<PAGE>
 
                                     1996


                        1996 ANNUAL REPORT AND FORM 10-K



                           [LOGO] FIRST BANK SYSTEM

<PAGE>
 
FIRST BANK SYSTEM

  CONTENTS
 
 2  Letter to Shareholders

 6  Business Line Reviews

18  Management's Discussion & Analysis

41  Consolidated Financial Statements

69  Five-Year Consolidated Financial Statements

71  Quarterly Consolidated Financial Data

76  Form 10-K

80  Executive Officers & Directors

81  FBS Locations

82  Corporate Data


FBS BANKING REGION

                                   [U.S.MAP]


ABOUT THE COMPANY
- -----------------

First Bank System, Inc. (FBS), a regional, multistate bank holding company
headquartered in Minneapolis, Minnesota, offers a wide array of financial
products and services to individuals, businesses and institutions.

     Through our bank subsidiaries, FBS serves customers principally in 11
Midwestern and Rocky Mountain states, where our banking franchise is a market
leader in most of the region's largest communities. Nationally, we're a leader
in corporate trust services and electronic credit card payment systems. And we
offer investment products that have ranked among the best available. We serve
our customers through multiple distribution channels including 359 banking and
15 nonbanking offices, a network of 3,235 automated teller machines (ATMs), and
centralized telephone service centers.

     With 1996 return on average assets of 1.88 percent, return on average
common equity of 21.4 percent, and an efficiency ratio of 49.9 percent, all
before nonrecurring items, FBS ranks among the top-performing U.S. bank holding
companies.

     Our commitment to creating shareholder value directs virtually every
decision we make. Focusing on five business lines has helped fulfill this
commitment. Our businesses are:

     Retail Banking--consumer and small business banking, increasingly through
convenient, cost-effective channels including supermarkets and general
merchandise stores, ATMs, and FastLine(SM) 24-Hour Banking by telephone.

     Payment Systems--consumer, corporate and purchasing cards, and merchant
processing.

     Business Banking and Private Financial Services--credit and other financial
services to middle market companies, and integrated services in private banking,
trust and investments to ultra affluent customers.

     Commercial Banking--credit products, treasury management, trust and other
financial services, primarily to large companies in the Twin Cities region.

     Corporate Trust and Institutional Financial Services--bond indenture
trusteeship, paying agent, and custody services to corporate and municipal debt
issuers; 401(k) and other employee benefit programs; asset management; and
institutional investment products.

     FBS is listed on the New York Stock Exchange under the ticker symbol FBS
and also may be found under FtBkSy.

     Our home page on the World Wide Web is located at http://www.fbs.com.

<PAGE>
 

                               FINANCIAL SUMMARY


<TABLE>
<CAPTION>
                                                                                                    Percent Change
(Dollars in Millions, Except Per Share Data)                               1996           1995           1995-1996
- ------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>          <C>
Income before nonrecurring items                                        $ 667.7        $ 568.1                17.5%
Nonrecurring items                                                         72.1              -                   *
                                                                        ----------------------
Net income                                                              $ 739.8        $ 568.1                30.2
                                                                        ----------------------
PER COMMON SHARE                                                                                                   
Primary income before nonrecurring items                                $  4.81        $  4.19                14.8
Nonrecurring items                                                          .53              -                   *
                                                                        ----------------------
Primary net income                                                      $  5.34        $  4.19                27.4
                                                                        ----------------------
Fully diluted income before nonrecurring items                          $  4.74        $  4.11                15.3 
Nonrecurring items                                                          .51              -                   *
                                                                        ---------------------- 
Fully diluted net income                                                $  5.25        $  4.11                27.7   
                                                                        ----------------------
Earnings on a cash basis before nonrecurring items**                    $  5.29        $  4.53                16.8  
                                                                        
Nonrecurring items                                                          .72              -                   * 
                                                                        ---------------------- 
Earnings on a cash basis (fully diluted)**                              $  6.01        $  4.53                32.7  
                                                                        ---------------------- 
Dividends paid                                                          $  1.65        $  1.45                13.8  
Common shareholders' equity                                               22.63          20.59                 9.9  
                                                                        ---------------------- 
RETURN ON AVERAGE ASSETS
Income before nonrecurring items                                           1.88%          1.73%                  *
Nonrecurring items                                                          .21              -                   * 
                                                                        ---------------------- 
Return on average assets                                                   2.09%          1.73%                  *  
                                                                        ---------------------- 
RETURN ON AVERAGE COMMON EQUITY
Income before nonrecurring items                                           21.4%          21.3%                  *
Nonrecurring items                                                          2.4              -                   * 
                                                                        ---------------------- 
Return on average common equity                                            23.8%          21.3%                  *  
                                                                        ---------------------- 
Net interest margin (taxable-equivalent basis)                             4.89%          4.91%                  * 
Efficiency ratio before nonrecurring items                                 49.9           53.3                   *  
Efficiency ratio                                                           51.0           53.9                   *   

AT YEAR END
Loans                                                                   $27,128        $26,400                 2.8%          
Allowance for credit losses                                                 517            474                 9.1     
Assets                                                                   36,489         33,874                 7.7     
Total shareholders' equity                                                3,053          2,725                12.0     
Tangible common equity to total assets***                                   6.7%           6.5%                  *     
Tier 1 capital ratio                                                        7.2            6.5                   *     
Total risk-based capital ratio                                             12.0           11.0                   *     
Leverage ratio                                                              6.8            6.1                   *      
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                

* Not meaningful.

** Calculated by adding amortization of goodwill and other intangible assets to
net income.

*** Defined as common equity less goodwill as a percentage of total assets less
goodwill.

Refer to Management's Discussion and Analysis on pages 24 and 25 for a
description of nonrecurring items.

                 [GRAPHS APPEAR HERE - SEE GRAPHICS APPENDIX]

First Bank System, Inc.

                                                                               1

<PAGE>
 

                              TO OUR SHAREHOLDERS


IT SEEMS ONE OF THE FEW CONSTANTS IN BANKING IS CHANGE. IN 1996   FIRST BANK
SYSTEM PROVED AGAIN THAT WE HAVE THE RESOURCES, KNOW-HOW AND DISCIPLINE TO ADAPT
TO OUR INDUSTRY'S CONTINUAL TRANSFORMATION--AND IN MANY INSTANCES, LEAD THE WAY.


Each day we are reshaping FBS to meet our customers' evolving needs and create
value for our shareholders. FBS's corporate culture thrives on change, and our
employees deserve thanks for another strong year. At the same time, we urge them
to strive for more.

     We must build on the winning attitude that has served us well: staying
focused on meeting customer needs and creating value for you, the shareholder.
Shareholder value drives our management priorities and directs virtually every
decision we make.

                         [PHOTO OF JOHN F. GRUNDHOFER]

FINANCIAL RESULTS
- -----------------

In 1996 FBS strengthened its position as one of the nation's top-performing
banking companies in terms of profitability and efficiency.

     FBS stock has continued to outperform key market indices over the period
since 1990, when current management assumed control of the company. One hundred
dollars invested in FBS common stock at December 31, 1989, would have been worth
$529 at year-end 1996. That compares with $329 for the KBW 50 Bank Index and
$257 for the S&P 500 stock index. The KBW 50 Bank Index is a market-
capitalization-weighted total return index of 50 bank stocks published by Keefe,
Bruyette & Woods, Inc.

     On a fully diluted basis and before nonrecurring items, earnings per common
share increased 15.3 percent to $4.74 in 1996 compared with the previous year.
Our goal is to sustain earnings per share growth of 12 to 15 percent over the
next several years (without accounting for possible acquisitions).

     In terms of key financial ratios, FBS continues to rank among the
industry's best. Excluding nonrecurring items, our return on average assets of
1.88 percent in 1996 placed us first among our peer group of 23 regional bank
holding companies, and our return on average common equity of 21.4 percent for
the year placed us second among our peers.

     Our relentless efforts to improve productivity also reached an important
milestone in 1996 when, for the first time, our ratio of expenses to revenues
(efficiency ratio) dropped below 50 percent. Our efficiency ratio of 49.9
percent

                                                         First Bank System, Inc.

2

<PAGE>
 
for the year and 49.2 percent for the fourth quarter placed us second in our
peer group. We plan to drive the ratio down to the mid-40s within the next few
years--we must in order to compete with nonbanks and their lower cost
structures. We believe that technology investment and revenue growth will make
this possible, as will our employees, who by second nature continually look for
ways to spend more wisely, eliminate waste, and work more productively.

     FBS has been able to generate high returns while maintaining a low risk
profile. While we've seen some increase in consumer credit losses, we're in a
stronger position than many of our competitors. Our base in the Midwestern and
Rocky Mountain states, combined with our conservative lending practices,
continues to work in our favor.

     Past performance does not guarantee future results. However, FBS's past
performance has set high expectations among our shareholders, managers and
employees. We plan to meet and exceed those expectations.

BUSINESS LINES
- --------------

First Bank System chooses to be in only those businesses that hold potential for
strong, sustainable profitability. In 1996 we streamlined our senior management
and realigned our organization into five business lines: Retail Banking, Payment
Systems, Business Banking and Private Financial Services, Commercial Banking,
and Corporate Trust and Institutional Financial Services.

     FBS offers standard products and services supported by central operations.
At the same time, we provide more hands-on, custom service to customers who
demand it. Our organizational structure enables us to meet the unique needs of
diverse customer segments. Each business line seeks to leverage resources and
customer relationships across FBS.

     RETAIL BANKING is our largest business. Two key technology initiatives are
changing the very nature of Retail Banking. First, we are successfully
encouraging customers to migrate to more cost-effective distribution channels
such as supermarket branches, automated teller machines, and FastLine(SM) 24-
Hour Banking. These channels offer customers the convenience of banking anytime,
anywhere. Second, our Relationship Management System (RMS), launched in 1995 and
expanded in 1996, generates detailed customer information that helps our people
provide better service and identify the best sales opportunities. Based on early
results, we expect RMS to provide opportunities to increase revenue and
profitability.

                 [GRAPH APPEARS HERE - SEE GRAPHICS APPENDIX]

     PAYMENT SYSTEMS is our fastest-growing business and our largest source of
fee income. FBS is the leading issuer of VISA(R) Corporate and Purchasing Cards,
one of the leading issuers of VISA consumer cards, and among the top 10
processors of credit card transactions. State-of-the-art technology in the new
First Bank Service Center in Fargo, North Dakota, enhances our efficiency and
effectiveness in customer service and processing.

     BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES, which together contribute
roughly the same percentage of net income as Retail Banking, provide middle
market companies and ultra affluent customers with relationship-oriented
service. The management structure facilitates cross-selling between business and
individual clients. Many of the business owners and managers served by our
business bankers have needs for personal banking, personal trust, and investment
services offered through Private Financial Services. Our business bankers are
typically among the first to identify these opportunities, and now they are in a
better position to leverage their customer relationships. Both Business Banking
and Private Financial Services experienced good growth in 1996.

49.9% FOR THE FIRST TIME, OUR EFFICIENCY RATIO DROPPED BELOW 50 PERCENT

First Bank System, Inc.

                                                                               3

<PAGE>
 
     COMMERCIAL BANKING, which provides an array of financial services to large
corporate customers, is a mature and profitable business. Credit quality remains
strong. Commercial Banking is successfully deepening client relationships by
providing highly customized, complex financial services to increasingly
demanding clients.

     CORPORATE TRUST improved its revenues and profitability with the completion
of our acquisition of BankAmerica's corporate trust business in early 1996. We
continued our growth by closing on our acquisition of Comerica, Inc.'s bond
indenture and paying agent business in January 1997. We have built the critical
mass needed to succeed in corporate trust, and we will continue to grow by
acquisition as other regional banks decide to exit this business.

     INSTITUTIONAL FINANCIAL SERVICES had nearly $40 billion in assets under
management at year-end 1996, up 35 percent from 1995. Our strong-performing
asset management services helped grow the First American Funds portfolio, a
proprietary mutual fund family advised by our First Asset Management (FAM)
group, to more than $12 billion in assets in 1996, up 72 percent from a year
earlier. Our focus on defined contribution plans and the introduction of the no-
load First American Strategy Funds, advised by FAM, contributed to our strong
results in 1996. We expect continued growth if we can continue to deliver top
investment results and introduce new products and services that fill customer
needs.

CAPITAL MANAGEMENT
- ------------------

Our success in generating earnings growth also contributes to one of our
greatest challenges: allocating capital. We challenge ourselves to allocate
capital for maximum shareholder benefit, as well as to maintain strong
protection for depositors and creditors.

     FBS pursues four key strategies in managing capital:

     .    INVESTMENT IN CORE BUSINESSES--We invest in technology and other
resources so that our core businesses can serve customers better, improve
profitability, and increase revenues. The Relationship Management System (RMS)
and the First Bank Service Center in Fargo are just two examples of significant
investments that we expect will pay off handsomely over the long term. State-of-
the-art technology gives us a key competitive edge against banks and nonbanks
alike.

     We also shift capital from businesses with deficient returns in order to
free capital for reinvestment in our strongest businesses. In February we
reached agreements to sell the mortgage servicing and mortgage loan production
business of our residential mortgage subsidiary, enabling

                 [GRAPH APPEARS HERE - SEE GRAPHICS APPENDIX]


1ST OUR RETURN ON AVERAGE ASSETS OF 1.88 PERCENT IN 1996 PLACED US FIRST AMONG
OUR PEER GROUP OF 23 REGIONAL BANK HOLDING COMPANIES.

                                                         First Bank System, Inc.

4

<PAGE>
 
further investment in our fee-based businesses and further lowering the risk
profile of FBS.

     .    ACQUISITIONS--We look for opportunities in existing markets and
adjacent markets where the economic benefits are highest, as well as niche
markets such as corporate trust. We will pursue only those acquisitions that we
believe will create shareholder value.

     In February 1996 we closed on our acquisition of FirsTier Financial, Inc.,
creating the second-largest banking institution in Nebraska in terms of total
deposits, and making that state our third-largest market. We completed the
integration of FirsTier within three days, quickly taking out operating expenses
for the benefit of shareholders.

     .    STOCK REPURCHASES--In February 1996 the FBS Board of Directors
authorized the repurchase of up to 25 million common shares through December
1997. At year-end we had repurchased approximately 15 million of those shares.

     .    DIVIDEND INCREASES--On February 19, 1997, the FBS Board of Directors
increased the quarterly dividend rate to 46.50 cents from 41.25 cents per common
share, an increase of 12.7 percent. It was our sixth consecutive annual
increase.

     While size is important to some aspects of our corporation, high
performance is what differentiates FBS in the marketplace. Our strategy is to
manage capital for the benefit of shareholders now and over the long term.

