     1,235.5       970.7
  Purchases.....................................................................................   (1,011.7)     (889.4)   (1,555.5)
Proceeds from sales/repayments of other real estate.............................................       65.8        99.5        95.8
Proceeds from sales of bank premises and equipment..............................................        6.4        31.5         9.7
Purchases of bank premises and equipment........................................................      (61.9)     (111.6)      (99.3)
Purchases of loans..............................................................................      (29.9)      (32.6)      (56.8)
Cash and cash equivalents of acquired subsidiaries..............................................       74.5         --        197.1
Business acquisitions, net of cash received.....................................................      (57.4)       (3.0)       67.4
Sale of unconsolidated subsidiaries.............................................................        --         12.8         --
Other--net......................................................................................      (12.2)      (26.3)       33.2
                                                                                                  ----------------------------------
      Net cash provided (used) by investing activities..........................................      216.7      (836.0)     (132.4)

FINANCING ACTIVITIES
Net cash provided (used) by:
  Deposits......................................................................................   (3,812.3)      (68.6)      138.8
  Federal funds purchased and securities sold under agreements to repurchase....................      936.6      (198.9)       12.5
  Short-term borrowings.........................................................................      226.2        57.0       (32.5)
Long-term debt transactions:
  Proceeds......................................................................................      611.5       440.0       160.8
  Principal payments............................................................................     (160.2)     (256.2)     (294.2)
Redemption of preferred stock...................................................................     (167.0)     (115.2)        --
Proceeds from dividend reinvestment, stock option, and stock purchase plans.....................       22.9        34.5        30.2
Purchase of treasury stock and stock warrants...................................................     (222.7)     (187.1)        --
Stock warrants exercised........................................................................        6.6         --          --
Cash dividends..................................................................................     (142.1)     (137.5)     (103.3)
                                                                                                  ----------------------------------
      Net cash used by financing activities.....................................................   (2,700.5)     (432.0)      (87.7)
                                                                                                  ----------------------------------
      Change in cash and cash equivalents.......................................................     (957.6)     (700.7)      448.1
Cash and cash equivalents at beginning of year..................................................    2,713.5     3,414.2     2,966.1
                                                                                                  ----------------------------------
      Cash and cash equivalents at end of year..................................................  $ 1,755.9   $ 2,713.5   $ 3,414.2
                                                                                                  ----------------------------------
</TABLE>
 

See Notes to Consolidated Financial Statements.


42   First Bank System, Inc. and Subsidiaries
- --

<PAGE>

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A.  Significant Accounting Policies

First Bank System, Inc. ("The Company") is a regional, multibank holding
company which provides bank and bank-related services principally to domestic
markets, through its subsidiaries.

BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
amounts in prior periods have been reclassified to conform to the current
presentation.

TRADING ACCOUNT SECURITIES - Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading account securities and are reported at fair value. Gains
or losses on sales of trading account securities, adjustments to fair values,
and other noninterest income are included in trading account profits and
commissions.

AVAILABLE-FOR-SALE SECURITIES - Securities that are not trading account
securities and which may be sold before maturity in response to changes in
interest rates or prepayment risk, or due to liquidity needs or changes in
funding sources or terms, are classified as available-for-sale. These
securities are carried at fair value, with unrealized holding gains or losses,
net of tax, reported in shareholders' equity. When securities are sold, the
amortized cost of the specific securities sold is used to compute the gain or
loss on sale.

HELD-TO-MATURITY SECURITIES - Included in held-to-maturity securities are those
securities which management has the positive intent and ability to hold to
maturity. These securities are stated at cost, as adjusted for accretion of
discounts or amortization of premiums, computed by the interest method. The
adjusted cost of the specific security sold is used to compute the gains or
losses on the sale.

LOANS - Loans are reported net of any unearned discount. Interest income is
accrued on loan balances outstanding. Loan and commitment fees are deferred and
recognized over the loan and/or commitment period as yield adjustments.

  Loans are reviewed regularly by management and are generally placed on
nonaccrual status when the collection of interest or principal has become 90
days past due or collection is otherwise considered doubtful. When a loan is
placed on nonaccrual status, previously recorded accrued but uncollected
interest is reversed against current period interest income. Interest payments
received on nonaccrual loans are generally applied against principal.

  Certain subsidiaries engage in both direct and leveraged lease financing. The
net investment in direct financing leases consists of the sum of all minimum
lease payments and estimated residual values, less unearned income and
investment tax credit. Unearned income is accreted into loan interest income
over the terms of the leases to produce a constant rate of return on the net
investment.

  The investment in leveraged leases consists of the sum of all lease payments
(less the portion applicable to principal and interest on nonrecourse debt) plus
estimated residual values, less unearned income. Unearned income is accreted
into loan interest income over the positive years of the net investment.

  Loans and mortgages held for sale are carried at the lower of cost or market
value as determined on an aggregate basis by type of loan.

ALLOWANCE FOR CREDIT LOSSES - Management determines the adequacy of the
allowance based on periodic evaluations of the loan portfolio and related off-
balance sheet commitments, recent loss experience, and other pertinent factors,
including current and anticipated economic conditions. The allowance is
increased by provisions charged to operating expense and reduced by net charge-
offs.



                                    First Bank System, Inc. and Subsidiaries  43
                                                                              --

<PAGE>
 

MORTGAGE BANKING - Acquisition costs of purchased mortgage servicing rights and
excess mortgage servicing fee receivables are capitalized and amortized on an
accelerated basis over the estimated period of net servicing revenue. On a
quarterly basis the Company reviews the carrying value of its mortgage servicing
rights and fees based on historical prepayment experience and expectations of
future prepayment activity, and if appropriate, reduces the carrying value to
estimated realizable value, calculated on a discounted basis.

INTEREST RATE SWAPS - The Company engages in interest rate swap transactions to
manage its interest rate risk and as a financial intermediary. The Company does
not enter into these contracts for speculative purposes. Income or expense on
swaps designated as hedges of assets, liabilities or commitments is recorded as
an adjustment to interest income or expense. If the hedged instrument is
disposed of, the swap agreement is marked to market with any resulting gain or
loss included with the gain or loss from the disposition. If the interest rate
swap is terminated, the gain or loss is deferred and amortized over the
remaining life of the specific asset or liability it was hedging. The initial
bid/offer spread on intermediated swaps is deferred and recognized in trading
account profits and commissions over the life of the agreements. Intermediated
swaps are marked to market and the resultant gain or loss is recorded currently
in trading account profits and commissions.

INTEREST RATE CONTRACTS - The Company uses interest rate forwards, options,
caps, and floors for managing its interest rate risk, as a financial
intermediary and in its trading operations. For interest rate contracts that
meet the criteria for hedge accounting treatment, gains or losses due to changes
in the market value of the contracts are deferred initially and amortized over
the period of interest rate risk exposure as adjustments to interest income or
expense. Gains or losses related to the termination of these financial
instruments or disposal of the hedged asset or liability are treated in the same
manner as interest rate swaps. All other interest rate contracts are marked to
market and the resulting gain or loss is recorded currently in trading account
profits and commissions.

BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost
less accumulated depreciation and amortized primarily on the straight line
method based on estimated useful lives.

  Capitalized leases, less accumulated amortization, are included in bank
premises and equipment, and the lease obligations are included in long-term
debt. Capitalized leases are amortized on the straight line method over the
lease term and the amortization is included in depreciation expense.

OTHER REAL ESTATE - Other real estate (ORE), which is included in other assets,
represents properties acquired through foreclosure, in-substance foreclosure or
other proceedings. Upon classification as ORE, any excess of the loan receivable
over the fair value of the collateral is charged to the allowance for credit
losses. Property is evaluated regularly to ensure that the recorded amount is
supported by the current fair value. In addition, annual appraisals are
conducted. Subsequent to classification as ORE, the asset is carried at the
lower of cost or fair value, less estimated selling costs. Changes in the
carrying amount of the asset are either recorded in a valuation allowance or
charged directly to expense.

INTANGIBLE ASSETS - The excess of cost over net assets of businesses acquired is
included in other assets and is amortized over periods ranging up to 25 years.
At December 31, 1994, goodwill totaled $324.7 million, net of accumulated
amortization of $64.5 million. Other intangible assets, net of accumulated
amortization, include corporate trust customer relationships of $82.4 million,
purchased mortgage servicing rights of $43.0 million, cardholder relationships
of $29.7 million, core deposits of $59.6 million, and other intangibles of $4.8
million at December 31, 1994. These assets are amortized over their estimated
useful lives ranging from seven to ten years using straight line and accelerated
methods, as appropriate.

INCOME TAXES - Deferred taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts at each year end.

STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash equivalents
are those amounts included in cash and due from banks and federal funds sold.


















44  First Bank System, Inc. and Subsidiaries
- --

<PAGE>




PER SHARE CALCULATIONS - Primary earnings per share are computed by dividing
income applicable to common stock (net income less preferred stock dividends) by
the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the period. To compute the dilutive effect of
restricted common shares issued under the 1991 and 1994 Stock Incentive Plans,
the treasury stock method is applied to the unvested portion of the shares
granted and the related unamortized expense. Fully diluted earnings per share
computations assume the conversion of the Series 1991A preferred stock during
the period that the stock was outstanding, unless the effect is anti-dilutive.

NOTE B.   Accounting Changes

ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - In January 1995, the Company
will adopt SFAS 114, "Accounting by Creditors for Impairment of a Loan," which
requires creditors to establish a valuation allowance when it is probable that
all the principal and interest due under the contractual terms of a loan will
not be collected. The impairment is measured based on the present value of
expected future cash flows based on the loans' effective interest rate,
observable market price or fair value of a collateral dependent loan. This
differs from the Company's current policy in that it requires establishing a
valuation allowance for uncollectible interest in addition to the principal
amounts of impaired loans. The Statement also requires in-substance foreclosures
to be reclassified from other real estate to nonperforming loans. The adoption
of SFAS 114 is not expected to have a material effect on the Company.

NOTE C.   Business Combinations and Pending Acquisitions

METROPOLITAN FINANCIAL CORPORATION - On January 24, 1995, the Company completed
the previously announced acquisition of Metropolitan Financial Corporation
("MFC"), a regional financial services holding company headquartered in
Minneapolis, Minnesota, resulting in 21.7 million shares being issued. As of
December 31, 1994, MFC had approximately $7.9 billion in assets, $5.5 billion in
deposits, and 211 offices principally in North Dakota, Minnesota, Nebraska,
Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. The Company will use the
pooling of interests method to account for the transaction. The following pro
formas represent a combination of the results of operations of FBS and MFC for
each period presented.


<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                            --------------------------------
(In Millions, Except Per-Share Amounts)                         1994        1993       1992
- --------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>        <C> 
Net interest income.......................................  $1,434.5    $1,355.9   $1,175.7
Cumulative effect of changes in accounting principles.....         -           -      233.2
Net income................................................     306.5       363.2      448.9
Net income per share......................................      2.16        2.48       3.35
                                                            ================================
</TABLE>


BOULEVARD BANCORP, INC. - On March 25, 1994, the Company completed the
acquisition of Boulevard Bancorp, Inc. ("Boulevard"), a commercial bank holding
company headquartered in Chicago, Illinois. Under the terms of the purchase
agreement, 6.2 million shares of the Company's common stock were issued. In
addition, Boulevard's outstanding stock options and warrants were converted into
stock options and warrants for the Company's common stock, at the same
conversion rate.

  In connection with the Boulevard acquisition, the Company bought back existing
shares of its common stock approximately equal to the number of shares issued at
the time of closing of the Boulevard acquisition. The repurchase of these shares
began in October 1993 and was completed in June 1994.

 

                                    First Bank System, Inc. and Subsidiaries  45
                                                                              --

<PAGE>
 
    The acquisition of Boulevard was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $206.2 million was allocated
to assets acquired and liabilities assumed based on their fair market values at
the date of acquisition. The excess of the purchase price over the fair market
values of net assets acquired was recorded as goodwill. Core deposit intangibles
of $23 million are amortized over the estimated lives of the deposits of
approximately 10 years, and goodwill of $144 million is amortized over 25 years.
The total assets acquired and liabilities assumed at the time of acquisition
were $1.6 billion and $1.5 billion, respectively. The results of operations of
Boulevard are included in the Company's Consolidated Statement of Income since
the date of acquisition.

    The following pro forma operating results of the Company assume that the
Boulevard acquisition had occurred at the beginning of each period presented
below. In addition to combining the historical results of operations of the two
companies, the pro forma results include adjustments for the estimated effect of
purchase accounting on the Company's results, principally amortization of
intangibles.


<TABLE>
<CAPTION>

                                             Years Ended December 31,
(In Millions, Except Per-Share Amounts)        1994            1993
- ---------------------------------------------------------------------
<S>                                          <C>             <C>
Net interest income.......................   $1,206.8        $1,186.1
Net income................................      403.7           299.0
Net income per share......................       3.38            2.26
                                             ========================
</TABLE>


    The pro forma information may not be indicative of the results that actually
would have occurred if the combination had been in effect on the dates indicated
or which may be obtained in the future.

COLORADO NATIONAL BANKSHARES, INC. AND WESTERN CAPITAL INVESTMENT CORPORATION -
Effective May 28, 1993, the Company completed the acquisition of Colorado
National Bankshares, Inc. ("CNB"), formerly the largest independent commercial
bank holding company in Colorado with $3.0 billion in assets. Approximately 20.6
million shares of the Company's common stock were issued for all of the
outstanding common stock of CNB. Effective December 18, 1992, Western Capital
Investment Corporation ("WCIC"), a $2.5 billion financial institution
headquartered in Denver, Colorado, merged with a wholly-owned subsidiary of the
Company, resulting in 5.3 million shares of the Company's common stock being
issued for all the outstanding common shares of WCIC.

    Both the CNB and WCIC acquisitions were accounted for using the pooling of
interests method of accounting. Accordingly, the Company's financial statements
have been restated for all periods prior to the acquisitions to include the
accounts and operations of CNB and WCIC.

BANK SHARES INCORPORATED - On December 31, 1992, the Company acquired Bank
Shares Incorporated ("BSI"), a $2.1 billion bank holding company headquartered
in Minneapolis, Minnesota, in a stock-for-stock exchange. Under the terms of the
purchase agreement, the Company issued 8.2 million shares of common stock for
all outstanding shares of BSI common stock. The acquisition of BSI was accounted
for under the purchase method of accounting, and accordingly, the results of
operations of BSI have been included in the Company's Consolidated Statement of
Income since the acquisition date.

    The following pro forma operating results of the Company assume that the BSI
acquisition had occurred at the beginning of 1992. In addition to combining the
historical results of operations of the two companies, the pro forma results
include adjustments for the estimated effect of purchase accounting on the
Company's results.


<TABLE>
<CAPTION>
                                                                     Year Ended
                                                                    December 31,
(In Millions, Except Per-Share Amounts)                                 1992   
- --------------------------------------------------------------------------------
<S>                                                                  <C>
Net interest income...............................................    $1,069.9
Cumulative effect of changes in accounting principles.............       157.3
Net income........................................................       293.1
Net income per share..............................................        2.29
                                                                      ========
</TABLE>


    The pro forma information may not be indicative of the results that actually
would have occurred if the combination had been in effect on the dates indicated
or which may be obtained in the future.


46  First Bank System, Inc. and Subsidiaries
- --

<PAGE>

OTHER ACQUISITIONS - During the past three years, the Company completed several
acquisitions and has one pending acquisition in markets in which the Company has
an existing presence, serving to strengthen the Company's retail banking market
shares in these communities. On October 18, 1994, the Company signed a
definitive purchase agreement to acquire First Western Corporation ("FWC"),
a $323 million bank holding company based in Sioux Falls, South Dakota.  FWC
owns Western Bank, which has nine branches in South Dakota. The transaction
received regulatory approval in January 1995 and is expected to close in the
first quarter of 1995. On September 30, 1994, the Company completed the
acquisition of Green Mountain Bancorporation, the holding company for the $35
million Green Mountain Bank, located in Lakewood, Colorado. On September 9,
1994, the Company completed its acquisition of the $121 million United Bank of
Bismarck, located in Bismarck, North Dakota. On April 29, 1994, the Company
completed the acquisition of First Financial Investors, Inc., a $200 million
savings bank holding company located in Duluth, Minnesota. On February 28, 1994,
the Company completed the acquisition of American Bancshares of Mankato, a $116
million bank holding company. During 1992, the Company acquired Siouxland Bank
Holding Company, a $174 million institution headquartered in Fargo, North
Dakota.

  The Company also completed the purchase of several corporate trust businesses
serving to strengthen the strategic direction of the Company. On September 2,
1994, the Company acquired the domestic corporate trust business of J.P. Morgan
& Co., Incorporated, which provides trust services for approximately 650 clients
with 3,800 bond issues in the areas of municipal, revenue, housing and corporate
bond indenture trusteeships. In March 1993, the Company acquired the corporate
trust business of two U.S. Bancorp subsidiaries in Washington and Oregon, and in
July 1992, the Company acquired the corporate trust business of Bankers Trust
Company of California.

NOTE D. Restrictions on Cash and Due from Banks
- -------------------------------------------------

  Bank subsidiaries are required to maintain average reserve balances with the
Federal Reserve Bank. The amount of those reserve balances averaged $389 million
for the quarter ended December 31, 1994.

NOTE E. Available-for-sale Securities
- -------------------------------------

  The detail of the amortized cost, gross unrealized holding gains and losses,
and fair value of available-for-sale securities at December 31 was as follows:


<TABLE>
<CAPTION>
                                          1994                                        1993
                        -------------------------------------------------------------------------------------
                                     Gross       Gross                           Gross       Gross
                                   Unrealized  Unrealized                      Unrealized  Unrealized
                        Amortized   Holding     Holding      Fair   Amortized   Holding     Holding      Fair
(In Millions)             Cost       Gains       Losses     Value     Cost       Gains       Losses     Value
- -------------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>         <C>         <C>      <C>        <C>         <C>         <C>
U.S. Treasury..........   $1,162      $ 1        $ (65)    $1,098    $1,527       $25        $(11)     $1,541
Mortgage-backed
 securities............    1,497        1          (84)     1,414     1,286        18          (4)      1,300
Other U.S. agencies....      191        -          (10)       181        51         1           -          52
State and political....      175        3            -        178       184        12           -         196
Other..................      275       11           (9)       277       216        16          (2)        230
                        -------------------------------------------------------------------------------------
   Total...............   $3,300      $16        $(168)    $3,148    $3,264       $72        $(17)     $3,319
                        =====================================================================================
</TABLE>


  The Company adopted SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," at December 31, 1993, and at that date, all the Company's
investment securities were classified as available for sale. At December 31,
1994, the Company's available-for-sale securities portfolio was $3.1 billion,
with an after-tax unrealized loss of $94.1 million recorded in shareholders'
equity. Securities transactions reported in the Consolidated Statement of Cash
Flows in 1994 reflect available-for-sale securities while transactions in 1993
and 1992 reflect held-to-maturity securities.

                                    First Bank System, Inc. and Subsidiaries  47
                                                                              --


<PAGE>

    Securities carried at $1.2 billion at December 31, 1994, and $.8 billion at
December 31, 1993, were pledged to secure public and trust deposits and for
other purposes required by law. Securities sold under agreements to repurchase
had an amortized cost of $.5 billion and $.4 billion at December 31, 1994, and
1993, respectively.

    Gross realized gains and losses on securities were as follows:


<TABLE>
<CAPTION>

(In Millions)                                        1994    1993   1992
- -------------------------------------------------------------------------
<S>                                                 <C>     <C>     <C>
Gross realized gains.............................   $ 2.0   $ 3.3   $ 1.9
Gross realized losses............................    (5.8)   (3.0)     --
                                                    ---------------------
Net realized gains (losses)......................   $(3.8)  $  .3   $ 1.9
                                                    =====================
</TABLE>


    For amortized cost, fair value and yield by maturity date of available-for-
sale securities outstanding as of December 31, 1994, see Table 10 on page 26
from which such information is incorporated by reference into these Notes to
Consolidated Financial Statements.

NOTE F. Loans and Allowance for Credit Losses
- ---------------------------------------------

The composition of the loan portfolio at December 31 was as follows:


<TABLE>
<CAPTION>
(In Millions)                                           1994      1993
- -----------------------------------------------------------------------
<S>                                                   <C>       <C>
COMMERCIAL:
  Commercial.......................................   $ 7,196   $ 6,176
  Financial institutions...........................       787     2,004
  Real estate:
    Commercial mortgage............................     1,822     1,495
    Construction...................................       327       231
  HLTs.............................................       283       183
                                                      -----------------
      Total commercial loans.......................    10,415    10,089
                                                      -----------------
CONSUMER:
  Residential mortgage.............................     2,273     2,422
  Residential mortgage held for sale...............       162     1,088
  Home equity and second mortgage..................     2,199     1,755
  Credit card......................................     2,409     1,757
  Revolving credit.................................       694       690
  Automobile.......................................       392       342
  Installment......................................       401       376
  Student loans held for sale......................       336       260
                                                      -----------------
    Total consumer loans...........................     8,866     8,690
                                                      -----------------
    Total loans....................................   $19,281   $18,779
                                                      =================
</TABLE>


    Certain directors and executive officers of the Company, including their
immediate families, companies in which they are principal owners, and trusts in
which they are involved, are loan customers of the Company and its subsidiaries.
These loans were made in the ordinary course of business at the subsidiaries'
normal credit terms, including interest rate and collateralization, and were all
current as to their terms at December 31, 1994, and 1993. The aggregate dollar
amounts of these loans were $8.4 million and $18.6 million at December 31, 1994,
and 1993, respectively. During 1994, additions totaled $88.5 million and
repayments totaled $98.7 million.



48  First Bank System, Inc. and Subsidiaries
- --


<PAGE>

    Nonaccrual and renegotiated loans totaled $113 million, $158 million, and
$250 million at December 31, 1994, 1993, and 1992, respectively. The effect of
nonaccrual and renegotiated loans on interest income was as follows:


<TABLE>
<CAPTION>
(In Millions)                                                      1994   1993    1992
- ---------------------------------------------------------------------------------------
<S>                                                                <C>    <C>     <C>
Interest income that would have been accrued
  at original contractual rates..................................  $9.7   $13.6   $21.6
Amount recognized as interest income.............................   2.1     3.4     7.8
                                                                   --------------------
Foregone revenue.................................................  $7.6   $10.2   $13.8
                                                                   ====================
</TABLE>


    Commitments to lend additional funds to customers whose loans were
classified as nonaccrual or renegotiated at December 31, 1994, totaled $6.7
million. During 1994, there were no loans that were restructured at market
interest rates and returned to a fully performing status.

    Activity in the allowance for credit losses was as follows:


<TABLE>
<CAPTION>
(In Millions)                                                 1994     1993     1992
- -------------------------------------------------------------------------------------
<S>                                                          <C>      <C>      <C>
Balance at beginning of year..............................   $423.2   $448.0   $426.9
Add:
 Provision charged to operating expense...................     93.0    125.2    183.4
Deduct:
 Loans charged off........................................    187.8    225.0    273.7
 Less recoveries of loans charged off.....................     83.2     75.0     70.6
                                                             ------------------------
 Net loans charged off....................................    104.6    150.0    203.1
Additions from acquisitions...............................     22.2        -     40.8
                                                             ------------------------
Balance at end of year....................................   $433.8   $423.2   $448.0
                                                             ========================
</TABLE>


NOTE G.  Bank Premises and Equipment
- ------------------------------------
Bank premises and equipment at December 31 consisted of the following:


<TABLE>
<CAPTION>
(In Millions)                                        1994       1993
- --------------------------------------------------------------------
<S>                                                  <C>        <C> 
 Land.............................................   $ 74       $ 73
 Buildings and improvements.......................    346        332
 Furniture, fixtures and equipment................    338        366
 Capitalized building leases......................     35         33
 Capitalized equipment leases.....................     35         31
                                                     ---------------
                                                      828        835
 Less accumulated depreciation and amortization...    437        453
                                                     ---------------
  Total...........................................   $391       $382
                                                     ===============
</TABLE>


                                    First Bank System, Inc. and Subsidiaries  49
                                                                              --

<PAGE>
 
NOTE H. Long-Term Debt
- ----------------------

  Long-term debt (debt with original maturities of more than one year) at 
December 31 consisted of the following:


<TABLE>
<CAPTION>
(In Millions)                                                         1994    1993
- -----------------------------------------------------------------------------------
<S>                                                                  <C>     <C>
FIRST BANK SYSTEM (Parent Company):
Floating-rate subordinated capital notes -- due November 29, 1996..  $  150  $  150
Fixed-rate 6.625% subordinated notes -- due May 15, 2003...........     100     100
Fixed-rate 8.00% subordinated notes -- due July 2, 2004............     125     125
Floating-rate subordinated notes -- due November 30, 2010..........     107     107
Medium-term notes..................................................     514     248
Capitalized lease obligations and other............................      15      15
                                                                     --------------
                                                                      1,011     745
SUBSIDIARIES:
Fixed-rate 6.00% subordinated notes -- due October 15, 2003........     100     100
Fixed-rate 7.55% subordinated notes -- due June 15, 2004...........     100       -
Fixed-rate 8.35% subordinated notes -- due November 1, 2004........     100       -
Step-up subordinated notes -- due August 15, 2005..................     100     100
Capitalized lease obligations......................................      39      39
Mortgage indebtedness and notes....................................      33      31
                                                                     --------------
  Total............................................................  $1,483  $1,015
                                                                     ==============
</TABLE>


  The floating-rate subordinated capital notes due November 29, 1996, are
currently redeemable at the option of the Company (with Federal Reserve Bank
approval). If the option is not exercised, the notes will be exchanged at
maturity for capital securities of the Company whose market value will equal the
principal amount of the notes. The interest rate per annum is one-eighth of one
percent above the London interbank offered rate ("LIBOR") for three-month
Eurodollar deposits subject to a minimum of 5.25 percent. At December 31, 1994,
the interest rate was 6.125 percent.

  The floating-rate subordinated notes due November 30, 2010, may be redeemed at
par at the option of the Company. The interest rate per annum for each quarterly
period is one-eighth of one percent above LIBOR for three-month Eurodollar
deposits subject to a minimum of 5.25 percent. At December 31, 1994, the
interest rate was 6.094 percent.

  The step-up subordinated notes due August 15, 2005, are issued by the
Company's subsidiary bank, First Bank National Association. The interest rate on
these notes is 6.25 percent through August 14, 2000, and 7.30 percent
thereafter. The notes have a one-time call feature at the option of the Bank on
August 15, 2000.

  Notes issued under the Company's medium-term note program may mature from 9
months to 15 years and bear fixed or floating interest rates. The notes
outstanding at December 31, 1994, mature from February 1995 to November 1997 and
have rates of 6.125 percent to 9.91 percent. The weighted average interest rate
at December 31, 1994, is 6.47 percent.

  Maturities of long-term debt outstanding at December 31, 1994, were:


<TABLE>
<CAPTION>
                                                                        Parent
(In Millions)                                             Consolidated  Company
- -------------------------------------------------------------------------------
<S>                                                       <C>           <C>
1995.....................................................     $  195     $  189
1996.....................................................        298        291
1997.....................................................        193        185
1998.....................................................          2          -
1999.....................................................          3          1
Thereafter...............................................        792        345
                                                              -----------------
  Total..................................................     $1,483     $1,011
                                                              =================
</TABLE>


50  First Bank System, Inc. and Subsidiaries
- --

<PAGE>

NOTE I.  Shareholders' Equity

  COMMON STOCK - At December 31, 1994, the Company has 9,936,528 shares of its
common stock reserved for future issuances under the Dividend Reinvestment Plan,
Employee Stock Purchase Plan, and the Stock Option Plans (see Note K on page
52). Additionally, there are 3,952,000 shares of common stock reserved for
issuance upon conversion of the Series 1991A Convertible Preferred Stock,
described below under "Preferred Stock."

  The Company completed several acquisitions in the past three years with a
total of 42.6 million common shares issued in exchange for the stock of the
acquired banks. (See Note C on page 45.)

  During 1994, the Company repurchased 6.3 million shares of common stock
utilized in connection with previously announced acquisitions and other
corporate purposes. On January 18, 1995, and February 15, 1995, the Board of
Directors authorized additional repurchase programs of 2.0 million and 14.0
million shares of common stock, respectively, for previously announced
acquisitions and other corporate purposes.

  The Company has outstanding 12.6 million common shares sold in a private
placement on July 18, 1990, which had accompanying periodic stock purchase
rights ("PSPRs") and risk event warrants. The PSPRs become exercisable upon the
event of a dividend shortfall, which will be deemed to exist if the Company does
not pay an annual dividend equal to at least $.82 per share during any of the
ten years following closing. Upon exercise, the holders of the PSPRs will
receive value equal to the dividend shortfall in the form of shares of the
Company's common or preferred stock, or the PSPRs may be redeemed for cash.

  The risk event warrants become exercisable (i) when a change in control, as
defined, occurs and the value received by common shareholders is less than
$13.875 per share, or (ii) on July 18, 2000, if the common stock market price is
less than $13.875 per share; however, this exercise provision terminates at any
time after July 18, 1995, if the common stock market price exceeds $20.82 per
share for 30 consecutive trading days and tangible book value exceeds $16.32 per
share. If the risk event warrants become exercisable in either event, the
holders of the warrants will receive value equal to any shortfall in the form of
common or preferred stock or cash at the option of the Company.

  The Company's Dividend Reinvestment Plan provides for automatic reinvestment
of dividends and for optional cash purchases of additional shares at market
price of up to $5,000 per quarter.

PREFERRED STOCK - The Company has four classes of cumulative preferred stock
with par values of $1.00 per share and 10,000,000 shares authorized. In the past
two years, the Company redeemed three of the four classes of cumulative
preferred stock.

  Series 1991A Convertible Preferred Stock, issued in November 1991, has
2,118,500 shares outstanding, redeemable at the option of the Company on or
after January 1, 1996, at $52.1375 per share, and thereafter at prices declining
to its stated value of $50 per share on or after July 1, 2002. During 1994, the
Company repurchased approximately 15,100 shares. Dividends are at a rate of
7.125 percent per annum. Series 1991A Convertible Preferred Stock is convertible
at the option of the holder at any time into common stock of the Company at the
rate of 1.7256 shares of common stock for each share of preferred stock, which
is equivalent to a conversion price of $28.975 per share of common stock.

  On April 1, 1994, the Company redeemed the 3,560,000 and 1,405,000 shares of
Series 1989A and Series 1989B, respectively, at a cost of $166.0 million. The
annual dividend prior to redemption was 10.5 percent on the Series 1989A shares
and the average annual dividend rate on the Series 1989B shares was 7.41 percent
and 8.24 percent in 1993 and 1992, respectively.

  In September 1993, the Company redeemed the 1,000,000 shares of Series 1983A
at the stated value of $100 per share. There was an average 6.5 percent dividend
on the Series 1983A shares during 1992.

  Shares of all the Company's preferred stock issuances rank prior to common
stock as to dividends and liquidation and have no voting rights except (i) in
the event of certain dividend arrearages (in which event, holders of shares of
the preferred stock are entitled to elect two additional directors to the
Company's Board of Directors to serve until such dividend arrearages have been
eliminated), and (ii) on matters that would have an adverse effect upon a series
of the preferred stock, including the issuance of additional shares of preferred
stock or shares of any other preferred stock ranking on a parity with the
preferred stock.
 
                                     First Bank System, Inc. and Subsidiaries 51
                                                                              --

<PAGE>

PREFERRED STOCK PURCHASE RIGHTS - In December 1988, the
Company declared a dividend of one preferred stock purchase
right ("Right") for each outstanding share of common stock
based on the shareholders of record on January 4, 1989. One
Right was also issued with respect to each share of common
stock issued since January 4, 1989. The rights are designed
to help management obtain fair and equal treatment for all
shareholders in the event of a potential takeover.

  Each Right initially entitles the registered holder to
purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred stock, par value $1,
of the Company at a price of $80, subject to adjustment.

  In the event that any person or group acquires 20 percent
or more of the Company's common stock outstanding, each Right
(other than any Right held by the acquiring person or group)
will thereafter entitle the holder to receive upon exercise
shares of the Company's common stock having a market value of
two times the purchase price.

  In the event that the Company is acquired in a merger or other business
combination transaction or 50 percent or more of its consolidated assets or
earning power is sold, each Right will thereafter entitle the holder to
receive, upon exercise, shares of common stock of the acquiring company having
a market value of two times the purchase price.

  The Rights will not be exercisable and will be transferable
with and only with the common stock until 10 days after (i) a
public announcement that a person or group has acquired 20
percent or more of the Company's common stock outstanding, or
(ii) a public announcement or commencement of a tender or
exchange offer which would result in a person or group
acquiring 20 percent or more of the common stock.

  The Rights expire on January 4, 1999, unless they are
redeemed by the Company at a price of $.01 per Right prior to
the acquisition by a person or group of 20 percent of the
Company's common stock outstanding. Pursuant to an amendment
adopted by the Board of Directors, the Rights will also
expire on the date which is 24 months after the first date
upon which the Company can generally be acquired by bank
holding companies, principally located in at least 15 of the
20 states which as of September 30, 1992, had the largest
amount of bank deposits.

  Until the Right is exercised, the Right holder will have no
rights as a stockholder of the Company, including the right
to vote or to receive dividends.

NOTE J.   Merger and Integration Charges

  In 1993, the Company recorded merger and integration charges totaling $72.2
million relating to the acquisition of CNB. Charges of $29.7 million were
recorded for anticipated integration expenses, system and operational
conversions, and required customer communications costs. Premises and equipment
write-downs of $14.3 million relate to redundant main office and branch
facilities. Other charges, totaling $28.2 million, primarily involve severance.

  In 1992, the Company recorded merger and integration
charges totaling $84.0 million relating primarily to the
acquisition of WCIC. Premises and equipment write-downs of
$31.2 million relate to the closing of redundant main office
and branch facilities. Securities and interest rate swap
write-downs of $12.6 million reflect the Company's intention
to dispose of certain mortgage-backed securities and swaps.
Other charges, totaling $40.2 million, primarily involve
severance, system conversions, and required customer
communications costs.

NOTE K.   Employee Benefits

PENSION PLAN - Pension benefits are provided to substantially
all employees based on years of service and employees'
compensation while employed with the Company. Employees are
fully vested after five years of service.

  The Company's funding policy is to contribute actuarially
determined amounts to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as
the Company determines to be appropriate. The actuarial cost
method used to compute pension cost is the projected unit
credit method.

52 First Bank System, Inc. and Subsidiaries
- --


<PAGE>
 
    Prior to their acquisition dates, when they became participants in the
Company's plan, the former CNB and Boulevard employees were covered by separate,
noncontributory pension plans that provided defined benefits based on an
employee's years of service and compensation during employment.