SHAREHOLDER FOCUS
- -----------------

Our commitment to creating shareholder value runs deep. Through an employee
stock purchase plan, all eligible employees have the opportunity to purchase FBS
stock at a discount and align their interests with our shareholders--to become
owners, and behave like them. A majority of employees own FBS stock through our
Capital Accumulation Plan, a 401(k) program.

     Management, in particular, is aligned with shareholders' interests. Nearly
200 senior managers have targets to own the equivalent of 80 percent to 550
percent of their annual salaries in FBS stock. At year-end 1996, senior managers
owned more than $100 million in FBS stock.

     At FBS, we are confident in our ability to capitalize on change. We are
successfully developing our franchise and creating shareholder value by meeting
customer needs, building strong core businesses, actively managing capital, and
delivering strong financial results.

     In addition to our dedicated employees, our Directors have earned thanks
for another year of prudent guidance. I especially want to acknowledge two
Directors who will retire at our annual meeting on April 24, 1997: Marilyn
Carlson Nelson, our longest-serving Director, who joined the Board in 1978; and
Dr. James J. Renier, a Director for more than a decade.

     Finally, thank you for expressing your confidence by investing in our
company. I look forward to writing you again in 1998 with news that we created
opportunities, overcame challenges, and built an even stronger First Bank
System.


/s/ John F. Grundhofer
John F. Grundhofer
Chairman, President and Chief Executive Officer
February 19, 1997

15.3% EARNINGS PER COMMON SHARE INCREASED 15.3 PERCENT OVER THE PREVIOUS YEAR ON
A FULLY DILUTED BASIS AND BEFORE NONRECURRING ITEMS.

First Bank System, Inc.

                                                                               5

<PAGE>
 
                                RETAIL BANKING


[GRAPHIC APPEARS HERE -- SEE GRAPHICS APPENDIX]


BUSINESS DESCRIPTION

Retail Banking focuses on the broad consumer and small business markets. We
serve approximately 1.9 million households and 147,000 small businesses
throughout our 11-state banking region.

We built our business on quality products, effective sales and service, long-
term relationships, and physical presence in the markets we serve, and these
competitive advantages remain important. However, with the aid of technology we
increasingly serve our customers through more convenient and efficient
distribution channels. These channels include 32 branches in supermarkets and
general merchandise stores, 2,324 in-market ATMs, FastLine(SM) 24-Hour Banking
by telephone, and First FinanciaLine(SM) telemarketing.

Retail Banking provides financial services to small businesses with annual sales
under $5 million. Bankers throughout our branch system analyze customer needs
and recommend solutions. If customers have credit needs, the bankers assist with
documentation and then rely on a centralized underwriting center for credit
approval. FBS offers competitive pricing and 48-hour turnaround on standard
credit products, including real estate loans, working capital loans and lines of
credit under $350,000.


Perspectives

ACHIEVING OPERATIONAL EXCELLENCE
- --------------------------------

In their book The Discipline of Market Leaders, business strategists Michael
Treacy and Fred Wiersema write, "Operationally excellent companies deliver a
combination of quality, price and ease of purchase that no one else in their
market can match." Retail Banking is committed to operational excellence.

  Investing in new technology is a prerequisite to achieving operational
excellence. Our state-of-the-art systems have enabled us to offer standardized
products and services, and centralize our back-office operations. Imaging
technology in retail loan processing makes our back office more efficient.
Customized software enhances customer sales and service in all our branches, as
well as in our central customer service and telemarketing facilities.

  Advanced systems give our personal bankers, tellers, telebankers and telephone
service representatives comprehensive customer information files and the ability
to answer questions about virtually all consumer products. They also can
transfer balances, make payments on accounts, and approve consumers for a
variety of products--all with speed, accuracy and consistency.

  Our centralized customer service, data processing, and operations units can
concentrate on improving productivity and service quality, while our branches
can focus on selling. In the branches, we have begun separating management of
sales and transactions so that we can focus on building a stronger sales
culture. We expect the transaction side of branch management to diminish over
time as more customers migrate to centrally managed alternative distribution
channels. At the same time, our branches will focus more on selling products and
services.

  Having operations functions taken out of our branches has proven to be a
significantly lower-cost way of doing business. It's also left us with unneeded
space. So we're developing a new paradigm for our branch network. In the future,
we will have more, but smaller, branches. With our focus on in-market
acquisitions, we have closed or divested more than 170 branches on a pro forma
basis since 1991.

  In 1996 we continued to reduce average branch size by leasing out excess space
and closing some of our larger offices. We also opened 18 smaller branches in
supermarkets and general merchandise stores. Long term, we will shed more of our
retail branch space with no or limited customer impact.

  The branch of the future also will be redesigned to better reflect our
  distribution strategy. We'll offer a variety of service levels by location,
ranging from full-service to fully automated, such as the prototype we opened in
Denver in 1996.

                                                         First Bank System, Inc.

6

<PAGE>
 
BANKING ANYTIME, ANYWHERE
- -------------------------

Our research confirms that today's customers have less time to spend on banking
transactions. They are growing more comfortable with diverse ways of interacting
with the bank, and they expect us to provide convenience. Retail Banking has
developed multiple distribution channels so that customers can conduct their
financial business with us anytime, anywhere. In addition to providing superior
convenience to the customer, these channels provide transactions at lower cost
than at a traditional branch.

  The telephone continues to be a cost-effective distribution channel for FBS.
Our telephone service centers fielded more than 46 million calls in 1996, and
about 72 percent of the calls were handled by our interactive voice response
(IVR) unit.

  With advanced telephone technology, we are using telemarketing, together with
advertising and direct mail, to sell and retain a wide variety of consumer and
small business products. In 1996, our telemarketing efforts handled
approximately 676,000 inbound calls, and converted nearly 40 percent of those
calls to new product sales.

  We have expanded our ATM network to ensure convenient customer access. We
provide support for 2,324 ATMs in our markets including the Fastbank(R), PEAK(R)
and MINIBANK networks. In addition, we process for 911 ATMs outside our existing
markets, generating transaction fee income.

72%

ABOUT 72 PERCENT OF THE CALLS FIELDED BY OUR TELEPHONE SERVICE CENTERS WERE
HANDLED BY OUR INTERACTIVE VOICE RESPONSE (IVR) UNIT.

  The home computer is an emerging distribution channel for FBS. In 1996 FBS
joined IBM Corporation and 14 other banks as co-owners of Integrion Financial
Network, which will develop industry standards for PC and home banking. In 1997
we will launch the first of several home banking options, using MECA Software's
Managing Your Money(R) and leveraging our ownership in MECA. Our World Wide Web
site now includes e-mail access to FastLine and a variety of customer service
functions.

  Customers can choose from a range of products and service terms to meet their
needs. Our new line of Chextra(R) Banking products, for example, provides
incentives for customers to maintain broader relationships with FBS or to use
nontraditional channels for some transactions. Monthly account maintenance fees
also are waived on certain accounts if the customer authorizes direct payroll
deposit or automatic payment of loans.

  We realize that some customers may feel uncomfortable changing to alternative
distribution channels, so we continually look for ways to make change easy for
them. In 1996 we provided tens of thousands of demonstrations at branches to
teach customers how to use ATM and telephone banking technology, and sponsored a
vacation getaway and other incentives for participants.

                                                                       continued

1996 HIGHLIGHTS

 .  Successfully integrated more than 60 banking offices in Nebraska and Iowa
   within three days of closing acquisition of FirsTier Financial, Inc.

 .  Increased Chextra(R) POS sales nearly 55 percent.

 .  Increased retail investment sales 29 percent.

 .  Grew FBS total average home equity and second mortgage loans nearly
   16 percent.

 .  Increased average small-business loans 23.5 percent.

ATM Banking

 .  Increased FBS deposit transactions at all ATMs 76 percent to 4.2 million.

 .  Acquired MINIBANK, a shared network including 473 ATMs, which provides
   electronic payment systems services to small and midsized financial
   institutions and retailers throughout Colorado and parts of Wyoming.

Telephone Banking

 .  Redirected customer telephone calls from 124 of our branches so that our
   central telephone center now fields those calls. This process provides faster
   resolution to customer service requests and allows branch staff to better
   focus on customers in the branch and make outbound customer calls.

 .  Increased sales from telemarketing efforts by 49 percent.

First Bank System, Inc.


                                                                               7

<PAGE>

1996 HIGHLIGHTS
(Continued)

PRODUCT DEVELOPMENTS

 .  Introduced no-load First American Strategy Funds, "funds of funds" that are
   advised by First Asset Management and which provide a one-stop option for
   investors seeking income, growth and income, growth, or aggressive growth
   portfolios.

 .  Introduced Easy First Equity Line, which allows customers to borrow $5,000 to
   $25,000 against the value of their home equity without an appraisal.

 .  Introduced InvestLine, which allows employee stock purchase plan participants
   to borrow against the stock held in their plan accounts.

 .  Introduced Mortgage Direct, a centralized telemarketing unit that originates
   home mortgages by telephone through an 800 number and referrals from personal
   bankers.

 .  Introduced Instant Approval for home equity and auto loans through First
   FinanciaLine(SM). Customers now can receive credit decisions on the telephone
   within minutes of applying for a loan.

 .  Initiated automated score-driven underwriting process for small-business
   loans under $50,000, enabling us to provide faster, consistent credit
   decisions while raising approval rates, reducing processing costs, and
   maintaining high asset quality.
 
FOCUSING ON RELATIONSHIP MANAGEMENT
- -----------------------------------

Our new Relationship Management System (RMS) is designed to revolutionize the
way we sell, increasing revenue and profitability. This key technology
initiative, launched in 1995 with ongoing rollout through early 1997, generates
detailed customer information that helps our people provide better service and
identify the best sales opportunities.

  RMS marks an important shift from account management to relationship
management. It uses predictive modeling to develop detailed relationship
strategies, and it links multiple account usage information to demographics and
analysis.

  Unlike other database marketing efforts, RMS actually analyzes customer
account and behavior data--and initiates action. Consider the issue of overdrawn
accounts. RMS determines which overdrafts should be paid, based on a variety of
customer and account usage characteristics. When the system encounters a check
drawn on an account having insufficient funds, it decides whether to honor the
check--and actually executes its decision based on customer behavior and value
to the bank.

  Initial results are promising. With RMS, loan approval rates have increased in
the branch and mail-in channels by 13 percent, with a 50 percent reduction in
manual credit overrides. When using RMS in the direct mail channel, customer
response rates were significantly improved. In addition, customers had a higher
rate of activation and utilization on the new credit lines when compared to
previous mailings.

  By the end of first quarter 1997, RMS will be implemented across all FBS
retail banking channels, handling 20 decision-making and support routines. All
customer contact employees in our branches, telephone centers, and direct-mail
unit will have RMS tools for more effective sales and service.

RESULTS

BANKING MADE EASY

PORTER AND HARRIET EDDY LIKE TO STAY CURRENT WITH TECHNOLOGY, ESPECIALLY WHEN IT
SIMPLIFIES THEIR LIVES. SO THE JAMESTOWN, NORTH DAKOTA, COUPLE, IN THEIR LATE
60S, EAGERLY USE MANY CONVENIENT ELECTRONIC OR TELEPHONE BANKING OPTIONS
AVAILABLE FROM FIRST BANK.

A SEMI-RETIRED INSURANCE BROKER AND HOMEMAKER, MR. AND MRS. EDDY COLLECT THEIR
SOCIAL SECURITY BENEFITS BY DIRECT DEPOSIT. THEY HAVE A CHEXTRA(R)BANKING
ACCOUNT, INCLUDING A DEBIT CARD, WHICH ENABLES THEM TO BUY GROCERIES AND OTHER
GOODS AND SERVICES WITHOUT WRITING CHECKS. THEY CALL FASTLINE(SM) 24-HOUR 
BANKING TO VERIFY BALANCES OR TRANSFER FUNDS. WHEN THEY DO VISIT THEIR LOCAL
FIRST BANK BRANCH, THEY TYPICALLY GO NO FURTHER THAN THE ATM LOBBY TO GET CASH
OR MAKE BUSINESS DEPOSITS.

IN 1996 THE EDDYS WERE AMONG THE FIRST TO SIGN UP FOR FASTLINE(SM) BILL PAY,
WHICH ENABLES THEM TO PAY MONTHLY BILLS BY TELEPHONE. THEY USED TO DRIVE AROUND
TOWN TO DELIVER PAYMENTS FOR RENT, UTILITIES, CREDIT CARDS, AND THE LIKE, OR
MAIL THEIR CHECKS AT THE POST OFFICE--EVEN DURING BITTERLY COLD AND SNOWY
WINTERS. WITH BILL PAY, THEY SAVE ON MILEAGE, STAMPS AND PERSONAL ENERGY. THEY
ALSO HAVE MORE TIME TO SPEND AT THE COUNTRY CLUB, WHERE THEY PAY THEIR
MEMBERSHIP DUES BY TELEPHONE.

                                                         First Bank System, Inc.

8

<PAGE>
 
                                PAYMENT SYSTEMS

[GRAPHIC APPEARS HERE -- SEE GRAPHICS APPENDIX]

BUSINESS DESCRIPTION

Payment Systems provides an array of innovative credit card products and
services to businesses and consumers. The business consists of three units.

CORPORATE PAYMENT SYSTEMS provides card products that help business and
government manage their expenses cost-effectively. Employees of Fortune 1000
companies use the First Bank VISA(R) Corporate Card, a non-revolving charge card
for travel and entertainment expenses. Large businesses use the First Bank VISA
Purchasing Card to simplify the procurement of high-volume, small-ticket items.
Government agencies use our I.M.P.A.C.(R) Card. Other products include the First
Bank VISA Relocation Card(SM), for costs associated with employee relocation.

CONSUMER PAYMENT SYSTEMS focuses on being the dominant card issuer in our
banking region and building valuable co-branding relationships. This strategy
leverages the distribution power of our co-branded partners and our branch
system, and is less dependent on direct mail. Both our Northwest Airlines and
Amway(R) co-brands continued to grow in volume and profitability in 1996, as did
our small business card products. First Bank also has card-accessible secured
lines of credit and an international prepaid travel card.

(CONTINUED NEXT PAGE)

Perspectives

CORPORATE AND PURCHASING CARDS: POISED FOR CONTINUED GROWTH
- -----------------------------------------------------------

Sales volume for First Bank VISA(R) Corporate and Purchasing Cards increased
nearly 50 percent in 1996, and our challenge is to perform an encore. It's a
challenge for which FBS is well-rehearsed.