    The following table sets forth the aggregate funded status and the net
amounts recognized in the Company's balance sheet and statement of income for
the plans at December 31:


<TABLE>
<CAPTION>

(Dollars in Millions)                                                  1994      1993      1992
- ------------------------------------------------------------------------------------------------
<S>                                                                    <C>       <C>       <C>
Actuarial present value of benefit obligations:
  Accumulated benefit obligation, including vested benefits
    of $267.1 million in 1994, $251.9 million in 1993, and
    $213.8 million in 1992.........................................  $(276.7)  $(260.2)  $(220.2)
                                                                     ===========================
Projected benefit obligation for service rendered to date..........  $(284.6)  $(288.2)  $(247.8)
Plan assets at fair value, primarily listed stocks and U.S. bonds..    275.5     260.6     247.0
                                                                     ---------------------------
Deficiency of plan assets over projected benefit obligation........     (9.1)    (27.6)     (0.8)
Unrecognized net loss from past experience different from
  that assumed and effects of changes in assumptions...............     25.9      38.1      14.3
Unrecognized net asset at end of year (amortized over 15 years)....    (23.6)    (27.5)    (26.8)
                                                                     ---------------------------
Accrued pension cost included in other liabilities.................  $  (6.8)  $ (17.0)  $ (13.3)
                                                                     ===========================
Net pension costs include the following components:
  Service cost-benefits earned during the period...................  $  19.2   $  17.2   $  14.9
  Interest cost on projected benefit obligation....................     21.2      20.8      20.9
  Actual return on plan assets.....................................     (9.7)    (29.2)    (18.0)
  Net amortization and deferral....................................    (18.8)      2.4      (8.8)
                                                                     ---------------------------
Net periodic pension benefit cost..................................  $  11.9   $  11.2   $   9.0
                                                                     ===========================
</TABLE>


     The FBS, CNB and Boulevard plans were valued separately for the years prior
to their acquisitions, and each plan independently determined its assumptions.
The aggregate disclosures, therefore, reflect the following weighted average
assumptions.


<TABLE>
<CAPTION>
                                                                            FBS          CNB     Boulevard
                                                                    ---------------------------------------
                                                                    1994   1993   1992   1992   1993   1992
- -----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>    <C>    <C>    <C>    <C>    <C>
Weighted average discount rate...................................   8.0%   7.0%   8.0%   9.0%    7.0%   8.3%
Expected long-term rate of return................................   9.5   10.0   10.0    9.0    10.0   10.0
Rate of increase in future compensation..........................   5.6    6.0    6.0    5.6     5.0    5.0
                                                                   ========================================
</TABLE>


Other Postretirement Plans - In addition to providing pension benefits, the
Company provides certain health care and life insurance benefits to retired
employees. Substantially all of the Company's employees may become eligible for
these benefits at or after age 55 with at least five years of service and age
plus years of service equal to or greater than 65 while working for the Company.

    Effective January 1, 1993, the Company revised the provisions of the
existing retiree health care plan. Under the terms of the new plan, the Company
will subsidize the cost of coverage for employees who retire before age 65 with
at least 10 years of service. The dollar amount of the subsidy will be based on
the employee's age and service at the time of retirement, and will remain frozen
until the retiree reaches age 65. After age 65 the retiree will assume
responsibility for the full cost of coverage. The new plan also contains other
cost-sharing features such as deductibles and coinsurance. The Company will
continue to subsidize the cost of coverage for employees who retired before
1993, and will subsidize the cost for certain employees who retire before 1995.
Those subsidies, as well as the retirees' contributions, will be adjusted
periodically.


                                    First Bank System, Inc. and Subsidiaries  53
                                                                              --

<PAGE>
 
  Effective January 1, 1992, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its retiree
benefit plans. Under SFAS 106, the Company accrues the estimated cost of retiree
benefit payments, other than pensions, during employees' active service periods.

  The Company elected to recognize the effect of this change in accounting on
the immediate recognition basis. The cumulative effect as of January 1, 1992, of
adopting SFAS 106 was the recognition of accrued postretirement health care
costs totaling $52.1 million. After related tax benefits of $20.5 million, net
income for 1992 was reduced by $31.6 million.

  The Company currently intends to fund the postretirement benefit costs as they
are incurred. The following table sets forth the plan's funded status recognized
in the Company's balance sheet and statement of income at December 31:


<TABLE>
<CAPTION>
(In Millions)                                                   1994     1993
- ------------------------------------------------------------------------------
<S>                                                            <C>      <C>
Accumulated postretirement benefit obligation:
  Retirees...................................................  $(41.3)  $(48.5)
  Fully eligible active plan participants....................    (3.6)    (3.4)
  Other active plan participants.............................    (9.2)   (12.5)
                                                               ---------------
    Total unfunded accumulated postretirement benefit 
     obligation..............................................   (54.1)   (64.4)
Unrecognized net loss (gain) from past experience different 
 from that assumed and from changes in assumptions...........    (9.3)     5.5
Unrecognized implementation obligation.......................     2.1      2.3
                                                               ---------------
Accrued postretirement benefit cost..........................  $(61.3)  $(56.6)
                                                               ===============
Net periodic postretirement benefit cost includes the 
 following components:
Service cost -- benefits attributed to service during the 
 period......................................................  $  1.1   $  1.3
Interest cost on accumulated postretirement benefit 
 obligation..................................................     4.0      4.7
Net amortization and deferral................................      .2       .2
                                                               ---------------
Total postretirement benefit cost............................  $  5.3   $  6.2
                                                               ===============
</TABLE>


  For measurement purposes, 11.0 percent and 7.0 percent annual rates of
increase in the per capita cost of covered health care benefits for participants
under age 65 and aged 65 and over, respectively, were assumed for 1994. For 1995
the annual rates of increase were assumed to be 10.0 percent and 6.5 percent,
respectively. Both rates were assumed to decrease gradually to 5.5 percent by
2003 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1 percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1994, by $5.3 million and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year then
ended by $.5 million.

  The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0 percent as of December 31, 1994, and
7.0 percent as of December 31, 1993.

54  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

STOCK PURCHASE PLAN - The 1984 Employee Stock Purchase Plan, as amended in 1989
and 1991, permits all eligible employees (those employed for one year with the
Company) and directors to purchase common stock. The plan provides for a
purchase price of 85 percent to 100 percent (as determined by a committee of the
Board of Directors for each purchase period) of the fair market value at the
beginning or the end of the purchase period, whichever is lower. For the current
option period ending June 30, 1995, the Committee approved an option price of 85
percent of fair market value. The plan results in no expense to the Company.

STOCK INCENTIVE PLAN - In April 1994, shareholders approved a revision to the
1991 Stock Incentive Plan, which increases the authorized issuance up to
5,000,000 shares of the Company's common stock. The Plan extends through April
2001. In April 1994, the shareholders also approved a Stock Incentive Plan which
authorizes the issuance of up to 5,000,000 shares of the Company's common stock.
This plan extends through January 2004. The terms of the new plan are
substantially the same as the 1991 Stock Incentive Plan. The Plans allow for the
granting of nonqualified stock options, incentive stock options, stock
appreciation rights (SARs), restricted stock or stock units (RSUs), performance
awards, dividend equivalents, and other stock-based awards at or above 100
percent of the market price at the date of grant. Awards may provide that upon
their exercise, the holder will receive shares of common stock or cash as
determined by a committee of the Board of Directors (Committee). Restrictions on
the restricted shares and RSUs generally limit the holders' rights to transfer
the shares during the restriction period determined by the Committee. At
December 31, 1994, there were 2,566,778 shares available, subject to adjustment
for forfeitures, for grant under the Plans.

  Restricted shares granted under the Plans vest over periods of three to seven
years, with the vesting of certain shares being subject to acceleration based on
the performance of the Company in comparison to the performance of a
predetermined group of regional banks. Compensation expense related to these
shares is determined at the time of grant based on the market price of the
Company's stock and is amortized on a straight line basis over the vesting
period. For the performance-based restricted shares, compensation expense is
amortized using the midpoint of the vesting period.

  Options granted under the Plans and predecessor plans are generally
exercisable up to 10 years from the date of grant. On the date exercised, the
option proceeds are credited to the common stock account to the extent of par
value of the shares issued and the excess is credited to capital surplus.

                                    First Bank System, Inc. and Subsidiaries  55
                                                                              --



<PAGE>
 
  The option information presented below has been restated to reflect options
under the WCIC and CNB Plans. The number and exercise price (option price) of
options and restricted shares granted under these plans were as follows:


<TABLE>
<CAPTION>
                     Additional Shares               Outstanding  Option/Market
                      Available Under   Outstanding  Restricted      Price
                      Incentive Plan      Options      Shares       Per Share
- -------------------------------------------------------------------------------
<S>                  <C>                <C>          <C>         <C> 
DECEMBER 31, 1991*..     4,166,357       3,588,598      4,800    $ 2.71 -30.125
                         =========
Granted:
  Stock Options.....                       852,616          -     23.50 -27.25
  Restricted Stock..                             -    166,583     24.50 -27.25
Exercised...........                      (661,338)         -      2.71 -25.885
Cancelled...........                      (111,963)         -      8.41 -30.125
                                        ---------------------------------------
DECEMBER 31, 1992*..     2,178,975       3,667,913    171,383    $ 2.71 -30.125
                         =========
Granted:
  Stock Options.....                       837,041          -     28.625-33.75
  Restricted Stock..                             -    105,300     28.25 -33.25
Exercised...........                    (1,791,654)         -      2.71 -30.125
Cancelled/Vested....                       (54,883)   (15,387)     8.41 -33.75
                                        ---------------------------------------
DECEMBER 31, 1993*..     1,230,217       2,658,417    261,296    $ 8.41 -33.75
                         =========
Granted:
  Stock Options.....                     6,269,997          -     29.75 -39.00
  Restricted Stock..                             -    192,732     29.75 -39.00
Exercised...........                    (1,535,200)         -      8.41 -35.25
Cancelled/Vested....                      (323,856)   (26,084)     8.41 -35.625
                                        ---------------------------------------
DECEMBER 31, 1994*..     2,566,778       7,069,358    427,944    $ 8.41 -39.00
                         =========      =======================================
</TABLE>


*At December 31, 1994, 1993, 1992 and 1991 options for 2,867,020, 1,184,308,
 2,359,958 and 1,511,350 shares, respectively, were exercisable.

56  First Bank System, Inc. and Subsidiaries
- --




<PAGE>
 
NOTE L. Income Taxes
- --------------------

  The components of income tax expense were:


<TABLE>
<CAPTION>
(Dollars in Millions)                                   1994    1993    1992
- ----------------------------------------------------------------------------
<S>                                                    <C>     <C>     <C>
FEDERAL:
Current tax..........................................  $147.5  $ 89.7  $38.7
Deferred tax provision...............................    75.3    59.3   21.4
                                                       ---------------------
  Federal income tax.................................   222.8   149.0   60.1
                                                       ---------------------
STATE:
Current tax..........................................    33.7    25.1   17.7
Deferred tax provision...............................      .4     4.7     .8
                                                       ---------------------
  State income tax...................................    34.1    29.8   18.5
                                                       ---------------------
  Total income tax provision.........................  $256.9  $178.8  $78.6
                                                       =====================
</TABLE>


  The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate was as follows:


<TABLE>
<CAPTION>
(Dollars in Millions)                           1994     1993      1992
- ------------------------------------------------------------------------
<S>                                             <C>      <C>      <C>
Tax at statutory rate (35% in 1994 and 1993,
 34% in 1992).................................  $236.8   $166.9   $ 80.4
State income tax, at statutory rates, net
 of federal tax benefit.......................    22.2     19.4     12.1
Tax effect of:
  Tax-exempt interest:
    Loans.....................................    (5.8)    (7.6)   (10.9)
    Securities................................    (4.1)    (4.4)    (4.2)
  Amortization of goodwill....................     8.6      7.3      3.7
  Other items.................................    (0.8)    (2.8)    (2.5)
                                                ------------------------
Applicable income taxes.......................  $256.9   $178.8   $ 78.6
                                                ========================
</TABLE>


  At December 31, 1994, for income tax purposes, the Company had the following 
net operating loss carryforwards available:


<TABLE>
<CAPTION>
                                                                     Expiration
(Dollars in Millions)                                        Amount       Dates
- -------------------------------------------------------------------------------
<S>                                                          <C>          <C>
Federal regular tax operating loss carryforwards...........   $ 2.2       2002
                                                                3.8       2003
                                                                5.2       2006
                                                               24.6       2008
                                                              -----
                                                              $35.8  
                                                              ==============
</TABLE>


  In addition, the Company has state net operating loss carryforwards of $206
million, primarily in one taxing jurisdiction. These carryforwards expire in
years 2001-2008.

                                    First Bank System, Inc. and Subsidiaries  57
                                                                              --

<PAGE>

     Deferred income tax assets and liabilities reflect the tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for the same items for income
tax reporting purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31 were as follows:


<TABLE>
<CAPTION>
(Dollars in Millions)                                            1994      1993
- ---------------------------------------------------------------------------------
<S>                                                            <C>       <C>
DEFERRED TAX ASSETS:
Loan loss reserves...........................................  $ 169.5   $ 151.0
Adjustment of available-for-sale securities to market value..     57.7     (20.9)
Real estate and other asset basis differences................     32.4      50.2
Federal operating loss carryforward..........................     12.9       7.2
State operating loss carryforward............................     12.0      18.1
Deferred gain on sale of buildings...........................     11.2      12.5
Deferred loan fees...........................................     10.0      12.5
Accrued severance, pension and retirement benefits...........      6.7       9.9
Accelerated depreciation.....................................      2.0      (4.9)
Alternative minimum tax credit carryforward..................      --       40.5
Contingent liabilities and other miscellaneous accruals......     52.2      50.2
                                                               ------------------
  Gross deferred tax assets..................................    366.6     326.3

DEFERRED TAX LIABILITIES:
Leasing activities...........................................    (46.2)    (46.9)
Deferred gains and other investment basis differences........    (37.0)    (26.5)
Other deferred liabilities and reserves......................    (49.2)    (73.3)
                                                               ------------------
  Gross deferred tax liabilities.............................   (132.4)   (146.7)
Deferred tax assets valuation reserve........................    (14.0)    (19.6)
                                                               ------------------
NET DEFERRED TAX ASSETS......................................  $ 220.2   $ 160.0
                                                               ------------------
</TABLE>


     Effective January 1, 1992, the Company adopted the provisions of SFAS 109,
"Accounting for Income Taxes." This resulted in the recognition of $213.9
million of deferred tax assets at January 1, 1992, of which $188.9 million was
included in the 1992 results of operations as a cumulative effect of an
accounting change and $25.0 million pertaining to carryforwards resulting from
purchase business combinations was reflected as a reduction of goodwill.

     Realization of the deferred tax asset over time is dependent upon the
Company generating sufficient taxable earnings in future periods. In determining
that realization of the deferred tax asset was more likely than not, the Company
gave consideration to a number of factors, including its recent earnings
history, its expectations for earnings in the future and, where applicable, the
expiration dates associated with tax carryforwards.

     The Company's valuation allowance decreased $5.6 million from December 31,
1993, to December 31, 1994. During 1994, the Company realized tax benefits
related to state net operating losses and the related valuation allowance was
eliminated.



58   First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
NOTE M. Financial Instruments With Off-Balance Sheet Risk and Credit
        Concentrations
- --------------------------------------------------------------------

  The Company uses various financial instruments that have off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to manage its interest rate risk. These instruments involve, to
varying degrees, elements of credit, interest rate, or liquidity risk. The
contract or notional amounts of these financial instruments at December 31 were
as follows:


<TABLE>
<CAPTION>
(In Millions)                                               1994    1993
- -------------------------------------------------------------------------
<S>                                                        <C>     <C>
Commitments to extend credit:
  Commercial.............................................  $6,980  $5,714
  Corporate and purchasing cards.........................   3,210   1,744
  Consumer credit card...................................   7,875   5,208
  Other consumer.........................................   2,385   2,391
Letters of credit:
  Standby................................................   1,318   1,208
  Commercial.............................................     175     135
Interest rate swap contracts:
  Hedge..................................................   2,674   2,811
  Intermediated..........................................     127     199
Interest rate options contracts:
  Hedge interest rate floors purchased...................     950     950
  Intermediated interest rate caps and floors purchased..     127     225
  Intermediated interest rate caps and floors written....     127     225
Liquidity support guarantees.............................     142     157
Forward and option contracts.............................     196   1,352
Mortgages sold with recourse.............................     156     198
Commitments to sell loans................................     875     132
Foreign currency commitments:
  Commitments to purchase................................     941   1,073
  Commitments to sell....................................     941   1,073
                                                           ==============
</TABLE>


COMMITMENTS TO EXTEND CREDIT - Commitments to extend credit are legally
binding and generally have fixed expiration dates or other termination clauses.
The contractual amount of the commitments represents the Company's exposure to
credit loss on commitments to extend credit, in the event of nonperformance by
the counterparty. The Company monitors its credit risk for commitments to extend
credit by applying the same credit policies in making commitments as it does for
loans, including obtaining collateral to secure commitments based on
management's credit assessment of the counterparty. Collateral held varies, but
may include marketable securities, receivables, inventory, equipment, and real
estate. Since the Company expects many of the commitments will expire without
being drawn upon, total commitment amounts do not necessarily represent the
Company's future liquidity requirements. In addition, the commitments to extend
consumer credit include various consumer credit line products that are
cancelable upon notification.

LETTERS OF CREDIT - Standby letters of credit are conditional commitments
issued by the Company guaranteeing the performance of a customer to a third
party. The guarantees frequently support public and private borrowing
arrangements, including commercial paper issuances, bond financings, and other
similar transactions. The Company issues commercial letters of credit on behalf
of customers to ensure payment of amounts owed or collection of amounts
receivable in connection with trade transactions. The Company's credit loss
exposure in the event of counterparty nonperformance is the letter of credit
contractual amount and is the same exposure involved in extending loans.
Management assesses the counterparty's credit to determine the collateral
obtained to support the letters of credit. Collateral held varies, but may
include marketable securities, real estate, accounts receivable and inventory.
Since the conditions requiring the Company to fund letters of credit may not
materialize, the Company expects the letters of credit liquidity requirements to
be less than the total outstanding commitments.

                                    First Bank System, Inc. and Subsidiaries  59
                                                                              --

<PAGE>
 

INTEREST RATE OPTIONS AND SWAPS - Interest rate swaps involve the contractual
exchange of fixed and floating rate interest payment obligations based on a
notional principal amount. The Company enters into interest rate swap contracts
to hedge its balance sheet for risk caused by fluctuations in interest rates and
as an intermediary for customers. At December 31, 1994, and 1993, interest rate
swaps totaling $2.7 billion and $2.8 billion, respectively, hedged medium-term
notes, subordinated debt, deposit notes, long-term certificates of deposit,
deposit accounts, savings certificates and commercial loans.

  Activity with respect to interest rate swap hedges was as follows:


<TABLE>
<CAPTION>
(In Millions)                                      1994       1993       1992
- -------------------------------------------------------------------------------
<S>                                              <C>        <C>        <C>
Notional amount outstanding at beginning 
  of year......................................  $2,810.8   $2,659.8   $2,009.7
Additions......................................   1,275.0      400.0    1,161.0
Maturities.....................................    (624.1)    (225.8)    (279.1)
Terminations...................................    (787.9)     (23.2)    (231.8)
                                                 ------------------------------
  Notional amount outstanding at end of year...  $2,673.8   $2,810.8   $2,659.8
                                                 ==============================
</TABLE>


  For interest rate swaps designated as hedges, the weighted average interest
rates to be paid were 6.09 percent and 3.32 percent at December 31, 1994, and
1993, respectively. At these same dates, the weighted average interest rates to
be received were 6.91 percent and 6.98 percent. FBS is a receiver of fixed rate
interest and a payer of floating rate interest on all hedges as of December 31,
1994.

  For notional balances and yields by maturity date of the interest rate swap
hedging portfolio as of December 31, 1994, see Table 17 on page 33. For a
description of the Company's objectives for using derivative financial
instruments, refer to "Interest Rate Risk Management" on pages 31 through 33.
Such information is incorporated by reference into these Notes to Consolidated
Financial Statements.

  At December 31, 1994, and 1993, interest rate floors totaling $950 million
with an average remaining maturity of 3.0 years and 4.0 years, respectively,
hedged floating rate commercial loans. For interest rate floors designated as
hedges, the weighted average 3-month LIBOR strike was 3.50 percent, compared
with a corresponding market index of 6.50 percent.

  In addition to utilizing swaps and options as part of the Company's
asset/liability management strategy, the Company also acts as intermediary for
swap and option agreements on behalf of its customers. To reduce its exposure to
interest and market risks related to these agreements, the Company enters into
generally matching or offsetting positions. The total notional amount of
customer swap agreements, including the offsetting positions, was $127 million
and $199 million at December 31, 1994, and 1993, respectively. The total
notional amount of customer option agreements, including the offsetting
positions, was $254 million and $450 million at December 31, 1994, and 1993,
respectively.

  Interest rate swap and option contracts will result in gains and losses
subsequent to the date of the contract, due to interest rate movements. For
intermediated swaps and options, the Company records these gains and losses as
they occur in trading income. For swaps used as hedges, the Company recognizes
the gains or losses as an adjustment to interest income or expense over the
terms of the hedge. The Company amortizes the gain or loss on terminated hedges
over the original life of the hedge if the hedged item remains outstanding. The
amortization of deferred gains and losses increased net interest income by $3.1
million and decreased net interest income by $.9 million during 1994, and 1993,
respectively. Unamortized deferred gains were $9.6 million at December 31, 1994.
The Company will amortize these gains through the year 2000.

  Interest rate swap and option agreements contain credit risk in the event
counterparties are unable to meet the terms of their contracts. The Company
estimates the credit risk for interest rate swap and option contracts by
calculating the present value of the cost to replace all outstanding contracts
in a gain position at current market rates, excluding counterparty contract
gains and losses reported on a net basis. At December 31, 1994, and 1993, the
gain position of these contracts, in the aggregate, was approximately $12
million and $172 million, respectively.

  The Company manages the credit risk of its interest rate swap and option
contracts through credit approvals, limits, bilateral collateral agreements and
monitoring procedures. Independent commercial bankers perform credit analyses to
establish counterparty limits. Senior management approves counterparty limits
and periodically reviews the limits to monitor compliance. In addition, the
Company reduces the assumed counterparty credit risk through master netting
agreements which permit the Company to settle interest rate contracts with the
same counterparty on a net basis.

60  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
LIQUIDITY SUPPORT GUARANTEES -  Liquidity support guarantees are contracts
whereby the Company agrees to provide a liquidity facility to support commercial
paper or tax-exempt bonds issued by its customers. The contracts are secured by
notes receivable, bonds or private insurance, guaranteeing payment of principal
and interest on any unreimbursed funds advanced. Since the conditions that
require the Company to fund the guarantees may not materialize, total guarantee
amounts do not necessarily represent the Company's future funding obligation.

FORWARD CONTRACTS AND COMMITMENTS TO SELL MORTGAGE LOANS - Forward contracts are
contracts for the delayed delivery of securities or cash settlement money market
instruments. The Company enters into these contracts to hedge the interest rate
risk of its mortgage loans held for sale. At December 31, 1994, and 1993,
forward contracts outstanding were $.2 billion and $1.4 billion, respectively.
At December 31, 1994, net unamortized deferred gains on the forward agreements
were $200,000. The Company manages its credit risk on forward contracts, which
would arise in the event of nonperformance by counterparties, through credit
approval and limit procedures.

  The Company is committed under agreements, which are not expected to result in
loss to the Company, to sell mortgage loans pursuant to master delivery
commitments, and the remaining balance on those commitments was $875 million at
December 31, 1994, and $132 million at December 31, 1993.

MORTGAGES SOLD WITH RECOURSE - Various recourse provisions, relating to
residential and multi-family mortgages sold with recourse, obligate the Company
for $156 million at December 31, 1994, and $198 million at December 31, 1993.
All of the loans sold are collateralized by real estate mortgages and a portion
of some of the loans sold is supported by either government-sponsored or private
mortgage insurance.

FOREIGN CURRENCY COMMITMENTS - Commitments to purchase and sell foreign currency
primarily consist of contracts to exchange currencies at specified exchange
rates on specified dates with various counterparties, which enables customers to
transfer or reduce the risks associated with changes in foreign currency
exchange rates. The Company minimizes the market and liquidity risks created by
changes in currency exchange rates by taking offsetting positions. In addition,
the Company controls the market risks associated with these contracts by
limiting the net exposure through policies, procedures, and monitoring. The
Company manages its credit risk, or potential risk of loss from contract
nonperformance by a counterparty, through credit limit approval and monitoring
procedures. The aggregate replacement cost of contracts in a gain position at
December 31, 1994, was not significant.

CREDIT CONCENTRATIONS - The Company concentrates its lending to borrowers in the
region where the Company has banking offices and lends to borrowers in a wide
variety of industries.

  Approximately 75 percent of the Company's commercial and financial portfolio
is outstanding to borrowers located in the Company's operating region of
Minnesota, Colorado, Wisconsin, Montana, North Dakota, South Dakota, and
Illinois. Collateral held may include marketable securities, accounts
receivable, inventory, and equipment.

  For detail of the Company's real estate portfolio by project type and
geography as of December 31, 1994, and 1993, see Table 8 on page 24 which is
incorporated by reference into these Notes to Financial Statements. Such loans
are collateralized by the related property.

  For detail of the Company's consumer loan portfolio by loan type see Table 7
on page 23 under the category "Consumer" as of December 31, 1994, and 1993,
which is incorporated by reference into these Notes to Financial Statements.
Approximately 80 percent of the total consumer portfolio outstanding at December
31, 1994, is to customers located in the Company's operating region. Residential
mortgages, home equity and auto loans are secured, but other consumer loan types
are generally not secured.

NOTE N. Fair Values of Financial Instruments
- --------------------------------------------

  SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the fair value of all financial instruments, both on and off
balance sheet, for which it is practicable to estimate their value. Financial
instruments are generally defined as cash, equity instruments or investments,


                                    First Bank System, Inc. and Subsidiaries  61
                                                                              --

<PAGE>
 
and contractual obligations to pay or receive cash or another financial
instrument. In defining fair value, the Statement indicates quoted market prices
are the preferred means of estimating the value of a specific instrument, but in
the cases where market quotes are not available, fair values should be
determined using various valuation techniques such as discounted cash flow
calculations or by using pricing models or services.

  Due to the nature of its business and the financing and investing needs of its
customers, the Company is involved with a large number of financial instruments,
the majority of which are not actively traded. Accordingly, the Company has used
several valuation techniques and considered various assumptions, including the
discount rate, the estimated timing and amount of cash flows and the aggregation
methods for valuing similar products, to estimate the fair value of the
financial instruments. As a result, the fair value estimates cannot be
substantiated by comparison to independent markets, and in a majority of the
cases, could not be realized by the immediate sale or settlement of the
financial instrument. Also, the estimates reflect a point in time valuation that
could change significantly based on changes in outside economic factors, such as
the general level of interest rates. Furthermore, the required disclosures
exclude the estimated values of certain financial instruments and all
nonfinancial instrument cash flows. Finally, the fair value disclosure is not
intended to provide or estimate a market value of the Company as a whole. The
following summarizes the valuation techniques and assumptions used by the
Company in estimating the fair value of the financial instruments:

CASH AND CASH EQUIVALENTS - Cash, fed funds sold and investments under
repurchase programs have no interest rate risk component and accordingly their
carrying value was assumed to approximate fair value.

SECURITIES - Generally, trading securities and available-for-sale securities
were valued using available market quotes. In some instances, for securities
that are not widely traded, market quotes for comparable securities were used.

LOANS - The loan portfolio consists of both variable rate and fixed rate loans,
the fair value of which was estimated using discounted cash flow analyses or
other valuation techniques. In order to apply discounted cash flow analyses,
loans were aggregated into "pools" of similar types and expected repayment
terms. The expected cash flows were reduced for estimated historical prepayment
experience. The projected cash flows on nonaccrual loans were further reduced by
the amount of estimated losses on the portfolio and discounted over an assumed
average remaining life of one to two years.

COMMERCIAL AND FINANCIAL INSTITUTIONS:  Commercial and financial institution
loans were valued using a discounted cash flow analysis. The fixed rate loans in
the commercial and financial institutions portfolio (excluding nonaccrual loans)
had a weighted average rate of 8.1 percent in 1994 and 7.5 percent in 1993 and a
weighted average maturity of 1.7 years in 1994 and 1993. The floating rate loans
had a weighted average rate of 8.4 percent in 1994 and 5.7 percent in 1993. The
high grade corporate bond yield curve was used to arrive at the discount rates
applied to these loans.

CORPORATE CARD:  The fair value of corporate cards and business cards was based
on an approach that is similar to that used by the Company to evaluate potential
acquisitions of portfolios of this type. Estimated net income adjusted for
account attrition was discounted using an estimated cost of capital of 13.6
percent in 1994 and 13.7 percent in 1993. The weighted average life was 7.6
years in 1994 and 9.3 years in 1993.

COMMERCIAL REAL ESTATE AND CONSTRUCTION:  Commercial real estate and
construction loans were valued using a discounted cash flow analysis. The fixed
rate portion of this portfolio (excluding nonaccrual loans) had a weighted
average interest rate of 8.8 percent and a weighted average remaining maturity
of 4.5 years in 1994 compared to 9.0 percent and 4.2 years in 1993. The floating
rate portion of this portfolio (excluding nonaccrual loans) had a weighted
average interest rate of 9.0 percent and a weighted average remaining maturity
of 3.7 years in 1994 compared to 9.0 percent and 4.2 years in 1993. The high
grade corporate bond yield curve was used to arrive at the discount rates
applied to these loans.

RESIDENTIAL FIRST MORTGAGES:  Residential first mortgages were segregated into
pools of similar coupons and maturities. These pools were matched to similar
mortgage-backed securities, and

62  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

market quotes were obtained. In addition, the fair value of the mortgage
servicing rights related to these mortgages was estimated using a discounted
cash flow analysis and was included in the fair value of the loans. The fixed
rate portion of this portfolio had a weighted average interest rate of 8.0
percent in 1994 and 8.1 percent in 1993 with a weighted average contractual
final remaining maturity of 15.3 years in 1994 and 14.2 years in 1993.

CONSUMER INSTALLMENT:  Fair value for consumer installment loans was estimated
using a discounted cash flow analysis. Prepayment assumptions ranging from 20-25
percent were applied to scheduled cash flows, based upon the Company's
experience with these assets. The floating rate portion of the consumer
installment loan portfolio had a weighted average rate of 9.0 percent in 1994
and 7.0 percent in 1993. The fixed rate portion of this portfolio had a weighted
average rate of 8.8 percent in 1994 and 9.2 percent in 1993 and a weighted
average remaining maturity of 1.4 years in 1994 and 1993. The high grade
corporate bond yield curve was used to arrive at the discount rates applied to
these loans.

REVOLVING HOME EQUITY LINES, SECOND MORTGAGES AND CONSUMER LINES:  The fair
value of revolving home equity lines, second mortgages and consumer lines was
based on an approach similar to that used by the Company to evaluate potential
acquisitions of portfolios of this type. Estimated net income adjusted for
account attrition was discounted using an estimated cost of capital of 12.1
percent for secured lines and loans and 13.6 for unsecured lines in 1994 and
13.7 percent for both secured and unsecured lines in 1993. The home equity lines
had a weighted average interest rate of 10.4 percent in 1994 and 7.8 percent in
1993 with a weighted average life of 5.4 years in 1994 and 5.3 years in 1993.
The fixed rate portion of the second mortgage loan portfolio had a weighted
average rate of 8.9 percent in 1994 and 9.0 percent in 1993 and a weighted
average remaining maturity of 3.6 years in 1994 and 2.3 years in 1993. Retail
credit cards had a weighted average interest rate of 16.9 percent in 1994 and
15.4 percent in 1993 with a weighted average life of 7.1 years in 1994 and 7.3
years in 1993. Other revolving lines had a weighted average interest rate of
12.4 percent in 1994 and 10.6 percent in 1993 with a weighted average life of
7.8 years in 1994 and 7.6 years in 1993.

CORE DEPOSIT INTANGIBLE - Core deposits provide a stable, low-cost source of
funds which can be invested to earn a return greater than the cost of servicing
the deposits. The fair value of the Company's core deposits was estimated using
a discounted cash flow model which estimates the present value of the difference
between the ongoing cost of the core deposits and the cost of alternative funds
at current market rates. This is the same method the Company uses in calculating
the value of the core deposit intangible of an acquired bank.

DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts and
certain money market deposits is defined by SFAS 107 to be equal to the amount
payable on demand at the date of the financial statements. Fair values for fixed
rate certificates of deposits were estimated using a discounted cash flow
analysis using the high grade corporate bond yield curve to establish discount
rates. The weighted average interest rate for the certificate of deposits was
5.3 percent in 1994 and 4.4 percent in 1993 and the weighted average maturity
was 1.2 years in 1994 and 1.0 year in 1993.

SHORT-TERM BORROWINGS - The majority of the federal funds purchased, borrowings
under repurchase agreements and other short-term borrowings are at variable
rates or have short-term maturities and their carrying value is assumed to
approximate their fair value.

LONG-TERM DEBT - Medium-term notes and mortgage note obligations totaling $514
million in 1994 and $123 million in 1993 were valued with a discounted cash flow
analysis using current market rates of similar maturity debt securities to
discount cash flows. The weighted average interest rate was 6.5 percent in 1994
and 9.4 percent in 1993 with a weighted average maturity of 1.7 years in 1994
and .7 years in 1993. Other long-term debt instruments were valued using
available market quotes.

LOAN COMMITMENTS, LETTERS OF CREDIT AND GUARANTEES - The substantial majority of
the Company's commitments have variable rates and do not expose the Company to
interest rate risk. No premium or discount was ascribed to loan commitments
because when funded, virtually all funding will be at current market rates.


                                    First Bank System, Inc. and Subsidiaries  63
                                                                              --

<PAGE>
 

INTEREST RATE SWAPS, OPTIONS, FLOORS AND CAPS - The interest rate options and
swap cash flows were estimated using a third party pricing model and discounted
based on appropriate LIBOR, Euro dollar future and Treasury yield curves.

  The estimated fair values of the Company's financial instruments are shown 
in the table below.


<TABLE>
<CAPTION>
                                                              1994                1993
                                                       -------------------------------------
                                                       Carrying    Fair    Carrying     Fair
(Dollars in Millions)                                   Amount    Value     Amount     Value
- ---------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>      <C>         <C>
FINANCIAL ASSETS:
  Cash and due from banks.............................  $ 1,621   $ 1,621   $ 1,682   $ 1,682
  Federal funds sold and resale agreements............      471       471     1,338     1,338
  Trading account securities..........................       77        77        55        55
  Available-for-sale securities.......................    3,148     3,148     3,319     3,319
Loans:
  Commercial:
    Commercial........................................    7,479     7,623     6,359     6,579
    Financial institutions............................      787       719     2,004     1,828
    Commercial real estate and construction...........    2,149     2,292     1,726     1,968
  Consumer:
    Residential mortgage..............................    2,273     2,180     2,422     2,482
    Residential mortgage held for sale................      162       162     1,088     1,105
    Home equity and second mortgage...................    2,199     2,260     1,755     1,820
    Credit card and revolving lines...................    3,103     3,339     2,447     2,673
    Other consumer installment........................    1,129     1,143       978     1,016
  Allowance for credit losses.........................     (434)        -      (423)        -
                                                        -------------------------------------
      Total loans.....................................   18,847    19,718    18,356    19,471
                                                        -------------------------------------
      Total financial assets..........................   24,164    25,035    24,750    25,865
NONFINANCIAL ASSETS:
  Core deposit intangible.............................       60       823        41       220
  Mortgage servicing portfolio........................       43       126        53        80
                                                        -------------------------------------
      Total...........................................   24,267   $25,984    24,844   $26,165
                                                                  =======             =======
Other assets..........................................    1,952               1,541
                                                        -------             -------
      Total Assets....................................  $26,219             $26,385
                                                        =======             =======
FINANCIAL LIABILITIES:
  Deposits:
    Noninterest-bearing deposits......................  $ 5,777   $ 5,777   $ 7,489   $ 7,489
    Interest-bearing checking and other savings.......    7,696     7,696     8,115     8,115
    Savings certificates and certificates
     (Greater Than)$100,000...........................    5,318     5,217     5,427     5,498
                                                        -------------------------------------
      Total deposits..................................   18,791    18,690    21,031    21,102
  Federal funds purchased.............................    1,630     1,630       553       553
  Securities sold under agreements to repurchase......      534       536       369       378
  Other short-term funds borrowed.....................      658       658       412       412
  Long-term debt......................................    1,483     1,439     1,015     1,036
                                                        -------------------------------------
      Total financial liabilities.....................   23,096   $22,953    23,380   $23,481
                                                                  =======             =======
NONFINANCIAL LIABILITIES..............................      848                 760
SHAREHOLDERS' EQUITY..................................    2,275               2,245
                                                        -------             -------
      Total Liabilities and Shareholders' Equity......  $26,219             $26,385
                                                        =======             =======
Off-Balance Sheet Financial Instruments:
  Unrecognized gain on interest rate swaps and
   options............................................      N/A   $     3       N/A   $   134
  Unrecognized loss on interest rate swaps and
   options............................................      N/A       121       N/A        11
  Loan commitments....................................      N/A                 N/A
  Letters of credit...................................      N/A         -       N/A         -
                                                        -------------------------------------
</TABLE>


64  First Bank System, Inc. and Subsidiaries
- --


<PAGE>

Note O.   Commitments and Contingent Liabilities
- ------------------------------------------------

Rental expense for operating leases amounted to $66.2 million in 1994, $72.1
million in 1993 and $66.4 million in 1992.