  In 1996 FBS continued to invest in technology for our Corporate Card program,
focusing on capabilities that enable our customers to reengineer their expense
reporting processes. For instance, we developed the ability to deliver First
Bank VISA transactions charged on the Corporate Card to a variety of automated
expense reporting applications. This capability allows our clients' employees to
complete their expense reports much more efficiently and accurately.

  Our new strategic alliance with the Hessel Group for the First Bank Corporate
Relocation Card(SM) added unique expense tracking and tax reporting
capabilities. "DRTS-DIRECT" combines the unique benefits and features of the
Relocation Card and Hessel Group's Domestic Relocation Tracking System (DRTS), a
system that employers use to calculate tax assistance for relocating employees
and print tax documents, as well as to analyze and manage relocation costs.

23.8%

INCREASED NONINTEREST INCOME 23.8 PERCENT.

  Corporate Payment Systems also completed development of a powerful data-mining
tool, FirstSource(SM), which provides both Corporate and Purchasing Card
customers the ability to perform complex, year-over-year, transaction-based
analysis.

  First to market with the purchasing card, FBS is well ahead of our competitors
in establishing customer relationships and developing innovative product and
service features. Our 10-step process for selling and training customers on the
Purchasing Card concept is a key factor in our success, and we have significant
experience working with an array of clients. Our technical support, including a
proprietary management information system that can integrate into the client's
accounts payable function, adds value to each client relationship.

  Innovative product and service features also help create loyal customers. One
popular benefit is FirstView, an integrated expense management reporting tool
that lets customers audit expenditures and relationships with merchants. We're
committed to developing additional tools to help our clients document, analyze
and manage their expenses.

  A key niche for us in this market is I.M.P.A.C.(R), our government purchasing
card. The federal government, including the Department of Defense,

                                                                       continued

First Bank System, Inc.

                                                                               9

<PAGE>
 
BUSINESS DESCRIPTION
(continued)

MERCHANT BANKCARD SERVICES provides an in-house, single-source solution for
electronic transaction processing. We enable our merchant customers to
electronically authorize and capture transactions from bankcards, other credit
cards, and debit cards, as well as to authorize or guarantee checks at the point
of sale. FBS has built relationships with about a dozen "front-end"
authorization networks to provide terminal, electronic cash register (ECR), and
computer applications for virtually any industry. FBS has combined that front-
end flexibility with a proprietary "back-end" merchant accounting platform,
which is recognized as one of the best in the industry. The combination of
flexibility and capability have positioned Merchant Bankcard Services for growth
in an industry demonstrating intense competition from both bank and nonbank
processors.


ranks among our largest clients. The I.M.P.A.C. program has saved the government
millions of dollars through reduced paper flow and a streamlined purchase order
process. The sheer size of the federal government, the current administration's
emphasis on reengineering, and our successful track record bode well for
I.M.P.A.C.'s growth potential.

  Private sector opportunities also are promising, as U.S. companies spend
approximately $400 billion annually on small-dollar purchases. We believe less
than 2 percent of this market has been tapped. Our first-entrant and
technological advantages will help us remain a high-quality, low-cost leader.

CONSUMER CARDS: BUILDING ON SUCCESS
- -----------------------------------

In 1996 Consumer Payment Systems focused on growing accounts, sales volume, and
overall profitability for existing portfolios. Our strategy is to pursue
relatively controlled growth by marketing through our branches, co-branding
partners, and other sources of new accounts. This strategy enables us to
maintain a strong credit discipline.

  We continue to work with our partner Northwest Airlines to propel our First
Bank WorldPerks(R) VISA cards to new heights. In 1996 the number of WorldPerks
cards issued grew 20 percent to more than 550,000. In cooperation with Northwest
Airlines we also bolstered our First Bank WorldPerks VISA Business Card,
introduced in 1995. New accounts grew as we focused on selling and distributing
the card through our partner channels. For example, we promoted the card by
enclosing sales literature with plane tickets. Through this and other programs,
we grew sales volume on our VISA small business cards to the number-one position
nationally.

  We also strengthened our seven-year-old Amway(R) VISA card with a
significant reintroduction. We dropped the annual fee, created a more attractive
Gold Card option, and developed a new application and collateral, among other
changes. New accounts grew due to these efforts.

  FBS will continue to seek other co-branding opportunities with similar growth
and profitability potential. New programs will focus on partners with strong
brands and good consumer distribution potential. Both FBS and the brand partners
must meet our profitability goals.

  Another ongoing initiative to build our credit card sales will be to leverage
First Bank's new Relationship Management System (RMS). Using RMS in a pilot
program, we identified prospects without credit cards and automatically
qualified them. A subsequent mailing resulted in twice the sales rate compared
to a control group.

  Consumer Payment Systems will continue to leverage our branch and other
channels, which provide a cost-effective alternative to direct marketing
channels. Five years ago, we gained a majority of our new accounts through mass
mailings. Today, less than a third of our new accounts result from
direct mail.

                                                         First Bank System, Inc.

10

<PAGE>
 
MERCHANT BANKCARD SERVICES: ENGINEERING FOR THE FUTURE
- ------------------------------------------------------

Merchant Bankcard Services offers products and prices that allow merchants to
concentrate on their businesses and to accept payments as efficiently as
possible. In 1996 Merchant Bankcard Services improved our ability to serve our
existing merchant base and attract new business both by enhancing our product
set and developing our staff. From a product standpoint, customers now can
access more and better point-of-sale applications, a greater number of point-of-
sale debit networks, improved check services, and many equipment
purchase/finance arrangements. Organizationally, we added marketing and
retention personnel, increased the size of our inside and outside sales forces,
and restructured our customer implementation and servicing organization.

  Merchant Bankcard Services also is leveraging other parts of FBS through
ongoing cross-selling. In 1996 members of our dedicated sales force tested
cross-selling checking and business reserve line products, and bankers tested
cross-selling small merchant bankcard accounts. Our goal is to offer a package
of products and services that is more valuable to a merchant than individual
products or services.

BUILDING A TECHNOLOGICAL EDGE
- -----------------------------

In July 1996 FBS opened the doors to the First Bank Service Center in Fargo--and
to a future of efficiency, profitability and growth in Payment Systems.

  The two-story, 150,000-square-foot facility is home to Payment Systems
Services, which includes customer service, research, and account initiation for
all FBS credit card products, as well as loan processing and servicing for our
indirect sales finance business. The facility consolidated operations from
Denver, Minneapolis, and Sioux Falls, South Dakota, resulting in more effective
line balancing, keeping staff productive on multiple tasks during peak and off-
peak hours.

  The service center features state-of-the-art telephone technology for more
efficient and effective management. ACD switching, for example, enables us to
route calls to representatives based on their expertise. With up-to-the-minute
management information, we can provide better customer service.

  At year end, approximately 700 employees were working in the service center.
The facility, with 1,200 work stations and a 35-acre site, is equipped for
growth.


RESULTS

COST SAVINGS IS IN THE CARDS

AS ELI LILLY AND COMPANY STRIVES TO MANAGE EXPENSES MORE COST-EFFECTIVELY, ITS
DEMAND FOR CARD PRODUCTS KEEPS GROWING. AND FBS PAYMENT SYSTEMS KEEPS PROVIDING
NEW CARD SOLUTIONS FOR THE INDIANAPOLIS-BASED PHARMACEUTICAL COMPANY AND ITS
SUBSIDIARIES.

LILLY BEGAN USING THE FIRST BANK VISA(R) CORPORATE TRAVEL CARD IN 1992, AND CARD
VOLUME HAS GROWN TREMENDOUSLY SINCE. IN 1996 THE COMPANY ADDED ELECTRONIC
EXPENSE REPORTING, ENABLING CARDHOLDERS TO SUBMIT AND RECONCILE TRAVEL EXPENSE
REPORTS WITHOUT TIME-CONSUMING AND COSTLY PAPERWORK.

LILLY ALSO HAS USED THE FIRST BANK VISA PURCHASING CARD SINCE 1992 TO STREAMLINE
ITS PROCUREMENT PROCESS AND REDUCE PROCESSING COSTS. THE PURCHASING CARD HAS
ENABLED LILLY TO CONSOLIDATE THOUSANDS OF Product Developments

IN 1997 THE COMPANY WILL EXPLORE USING AN ELECTRONIC SYSTEM THAT WOULD ALLOW
EMPLOYEES TO ORDER SUPPLIES FROM AN ON-LINE CATALOG USING PCS. THE FIRST BANK
VISA PURCHASING CARD WILL BE THE PREFERRED PAYMENT VEHICLE FOR THIS SYSTEM.


1996 Highlights

 .  Increased total revenue 12.8 percent.

 .  Increased noninterest income 23.8 percent.

Corporate Payment Systems

 .  Continued to be the largest issuer of VISA(R) Corporate and Purchasing Cards
   in terms of number of cards and sales volume, and the leading issuer of
   purchasing cards to the federal government.

 .  Increased Corporate and Purchasing Card relationships to more than 200 of the
   Fortune 1000.

Consumer Payment Systems

 .  Continued to be among the nation's largest issuers of VISA credit cards.

 .  Ranked first within the VISA network in sales volume for small business
   cards.

 .  Increased sales volume on our co-branded credit cards by more than 25
   percent.

Merchant Bankcard Services

 .  Remained among the top 10 processors of VISA and MasterCard(R) transactions,
   serving more than 55,000 merchant locations.

 .  Improved branch marketing efforts to more efficiently target regional
   business, our most profitable niche.

First Bank System, Inc.

                                                                              11

<PAGE>
 
                 BUSINESS BANKING & PRIVATE FINANCIAL SERVICES


[GRAPH APPEARS HERE -- SEE GRAPHICS APPENDIX]


BUSINESS DESCRIPTION

Through Business Banking and Private Financial Services (PFS), FBS meets the
unique financial needs of nearly 21,600 middle market companies and
approximately 27,000 ultra affluent customers throughout our banking region. The
management structure enables us to leverage the synergistic potential between
business and individual customers so that we can fully serve these
relationships.

BUSINESS BANKING provides deposit, credit, treasury management, international,
and other financial products and services to middle market companies with annual
sales in excess of $5 million. Through 67 local offices, we serve customers in
industries where FBS has the intellectual capital and other resources to
adequately assess risk and provide innovative solutions with high-quality
products and excellent customer service.

PRIVATE FINANCIAL SERVICES serves the ultra affluent market with one-stop access
to investment management, personal trust, and private banking services. We
define the ultra affluent market to be the top 3 percent of households. PFS also
serves professional firms, family wealth groups, and executives of Business
Banking customers. We provide individualized service through 31 offices, all in
metropolitan areas.


Perspectives

SEIZING MARKET OPPORTUNITIES
- ----------------------------

Business Banking and Private Financial Services (PFS) experienced strong growth
in 1996, and prospects for the future are bright. Average loans increased 22
percent during the year to $7.28 billion, and loan commitments grew 23 percent
to more than $12.1 billion by year-end.

  We also experienced tremendous growth in several niche businesses. Our asset-
based lending division, Republic Acceptance Corporation, achieved average annual
loan growth of 83 percent to end the year at approximately $155 million in
outstandings. Our leasing division, which specializes in both equipment and auto
lease financing, recorded average annual loan growth of nearly 46 percent to end
the year at $179 million in outstandings.

  Business Banking and Private Financial Services benefit from growing economies
in our 11-state banking region. Facing increased competition from bank and
nonbank providers, we differentiate Business Banking through outstanding
relationship management. We stay close to our customers by understanding their
needs, providing high-quality products and services, and marketing aggressively.

22%

INCREASED AVERAGE LOANS 22 PERCENT TO $7.28 BILLION.

  Competition for PFS also is growing, but the market itself is expanding
substantially. We expect the five-year compounded annual growth rate for
households with income of $150,000 or more to be 20 percent, compared to an
overall household growth rate of less than 2 percent. Furthermore, customer
surveys indicate the opportunity to capture a greater share of our customers'
credit outstandings and investment portfolios.

  Improving customer satisfaction--so critical in a relationship-driven
business--is our top priority, and key to gaining a competitive advantage.
Toward this end, in 1997 we plan to increase customer calls, improve customer
service, and align incentive compensation to reflect improvement in customer
satisfaction.

LEVERAGING BUSINESS AND PERSONAL SYNERGIES
- ------------------------------------------

Business owners and executives welcome a high level of service from their
bankers, both for their business and personal needs. Our bankers have the
expertise to recognize both the business and personal financial requirements
of their customers.

  Managing Business Banking and PFS together, we are better positioned to
leverage FBS resources to deliver integrated financial services to our business
and ultra affluent customers.

                                                         First Bank System, Inc.

12

<PAGE>
 
  In Business Banking, we strive to be close to the customer. Our relationship
managers make credit decisions and have direct accountability for profitability.
They're motivated to leverage local customer relationships. And they have more
time to spend with customers and prospects, because we centralized
administrative functions such as policy-making, procedures and training.

  In PFS, we decentralized management to be more aligned with Business Banking.
PFS serves clients through teams consisting of managing directors and experts
from personal trust, private banking and investments. This team approach
provides greater expertise to our clients and helps address a wider array of
their financial needs. Team members report through their respective business
lines--functional reporting that underscores our commitment to maintaining
strong core competencies, while still providing fully integrated product and
service delivery.

PROVIDING SERVICE OPTIONS
- -------------------------

Private Financial Services remains relationship-driven. However, we are applying
technology where appropriate to serve customers more conveniently and
efficiently.

  In personal trust, for example, we began segmenting our customers so that we
can provide the optimal delivery method to different customers based on their
needs. A personal trust customer with complex and diverse assets works with a
relationship manager, who assembles a team of experts who can deliver a high
degree of personal service. A customer with simpler needs, such as managing a
portfolio invested mainly in mutual funds, may choose to work directly with
Trust Customer Service instead of a relationship manager.

  Trust Customer Service, opened in 1996, provides personal trust customers
convenient access to their accounts through an 800 number. Trained
representatives can handle most inquiries and transactions--from providing
account balances to managing investments to making distributions--in a timely
manner. About 30 percent of Trust Customer Service clients call on a monthly
basis.


Results

INTERNAL REFERRALS BENEFIT CLIENTS 

TERRY L. SCHMIDT AND ROSE MANUFACTURING COMPANY ENJOY A SUCCESSFUL, LONG-TERM
RELATIONSHIP WITH COLORADO NATIONAL BANK (CNB), FIRST BANK SYSTEM'S COLORADO
AFFILIATE. SCHMIDT RECENTLY SOLD THE DENVER-BASED MANUFACTURING FIRM, WHICH
PRODUCES WORKPLACE SAFETY EQUIPMENT.