  Future minimum payments, by year and net of sublease rentals, under
capitalized leases and noncancelable operating leases with initial terms of one
year or more, consisted of the following at December 31, 1994:


<TABLE>
<CAPTION>

                                                       Capitalized   Operating
(In Millions)                                            Leases       Leases
- ------------------------------------------------------------------------------
<S>                                                    <C>           <C>
1995................................................     $ 10.6       $ 49.1
1996................................................       10.7         42.4
1997................................................       10.7         40.2
1998................................................        4.5         39.4
1999................................................        4.5         79.0
Thereafter..........................................       62.9        310.1
                                                         -------------------
Total minimum lease payments........................      103.9       $560.2
                                                                      ======
Less amount representing interest...................       51.1
                                                         ------
Present value of net minimum lease payments.........     $ 52.8
                                                         ======
</TABLE>


  The Company currently occupies approximately 640,000 square feet in First Bank
Place, located in Minneapolis, under a 10-year lease. The Company has eight 
five-year options to renew the lease. Minimum rental payments are approximately
$12.5 million annually.

  In November 1992 the Company acquired a 368,000 square foot facility in St.
Paul. The lease term extends for 21 years, commencing November 1991, with two
five-year renewal options. Minimum rental payments are approximately $4.2
million annually.

  A wholly-owned subsidiary of First Bank National Association ("the Bank") is a
partner in a joint venture that owns and operates a twin-tower office complex
known as Pillsbury Center. The Bank and the Parent Company have long-term lease
agreements to occupy space in one of the towers. Approximately two-thirds of the
space has been sublet for the remaining life of the long-term lease obligation
and the remaining space has been sublet through the year 2001. The unamortized
portion of the capitalized lease was $23.0 million at December 31, 1994, and
$23.3 million at December 31, 1993. Minimum annual payments required under the
leases are approximately $2.7 million.

  Various legal proceedings are currently pending against the Company. Due to
the complex nature of some of these actions and proceedings, it may be a number
of years before such matters ultimately are resolved. In the opinion of
management, the aggregate liability, if any, will not have a material adverse
effect on the Company's financial position.


                                    First Bank System, Inc. and Subsidiaries  65
                                                                              --


<PAGE>

NOTE P.  Supplemental Disclosures to the Consolidated Financial Statements
- --------------------------------------------------------------------------
         CONSOLIDATED BALANCE SHEET - Time certificates of deposit in
         denominations of $100,000 or more totaled $896 million and
         $1,061 million at December 31, 1994, and 1993, respectively.

         CONSOLIDATED STATEMENT OF CASH FLOWS - Listed below are
         supplemental disclosures to the Consolidated Statement of
         Cash Flows.

<TABLE>
<CAPTION>
             Year Ended December 31 (In Millions)                                                   1994      1993       1992
             -------------------------------------------------------------------------------------------------------------------
             <S>                                                                                  <C>         <C>      <C>
             Income taxes paid.................................................................   $   147.1   $114.2   $    53.5
             Interest paid.....................................................................       529.0    567.1       716.6
             Net noncash transfers to foreclosed property......................................        13.1     26.8        71.6
             Noncash merger-related transfers to securities held for sale......................           -    181.6           -
             Change in unrealized gain (loss) on available-for-sale securities,
               net of taxes of $78.6 in 1994 and $20.9 in 1993.................................      (128.1)    34.0           -
             Cash acquisitions of businesses:
               Fair value of noncash assets acquired...........................................       276.9     40.8        26.0
               Liabilities assumed.............................................................      (219.5)   (37.8)      (93.4)
                                                                                                  ------------------------------
                 Net...........................................................................   $    57.4   $  3.0   $   (67.4)
                                                                                                  ==============================
             Stock acquisitions of businesses:
               Fair value of noncash assets acquired...........................................   $ 1,805.8        -   $ 2,096.0
               Net cash acquired...............................................................        74.5        -       197.1
               Liabilities assumed.............................................................    (1,648.0)       -    (2,060.1)
                                                                                                  ------------------------------
                 Net value of common stock issued..............................................   $   232.3        -   $   233.0
                                                                                                  ==============================
</TABLE>
 

NOTE Q.  First Bank System, Inc. (Parent Company)
- -------------------------------------------------

<TABLE> 
<CAPTION> 
             CONDENSED BALANCE SHEET

             December 31 (In Millions)                                                                         1994        1993
             -------------------------------------------------------------------------------------------------------------------
             <S>                                                                                               <C>         <C> 
             ASSETS
             Deposits with banks, principally interest-bearing (including $373 and $139 with subsidiaries)..  $  374      $  140
             Available-for-sale securities..................................................................     149         121
             Investments in:
               Bank affiliates and bank holding companies...................................................   2,322       2,315
               Nonbank affiliates...........................................................................      44          69
               Trust affiliates.............................................................................      56          51
             Advances to:
               Bank affiliates and bank holding companies...................................................     155         141
               Nonbank affiliates...........................................................................     100          67
             Other assets...................................................................................     270         233
                                                                                                              ------------------
                 Total assets...............................................................................  $3,470      $3,137
                                                                                                              ==================
             LIABILITIES AND SHAREHOLDERS' EQUITY
             Short-term funds borrowed......................................................................  $    6      $    4
             Advances from subsidiaries.....................................................................      30          54
             Long-term debt.................................................................................   1,011         745
             Other liabilities..............................................................................     148          89
             Shareholders' equity...........................................................................   2,275       2,245
                                                                                                              ------------------
                 Total liabilities and shareholders' equity.................................................  $3,470      $3,137
                                                                                                              ==================
</TABLE>



66  First Bank System, Inc. and Subsidiaries
- --


<PAGE>


<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME

Year Ended December 31 (In Millions)                                     1994     1993     1992
- ------------------------------------------------------------------------------------------------
<S>                                                                     <C>      <C>      <C>
INCOME
Dividends from subsidiaries (including $397.9, $357.4 and $152.0
  from bank and bank holding company subsidiaries)...................   $430.9   $361.4   $158.9
Interest from subsidiaries...........................................     19.0     20.4     24.8
Service and management fees from subsidiaries........................     78.6     69.3     64.9
Other income.........................................................     23.5     20.3     16.4
                                                                        ------------------------
    Total income.....................................................    552.0    471.4    265.0

EXPENSES
Interest on short-term funds borrowed................................      2.8      2.4       .6
Interest on long-term debt...........................................     47.4     44.0     46.6
Operating expenses paid to subsidiaries..............................      8.3      7.0      7.0
Other expenses.......................................................     91.9     97.1     75.2
                                                                        ------------------------
    Total expenses...................................................    150.4    150.5    129.4
                                                                        ------------------------
Income before income taxes, cumulative effect of changes
  in accounting principles and equity in undistributed income
  of subsidiaries....................................................    401.6    320.9    135.6
Income taxes (benefit)...............................................     (9.2)   (14.3)    47.0
                                                                        ------------------------
Income before cumulative effect of changes in accounting principles
  and equity in undistributed income of subsidiaries.................    410.8    335.2     88.6
Cumulative effect of changes in accounting principles................        -        -     40.3
                                                                        ------------------------
Income of parent company.............................................    410.8    335.2    128.9
Equity (deficiency) in undistributed income of subsidiaries:
  Bank affiliates and bank holding companies.........................     23.0    (47.9)   165.2
  Nonbank affiliates.................................................    (19.5)     4.0     14.3
  Trust affiliates...................................................      5.5      6.7      3.4
                                                                        ------------------------
                                                                           9.0    (37.2)   182.9
                                                                        ------------------------
    Net income.......................................................   $419.8   $298.0   $311.8
                                                                        ========================
</TABLE>



                                    First Bank System, Inc. and Subsidiaries  67
                                                                              --

<PAGE>
 

<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS

Year Ended December 31 (In Millions)                               1994      1993      1992
- ---------------------------------------------------------------------------------------------
<S>                                                               <C>       <C>       <C>
OPERATING ACTIVITIES
Net income......................................................   $ 419.8   $ 298.0   $ 311.8
Adjustments to reconcile net income to net cash
  provided by operating activities:
  (Equity) deficiency in undistributed income of subsidiaries
    before cumulative effect of accounting changes..............      (9.0)     37.2    (182.9)
  Cumulative effect of accounting changes.......................         -         -     (40.3)
  Decrease (increase) in accrued receivables, net...............      46.1      (5.7)       .2
  (Decrease) increase in accrued liabilities, net...............     (15.4)    (30.7)     68.5
  Amortization of goodwill and other intangibles................       5.5       5.4       4.9
  Deferred tax provision........................................      53.2      13.4      (7.6)
  Other -- net..................................................     (39.7)    (31.7)      8.4
                                                                   ---------------------------
    Net cash provided by operating activities...................     460.5     285.9     163.0

INVESTING ACTIVITIES
Securities transactions:
  Sales and maturities..........................................      20.4      22.5      26.9
  Purchases.....................................................     (55.2)    (61.3)    (45.5)
Investment in subsidiaries......................................     (83.7)    (43.2)   (158.7)
Equity distributions from subsidiaries..........................     235.0         -         -
Net (increase) decrease in short-term advances to affiliates....     (50.0)     54.2      21.9
Long-term advances made to affiliates...........................         -     (22.4)    (40.0)
Principal collected on long-term advances made to affiliates....       0.3     126.0        .8
Other -- net....................................................     (31.6)     23.3      16.6
                                                                   ---------------------------
    Net cash provided (used) by investing activities............      35.2      99.1    (178.0)

FINANCING ACTIVITIES
Net (decrease) increase in short-term funds borrowed............     (25.1)     44.5      10.7
Proceeds from long-term debt....................................     405.1     240.0     125.8
Principal payments on long-term debt............................    (138.8)   (244.7)    (88.0)
Redemption of preferred stock...................................    (167.0)   (115.2)        -
Proceeds from dividend reinvestment, stock option, and
  stock purchase plans..........................................      22.9      34.5      19.2
(Purchase) issuance of treasury stock and stock warrants........    (222.7)   (187.1)      2.8
Stock warrants exercised........................................       6.6         -         -
Cash dividends..................................................    (142.1)   (137.5)   (100.1)
                                                                   ---------------------------
    Net cash used by financing activities.......................    (261.1)   (365.5)    (29.6)
                                                                   ---------------------------
    Change in cash and cash equivalents.........................     234.6      19.5     (44.6)
Cash and cash equivalents at beginning of year..................     139.5     120.0     164.6
                                                                   ---------------------------
    Cash and cash equivalents at end of year....................   $ 374.1   $ 139.5   $ 120.0
                                                                   ===========================
</TABLE>


    Certain restrictions exist regarding the extent to which bank subsidiaries
may transfer funds to the Company in the form of dividends, loans or advances.
Federal law prevents the Company and its nonbank subsidiaries from borrowing
from bank subsidiaries unless the loans are secured by various types of
collateral. These secured loans that may be made by bank subsidiaries to the
Company or any individual affiliate are generally limited to 10 percent of the
bank's equity and 20 percent of the bank's equity for loans to all affiliates
and the Company in the aggregate.
    Payment of dividends to the Company by its subsidiary banks is subject to
review by banking regulators and is subject to various statutory limitations and
in certain circumstances requires approval by banking regulatory agencies. The
approval of the Comptroller of the Currency is required if total dividends
declared by a national bank in any calendar year exceed the bank's net profits
(as defined) for that year combined with its retained net profits for the
preceding two calendar years. These permissible dividends are further limited by
the minimum capital constraints imposed on all national banks by the Comptroller
of the Currency. Within the limit of these regulatory guidelines, all
subsidiaries have the ability to pay dividends without prior regulatory
approval.


68  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 
REPORT OF MANAGEMENT

The financial statements of First Bank System, Inc. were prepared by management,
which is responsible for their integrity and objectivity. The statements have
been prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and include amounts that are based on
management's best estimates and judgment. All financial information throughout
the annual report is consistent with that in the financial statements.

  The Company maintains accounting and internal control systems that are
believed to provide reasonable assurance that assets are safeguarded and
transactions are properly authorized and recorded. To monitor compliance, the
Company carries out an extensive audit program. This program includes a review
for compliance with written policies and procedures and a comprehensive review
of the adequacy and effectiveness of internal control systems. However, there
are limits inherent in all systems of internal accounting control and management
recognizes that errors or irregularities may occur. Based on the recognition
that the costs of such systems should not exceed the benefits to be derived,
management believes the Company's system provides an appropriate cost/benefit
balance.

  The Company's independent auditors, Ernst & Young LLP, have been engaged to
render an opinion on the financial statements and to assist in carrying out the
audit program described above. Their opinion on the financial statements is
based on procedures performed in accordance with generally accepted auditing
standards, including tests of the accounting records to the extent necessary to
allow them to report on the fairness of the financial statements. Ernst & Young
LLP has full access to the Audit Committee.

  The management of the Company is committed to and has always maintained and
enforced a philosophy of high ethical standards in the conduct of its business.
Written policies covering conflicts of interest and other subjects are
formulated in a Code of Ethics which is uniformly applicable to all officers and
employees of the Company.

/s/ John F. Grundhofer

John F. Grundhofer

Chairman, President and Chief Executive Officer

/s/ Richard A. Zona

Richard A. Zona

Vice Chairman and Chief Financial Officer

/s/ David J. Parrin

David J. Parrin

Senior Vice President and Controller



REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Shareholders
First Bank System, Inc.

We have audited the accompanying consolidated balance sheets of First Bank
System, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
  We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by 
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.
  In our opinion, the financial statements referred to above present fairly, in 
all material respects, the consolidated financial position of First Bank System,
Inc. and subsidiaries at December 31, 1994 and 1993, and the consolidated 
results of their operations and their cash flows for each of the three years in 
the period ended December 31, 1994, in conformity with generally accepted 
accounting principles.


                                                               Ernst & Young LLP

Minneapolis, Minnesota
January 24, 1995



                                    First Bank System, Inc. and Subsidiaries  69
                                                                              --

<PAGE>
 

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET - FIVE-YEAR SUMMARY

                                                                                                              % Change
December 31 (In Millions)                              1994       1993       1992       1991       1990      1993-1994
- ----------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>        <C>        <C>        <C>        <C>
ASSETS
Cash and due from banks...........................    $ 1,621    $ 1,682    $ 1,916    $ 1,593    $ 1,922       (3.6)%
Federal funds sold and resale agreements..........        471      1,338      1,710      1,509      1,602      (64.8)
Interest-bearing deposits with banks..............          -          -        327        410         58         **
Trading account securities........................         77         55         94        151        136       40.0
Securities held for sale..........................          -          -        284        336          -         **
Securities:*
  U.S. Treasury...................................      1,098      1,541      1,816      1,155        964      (28.7)
  Mortgage-backed securities......................      1,414      1,300      1,583      1,165      1,577        8.8
  State and political subdivisions................        178        196        188        166        445       (9.2)
  U.S. agencies and other.........................        458        282        325         19        420       62.4
                                                      ---------------------------------------------------
    Total securities..............................      3,148      3,319      3,912      2,505      3,406       (5.2)
Loans.............................................     19,281     18,779     17,076     16,365     16,829        2.7
  Less allowance for credit losses................        434        423        448        427        454        2.6
                                                      ---------------------------------------------------
    Net loans.....................................     18,847     18,356     16,628     15,938     16,375        2.7
Other assets......................................      2,055      1,635      1,754      1,409      1,305       25.7
                                                      ---------------------------------------------------
      Total assets................................    $26,219    $26,385    $26,625    $23,851    $24,804       (.6)%
                                                      ===================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
  Noninterest-bearing.............................    $ 5,777    $ 7,489    $ 6,011    $ 4,723    $ 4,295      (22.9)%
  Interest-bearing................................     13,014     13,542     15,177     14,422     15,083       (3.9)
                                                      ---------------------------------------------------
      Total deposits..............................     18,791     21,031     21,188     19,145     19,378      (10.7)
Short-term borrowings.............................      2,822      1,334      1,450      1,303      1,651      111.5
Long-term debt....................................      1,483      1,015        822        948      1,506       46.1
Other liabilities.................................        848        760        847        603        669       11.6
                                                      ---------------------------------------------------
      Total liabilities...........................     23,944     24,140     24,307     21,999     23,204        (.8)
Shareholders' equity..............................      2,275      2,245      2,318      1,852      1,600        1.3
                                                      ---------------------------------------------------
      Total liabilities and shareholders' equity..    $26,219    $26,385    $26,625    $23,851    $24,804        (.6)%
                                                      ===================================================
</TABLE>

 *Available-for-sale in 1994 and 1993
**Not meaningful


70  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME -- FIVE-YEAR SUMMARY

                                                                                                                           % Change
Year Ended December 31 (In Millions)                                  1994       1993      1992      1991      1990       1993-1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>       <C>       <C>       <C>          <C>
INTEREST INCOME
Loans.............................................................  $1,510.7   $1,398.6  $1,418.8  $1,624.3  $1,922.2        8.0%
Securities:
  Taxable.........................................................     199.2      218.2     186.4     221.1     274.3       (8.7)
  Exempt from federal income taxes................................      12.0       14.6      12.0      19.1      34.9      (17.8)
Other interest income.............................................      25.2       30.4      64.1      97.5     146.4      (17.1)
                                                                    --------------------------------------------------
  Total interest income...........................................   1,747.1    1,661.8   1,681.3   1,962.0   2,377.8        5.1

INTEREST EXPENSE
Deposits..........................................................     373.1      423.7     568.7     872.8   1,191.4      (11.9)
Federal funds purchased and repurchase agreements.................      91.2       31.8      37.1      57.9     139.0      186.8
Other short-term funds borrowed...................................      18.5       19.0      14.3      24.2      70.6       (2.6)
Long-term debt....................................................      69.5       54.4      66.1     100.3     152.2       27.8
                                                                    --------------------------------------------------
  Total interest expense..........................................     552.3      528.9     686.2   1,055.2   1,553.2        4.4
                                                                    --------------------------------------------------
Net interest income...............................................   1,194.8    1,132.9     995.1     906.8     824.6        5.5
Provision for credit losses (1992 includes $13.6 merger-related)..      93.0      125.2     183.4     202.2     215.4      (25.7)
                                                                    --------------------------------------------------
Net interest income after provision for credit losses.............   1,101.8    1,007.7     811.7     704.6     609.2        9.3

NONINTEREST INCOME
Credit card fees..................................................     179.0      137.1     116.9      94.4      71.6       30.6
Trust fees........................................................     159.2      146.1     127.8     115.5     108.1        9.0
Service charges on deposit accounts...............................     115.6      115.3     108.4      97.2      91.8         .3
Securities gains (losses).........................................      (3.8)        .3       1.9       8.9       3.6          *
Other.............................................................     178.0      170.8     180.7     181.7     162.5        4.2
                                                                    --------------------------------------------------
  Total noninterest income........................................     628.0      569.6     535.7     497.7     437.6       10.3

NONINTEREST EXPENSE
Salaries..........................................................     395.7      389.1     388.7     371.7     391.8        1.7
Employee benefits.................................................      91.6       86.3      85.5      79.3      77.3        6.1
Net occupancy.....................................................      86.3       93.4      87.9      84.0      83.3       (7.6)
Furniture and equipment...........................................      78.3       72.7      67.2      64.8      67.8        7.7
FDIC insurance....................................................      46.0       46.4      42.2      38.5      25.2        (.9)
Advertising.......................................................      29.7       20.5      20.0      21.8      26.0       44.9
Amortization of goodwill and other intangible assets..............      39.6       30.6      25.2      21.6      14.7       29.4
Other personnel costs.............................................      32.2       27.5      20.2      17.8      11.6       17.1
Professional services.............................................      33.8       36.7      38.7      37.8      36.8       (7.9)
Data processing...................................................      13.9       21.3      22.4      23.5      17.1      (34.7)
Other real estate (1992 includes $26.4 merger-related)............      (2.9)       2.2      41.2      29.9      42.4     (231.8)
Merger and integration............................................         -       72.2      84.0         -         -          *
Other.............................................................     208.9      201.6     191.1     178.6     187.0        3.6
                                                                    --------------------------------------------------
Total noninterest expense.........................................   1,053.1    1,100.5   1,114.3     969.3     981.0       (4.3)
                                                                    --------------------------------------------------
Income before income taxes and cumulative effect
  of changes in accounting principles.............................     676.7      476.8     233.1     233.0      65.8       41.9
Applicable income taxes...........................................     256.9      178.8      78.6      25.9       8.5       43.7
                                                                    --------------------------------------------------
Income before cumulative effect
  of changes in accounting principles.............................     419.8      298.0     154.5     207.1      57.3       40.9
Cumulative effect of changes in accounting principles.............         -          -     157.3         -         -          *
                                                                    --------------------------------------------------
Net income........................................................  $  419.8   $  298.0  $  311.8  $  207.1  $   57.3       40.9%
                                                                    ==================================================    =======
Net income applicable to common equity............................  $  408.6   $  270.2  $  281.6  $  183.4  $   33.6       51.2%
                                                                    ==================================================    =======

 *Not meaningful
</TABLE>



                                    First Bank System, Inc. and Subsidiaries  71
                                                                              --

<PAGE>
 

<TABLE>
<CAPTION>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES


Five Year Summary of Consolidated Operations                                   1994                              1993
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                         Interest                         Interest
                                                                                          Yields                           Yields
(In Millions)                                                     Balance    Interest    and Rates  Balance    Interest   and Rates
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>        <C>         <C>        <C>        <C>         <C>
ASSETS
Securities:
  U.S. Treasury.................................................  $ 1,559    $   81.9      5.25%    $ 1,778    $  100.7     5.66%
  Mortgage-backed securities....................................    1,534        91.4      5.96       1,486        85.1     5.73
  State & political.............................................      181        19.7     10.88         192        22.1    11.51
  U.S. agencies and other.......................................      463        24.2      5.23         472        26.7     5.66
                                                                  -------------------               -------------------
    Total securities............................................    3,737       217.2      5.81       3,928       234.6     5.97
Unrealized loss on available-for-sale securities................      (58)                                -           
                                                                  -------                           -------
    Net securities..............................................    3,679                             3,928
Trading account securities......................................       73         3.4      4.66         117         4.7     4.02
Federal funds sold and resale agreements........................      405        16.5      4.07         755        22.3     2.95
Loans:
  Commercial:
    Commercial..................................................    7,035       528.5      7.51       6,077       433.5     7.13
    Financial institutions......................................    1,146        30.1      2.63       1,534        42.5     2.77
    Real estate:
      Commercial mortgage.......................................    1,657       141.3      8.53       1,511       125.1     8.28
      Construction..............................................      264        21.3      8.07         207        15.3     7.39
                                                                  -------------------               -------------------
      Total commercial..........................................   10,102       721.2      7.14       9,329       616.4     6.61
  Consumer:
    Residential mortgage........................................    2,352       174.5      7.42       2,556       201.9     7.90
    Residential mortgage held for sale..........................      354        24.6      6.95         949        66.0     6.95
    Home equity and second mortgage.............................    1,963       170.9      8.71       1,386       113.9     8.22
    Credit card.................................................    2,054       248.9     12.12       1,733       233.1    13.45
    Other.......................................................    1,737       179.6     10.34       1,803       178.5     9.90
                                                                  -------------------               -------------------
      Total consumer............................................    8,460       798.5      9.44       8,427       793.4     9.41
                                                                  -------------------               -------------------
      Total loans...............................................   18,562     1,519.7      8.19      17,756     1,409.8     7.94
  Allowance for credit losses...................................      445                               447
                                                                  -------                           -------
    Net loans...................................................   18,117                            17,309
Other earning assets............................................      124         5.4      4.35         139         8.1     5.83
                                                                  -------------------               -------------------
      Total earning assets*.....................................   22,901     1,762.2      7.69      22,695     1,679.5     7.40
Cash and due from banks.........................................    1,674                             1,720
Other assets....................................................    1,690                             1,607
                                                                  -------                           -------
      Total assets..............................................  $25,762                           $25,575
                                                                  =======                           =======
LIABILITIES AND SHAREHOLDERS' EQUITY
  Noninterest-bearing deposits..................................  $ 6,057                           $ 6,416
  Interest-bearing
   deposits:
    Interest checking...........................................    2,590        36.7      1.42       2,454        38.6     1.57
    Money market accounts.......................................    3.857       106.8      2.77       3,923       102.9     2.62
    Other savings accounts......................................    1,499        30.4      2.03       1,411        30.2     2.14
    Savings certificates........................................    4,192       141.4      3.37       4,957       182.6     3.68
    Certificates over $100,000..................................      947        57.8      6.10       1,186        69.4     5.85
                                                                  -------------------               -------------------
      Total interest-bearing deposits...........................   13,085       373.1      2.85      13,931       423.7     3.04
Short-term borrowings...........................................    2,371       109.7      4.63       1,270        50.8     4.00
Long-term debt..................................................    1,232        69.5      5.64         913        54.4     5.96
                                                                  -------------------               -------------------
      Total interest-bearing liabilities........................   16,688       552.3      3.31      16,114       528.9     3.28
Other liabilities...............................................      765                               740
Preferred equity................................................      131                               348
Common equity...................................................    2,121                             1,957
                                                                  -------                           -------
      Total liabilities and shareholders' equity................  $25,762                           $25,575
                                                                  =======                           =======
Net interest income.............................................             $1,209.9                          $1,150.6
                                                                             ========                          ========
Gross interest margin...........................................                           4.38%                            4.12%
                                                                                           ====                             ==== 
Gross interest margin without taxable-equivalent increments.....                           4.32%                            4.04%
                                                                                           ====                             ==== 
PERCENT OF EARNING ASSETS
Interest income.................................................                           7.69%                            7.40%
Interest expense................................................                           2.41                             2.33
                                                                                           ====                             ==== 
    Net interest margin.........................................                           5.28                             5.07
                                                                                           ====                             ==== 
Net interest margin without taxable-equivalent increments.......                           5.22%                            4.99%
                                                                                           ====                             ==== 
</TABLE>


Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent for 1994 and 1993 and 34 percent for 1992, 1991 and 1990.

Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.

*Before deducting the allowance for credit losses and excluding the unrealized
loss on available-for-sale securities.

** Not meaningful


72  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

<TABLE>
<CAPTION>
CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES

                                                 1992                       1991                        1990              1993-1994
- -----------------------------------------------------------------------------------------------------------------------------------
                                                        Interest                   Interest                   Interest     % Change
                                                         Yields                     Yields                     Yields       Average 
(In Millions)                         Balance  Interest and Rates Balance Interest and Rates Balance Interest and Rates     Balance
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>      <C>       <C>     <C>      <C>       <C>     <C>      <C>        <C>         <C>
ASSETS
Securities:
  U.S. Treasury.....................  $ 1,529  $   97.1   6.35%  $   995  $   77.8   7.82%  $   970  $   77.9    8.03%      (12.3)%
  Mortgage-backed securities........      953      70.0   7.35     1,312     117.2   8.93     1,576     155.6    9.87         3.2
  State & political.................      152      18.1  11.91       241      27.5  11.41       581      62.2   10.71        (5.7)
  U.S. agencies and other...........      266      17.6   6.62       398      25.7   6.46       558      29.5    5.29        (1.9)
                                      -----------------          -----------------          -----------------
    Total securities................    2,900     202.8   6.99     2,946     248.2   8.42     3,685     325.2    8.82        (4.9)
Unrealized loss on available-for-
 sale securities....................       --                         --                         --                            **
                                      -------                    -------                    -------
    Net securites...................    2,900                      2,946                      3,685                          (6.3)
Trading account securities..........      137       6.5   4.74       176      12.1   6.88       185      15.8    8.54       (37.6)
Federal funds sold and resale
 agreements.........................    1,318      45.1   3.42     1,292      75.8   5.87     1,353     110.4    8.16       (46.4)
Loans:
  Commercial:
    Commercial......................    5,875     451.9   7.69     6,773     638.5   9.43     8,374     891.4   10.64        15.8
    Financial institutions..........    1,096      40.8   3.72       710      31.2   4.39       562      33.6    5.98       (25.3)
    Real estate:
      Commercial mortgage...........    1,502     128.8   8.58     1,391     135.1   9.71     1,283     133.2   10.38         9.7
      Construction..................      258      20.2   7.83       328      30.5   9.30       465      46.1    9.91        27.5
                                      -----------------          -----------------          -----------------
      Total commercial..............    8,731     641.7   7.35     9,202     835.3   9.08    10,684   1,104.3   10.34         8.3
  Consumer:
    Residential mortgage............    2,133     183.9   8.62     2,023     182.5   9.02     2,908     293.5   10.09        (8.0)
    Residential mortgage held for
     sale...........................      718      58.1   8.09       674      64.5   9.57       768      78.1   10.17       (62.7)
    Home equity and second mortgage.    1,063      93.8   8.82       854      78.0   9.13       675      77.7   11.51        41.6
    Credit card.....................    1,709     243.0  14.22     1,495     217.3  14.54     1,091     174.1   15.96        18.5
    Other...........................    1,903     214.8  11.29     2,093     271.3  12.96     1,978     225.0   11.38        (3.7)
                                      -----------------          -----------------          -----------------
      Total consumer................    7,526     793.6  10.54     7,139     813.6  11.40     7,420     848.4   11.43          .4
                                      -----------------          -----------------          -----------------
      Total loans...................   16,257   1,435.3   8.83    16,341   1,648.9  10.09    18,104   1,952.7   10.79         4.5
  Allowance for credit losses.......      467                        455                        478                           (.4)
                                      -------                    -------                    -------
    Net loans.......................   15,790                     15,886                     17,626                           4.7
Other earning assets................      371      14.3   3.85       161      11.4   7.08       270      21.8    8.07       (10.8)
                                      -----------------          -----------------          -----------------
      Total earning assets*.........   20,983   1,704.0   8.12    20,916   1,996.4   9.54    23,597   2,425.9   10.28          .9
Cash and due from banks.............    1,510                      1,333                      1,383                          (2.7)
Other assets........................    1,566                      1,281                      1,354                           5.2
                                      -------                    -------                    -------
      Total assets..................  $23,592                    $23,075                    $25,856                            .7%
                                      =======                    =======                    =======

LIABILITIES AND SHAREHOLDERS' EQUITY
  Noninterest-bearing deposits......  $ 4,810                    $ 3,879                    $ 3,578                         (5.6)%
  Interest-bearing deposits:
    Interest checking...............    2,198      51.7   2.35     1,897      57.5   3.03     1,748      84.7    4.85         5.5
    Money market accounts...........    3,874     124.5   3.21     3,607     194.3   5.39     3,297     226.0    6.85        (1.7)
    Other savings accounts..........    1,132      34.2   3.02       988      47.8   4.84     1,018      52.0    5.11         6.2
    Savings certificates............    5,292     258.6   4.89     5,504     402.1   7.31     5,548     445.7    8.03       (15.4)
    Certificates over $100,000......    1,468      99.7   6.79     2,340     171.1   7.31     4,375     383.0    8.75       (20.2)
                                      -----------------          -----------------          -----------------
      Total interest-bearing
       deposits.....................   13,964     568.7   4.07    14,336     872.8   6.09    15,986   1,191.4    7.45        (6.1)
Short-term borrowings...............    1,106      51.4   4.65     1,384      82.1   5.93     2,507     209.6    8.36        86.7
Long-term debt......................      927      66.1   7.13     1,214     100.3   8.26     1,652     152.2    9.21        34.9
                                      -----------------          -----------------          -----------------
      Total interest-bearing
       liabilities..................   15,997     686.2   4.29    16,934   1,055.2   6.23    20,145   1,553.2    7.71         3.6
Other liabilities...................      686                        578                        623                           3.4
Preferred equity....................      379                        282                        264                         (62.4)
Common equity.......................    1,720                      1,402                      1,246                           8.4
                                      -------                    -------                    -------
      Total liabilities and
       shareholders' equity.........  $23,592                    $23,075                    $25,856                            .7%
                                      =======                    =======                    =======                            --
Net interest income.................           $1,017.8                   $  941.2                   $  872.7
                                               ========                   ========                   ========
Gross interest margin...............                      3.83%                      3.31%                      2.57%
                                                          ====                       ====                       ====
Gross interest margin without
 taxable-equivalent increments......                      3.72%                      3.15%                      2.37%
                                                          ====                       ====                       ====

PERCENT OF EARNING ASSETS
Interest income.....................                      8.12%                      9.54%                      10.28%
Interest expense....................                      3.27                       5.04                        6.58
                                                          ====                       ====                       ====
    Net interest margin.............                      4.85                       4.50                        3.70
                                                          ====                       ====                       ====
Net interest margin without
 taxable-equivalent increments......                      4.74%                      4.34%                       3.49%
                                                          ====                       ====                       ====

</TABLE>


Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent for 1994 and 1993 and 34 percent for 1992, 1991 and 1990.

Interest income and rates on loans include loan fees. Nonaccrual loans are
included in average loan balances.

*Before deducting the allowance for credit losses and excluding the unrealized
loss on available-for-sale securities.

** Not meaningful


                                    First Bank System, Inc. and Subsidiaries  73
                                                                              --

<PAGE>


QUARTERLY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                         1994                                1993                   
                                                        -------------------------------------------------------------------------
                                                          Fourth    Third    Second    First   Fourth    Third   Second    First
(In Millions, Except Per Share Data)                     Quarter   Quarter   Quarter  Quarter  Quarter  Quarter  Quarter  Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>
INTEREST INCOME
Loans..................................................  $ 419.2   $ 391.1   $ 362.2  $ 338.2  $ 352.6  $ 353.9  $ 348.6  $ 343.5
Securities:
  Taxable..............................................     47.5      51.5      53.8     46.4     46.9     52.9     58.4     60.0
  Exempt from federal income taxes.....................      2.9       3.0       3.1      3.0      4.7      3.2      3.3      3.4
Other interest income..................................      7.2       6.3       6.8      4.9      6.8      4.9      7.1     11.6
                                                        -------------------------------------------------------------------------
      Total interest income............................    476.8     451.9     425.9    392.5    411.0    414.9    417.4    418.5

INTEREST EXPENSE
Deposits...............................................    104.8      93.9      89.3     85.1     94.0    102.1    107.0    120.6
Federal funds purchased and repurchase agreements......     31.1      30.4      20.6      9.1      7.6      9.0      7.5      7.7
Other short-term funds borrowed........................      8.5       3.2       3.2      3.6      4.9      5.1      5.1      3.9
Long-term debt.........................................     21.4      18.2      16.5     13.4     14.9     13.4     13.0     13.1
                                                        -------------------------------------------------------------------------
      Total interest expense...........................    165.8     145.7     129.6    111.2    121.4    129.6    132.6    145.3
                                                        -------------------------------------------------------------------------
Net interest income....................................    311.0     306.2     296.3    281.3    289.6    285.3    284.8    273.2
Provision for credit losses............................     23.0      23.0      23.0     24.0     27.0     27.0     33.1     38.1
                                                        -------------------------------------------------------------------------
Net interest income after provision for credit losses..    288.0     283.2     273.3    257.3    262.6    258.3    251.7    235.1

NONINTEREST INCOME
Credit card fees.......................................     50.3      49.2      43.5     36.0     37.5     36.6     34.5     28.5
Trust fees.............................................     41.7      38.9      40.1     38.5     37.5     36.6     36.5     35.5
Service charges on deposit accounts....................     27.9      29.2      29.1     29.4     28.4     28.6     28.0     30.3
Securities gains (losses)..............................     (1.0)     (2.8)        -        -        -        -        -       .3
Other..................................................     44.2      44.9      41.0     47.9     42.5     40.2     41.5     46.6
                                                        -------------------------------------------------------------------------
      Total noninterest income.........................    163.1     159.4     153.7    151.8    145.9    142.0    140.5    141.2

NONINTEREST EXPENSE
Salaries...............................................    102.8     100.2      98.5     94.2     95.0     97.3     97.3     99.5
Employee benefits......................................     21.0      23.6      23.3     23.7     19.6     20.0     21.9     24.8
Net occupancy..........................................     20.6      22.0      22.2     21.5     22.8     22.8     23.2     24.6
Furniture and equipment................................     20.2      18.8      20.2     19.1     19.2     17.8     18.5     17.2
FDIC insurance.........................................     11.2      11.0      12.3     11.5     11.5     11.4     11.7     11.8
Advertising............................................      7.3       6.2       8.1      8.1      4.7      6.0      5.1      4.7
Amortization of goodwill and other intangible assets...     11.2      10.5       9.9      8.0      7.7      7.7      7.7      7.5
Other personnel costs..................................      8.1       7.6       8.8      7.7      8.5      7.2      6.6      5.2
Professional services..................................     10.2       8.6       8.5      6.5     10.7      9.1      8.6      8.3
Data processing........................................      3.6       3.4       3.4      3.5      3.3      4.4      7.2      6.4
Merger and integration.................................        -         -         -        -        -        -     72.2        -
Other..................................................     54.5      55.0      47.0     49.5     52.3     52.0     52.0     47.5
                                                        -------------------------------------------------------------------------
      Total noninterest expense........................    270.7     266.9     262.2    253.3    255.3    255.7    332.0    257.5
                                                        -------------------------------------------------------------------------
Income before income taxes.............................    180.4     175.7     164.8    155.8    153.2    144.6     60.2    118.8
Applicable income taxes................................     69.9      67.6      62.1     57.3     57.3     53.5     26.7     41.3
                                                        -------------------------------------------------------------------------
Net income.............................................  $ 110.5   $ 108.1   $ 102.7  $  98.5  $  95.9  $  91.1  $  33.5  $  77.5
                                                        =========================================================================
Net income applicable to common equity.................  $ 108.6   $ 106.2   $ 100.8  $  93.0  $  90.4  $  83.7  $  26.1  $  70.0
                                                        =========================================================================
Earnings per common share..............................  $   .95   $   .91   $   .87  $   .84  $   .81  $   .74  $   .23  $   .61

SELECTED AVERAGE BALANCES
Loans..................................................  $19,049   $18,684   $18,469  $18,034  $18,819  $18,188  $17,292  $16,685
Earning assets.........................................   23,046    23,062    23,205   22,278   23,270   22,710   22,455   22,267
Total assets...........................................   25,985    25,860    26,125   25,063   26,266   25,554   25,347   25,053
Deposits...............................................   18,577    18,741    19,655   19,604   20,930   20,248   20,284   19,916
Long-term debt.........................................    1,368     1,279     1,222    1,056    1,072      916      847      817
Common equity..........................................    2,170     2,168     2,134    2,011    1,957    1,974    1,949    1,936
                                                        -------------------------------------------------------------------------
</TABLE>


The second quarter of 1993 included $72.2 million in merger-related charges in
connection with the Colorado National Bankshares, Inc. acquisition.


74  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

<TABLE>
<CAPTION>
SUPPLEMENTAL FINANCIAL DATA

EARNINGS PER SHARE SUMMARY

                                                         1994       1993       1992       1991      1990
- ---------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>        <C>       <C>
Primary net income before cumulative effect
 of accounting changes..........................         $3.57      $2.39      $1.18      $1.79      $.36
Cumulative effect of accounting changes.........            --         --       1.49         --        --
                                                         ------------------------------------------------
Primary net income..............................         $3.57      $2.39      $2.67      $1.79      $.36
                                                         ================================================
Fully diluted net income before cumulative
 effect of accounting changes...................         $3.52      $2.38      $1.21      $1.78      $.36
Cumulative effect of accounting changes.........            --         --       1.43         --        --
                                                         ------------------------------------------------
Fully diluted net income........................         $3.52      $2.38      $2.64      $1.78     $ .36
                                                         ================================================
</TABLE>
 

<TABLE> 
<CAPTION> 
RATIOS
                                                          1994       1993       1992       1991       1990
- ----------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>        <C>       <C>
Return on average assets........................          1.63%      1.17%      1.32%       .90%      .22%
Return on average common shareholders' equity...          19.3       13.8       16.4       13.1       2.7
Average total equity to average assets..........           8.7        9.0        8.9        7.3       5.8
Dividends per share to net income per share.....          32.5       41.8       33.0       45.8         *
                                                         ------------------------------------------------
</TABLE>

*Not meaningful


<TABLE>
<CAPTION>
OTHER STATISTICS
                                                      1994           1993          1992           1991           1990
- -------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>           <C>            <C>            <C>
Common shares outstanding -- year end*..........   112,678,658    109,401,664   113,450,425    102,536,867    101,079,861
Average common shares outstanding and common
 stock equivalents:
 Primary........................................   114,544,806    113,075,429    105,361,022   102,533,284     93,302,380
 Fully diluted..................................   118,238,360    116,794,358    109,671,248   103,668,953     93,302,380
Number of shareholders -- year-end**............        22,094         22,100         25,625        23,977         25,484
Average number of employees (full-time
 equivalents)...................................        11,997         12,300         12,553        12,742         13,626
Common dividends paid (millions)................        $130.9         $109.7          $73.1         $65.6          $58.8
                                                  -----------------------------------------------------------------------

</TABLE>
 

 *Defined as total common shares less common stock held in treasury.
**Based on number of common stock shareholders of record


<TABLE> 
<CAPTION> 
STOCK PRICE RANGE AND DIVIDENDS
                                                                       1994                              1993
                                                        ---------------------------------------------------------------------
                                                            Sales Price                        Sales Price
                                                        -------------------     Dividends   -------------------     Dividends
                                                         High          Low        Paid       High         Low         Paid
- -----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>        <C>         <C>          <C>        <C>
First quarter...................................        $33.13       $29.38       $.29      $32.00       $27.13       $.25
Second quarter..................................         39.00        31.50        .29       34.00        25.88        .25
Third quarter...................................         38.50        35.25        .29       33.63        29.50        .25
Fourth quarter..................................         37.50        32.13        .29       34.13        28.00        .25
Closing price -- December 31....................                33.22                              30.75
                                                        ---------------------------------------------------------------------
The common stock of First Bank System, Inc. is traded on the New York Stock
 Exchange.
</TABLE>



                                    First Bank System, Inc. and Subsidiaries  75
                                                                              --

<PAGE>
 
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES


<TABLE>
<CAPTION>
                                                                                         Maturing
                                                                        ------------------------------------------
                                                                        In 1 Year     After 1 Year
At December 31, 1994 (In Millions)                                       or Less    Through 5 Years  After 5 Years
- ------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>              <C>
Commercial                                                                $6,133         $1,160           $186
Financial institutions............................................           663            110             14
Real estate:
  Commercial mortgage.............................................           979            616            227
  Construction....................................................           303             14             10
                                                                        ------------------------------------------
        Total.....................................................        $8,078         $1,900           $437
                                                                        ==========================================
</TABLE>
 


<TABLE> 
<CAPTION> 
                                                                          Due in        Due After
                                                                         One Year       One Year        Total
- ------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>            <C>             <C>
Loans at fixed interest rates.....................................        $  815         $  902         $ 1,717
Loans at variable interest rates..................................         7,263          1,435           8,698
                                                                         ------------------------------------------
        Total.....................................................        $8,078         $2,337         $10,415
                                                                         ==========================================
</TABLE>
 
The maturities of loans shown above are based on remaining scheduled repayments.


TIME CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS IN DENOMINATIONS OF
$100,000 OR MORE AT DECEMBER 31


<TABLE> 
<CAPTION> 
                                                 Under        Three        Six to       Over
                                                 Three        to Six       Twelve       Twelve
(In Millions)                                    Months       Months       Months       Months       Total
- -----------------------------------------------------------------------------------------------------------
<S>                                              <C>          <C>          <C>          <C>          <C> 
1994.........................................     $358         $103         $199         $236        $  896
1993.........................................      370          148          209          334         1,061
1992.........................................      462          171          200          541         1,374
                                                 ----------------------------------------------------------
</TABLE>




76  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 

<TABLE>
<CAPTION>
SHORT-TERM FUNDS BORROWED


                                                                       Average       Maximum         Average      Weighted
                                                                        Daily      Outstanding    Interest Rate    Average
                                                       Outstanding      Amount     Month-Ending    Paid During  Interest Rate
(In Millions)                                          at Year-End    Outstanding    Balance         the Year    at Year-End
- -----------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>          <C>            <C>           <C>
1994
Federal funds purchased and securities sold under
  agreements to repurchase.........................       $2,164         $2,018       $2,813           4.52%         5.52%
Other..............................................          658            353          764           5.24          5.72
                                                       -------------------------                                             
  Total............................................       $2,822         $2,371        3,212           4.63          5.57
                                                       =========================
1993
Federal funds purchased and securities sold under
  agreements to repurchase.........................       $  922         $  990       $1,388           3.21%         3.15%
Other..............................................          412            280          412           6.79          2.87
                                                       -------------------------                                             
  Total............................................       $1,334         $1,270        1,642           4.00          3.07
                                                       =========================                                              
1992
Federal funds purchased and securities sold under
  agreements to repurchase.........................       $1,122         $  842       $1,140           4.41%         3.39%
Other..............................................          328            264          396           5.42          3.09
                                                       -------------------------
  Total............................................       $1,450         $1,106        1,479           4.65          3.27
                                                       =========================                                              
</TABLE>



<PAGE>
 
ANNUAL REPORT ON FORM 10-K


Securities and Exchange Commission
Washington, D.C. 20549

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1994.

Commission File Number 1-6880

FIRST BANK SYSTEM, INC.
Incorporated in the State of Delaware
IRS Employer Identification #41-0255900
Address: 601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Telephone: (612) 973-1111

Securities registered pursuant to Section 12(b) of the Act (all registered on
the New York Stock Exchange): Common Stock, Par Value $1.25; $3.5625 Cumulative
Convertible Preferred Stock, Series 1991A; Preferred Share Purchase Rights.

  Securities registered pursuant to Section 12(g) of the Act: Warrants to
Purchase Shares of Common Stock.

  As of January 31, 1995, First Bank System, Inc. had 135,215,613 shares of
common stock outstanding. The aggregate market value of common stock held by
non-affiliates as of January 31, 1995, was 4,640,747,984.

  First Bank System, Inc. (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past 90
days.

  Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the Company's definitive proxy statement incorporated by reference
herein.

  This Annual Report and Form 10-K incorporates into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission. Only those sections of the Annual Report referenced in the following
cross-reference index are incorporated in the Form 10-K.


<TABLE>
<CAPTION>
Cross-Reference                                                            Page
- -------------------------------------------------------------------------------
<S>                                                                        <C>
P
ART I

ITEM 1    Business
          General............................................................79
          Distribution of Assets, Liabilities and
           Stockholders' Equity; Interest Rates
           and Interest Differential...............................18-19, 72-73
          Investment Portfolio........................................25-26, 70
          Loan Portfolio............................22-25, 27-31, 43, 48-49, 76
          Summary of Loan Loss Experience.............................20, 27-31
          Deposits....................................................72-73, 76
          Return on Equity and Assets........................................75
          Short-Term Borrowings..............................................77

ITEM 2    Properties.........................................................79

ITEM 3    Legal Proceedings................................................none

ITEM 4    Submission of Matters to a Vote of Security Holders..............none


PART II

ITEM 5    Market for the Registrant's Common
           Equity and Related Stockholder Matters....................36, 68, 75

ITEM 6    Selected Financial Data............................................15

ITEM 7    Management's Discussion and Analysis of
           Financial Condition and Results of Operations..................14-38

ITEM 8    Financial Statements and Supplemental Data.....................74, 80

ITEM 9    Changes in and Disagreements with
           Accountants on Accounting and
           Financial Disclosures...........................................none


PART III

ITEM 10   Directors and Executive Officers of the Registrant.................82

ITEM 11   Executive Compensation............................................. *

ITEM 12   Security Ownership of Certain
           Beneficial Owners and Management.................................. *

ITEM 13   Certain Relationships and Related Transactions..................... *


PART IV

ITEM 14   Exhibits, Financial Statement Schedules
           and Reports on Form 8-K...........................................80
</TABLE>


*First Bank System's definitive proxy statement for the 1995 Annual Meeting of
 Shareholders is incorporated herein by reference, other than the sections
 entitled "Report of the Organization Committee on Executive Compensation" and
 "Performance Graph."

78  First Bank System, Inc. and Subsidiaries
- --

<PAGE>


GENERAL - First Bank System, Inc. (the "Company") is a regional, multi-state
bank holding company headquartered in the Twin Cities of Minneapolis and St.
Paul, Minnesota. The Company was incorporated in Delaware in 1929 and owns more
than 99 percent of the capital stock of each of the nine commercial banks and
four trust companies, having 200 banking offices in Minnesota, Colorado,
Montana, North Dakota, South Dakota, Wisconsin, and Illinois. The Company also
has various nonbank subsidiaries engaged in financial services principally in
the Upper Midwest.


  The banks are engaged in general commercial banking business principally in
domestic markets. They range in size from $37 million to $10.0 billion in
deposits and provide a wide variety of services to individuals, businesses,
industry, institutional organizations, governmental entities and other financial
institutions. Depository services include checking accounts, savings accounts
and time certificate contracts. Ancillary services such as cash management and
receivable lockbox collection are provided for corporate customers. Nine
subsidiary banks and four trust companies provide a full range of fiduciary
activities for individuals, estates, foundations, business corporations, and
charitable organizations.

  The Company provides banking services through its subsidiary banks to both
domestic and foreign customers and correspondent banks. These services include
consumer banking, commercial lending, financing of import/export trade, foreign
exchange, and investment services.

  The Company, through its subsidiaries, also provides services in mortgage
banking, trust, commercial and agricultural finance, data processing, leasing,
and brokerage services.

  On a full-time equivalent basis, employment during 1994 averaged a total of
11,997 employees.

COMPETITION - The commercial banking business is highly competitive. Subsidiary
banks compete with other commercial banks and with other financial institutions,
including savings and loan associations, mutual savings banks, finance
companies, mortgage banking companies, credit unions, and mutual funds.
In recent years, competition also has increased from institutions not subject to
the same regulatory restrictions as domestic banks and bank holding companies.

GOVERNMENT POLICIES - The operations of the Company's various operating units
are affected by state and federal legislative changes and by policies of various
regulatory authorities, including those of the several states in which they
operate, the United States and foreign governments. These policies include, for
example, statutory maximum legal lending rates, domestic monetary policies of
the Board of Governors of the Federal Reserve System, United States fiscal
policy, international currency regulations and monetary policies, and capital
adequacy and liquidity constraints imposed by bank regulatory agencies.

SUPERVISION AND REGULATION - The Company is a registered bank holding company
under the Bank Holding Company Act of 1956 (the "Act") and is subject to the
supervision of, and regulation by, the Board of Governors of the Federal Reserve
System (the "Board").

  Under the Act, a bank holding company may engage in banking, managing or
controlling banks, furnishing or performing services for banks it controls, and
conducting activities that the Board has determined to be closely related to
banking. The Company must obtain approval of the Board before acquiring control
of a bank or by acquiring more than 5 percent of the outstanding voting shares
of a company engaged in a "bank-related" business. Under the Act and state laws,
the Company is subject to certain restrictions as to states in which the Company
can acquire a bank.

  On September 29, 1994, the Act was amended by The Interstate Banking and
Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions
anywhere in the country, effective one year after the date of enactment and
interstate branching by acquisition and consolidation, effective June 1, 1997,
in those states that have not opted out by that date.

  National banks are subject to the supervision of, and are examined by, the
Comptroller of the Currency. State banks are subject to the supervision of the
regulatory authorities of the states in which they are located. All subsidiary
banks of the Company are members of the Federal Deposit Insurance Corporation,
and as such, are subject to examination thereby. In practice, the primary
federal regulator makes regular examinations of each subsidiary bank subject to
its regulatory review or participates in joint examinations with other federal
regulators. Areas subject to regulation by federal and state authorities include
the allowance for credit losses, investment, loans, mergers, issuance of
securities, payment of dividends, establishment of branches and other aspects of
operations.

PROPERTIES - At December 31, 1994, the Company's subsidiaries owned and operated
a total of 136 facilities while leasing an additional 157 facilities, all of
which are well maintained.

  The Company's three largest facilities are located in Minneapolis, St. Paul,
and Denver. In Minneapolis, First Bank National Association and the Company's
corporate offices occupy parts of four buildings. Thirty-one floors of First
Bank Place and a portion of one floor of the Pillsbury Center are leased. The
Company also occupies ten floors in the Marquette Bank Building and three floors
in the Concourse Building, both of which are owned by the Company. In St. Paul,
the Company leases an Operations Center as well as one-fourth of the First
National Bank Building and four floors in the First Trust Center. In Denver,
Colorado National Bank occupies approximately 70 percent of the Colorado
National Bank Building and three percent of the Park Central Building, both of
which are owned by subsidiaries of Colorado National Bank.

  Additional information with respect to premises and equipment is presented in
Notes G and O of Notes to Consolidated Financial Statements.



                                 First Bank System, Inc. and Subsidiaries  79
                                                                           --

<PAGE>

EXHIBITS


<TABLE>
<CAPTION>
Financial Statements Filed                               Page
- -------------------------------------------------------------
<S>                                                     <C>
First Bank System, Inc. and Subsidiaries
Consolidated Financial Statements.....................     39
Notes to Consolidated Financial Statements............     43
Report of Independent Auditors........................     69
</TABLE>


Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are omitted since the required information is included in the
footnotes or is not applicable.

  During the three months ended December 31, 1994, the Company filed the
following reports on Form 8-K/A: 

  Form 8-K/A dated November 10, 1994, amending Form 8-K filed on August 5, 1994,
which includes pro forma financial information reflecting the acquisition of
Metropolitan Financial Corporation filed pursuant to Item 7(b).

  Form 8-K/A dated December 8, 1994, amending Form 8-K filed on August 5, 1994,
which includes unaudited financial statements of Metropolitan Financial 
Corporation filed pursuant to Item 7(b).

  The following Exhibit Index lists the Exhibits to Annual Report on Form 10-K.

      (1)3A  Restated Certificate of Incorporation, as amended. Filed as 
             Exhibit 2.1 to Form 8-A/A-2 dated October 6, 1994.
      (1)3B  By-laws. Filed as Exhibit 3B to report on Form 10-K for fiscal year
             ended December 31, 1993.
          4  [Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, copies of
             instruments defining the rights of holders of long-term debt are
             not filed. First Bank System, Inc. agrees to furnish a copy thereof
             to the Securities and Exchange Commission upon request.]
     (1)10A  Stock Purchase Agreements dated as of May 30, 1990, among Corporate
             Partners, L.P.; Corporate Offshore Partners, L.P.; The State Board
             of Administration of Florida and First Bank System, Inc. and
             related documents. Filed as Exhibits 4.8-4.15 to Registration
             Statement on Form S-3 filed on September 10, 1991.
  (1)(2)10B  First Bank System, Inc. 1987 Stock Option Plan. Filed as Exhibit
             10E to report on Form 10-K for fiscal year ended December 31, 1991.
  (1)(2)10C  First Bank System, Inc. Nonqualified Supplemental Executive
             Retirement Plan. Filed as Exhibit 10F to report on Form 10-K for
             fiscal year ended December 31, 1991.
  (1)(2)10D  First Bank System, Inc. Executive Deferral Plan. Filed as Exhibit
             10G to report on Form 10-K for fiscal year ended December 31, 1991.
  (1)(2)10E  First Bank System, Inc. Annual Incentive Plan. Filed as Exhibit 10H
             to report on Form 10-K for fiscal year ended December 31, 1992.
  (1)(2)10F  First Bank System, Inc. Independent Director Retirement and Death
             Benefit Plan. Filed as Exhibit 10I to report on Form 10-K for
             fiscal year ended December 31, 1992.
  (1)(2)10G  First Bank System, Inc. Deferred Compensation Plan for Directors.
             Filed as Exhibit 10J to report on Form 10-K for fiscal year ended
             December 31, 1992.
     (1)10H  Rights Agreement dated as of December 21, 1988, between First Bank
             System, Inc. and Morgan Shareholder Services Trust Company. Filed
             as Exhibit 1 to Form 8-K filed January 5, 1989.
     (1)10I  Amendment No. 1 dated as of May 30, 1990, to Rights Agreement.
             Filed as Exhibit 4(a) to Form 8-K dated June 5, 1990.
     (1)10J  Amendment No. 2 dated as of February 17, 1993, to Rights Agreement.
             Filed as Exhibit 4(a) to Form 8-K filed March 1, 1993.
  (1)(2)10K  First Bank System, Inc. Restated Employee Stock Purchase Plan.
             Filed as Exhibit 10L to report on Form 10-K for fiscal year ended
             December 31, 1991.
  (1)(2)10L  Form of Change-in-Control Agreement between First Bank System, Inc.
             and certain officers of the Company. Filed as Exhibit 10M to report
             on Form 10-K for fiscal year ended December 31, 1991.
     (2)10M  First Bank System, Inc. 1991 Stock Incentive Plan, as amended.
  (1)(2)10N  First Bank System, Inc. 1994 Stock Incentive Plan. Filed as 
             Exhibit 10M to report on Form 10-K for fiscal year ended December 
             31, 1993.
     (2)10O  Agreement between First Bank System, Inc. and John F. Grundhofer
             dated January 18, 1995.
  (1)(2)10P  Deferred Income Agreement between First Bank System, Inc. and John
             F. Grundhofer dated November 1, 1993. Filed as Exhibit 10O to
             report on Form 10-K for fiscal year ended December 31, 1993.
  (1)(2)10Q  Description of First Bank System, Inc. Stock Option Loan Policy.
             Filed as Exhibit 10P to report on Form 10-K for fiscal year ended
             December 31, 1993.
     (2)10R  Employment Agreement dated as of April 30, 1993, by and between
             First Bank System, Inc. and Will F. Nicholson, Jr.
     (2)10S  Employment Agreement dated as of December 31, 1994, by and between
             First Bank System, Inc. and Will F. Nicholson, Jr.
     (2)10T  Consulting Agreement dated as of January 23, 1995, by and between
             First Bank System, Inc. and Norman M. Jones.
     (1)10U  Agreement of Merger and Consolidation, dated July 21, 1994, by and 
             between First Bank System, Inc. and Metropolitan Financial 
             Corporation. Filed as Exhibit 2.1 to Form 8-K filed August 5, 1994.
         11  Statement re: Computation of Primary and Fully Diluted Net Income
             per Common Share.
         12  Statement re: Computation of Ratio of Earnings to Fixed Charges.
         13  Annual Report to Shareholders for the year ended December 31, 1994.
             (See Cover Page)
         21  Subsidiaries of the Registrant.
         23  Consent of Ernst & Young LLP.
         27  Financial Data Schedule.

Copies of the Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Financial Statement Schedule and
Exhibits.

(1) Exhibit has heretofore been filed with the Securities and Exchange
    Commission and is incorporated herein as an exhibit by reference.
(2) Items that are management contracts or compensatory plans or arrangements
    required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.




80  First Bank System, Inc. and Subsidiaries
- --

<PAGE>
 


SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on February
15, 1995, on its behalf by the undersigned thereunto duly authorized.

First Bank System, Inc.
John F. Grundhofer
Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 15, 1995, by the following persons on behalf
of the registrant and in the capacities indicated.

JOHN F. GRUNDHOFER
Chairman, President, Chief Executive Officer, and Director
(principal executive officer)
 
RICHARD A. ZONA
Vice Chairman and Chief Financial Officer
(principal financial officer)

DAVID J. PARRIN
Senior Vice President and Controller
(principal accounting officer)

COLEMAN BLOOMFIELD
Director

DELBERT W. JOHNSON
Director

NORMAN M. JONES
Director

JOHN H. KAREKEN
Director

RICHARD L. KNOWLTON
Director
                               
KENNETH A. MACKE
Director

MARILYN C. NELSON
Director
                               
WILL F. NICHOLSON, JR.
Director
                               
NICHOLAS R. PETRY
Director
                               
EDWARD J. PHILLIPS
Director
                               
JAMES J. RENIER
Director
                               
S. WALTER RICHEY
Director
                               
RICHARD L. ROBINSON
Director
                               
RICHARD L. SCHALL
Director
                               
LYLE E. SCHROEDER
Director

                               
                                   First Bank System, Inc. and Subsidiaries  81
                                                                             --

<PAGE>
 
EXECUTIVE OFFICERS

JOHN F. GRUNDHOFER
Mr. Grundhofer, 56 has been Chairman of the Board, President and Chief Executive
Officer of First Bank System since 1990. Previously, he served as Vice Chairman 
and Senior Executive Officer for Southern California, Wells Fargo Bank N.A.

WILLIAM F. FARLEY
Mr. Farley, 50, has been Vice Chairman of First Bank System since 1990. His 
previous positions include: Partner, Headrick & Farley and President, First Bank
National Association.

PHILIP G. HEASLEY
Mr. Heasley, 45, was named Vice Chairman in 1993 and continues to serve as 
President of the Retail Product Group. His previous positions include: Executive
Vice President and President of the Retail Product Group and Senior Vice 
President, Consumer Business, Electronic Banking Division.

RICHARD A. ZONA
Mr. Zona, 50, has served as Vice Chairman since 1990 and Chief Financial Officer
since 1989. He was previously a Partner at Ernst & Young.

J. ROBERT HOFFMANN
Mr. Hoffmann, 49, has been Executive Vice President and Chief Credit Officer 
since 1990. He previously served as Executive Vice President, Credit 
Administration at First Bank National Association.

JOHN M. MURPHY, JR.
Mr. Murphy, 51, has been Chairman and Chief Investment Officer, First Trust 
National Association, since 1990. Before that he was Managing Director, First 
Asset Management, a division of First Bank National Association.

DANIEL C. ROHR
Mr. Rohr, 48, has served as Executive Vice President of the Commercial Banking 
Group since 1990. Previously, he was Executive Vice President and Chief Credit 
Officer at Columbia Savings & Loan Association.

ROBERT H. SAYRE
Mr. Sayre, 55, has served as Executive Vice President of Human Resources since 
1990. Previously, he was Executive Director at Russell Reynolds Associates, Inc.

MICHAEL J. O'ROURKE
Mr. O'Rourke, 50, has been Executive Vice President, Secretary and General 
Counsel since 1991. Previously, he was Senior Vice President, Secretary and 
General Counsel.

DAVID R. EDSTAM
Mr. Edstam, 47, has been Senior Vice President and Treasurer since 1989.

ELIZABETH A. MALKERSON
Ms. Malkerson, 45, has been Senior Vice President of Corporate Relations since 
1990. Her previous position was Vice President of External Affairs.

DAVID J. PARRIN
Mr. Parrin, 39, was named Senior Vice President and Controller in 1994. 
Previously, he was a Partner at Ernst & Young.

DIRECTORS

COLEMAN BLOOMFIELD
Chairman of the Board
Minnesota Mutual Life Insurance Co.
St. Paul, Minnesota

JOHN F. GRUNDHOFER
Chairman, President and Chief Executive Officer
First Bank System, Inc.
Minneapolis, Minnesota

ROGER L. HALE
President and Chief Executive Officer
TENNANT
Minneapolis, Minnesota

DELBERT W. JOHNSON
Chairman and Chief Operating Officer
Pioneer Metal Finishing, Inc.
Minneapolis, Minnesota

NORMAN M. JONES*
Former Chairman and Chief Executive Officer
Metropolitan Financial Corporation
Minneapolis, Minnesota

JOHN H. KAREKEN
Professor of Banking and Finance
Curtis L. Carlson School of Management
University of Minnesota
Minneapolis, Minnesota

RICHARD L. KNOWLTON
Chairman of the Board
Hormel Foods Corporation
Austin, Minnesota

KENNETH A. MACKE
Macke Partners
Golden Valley, Minnesota

MARILYN C. NELSON
Vice Chair
Carlson Holdings, Inc.
Minneapolis, Minnesota

WILL F. NICHOLSON, JR.
Chairman, President and Chief Executive Officer
Colorado National Bankshares, Inc.
Denver, Colorado

NICHOLAS R. PETRY
President
The Petry Company
Denver, Colorado

EDWARD J. PHILLIPS
Chairman and Chief Executive Officer
Phillips Beverage Company
Minneapolis, Minnesota

JAMES J. RENIER
Retired Chairman of the Board and Chief Executive Officer
Honeywell Inc.
Minneapolis, Minnesota

S. WALTER RICHEY
President and Chief Executive Officer
Space Center Company
St. Paul, Minnesota

RICHARD L. ROBINSON
Chairman and Chief Executive Officer
Robinson Dairy, Inc.
Denver, Colorado

RICHARD L. SCHALL
Retired Vice Chairman of the Board
Dayton Hudson Corporation
Minneapolis, Minnesota

LYLE E. SCHROEDER
President and Chief Executive Officer
Sioux Valley Hospital
Sioux Falls, South Dakota


*Elected to the Board of Directors effective
 February 15, 1995




82   First Bank System, Inc. and Subsidiaries
- --


<PAGE>


FBS LOCATIONS*

<TABLE> 
<S>                     <C>                      <C>                   <C> 
MINNESOTA               St. Louis Park           KANSAS                SOUTH DAKOTA
Albert Lea              St. Paul (6)             Andover               Aberdeen
Alexandria (2)          Stillwater               Augusta               Mitchell
Amboy                   Virginia                 Clay Center           Pierre
Anoka (2)               Wayzata                  El Dorado             Rapid City (4)
Apple Valley            West St. Paul            Emporia (2)           Sioux Falls (5)
Austin                  White Bear Lake (2)      Eureka             
Babbitt                 Willmar                   Gardner               WISCONSIN
Blaine                  Woodbury                 Holton                Brookfield
Blooming Prairie                                 Iola                  Brown Deer
Bloomington (4)         COLORADO                 Lawrence (2)          Hudson
Brainerd                Arvada (2)               Manhattan             LaCrosse
Brooklyn Center         Aspen                    Overland Park         Milwaukee (2)
Brooklyn Park           Aurora (3)               Prairie Village       Onalaska
Burnsville              Boulder (2)              Pratt
Chisago City            Broomfield               Topeka (2)            WYOMING
Cloquet                 Canon City               Wichita (4)           Caspar
Columbia Heights        Colorado Springs  (6)                          Cheyenne (2)
Cottage Grove           Denver (19)              MONTANA               Cody
Duluth (7)              Englewood (3)            Billings (2)          Evanston
Eagan (2)               Evergreen                Bozeman               Gillette
East Grand Forks        Fort Collins (2)         Butte                 Green River
Eden Prairie (2)        Glenwood Springs         Great Falls (3)       Lander
Edina (3)               Golden                   Havre                 Laramie
Elk River               Grand Junction           Helena                Riverton
Fairmont                Greeley                  Miles City            Rock Springs
Fergus Falls            La Junta                 Missoula (2)          Sheridan
Forest Lake             Lakewood (4)                                   Torrington
Grand Rapids            Littleton (4)            NEBRASKA              Worland
Hibbing                 Longmont                 Beatrice
Hopkins                 Loveland                 Bellevue              CORPORATE TRUST OFFICES
Lamberton               Northglenn               Columbus              Billings, MT
Little Canada           Pueblo (4)               Hastings              Cheyenne, WY
Mankato (2)             Westminster (2)          Kearney               Chicago, IL
Maple Grove             Wheat Ridge              Lincoln (4)           Denver, CO
Minneapolis (15)                                 North Platte          Des Plaines, IL
Minnetonka (2)          ILLINOIS                 Omaha (6)             Duluth, MN
Monticello              Chicago (6)                                    Fargo, ND
Moorhead                Des Plaines (3)          NORTH DAKOTA          Grand Junction, CO
New Prague              Downers Grove            Beulah                Los Angeles, CA
Oakdale                                          Bismarck (5)          Milwaukee, WI
Owatonna                IOWA                     Devils Lake           Minneapolis, MN
Pine City               Altoona                  Dickinson             New York, NY
Pine River              Ankeny                   Fargo (5)             Portland, OR
Plymouth (2)            Carlisle                 Grand Forks (4)       Pueblo, CO
Princeton               Clear Lake               Jamestown             Rochester, MN
Prior Lake              Council Bluffs (2)       Langdon               San Francisco, CA
Ramsey                  Des Moines (6)           Lisbon                Seattle, WA
Robbinsdale             Hampton                  Mandan                Sioux Falls, SD
Rochester (4)           Iowa Falls               Minot (2)             St. Paul, MN
Sauk Rapids             Knoxville                Valley City
Shoreview               Mason City (2)           Wahpeton              REPUBLIC ACCEPTANCE CORP. OFFICES 
St. Anthony             Pella                    West Fargo            Brookfield, WI
St. Cloud (2)           Red Oak                  Williston             Des Plaines, IL
                        West Des Moines (2)                            Kansas City, MO
                                                                       Lakewood, CO
                                                                       Minneapolis, MN
                                                                       St. Louis, MO
</TABLE>
 

*First Bank System, Inc. primarily serves Minnesota, Colorado, Illinois, Iowa,
 Kansas, Montana, Nebraska, North Dakota, South Dakota, Wisconsin, and Wyoming
 through 310 banking locations and 33 additional offices of nonbank
 subsidiaries. This includes 115 offices of Metropolitan Financial Corporation
 (January 1995).



                                    First Bank System, Inc. and Subsidiaries  83
                                                                              --

<PAGE>



CORPORATE DATA 


EXECUTIVE OFFICES
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
(612) 973-1111

ANNUAL MEETING
The annual meeting of shareholders will be held at the Minneapolis Convention
Center, 1301 Second Avenue South, Minneapolis, Minnesota 55403, at 2 p.m. on
Wednesday, April 26, 1995.