ROSE MANUFACTURING BECAME A CLIENT OF CNB'S BUSINESS BANKING GROUP NEARLY 20
YEARS AGO. AMONG OTHER SERVICES, CNB HAS PROVIDED THE COMPANY WITH A REVOLVING
LINE OF CREDIT FOR WORKING CAPITAL PURPOSES, AS WELL AS TERM DEBT TO FINANCE
EQUIPMENT PURCHASES. WHEN MR. SCHMIDT PLANNED TO SELL THE BUSINESS IN 1996, CNB
RISKED LOSING A LOYAL CLIENT.

HOWEVER, ROSE MANUFACTURING REMAINS A CNB CLIENT UNDER NEW OWNERSHIP. AND WHEN
MR. SCHMIDT'S BUSINESS BANKER LEARNED ABOUT THE PENDING TRANSACTION, SHE
REALIZED HE WOULD NEED FINANCIAL SERVICES RELATING TO THE PROCEEDS OF THE SALE.
SO SHE REFERRED HER CLIENT TO A BANKER IN PRIVATE FINANCIAL SERVICES (PFS).

AS THE SALE NEARED, MR. SCHMIDT MET WITH THE PFS BANKER, A TRUST OFFICER AND
CNB'S VICE CHAIRMAN. AS A RESULT, HE ESTABLISHED A TRUST ACCOUNT WITH CNB. 

BY LEVERAGING SYNERGIES WITHIN BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES,
MR. SCHMIDT BENEFITED FROM VALUABLE NEW SERVICES, AND CNB RETAINED TWO VALUED
RELATIONSHIPS.


1996 Highlights

 .  Successfully integrated more than 7,000 Business Banking customers and 3,500
   Private Financial Services (PFS) customers in Nebraska and Iowa from
   acquisitions of FirsTier Financial, Inc., First Bank of Omaha, and Southwest
   Bank; completed FirsTier integration within three days of closing
   acquisition.

 .  Increased average loans 22 percent to $7.28 billion, including FirsTier
   acquisition.

 .  Grew loan commitments 23 percent to more than $12.1 billion.

 .  Improved net tangible return on equity to 35.5 percent from 32.3 percent.

 .  Lowered efficiency ratio on a cash basis to 37 percent from 42 percent.

 .  Opened new Wisconsin Business Banking office serving greater Appleton and
   Green Bay, rapidly growing manufacturing and service markets.

 .  Grew assets under administration in PFS 58.4 percent to $24.41 billion,
   including FirsTier acquisition.

First Bank System, Inc.

                                                                              13

<PAGE>
 
                               COMMERCIAL BANKING

[GRAPH APPEARS HERE -- SEE GRAPHICS APPENDIX]

BUSINESS DESCRIPTION

Commercial Banking provides credit and noncredit financial solutions to public
and private companies with annual revenues of $25 million or more.

We focus on middle market and national companies that are either headquartered
or maintain large operations in the Twin Cities region, where we are the market
leader. In addition, we serve corporations in selected national markets and
niche specialties such as asset-based lending, including agricultural credit,
business credit, leasing, and real estate lending. We also are one of the
nation's leading providers of credit and other financial services to mortgage
bankers. We provide structured finance expertise as well as noncredit products
and advisory services including treasury management, international banking,
corporate finance, and loan syndications.

Commercial Banking is relationship-driven, not transaction-based. A team of
delivery and support professionals led by a relationship manager works closely
with each client at multiple levels to link various products and services to
meet unique client needs.


RESULTS

PROVIDING VALUE THROUGH STRUCTURED FINANCE 

NEEDING TO FINANCE CONSTRUCTION OF A MANUFACTURING FACILITY FOR ITS NEW SISTER
COMPANY, A MINNEAPOLIS-BASED COMMERCIAL BANKING CLIENT LOOKED NO FURTHER THAN
FBS. FACING CHALLENGING TIME CONSTRAINTS, OUR RELATIONSHIP MANAGERS STRUCTURED A
COMPLEX FINANCIAL PACKAGE TO BUILD THE MANUFACTURING FACILITY AND PROVIDE CREDIT
FOR WORKING CAPITAL REQUIREMENTS.

OUR ULTIMATE SOLUTION, USING AN ALL-FBS TEAM, INCLUDED ISSUING "LOWER-FLOATER"
INDUSTRIAL DEVELOPMENT BONDS TO REDUCE INTEREST COSTS. COMMERCIAL BANKING,
RESPONDING TO THE CRITICAL TIMING, PROVIDED A BRIDGE LOAN TO FUND INTERIM
CONSTRUCTION COSTS PRIOR TO ISSUING THE BONDS AND SUBSEQUENTLY ISSUED A LETTER
OF CREDIT TO FACILITATE THE SALE OF THE BONDS. FBS INVESTMENT SERVICES, INC.
SERVED AS THE PLACEMENT AND REMARKETING AGENT, AND FIRST TRUST PROVIDED TRUSTEE
SERVICES FOR THE BONDS. FINALLY, TREASURY MANAGEMENT SERVICES WERE IMPLEMENTED
TO TRANSACT PAYMENTS OF BOND PROCEEDS TO CONSTRUCTION VENDORS.

USING ALL FBS RESOURCES REDUCED COSTS AND INCREASED CONVENIENCE TO THE CLIENT.
MORE AND MORE, SITUATIONS DEMAND COMPLEX FINANCIAL SOLUTIONS. THIS EXPERIENCE
SHOWS HOW OUR RELATIONSHIP MANAGERS CAN MARSHAL EXPERTISE THROUGHOUT FBS TO
DELIVER VALUE TO OUR CLIENTS.


Perspectives

BUILDING CLIENT LOYALTY
- -----------------------

Like our industry as a whole, Commercial Banking is changing rapidly.
Competition is expanding from new sources every day, while our client base in
many industries faces accelerating consolidation. Companies demand more from
their banking partners, and they are placing their financial business with fewer
bank providers. Furthermore, the strengthening financial condition of many
companies translates into lower demand for funds and lower margins.

  We can't control the competition. We can't control the economy. But we can
focus on our clients. To succeed, we must create loyal clients. A loyal client
is one who is highly satisfied with our partnership, who knows that we
understand the client's business, and who repeatedly comes to us for more. Our
strategy for fostering client loyalty is to distinguish ourselves from other
service providers by consistently exceeding our clients' expectations.

  How do we know what exceeds clients' expectations? We asked them. We
identified three key banking practices that lead to client loyalty:

  CLIENT FOCUS--focusing on client needs, communicating and listening to
clients, and generating innovative ideas and solutions.

  SUPERB EXECUTION--providing products and services that our clients need, and
maintaining a commitment to excellence.

  ESSENTIAL KNOWLEDGE--having business acumen, understanding our clients and
their industries, and being able to link client needs to our products and
services.

  To improve client loyalty in 1996, we launched a rigorous sales initiative
that requires our relationship teams to continuously understand and identify
potential relationships between our clients' needs, market and industry factors,
and available financial solutions. The result of this "Client Ready Approach" is
a common sales method that develops customized financial solutions for clients
and generates revenue for FBS.

                                                         First Bank System, Inc.

14

<PAGE>
 
MOVING TOWARD ALIGNMENT
- -----------------------

In building client loyalty, we know that people are the key to differentiation
in a relationship-driven business. The increasingly complex needs of our clients
require teams of committed delivery and support professionals working together
to provide effective solutions.

  For these teams to be effective, team members must be aligned. In Commercial
Banking, we have chosen to focus our alignment efforts around five values that
guide us in our strategy to consistently exceed our clients' expectations. These
values are integrity, initiative, accountability, teamwork and innovation.

  In 1996 we continued our commitment toward achieving a culture of aligned
values. Through a process that included a series of workshops, employees gained
a better understanding of Commercial Banking's values and the individual changes
necessary to achieve alignment with these values. Through self-assessment tools
and feedback from co-workers, employees also received data that provided a basis
for generating individual development plans focused on improving alignment.

  We are confident that a culture of committed employees aligned with a shared
set of values will lead to increased client satisfaction and loyalty and will
continue to differentiate us in an increasingly competitive environment.

FOCUSING ON OPPORTUNITY
- -----------------------

In 1996 we continued to analyze product usage, profitability, and relationship
potential among our client base.

  As our clients' businesses become more demanding, they require more
sophisticated financial solutions. And clients' needs vary. With the goal of
focusing our expertise for maximum client benefit, clients are strategically
linked with the most appropriate relationship team to handle their unique needs.

10%

INCREASED AVERAGE LOANS, EXCLUDING LOANS TO MORTGAGE BANKERS, BY MORE THAN 10
PERCENT TO $4.9 BILLION.

  In addition to focusing appropriate resources on our clients, we also have
stepped up our efforts to win and retain the most complex relationships--which
are often the most profitable. Traditionally, banks have offered a standard line
of credit and noncredit products without regard for the particular needs of
their clients. In other words, banks were more focused on selling products than
providing effective solutions. Now, we have sophisticated professionals who have
the resources to deliver customized, innovative financial solutions to meet our
clients' most complex, challenging and unique needs.


1996 Highlights

 .  Increased average loans, excluding loans to mortgage bankers, by 10.2 percent
   to $4.9 billion.

 .  Served as agent on transactions totaling $1.7 billion and co-agent on
   transactions totaling $6.7 billion.

 .  Increased total FBS revenues from treasury management services by 12.1
   percent including acquisitions.

 .  Maintained strong credit quality, with nonperforming assets of $41.1 million,
   or .78 percent of loans plus other real estate owned.

 .  Improved efficiency ratio on a cash basis to 29.3 percent from 31.6 percent.

First Bank System, Inc.

                                                                              15

<PAGE>
 
               CORPORATE TRUST & INSTITUTIONAL FINANCIAL SERVICES

[GRAPH APPEARS HERE -- SEE GRAPHICS APPENDIX]

BUSINESS DESCRIPTION

Corporate Trust and Institutional Financial Services share a trust accounting
system, fee billing unit, and the legal entity First Trust, but otherwise remain
distinct businesses.

Through CORPORATE TRUST, FBS is one of the nation's largest providers of
domestic corporate trust services. Corporate Trust provides trusteeship for
municipal, corporate, asset-backed and international bonds, as well as paying
agent, escrow agent, and document custodial services to debt issuers.

INSTITUTIONAL FINANCIAL SERVICES focuses on investment clients and products. The
business is organized into two groups: First Asset Management (FAM) and
Investment Services. FAM provides centralized investment management, delivery
and business support services for all FBS individual and institutional
investment products. These products include First American Funds (a proprietary
mutual fund family advised by FAM) and 401(k) products. Investment Services is
FBS's full-service broker/dealer providing a wide array of investment products
to individual investors, and underwriting, distribution and portfolio services
to institutional clients.


Perspectives

CORPORATE TRUST: POSITIONED TO LEAD
- -----------------------------------

In the corporate trust business, establishing economies of scale is necessary
for competing effectively. The advantage goes to companies with the means to
invest in efficient technology and offer a breadth of high-quality products and
services. Through recent acquisitions and internal growth, FBS has become one of
the largest providers of corporate trust services in the industry.

  In 1996 we successfully completed the integration of BankAmerica's corporate
trust business, doubling our corporate trust revenue and profitability. We
continued our growth by announcing the acquisition of Comerica, Inc.'s bond
indenture and paying agent business. Having closed on the Comerica acquisition
in January 1997, FBS now serves more than 10,000 clients with 33,000 bond issues
in the areas of municipal, revenue, housing and corporate bond indenture
trusteeships.

  FBS continues to explore acquisition opportunities for Corporate Trust, but
scale is just one reason we are well-positioned to succeed in this niche.

  We are investing in the infrastructure needed to absorb future acquisitions
and grow our existing business. For example, we're upgrading systems for fee
billing and collection, account control, and bondholder accounting and service.
Our continuing emphasis on automation and standardization enhances our ability
to deliver the levels of accuracy, quality and timeliness that bondholders and
bond issuers demand.

  Our strategy of maintaining local offices gives us a competitive edge in
retaining and expanding our client base, particularly for municipal bonds.
Through 13 full-service offices nationwide, we clearly have the size, experience
and resources to compete profitably and efficiently.

  In addition, we are able to leverage management expertise throughout FBS in
areas such as acquisitions and cost control.


RESULTS

TOP-OF-THE-LINE SYSTEMS, SERVICE AND CLIENTS

THE CALIFORNIA HOUSING FINANCE AGENCY (CHFA) BECAME A FIRST TRUST CUSTOMER IN
1992, WHEN FBS ACQUIRED A MAJOR COMPETITOR'S CORPORATE TRUST PORTFOLIO. CHFA HAD
BEEN CONSIDERING CHANGING VENDORS TO PROVIDE TRUSTEE AND PAYING AGENT SERVICES,
AND AGREED TO STAY PUT IF FIRST TRUST COULD PROVIDE HIGH-QUALITY SERVICE AND
MAINTAIN A LOCAL PRESENCE. WE DID BOTH.

TODAY CHFA IS ONE OF CORPORATE TRUST'S LARGEST CLIENTS AND ONE OF THE LARGEST
BOND ISSUERS IN CALIFORNIA. THE AGENCY'S OUTSTANDING DEBT HAS GROWN NEARLY 40
PERCENT SINCE 1992. IN 1996 THE AGENCY ISSUED MORE THAN $1 BILLION IN NEW BONDS,
AS IT IMPROVED ITS EFFICIENCY AND PRODUCT DELIVERY. 

FIRST TRUST HAS PROVED CAPABLE OF HANDLING THIS RAPIDLY GROWING, HIGH-PROFILE
CLIENT AND ITS COMPLEX BUSINESS. OUR CENTRALIZED TRUST ACCOUNTING SYSTEMS AND
OUR STAFF PROVIDE THE DEPENDABLE, HIGH-QUALITY SERVICE THE AGENCY NEEDS. WHEN
HANDS-ON, PERSONAL ATTENTION IS REQUIRED, A DEDICATED ACCOUNT TEAM IS NEARBY IN
OUR SAN FRANCISCO REGIONAL OFFICE, ONE OF 13 ACROSS THE COUNTRY.

                                                         First Bank System, Inc.

16

<PAGE>
 
INSTITUTIONAL FINANCIAL SERVICES: PERFORMANCE PLUS
- --------------------------------------------------

72%

GREW PROPRIETARY FIRST AMERICAN MUTUAL FUND ASSETS 72 PERCENT TO $12.8 BILLION.

The goal of Institutional Financial Services is to satisfy customers, enabling
us to grow noninterest income by gathering assets. In 1996 our assets under
management increased 35 percent to $39.3 billion, and fee income grew 16 percent
to $85.8 million.