SECURITIES INFORMATION
First Bank System Common Stock is traded on the New York Stock Exchange under
the ticker symbol FBS and also may be found under the listing FtBkSy. The
transfer agent and registrar for First Bank System is First Chicago Trust
Company of New York, P.O. Box 2500, Jersey City, New Jersey 07303-2500.

DIVIDEND REINVESTMENT
First Bank System shareholders can take advantage of a plan that provides
automatic reinvestment of dividends and/or optional cash purchases of additional
shares at market price of up to $5,000 per quarter. If you would like more
information, contact First Chicago Trust Company of New York, P.O. Box 13531,
Newark, New Jersey 07188-0001, (800) 446-2617.

INVESTMENT COMMUNITY CONTACTS
John R. Danielson
Senior Vice President, Investor Relations
(612) 973-2261

General Information, Investor Relations
(612) 973-2263
First Bank System, Inc.
P.O. Box 522
Minneapolis, Minnesota 55480

A limited number of spiral-bound 1994 Annual Reports are available for the
investment community. Also available are a limited number of supplemental
restated financial statements which reflect the acquisition of Metropolitan
Financial Corporation. Please write or call Investor Relations to obtain a copy.

COMMUNITY RESPONSIBILITY REPORT
For information about FBS's community reinvestment activities, call FBS
Community Relations, (612) 973-2433.

For additional annual reports or information about the 1995 annual meeting of
shareholders, please contact Corporate Relations, First Bank System, First Bank
Place, Minneapolis, Minnesota 55402, (612) 973-2434.

First Bank System is an Equal Employment Opportunity/Affirmative Action
employer.

<PAGE>
 
                          [LOGO OF FIRST BANK SYSTEM]
                          First Bank System
                          P.O. Box 522
                          Minneapolis, Minnesota
                          55480

<PAGE>
 
Inside Front Cover
- ------------------

Map of the United States.  The 11 Midwest and Rocky Mountain states (Montana,
Wyoming, Colorado, North Dakota, South Dakota, Nebraska, Kansas, Minnesota,
Iowa, Wisconsin, and Illinois) in which FBS has retail banking offices as of
January 24, 1995, are shaded.

- - Iowa, Kansas, Nebraska, and Wyoming were added as the result of the
Metropolitan Financial Corporation acquisition in January, 1995.

Graphs illustrate the following information:

Return on average common equity* (percent)
1990:   2.7
1991:  13.1
1992:  12.0
1993:  16.4
1994:  19.3

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.


Earnings per share* (dollars)
1990:  0.36
1991:  1.79
1992:  1.96
1993:  2.83
1994:  3.57

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.

<PAGE>
 
Shareholders' equity to assets ratio (percent)
1990:  6.5
1991:  7.8
1992:  8.7
1993:  8.5
1994:  8.7


Page 1
- ------

Graphs illustrate the following information:

Return on average assets* (percent)
1990:  0.22
1991:  0.90
1992:  1.00
1993:  1.36
1994:  1.63

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.


Efficiency ratio* (percent)
1990:  75.1
1991:  67.8
1992:  64.7
1993:  59.8
1994:  57.2

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.


Allowance coverage ratio of nonperforming loans (percent)
1990:  104
1991:  142
1992:  179
1993:  269
1994:  385

<PAGE>
 
Page 2
- ------

Graph illustrates the following information:  Five-year total return* (percent)

Index:  12/31/89 = 100
S&P500 = Standard & Poor's Index of 500 Stocks
KBW 50 = Keefe Bruyette & Woods 50-bank index

1989:  FBS/100, S&P500/100, KBW 50/100
1990:  FBS/83,  S&P500/97,  KBW 50/72
1991:  FBS/159, S&P500/126, KBW 50/114
1992:  FBS/193, S&P500/136, KBW 50/145
1993:  FBS/217, S&P500/150, KBW 50/153
1994:  FBS/243, S&P500/154, KBW 50/145

* Capital appreciation plus dividends


Page 4
- ------

Photograph of FBS senior management team.  Front from left:  Richard A. Zona,
vice chairman and chief financial officer, and John F. Grundhofer, chairman,
president and chief executive officer.  Back from left:  William F. Farley, vice
chairman, Distribution Group; J. Robert Hoffmann, executive vice president and
chief credit officer; Daniel C. Rohr, executive vice president, Commercial
Banking; Philip G. Heasley, vice chairman and president, Retail Products Group;
John M. Murphy, Jr., chairman and chief investment officer; First Trust N.A.;
Michael J. O'Rourke, executive vice president and general counsel; and Robert H.
Sayre, executive vice president for human resources.


Page 5
- ------

Table entitled "FBS Leading Market Shares*"

Minnesota, deposit share: 25%, rank: 1st
Twin Cities, deposit share: 34%, rank: 1st
Colorado, deposit share: 19%, rank: 1st
Denver, deposit share: 24%, rank: 1st
North Dakota, deposit share: 26%, rank: 1st
Montana, deposit share: 14%, rank: 2nd
South Dakota, deposit share: 11%, rank: 2nd
Wyoming, deposit share: 9%, rank: 2nd

*Note: Includes Metropolitan Financial and First Western.  South Dakota excludes
credit card banks.

<PAGE>
 
Table entitled, "Recent Acquisitions" (assets in millions)

First Western Corporation, closing date: 1Q95, location: South Dakota, 
  assets: 323
Metropolitan Financial Corporation, closing date: 1Q95, location: Midwest,
  assets: 7,900
Green Mountain Bancorporation, Inc., closing date: 3Q94, location: Colorado,
  assets: 35
J.P. Morgan Corporate Trust, closing date: 3Q94, location: New York/National,
  assets: N/A
United Bank of Bismarck, closing date: 3Q94, location: North Dakota, assets: 121
First Financial Investors, Inc., closing date: 2Q94, location: Minnesota,
  assets: 200
Boulevard Bancorp, Inc., closing date: 1Q94, location: Illinois, assets: 1,600
American Bancshares of Mankato, closing date: 1Q94, location:  Minnesota,
  assets: 116


Page 6
- ------

Graphs illustrate the following information:

Pie chart shows that the Retail and Community Banking Group accounts for 42
percent of FBS's net income.


Efficiency Ratio* (percent)
1992:  76.4
1993:  71.1
1994:  67.7

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.

Net Interest Income (Millions)
1992:  679
1993:  744
1994:  781


Page 7
- ------

Net Income* (Millions)
1992:  94
1993:  138
1994:  177

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.

<PAGE>
 
Noninterest Income (Millions)
1992:  188
1993:  179
1994:  187


Page 8
- ------

Graphs illustrate the following information:

Pie chart shows that the Payment Systems Group accounts for 22 perecent of FBS's
net income.

Efficiency Ratio* (percent)
1992:  45.7
1993:  42.4
1994:  41.7

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.

Net Interest Income (Millions)
1992:  136
1993:  148
1994:  185


Page 9
- ------

Net Income* (Millions)
1992:  39
1993:  70
1994:  93

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.


Noninterest Income (Millions)
1992:  134
1993:  157
1994:  196

<PAGE>
 
Page 10
- -------

Graphs illustrate the following information:

Pie chart shows that the Commercial Banking Group accounts for 27 percent of
FBS's net income.

Efficiency Ratio* (percent)
1992:  37.4
1993:  33.7
1994:  32.1

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.

Net Interest Income (Millions)
1992:  183
1993:  227
1994:  219


Page 11
- -------

Net Income* (Millions)
1992:  76
1993:  105
1994:  113

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.


Noninterest Income (Millions)
1992:  56
1993:  60
1994:  60

<PAGE>
 
Page 12
- -------

Graphs illustrate the following information:

Pie chart shows that the Trust & Investment Group accounts for 9 percent of
FBS's net income.

Efficiency Ratio* (percent)
1992:  72.8
1993:  71.2
1994:  70.9

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.

Net Interest Income (Millions)
1992:  19
1993:  32
1994:  26


Page 13
- -------

Net Income* (Millions)
1992:  28
1993:  36
1994:  37

*Before the cumulative effect of accounting changes and/or merger-related
charges in 1992 and 1993.


Noninterest Income (Millions)
1992:  157
1993:  173
1994:  186





<PAGE>
 
                                                                    Exhibit 10M


                            FIRST BANK SYSTEM, INC.
                           1991 STOCK INCENTIVE PLAN
          (Retyped to Reflect Amendments Effective April 21, 1993 and
                     Amendments Effective April 28, 1994)
 

SECTION 1.  PURPOSE; EFFECT ON PRIOR PLANS.

          (a)  Purpose.  The purpose of the First Bank System, Inc. 1991 Stock
Incentive Plan (the "Plan") is to aid in attracting and retaining management
personnel and members of the Board of Directors who are not also employees
("Non-Employee Directors") of First Bank System, Inc. (the "Company") capable of
assuring the future success of the Company, to offer such personnel and Non-
Employee Directors incentives to put forth maximum efforts for the success of
the Company's business and to afford such personnel and Non-Employee Directors
an opportunity to acquire a proprietary interest in the Company.

          (b)  Effect on Prior Plans.  From and after the effective date of the
Plan, no stock options or restricted stock awards shall be granted under the
Company's 1987 Stock Option Plan and Special Performance and Retention Plan.
All outstanding stock options and restricted stock awards previously granted
under the 1987 Stock Option Plan and Special Performance and Retention Plan
shall remain outstanding in accordance with the terms
 thereof.

SECTION 2.  DEFINITIONS.

          As used in the Plan, the following terms shall have the meanings set
forth below:

          (a)  "Affiliate" shall mean (i) any entity that, directly or
indirectly through one or more intermediaries, is controlled by the Company and
(ii) any entity in which the Company has a significant equity interest, as
determined by the Committee.

          (b)  "Award" shall mean any Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent
or other Stock-Based Award granted under the Plan.

          (c)  "Award Agreement" shall mean any written agreement, contract or
other instrument or document evidencing any Award granted under the Plan.

<PAGE>
 
          (d)  "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and any regulations promulgated thereunder.

          (e)  "Committee" shall mean a committee of the Board of Directors of
the Company designated by such Board to administer the Plan and composed of not
less than three directors, each of whom is a "disinterested person" within the
meaning of Rule 16b-3.  Each member of the Committee shall be an "outside
director" within the meaning of Section 162(m) of the Code.

          (f)  "Dividend Equivalent" shall mean any right granted under Section
6(e) of the Plan.

          (g)  "Eligible Person" shall mean any employee, officer, consultant or
independent contractor providing services to the Company or any Affiliate who
the Committee determines to be an Eligible Person.  Eligible Person shall not
include any Non-Employee Director, who shall receive Awards only pursuant to
Section 6(h) of the Plan.

          (h)  "Fair Market Value" shall mean, with respect to any property
(including, without limitation, any Shares or other securities), the fair market
value of such property determined by such methods or procedures as shall be
established from time to time by the Committee or, in the case of grants
pursuant to Section 6(h), the Board of Directors.  Notwithstanding the
foregoing, for purposes of the Plan, the Fair Market Value of Shares on a given
date shall be the closing price of the Shares as reported on the New York Stock
Exchange on such date, if the Shares are then quoted on the New York Stock
Exchange.

          (i)  "Incentive Stock Option" shall mean an option granted under
Section 6(a) of the Plan that is intended to meet the requirements of Section
422 of the Code or any successor provision.

          (j)  "Non-Qualified Stock Option" shall mean an option granted under
Section 6(a) of the Plan, or Section 6(h) of the Plan in the case of grants to
Non-Employee Directors, that is not intended to be an Incentive Stock Option.

          (k)  "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option.

          (l)   "Other Stock-Based Award" shall mean any right granted under
Section 6(f) of the Plan.

          (m)  "Participant" shall mean an Eligible Person designated to be
granted an Award under the Plan.

                                       2

<PAGE>
 
          (n)  "Performance Award" shall mean any right granted under Section
6(d) of the Plan.

          (o)  "Person" shall mean any individual, corporation, partnership,
association or trust.

          (p)  "Restricted Stock" shall mean any Share granted under Section
6(c) of the Plan.

          (q)  "Restricted Stock Unit" shall mean any unit granted under Section
6(c) of the Plan evidencing the right to receive a Share (or a cash payment
equal to the Fair Market Value of a Share) at some future date.

          (r)  "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934.

          (s)  "Shares" shall mean shares of Common Stock, $1.25 par value, of
the Company or such other securities or property as may become subject to Awards
pursuant to an adjustment made under Section 4(c) of the Plan.

          (t)  "Stock Appreciation Right" shall mean any right granted under
Section 6(b) of the Plan.

SECTION 3.  ADMINISTRATION.

          (a)  Power and Authority of the Committee.  The Plan shall be
administered by the Committee; provided, however, that Section 6(h) of the Plan
shall not be administered by the Committee but rather by the Board of Directors
subject to the provisions and restrictions of such Section 6(h).  Subject to the
terms of the Plan and applicable law, and except with respect to Section 6(h) of
the Plan, the Committee shall have full power and authority to:  (i) designate
Participants; (ii) determine the type or types of Awards to be granted to each
Participant under the Plan; (iii) determine the number of Shares to be covered
by (or with respect to which payments, rights or other matters are to be
calculated in connection with) each Award; (iv) determine the terms and
conditions of any Award or Award Agreement; (v) amend the terms and conditions
of any Award or Award Agreement and accelerate the exercisability of Options or
the lapse of restrictions relating to Restricted Stock or Restricted Stock
Units; (vi) determine whether, to what extent and under what circumstances
Awards may be exercised in cash, Shares, other securities, other Awards or other
property, or canceled, forfeited or suspended; (vii) determine whether, to what
extent and under what circumstances cash, Shares, other securities, other
Awards, other property and other amounts payable with respect to an Award under
the Plan shall be deferred either automatically or at the election of the holder
thereof or the Committee; (viii) interpret and administer the Plan and any
instrument or agreement relating to, or Award made under, the Plan; 

                                       3

<PAGE>
 
(ix) establish, amend, suspend or waive such rules and regulations and appoint
such agents as it shall deem appropriate for the proper administration of the
Plan; and (x) make any other determination and take any other action that the
Committee deems necessary or desirable for the administration of the Plan.
Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations and other decisions under or with respect to the
Plan or any Award shall be within the sole discretion of the Committee, may be
made at any time and shall be final, conclusive and binding upon any
Participant, any holder or beneficiary of any Award and any employee of the
Company or any Affiliate.

          (b)  Meetings of the Committee.  The Committee shall select one of its
members as its chairman and shall hold its meetings at such times and places as
the Committee may determine.  A majority of the Committee's members shall
constitute a quorum.  All determinations of the Committee shall be made by not
less than a majority of its members.  Any decision or determination reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority vote at a meeting duly called and
held.  The Committee may appoint a secretary and may make such rules and
regulations for the conduct of its business as it shall deem advisable.

SECTION 4.  SHARES AVAILABLE FOR AWARDS.

          (a)  Shares Available.  Subject to adjustment as provided in Section
4(c), the number of Shares available for granting Awards under the Plan shall be
5,000,000.  If any Shares covered by an Award or to which an Award relates are
not purchased or are forfeited, or if an Award otherwise terminates without
delivery of any Shares, then the number of Shares counted against the aggregate
number of Shares available under the Plan with respect to such Award, to the
extent of any such forfeiture or termination, shall again be available for
granting Awards under the Plan.  In addition, any Shares that are used by a
Participant as full or partial payment to the Company of the purchase price
relating to an Award, or in connection with satisfaction of tax obligations
relating to an Award in accordance with the provisions of Section 8(a) of the
Plan, shall again be available for granting Awards to Eligible Persons who are
not officers or directors of the Company for purposes of Section 16 of the
Securities Exchange Act of 1934, as amended.

          (b)  Accounting for Awards.  For purposes of this Section 4, if an
Award entitles the holder thereof to receive or purchase Shares, the number of
Shares covered by such Award or to which such Award relates shall be counted on
the date of grant of such Award against the aggregate number of Shares available
for granting Awards under the Plan.

          (c)  Adjustments.  In the event that the Committee (or, in the case of
grants under Section 6(h) of the Plan, the Board of Directors) shall determine
that any dividend or other distribution (whether in the form of cash, Shares,
other 

                                       4

<PAGE>
 
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase Shares or other securities of the Company
or other similar corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee (or, in the case of grants under
Section 6(h) of the Plan, the Board of Directors) to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee (or, in the case of
grants under Section 6(h) of the Plan, the Board of Directors) shall, in such
manner as it may deem equitable, adjust any or all of (i) the number and type of
Shares (or other securities or other property) which thereafter may be made the
subject of Awards, (ii) the number and type of Shares (or other securities or
other property) subject to outstanding Awards and (iii) the purchase or exercise
price with respect to any Award; provided, however, that the number of Shares
covered by any Award or to which such Award relates shall always be a whole
number.

          (d)  Incentive Stock Options.  Notwithstanding the foregoing, the
number of Shares available for granting Incentive Stock Options under the Plan
shall not exceed 3,000,000, subject to adjustment as provided in the Plan and
Section 422 or 424 of the Code or any successor provisions.

          (e)  Award Limitations Under the Plan.  No Eligible Person may be
granted any Award or Awards, the value of which Awards are based solely on an
increase in the value of the Shares after the date of grant of such Awards, for
more than 500,000 Shares, in the aggregate, in any three calendar year period
beginning with the period commencing January 1, 1994 and ending December 31,
1996; provided, however, that such limitation shall apply only to Shares
available for granting Awards under the Plan pursuant to amendments to the Plan
submitted for stockholder approval at the Company's 1994 annual meeting of
stockholders and amendments adopted thereafter.  The foregoing limitation
specifically includes the grant of any "performance-based" Awards within the
meaning of (S)162(m) of the Code.

SECTION 5.  ELIGIBILITY.

          Any Eligible Person, including any Eligible Person who is an officer
or director of the Company or any Affiliate, shall be eligible to be designated
a Participant; provided, however, that an Incentive Stock Option may only be
granted to full or part-time employees (which term as used herein includes,
without limitation, officers and directors who are also employees) and an
Incentive Stock Option shall not be granted to an employee of an Affiliate
unless such Affiliate is also a "subsidiary corporation" of the Company within
the meaning of Section 424(f) of the Code or any successor provision.  Non-
Employee Directors shall receive Awards of Non-Qualified Stock Options as
provided in Section 6(h) of the Plan.

                                       5

<PAGE>
 
SECTION 6.  AWARDS.

          (a)  Options.  The Committee is hereby authorized to grant Options to
Participants with the following terms and conditions and with such additional
terms and conditions not inconsistent with the provisions of the Plan as the
Committee shall determine:

            (i)  Exercise Price.  The purchase price per Share purchasable under
     an Option shall be determined by the Committee; provided, however, that
     such purchase price shall not be less than 100% of the Fair Market Value of
     a Share on the date of grant of such Option.

           (ii)  Option Term.  The term of each Option shall be fixed by the
     Committee.

          (iii)  Time and Method of Exercise.  The Committee shall determine the
     time or times at which an Option may be exercised in whole or in part and
     the method or methods by which, and the form or forms (including, without
     limitation, cash, Shares, other securities, other Awards or other property,
     or any combination thereof, having a Fair Market Value on the exercise date
     equal to the relevant exercise price) in which, payment of the exercise
     price with respect thereto may be made or deemed to have been made.

          (iv)  Reload Options.  The Committee may grant "reload" options,
     separately or together with another Option, pursuant to which, subject to
     the terms and conditions established by the Committee and any applicable
     requirements of Rule 16b-3 or any other applicable law, the Participant
     would be granted a new Option when the payment of the exercise price of a
     previously granted option is made by the delivery of shares of the
     Company's Common Stock owned by the Participant pursuant to Section
     6(a)(iii) hereof or the relevant provisions of another plan of the Company,
     and/or when shares of the Company's Common Stock are tendered or forfeited
     as payment of the amount to be withheld under applicable income tax laws in
     connection with the exercise of an option, which new Option would be an
     option to purchase the number of Shares not exceeding the sum of (A) the
     number of shares of the Company's Common Stock provided as consideration
     upon the exercise of the previously granted option to which such "reload"
     option relates and (B) the number of shares of the Company's Common Stock
     tendered or forfeited as payment of the amount to be withheld under
     applicable income tax laws in connection with the exercise of the option to
     which such "reload" option relates.  "Reload" options may be granted with
     respect to options previously granted under this Plan, the First Bank
     System 1987 Stock Option Plan or any other stock option plan of the
     Company, and 

                                       6

<PAGE>
 
     may be granted in connection with any Option granted under this Plan at the
     time of such grant. Such "reload" options shall have a per share exercise
     price equal to the Fair Market Value as of the date of grant of the new
     Option.

          (b)  Stock Appreciation Rights.  The Committee is hereby authorized to
grant Stock Appreciation Rights to Participants subject to the terms of the Plan
and any applicable Award Agreement.  A Stock Appreciation Right granted under
the Plan shall confer on the holder thereof a right to receive upon exercise
thereof the excess of (i) the Fair Market Value of one Share on the date of
exercise (or, if the Committee shall so determine, at any time during a
specified period before or after the date of exercise) over (ii) the grant price
of the Stock Appreciation Right as specified by the Committee, which price shall
not be less than 100% of the Fair Market Value of one Share on the date of grant
of the Stock Appreciation Right.  Subject to the terms of the Plan and any
applicable Award Agreement, the grant price, term, methods of exercise, dates of
exercise, methods of settlement and any other terms and conditions of any Stock
Appreciation Right shall be as determined by the Committee.  The Committee may
impose such conditions or restrictions on the exercise of any Stock Appreciation
Right as it may deem appropriate.

          (c)  Restricted Stock and Restricted Stock Units.  The Committee is
hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units
to Participants with the following terms and conditions and with such additional
terms and conditions not inconsistent with the provisions of the Plan as the
Committee shall determine:

           (i)  Restrictions.  Shares of Restricted Stock and Restricted Stock
     Units shall be subject to such restrictions as the Committee may impose
     (including, without limitation, any limitation on the right to vote a Share
     of Restricted Stock or the right to receive any dividend or other right or
     property with respect thereto), which restrictions may lapse separately or
     in combination at such time or times, in such installments or otherwise as
     the Committee may deem appropriate.

          (ii)  Stock Certificates.  Any Restricted Stock granted under the Plan
     shall be evidenced by issuance of a stock certificate or certificates,
     which certificate or certificates shall be held by the Company.  Such
     certificate or certificates shall be registered in the name of the
     Participant and shall bear an appropriate legend referring to the terms,
     conditions and restrictions applicable to such Restricted Stock.  In the
     case of Restricted Stock Units, no Shares shall be issued at the time such
     Awards are granted.

           (iii)  Forfeiture; Delivery of Shares.  Except as otherwise
     determined by the Committee, upon termination of employment (as determined
     under criteria established by the Committee) during the applicable
     restriction period, all Shares of Restricted Stock and all Restricted Stock
     Units at such time 

                                       7

<PAGE>
 
     subject to restriction shall be forfeited and reacquired by the Company;
     provided, however, that the Committee may, when it finds that a waiver
     would be in the best interest of the Company, waive in whole or in part any
     or all remaining restrictions with respect to Shares of Restricted Stock or
     Restricted Stock Units. Shares representing Restricted Stock that is no
     longer subject to restrictions shall be delivered to the holder thereof
     promptly after the applicable restrictions lapse or are waived. Upon the
     lapse or waiver of restrictions and the restricted period relating to
     Restricted Stock Units evidencing the right to receive Shares, such Shares
     shall be issued and delivered to the holders of the Restricted Stock Units.

          (d)  Performance Awards.  The Committee is hereby authorized to grant
Performance Awards to Participants subject to the terms of the Plan and any
applicable Award Agreement.  A Performance Award granted under the Plan (i) may
be denominated or payable in cash, Shares (including, without limitation,
Restricted Stock), other securities, other Awards or other property and (ii)
shall confer on the holder thereof the right to receive payments, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee shall establish.  Subject to the terms of the Plan and
any applicable Award Agreement, the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
Performance Award granted and the amount of any payment or transfer to be made
pursuant to any Performance Award shall be determined by the Committee.

          (e)  Dividend Equivalents.  The Committee is hereby authorized to
grant to Participants Dividend Equivalents under which such Participants shall
be entitled to receive payments (in cash, Shares, other securities, other Awards
or other property as determined in the discretion of the Committee) equivalent
to the amount of cash dividends paid by the Company to holders of Shares with
respect to a number of Shares determined by the Committee.  Subject to the terms
of the Plan and any applicable Award Agreement, such Dividend Equivalents may
have such terms and conditions as the Committee shall determine.

          (f)  Other Stock-Based Awards.  The Committee is hereby authorized to
grant to Participants such other Awards that are denominated or payable in,
valued in whole or in part by reference to, or otherwise based on or related to,
Shares (including, without limitation, securities convertible into Shares), as
are deemed by the Committee to be consistent with the purpose of the Plan;
provided, however, that such grants must comply with Rule 16b-3 and applicable
law.  Subject to the terms of the Plan and any applicable Award Agreement, the
Committee shall determine the terms and conditions of such Awards.  Shares or
other securities delivered pursuant to a purchase right granted under this
Section 6(f) shall be purchased for such consideration, which may be paid by
such method or methods and in such form or forms (including without limitation,
cash, Shares, other securities, other Awards or other property or any
combination thereof), as the 

                                       8

<PAGE>
 
Committee shall determine, the value of which consideration, as established by
the Committee, shall not be less than 100% of the Fair Market Value of such
Shares or other securities as of the date such purchase right is granted.

          (g)  General.  Except as otherwise specified with respect to Awards to
Non-Employee Directors pursuant to Section 6(h) of the Plan:

             (i)  No Cash Consideration for Awards.  Awards shall be granted for
     no cash consideration or for such minimal cash consideration as may be
     required by applicable law.

           (ii)  Awards May Be Granted Separately or Together.  Awards may, in
     the discretion of the Committee, be granted either alone or in addition to,
     in tandem with or in substitution for any other Award or any award granted
     under any plan of the Company or any Affiliate other than the Plan.  Awards
     granted in addition to or in tandem with other Awards or in addition to or
     in tandem with awards granted under any such other plan of the Company or
     any Affiliate may be granted either at the same time as or at a different
     time from the grant of such other Awards or awards.

          (iii)  Forms of Payment under Awards.  Subject to the terms of the
     Plan and of any applicable Award Agreement, payments or transfers to be
     made by the Company or an Affiliate upon the grant, exercise or payment of
     an Award may be made in such form or forms as the Committee shall determine
     (including, without limitation, cash, Shares, other securities, other
     Awards or other property or any combination thereof), and may be made in a
     single payment or transfer, in installments or on a deferred basis, in each
     case in accordance with rules and procedures established by the Committee.
     Such rules and procedures may include, without limitation, provisions for
     the payment or crediting of reasonable interest on installment or deferred
     payments or the grant or crediting of Dividend Equivalents with respect to
     installment or deferred payments.

           (iv)  Limits on Transfer of Awards.  No Award and no right under any
     such Award shall be transferable by a Participant otherwise than by will or
     by the laws of descent and distribution; provided, however, that, if so
     determined by the Committee, a Participant may, in the manner established
     by the Committee, designate a beneficiary or beneficiaries to exercise the
     rights of the Participant and receive any property distributable with
     respect to any Award upon the death of the Participant.  Each Award or
     right under any Award shall be exercisable during the Participant's
     lifetime only by the Participant or, if permissible under applicable law,
     by the Participant's guardian or legal representative.  No Award or right
     under any such Award may be pledged, alienated, attached or otherwise
     encumbered, and any 

                                       9

<PAGE>
 
     purported pledge, alienation, attachment or encumbrance thereof shall be
     void and unenforceable against the Company or any Affiliate.

           (v)  Term of Awards.  The term of each Award shall be for such period
     as may be determined by the Committee.

          (vi)  Restrictions; Securities Exchange Listing.  All certificates for
     Shares or other securities delivered under the Plan pursuant to any Award
     or the exercise thereof shall be subject to such stop transfer orders and
     other restrictions as the Committee (or, in the case of grants under
     Section 6(h) of the Plan, the Board of Directors) may deem advisable under
     the Plan or the rules, regulations and other requirements of the Securities
     and Exchange Commission and any applicable federal or state securities
     laws, and the Committee (or, in the case of grants under Section 6(h) of
     the Plan, the Board of Directors) may cause a legend or legends to be
     placed on any such certificates to make appropriate reference to such
     restrictions.  If the Shares or other securities are traded on a securities
     exchange, the Company shall not be required to deliver any Shares or other
     securities covered by an Award unless and until such Shares or other
     securities have been admitted for trading on such securities exchange.

          (h)  Non-Qualified Stock Options to Non-Employee Directors.  The Board
of Directors shall issue Non-Qualified Stock Options to Non-Employee Directors
in accordance with this Section 6(h).

          Each Non-Employee Director serving on the Company's Board of Directors
immediately following the 1993 Annual Meeting of Stockholders of the Company
shall be granted, as of the date of such meeting, a Non-Qualified Stock Option
to purchase 2,500 Shares (subject to adjustment pursuant to Section 4(c) of the
Plan).  Each Non-Employee Director first elected or appointed to the Company's
Board of Directors after the 1993 Annual Meeting of Stockholders and during the
term of the Plan shall be granted, as of the date of such Director's first
election or appointment to the Board of Directors, a Non-Qualified Stock Option
to purchase 2,500 Shares (subject to adjustment pursuant to Section 4(c) of the
Plan).  After the initial grant to each Non-Employee Director as set forth above
in this Section 6(h), each such Director shall be granted during the term of the
Plan, as of the date of each Annual Meeting of Stockholders of the Company, if
such Director's term of office continues after such date, a Non-Qualified Stock
Option to purchase 1,000 Shares (subject to adjustment pursuant to Section 4(c)
of the Plan).

          Each Non-Qualified Stock Option granted to a Non-Employee Director
pursuant to this Section 6(h) shall be exercisable in full as of the date of
grant, shall have an exercise price equal to the Fair Market Value of a Share on
the date of grant and shall expire on the tenth anniversary of the date of
grant, except as provided below.  "Reload" options may not be granted to any
Non-Employee Director.  This 

                                       10

<PAGE>
 
Section 6(h) shall not be amended more than once every six months other than to
comport with changes in the Code, the Employee Retirement Income Security Act or
the rules and regulations thereunder.

          All grants of Non-Qualified Stock Options pursuant to this Section
6(h) shall be automatic and non-discretionary and shall be made strictly in
accordance with the foregoing terms and the following additional provisions:

          (i)  Non-Qualified Stock Options granted to a Non-Employee Director
     hereunder shall terminate and may no longer be exercised if such Director
     ceases to be a Non-Employee Director of the Company, except that:

               (A) If such Director's term shall be terminated for any reason
          other than gross and willful misconduct, death, disability, or
          retirement, such Director may at any time within a period of three
          months after such termination, but not after the termination date of
          the Option, exercise the Option.

               (B) If such Director's term shall be terminated by reason of
          gross and willful misconduct during the course of the term, including
          but not limited to, wrongful appropriation of funds of the Company or
          the commission of a gross misdemeanor or felony, the Option shall be
          terminated as of the date of the misconduct .

               (C) If such Director's term shall be terminated by reason of
          disability or retirement, such Director may exercise the Option in
          accordance with the terms thereof as though such termination had never
          occurred. If such Director shall die following any such termination,
          the Option may be exercised in accordance with its terms by the
          personal representatives or administrators of such Director or by any
          person or persons to whom the Option has been transferred by will or
          the applicable laws of descent and distribution.

               (D) If such Director shall die while a Director of the Company or
          within three months after termination of such Director's term for any
          reason other than disability or retirement or gross and willful
          misconduct, the Option may be exercised in accordance with its terms
          by the personal representatives or administrators of such Director or
          by any person or persons to whom the Option has been transferred by
          will or the applicable laws of descent and distribution.

          (ii)  Non-Qualified Stock Options granted to Non-Employee Directors
     may be exercised in whole or in part from time to time by serving written
     notice of exercise on the Company at its principal executive offices, to
     the attention of the Company's Secretary.  The notice shall state the
     number of 

                                       11

<PAGE>
 
     shares as to which the Option is being exercised and be accompanied by
     payment of the purchase price. A Non-Employee Director may, at such
     Director's election, pay the purchase price by check payable to the
     Company, by promissory note, or in shares of the Company's Common Stock, or
     in any combination thereof having a Fair Market Value on the exercise date
     equal to the applicable exercise price. If payment or partial payment is
     made by promissory note, such note shall (A) be secured by the Shares to be
     delivered upon exercise of such Option (other than those withheld in
     payment of taxes as set forth below), (B) be limited in principal amount to
     the maximum amount permitted under applicable laws, rules and regulations,
     (C) be for a term of six years and (D) bear interest at the applicable
     federal rate (as determined in accordance with Section 1274(d) of the
     Code), compounded semi-annually.

          (iii)  In order to comply with all applicable federal or state income
     tax laws or regulations, the Company may take such action as it deems
     appropriate to ensure that all applicable federal or state payroll,
     withholding, income or other taxes, which are the sole and absolute
     responsibility of a Non-Employee Director, are withheld or collected from
     such Director.  At any time when a Non-Employee Director is required to pay
     the Company an amount required to be withheld under applicable income tax
     laws in connection with an Option granted pursuant to this Section 6(h),
     such Director may (A) elect to have the Company withhold a portion of the
     Shares otherwise to be delivered upon exercise of such Option with a Fair
     Market Value equal to the amount of such taxes (an "Election") or (B)
     deliver to the Company Shares other than Shares issuable upon exercise of
     such Option with a Fair Market Value equal to the amount of such taxes.  An
     Election, if any, must be made on or before the date that the amount of tax
     to be withheld is determined.  The Board of Directors may disapprove of any
     Election, may suspend or terminate the right to make Elections, may limit
     the amount of any Election, and may make rules concerning the required
     information to be included in any Election.  Non-Employee Directors may
     only make an Election in compliance with the Rules established by the
     Company to comply with Section 16(b) of the Securities Exchange Act of
     1934, as amended, and the rules and regulations promulgated thereunder.

SECTION 7.  AMENDMENT AND TERMINATION; ADJUSTMENTS.

          Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:

          (a)  Amendments to the Plan.  The Board of Directors of the Company
may amend, alter, suspend, discontinue or terminate the Plan; provided, however,
that, notwithstanding any other provision of the Plan or any Award Agreement,
without the approval of the stockholders of the Company, no such amendment,

                                       12

<PAGE>
 
alteration, suspension, discontinuation or termination shall be made that,
absent such approval:

          (i)  would cause Rule 16b-3 to become unavailable with respect to the
     Plan;

          (ii)  would violate the rules or regulations of the New York Stock
     Exchange, any other securities exchange or the National Association of
     Securities Dealers, Inc. that are applicable to the Company; or

          (iii)  would cause the Company to be unable, under the Code, to grant
     Incentive Stock Options under the Plan.

          (b)  Amendments to Awards.  Except with respect to Awards granted
pursuant to Section 6(h) of the Plan, the Committee may waive any conditions of
or rights of the Company under any outstanding Award, prospectively or
retroactively.  The Committee may not amend, alter, suspend, discontinue or
terminate any outstanding Award, prospectively or retroactively, without the
consent of the Participant or holder or beneficiary thereof, except as otherwise
herein provided.

          (c)  Correction of Defects, Omissions and Inconsistencies.  The
Committee (or, in the case of grants under Section 6(h) of the Plan, the Board
of Directors) may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem desirable to carry the Plan into effect.

SECTION 8.  INCOME TAX WITHHOLDING; TAX BONUSES.

          (a)  Withholding.  In order to comply with all applicable federal or
state income tax laws or regulations, the Company may take such action as it
deems appropriate to ensure that all applicable federal or state payroll,
withholding, income or other taxes, which are the sole and absolute
responsibility of a Participant, are withheld or collected from such
Participant.  In order to assist a Participant in paying all federal and state
taxes to be withheld or collected upon exercise or receipt of (or the lapse of
restrictions relating to) an Award, the Committee, in its discretion and subject
to such additional terms and conditions as it may adopt, may permit the
Participant to satisfy such tax obligation by (i) electing to have the Company
withhold a portion of the Shares otherwise to be delivered upon exercise or
receipt of (or the lapse of restrictions relating to) such Award with a Fair
Market Value equal to the amount of such taxes or (ii) delivering to the Company
Shares other than Shares issuable upon exercise or receipt of (or the lapse of
restrictions relating to) such Award with a Fair Market Value equal to the
amount of such taxes.  The election, if any, must be made on or before the date
that the amount of tax to be withheld is determined.

                                       13

<PAGE>
 
          (b)  Tax Bonuses.  The Committee, in its discretion, shall have the
authority, at the time of grant of any Award under this Plan or at any time
thereafter, to approve cash bonuses to designated Participants to be paid upon
their exercise or receipt of (or the lapse of restrictions relating to) Awards
in order to provide funds to pay all or a portion of federal and state taxes due
as a result of such exercise or receipt (or the lapse of such restrictions).
The Committee shall have full authority in its discretion to determine the
amount of any such tax bonus.

SECTION 9.  GENERAL PROVISIONS.

          (a)  No Rights to Awards.  Except as otherwise provided in Section
6(h) of the Plan, no Eligible Person, Participant or other Person shall have any
claim to be granted any Award under the Plan, and there is no obligation for
uniformity of treatment of Eligible Persons, Participants or holders or
beneficiaries of Awards under the Plan.  The terms and conditions of Awards need
not be the same with respect to different Participants.

          (b)  Delegation.  The Committee may delegate to one or more officers
of the Company or any Affiliate or a committee of such officers the authority,
subject to such terms and limitations as the Committee shall determine, to grant
Awards to Eligible Persons who are not officers or directors of the Company for
purposes of Section 16 of the Securities Exchange Act of 1934, as amended.

          (c)  Award Agreements.  No Participant will have rights under an Award
granted to such Participant unless and until an Award Agreement shall have been
duly executed on behalf of the Company.

          (d)  No Limit on Other Compensation Arrangements.  Nothing contained
in the Plan shall prevent the Company or any Affiliate from adopting or
continuing in effect other or additional compensation arrangements, and such
arrangements may be either generally applicable or applicable only in specific
cases.

          (e)  No Right to Employment, Etc.  The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ, or as
giving a Non-Employee Director the right to continue as a Director, of the
Company or any Affiliate.  In addition, the Company or an Affiliate may at any
time dismiss a Participant from employment, or terminate the term of a Non-
Employee Director, free from any liability or any claim under the Plan, unless
otherwise expressly provided in the Plan or in any Award Agreement.

          (f)  Governing Law.  The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Minnesota.

                                       14

<PAGE>
 
          (g)  Severability.  If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction
or would disqualify the Plan or any Award under any law deemed applicable by the
Committee (or, in the case of grants under Section 6(h) of the Plan, the Board
of Directors), such provision shall be construed or deemed amended to conform to
applicable laws, or if it cannot be so construed or deemed amended without, in
the determination of the Committee (or, in the case of grants under Section 6(h)
of the Plan, the Board of Directors), materially altering the purpose or intent
of the Plan or the Award, such provision shall be stricken as to such
jurisdiction or Award, and the remainder of the Plan or any such Award shall
remain in full force and effect.

          (h)  No Trust or Fund Created.  Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person.  To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.

          (i)  No Fractional Shares.  No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee (or, in the case
of grants under Section 6(h) of the Plan, the Board of Directors) shall
determine whether cash shall be paid in lieu of any fractional Shares or whether
such fractional Shares or any rights thereto shall be canceled, terminated or
otherwise eliminated.

          (j)  Headings.  Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference.  Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.

SECTION 10.  EFFECTIVE DATE OF THE PLAN.

          The Plan shall be effective as of the date of its approval by the
stockholders of the Company.

SECTION 11.  TERM OF THE PLAN.

          Awards shall only be granted under the Plan during a 10-year period
beginning on the effective date of the Plan.  However, unless otherwise
expressly provided in the Plan or in an applicable Award Agreement, any Award
theretofore granted may extend beyond the end of such 10-year period, and the
authority of the Committee provided for hereunder with respect to the Plan and
any Awards, and the authority of the Board of Directors of the Company to amend
the Plan, shall extend beyond the end of such period.

                                       15



<PAGE>
 
                                                                    Exhibit 10O


                             EMPLOYMENT AGREEMENT


          THIS AGREEMENT, dated as of January 18, 1995, by and between First
Bank System, Inc., a Delaware corporation ("Employer"), and John F. Grundhofer
("Executive").

          In consideration of the respective undertakings of Employer and
Executive set forth below, Employer and Executive agree as follows:

      1.  Employment.  Employer hereby employs Executive, and Executive
accepts such employment and agrees to perform services for the Employer, for the
period and upon the other terms and conditions set forth in this Agreement.

      2. Term of Employment. The term of Executive's employment pursuant to this
Agreement will commence on January 30, 1995 (the "Commencement Date") and,
unless terminated at an earlier date in accordance with Section 5 of this
Agreement, shall continue in effect until the third anniversary of the
Commencement Date; and, commencing on the first anniversary of the Commencement
Date and on each anniversary thereafter, the term of this Agreement shall
automatically be extended for one additional year unless, not later than 30 days
prior to any such date of automatic extension of this Agreement, Employer or
Executive shall have given the other party to this Agreement written
 notice that
the Agreement will not be so extended. The term of Executive's employment
commencing on the Commencement Date and ending pursuant to the terms hereof is
hereinafter referred to as the "Period of Employment."

      3.  Position and Duties.

          3.01  Service with Employer.  During the Period of Employment,
Executive agrees to perform such reasonable executive employment duties as
Employer shall assign to him from time to time and shall have the title of
Chairman of the Board, President and Chief Executive Officer.  Executive also
agrees to serve, for any period for which he is elected, as a director on the
Board of Directors of Employer and to serve as a member of any committee of the
Board of Directors of Employer to which Executive may be elected or appointed.

          3.02  Performance of Duties.  Executive agrees to serve Employer
faithfully and to the best of his ability and to devote his full business time,
attention and efforts to the business and affairs of Employer during the Period
of Employment; provided, however, that Executive may engage in other activities,
such as activities involving charitable, educational, religious and similar
types of organizations, speaking engagements, membership on the boards of
directors of other organizations (as Employer may from time to time approve),
management of Executive's personal investments, and similar types of activities
to the extent that such other activities do not inhibit in any material way or

<PAGE>
 
prohibit the performance of Executive's duties under this Agreement, or
inhibit in any material way or conflict with the business of Employer and its
subsidiaries.

      4.  Compensation.

          4.01  Base Salary.  As base compensation for all services to be
rendered by Executive under this Agreement, Employer will pay to Executive
during the Period of Employment a base annual salary to be paid in substantially
equal installments in accordance with Employer's standard payroll procedures and
policies.  The initial base annual salary will be at least $620,000, but the
base annual salary may be increased (but not reduced) from time to time in the
sole discretion of Employer; provided, however, that for any of the three years
beginning after a Change-in-Control, as defined in Section 8.13, during the
Period of Employment Executive's base annual salary shall be increased by a
percentage not less than the average percentage increase in the base annual
salary for each of the next five highest paid officers of Employer for such
year.

          4.02  Annual Bonus.  During the Period of Employment, Executive will
be entitled to participate in the Employer's Executive Incentive Plan (or, if
such Plan shall cease to exist, Employer's annual bonus award program, if any,
for Employer's executives at Executive's grade level).  The award of an annual
bonus is highly discretionary and is subject to the terms and provisions of the
Executive Incentive Plan (or, if such Plan shall cease to exist, Employer's
annual bonus award program, if any, for Employer's executives at Executive's
grade level).

          4.03  Options and Restricted Stock.  During the Period of Employment,
Executive will be eligible to receive grants of Employer's stock options and
restricted stock, or other awards pursuant to equity-based plans of Employer.
Such grants are highly discretionary and would be subject to the terms of the
applicable agreements prescribed by Employer from time to time.

          4.04  Participation in Other Benefit Plans.  During the Period of
Employment, Executive will be entitled to participate in such retirement plans,
major medical, hospital, surgical and dental plans, executive disability plans
and other Employer benefits not described elsewhere in this Section 4 as are
being provided by Employer to executives at Executive's grade level from time to
time to the extent that Executive's age, positions and other factors qualify him
for such benefits.  If, for any period during the Period of Employment,
Executive is not eligible by reason of length of service to participate in such
plans maintained by Employer, Employer shall provide Executive with benefits
equivalent to those provided under such plans and, with respect to benefits
provided by Employer equivalent to those provided under Employer's major
medical, hospital, surgical and dental plans, shall compensate Executive on an
after-tax basis for any additional income taxes payable by Executive by reason
of Employer providing such benefits directly rather than through such plans.

                                      -2-

<PAGE>
 
          4.05  Long-Term Disability Benefits.  During the Period of Employment,
Executive's annual benefit under Employer's long-term disability plan will not
be less than 60% of the total of (i) Executive's base annual salary at the date
of disability plus (ii) the annual average of bonuses received by Executive
during the three prior Executive Incentive Plan years (or, if such Plan shall
cease to exist, such other annual bonus award program, if any, pursuant to which
Executive received annual bonus payments), and Employer agrees to pay Executive
(at the time benefits are payable under the long-term disability plan) the
excess, if any, of such annual benefit over the annual benefit provided by
Employer's long-term disability plan.

          4.06  Survivor Benefit Programs; Life Insurance.  During the Period of
Employment, Executive will be entitled to participate in survivor benefit
programs covering Employer's executives at Executive's grade level in effect on
the Commencement Date or as modified or supplemented by Employer from time to
time.  If, for any period during the Period of Employment, Executive is not
eligible to participate in such survivor benefit programs, Employer shall
provide Executive with benefits equivalent to those provided under such
programs.  In addition, during the Period of Employment Employer shall continue
to provide a life insurance policy with a face value of at least $1 million for
the benefit of a beneficiary designated by Executive (or, if no beneficiary is
designated, for the benefit of Executive's spouse).  Such insurance policy shall
be in addition to the amount of group term insurance, if any, provided to
Executive under an insurance plan maintained by Employer for its employees
generally.  Executive hereby represents to Employer that Executive is insurable
on normal terms and conditions.

          4.07  Vacation and Sick Leave.  During the Period of Employment,
Executive will be entitled to reasonable paid vacation periods each year, will
be entitled to carry over to subsequent years unused vacation periods, and upon
termination of employment will be entitled to be paid for unused vacation
periods, in each case in accordance with Employer's policy for executives at
Executive's grade level from time to time.  Executive will also be entitled to
reasonable sick leave in accordance with Employer's policy for executives at
Executive's grade level from time to time.

          4.08  Perquisites.  During the Period of Employment, Employer will
provide Executive with such perquisites as Employer from time to time provides
to executives at Executive's grade level including, without limitation, (a) an
automobile or an automobile allowance consistent with Employer's policies for an
executive at Executive's grade level, (b) reimbursement of initiation fees, if
any, and dues for one country club and one business club of Executive's choice,
and (c) the reimbursement of the cost of financial and tax counseling (subject
to an annual limit of two percent of current base annual salary). Additionally,
during the Period of Employment, Employer will reimburse Executive for the
difference between (i) interest payments made by Executive on Executive's real
estate mortgage loan for his personal

                                      -3-

<PAGE>
 
residence (with the loan amount not to exceed 80% of the purchase price for such
residence) and (ii) the interest payments that would apply to such loan if the
interest rate on such loan were one percentage point less than the interest rate
generally prevailing in the market at the time the loan was entered into.

          4.09  Expenses.  Employer will reimburse Executive for all expenses
and disbursements reasonably incurred by Executive in the performance of his
duties during the Period of Employment, and such other facilities or services as
Employer and Executive may, from time to time, agree are reimbursable, subject
to the presentment of appropriate vouchers in accordance with the Employer's
normal policies for expense verification.

          4.10  [This Section is intentionally omitted.]

          4.11  Indemnity and Hold Harmless.  Except to the extent inconsistent
with Employer's charter or bylaws, Employer will indemnify Executive and hold
Executive harmless to the fullest extent permitted by law with respect to acts
of Executive as an officer and director of Employer during the Period of
Employment.  Employer further agrees that if and to the extent Employer in its
sole discretion maintains directors' and officers' insurance policies, Executive
will be covered by such policies with respect to acts of Executive as an officer
and director of Employer during the Period of Employment to the same extent as
all other officers and directors of Employer under such policies.

          4.12  Payments on Account of Restricted Stock Relating to Former
Employment.  Employer has established and is maintaining a bookkeeping account
for Executive (the "Bookkeeping Account"), which account was initially credited
with $305,074, representing the amount agreed to be paid to Executive and not
paid to date in respect of shares of Wells Fargo & Company ("Wells Fargo")
Common Stock transferred by Wells Fargo to Executive, but not vested, as of
January 30, 1990.  The amount credited to the Bookkeeping Account shall be
deemed to have been invested in such stock, bonds or other securities as
Executive shall, from time to time, designate in writing to Employer's Executive
Vice President, Human Resources, or such other individual as Employer shall
designate, which deemed investments must be reasonably acceptable to Employer
and must be of a type that Employer would be permitted to make under applicable
laws and regulations.  The Bookkeeping Account shall be credited or debited, as
the case may be, with gains or losses deemed incurred as a result of such
designated, deemed investments.

          Certain debits have been made to the Bookkeeping Account as provided
in the Employment Agreement dated December 30, 1992 by and between Employer and
Executive (the "Prior Employment Agreement").  The balance of the Bookkeeping
Account shall become payable to, or with respect to, Executive upon the earliest
of the following events (i) January 30, 2003, (ii) Executive's death or (iii)
Executive's termination of employment for any reason within 24 months after a
Change in Control. In the event the balance of the Bookkeeping Account becomes
payable upon Executive's

                                      -4-

<PAGE>
 
termination of employment for any reason other than death within 24 months after
a Change in Control, the entire balance shall be paid within 30 days of such
event. In the event the balance of the Bookkeeping Account becomes payable upon
Executive's death, the entire balance shall be paid by December 31 of the
calendar year in which Executive dies. Upon the occurrence of any other event
giving rise to Employer's obligation to pay Executive the balance of the
Bookkeeping Account, on January 30 of each year beginning in the year 2003 and
for each of the next nine consecutive years, after taking into account any
amount credited or debited to the Bookkeeping Account as a result of the deemed
investment thereof or otherwise pursuant to the terms of this Section 4.12, the
following proportions of the Bookkeeping Account shall be paid to Executive:
1/10, 1/9, 1/8, 1/7, 1/6, 1/5, 1/4, 1/3, 1/2 and the entire remaining balance
thereof.

          Employer, in its sole and absolute discretion, may alter the timing or
manner of payment of the balance of the Bookkeeping Account in the event that
Executive establishes to the satisfaction of Employer severe financial hardship.
Severe financial hardship will be deemed to have occurred in the event of
Executive's impending bankruptcy, a dependent's long and serious illness or
other events of similar magnitude.  Executive may designate a beneficiary or
beneficiaries who, upon his death, are to receive distributions that otherwise
would have been paid to Executive.  All designations shall be in writing and
shall be effective only if and when delivered to Employer during the lifetime of
Executive.

          Employer shall have the right to deduct from all payments made
pursuant to this Section 4.12 any federal, state or local taxes required by law
to be withheld with respect to such payments.  Executive and Employer understand
and agree that the timetable set forth above with respect to the payment of the
balance of the Bookkeeping Account is irrevocable and shall not be subject to
any amendment or modification.  Further, Executive and Employer understand and
agree that Employer is under a contractual obligation to make payments to
Executive in accordance with this Section 4.12.  Such payments shall not be
financed from any trust fund, insurance or otherwise and shall be paid solely
out of the general funds of Employer, and Executive shall have no interest
whatsoever in any investments made by Employer on account of Executive's request
with respect to deemed investments of the Bookkeeping Account.  Executive will
not have any interest whatsoever in any specific asset of Employer as a result
of this Agreement, and Executive's rights to payments hereunder shall be no
greater than the right of any other general, unsecured creditor of Employer.  In
no event shall Employer make any payment hereunder to any assignee or creditor
of Executive or a beneficiary.  Prior to the time of payment hereunder,
Executive or a beneficiary thereof shall have no rights by way of anticipation
or otherwise to assign or otherwise dispose of any interest under this Section
4.12, nor shall such rights be assigned or transferred by operation of law.

          4.13  Reimbursement of Professional Fees.  Employer will pay to (or
reimburse Executive for) the reasonable fees and 

                                      -5-

<PAGE>
 
expenses of Executive's personal professional advisors for professional services
rendered to Executive in connection with this Agreement and matters related
thereto; provided, however, that payment by Employer pursuant to this Section
4.13 will not exceed $5,000.

      5.  Termination.

          5.01  Grounds for Termination.  The Period of Employment will
terminate prior to the expiration of the term set forth in Section 2 of this
Agreement in the event that:

     (a)  Executive shall die.

     (b)  Executive shall qualify for and accrue payments under Employer's
          Disability Program for a period covering 90 consecutive days.

     (c)  Employer shall terminate the Period of Employment for Cause.  "Cause"
          means termination upon (i) the willful and continued failure by
          Executive to substantially perform his duties with Employer (other
          than any such failure resulting from his disability or from
          termination by Executive for Good Reason), after a written demand for
          substantial performance is delivered to Executive that specifically
          identifies the manner in which Employer believes that Executive has
          not substantially performed his duties, and Executive has failed to
          resume substantial performance of his duties on a continuous basis
          within 14 days of receiving such demand, (ii) the willful engaging by
          Executive in conduct which is demonstrably and materially injurious to
          Employer, monetarily or otherwise, (iii) Executive's conviction of a
          felony which impairs his ability substantially to perform his duties
          with Employer or (iv) the issuance of an order under Section 8(e)(4)
          or 8(g)(1) of the Federal Deposit Insurance Act ("FDIC") by which
          Executive is removed and/or permanently prohibited from participating
          in the conduct of the affairs of Employer and/or any other affiliate
          of Employer.  For purposes of this paragraph, no act, or failure to
          act, on Executive's part will be deemed "willful" unless done, or
          omitted to be done, by Executive not in good faith and without
          reasonable belief that his action or omission was in the best interest
          of Employer.  Failure to perform Executive's duties with Employer
          during any period of disability shall not constitute Cause.

     (d)  Executive shall terminate the Period of Employment for Good Reason.
          "Good Reason" means termination by Executive upon the occurrence,
          without Executive's consent, of any one or more of the following: (i)
          the assignment to Executive of any duties inconsistent in any respect
          with Executive's position (including status, offices, titles, and
          reporting requirements), authorities, duties, or other
          responsibilities as in

                                      -6-

<PAGE>
 
          effect immediately prior to such assignment or any other action of
          Employer which results in a diminishment in such position, authority,
          duties, or responsibilities, other than an insubstantial and
          inadvertent action which is remedied by Employer promptly after
          receipt of notice thereof given by Executive; (ii) a reduction by
          Employer in Executive's base salary as in effect on the Commencement
          Date or as the same shall be increased from time to time; (iii)
          Employer's requiring Executive to be based at a location in excess of
          30 miles from the location of Executive's principal office immediately
          prior to such requirement; (iv) the failure by Employer to provide
          Executive with compensation and benefits at least equal (in terms of
          benefit levels and/or reward opportunities) to those provided for
          under each compensation or benefit plan, program, policy and practice
          as in effect at the Commencement Date (or as in effect following the
          Commencement Date, if greater); (v) the failure of Employer to obtain
          a satisfactory agreement from any successor to Employer to assume and
          agree to perform this Agreement; (vi) a material breach by Employer of
          its obligations under this Agreement after notice in writing from
          Executive and a reasonable opportunity for Employer to correct such
          conduct; and (vii) any purported termination by Employer of
          Executive's employment that is not effected pursuant to a Notice of
          Termination (as hereinafter defined). Executive's right to terminate
          the Period of Employment for Good Reason shall not be affected by
          Executive's incapacity due to physical or mental illness. Executive's
          continued employment shall not constitute consent to, or a waiver of
          rights with respect to, any circumstance constituting Good Reason.
          Termination by Executive of the Period of Employment for Good Reason
          shall constitute termination for Good Reason for all purposes of this
          Agreement, notwithstanding that Executive may also thereby be deemed
          to have "retired" under any applicable retirement programs of
          Employer.

     (e)  Employer terminates the Period of Employment other than for "Cause."

     (f)  Executive terminates the Period of Employment for any reason not
          constituting Good Reason.

Notwithstanding any termination of the Period of Employment, Executive, in
consideration of his employment hereunder to the date of such termination, will
remain bound by the provisions of this Agreement that specifically relate to
periods, activities or obligations upon or subsequent to the termination of
Executive's employment.

          5.02  Effect of Termination.

     (a)  In the event of termination of the Period of Employment pursuant to
          the provisions of Section 5.01(a) above, 

                                      -7-

<PAGE>
 
          Executive's trust estate or estate, as the case may be (as determined
          in accordance with Section 8.02 of this Agreement), will be entitled
          to be paid the base annual salary otherwise payable to Executive
          pursuant to Section 4.01 of this Agreement only through the date of
          such termination. Additionally, Executive's survivors will be entitled
          to any benefits provided under Employer's survivor benefit program.

     (b)  In the event of termination of the Period of Employment pursuant to
          the provisions of Section 5.01(b) above, Executive will be entitled to
          be paid the base annual salary otherwise payable to Executive pursuant
          to Section 4.01 of this Agreement only through the date of such
          termination.  Executive will be entitled to benefits under Employer's
          Disability Program and to the benefits provided for in Section 4.05 in
          connection with Employer's Disability Plan.  If Executive shall cease
          to be eligible for long-term disability payments pursuant to the
          Disability Plan within three years following the date of such
          termination, Employer will pay Executive a lump sum payment in the
          amount of Executive's annual base salary at the time of such
          termination.

     (c)  In the event of termination of the Period of Employment pursuant to
          the provisions of Section 5.01(c) or (f) above, Employer will have no
          further obligations hereunder except that Employer will pay Executive
          his base salary, at the rate then in effect, and continue to provide
          Executive his health and welfare benefits through the date of such
          termination.  Executive will not be paid any annual bonus pursuant to
          Section 4.02 of this Agreement for the calendar year in which the
          termination occurs or any subsequent calendar year.

     (d)  In the event of termination of the Period of Employment pursuant to
          the provisions of Sections 5.01(d) or 5.01(e) above, Employer will (i)
          pay Executive his full base salary through the date of termination at
          the rate in effect at the time Notice of Termination is given; (ii)
          pay as damages to Executive, not later than 30 days following the date
          of termination, a lump sum payment equal to three times the sum of (A)
          Executive's annual base salary in effect at the time Notice of
          Termination is given and (B) the annual target bonus potential
          available to Executive at the time Notice of Termination is given (or,
          in the event of termination within 24 months following a Change-in-
          Control, if either of the following amounts is greater, the bonus
          earned in the last fiscal year prior to the date of termination or the
          average bonus earned in the last three fiscal years prior to the date
          of termination, whichever is larger), (iii) continue to provide the
          employee benefits described in Sections 4.04, 4.05 (with disability
          benefits to be calculated as of the date of termination), and 4.06 to
          which Executive was entitled

                                      -8-

<PAGE>
 
          on the date of such termination for a period of three years from the
          date of such termination, (iv) continue to provide the perquisites
          described in Section 4.08 to which Executive was entitled on the date
          of such termination for a period of three years from the date of such
          termination, (v) cause the acceleration of the exercisability of any
          stock option or the vesting of any restricted stock grants (other than
          those pursuant to Employer's Restricted Stock and Performance Plan)
          that would have become exercisable or vested, as the case may be,
          during the remaining Period of Employment had no such termination
          occurred, (vi) cause the acceleration of vesting of restricted stock
          grants under Employer's Restricted Stock and Performance Plan if the
          vesting schedule has been determined at the time of such termination
          and such vesting would have occurred during the remaining Period of
          Employment had no such termination occurred, (vii) give Executive
          credit for three additional years of service (or five additional years
          of service in the event of termination within 24 months following a
          Change-in-Control) under Employer's Nonqualified Supplemental
          Executive Retirement Plan (the "SERP"), provided, however, that
          Executive shall not receive any such credit if Executive has
          previously received five additional years of service at age 60 under
          the terms of the SERP, (viii) in the event of termination within 24
          months following a Change-in-Control, pay Executive the full amount of
          any long-term cash incentive award for any plan periods then in
          progress to the extent not provided for in any Employer long-term cash
          incentive plan or plans; and (ix) pay for individual outplacement
          counseling services to Executive up to a maximum of $60,000.
          Executive will not be paid any annual bonus pursuant to Section 4.02
          of this Agreement for the calendar year in which the termination
          occurs.

          5.03  Notice of Termination.  Any purported termination by Employer or
Executive of the Period of Employment shall be communicated by written Notice of
Termination to the other party hereto.  For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which indicates the specific
termination provision in Section 5.01 above relied upon.

          5.04  Offsets.  Executive shall have no duty to seek other employment.
However, in the event of termination of the Period of Employment pursuant to the
provisions of Sections 5.01(d) or 5.01(e), the following offsets will apply to
reduce the payments and benefits which Executive shall be entitled to receive
pursuant to Section 5.02(d): (i)(A) in the event of termination within 24 months
following a Change-in-Control, the amount payable to Executive pursuant to
Section 5.02(d)(ii) will be offset by any salary, cash bonus and other earned
income (within the meaning of Section 911(d)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code")) received by Executive for services rendered by
Executive to persons or entities other than the Employer during

                                      -9-

<PAGE>
 
or with respect to the 36-month period after the date of termination, or (B) in
the event of termination at any time not within 24 months following a Change-in-
Control, one-third of the amount payable to Executive pursuant to Section
5.02(d)(ii)(A) and the entire amount payable to Executive pursuant to Section
5.02(d)(ii)(B) shall be offset by amounts received by Executive which are
described in subparagraph (A) above; (ii) the benefits payable to Executive
pursuant to Section 5.02(d)(iii) and (iv) shall be discontinued if Executive
obtains full-time employment providing welfare benefits during the 36-month
period following the date of termination; and (iii) in the event of termination
at any time within 24 months following a Change-in-Control, any additional
benefits under Employer's SERP pursuant to Section 5.02(d) will be reduced by
the amount of vested defined benefit pension benefits and vested defined benefit
non-qualified supplemental retirement benefits actually payable to Executive
without any risk of forfeiture from persons or entities other than Employer
which are attributable to services rendered by Executive to such other persons
or entities during the 36 months following the date of termination of
Executive's employment. Such reduction shall be calculated based on the vested
benefits payable at age 65 under the single life annuity form of payment under
the applicable plans which are accrued by Executive during such period. The
foregoing calculations for a particular plan shall be made by the actuary for
such plan in accordance with generally accepted actuarial principles. The amount
of such reduction at age 65 shall be actuarially reduced if Executive's benefits
under the Employer's SERP commence before Executive attains age 65.

          Not less frequently than annually (by December 31 of each year),
Executive shall account to Employer with respect to all payments and benefits
received by Executive which are required hereunder to be offset against payments
or benefits received by Executive from Employer. If the Employer has paid
amounts in excess of those to which Executive is entitled (after giving effect
to the offsets provided above), Executive shall reimburse Employer for such
excess by December 31 of such year. The requirements imposed under this
paragraph shall terminate on December 31 of the calendar year which includes the
third anniversary of the date of termination.

          5.05  Additional Payments.  In the event Executive becomes entitled to
payments under Article 5 of this Agreement, Employer shall cause its independent
auditors promptly to review, at Employer's sole expense, the applicability of
Section 4999 of the Code to such payments. If such auditors shall determine that
any payment or distribution of any type by Employer to Executive or for his
benefit, whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise (the "Total Payments"), would be subject to
the excise tax imposed by Section 4999 of the Code, or any interest or penalties
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional cash payment (a "Gross-Up
Payment") within 30 days of such determination equal to an amount such that
after payment by

                                     -10-

<PAGE>
 
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax imposed upon the Gross-Up Payment,
Executive would retain an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Total Payments. For purposes of the foregoing determination,
Executive's tax rate shall be deemed to be the highest statutory marginal state
and Federal tax rate (on a combined basis) then in effect. If no determination
by Employer's auditors is made prior to the time a tax return reflecting the
Total Payments is required to be filed by Executive, Executive will be entitled
to receive a Gross-Up Payment calculated on the basis of the Total Payments
reported by Executive in such tax return, within 30 days of the filing of such
tax return. In all events, if any tax authority determines that a greater Excise
Tax should be imposed upon the Total Payments than is determined by the
Company's independent auditors or reflected in Executive's tax return pursuant
to this Section 5.05, Executive shall be entitled to receive the full Gross-Up
Payment calculated on the basis of the amount of Excise Tax determined to be
payable by such tax authority from Employer within 30 days of such
determination.

          5.06 Nonexclusivity of Rights. Nothing in this Agreement shall prevent
or limit Executive from continuing or future participation in any benefit,
bonus, incentive, retirement or other plan or program provided by Employer and
for which Executive may qualify, nor, except as expressly provided in this
Agreement, shall anything herein limit or reduce such rights as Executive may
have under any other agreement with, or plan, program, policy or practice of,
Employer. Amounts which are vested benefits or which Executive is otherwise
entitled to receive under any agreement with, or plan, program, policy or
practice of, Employer (including, without limitation, the cashout of unused
vacation days upon termination of employment) shall be payable in accordance
with such agreement, plan, program, policy or practice, except as explicitly
modified by this Agreement. Notwithstanding the foregoing, if Executive becomes
entitled to benefits under Article 5 of this Agreement, Executive shall not be
entitled to receive payments under the First Bank System Severance Pay Plan, the
First Bank System, Inc. Senior Management Change-in-Control Severance Pay Plan,
the First Bank System, Inc. Middle Management Change-in-Control Severance Pay
Plan, the First Bank System, Inc. Broad-Based Change-in-Control Severance Pay
Plan or any other severance pay plan of Employer.

      6.  Non-Competition and Unfair Competition.

          6.01  Agreement Not to Compete.  Without the approval by resolution of
the Board of Directors of Employer, upon termination of Executive's employment
with Employer by Employer for Cause pursuant to Section 5.01(c) or by Executive
without Good Reason pursuant to Section 5.01(f), Executive will not, for a
period of three years thereafter, become an officer, employee, agent, partner,
director or substantial stockholder (holding more than 5% of the voting
securities) of any bank, savings bank, trust company, bank and trust company,
savings and loan association or holding company thereof, in each case if such
entity conducts

                                     -11-

<PAGE>
 
business in the State of Colorado, the State of Minnesota, the State of Montana,
the State of North Dakota, the State of South Dakota, the State of Wisconsin or
any other State in which Employer has substantial operations.

          6.02  Agreement Not to Solicit.  Without the approval by resolution of
the Board of Directors of Employer, upon termination of Executive's employment
with Employer for any reason whatsoever, Executive will not, for the remainder
of the Period of Employment if no termination had occurred (or, if longer, for
the one-year period following such termination), (i) solicit or aid in
soliciting as a customer or client of banking or related financial services
(including, without limitation trust, credit card and investment management
services) any person, firm, corporation, association or other entity (A) that
was a customer or client of Employer or any other affiliate of Employer, and for
which Executive or anyone under Executive's supervision performed any services
or with which substantial business relations were maintained by Employer or any
other affiliate of Employer at any time during the five years prior to the
termination of the Period of Employment or (B) whose identity or particular
needs Executive otherwise discovered as a result of his employment with
Employer, or (ii) solicit or aid in soliciting any employees of Employer or any
other affiliate of Employer to leave their employment. Without the approval by
resolution of the Board of Directors of Employer, upon termination of
Executive's Employment with Employer for any reason whatsoever, Executive agrees
never to copy, remove from Employer or its affiliates, dispose or make any use
of any confidential customer list, confidential business information with
respect to customers, confidential materials relating to the practices or
procedures of Employer or its affiliates, or any other proprietary information.

      7.  Taxes.  All payments to be made to Executive under this Agreement
will be net of required withholding of federal, state and local income and
employment taxes. Whenever under this Agreement Executive is to be compensated
or reimbursed on an "after-tax basis," Executive will be assumed to be subject
to federal income taxes at the highest marginal rate applicable to individuals
and to state income taxes at the highest marginal effective rate for residents
of Minneapolis, Minnesota.

      8.  Miscellaneous.

          8.01  Governing Law.  This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of Minnesota.

          8.02  Successors.  This Agreement shall be binding upon and inure
to the benefit of Employer and its successors. This Agreement will inure to the
benefit of, be enforceable by, and any amounts and benefits owed to Executive at
the time of Executive's death, unless otherwise provided herein, will be paid
to, the Trustee under the John F. and Beverly J. Grundhofer Living Trust
Agreement, or, if such Trust is not then in existence, the personal
representative or personal representatives of Executive's

                                     -12-

<PAGE>
 
estate. Reference to the "John F. and Beverly J. Grundhofer Living Trust
Agreement" means that certain Declaration of Trust, John F. and Beverly J.
Grundhofer Living Trust, dated February 22, 1988, by and between John F. and
Beverly J. Grundhofer, as donors and as original Trustees, as amended and
existing at John F. Grundhofer's death. Reference to the Trustee under the John
F. and Beverly J. Grundhofer Living Trust Agreement means the then acting
Trustee or Trustees under the John F. and Beverly J. Grundhofer Living Trust
Agreement and any successor Trustees.

          Employer will require any successor (whether direct or indirect, by
purchase, merger, consolidation, or otherwise) to all or substantially all of
the business and/or assets of Employer or of any division or subsidiary thereof
employing Executive to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that Employer would be required to
perform if no such succession had taken place. Failure of Employer to obtain
such assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Executive to compensation
from Employer in the same amount and on the same terms as Executive would be
entitled to hereunder if Executive terminated his employment for Good Reason
following a Change-in-Control, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the date of termination and notice of termination shall be deemed to have
been given on such date. In any case where a successor assumes the Employer's
obligations under this Agreement by operation of law, the requirements imposed
in this paragraph will be satisfied if the successor acknowledges to Executive
in writing that it has assumed the Employer's obligations under this Agreement
by operation of law within 30 days of receipt of a written notice from Executive
requesting such acknowledgment.

          8.03  Prior Agreements.  This Agreement contains the entire agreement
of the parties relating to the employment of Executive by Employer and the other
matters discussed herein and supersedes all prior agreements and understandings
with respect to such subject matter, and the parties hereto have made no
agreements, representations or warranties relating to the subject matter of this
Agreement which are not set forth herein. The Prior Employment Agreement is
hereby terminated and shall have no further force or effect. The Change in
Control Severance Pay Agreement entered into between Employer and Executive on
March 16, 1992, which was attached as Exhibit A to the Prior Employment
Agreement with Employer, is hereby terminated and shall have no further force or
effect.

          8.04  Amendments.  No amendment or modification of this Agreement
will be deemed effective unless made in writing and signed by each party hereto.

          8.05  No Waiver.  No term or condition of this Agreement will be
deemed to have been waived, nor will there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver will not be 

                                     -13-

<PAGE>
 
deemed a continuing waiver unless specifically stated, will operate only as to
the specific term or condition waived and will not constitute a waiver of such
term or condition for the future or as to any act other than that specifically
waived.