  We are on target to meet our long-term objectives for size and revenue.
Furthermore, we are confident that we can continue to grow because we offer
sound investment products--both in performance and breadth--and because FBS has
solid market presence and distribution.

  Strong, long-term performance is fueling our growth and is a key reason why
First American Funds, a proprietary mutual fund family advised by First Asset
Management (FAM), reached $12.8 billion in assets under management in 1996. At
year-end, Morningstar gave eight of these funds four-star ratings or higher for
three-year performance.

  In 1996 we continued to expand our product offerings to meet the needs of a
wide range of investors. First American Strategy Funds, "funds of funds" that
invest primarily in shares of other First American funds, were introduced into
the no-load arena. The new funds, advised by FAM, provide a one-stop option for
investors seeking income, growth and income, growth, or aggressive growth
portfolios.

  In retirement investments, FBS is seizing the opportunity related to the shift
of assets from defined benefit to defined contribution plans. First Select, our
new 401(k) plan for companies with 250 to 5,000 employees, promises to be a
successful vehicle for defined benefit plan conversion. It gives customers the
option to invest in First American Funds as well as in partner funds such as
Fidelity and Putnam. Our retirement products continue to grow largely on the
strength of referrals from FBS retail and business bankers.


401(K) SOLUTION FOR A GROWING COMPANY

WHEN THE RAMKOTA COMPANIES, INC., LAUNCHED ITS 401(K) PROGRAM IN 1989, IT
INSTINCTIVELY TURNED TO FIRST TRUST. THE SIOUX FALLS, S.D.-BASED COMPANY ALREADY
RELIED ON FIRST BANK FOR DEPOSIT AND CREDIT SERVICES, AS WELL AS CASH
MANAGEMENT, TRUST ADMINISTRATION, AND CREDIT CARDS.

AS RAMKOTA GREW RAPIDLY THROUGH ACQUISITIONS TO OWN AND MANAGE 38 HOTELS IN 13
STATES, ITS 401(K) PROGRAM GREW MORE COMPLEX. BY 1996 THE COMPANY SPONSORED 28
RETIREMENT PLANS--A CUMBERSOME, TIME-CONSUMING ADMINISTRATIVE BURDEN.

RECOGNIZING RAMKOTA'S NEEDS, FIRST TRUST RECOMMENDED CONSOLIDATING THE COMPANY'S
401(K) BENEFITS USING THE FIRST AMERICAN RETIREMENT PLAN. RAMKOTA AGREED,
SIGNIFICANTLY REDUCING ADMINISTRATIVE TASKS. IN ADDITION, RAMKOTA EMPLOYEES NOW
HAVE MORE COMPLETE, TIMELY ACCESS TO THEIR RETIREMENT ACCOUNTS. AN 800 NUMBER
ENABLES THEM TO CHECK DAILY BALANCES AND TRANSFER FUNDS BY PHONE 24 HOURS A DAY.
THEY RECEIVE STATEMENTS THAT ARE MORE DETAILED AND TIMELY THAN BEFORE. AND THEY
CAN CHOOSE FROM AMONG SEVERAL INVESTMENT OPTIONS FROM THE FIRST AMERICAN FUNDS
FAMILY.

EVEN WITH CONTINUED EXPANSION, RAMKOTA CAN EASILY ENROLL NEW EMPLOYEES IN THE
FIRST AMERICAN RETIREMENT PLAN WITHOUT ADDING NEW PLANS.


1996 Highlights

Corporate Trust

 .  Completed integration of BankAmerica's corporate trust business.

 .  Announced acquisition of bond indenture services business of Comerica, Inc.

 .  Grew principal outstanding 39 percent to $458 billion.

 .  Increased bond issues 83 percent to 33,000.

 .  Increased number of bondholders served by 77 percent to 995,000.

 Institutional Financial Services

 .  Increased assets under management 35 percent to $39.3 billion.

 .  Grew proprietary First American mutual fund assets 72 percent to $12.8
   billion.

 .  Increased small plan 401(k) plan assets under management 74 percent to $712.3
   million.

 .  Attracted 121 new retirement plan sponsors, up 45 percent.

 .  Established nearly 39,000 new brokerage account relationships, a 16.5 percent
   increase in new relationships.

 .  Increased brokerage investment sales revenue by 27 percent.

 .  Increased public finance and municipal underwriting volume by nearly $500
   million, a 33 percent increase.

First Bank System, Inc.

                                                                              17

<PAGE>
 

                     MANAGEMENT'S DISCUSSION AND ANALYSIS



OVERVIEW

SUMMARY OF 1996 RESULTS First Bank System, Inc. (the "Company") earned a record
$740 million for the year 1996, up 30 percent from 1995 net income of $568
million. On a per fully diluted share basis, net income was $5.25 compared with
$4.11 in 1995, an increase of 28 percent. Return on average assets and return on
average common equity were 2.09 percent and 23.8 percent, compared with returns
of 1.73 percent and 21.3 percent in 1995.

     Several nonrecurring items affected operating results for 1996. The impact
of these items was $72.1 million ($138.0 million on a pre-tax basis), or $.53
per share. Nonrecurring gains were: $190 million, net of expenses, received for
the termination of the First Interstate Bancorp ("First Interstate") merger
agreement; a $65 million refund of state income taxes, including interest; $45.8
million in gain on the sale of the Company's mortgage banking operations; and,
$15 million in net securities gains. Nonrecurring charges included: $31.3
million in merger and integration charges associated with the acquisitions of
FirsTier Financial, Inc. ("FirsTier") and the corporate trust business of
BankAmerica Corporation ("BankAmerica"); $38.6 million in branch distribution
resizing expenses; a $29.5 million valuation adjustment of cardholder and core
deposit intangibles; $10.1 million for a one-time employee bonus; $17.3 million
to acquire software and write-off other miscellaneous assets; and, a $51 million
one-time special assessment by the Federal Deposit Insurance Corporation
("FDIC") on deposits insured by the Savings Association Insurance Fund ("SAIF").

     Operating earnings (net income excluding nonrecurring items) for 1996 were
$667.7 million, an increase of $99.6 million (18 percent) from 1995. On a per
fully diluted share basis, operating earnings were $4.74 in 1996, compared with
$4.11 in 1995. Return on average assets and return on average common equity,
excluding nonrecurring items, were 1.88 percent and 21.4 percent, compared with
returns of 1.73 percent and 21.3 percent in 1995. Excluding nonrecurring items,
the efficiency ratio (the ratio of expenses to revenues) improved to 49.9
percent in 1996 from 53.3 percent in 1995.

     The strong 1996 results reflect growth in net interest and noninterest
income, controlled operating expenses, and effective capital management. Net
interest income on a taxable-equivalent basis was $1.6 billion, an increase of
$100 million (7 percent) from 1995. Noninterest income increased $117.8 million
(16 percent) from 1995, excluding nonrecurring items, primarily as a result of
growth in credit card, trust fees and service charges on deposit accounts.
Excluding nonrecurring items, 1996 noninterest expense increased $35.4 million
(3 percent) compared with 1995 primarily because of acquisitions. Compared with
noninterest expense for 1995, adjusted for acquisitions and divestitures,
noninterest expense declined $101 million (8 percent) in 1996.

     Credit quality remained strong during 1996. Nonperforming assets totaled
$137.7 million at December 31, 1996, down $16 million (10 percent) from December
31, 1995. The ratio of allowance for credit losses to nonperforming loans
increased to 429 percent from 401 percent at December 31, 1995. See "Corporate
Risk Profile" for additional information.

ACQUISITION AND DIVESTITURE ACTIVITY On February 16, 1996, the Company completed
its acquisition of Omaha-based FirsTier for $717 million. Under the terms of the
purchase agreement, the Company exchanged .8829 shares of its common stock for
each common share of FirsTier, or a total of 16.5 million shares. FirsTier had
$3.7 billion in assets, $2.9 billion in deposits, and 63 offices in Nebraska and
Iowa. As a purchase transaction, the results of operations of FirsTier are
included in the Company's results from the date of acquisition.

     During the fourth quarter of 1995 and first quarter of 1996 the Company
acquired the corporate trust business of BankAmerica. After the acquisition, the
Company became one of the nation's leading providers of domestic corporate trust
services.

     During 1996 the Company sold its residential mortgage servicing and loan
production business to three parties. Bank of America fsb, a subsidiary of
BankAmerica, purchased approximately $14 billion in mortgage servicing rights.
Columbia National, Inc., of Maryland, and Knutson Mortgage Co., of Minnesota,
agreed to purchase the Company's loan production business. The Company will now
deliver mortgage loan products through bank branches and telemarketing. These
transactions resulted in a net gain of $45.8 million.

     On January 31, 1997, the Company completed its acquisition of the bond
indenture services and paying agency business of Comerica Incorporated. This
business serves approximately 860 municipal and corporate clients with about
2,400 bond issues.

     On January 24, 1996, First Interstate announced that it had terminated a
merger agreement with the Company and entered into a definitive agreement with
Wells Fargo & Company. Under the terms of a settlement agreement, the Company
received $125 million on January 24, 1996, and an additional $75 million paid
upon consummation of the merger of First Interstate and Wells Fargo & Company on
April 1, 1996.

     Refer to Note C for additional information regarding acquisitions and
divestitures.

18                                                      First Bank System, Inc.

<PAGE>
 
TABLE 1  SELECTED FINANCIAL DATA


<TABLE> 
<CAPTION> 
(Dollars in Millions, Except Per Share Data)                                 1996            1995       1994       1993       1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>             <C>        <C>        <C>        <C>
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)........................   $1,553.6        $1,454.0   $1,434.5   $1,355.9   $1,175.7
Provision for credit losses...........................................      136.0           115.0      123.6      133.1      191.7
                                                                         ----------------------------------------------------------
  Net interest income after provision for credit losses...............    1,417.6         1,339.0    1,310.9    1,222.8      984.0
Securities gains (losses).............................................       15.0              --     (115.0)        .3       46.3
Other nonrecurring gains..............................................      300.8            31.0         --         --         --
Other noninterest income..............................................      869.9           752.1      673.9      618.6      567.4
Merger-related charges*...............................................       69.9              --      125.3       72.2      110.4
Other nonrecurring charges............................................      107.9            31.0         --         --         --
Other noninterest expense.............................................    1,210.3         1,174.9    1,224.1    1,192.5    1,135.9
                                                                         ----------------------------------------------------------
  Income from continuing operations before
   income taxes and cumulative effect of changes
   in accounting principles...........................................    1,215.2           916.2      520.4      577.0      351.4
Taxable-equivalent adjustment.........................................       20.6            13.8       15.1       17.7       22.7
Income taxes..........................................................      454.8           334.3      191.8      198.6      115.7
                                                                         ---------------------------------------------------------- 

  Income from continuing operations before cumulative
   effect of changes in accounting principles.........................      739.8           568.1      313.5      360.7      213.0
Income (loss) from discontinued operations............................         --              --       (8.5)       2.5        2.7
                                                                         ----------------------------------------------------------
  Income before cumulative effect of changes
   in accounting principles...........................................      739.8           568.1      305.0      363.2      215.7
Cumulative effect of changes in accounting principles.................         --              --         --         --      233.2
                                                                         ----------------------------------------------------------
  Net income..........................................................   $  739.8        $  568.1   $  305.0   $  363.2   $  448.9
                                                                         ----------------------------------------------------------
Return on average assets..............................................       2.09%           1.73%       .91%      1.13%      1.56%
Return on average assets before merger-related
 and nonrecurring items and cumulative effect of
 changes in accounting principles.....................................       1.88            1.73       1.35       1.27        .89
Return on average common equity.......................................       23.8            21.3       11.2       13.9       20.0
Return on average common equity before merger-related
 and nonrecurring items and cumulative effect of
 changes in accounting principles.....................................       21.4            21.3       17.0       15.8       10.8
Net interest margin...................................................       4.89            4.91       4.74       4.69       4.54
Efficiency ratio......................................................       51.0            53.9       64.0       64.1       71.5
Efficiency ratio before merger-related and
 nonrecurring items...................................................       49.9            53.3       58.1       60.4       65.2

PER COMMON SHARE:
Primary income from continuing operations
 before cumulative effect of changes in
 accounting principles................................................   $   5.34        $   4.19   $   2.21   $   2.46   $   1.46
  Income (loss) from discontinued operations..........................         --              --       (.06)       .02        .02
  Cumulative effect of changes in accounting principles...............         --              --         --         --       1.87
                                                                         ----------------------------------------------------------
Primary net income....................................................   $   5.34        $   4.19   $   2.15   $   2.48   $   3.35
                                                                         ----------------------------------------------------------
Fully diluted income from continuing operations
 before cumulative effect of changes in
 accounting principles................................................   $   5.25        $   4.11   $   2.20   $   2.45   $   1.45
  Income (loss) from discontinued operations..........................         --              --       (.06)       .02        .02
  Cumulative effect of changes in accounting principles...............         --              --         --         --       1.79
                                                                         ----------------------------------------------------------
Fully diluted net income..............................................   $   5.25        $   4.11   $   2.14   $   2.47   $   3.26
                                                                         ----------------------------------------------------------
Dividends paid**......................................................   $   1.65        $   1.45   $   1.16   $   1.00   $    .88

AVERAGE BALANCE SHEET DATA:
Loans.................................................................   $ 26,806        $ 25,383   $ 23,863   $ 21,808   $ 19,108
Earning assets........................................................     31,754          29,603     30,265     28,907     25,899
Assets................................................................     35,477          32,886     33,545     32,191     28,837
Deposits..............................................................     23,443          22,708     24,661     25,637     22,953
Long-term debt........................................................      3,393           2,963      2,609      1,633      1,453
Common equity.........................................................      3,085           2,634      2,603      2,409      2,090
Total shareholders' equity............................................      3,175           2,739      2,746      2,769      2,495

YEAR-END BALANCE SHEET DATA:
Loans.................................................................   $ 27,128        $ 26,400   $ 24,556   $ 23,497   $ 20,692
Assets................................................................     36,489          33,874     34,128     33,370     32,758
Deposits..............................................................     24,379          22,514     24,256     26,386     26,395
Long-term debt........................................................      3,553           3,201      2,981      2,070      1,151
Common equity.........................................................      3,053           2,622      2,494      2,466      2,354
Total shareholders' equity............................................      3,053           2,725      2,612      2,744      2,745
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

 *Includes $26.4 relating to ORE in 1992, and $56.5 relating to severance in 
  1994.