          8.06  Assignment.  This Agreement is not assignable, in whole or
in part, by any party without the written consent of the other party.

          8.07  Injunctive Relief.  Executive agrees that it would be difficult
to compensate Employer fully for damages for any violation of the provisions of
this Agreement, including without limitation the provisions of Section 6.
Accordingly, Executive specifically agrees that Employer will be entitled to
temporary and permanent injunctive relief to enforce the provisions of this
Agreement and that such relief may be granted without the necessity of proving
actual damages. This provision with respect to injunctive relief will not,
however, diminish the right of Employer to claim and recover damages in addition
to injunctive relief.

          8.08  Disputes and Legal Fees.

     (a)  Before a Change-in-Control.  Any controversy or claim arising out of
          or relating to this Agreement, or the breach thereof, which is not
          resolved by the parties will not sooner than 30 days after the dispute
          shall arise, be settled by arbitration before three arbitrators in
          accordance with the rules of the American Arbitration Association, and
          judgment upon an award rendered by the arbitrators, or at least a
          majority of them, may be entered in any court having jurisdiction
          thereof; provided, however, that Employer will be entitled to seek
          injunctive or other equitable relief in a court of law to enforce the
          provisions of Section 6.  Such arbitration shall be conducted in
          Minneapolis, Minnesota.  The expenses incurred in connection with any
          arbitration, including but not limited to each party's legal fees and
          the arbitrators' fees and expenses, will be allocated between the
          parties according to the relative fault of each, as determined by the
          arbitrators.

     (b)  After a Change-in-Control.  Subparagraph (a) above shall not apply
          after a Change-in-Control, and the provisions of this subparagraph (b)
          shall apply instead.  If Executive so elects, any dispute or
          controversy arising under or in connection with this Agreement shall
          be settled exclusively by arbitration in accordance with the rules of
          the American Arbitration Association then in effect.  Judgment may be
          entered on the arbitrator's award in any court having jurisdiction.
          If Executive does not elect arbitration, Executive may pursue any and
          all legal remedies available to him.  Employer shall pay to Executive
          any legal fees and expenses incurred by him after a Change-in-Control
          (i) as a result of successful 

                                     -14-

<PAGE>
 
          litigation or arbitration against Employer for nonpayment of any
          benefit hereunder or (ii) in connection with any dispute with any
          Federal, state or local governmental agency with respect to benefits
          claimed under this Agreement. If Executive elects arbitration,
          Employer will pay all fees and expenses of the arbitrator.

          8.09 Severability.  To the extent that any provision of this Agreement
shall be determined to be invalid or unenforceable, the invalid or unenforceable
portion of such provision will be deleted from this Agreement, and the validity
and enforceability of the remainder of such provision and of this Agreement will
be unaffected.  In furtherance of and not in limitation of the foregoing, it is
expressly agreed that should the duration of or geographical extent of, or
business activities covered by, the noncompetition covenant contained in Section
6 be determined to be in excess of that which is valid or enforceable under
applicable law, then such provision will be construed to cover only that
duration or extent, or those activities which may validly or enforceably be
covered.  Executive acknowledges the uncertainty of the law in this respect and
expressly stipulates that this Agreement will be construed in a manner which
renders its provisions valid and enforceable to the maximum extent (not
exceeding its express terms) possible under applicable law.

          8.10 Notices.  All notices under this Agreement will be in writing and
will be deemed effective when delivered in person (in Employer's case, to its
Secretary) or twenty-four (24) hours after deposit thereof in the U.S. mails,
postage prepaid, for delivery as registered or certified mail -- addressed, in
the case of Executive, to him at his last residential address known by Employer
and, in the case of Employer, to its corporate headquarters, attention of its
Secretary, or to such other address as Executive or Employer may designate in
writing at any time or from time to time to the other party.  In lieu of notice
by deposit in the U.S. mails, a party may give notice by telegram, telex or
telecopy, in which case such notice will be deemed effective upon receipt.

          8.11  Counterparts.  This Agreement may be executed by the parties
hereto in counterparts, each of which will be deemed to be an original, but all
such counterparts will together constitute one and the same instrument.

          8.12  Headings.  The headings of paragraphs herein are included solely
for convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.

          8.13 Change in Control. For purposes of this Agreement, a "Change-in-
Control" shall mean:

     (A)  a change-in-control of a nature that would be required to be reported
          in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
          under the Securities Exchange 

                                     -15-

<PAGE>
 
          Act of 1934, as amended (the "Exchange Act"), whether or not Employer
          is then subject to such reporting requirement; or

     (B)  the public announcement (which, for purposes of this definition, shall
          include, without limitation, a report filed pursuant to Section 13(d)
          of the Exchange Act) by Employer or any "person" (as such term is used
          in Section 13(d) and 14(d) of the Exchange Act) that such person has
          become the "beneficial owner" (as defined in Rule 13d-3 promulgated
          under the Exchange Act), directly or indirectly, of securities of
          Employer (w) representing 20% or more, but not more that 50%, of the
          combined voting power of Employer's then outstanding securities unless
          the transaction resulting in such ownership has been approved in
          advance by the Continuing Directors (as hereinafter defined) or (x)
          representing more than 50% of the combined voting power of Employer's
          then outstanding securities (regardless of any approval by the
          Continuing Directors); provided, however, that notwithstanding the
          foregoing, no Change-in-Control shall be deemed to have occurred for
          purposes of this Agreement by reason of ownership of 20% or more of
          the total voting capital stock of Employer then issued and outstanding
          by (y) Employer, any subsidiary of Employer or any employee benefit
          plan of Employer or of any subsidiary of Employer or any entity
          holding shares of the Common Stock organized, appointed or established
          for, or pursuant to the terms of, any such plan (any such person or
          entity described in this clause (y) is referred to herein as a
          "Company Entity") or (z) Corporate Partners, L.P., Corporate Offshore
          Partners, L.P., The State Board of Administration of Florida, their
          respective "Affiliates" (including, for this purpose, their respective
          limited partners) and/or any "Permitted Transferee" of such "Persons"
          (collectively, the "Investors"), who have acquired or will acquire
          such stock at any time pursuant to, in conformity with and as
          contemplated by the terms of the fully executed version of that
          certain Stock Purchase Agreement and related documents dated as of May
          30, 1990, by Employer with the Investors (the terms "Affiliates,"
          "Permitted Transferee" and "Persons" shall have the meanings given to
          them in such Stock Purchase Agreement); or

     (C)  the announcement of a tender offer by any person or entity (other than
          a Company Entity) for 20% or more of Employer's voting capital stock
          then issued and outstanding, which tender offer has been approved by
          the Board of Governors of the Federal Reserve System and has not been
          approved by the Board, a majority of the members of which are
          Continuing Directors (as hereinafter defined), and recommended to the
          shareholders of Employer, or

                                     -16-

<PAGE>
 
     (D)  the Continuing Directors (as hereinafter defined) cease to constitute
          a majority of Employer's Board of Directors; or

     (E)  the shareholders of Employer approve (x) any consolidation or merger
          of Employer in which Employer is not the continuing or surviving
          corporation or pursuant to which shares of Employer stock would be
          converted into cash, securities or other property, other than a merger
          of Employer in which shareholders immediately prior to the merger have
          the same proportionate ownership of stock of the surviving corporation
          immediately after the merger; (y) any sale, lease, exchange, or other
          transfer (in one transaction or a series of related transactions) of
          all or substantially all of the assets of Employer; or (z) any plan of
          liquidation or dissolution of Employer.

     For purposes of this definition, "Continuing Director" shall mean any
     person who is a member of the Board of Directors of Employer, while such
     person is a member of the Board of Directors, who is not an Acquiring
     Person (as defined below) or an Affiliate or Associate (as defined below)
     of an Acquiring Person, or a representative of an Acquiring Person or of
     any such Affiliate or Associate, and who (x) was a member of the Board of
     Directors on the date of this Agreement as first written above or (y)
     subsequently becomes a member of the Board of Directors, if such person's
     initial nomination for election or initial election to the Board of
     Directors is recommended or approved by a majority of the Continuing
     Directors.  For purposes of this definition, "Acquiring Person" shall mean
     any "person" (as such term is used in Sections 13(d) and 14(d) of the
     Exchange Act) who or which, together with all Affiliates and Associates of
     such person, is the "beneficial owner" (as defined in Rule 13d-3
     promulgated under the Exchange Act), directly or indirectly, of securities
     of Employer representing 20% or more of the combined voting power of
     Employer's then outstanding securities, but shall not include the Investors
     or any Company Entity; and "Affiliate" and "Associate" shall have their
     respective meanings ascribed to such terms in Rule 12b-2 promulgated under
     the Exchange Act.

          8.14 Code Section 162(m).  Notwithstanding any other provision of this
Agreement to the contrary, to the extent that Employer's tax deduction for
remuneration in respect of the payment of any amount under Sections 5.02, 5.05
or 8.02 of this Agreement would be disallowed under Code Section 162(m) by
reason of the fact that Executive's applicable employee remuneration, as defined
in Code Section 162(m)(4), either exceeds or, if such amount were paid, would
exceed the $1,000,000 limitation in Code Section 162(m)(1), Employer may, in its
sole discretion, defer the payment of such amount, but only to the extent that,
and for so long as, Employer's tax deduction in respect of the payment thereof
would be so disallowed under Code Section 162(m); provided that no payment may
be deferred beyond three months after the end of Employer's fiscal year in which
Executive's termination of

                                     -17-

<PAGE>
 
employment occurs, and Employer may accelerate the payment of previously
deferred amounts if it determines that the amount of the tax deduction that
would be disallowed is not significant.  Amounts which are deferred under this
Section 8.14 will be credited with interest at a rate determined by Employer
from time to time, but in no event less than the long-term applicable federal
rate under Code Section 1274(d) in effect from time to time.

          IN WITNESS WHEREOF, Executive and Employer have executed this
Agreement as of the date set forth in the first paragraph hereof.

                              FIRST BANK SYSTEM, INC.

                               

                              By   /s/ R. H. Sayre
                                   ----------------------- 
                              Its  EVP of Human Resources
                                   -----------------------
                                  

                                   /s/ John F. Grundhofer
                                   ----------------------- 
                                   John F. Grundhofer

                                     -18-



<PAGE>
 
                                                                    Exhibit 10R


                             EMPLOYMENT AGREEMENT


          THIS AGREEMENT (this "Agreement"), is entered into as of April 30,
1993, by and between First Bank System, Inc., a Delaware corporation ("FBS"),
and Will F. Nicholson, Jr. ("Executive").

                                   RECITALS

          A.  Executive is currently the Chairman of the Board of Directors,
President and Chief Executive Officer of Colorado National Bankshares, Inc., a
Colorado corporation.

          B.  Pursuant to an Agreement of Merger and Consolidation dated
November 8, 1992 (the "Merger Agreement"), FBS has agreed to acquire all of the
issued and outstanding shares of Colorado National Bankshares, Inc. through the
merger (the "Merger") of Colorado National Bankshares, Inc. with and into
Central Bancorporation, Inc. ("CBI"), a wholly owned subsidiary of FBS.

          C.  In the event that the Merger is completed, FBS desires to retain
Executive as an executive employee of Colorado National Bankshares, Inc.
including the successor thereto as a result of the Merger (the "Company") to
perform the duties and responsibilities described herein, and Executive is
willing to perform such duties and to assume such responsibilities, on the terms
and subject to the conditions set forth herein.

          D.  The parties hereto intend that the terms and conditions of this

Agreement be conditioned upon the completion of the Merger.

                                   AGREEMENT

          NOW THEREFORE, in consideration of the mutual agreements and
undertakings set forth herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, and intending to be
legally bound hereby, FBS and Executive agree as follows:

     1.   Employment.  Subject to and effective upon the occurrence of the
"Effective Date," as defined in the Merger Agreement, FBS hereby agrees to cause
the Company to employ Executive, and Executive accepts such employment and
agrees to perform services for the Company, for the period and upon the other
terms and conditions set forth in this Agreement.  The parties agree that
Executive shall be obligated to devote such time as is reasonably necessary to
fulfill Executive's duties and responsibilities under this Agreement.

<PAGE>
 
     2.   Term.  The term of Executive's employment hereunder shall commence on
the Effective Date and shall continue through December 31, 1994, unless
terminated at an earlier date pursuant to the provisions of Section 11 of this
Agreement (the "Primary Term").  If the Primary Term runs through December 31,
1994, Executive will retire from employment with FBS and the Company on such
date.  For the period commencing on January 1, 1995 and continuing through
December 31, 1995, unless terminated at an earlier date pursuant to the
provisions of Section 11 of this Agreement (the "Consulting Term"), Executive
shall provide consulting services as described in Section 5.01 below.
Notwithstanding the foregoing, if Executive is unable to perform the services
described in Section 3.01 of this Agreement due to Executive's death or
disability at or prior to the Effective Date, this Agreement shall be of no
further force and effect and the parties hereto will have no obligations
hereunder.

     3.   Primary Term.

          3.01  Description of Duties.  During the Primary Term, Executive shall
be employed as the Chairman of the Board, President and Chief Executive Officer
of the Company.  Executive shall perform the duties and assume the
responsibilities customarily associated with such positions in a manner
consistent with Executive's performance of such duties prior to the date of this
Agreement, and shall perform such other acts and duties as may reasonably be
assigned to him by John F. Grundhofer or Mr. Grundhofer's successor as Chairman
of the Board, President and Chief Executive Officer of FBS, provided that such
additional acts and duties are (i) customarily performed by executives of
Executive's position and experience; (ii) within the scope of Executive's
education, training and expertise; and (iii) not illegal or unlawful.  Such
duties and responsibilities shall be performed primarily in the Denver, Colorado
metropolitan area.

          3.02  Base Salary.  As base compensation for all services to be
rendered by Executive under this Agreement during the Primary Term, FBS or the
Company will pay to Executive during the Primary Term a base annual salary to be
paid in substantially equal installments in accordance with FBS' or the
Company's standard payroll procedures and policies.  The initial base annual
salary will be $425,000 (which amount shall be subject to withholding taxes
pursuant to Section 12.05 of this Agreement), but the base annual salary may be
increased (but not reduced) from time to time in the sole discretion of FBS.

          3.03  Annual Bonus.  For 1993 (assuming the Effective Date occurs in
1993) and 1994, Executive will be entitled to receive bonus compensation
consistent with the bonus plan existing on the date of this Agreement for
Colorado National Bankshares, Inc. executives, which generally provides for
payment of a bonus equal to 45% of Executive's base compensation if the
company's financial goals for a given calendar year are met or exceeded; plus an
additional bonus of 10% of such bonus to 

                                      -2-

<PAGE>
 
be awarded at the discretion of Mr. Grundhofer or his successor subject to
approval by the Organization Committee of the FBS Board of Directors.

          3.04  Participation in Benefit Plans.  During the Primary Term,
Executive will be entitled to participate in such retirement plans, major
medical, hospital, surgical and dental plans, and other FBS or Company benefits
not described elsewhere herein as are being provided from time to time by the
Company to executives at Executive's grade level to the extent that Executive's
age, positions and other factors qualify him for such benefits; provided,
however, that Executive will not participate in FBS' or the Company's long-term
disability plan.  Executive will be entitled to holiday and vacation time off
and pay in accordance with FBS policy as it exists from time to time.

          3.05  Perquisites.  During the Primary Term, FBS or the Company will
(i) make all lease and other payments payable with respect to the automobile
currently provided to Executive through a subsidiary of the Company; (ii)
provide reimbursement of annual dues and, if preapproved by FBS, special
assessments with respect to (a) the Denver Club, (b) the Cheyenne Mountain Club,
(c) the Castle Pines Golf Club and (d) the University Club in New York, New
York; (iii) make arrangements with a cardiologist in Minneapolis, Minnesota to
provide an extensive annual physical examination followed by personal
consultation and provide reimbursement of expenses of up to $1,000 annually in
connection therewith; (iv) provide reimbursement of the cost of legal, financial
and tax counseling (subject to an annual limit of two percent of current base
annual salary); and (v) provide such other perquisites as are consistent with
the Company's policies from time to time for an executive at Executive's grade
level.  At the termination of the Primary Term, Executive shall be entitled to
assume responsibility for lease payments on the automobile provided to Executive
pursuant to this Section 3.05 or to return the automobile to the Company, in
which event Executive shall have no further liability or obligation with respect
to such automobile.

          3.06  Working Facilities; Secretarial Support.  During the Primary
Term, the Company shall, at its sole cost and expense, furnish Executive with a
private office located on an executive floor of the Company's Denver, Colorado
office headquarters, a designated, reserved parking space in the attached
underground parking facilities serving such offices, if any, and such other
facilities and services as are customarily provided to the Company's executive
employees, consistent with Executive's position and adequate for the proper
performance of his duties under this Agreement.  During such period, the Company
shall also, at its sole cost and expense, provide Executive with secretarial
assistance to be provided by Executive's current secretarial assistant, Mary
Perrott Smith, or a successor to be mutually agreed upon by the Company and
Executive.

                                      -3-

<PAGE>
 
          3.07  Expenses.  During the Primary Term, the Company will pay or
reimburse Executive for all other reasonable and necessary out-of-pocket
expenses incurred by him in the performance of his duties under this Agreement
(including expenses incurred in connection with civic activities and clubs
approved by FBS), subject to the presentment of appropriate vouchers in
accordance with the Company's normal policies, as they exist from time to time,
for expense verification.

     4.   Post-Retirement Benefits.

          4.01  Continuing Benefits.  Except as otherwise provided in this
Section 4, Executive shall not be entitled to benefits or perquisites or to
participate in bonus or stock-based incentive plans of FBS or the Company
following the conclusion of the Primary Term other than those benefits to which
Executive is entitled under normal retirement plans and policies of FBS and the
Company, including, without limitation, the FBS Healthcare Plan as it exists
from time to time or any successor thereto.

          4.02  Club Memberships.  The Company will continue to provide 
Executive with reimbursement of annual dues and, if preapproved by FBS, special
assessments with respect to (i) the Denver Club or successor club through the
date that Executive attains the age of 70 years old and (ii) the Castle Pines
Golf Club through the date that Executive attains the age of 70 years old and
will provide Executive with reimbursement of one-half of the annual dues and, if
preapproved by FBS, one-half of special assessments with respect to the Castle
Pines Golf Club thereafter through the date that Executive attains the age of 75
years old.

          4.03  Working Facilities; Secretarial Support.  Commencing at the end
of the Primary Term, the Company shall, at its sole cost and expense, furnish
Executive with a private office, consistent with Executive's status as a retired
executive, located at the Company's Denver, Colorado office headquarters or such
other Denver, Colorado location as is appropriate consistent with Executive's
status as a retired executive, and appropriate parking accommodations in the
parking facility serving such office.  During such period, the Company shall
also, at its sole cost and expense, provide Executive with secretarial
assistance by an individual mutually agreed upon by the Company and Executive;
provided, however, that Executive's secretarial assistant may be assigned other
duties in addition to providing secretarial support to Executive and may be
employed on a part-time basis.  Notwithstanding the foregoing, at such time as
Executive fails to utilize such office space, parking accommodations and
secretarial support, and such failure is continuous and ongoing, the Company
shall have no further obligations with respect to the provision thereof pursuant
to this Section 4.03.

                                      -4-

<PAGE>
 
     5.   Consulting Term.

          5.01  Description of Duties.  During the Consulting Term, Executive
shall act as a consultant to FBS and the Company, providing general business
advice and consultation on matters relating to the operations of the Company and
in the furtherance of the Company's business interests as may be requested by
FBS or the Company and acceptable to Executive.  Executive shall provide such
consulting services on an "as-available" basis, it being expressly agreed that
Executive's duties pursuant to this Agreement during the Consulting Term shall
in no way interfere with any other activities in which Executive may be engaged,
including, without limitation, Executive's service on the boards of directors of
other corporations, travel or other commitments.

          5.02  Compensation.  For all services rendered by Executive during the
Consulting Term under this Agreement, FBS or the Company shall pay Executive the
sum of $300,000 (the "Consulting Compensation") (which amount shall be subject
to withholding taxes pursuant to Section 12.05 of this Agreement).  The
Consulting Compensation shall be payable in a lump sum after January 1, 1995,
but prior to January 31, 1995.  In the event that the Consulting Term is
terminated prior to December 31, 1995 for any reason following such payment,
Executive will be entitled to retain the full amount of the Consulting
Compensation.

     6.   Appointment to FBS Board of Directors.  As soon as practicable after
the Effective Date, Executive shall be appointed to fill a vacant position then
existing, or, if no such vacancy exists, the next position that becomes vacant,
on the Board of Directors of FBS.  Executive will be subject to all applicable
policies relating to membership on the Board of Directors of FBS, including,
without limitation, policies relating to resignation from such Board following
retirement.  As a member of the FBS Board of Directors, Executive shall be
covered by all directors' and officers' liability insurance policies carried by
FBS and by any indemnification provisions adopted by FBS for its directors.
While Executive serves as a director of FBS, he shall receive the customary
compensation and benefits, if any, of a director with Executive's then current
employment status serving on such board.

     7.   Other Board Memberships.  The parties acknowledge and agree that
Executive currently serves on the Boards of Directors of certain public and
private corporations and civic and philanthropic organizations, including the
Boards of Directors of Visa USA, Visa International and the U.S. Chamber of
Commerce.  FBS hereby agrees that nothing contained in this Agreement shall be
deemed to preclude Executive's continuing involvement with such corporations and
organizations.  FBS agrees to reimburse Executive for all reasonable and
necessary out-of-pocket expenses incurred by him in connection with his service
on the Board of Directors of the U.S. Chamber of Commerce, subject to the
presentment of appropriate 

                                      -5-

<PAGE>
 
vouchers in accordance with FBS' normal policies, as they exist from time to
time, for expense verification.

     8.   Termination of Existing Compensation Agreement.

          8.01  Termination Payment.  The parties acknowledge and agree that
Executive and the Company are parties to a Compensation Agreement dated as of
November 9, 1988 (the "Compensation Agreement").  In consideration of
Executive's agreement to terminate the Compensation Agreement without exercising
the rights and remedies available to Executive thereunder, and as an inducement
to Executive to enter into this Agreement, on the Effective Date the Company
shall pay to Executive the sum of $1,700,000 (the "Termination Payment") (which
amount shall be subject to withholding taxes pursuant to Section 12.05 of this
Agreement).  The Termination Payment will be timed such that Executive will be
able to apply the Termination Payment toward the exercise of certain options to
purchase shares of Common Stock of the Company held by Executive which expire on
the Effective Date.  Upon Executive's receipt of the Termination Payment, the
Compensation Agreement shall be deemed terminated and of no further force or
effect whatsoever, and thereafter the terms and conditions of Executive's
employment by the Company, and the compensation to be paid to Executive in
connection therewith, shall be governed solely by the terms and conditions of
this Agreement.

          8.02  Indemnification.  The Company shall indemnify Executive and hold
Executive harmless against all claims, losses, damages, penalties, expenses and
taxes, including, without limitation, reasonable accountants' and attorneys'
fees, that may arise (a) by virtue of the Internal Revenue Service asserting an
excise tax charge under Section 4999, or any successor provision, of the
Internal Revenue Code of 1986, as amended, against the Termination Payment or
other payment or benefit to or on behalf of Executive under this Agreement or as
a result of the vesting of Executive's unvested stock options; or (b) as a
result of any payments made to or on the behalf of Executive pursuant to this
indemnification (collectively, the "Excise Expenses").  For this purpose, taxes
shall be calculated based on the highest individual state and federal tax rates
then in effect.

          8.03  Conditions to Indemnification.  As a condition to the
indemnification set forth in Section 8.02, Executive must provide written notice
to the Company in a timely fashion, including copies of all relevant documents
and information, of any examination or notice of examination that could result
in the imposition of any tax or related expense which might be the basis for a
claim for indemnification under this Agreement, and provide an opportunity for
the Company to contest such tax or related expense in a timely manner.

                                      -6-

<PAGE>
 
          8.04  Prepayment by Company.  The Company may elect to prepay to
Executive or on Executive's behalf, an estimated amount of the Excise Expenses
(the "Paid Indemnification"); provided, however, that the Company shall remain
liable to Executive under Section 8.02 to the extent that the Excise Expenses
exceed the Paid Indemnification.  In the event that the Paid Indemnification
exceeds the amount of Excise Expenses, Executive agrees to return to the Company
such excess amount of the Paid Indemnification paid to Executive, or, if paid to
the Internal Revenue Service, which is refunded or otherwise credited to
Executive, or would be refunded or credited to Executive upon the filing of the
appropriate returns or amendments thereto.

     9.   Company Supplemental Executive Retirement Plan.  FBS and the Company
shall maintain and continue in existence the Company's Nonqualified Supplemental
Retirement Plan for Key Officers of Colorado National Bankshares, Inc. and
Subsidiaries, as currently amended (the "SERP"), and honor that certain
Nonqualified Supplemental Retirement Plan Designation and Agreement dated
November 9, 1988, between the Company and Executive, until such time as
Executive has received all sums due to him thereunder.  FBS and the Company
agree not to amend or modify the SERP in any way that might reduce the benefits
available to Executive thereunder.

     10.  Personal Retirement Account.  Executive may elect, in his sole and
absolute discretion exercisable by 30 days written notice to FBS, to receive a
lump sum distribution of all amounts contained in his FBS Personal Retirement
Account; provided, however, that no such distribution shall be made prior to
such time as Executive is eligible to receive a distibution in accordance with
the terms of the FBS Personal Retirement Account.  In the event of such election
by Executive, the Company will cooperate with Executive in rolling the funds
over into an Individual Retirement Account.

     11.  Termination.

          11.01  Grounds for Termination.  Executive's engagement pursuant to
this Agreement will terminate in the event that:

               (a)  Executive dies.

               (b)  During the Primary Term Executive would qualify for and
                    accrue payments under the FBS Disability Program or any
                    other disability program applicable to executives of the
                    Company for a period covering 90 consecutive days if
                    Executive were participating in any such program.

                                      -7-

<PAGE>
 
          (c)  FBS or the Company terminates Executive's engagement under this
               Agreement for Cause. "Cause" means termination upon (i) the
               willful and continued failure by Executive to substantially
               perform his duties with the Company (other than any such failure
               resulting from his disability), after a written demand for
               substantial performance is delivered to Executive that
               specifically identifies the manner in which the Company believes
               that Executive has not substantially performed his duties, and
               Executive has failed to resume substantial performance of his
               duties on a continuous basis within 30 days of receiving such
               demand, (ii) the willful engaging by Executive in conduct which
               is demonstrably and materially injurious to the financial
               condition or business reputation of the Company or of FBS, (iii)
               Executive's conviction of a felony which impairs his ability
               substantially to perform his duties with the Company or (iv) the
               issuance of an order under Sections 8(e)(4) or 8(g)(1) of the
               Federal Deposit Insurance Act ("FDIA") by which Executive is
               removed and/or permanently prohibited from participating in the
               conduct of the affairs of the Company or any of its affiliates.
               For purposes of this paragraph, no act, or failure to act, on
               Executive's part shall be deemed "willful" unless done, or
               omitted to be done, by Executive not in good faith and without
               reasonable belief that his action or omission was in the best
               interest of the Company. Failure to perform Executive's duties
               with the Company during any period of disability shall not
               constitute Cause.

          (d)  Executive resigns for any reason upon 90 days prior written 
               notice to FBS and the Company.

          11.02     Effect of Termination.

          (a)  In the event of termination of Executive's engagement pursuant to
               the provisions of Section 11.01(c) or (d) above, the Company and
               FBS shall have no further obligations hereunder from the date of
               such termination except the Company shall pay Executive his base
               salary, at the rate then in effect, and continue to provide
               Executive his health and welfare benefits through the date of
               such termination.

                                      -8-

<PAGE>
 
          (b)  In the event of termination of Executive's engagement pursuant to
               the provisions of Section 11.01(a) above during the Primary Term
               or the Consulting Term, the Company and FBS shall have no further
               obligations hereunder from the date of such termination except
               that Executive's estate will be entitled to receive any base
               salary that would otherwise have been paid to Executive pursuant
               to Section 3.02 of this Agreement if no such termination had
               occurred, any unpaid portion of the Consulting Compensation, and
               benefits to which such estate is entitled, if any, under benefit
               plans of the Company and/or FBS pursuant to the terms of such
               plans as in effect from time to time; provided, however, that FBS
               and the Company shall continue to be bound by the terms and
               provisions of Section 9. Such payments shall be made in
               accordance with their terms.

          (c)  In the event of termination of Executive's engagement pursuant to
               the provisions of Section 11.01(b) above during the Primary Term,
               the Company and FBS shall have no further obligations hereunder
               from the date of such termination except that Executive will be
               entitled to receive any base salary that would otherwise have
               been paid to Executive pursuant to Section 3.02 of this Agreement
               if no such termination had occurred and any unpaid portion of the
               Consulting Compensation; provided, however, that FBS and the
               Company shall continue to be bound by the terms and provisions of
               Section 9. Such payments shall be made in accordance with their
               terms.

The provisions of this Section 11.02 are exclusive with respect to this
Agreement and set forth the only remedies of Executive against FBS or the
Company upon termination of Executive's employment pursuant to this Agreement.

          11.03  FDIA Suspension.  If Executive is suspended and/or temporarily 
prohibited from participating in the conduct of the affairs of the Company or 
any of its affiliates by a notice served under Section 8(e)(3) or (g)(1) of the 
FDIA (12 U.S.C. (S) 1818(e)(3) and (g)(1)), the Company's and FBS' obligations 
under this Agreement shall be suspended as of the date of service, unless 
stayed by appropriate proceedings.  If the charges in the notice are dismissed, 
the Company shall (i) pay Executive all or part of the compensation withheld 
while its contract obligations were suspended and (ii) reinstate (in whole or 
in part) any of its obligations that were suspended.

                                      -9-

<PAGE>
 
     12.  Miscellaneous.

          12.01  Governing Law.  THIS AGREEMENT IS MADE UNDER AND SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO.

          12.02  Condition to Effectiveness.  This Agreement shall be of no
force or effect until Executive and the Company enter into an agreement,
substantially in the form attached hereto as Exhibit A, to terminate the
Compensation Agreement, dated as of November 9, 1988, between Executive and the
Company.

          12.03  Waiver of Severance Payments.  Executive hereby acknowledges
that he is entering into this Agreement in lieu of receiving the severance
payments and benefits pursuant to Section 5.13(d) of the Merger Agreement and
accordingly waives any and all rights to such payments or benefits.

          12.04  Prior Agreements.  This Agreement (together with the
agreements contained in any Exhibit to this Agreement) contains the entire
agreement of the parties relating to the employment of Executive by the Company
following the Effective Date and the other matters discussed herein and
supersedes all prior agreements and understandings with respect to such subject
matter, and the parties hereto have made no agreements, representations or
warranties relating to the subject matter of this Agreement which are not set
forth herein (or in any Exhibit hereto).

          12.05  Withholding Taxes.  FBS or the Company will withhold from
any compensation or other benefits payable under this Agreement all federal,
state, city or other taxes as are required pursuant to any law or governmental
regulation or ruling.

          12.06  Amendments.  No amendment or modification of this Agreement
shall be deemed effective unless made in writing and signed by each party
hereto.

          12.07  No Waiver.  No term or condition of this Agreement shall be
deemed to have been waived, nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought.  Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.

                                      -10-

<PAGE>
 
          12.08  Assignment.  This Agreement is not assignable, in whole or in 
part, by any party without the written consent of the other parties; provided, 
however, that the parties hereto agree and acknowledge that any rights and 
obligations of the Company that may exist under this Agreement shall be
assigned by operation of law on the Effective Date to the successor corporation
resulting from the Merger and that references to the Company herein are deemed
to include such successor.

          12.09  Performance by the Company.  FBS represents and warrants that, 
in the event the Merger is completed, it will possess sufficient power and
control over the Company to cause the Company to perform all obligations and
duties of the Company set forth herein (the "Company Duties").  FBS shall cause
the Company to, and warrants that the Company will, perform the Company Duties.
To the extent that the Company fails, for any reason whatsoever, to perform the
Company Duties, FBS shall perform in the Company's place, and shall indemnify
Executive for any and all costs and expenses whatsoever reasonably incurred by
Executive as a result of the Company's failure to perform.

          12.10  Severability.  To the extent that any provision of this
Agreement shall be determined to be invalid or unenforceable, the invalid or
unenforceable portion of such provision shall be deleted from this Agreement,
and the validity and enforceability of the remainder of such provision and of
this Agreement shall be unaffected.

          12.11  Notices.  Any notice hereunder by any party to another party
shall be given in writing by personal delivery or certified mail, return receipt
requested.  If addressed to Executive the notice shall be delivered or mailed to
Executive at the address specified under Executive's signature hereto (or such
other address as Executive shall provide to FBS, by written notice, for such
purpose), or if addressed to the Company or FBS, the notice shall be delivered
or mailed to FBS at its executive offices to the attention of the Chief
Executive Officer of FBS.  A notice shall be deemed given, if by personal
delivery, on the date of such delivery or, if by certified mail, on the date
shown on the applicable return receipt.

          12.12  Counterparts.  This Agreement may be executed by the parties
hereto in counterpart, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.

          12.13  Headings.  The headings of paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.

                                      -11-

<PAGE>
 
          IN WITNESS WHEREOF, Executive and FBS have executed this Agreement as
of the date set forth in the first paragraph.

                                    FIRST BANK SYSTEM, INC.


                                    By  /s/ R. H. Sayre
                                      ---------------------------------------
                                      Its    EVP of Human Resources
                                         ------------------------------


                                          /s/ Will F. Nicholson, Jr.
                                      ---------------------------------------
                                              Will F. Nicholson, Jr.
                                                30 Cherry Street
                                             Denver, Colorado  80220

                                      -12-



<PAGE>
 
                                                                    Exhibit 10S


                             EMPLOYMENT AGREEMENT


          THIS AGREEMENT (this "Agreement"), is entered into as of December 31,
1994 by and between First Bank System, Inc., a Delaware corporation ("FBS"), and
Will F. Nicholson, Jr. ("Executive").

                                   RECITALS

          A.  Executive is currently the Chairman of the Board of Directors,
President and Chief Executive Officer of Colorado National Bankshares, Inc., a
Colorado corporation ("CNBI"), pursuant to an Employment Agreement dated as of
April 30, 1993 by and between FBS and Executive (the "1993 Agreement").

          B.  Pursuant to the 1993 Agreement, Executive shall retire from
employment with FBS and CNBI on December 31, 1994.

          C.  Pursuant to the 1993 Agreement, and subject to the terms and
conditions thereof, Executive shall provide consulting services during the
"Consulting Term" as defined in the 1993 Agreement.

          D.  Following Executive's retirement from employment with FBS and CNBI
on December 31, 1994, FBS wishes to employ Executive as an executive of Rocky
Mountain BankCard System, Inc., an indirectly wholly owned subsidiary of FBS
("RMBCS"), pursuant to the terms and conditions of this Agreement.

          E.  This Agreement is in addition to, and in no way modifies the
rights and obligations of FBS and Executive under, the 1993 Agreement.


                                   AGREEMENT

          NOW THEREFORE, in consideration of the mutual agreements and
undertakings set forth herein, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, and intending to be
legally bound hereby, FBS and Executive agree as follows:

     1.   Employment.  Effective as of January 3, 1995 (the "Effective Date"),
FBS hereby agrees to cause RMBCS to employ Executive, and Executive accepts such
employment and agrees to perform services for RMBCS, for the period and upon the
other terms and conditions set forth in this Agreement.  Executive's employment
with RMBCS and any of its affiliates shall not exceed 79 hours per calendar
month.