**Dividends per share have not been restated for the Metropolitan Federal
  Corporation ("MFC") or Colorado National Bankshares, Inc. ("CNB") mergers. MFC
  paid common dividends of $25.1 million in 1994 ($.80 per share), $12.1 million
  in 1993 ($.39 per share) and $7.7 million in 1992 ($.27 per share). CNB paid
  common dividends of $3.2 million in 1992 ($.28 per share).

First Bank Systems, Inc.                                                      19

<PAGE>
 
TABLE 2  LINE OF BUSINESS FINANCIAL PERFORMANCE
  

<TABLE> 
<CAPTION> 
                                              Retail                          Payment                  Business Banking and
                                              Banking                         Systems               Private Financial Services
                                 ---------------------------------------------------------------------------------------------------
                                                          Percent                   Percent                      Percent
(Dollars in Millions)                   1996       1995    Change    1996     1995   Change    1996       1995   Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>     <C>       <C>        <C>      <C>    <C>    <C>              <C>         <C>    
CONDENSED INCOME STATEMENT:                                                                           
Net interest income                                                                                   
  (taxable-equivalent                                                                                 
   basis).........................  $  758.6    $ 712.1      6.5%  $146.5   $155.8     (6.0)%  $394.1   $330.0     19.4% 
Provision for credit losses.......      20.2       19.5      3.6     92.0     74.8     23.0      13.4     11.0     21.8  
Noninterest income................     161.4      141.1     14.4    330.3    266.9     23.8     116.8     95.2     22.7  
Noninterest expense...............     569.6      541.4      5.2    208.9    193.0      8.2     199.8    182.7      9.4  
Income taxes and taxable-                                                                                               
  equivalent adjustment...........     125.5      111.1              66.8     58.9              113.1     87.9           
Income before nonrecurring          --------------------           ----------------           -----------------          -----------
 items............................  $  204.7    $ 181.2     13.0   $109.1   $ 96.0     13.6    $184.6   $143.6     28.6  
                                    --------------------           ----------------           -----------------          -----------

Net nonrecurring items                                                                                                  
 (after-tax)......................                                                                                      
   Net income.....................                                                                                      
                                                                                                      
AVERAGE BALANCE SHEET DATA:                                                                                             
Commercial loans..................  $    442    $   358     23.5   $1,148   $  807     42.3    $6,695   $5,472     22.4  
Consumer loans,                                                                                                         
  excluding residential                                                                                                 
   mortgage.......................     6,441      5,849     10.1    2,654    2,341     13.4       463      405     14.3  
Residential mortgage loans........     3,323      4,815    (31.0)      --       --       --       124       91     36.3  
Assets............................    13,151     13,932     (5.6)   4,632    3,854     20.2     9,615    7,837     22.7  
Deposits..........................    16,993     16,839       .9       40       40       --     3,638    3,139     15.9  
Common equity.....................     1,039      1,002      3.7      427      351     21.7       841      608     38.3 
                                    --------------------           ----------------           -----------------          -----------
Return on average assets..........      1.56%      1.30%             2.36%    2.49%              1.92%    1.83%          
Return on average common                                                                                                
 equity ("ROCE")..................      19.7       18.1              25.6     27.4               22.0     23.6  
Net tangible ROCE**...............      36.2       26.0              43.4     47.8               35.5     32.3          
Efficiency ratio..................      61.9       63.5              43.8     45.7               39.1     43.0          
Efficiency ratio on a cash                                                                                              
 basis**..........................      59.2       61.4              41.8     43.2               36.9     41.9           
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

 *Not meaningful.
**Calculated by excluding goodwill and other intangibles and the related
  amortization.
  Note:The Company's mortgage banking operations, which were sold in first
  quarter 1996, and nonrecurring items are included in "Other."

LINE OF BUSINESS FINANCIAL REVIEW

Financial performance is measured by major lines of business, which include:
Retail Banking, Payment Systems, Business Banking and Private Financial
Services, Commercial Banking, and Corporate Trust and Institutional Financial
Services. Business line results are derived from the Company's business unit
profitability reporting system. Designations, assignments, and allocations may
change from time to time as management accounting systems are enhanced or
product lines change. During 1996 certain organization and methodology changes
were made and 1995 results are presented on a consistent basis.

RETAIL BANKING Retail Banking delivers products and services to the broad
consumer market and small-business through branch offices, telemarketing, direct
mail, and automated teller machines ("ATMs"). Net income was $204.7 million in
1996 compared with $181.2 million in 1995. Return on average assets increased to
1.56 percent from 1.30 percent in 1995. Net tangible return on average common
equity increased to 36.2 percent from 26.0 percent in the previous year.

     The increase in net interest income resulted from growth in core commercial
and nonmortgage consumer loans and the February 1996 acquisition of FirsTier.
Noninterest income and expense were higher in 1996 compared with 1995,
reflecting the impact of acquisitions. The efficiency ratio on a cash basis
improved to 59.2 percent in 1996 from 61.4 percent a year ago.

PAYMENT SYSTEMS Payment Systems includes consumer and business credit cards,
corporate and purchasing card services, card-accessed secured and unsecured
lines of credit, ATM processing, and merchant processing. Net income increased
14 percent in 1996 to $109.1 million compared with $96.0 million in 1995. Return
on average assets was 2.36 percent, compared with 2.49 percent in 1995, and net
tangible return on average common equity was 43.4 percent compared with 47.8
percent in 1995.

                                                        First Bank Systems, Inc.
20                                                      

<PAGE>
 

<TABLE> 
<CAPTION> 
                                                           Corporate Trust and                       
                        Commercial                       Institutional Financial                             Consolidated
                         Banking                                Services                 Other                 Company
- ------------------------------------------------------------------------------------------------------------------------------------
                                        Percent                            Percent                                        Percent
                   1996         1995     Change      1996            1995   Change    1996   1995        1996        1995  Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S>              <C>          <C>       <C>        <C>             <C>      <C>      <C>    <C>      <C>         <C>          <C>   

                 $209.2       $216.1      (3.2)%   $ 39.4          $ 26.3     49.8%  $ 5.8  $13.7    $1,553.6    $1,454.0      6.9%
                   10.4          9.7       7.2         --              --       --      --    (.1)      136.0       115.0     18.3
                   59.8         60.3       (.8)     196.9           140.6     40.0     4.7   48.0       869.9       752.1     15.7
                   79.9         88.3      (9.5)     142.7           109.4     30.4     9.4   60.1     1,210.3     1,174.9      3.0
                                                                                                                
                   68.0         67.8                 35.6            21.8               .5     .6       409.5       348.1
- -------------------------------------            ------------------------            -------------------------------------  
                 $110.7       $110.6        .1     $ 58.0          $ 35.7     62.5      .6    1.1       667.7       568.1     17.5
- -------------------------------------            ------------------------            
                                                                                      72.1     --        72.1          --        *
                                                                                     -------------------------------------   
                                                                                     $72.7  $  1.1     $739. 8     $568.1     30.2
                                                                                     -------------------------------------

                 $5,438       $4,978       9.2     $   --          $   --     $ --   $  --  $   4    $ 13,723    $ 11,619     18.1
                                                                                                                
                   --             --        --         --              --       --      --     --       9,558       8,595     11.2
                   --             --        --         --              --       --      78    263       3,525       5,169    (31.8)
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                  6,752        6,095      10.8      1,165             709     64.3     162    459      35,477      32,886      7.9
                  1,569        1,620      (3.1)     1,040             788     32.0     163    282      23,443      22,708      3.2
                    473          427      10.8        289             179     61.5      16     67       3,085       2,634     17.1
- -------------------------------------            ------------------------            -------------------------------------  
                *  1.64%        1.81%                   *               *                                1.88%       1.73%
                   23.4         25.9                 20.1%           19.9%                               21.4        21.3
                   24.4         27.2                 36.6            28.8                                35.2        30.7 
                   29.7         31.9                 60.4            65.5                                49.9        53.3 
                   29.3         31.6                 52.5            60.3                                46.8        50.7
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>



     Fee-based noninterest income increased approximately 24 percent in 1996
compared with 1995. The increases were due to growth in the sales volume of the
Corporate Card, the Purchasing Card, the First Bank WorldPerks(R) VISA(R) card,
and the expansion of the ATM network. Net interest income decreased slightly due
to a change in the loan mix. Average commercial loans, which are primarily
noninterest-earning Corporate and Purchasing Card balances, comprised
approximately 30 percent of the portfolio in 1996, compared with approximately
26 percent in 1995. Noninterest expense increased 8 percent reflecting an
increase in sales volume. The efficiency ratio on a cash basis improved to 41.8
percent from 43.2 percent in 1995.

BUSINESS BANKING AND PRIVATE FINANCIAL SERVICES

Business Banking and Private Financial Services includes middle-market banking
services, private banking, and personal trust. Net income increased 29 percent
to $184.6 million compared with 1995. Return on average assets was 1.92 percent
compared with 1.83 percent in 1995, and net tangible return on average common
equity was 35.5 percent compared with 32.3 percent in 1995.

     Net interest income increased 19 percent, reflecting 22 percent growth in
average loan balances including acquisitions. The 23 percent increase in
noninterest income in 1996 compared with 1995 resulted from acquisitions and a
more effective approach to charging for private financial services. Noninterest
expense increased in 1996 compared with 1995 reflecting the impact of
acquisitions. The efficiency ratio on a cash basis improved to 36.9 percent in
1996 from 41.9 percent in 1995.

COMMERCIAL BANKING Commercial Banking provides lending, treasury management, and
other financial services to middle-market, large corporate and mortgage banking
companies. Net income was $110.7 million, essentially unchanged from 1995.
Return on average assets was 1.64 percent compared with 1.81 percent in 1995,
and net tangible return on average common equity was 24.4 percent compared with
27.2 percent in 1995.

First Bank System, Inc.                                                     21

<PAGE>
 
     Although average loans increased $460 million (9 percent) from 1995, net
interest income was lower primarily reflecting the impact of lending to the
cyclical mortgage banking sector. Noninterest income remained relatively flat in
1996 compared with 1995. The decrease in noninterest expense reflected the
benefits of increased operational efficiencies. The efficiency ratio on a cash
basis improved to 29.3 percent compared to 31.6 percent in 1995.

CORPORATE TRUST AND INSTITUTIONAL FINANCIAL SERVICES 
Corporate Trust and Institutional Financial Services includes institutional and
corporate trust services, investment management services, and a full-service
brokerage company. Net income increased 63 percent to $58.0 million compared
with the prior year. The net tangible return on average common equity was 36.6
percent in 1996, compared with 28.8 percent in 1995.

     Corporate Trust net income increased over 1995 primarily due to the
Company's strategy to grow its fee-based businesses including the full year
impact of the BankAmerica Corporate Trust business acquisition. Institutional
Financial Services net income increased reflecting growth in mutual fund
balances due to successful marketing promotions and the acquisition of FirsTier.
The efficiency ratio on a cash basis improved to 52.5 percent from 60.3 percent
in 1995, reflecting the effective integration of acquisitions, process re-
engineering efforts, and revenue growth.

STATEMENT OF INCOME ANALYSIS


NET INTEREST INCOME Net interest income on a taxable-equivalent basis was $1.55
billion in 1996 compared with $1.45 billion in 1995 and $1.43 billion in 1994.
The 1996 increase as compared with 1995 was attributable primarily to growth in
average loans. During 1996, $1.3 billion of residential mortgage loans were
securitized and reclassified to available-for-sale securities to enhance
liquidity and financial management flexibility. Excluding residential mortgage
loan balances, 1996 average loans were higher by approximately $3.1 billion than
1995, reflecting growth in core commercial and consumer loans, as well as the
February 1996 acquisition of FirsTier. Average securities were higher than 1995,
reflecting the transfer of securitized mortgage loan balances and the addition
of securities acquired with FirsTier, partially offset by maturities and sales.

     Partially offsetting the impact of higher average loan balances was the
effect of a lower average yield on loans. The average yield on loans for 1996
was 8.75 percent, or 24 basis points lower than 8.99 percent in 1995 due to
declining interest rates over the past year. The improvement in net interest
income also reflected a decrease of 16 basis points on rates paid on interest-
bearing liabilities.

     The improvement in net interest income from 1994 to 1995 reflected an
increase in the average yield on earning asset balances due to increases in
market interest rates during 1994 and the first quarter of 1995 and a shift in
the mix from securities and residential mortgage-related balances to other
higher yielding commercial and consumer loan balances. Solid loan growth
occurred in both nonmortgage consumer and commercial loans, offset primarily by
a decrease in the balance of residential mortgage loans. Excluding these
residential mortgage loan balances, average loans for the year increased by $2.5
billion from 1994, as demand for small business and middle-market loans, credit
cards, home equity, and other consumer loans remained strong.

 
TABLE 3  ANALYSIS OF NET INTEREST INCOME


<TABLE> 
<CAPTION> 
(Dollars in Millions)                                                              1996             1995              1994      
- --------------------------------------------------------------------------------------------------------------------------------- 
<S>                                                                            <C>                <C>                <C>          
Net interest income (taxable-equivalent basis)......................           $1,553.6           $1,454.0           $1,434.5     
                                                                          ------------------------------------------------------- 
Average balances of earning assets supported by:                                                                                  
 Interest-bearing liabilities.......................................           $ 24,677            $23,527            $23,618     
 Noninterest-bearing liabilities....................................              7,077              6,076              6,647     
                                                                          ------------------------------------------------------- 
  Total earning assets..............................................           $ 31,754            $29,603            $30,265     
                                                                          ------------------------------------------------------- 
                                                                                                                                  
Average yields and weighted average rates (taxable-equivalent basis):                                                              
 Earning assets yield...............................................               8.42%              8.64%              7.61%    
 Rate paid on interest-bearing liabilities..........................               4.54               4.70               3.68     
                                                                          ------------------------------------------------------- 
Gross interest margin...............................................               3.88%              3.94%              3.93%    
                                                                          ------------------------------------------------------- 
Net interest margin.................................................               4.89%              4.91%              4.74%    
                                                                          ------------------------------------------------------- 
Net interest margin without taxable-equivalent increments...........               4.83%              4.87%              4.69%    
- --------------------------------------------------------------------------------------------------------------------------------- 
</TABLE>
 
 
22                                                       First Bank System, Inc.

<PAGE>
 
TABLE 4  CHANGES IN RATE AND VOLUME


<TABLE> 
<CAPTION> 
                                                       1996 Compared with 1995             1995 Compared with 1994
(In Millions)                                    Volume     Yield/Rate       Total     Volume       Yield/Rate     Total
- ----------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>        <C>               <C>       <C>         <C>            <C>    
Increase (decrease) in:
 Interest income:
   Loans..................................        $  125.6       $ (60.5)     $  65.1   $  127.6        $  230.0    $  357.6
   Taxable securities.....................             7.9           7.5         15.4     (131.7)           29.9      (101.8)
   Nontaxable securities..................            25.8          (3.8)        22.0        (.5)            (.6)       (1.1)
   Federal funds sold and                       
    resale agreements.....................            11.9          (1.6)        10.3       (6.0)            5.7         (.3)
  Other...................................             5.0          (2.3)         2.7         --             1.4         1.4
                                                ----------------------------------------------------------------------------
    Total.................................           176.2         (60.7)       115.5      (10.6)          266.4       255.8
Interest expense:                               
  Savings deposits and time                     
    deposits less than $100,000...........             2.1         (18.7)       (16.6)     (29.0)          146.2       117.2
  Time deposits over $100,000.............           (12.5)         (4.5)       (17.0)     (19.9)           12.1        (7.8)
  Short-term borrowings...................            48.2         (13.7)        34.5       41.8            43.0        84.8
  Long-term debt..........................            26.3         (13.6)        12.7       21.4            20.7        42.1
  Company-obligated mandatorily                 
    redeemable capital securities               
    of FBS Capital I......................             2.3            --          2.3         --              --          --
                                                 ---------------------------------------------------------------------------
Total.....................................            66.4         (50.5)        15.9       14.3           222.0       236.3
                                                 ---------------------------------------------------------------------------
Increase (decrease) in net                      
interest income...........................        $  109.8       $ (10.2)     $  99.6   $  (24.9)       $   44.4    $   19.5
- ----------------------------------------------------------------------------------------------------------------------------
</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.


     Partially offsetting the 1995 increase in the average yield on earning
assets was an increase in the average rate paid on interest-bearing liabilities
as a result of increases in deposit rates and, to a lesser extent, a shift in
mix from deposits to borrowings in 1995 as compared to 1994. Average interest-
bearing deposits decreased reflecting the 1995 divestiture of $848 million of
deposits and consumers moving funds into alternative investment vehicles.

     The net interest margin, on a taxable-equivalent basis, was 4.89 percent in
1996, essentially unchanged from 4.91 percent in 1995. The net interest margin
was 4.74 percent in 1994. The improvement in the net interest margin in 1995
over 1994 resulted from a shift in the mix of earning assets from securities and
lower-margin mortgage-related loans to higher yield consumer and commercial
loans.

PROVISION FOR CREDIT LOSSES The provision for credit losses was $136.0 million
in 1996, up $21.0 million from the provision of $115.0 million in 1995 and $12.4
million from the provision of $123.6 million in 1994. Net charge-offs increased
to $152.8 million in 1996 from $121.0 million in 1995 and 140.3 million in 1994.
These increases resulted from increased loan volumes, higher credit card net
charge-offs, and lower commercial loan net recoveries. The 1994 provision for
credit losses included a $16.5 million merger-related provision to provide for
the Company's plans and policies with respect to MFC's commercial and consumer
loan portfolios. Refer to "Corporate Risk Profile" for further information on
credit quality.

First Bank System, Inc.                                                     23

<PAGE>
 
TABLE 5  NONINTEREST INCOME

(Dollars in Millions)                              1996       1995       1994
- ------------------------------------------------------------------------------

Credit card fees.............................  $  292.6     $232.7    $ 179.0
Trust fees...................................     230.7      175.3      159.2
Services charges on deposit accounts.........     141.5      123.7      127.3
Investment products fees and commissions.....      33.4       27.6       29.6
Trading account profits and commissions......      13.0       11.1        9.3
Other........................................     158.7      181.7      169.5
                                               ------------------------------
 Subtotal....................................     869.9      752.1      673.9

Termination fee, net.........................     190.0         --         --
State income tax refund......................      65.0         --         --
Gain on sale of mortgage banking operations..      45.8         --         --
Gain on sale of branches.....................        --       31.0         --
Securities gains (losses)....................      15.0         --     (115.0)
                                               ------------------------------
 Nonrecurring gains (losses).................     315.8       31.0     (115.0)
                                               ------------------------------
  Total noninterest income...................  $1,185.7     $783.1    $ 558.9
- -----------------------------------------------------------------------------

NONINTEREST INCOME Noninterest income was $1.19 billion in 1996, compared with
$783.1 million in 1995, an increase of $402.6 million (51 percent). Noninterest
income was $558.9 million in 1994. Nonrecurring gains included in noninterest
income in 1996 totaled $315.8 million, including a $190 million termination fee
received from the First Interstate transaction, net of $10 million in costs; a
$65 million state tax refund, including interest; a $45.8 million gain on the
sale of the Company's mortgage banking operations; and, $15 million in net
securities gains. Noninterest income in 1995 included a $31 million nonrecurring
gain on the sale of 63 branches. Included in 1994 noninterest income was a
$115.0 million nonrecurring loss primarily related to securities sold in January
1995 as a result of MFC's actions to reduce interest rate risk consistent with
prior regulatory requests and to align more closely the interest rate risk
profile of MFC with that of the Company.

     Excluding nonrecurring items, noninterest income in 1996 was $869.9
million, a $117.8 million (16 percent) increase from 1995. Noninterest income in
1995, excluding nonrecurring items, increased $78.2 million (12 percent) from
1994. The improvements resulted primarily from continued growth in credit card
and trust fees. Credit card fees increased due to higher sales volumes for
Corporate and Purchasing Cards and the First Bank WorldPerks VISA card. Trust
fees were up primarily on growth attributable to the Company's corporate trust
acquisition strategy, including the acquisitions of the BankAmerica corporate
trust business and FirsTier completed in 1996, and core growth in personal and
institutional trust fees. Service charges on deposit accounts increased over
1995 primarily as a result of increased demand deposits and the acquisition of
FirsTier. Other noninterest income decreased in 1996 as compared to 1995,
reflecting the impact of the sale of the Company's mortgage banking operations,
and increased in 1995 as compared to 1994, due to increased ATM network
transaction volume.
 
                                                         First Bank System, Inc.
24                                                       

<PAGE>
 
TABLE 6  NONINTEREST EXPENSE


<TABLE> 
<CAPTION> 
(Dollars in Millions, Except Per Employee Data)                            1996            1995             1994
- -----------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>              <C>  
Salaries**............................................................ $  456.4        $  441.0         $  450.7
Employee benefits**...................................................    104.1            96.4            105.7
                                                                       -----------------------------------------
 Total personnel expense..............................................    560.5           537.4            556.4
Goodwill and other intangible assets**................................     77.0            57.1             50.4
Net occupancy.........................................................     98.5            98.6            103.8
Furniture and equipment...............................................     89.0            94.2             88.3
Other personnel costs.................................................     55.8            40.9             35.7
Professional services**...............................................     39.9            36.9             38.5
Advertising and marketing.............................................     35.4            32.0             35.5
Telephone.............................................................     27.3            25.1             25.9
Printing, stationery and supplies.....................................     23.4            22.4             23.0
Postage...............................................................     22.8            22.5             23.0
Third party data processing...........................................     21.8            17.8             20.3
FDIC insurance........................................................     11.4            35.8             58.4
Other**...............................................................    147.5           154.2            164.9
                                                                        -----------------------------------------
 Subtotal.............................................................  1,210.3         1,174.9          1,224.1
SAIF special assessment...............................................     51.0              --               --
Merger-related........................................................     31.3              --            125.3
Branch distribution resizing..........................................     38.6              --               --
Goodwill and other intangible assets valuation adjustment.............     29.5              --               --
Special employee bonus................................................     10.1              --               --
Other.................................................................     17.3            31.0               --
                                                                        -----------------------------------------
 Nonrecurring charges.................................................    177.8            31.0            125.3
                                                                        -----------------------------------------
  Total noninterest expense........................................... $1,388.1        $1,205.9         $1,349.4
                                                                        -----------------------------------------
Efficiency ratio*.....................................................     51.0%           53.9%            64.0%
Efficiency ratio before merger-related items and nonrecurring items...     49.9            53.3             58.1
Average number of full-time equivalent employees......................   12,976          13,231           14,725
Personnel expense per employee**...................................... $ 43,195        $ 40,617         $ 37,786
- -----------------------------------------------------------------------------------------------------------------
</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.
**Before effect of nonrecurring items.


NONINTEREST EXPENSE Noninterest expense was $1.39 billion in 1996, compared with
$1.21 billion in 1995, an increase of $182.2 million (15 percent), and $1.35
billion in 1994. Nonrecurring charges in 1996 totaled $177.8 million, including
merger and integration charges of $31.3 million for the acquisitions of FirsTier
and the BankAmerica corporate trust business and $38.6 million in branch
distribution resizing expenses; a $29.5 million valuation adjustment to reduce
the carrying value of credit card and core deposit intangibles to estimated fair
value; $10.1 million for a one-time $750 per-employee bonus to thank employees
for staying focused on customers and shareholder value during the bid for First
Interstate; $17.3 million to acquire credit card and revolving credit software
and to write-off other miscellaneous assets; and, a $51 million one-time special
assessment by the FDIC on SAIF deposits. Nonrecurring charges in 1995 included
the write-off of $23 million of unamortized software costs related to a change
in the Company's policy to expense software costs and an $8 million write-off of
other miscellaneous assets. Nonrecurring charges included in noninterest expense
in 1994 were merger and integration charges of $66.2 million and merger-related
severance charges of $56.5 million related to the MFC transaction. Refer to Note
K for further information on merger, integration and resizing charges.

First Bank System, Inc.                                                      25

<PAGE>
 
     On a pro forma basis (adjusting for purchase acquisitions, divested
businesses and nonrecurring items), noninterest expense in 1996 declined $101.4
million (8 percent) compared with 1995, and 1995 decreased $80.9 million (6
percent) compared with 1994. These reductions were achieved as a result of
effective acquisition integration and ongoing expense control. Excluding
nonrecurring items, the Company's efficiency ratio improved to 49.9 percent in
1996 from 53.3 percent in 1995 and 58.1 percent in 1994. The Company's
efficiency ratio ranks second among its peer group. The keys to this high
productivity are a tight cost control culture throughout the organization and
the successful integration of acquisitions. Each acquisition has been integrated
at a progressively faster pace, enabling substantial cost reductions.

     Total salaries and benefits, excluding nonrecurring charges, increased
$23.1 million (4 percent) to $560.5 million in 1996 compared with 1995,
reflecting recent acquisitions. Average full-time equivalent employees decreased
2 percent to 12,976 in 1996 from 13,231 in 1995. Salaries and employee benefits
expenses in 1995 were $537.4 million, down from 1994's total of $556.4 million,
reflecting a decrease in full-time equivalent employees.

     Amortization of goodwill and other intangible assets, excluding the
valuation adjustment discussed above, was $77.0 million in 1996, $57.1 million
in 1995, and $50.4 million in 1994. The increases were primarily attributable to
the additional goodwill and intangible assets resulting from the corporate trust
business and bank acquisitions in 1994 through 1996.

     The increase in other personnel expense for 1996 compared with 1995 related
to several technology projects currently in process. 

     FDIC insurance premiums were $11.4 million in 1996, $35.8 million in 1995,
and $58.4 million in 1994. The current year decrease from 1995 resulted from the
FDIC suspending the assessment of premiums on deposits covered by the Bank
Insuarance Fund ("BIF") effective January 1, 1996 and the receipt of a $2.6
million SAIF premium rebate. The decrease in 1995 from 1994 was due to a
reduction in the FDIC's assessment rate on BIF insured deposits from $.23 to
$.04 per $100, retroactive to June 1, 1995. In addition to the one-time special
assessment discussed above, starting in 1997 BIF-insured institutions are
required to assist in paying interest on the Financing Corp. ("FICO") bonds,
which financed the resolution of the thrift industry series. The FICO assessment
is approximately 1.3 basis points on BIF-insured deposits and 6.5 basis points
on SAIF-insured deposits. The first quarter 1997 FICO assessment is
approximately $1.4 million.

INCOME TAX EXPENSE The provision for income taxes was $454.8 million in 1996
compared with $334.3 million in 1995 and $191.8 million in 1994. The increases
in 1996 and 1995 were primarily due to an increasing level of taxable income.

     At December 31, 1996, the Company's net deferred tax asset was essentially
unchanged at $216.2 million, compared with a net deferred tax asset of $216.3
million at December 31, 1995. 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 M.

DISCONTINUED OPERATIONS Because of regulatory restrictions on nonbanking
activities, the Company sold Edina Realty, Inc. ("Edina"), its real estate
brokerage subsidiary, on December 8, 1995. Edina's operations were reported in
the Consolidated Statement of Income as discontinued operations, with income and
expenses excluded from captions applicable to continuing operations. Edina's
assets, liabilities, and cash flows were not material to the Company's financial
statements. Edina's 1994 results included a $12.5 million accrual for the
settlement of two class action lawsuits against Edina, which was paid in 1995.

                                                         First Bank System, Inc.
26                                                       

<PAGE>
 
TABLE 7  LOAN PORTFOLIO DISTRIBUTION


<TABLE> 
<CAPTION> 
                                            1996                    1995                1994    
- ------------------------------------------------------------------------------------------------------      
                                                Percent                 Percent              Percent  
At December 31 (Dollars in Millions)    Amount  of Total        Amount  of Total    Amount  of Total  
- ------------------------------------------------------------------------------------------------------ 
<S>                                   <C>       <C>            <C>      <C>        <C>      <C>     
COMMERCIAL:                                                                                           
 Commercial                           $  9,456      34.9%      $ 8,271      31.3%  $ 7,285      29.7% 
 Financial institutions                    905       3.3         1,060       4.0       787       3.2  
 Real estate:                                                                                         
   Commercial mortgage                   3,090      11.4         2,784      10.6     2,454      10.0  
   Construction                            654       2.4           403       1.5       330       1.3  
                                   -----------------------------------------------------------------  
     Total commercial                   14,105      52.0        12,518      47.4    10,856      44.2  

CONSUMER:                                                                                             
 Residential mortgage                    3,019      11.1         4,655      17.6     5,098      20.8  
 Residential mortgage held for sale         42        .2           257       1.0       197        .8  
 Home equity and second mortgage         3,263      12.0         2,805      10.6     2,453      10.0  
 Credit card                             2,858      10.6         2,586       9.8     2,409       9.8  
 Automobile                              1,991       7.3         1,821       6.9     1,770       7.2  
 Revolving credit                          737       2.7           757       2.9       725       2.9  
 Installment                               607       2.2           607       2.3       712       2.9  
 Student*                                  506       1.9           394       1.5       336       1.4  
                                    ----------------------------------------------------------------- 
     Total consumer                     13,023      48.0        13,882      52.6    13,700      55.8  
                                    ----------------------------------------------------------------- 
     Total loans                      $ 27,128     100.0%      $26,400     100.0%  $24,556     100.0% 
- -----------------------------------------------------------------------------------------------------
<CAPTION>  
                                            1993                    1992
- ---------------------------------------------------------------------------------
                                                Percent                 Percent
At December 31 (Dollars in Millions)    Amount  of Total        Amount  of Total
- --------------------------------------------------------------------------------- 
<S>                                    <C>          <C>        <C>          <C> 
COMMERCIAL:                                              
 Commercial                            $ 6,170      26.3%      $ 5,781      27.9%
 Financial institutions                  2,004       8.5         1,132       5.5
 Real estate:                                            
   Commercial mortgage                   2,233       9.5         2,207      10.6
   Construction                            241       1.0           239       1.2
                                     -------------------------------------------- 
     Total commercial                   10,648      45.3         9,359      45.2

CONSUMER:                                                
 Residential mortgage                    5,125      21.8         4,641      22.5
 Residential mortgage held for sale      1,149       4.9           856       4.1
 Home equity and second mortgage         1,932       8.2         1,482       7.2
 Credit card                             1,757       7.5         1,782       8.6
 Automobile                              1,159       4.9         1,050       5.1
 Revolving credit                          695       3.0           605       2.9
 Installment                               772       3.3           671       3.2
 Student*                                  260       1.1           246       1.2
                                     -------------------------------------------- 
     Total consumer                     12,849      54.7        11,333      54.8
                                     -------------------------------------------- 
     Total loans                       $23,497     100.0%      $20,692     100.0%
- ---------------------------------------------------------------------------------
</TABLE>
 

* All or part of the student loan portfolio may be sold when the repayment
  period begins.