<PAGE>
 
     2.   Term.  The term of Executive's employment hereunder shall commence on
the Effective Date and shall continue through December 31, 1995; and commencing
on January 1, 1996, the term of this Agreement shall automatically be extended
through December 31, 1996 unless, not later than 30 days prior to January 1,
1996, FBS (including its affiliates) or Executive shall have given the other
party to this Agreement written notice that the Agreement will not be so
extended.  The term of Executive's employment commencing on the Effective Date
and ending pursuant to the terms hereof is hereinafter referred to as the
"Term."  Notwithstanding the foregoing, if Executive is unable to perform the
services described in Section 3 of this Agreement due to Executive's death or
disability at or prior to the Effective Date, this Agreement shall be of no
further force and effect and the parties hereto will have no obligations
hereunder.

     3.   Description of Duties.  During the Term, Executive shall be employed
as the Chairman of the Board of RMBCS.  Executive shall perform such acts and
duties as may reasonably be assigned to him by John F. Grundhofer or Mr.
Grundhofer's successor as Chairman of the Board, President and Chief Executive
Officer of FBS; provided, however, that such additional acts and duties are (i)
customarily performed by executives of Executive's position and experience; (ii)
within the scope of Executive's education, training and expertise; and (iii) not
illegal or unlawful.  Such duties and responsibilities shall be performed
primarily in the Denver, Colorado metropolitan area.

     4.   Compensation.  As compensation for all services to be rendered by
Executive under this Agreement during the Term, FBS or RMBCS will pay to
Executive during the Term an annual salary to be paid in substantially equal
installments in accordance with FBS' or RMBCS's standard payroll procedures and
policies.  The initial base annual salary will be $50,000 (which amount shall be
subject to withholding taxes pursuant to Section 13.03 of this Agreement), but
the base annual salary may be increased (but not reduced) from time to time in
the sole discretion of FBS.  Executive shall not be entitled to participate in
bonus or stock-based incentive plans of FBS or RMBCS by virtue of this
Agreement.

     5.   Participation in Benefit Plans.  During the Term, Executive will not
be entitled to any welfare benefits or other benefits or compensation by virtue
of Executive's status as an employee of RMBCS except as otherwise provided in
this Agreement; provided, however, that during the Term FBS shall provide
Executive with coverage under such dental care plans as are provided to
executives of FBS on the terms provided to such executives; and, provided
further, that to the extent that Executive's out-of-pocket expenses relating to
welfare benefits received pursuant to Section 4.01 of the 1993 Agreement exceed
the out-of-pocket expenses that Executive would have been required to pay had he
continued to receive coverage on the terms of which he received coverage prior
to his retirement on December 31, 1994, FBS shall reimburse executive for any
such excess during the Term.

                                      -2-

<PAGE>
 
     6.   Perquisites.  During the Term, FBS or RMBCS will (i) make all lease
and other payments payable with respect to the automobile currently provided to
Executive through an affiliate of FBS; (ii) provide reimbursement of annual dues
and, if pre-approved by FBS, special assessments with respect to the Cheyenne
Mountain Club and the University Club in New York, New York; (iii) make
arrangements with a physician of Executive's choice to provide an extensive
annual physical examination followed by personal consultation and provide
reimbursement of expenses of up to $1,000 annually in connection therewith; and
(iv) provide reimbursement of the cost of legal, financial and tax counseling up
to an aggregate maximum of $13,458.  At the termination of the Term, Executive
shall be entitled to assume responsibility for lease payments on the automobile
provided to Executive pursuant to this Section 6 or to return the automobile to
FBS or its appropriate affiliate, in which event Executive shall have no further
liability or obligation with respect to such automobile.

     7.   Working Facilities; Secretarial Support.  FBS and Executive agree that
during the Term, the working facilities and secretarial support provided for in
Section 4.03 of the 1993 Agreement are adequate for Executive's employment under
this Agreement, and that no further provisions need be made in that regard.

     8.   Expenses.  During the Term, RMBCS will pay or reimburse Executive for
all other pre-approved, reasonable and necessary out-of-pocket expenses incurred
by him in the performance of his duties under this Agreement (including expenses
incurred in connection with civic activities and clubs approved by FBS), subject
to the presentment of appropriate vouchers in accordance with FBS' or RMBCS's
normal policies, as they exist from time to time, for expense verification.
During the Term, FBS hereby approves reimbursement for expenses relating to
membership in the Colorado Forum up to an annual maximum of $7,200 and
reimbursement for expenses relating to membership in the Colorado Concern up to
an annual maximum of $2,500.

     9.   Resignation from FBS Board of Directors.  Executive agrees to retire
from the FBS Board of Directors effective December 31, 1994, and this Agreement
shall serve as written notice of such resignation.

     10.  Other Board Memberships.  The parties acknowledge and agree that
Executive currently serves on the Boards of Directors of certain public and
private corporations and civic and philanthropic organizations, including the
Boards of Directors of Visa USA, Visa International and the U.S. Chamber of
Commerce.  FBS hereby agrees that nothing contained in this Agreement shall be
deemed to preclude Executive's continuing involvement with such corporations and
organizations.  FBS agrees to reimburse Executive for all reasonable and
necessary out-of-pocket expenses incurred by him in connection with his service
on the Boards of Directors 

                                      -3-

<PAGE>
 
of Visa USA, Visa International and the U.S. Chamber of Commerce, subject to the
presentment of appropriate vouchers in accordance with FBS' normal policies, as
they exist from time to time, for expense verification.

     11.  Termination.  FBS may terminate Executive's duties under Section 3 of
this Agreement upon written notice of such termination to Executive; provided,
however, that Executive shall receive the payments and benefits provided for in
Sections 4, 5 and 6 of this Agreement through the end of the Term. RMBCS and FBS
shall have no further obligations hereunder from the date of such termination
except as provided in the previous sentence.

     12.  1993 Agreement.  The parties agree that the 1993 Agreement remains in
full force and effect, and that this Agreement in no way modifies the rights and
obligations of FBS and Executive under the 1993 Agreement.  The parties
explicitly acknowledge, without limitation, that the provisions of Sections 4,
5, 11 and 12 of the 1993 Agreement are not modified by this Agreement.

     13.  Miscellaneous.

          13.01     Governing Law.  THIS AGREEMENT IS MADE UNDER AND SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO.

          13.02     Prior Agreements.  This Agreement contains the entire
agreement of the parties relating to the employment of Executive by RMBCS
following the Effective Date and the other matters discussed herein and
supersedes all prior agreements and understandings with respect to such subject
matter, and the parties hereto have made no agreements, representations or
warranties relating to the subject matter of this Agreement which are not set
forth herein; provided, however, that the parties hereby acknowledge that this
Agreement is in addition to, and in no way modifies the rights and obligations
of FBS and Executive under, the 1993 Agreement.

          13.03     Withholding Taxes.  FBS or RMBCS will withhold from any
compensation or other benefits payable under this Agreement all federal, state,
city or other taxes as are required pursuant to any law or governmental
regulation or ruling.

          13.04     Amendments.  No amendment or modification of this Agreement
shall be deemed effective unless made in writing and signed by each party
hereto.

          13.05     No Waiver.  No term or condition of this Agreement shall be
deemed to have been waived, nor shall there be any estoppel to enforce any

                                      -4-

<PAGE>
 
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought.  Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.

          13.06     Assignment.  This Agreement is not assignable, in whole or
in part, by any party without the written consent of the other parties.

          13.07     Severability.  To the extent that any provision of this
Agreement shall be determined to be invalid or unenforceable, the invalid or
unenforceable portion of such provision shall be deleted from this Agreement,
and the validity and enforceability of the remainder of such provision and of
this Agreement shall be unaffected.

          13.08     Notices.  Any notice hereunder by any party to another party
shall be given in writing by personal delivery or certified mail, return receipt
requested.  If addressed to Executive the notice shall be delivered or mailed to
Executive at the address specified under Executive's signature hereto (or such
other address as Executive shall provide to FBS, by written notice, for such
purpose), or if addressed to RMBCS or FBS, the notice shall be delivered or
mailed to FBS at its executive offices to the attention of the Chief Executive
Officer of FBS.  A notice shall be deemed given, if by personal delivery, on the
date of such delivery or, if by certified mail, on the date shown on the
applicable return receipt.

          13.09     Counterparts.  This Agreement may be executed by the parties
hereto in counterpart, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.

          13.10     Headings.  The headings of paragraphs herein are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.

                                      -5-

<PAGE>
 
          IN WITNESS WHEREOF, Executive and FBS have executed this Agreement as
of the date set forth in the first paragraph.

                                    FIRST BANK SYSTEM, INC.


                                    By  /s/ R. H. Sayre
                                      --------------------------------------
                                        Its  EVP Human Resources
                                           ---------------------------------


                                        /s/ Will F. Nicholson, Jr.
                                    ---------------------------------------
                                            Will F. Nicholson, Jr.
                                             37 Polo Club Circle
                                           Denver, Colorado  80220

                                      -6-



<PAGE>
 
                                                                    Exhibit 10T


                             CONSULTING AGREEMENT


          CONSULTING AGREEMENT, entered into January 23, 1995 by and between
First Bank System, Inc., a Delaware corporation (the "Company"), and Norman M.
Jones ("Consultant").

          WHEREAS, the Company has entered into an Agreement of Merger and
Consolidation dated July 21, 1994 (the "Merger Agreement") by and between the
Company and Metropolitan Financial Corporation ("MFC"), which provides for the
merger of MFC with and into the Company upon the terms and conditions set forth
in the Merger Agreement; and

          WHEREAS, Section 5.21(b) of the Merger Agreement provides that the
Company shall enter into a consulting agreement with Consultant prior to the
Effective Date (as defined in the Merger Agreement); and

          WHEREAS, the Company desires to retain Consultant to render consulting
and advisory services for the Company on the terms and conditions set forth in
this agreement, and Consultant desires to be retained by the Company on such
terms and conditions.

          NOW THEREFORE, in consideration of the respective covenants and
commitments of the Company and Consultant set forth in this agreement, and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Company
 and Consultant agree as follows:

          1.   Retention of Consultant; Services to be Performed.  The Company
hereby retains Consultant to assist the Company in identifying and contacting,
on behalf of the Company, potential financial institution acquisition candidates
as requested from time to time by the Company and to render such other
consulting and advisory services as the Company may request from time to time.
Consultant hereby accepts such engagement and agrees to perform such services
for the Company upon the terms and conditions set forth in this agreement.  The
Company and Consultant further agree that this agreement shall satisfy the
obligations of the Company under Section 5.21(b) of the Merger Agreement.
During the term of this agreement, Consultant shall devote such portion of his
business time, attention, skill and energy to the business of the Company as may
be reasonably required to perform the services required by this agreement, up to
one-third time, and during such time shall assume and perform to the best of his
ability such reasonable responsibilities and duties as shall be assigned to
Consultant from time to time by the Company.  The Company shall use its best
efforts to (a) secure the election of Consultant to the Company's Board of
Directors for a term of at least three years and (b) appoint Consultant as
Chairman of the Board of Directors of Metropolitan Federal Bank, fsb (the
"Bank"), or its successor following the merger between the Company and MFC, for
at least three years, subject to any applicable regulatory requirements. During
the term of this agreement, Consultant shall report 

<PAGE>
 
to Richard A. Zona or such other person as the Company may designate from time
to time.

          2.   Term.  Unless terminated at an earlier date in accordance with
Section 6 of this agreement, the term of this agreement shall commence on the
Effective Date and shall continue for a continuous period until the third
anniversary of the Effective Date.

          3.   Compensation.  As compensation in full for Consultant's services
hereunder, the Company shall pay to Consultant a consulting fee at the annual
rate of $200,000 less any cash payments received from the Company by reason of
his service as a member of the Company's Board of Directors, including retainer
and meeting fees (and, in addition, shall transfer to Consultant certain used
furniture that has heretofore been in the Loring Green apartment maintained by
MFC). Pursuant to Section 5.21(a) of the Merger Agreement, Mr. Jones may also
serve as a member of the Company's Board of Directors and as Chairman of the
Board of Directors of the Bank, and the Company and Consultant hereby
acknowledge and agree that during the term of this agreement Consultant shall
not be entitled to any additional compensation for such services (except that
Consultant will be entitled to receive all benefits under all plans applicable
to nonemployee members of the Company's Board of Directors).

          4.   Benefits and Expenses.

          (a)  Office and Facilities. During the term of this agreement, the
               Company shall furnish Consultant, at the Company's sole expense,
               with suitable office space located in downtown Minneapolis,
               Minnesota, and full-time secretarial services, together with
               other reasonable facilities and services as are suitable,
               necessary and appropriate for Consultant to perform his duties
               pursuant to this agreement.

          (b)  Business Expenses. Consultant shall be reimbursed by the Company
               in accordance with the policies and procedures that are
               established from time to time by the Company for all reasonable
               and necessary out-of-pocket expenses that are incurred by
               Consultant in performing his duties under this agreement and
               pursuant to Section 5.21(a) of the Merger Agreement, including,
               without limitation, reasonable travel expenses incurred by
               Consultant in rendering services outside of the Minneapolis/St.
               Paul metropolitan area.

          5.   Protection of Confidential Information of the Company.  Except as
permitted or directed by the Company's Board of Directors, during the term of
this agreement or at any time thereafter, Consultant shall not divulge, furnish
or make accessible to anyone or use in any way (other than in the ordinary
course of 

                                      -2-

<PAGE>
 
the business of the Company) any confidential or proprietary knowledge or
information of the Company which Consultant has acquired or become acquainted
with or will acquire or become acquainted with prior to the termination of this
agreement (including during his employment by MFC or its affiliates prior to the
Effective Date), whether developed by himself or by others, including any
customer lists of the Company and any other trade secrets or confidential
information of the Company.  Consultant acknowledges that the above-described
knowledge or information constitutes a unique and valuable asset of the Company
acquired at great time and expense by the Company and its predecessors, and that
any disclosure or other use of such knowledge or information other than for the
sole benefit of the Company would be wrongful and would cause irreparable harm
to the Company.  The Company specifically acknowledges that Consultant is not
prohibited from competing with the Company or its affiliates after the
termination of this agreement, regardless of whether such competition arises
from Consultant acting on his own behalf or as an employee, director, consultant
or otherwise for another. The confidentiality obligations of this Section 5 do
not apply to Consultant's use or communication of expertise gained from his
experience with MFC and the Company and their respective affiliates at any time
prior to the termination of this agreement, including general business
procedures and methodologies used by such entities in their respective
industries, provided such use or communication does not involve disclosure of
confidential or proprietary information of MFC or the Company.  The foregoing
obligations of confidentiality, however, shall not apply to any knowledge or
information which is now published or which subsequently becomes generally
publicly known in the form in which it was obtained from the Company, other than
as a direct or indirect result of the breach of this agreement by Consultant.
The term "Company" as used in this paragraph includes all subsidiaries of the
Company.

          6.   Termination.  Notwithstanding any contrary provision contained
elsewhere in this agreement, this agreement and the rights and obligations of
the Company and Consultant hereunder (other than the rights and obligations of
the parties under Section 5) shall be terminated upon the occurrence of any of
the following events:

          (a)  immediately in the event of Consultant's death; or

          (b)  immediately in the event that Consultant becomes disabled so that
               he is unable to render his normal services under this agreement
               for a continuous period of 90 days; or

          (c)  immediately in the event that Consultant is convicted of any
               crime (excluding traffic violations or other minor offenses), or
               engages in any activities that constitute a material violation of
               normal standards of business ethics;

                                      -3-

<PAGE>
 
          (d)  upon 15 days prior written notice by the Company to Consultant if
               Consultant has failed in any material respect to perform his
               responsibilities hereunder and such default is not cured within
               such 15 day period;

          (e)  immediately in the event that Consultant delivers to the Company
               written notice of his intention to voluntarily terminate this
               agreement; or

          (f)  upon 15 days' prior written notice by Consultant to the Company
               if the Company has failed in any material respect to perform its
               responsibilities hereunder and such default is not cured within
               such 15-day period.

          In the event this agreement is terminated pursuant to paragraphs (a)
through (e) of this Section 6 prior to the expiration of the term hereof,
Consultant shall be entitled to receive his consulting fee pro rated through the
date of termination, but all other rights to receive consulting fees shall
terminate on such date.  In the event that this agreement is terminated pursuant
to paragraph (f) of this Section 6 prior to the expiration of the term hereof,
Consultant shall be entitled to be paid by the Company, within 10 days of such
termination, a lump sum equal to the aggregate of the consulting fee payments
due pursuant to Section 3 of this agreement for the then remaining term of this
agreement.

          7.  Regulatory Invalidity.  Notwithstanding any provision in this
agreement to the contrary, no payment shall be due Consultant hereunder, and the
Company shall not be obligated and shall not make any payment hereunder, if,
because of the condition of the Company or any insured institution subsidiary of
the Company or the acts of the Consultant, such payment would be prohibited
pursuant to Section 18 of the Federal Deposit Insurance Act, as amended, 12
U.S.C. (S) 1828(k), or the regulations governing  insured depositary
institutions or depository institution holding companies promulgated pursuant
thereto.

          8.   Satisfaction.  Consultant expressly acknowledges that the Bank is
a federal savings bank subject to regulation of the Office of Thrift Supervision
under the Home Owners' Loan Act, and particularly to regulation relating to the
level and form of employment agreement and compensation which such a savings
institution may pay its executive officers.   This Agreement is solely between
the Company and Consultant. The Bank is not a party to this agreement and
nothing in this agreement shall create any obligation enforceable against the
Bank by Consultant or imply any course of conduct or level of compensation to
which the Bank will be bound.  Nothing in Sections 8 or 9 of this Agreement
shall have any effect on the Company's obligations to Consultant pursuant to
this Agreement.

          9.   Management Services Agreement.  (a) The Company may allocate
reasonable expenses and fees to the 

                                      -4-

<PAGE>
 
Bank for Consultant's services to the Bank hereunder under a management services
agreement between the Company and the Bank, provided that, notwithstanding any
other provision in such management services agreement to the contrary:

     (i)    The Bank may terminate any management services agreement between the
            Company and the Bank concerning the provision by the Company of
            services of Consultant to the Bank before expiration of any term of
            such agreement at any time by vote of the board of directors of the
            Bank. To the extent such termination is not for "Cause," the Company
            may continue to collect reimbursement for the services provided by
            Consultant to the Bank under a management services agreement, for
            the remainder of the term of such services. To the extent such
            termination is for Cause, all obligations of the Bank with respect
            to reimbursing the Company for the services provided by Consultant
            shall cease on the date of termination. For purposes of this
            Section, "Cause" shall include personal dishonesty, incompetence,
            willful misconduct, breach of fiduciary duty involving personal
            profit, intentional failure to perform stated duties, willful
            violation of any law, rule or regulation (other than traffic
            violations or other similar offenses), a final cease-and-desist
            order, or a material breach of any agreement between the Bank and
            Consultant.

     (ii)   To the extent that Consultant is suspended or temporarily prohibited
            from participating in the conduct of the Bank's affairs by a notice
            served under Section 8(e)(3) or (g)(1) of the Federal Deposit
            Insurance Act (12 U.S.C. (S) 1818(e)(3), or (g)(1)), the Company
            shall not collect any reimbursement for any services of Consultant
            unless stayed by appropriate proceedings.

     (iii)  If:

            (A)  the Consultant is removed or permanently prohibited from
                 participating in the conduct of the Bank's affairs by order
                 under section 8(e)(4) or (g)(1) of the Federal Deposit
                 Insurance Act (12 U.S.C. (S) 1818(e)(4) or (g)(1));

            (B)  the Bank shall be in "Default" as defined in section 3(x)(1) of
                 the Federal Deposit Insurance Act (12 U.S.C. (S) 1813(x)(1));

            (C)  the Federal Deposit Insurance Corporation or Resolution Trust
                 Corporation enters into an agreement to provide assistance to
                 or on behalf of the Bank under the authority

                                      -5-

<PAGE>
 
                 of Section 13(c) of the Federal Deposit Insurance Act (12
                 U.S.C. (S) 1823(c)); or

            (D)  the Director of the Office of Thrift Supervision or his or her
                 designee approves a supervisory merger to resolve problems
                 related to the operation of the Bank or the Bank is determined
                 by such Director to be in an unsafe and unsound condition;

     then all obligations of the Bank to the Company under any management
     services agreement between the Company and the Bank concerning the
     provision of services by Consultant shall terminate as of the effective
     date of the order, default, or determination of the Director of the OTS;
     provided, however, that any obligations of the Bank accrued prior to such
     termination shall not be affected by any such termination and further
     provided, however, that in the event of any occurrence described in
     paragraphs (C) or (D) above, any obligations of the Bank to the Company
     with respect to the services provided by Consultant shall not terminate to
     the extent that continuation of such services is necessary to the continued
     operation of the Bank.

(b)  Any termination by the Bank pursuant to Sections 8 or 9 of this Agreement
     of any management services agreement between the Company and Bank
     concerning the provision of services by Consultant shall not be deemed to
     terminate any obligations of the Company to Consultant pursuant to this
     Agreement.

          10.  Miscellaneous.

          (a) Assignment.  This agreement and the rights and obligations of the
parties hereunder shall not be assignable, in whole or in part, by either party
without the prior written consent of the other party.

          (b) Governing Law.  This agreement shall be construed and enforced in
accordance with the laws of the state of Minnesota.

          (c) Entire Agreement.  This agreement evidences the entire
understanding and agreement of the parties hereto relative to the consulting
arrangement between Consultant and the Company and the other matters discussed
herein.  This agreement supersedes any and all other agreements and
understandings, whether written or oral, relative to the matters discussed
herein.  This agreement may only be amended by a written document signed by both
Consultant and the Company.

          (d) Injunctive Relief.  Consultant acknowledges that it would be
difficult to fully compensate the Company for damages resulting from any breach
by Consultant of the provisions of Section 5 of this agreement.  Accordingly, in
the event of any actual or threatened breach of such provisions, the Company
shall (in 

                                      -6-

<PAGE>
 
addition to any other remedies that it may have) be entitled to temporary and/or
permanent injunctive relief to enforce such provisions, and such relief may be
granted without the necessity of proving actual damages.

          (e) Severability.  To the extent any provision of this agreement shall
be determined to be invalid or unenforceable, such provision shall be deleted
from this agreement, and the validity and enforceability of the remainder of
such provision and of this agreement shall be unaffected.

          (f) Status of Consultant.  In rendering services pursuant to this
agreement, Consultant shall be acting as an independent contractor and not as an
employee or agent of the Company.  As an independent contractor, Consultant
shall have no authority, express or implied, to commit or obligate the Company
in any manner whatsoever, except as specifically authorized from time to time in
writing by an authorized representative of the Company, which authorization may
be general or specific; provided, however, that nothing herein shall affect any
authority that Consultant may have from time to time as a director of the
Company or Chairman of the Board of Directors of the Bank or its successor
following the merger between the Company and MFC.  Nothing contained in this
agreement shall be construed or implied to create a partnership.  Consultant
shall be responsible for the payment of all federal, state or local taxes
payable with respect to all amounts paid to Consultant under this agreement;
provided, however, that if Consultant fails to pay such taxes and the Company is
determined to be liable for collection and/or remittance of any such taxes,
Consultant shall immediately reimburse the Company for all such payments made by
the Company.

          (g) Change in Control.  The Company acknowledges and agrees that:  (i)
the Effective Date (as defined in the Merger Agreement) shall be considered to
be the date of a "Change in Control" for purposes of the MFC Executive
Management Change in Control Severance Pay Plan (the "Executive Change in
Control Plan"); and (ii) as of such Effective Date, Consultant's employment with
MFC shall, under the terms of the Executive Change in Control Plan, be
considered to be terminated for a reason other than death or Cause (and such
Effective Date shall be considered to be the "Date of Termination," for purposes
of the Executive Change in Control Plan).  Accordingly, as of such Effective
Date Consultant shall become an "Eligible Participant" (within the meaning of
the Executive Change in Control Plan) entitled to all the benefits provided for
in Article 4 of the Executive Change in Control Plan (and the Company shall be
responsible for paying such benefits to Consultant).

                                      -7-

<PAGE>
 
          IN WITNESS WHEREOF, The Company and Consultant have executed this
agreement as of the date set forth in the first paragraph.


                                    FIRST BANK SYSTEM, INC.


                                    By  /s/ R A Zona
                                       ----------------------------------
                                        Its   Vice Chairman and CFO      
                                            -----------------------------



                                        /s/   Norman M. Jones
                                       ----------------------------------
                                       Norman M. Jones

                                      -8-



<PAGE>

EXHIBIT 11
Computation of Primary and Fully Diluted Net Income Per Common Share


<TABLE>
<CAPTION>

                                                                                  Year Ended December 31
                                                                  ------------------------------------------------------
(Dollars in millions, except per share data)                                 1994              1993              1992 
- ------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>               <C> 
Primary:
  Average shares outstanding                                          112,826,859       112,047,588       103,707,840
  Net effect of the assumed purchase of stock under the stock 
    option and stock purchase plans--based on the treasury 
    stock method using average market price                             1,717,947         1,027,841         1,653,182
                                                                  ------------------------------------------------------
                                                                      114,544,806       113,075,429       105,361,022
                                                                  ======================================================

  Income before cumulative effect of accounting changes                    $419.8            $298.0            $154.5  
  Preferred dividends                                                       (11.2)            (27.8)            (30.2) 
                                                                  ------------------------------------------------------
  Income before cumulative effect of accounting changes 
    applicable to common equity                                            $408.6            $270.2            $124.3
                                                                  ======================================================
  Income before cumulative effect of accounting changes 
    per common share                                                        $3.57             $2.39             $1.18
                                                                  ======================================================

  Cumulative effect of accounting changes applicable to 
    common equity                                                            --                --              $157.3
                                                                  ======================================================
  Cumulative effect of accounting changes per common share                   --                --               $1.49
                                                                  ======================================================

  Net income                                                               $419.8            $298.0            $311.8
  Preferred dividends                                                       (11.2)            (27.8)            (30.2)
                                                                  ------------------------------------------------------
  Net income applicable to common equity                                   $408.6            $270.2            $281.6
                                                                  ======================================================
  Net income per common share                                               $3.57             $2.39             $2.67
                                                                  ======================================================



Fully diluted: *
  Average shares outstanding                                          112,826,859       112,047,588       103,707,840
  Net effect of the assumed purchase of stock under the stock 
    option and stock purchase
 plans--based on the treasury 
    stock method using average market price or year-end 
    market price, whichever is higher                                   1,755,817         1,065,030         2,011,784
  Assumed conversion of Series 1991A Preferred Stock                    3,655,684         3,681,740         3,951,624
                                                                  ------------------------------------------------------
                                                                      118,238,360       116,794,358       109,671,248
                                                                  ======================================================

  Income before cumulative effect of accounting changes                    $419.8            $298.0            $154.5
  Preferred dividends, excluding 1991A Preferred Stock                       (3.7)            (19.8)            (22.0)
                                                                  ------------------------------------------------------
  Income before cumulative effect of accounting changes 
    applicable to common equity                                            $416.1            $278.2            $132.5
                                                                  ======================================================
  Income before cumulative effect of accounting changes 
    per common share                                                        $3.52             $2.38             $1.21 
                                                                  ======================================================

  Cumulative effect of accounting changes applicable to 
    common equity                                                            --                --              $157.3
                                                                  ======================================================
  Cumulative effect of accounting changes per common share                   --                --               $1.43
                                                                  ======================================================

  Net Income                                                               $419.8            $298.0            $311.8
  Preferred dividends, excluding 1991A Preferred Stock                       (3.7)            (19.8)            (22.0)  
                                                                  ------------------------------------------------------
  Net income applicable to common equity                                   $416.1            $278.2            $289.8   
                                                                  ======================================================
  Net income per common share                                               $3.52             $2.38             $2.64   
                                                                  ======================================================

</TABLE>
 
 * This calculation is submitted in accordance with Regulation S-K item
   601(b)(11) although not required by footnote 2 to paragraph 17 of APB Opinion
   No. 15 because it results in dilution of less than 3%.



<PAGE>


EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges

<TABLE> 
<CAPTION> 

                                                                                      Year
                                                                                     Ended
                                                                               December 31
                                                                          -----------------
(Dollars in Millions)                                                                 1994
- -------------------------------------------------------------------------------------------
<S>                                                                       <C>  
EARNINGS
  1. Net income                                                           $        419,800
  2. Applicable income taxes                                                       256,900
                                                                          -----------------
  3. Income before taxes (1 + 2)                                          $        676,700
                                                                          =================
  4. Fixed charges:
     a. Interest expense excluding interest on deposits                   $        179,200
     b. Portion of rents representative of interest and amortization 
          of debt expense                                                           26,400
                                                                          -----------------
     c. Fixed charges excluding interest on deposits (4a + 4b)                     205,600
     d. Interest on deposits                                                       373,100
                                                                          -----------------
     e. Fixed charges including interest on deposits (4c + 4d)            $        578,700
                                                                          =================
  5. Amortization of interest capitalized                                 $          4,800
  6. Earnings excluding interest on deposits (3 + 4c + 5)                          887,100
  7. Earnings including interest on deposits (3 + 4e + 5)                        1,260,200
  8. Fixed charges excluding interest on deposits (4c)                             205,600
  9. Fixed charges including interest on deposits (4e)                             578,700

RATIO OF EARNINGS TO FIXED CHARGES
 10. Excluding interest on deposits (line 6/line 8)                                   4.31
 11. Including interest on deposits (line 7/line 9)                                   2.18
                                                                          -----------------
</TABLE>






<PAGE>
                                                                     Exhibit 22



                            FIRST BANK SYSTEM, INC.
                     BANKING AND NON-BANKING SUBSIDIARIES



                          Bank and Trust Operations*
                          --------------------------


MINNESOTA
- ---------
                  First Bank National Association
                  First National Bank of East Grand Forks
                  First Trust National Association

ARIZONA
- -------
                  First Trust Company of Arizona  (Inactive)

CALIFORNIA
- ----------
                  First Trust of California, National Association

COLORADO
- --------
                  Colorado National Bank
                  Colorado National Bank Aspen

ILLINOIS
- --------
                  First Bank National Association

MONTANA
- -------
                  First Bank Montana, National Association
                  First Trust Company of Montana, National Association

NEW YORK
- --------
                  First Trust of New York, National Association

NORTH DAKOTA
- ------------
                  First Bank of North Dakota, National Association
                  First Trust Company of North Dakota, National Association

SOUTH DAKOTA
- ------------
                  First Bank of South Dakota (National Association)

WASHINGTON
- ----------
                  First Trust Washington


WISCONSIN
- ---------
                  First Bank (N.A.)



<PAGE>
 
                           NON-BANKING SUBSIDIARIES
                           ------------------------

                                                        State of
Subsidiary                                              Incorporation
- ----------                                              -------------

FBS Associated Properties, Inc.                         Minnesota

FBS Capital Markets Limited - (Inactive)                Great Britain

FBS Card Services, Inc.                                 Minnesota

FBS Cayman Ltd. - (Inactive)                            Cayman Islands

FBS Community Development Corporation                   Minnesota

FBS Credit Services, Inc.                               Minnesota

FBS Information Services Corporation
                    Minnesota

FBS Portfolio, Inc.                                     Minnesota

FBS Trade Services Limited                              Hong Kong

FBS Venture Capital Corporation                         Minnesota

First Bank System Foundation                            Minnesota

First Building Corporation                              Minnesota

First Group Royalties, Inc.                             Minnesota

First System Agencies, Inc.                             Delaware

First System Services, Inc.                             Minnesota

Marquette Information Services, Inc.                    Minnesota

Marquette Insurance Agency, Inc.                        Minnesota

Colorado National Bankshares, Inc.                      Colorado

Boulevard Bancorp, Inc.                                 Delaware

Boulevard Technical Services, Incorporated              Illinois





<PAGE>
 
                                                                     Exhibit 23


                        CONSENT OF INDEPENDENT AUDITORS


We consent to the incorporation by reference in Registration Statements 
Number 2-89224, Number 33-16242, Number 33-42333, Number 33-55932, Number
33-42334, Number 33-52835, Number 33-52959, and Number 33-53395 on
Form S-8, Registration Statements Number 33-38268, Number 33-33508, 
Number 33-39303, Number 33-47785, Number 33-51407, Number 33-57169, 
Number 33-55485, and Number 33-52495 on Form S-3, and Registration 
Statement Number 33-56955 on Form S-4 of First Bank System, Inc. and 
in the related Prospectuses of our report dated January 24, 1995 with
respect to the consolidated financial statements of First Bank System,
Inc. included in the Annual Report [Form 10-K] for the year ended 
December 31, 1994.


/s/ Ernst & Young LLP


Minneapolis, Minnesota
February 24, 1995





<TABLE> <S> <C>


<PAGE>
 
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 
         THE FIRST BANK SYSTEM, INC. DECEMBER 31, 1994, 10-K AND IS QUALIFIED 
         IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                               <C>
<PERIOD-TYPE>                     YEAR
<FISCAL-YEAR-END>                           DEC-31-1994
<PERIOD-START>                              JAN-01-1994
<PERIOD-END>                                DEC-31-1994
<CASH>                                        1,621,000
<INT-BEARING-DEPOSITS>                                0
<FED-FUNDS-SOLD>                                471,000
<TRADING-ASSETS>                                 77,000
<INVESTMENTS-HELD-FOR-SALE>                   3,148,000
<INVESTMENTS-CARRYING>                                0
<INVESTMENTS-MARKET>                                  0
<LOANS>                                      19,281,000
<ALLOWANCE>                                     434,000
<TOTAL-ASSETS>                               26,219,000
<DEPOSITS>                                   18,791,000
<SHORT-TERM>                                  2,822,000
<LIABILITIES-OTHER>                             670,000
<LONG-TERM>                                   1,483,000
<COMMON>                                        145,000
<PREFERRED-MANDATORY>                                 0
<PREFERRED>                                     106,000
<OTHER-SE>                                    2,024,000
<TOTAL-LIABILITIES-AND-EQUITY>               26,219,000
<INTEREST-LOAN>                               1,510,700
<INTEREST-INVEST>                               211,200
<INTEREST-OTHER>                                 25,200
<INTEREST-TOTAL>                              1,747,100
<INTEREST-DEPOSIT>                              373,100
<INTEREST-EXPENSE>                              552,300
<INTEREST-INCOME-NET>                         1,194,800
<LOAN-LOSSES>                                    93,000
<SECURITIES-GAINS>                              (3,800)
<EXPENSE-OTHER>                               1,053,100
<INCOME-PRETAX>                                 676,700
<INCOME-PRE-EXTRAORDINARY>                      419,800
<EXTRAORDINARY>                                       0
<CHANGES>                                             0
<NET-INCOME>                                    419,800
<EPS-PRIMARY>                                      3.57
<EPS-DILUTED>                                      3.52
<YIELD-ACTUAL>                                     5.28
<LOANS-NON>                                     112,600
<LOANS-PAST>                                     26,000
<LOANS-TROUBLED>                                    100
<LOANS-PROBLEM>                                       0

<ALLOWANCE-OPEN>                                423,200
<CHARGE-OFFS>                                   187,800
<RECOVERIES>                                     83,200
<ALLOWANCE-CLOSE>                               433,800
<ALLOWANCE-DOMESTIC>                                  0
<ALLOWANCE-FOREIGN>                                   0
<ALLOWANCE-UNALLOCATED>                         268,100
        

</TABLE>


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