BALANCE SHEET ANALYSIS

LOANS The Company's loan portfolio increased $728 million to $27.1 billion at
December 31, 1996, from $26.4 billion at December 31, 1995. Growth in most
commercial and consumer loan categories was partially offset by a decrease in
residential mortgage-related balances. This decrease reflects the securitization
of $1.3 billion of residential mortgage loans, which were reclassified to
available-for-sale securities during 1996. The securitization enhances liquidity
and financial management flexibility. Excluding residential mortgages, total
loans at December 31, 1996 were higher by approximately $2.6 billion than
December 31, 1995, reflecting growth in core commercial and consumer loans as
well as the acquisition of FirsTier. The Company's loan portfolio carries credit
risk, which may ultimately result in loan charge-offs. The Company manages this
risk through stringent, centralized credit policies and review procedures, as
well as diversification along geographic and customer lines. See "Corporate Risk
Profile" for a more detailed discussion of the management of credit risk
including the allowance for credit losses.

COMMERCIAL Commercial loans totaled $9.5 billion at year-end 1996, up $1.2
billion (14 percent), from year-end 1995. Year-end 1995 commercial loans were
$8.3 billion, up $1.0 billion (14 percent), from year-end 1994. The increase in
commercial loans was primarily attributable to acquisitions and growth in core
middle-market business lending.

     At December 31, 1996, the significant industry groups based on commercial
loans outstanding were consumer cyclical products and services (20 percent),
consumer staple product and services (18 percent), and capital goods (15
percent). This diverse mix of industries is similar to 1995 and 1994.

     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, South Dakota, Iowa, Kansas, Nebraska, and Wyoming.

     FINANCIAL INSTITUTIONS The portfolio of loans to financial institutions was
relatively unchanged at $.9 billion at December 31, 1996, compared with $1.1
billion at December 31, 1995. The outstandings fluctuate due to the cyclical
nature of mortgage banking firms' loan volume.

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

First Bank System, Inc.                                                      27

<PAGE>
 
TABLE 8  COMMERCIAL REAL ESTATE EXPOSURE BY PROPERTY TYPE AND GEOGRAPHY


<TABLE> 
<CAPTION> 
                                                                               Percentage of Total
                                                                                  at December 31
                                                                              ---------------------
PROPERTY TYPE                                                                  1996            1995
- ---------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>  
Retail.....................................................................    21.1%           19.0%
Mixed-use office...........................................................    17.4            16.5
Office building............................................................    12.9            13.9
Multi-family...............................................................    11.4            14.7
Hotel/motel................................................................     8.4             7.4
Single-family residential..................................................     5.5             4.2
Land.......................................................................     3.2             2.3
Other, primarily owner-occupied............................................    20.1            22.0
                                                                              ---------------------
                                                                              100.0%          100.0%
- ----------------------------------------------------------------------------------------------------
GEOGRAPHY
- ----------------------------------------------------------------------------------------------------
Minnesota..................................................................    27.8%           29.0%
Colorado...................................................................    15.7            18.2
Iowa, Kansas and Nebraska..................................................    12.9             6.9
Montana, North Dakota, South Dakota and Wyoming............................    12.0            14.3
Wisconsin and Illinois.....................................................    11.4            12.9
                                                                              ---------------------
  Total FBS region.........................................................    79.8            81.3
West.......................................................................     8.9             7.8
Southeast..................................................................     6.1             6.0
Southwest..................................................................     2.2             2.2
Mid-Atlantic...............................................................     1.8              .8
Other Midwest..............................................................     1.2             1.9
                                                                              ---------------------
                                                                              100.0%          100.0%
- ---------------------------------------------------------------------------------------------------
</TABLE>


COMMERCIAL REAL ESTATE The Company's portfolio of commercial real estate
mortgages and construction loans grew to $3.7 billion at December 31, 1996,
compared with $3.2 billion at December 31, 1995, primarily due to acquisitions.

     Commercial mortgages outstanding were $3.1 billion at December 31, 1996,
compared with $2.8 billion at December 31, 1995. Real estate construction loans
outstanding at December 31, 1996, totaled $654 million compared with $403
million from year-end 1995. Table 8 shows the breakdown of these real estate
exposures by property type and geographic location. The Company maintains the
real estate construction designation 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 $33 million of
construction loans were transferred to the commercial mortgage portfolio in
1996.

     At year-end 1996, real estate interests secured $125 million of tax-exempt
industrial development loans and $318 million of standby letters of credit. At
year-end 1995, these exposures totaled $128 million and $319 million,
respectively. The Company's commercial real estate mortgages and construction
loans had combined unfunded commitments of $406 million at December 31, 1996,
and $409 million at December 31, 1995.

     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 $484 million at December 31, 1996, and $356 million at December 31,
1995.
                                                               
                                                         First Bank System, Inc.
28

<PAGE>
 
CONSUMER Total consumer loan outstandings decreased $859 million to $13.0
billion at December 31, 1996, from $13.9 billion at December 31, 1995. Excluding
a $1.85 billion (38 percent) decrease in residential mortgage loans, consumer
loans increased $992 million (11 percent). 

     Residential mortgage outstandings decreased to $3.1 billion at December 31,
1996, reflecting the securitization discussed above.

     Home equity and second mortgages increased $458 million, primarily due to
successful marketing promotions and acquisitions. Credit cards grew $272 million
primarily as a result of higher sales volumes for the First Bank WorldPerks VISA
card.

     Of total consumer balances outstanding, approximately 80 percent are to
customers located in the Company's operating region. See "Corporate Risk
Profile" for a discussion of the general economic conditions within the
Company's operating region.

SECURITIES At December 31, 1996, securities totaled $3.6 billion compared with
$3.3 billion at December 31, 1995, reflecting the securitization discussed above
and the addition of approximately $900 million of FirsTier securities, offset by
maturities and sales. Mortgage-backed securities, as a percentage of the total
securities portfolio, have also increased, reflecting the securitization
discussed above. The relative mix of the remainder of the securities portfolio
has not changed significantly from prior years.

SECURITIES PURCHASED AND SOLD UNDER RESALE AGREEMENTS The daily average
outstanding amount of securities purchased under resale agreements for 1996 was
$451 million compared with $241 million for 1995. The maximum 1996 month-end
outstanding amount was $795 million compared with $380 million for 1995. The
daily average outstanding amount of securities sold under resale agreements for
1996 was $473 million compared with $327 million for 1995. The maximum 1996
month-end outstanding amount was $819 million compared with $440 million in
1995. The Company maintains control of all securities underlying these
agreements.

TABLE 9  AVAILABLE-FOR-SALE SECURITIES PORTFOLIO AVERAGE MATURITY

At December 31, 1996                               Average Contractual Maturity
- --------------------------------------------------------------------------------
U.S. Treasury................................................2 years, 11 months
Other U.S. agencies........................................... 1 year, 5 months
State and political...........................................11 years, 1 month
Other*........................................................5 years, 5 months
 Total........................................................6 years, 5 months
- --------------------------------------------------------------------------------

* Excludes equity securities that 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 include mortgage-backed securities.

First Bank System, Inc.                                                       29

<PAGE>
 
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              
- ---------------------------------------------------------------------------------------------------------------------------      
                                    Amort-                        Amort-                        Amort-                           
At December 31, 1996                tizied      Fair              tizied      Fair              tizied      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...................    $192.1    $192.8    6.77%     $158.2    $157.4    5.49%     $203.1    $194.7     5.51%        
Mortgage-backed*................        --        --      --          --        --      --          --        --       --         
Other U.S. agencies.............      31.5      31.5    5.57         4.5       4.4    5.77         5.5       5.4     5.57         
State and political**...........      10.0      10.0    9.05        67.0      68.0    7.44        73.8      74.0     7.78         
Other...........................       5.7       5.8    6.95         6.1       6.1    7.48         2.2       2.2     6.62         
                                    ---------------------------------------------------------------------------------------      
                                    $239.3    $240.1    6.71%     $235.8    $235.9    6.10%     $284.6    $276.3     6.11%          
- ---------------------------------------------------------------------------------------------------------------------------      
<CAPTION> 
                                                                        Mortgage-Backed                                            
Maturing:                                 Over 10 Years                   Securities                       Total                   
- ---------------------------------------------------------------------------------------------------------------------------
                                    Amort-                         Amort-                         Amort-                  
At December 31, 1996                tizied      Fair               tizied      Fair               tizied      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...................    $   --    $   --     --%    $      --   $    --        --%  $  553.4  $  544.9    5.94%         
Mortgage-backed*................        --        --     --       2,453.8   2,463.7      7.05    2,453.8   2,463.7    7.05          
Other U.S. agencies.............        .2        .2  10.24            --        --        --       41.7      41.5    5.61          
State and political**...........     315.1     313.3   8.06            --        --        --      465.9     465.3    7.94          
Other...........................      22.4      25.8   7.13***         --        --        --       36.4      39.9    7.13***       

                                    ---------------------------------------------------------------------------------------
                                    $337.7    $339.3   8.05%*** $ 2,453.8  $2,463.7      7.05%  $3,551.2  $3,555.3    6.98%         
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

  *Variable rate mortgage-backed securities represented 32% of the balance of
   mortgage-backed securities.
 **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.
***Average yield calculations exclude equity securities that have no stated
   yield


DEPOSITS Noninterest-bearing deposits were $7.9 billion at December 31, 1996, up
from $6.4 billion at December 31, 1995. Interest-bearing deposits were $16.5
billion at December 31, 1996, up from $16.2 billion at December 31, 1995. The
increases were primarily due to the acquisitions of FirsTier and the corporate
trust business of BankAmerica.

BORROWINGS Short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings,
were $4.1 billion at December 31, 1996, down $288 million from $4.4 billion at
the end of 1995. The decrease was primarily due to a $796 million reduction in
federal funds purchased, partially offset by an increase in securities sold
under agreement to repurchase.

     Long-term debt was $3.6 billion at December 31, 1996, up from $3.2 billion
at December 31, 1995. In March 1996, the Company placed $125 million in 6.875
percent subordinated debt in the form of 10-year noncallable notes. The Company
also issued $500 million in medium-term bank notes, with original maturities of
12 to 60 months, during 1996. These issuances were partially offset by a net
decrease of $94 million in Federal Home Loan Bank Advances and $174 million of
medium-term notes.

     The Company issued $300 million of Company-obligated mandatorily redeemable
capital securities in November 1996. See "Capital Management" for further
information.

CORPORATE RISK PROFILE

OVERALL RISK PROFILE Managing risk is an essential part of successfully
operating a financial services company. The most prominent risk exposures are
credit quality, interest rate sensitivity, and liquidity. Credit quality risk is
the risk of not collecting interest and/or the principal balance of a loan or
investment when it is due. Interest rate risk is the potential reduction of net
interest income as the result of changes in interest rates. Rate movements can
affect the repricing of assets and liabilities differently, as well as their
market value. Liquidity risk is the possible inability to fund obligations to
depositors, investors and borrowers.

30                                                       First Bank System, Inc.

<PAGE>
 
CREDIT MANAGEMENT In 1996 the Company maintained its high level of credit
quality as nonperforming assets declined for the seventh consecutive year. The
ratio of nonperforming assets to loans plus other real estate declined to .51
percent at year-end from .58 percent and .94 percent at year-end 1995 and 1994,
respectively.

     The Company's strategy for credit risk management includes stringent,
centralized credit policies, and standard underwriting criteria for specialized
lending categories, such as mortgage banking, real estate construction, and
consumer credit. The strategy also emphasizes diversification on both a
geographic and customer level, regular credit examinations, and quarterly
management reviews of large loans and loans experiencing deterioration of credit
quality. The Company strives to identify potential problem loans early, take any
necessary charge-off promptly, and maintain strong reserve levels. In the
Company's retail banking operations, a standard credit scoring system is used to
assess consumer credit risks and to price consumer products accordingly.
Commercial banking operations rely on a strong credit culture that combines
prudent credit policies and individual lender accountability. In addition, the
commercial lenders generally focus on middle-market companies within their
regions.

     In evaluating its credit risk, the Company considers the loan portfolio
composition, the level of allowance coverage, and macroeconomic factors. Most
economic indicators in the Company's operating regions compare favorably with
national trends. Approximately 50 percent of the Company's loan portfolio
consists of credit to businesses and consumers in Minnesota and Colorado.
According to federal and state government agencies, unemployment rates in
Minnesota and Colorado were 3.5 percent and 3.7 percent, respectively, for the
month of December 1996, compared with the national unemployment rate of 5.3
percent. Through September 30, 1996, the national foreclosure rate was 1.00
percent, compared with .58 percent in Minnesota and .37 percent in Colorado.

     The Company engages in non-lending activities that may give rise to credit
risk, including interest rate swap contracts for balance sheet hedging purposes,
foreign exchange transactions for customers, and the processing of credit card
transactions for merchants. These activities are subject to the same credit
review, analysis and approval processes as those applied to commercial loans.
For additional information on interest rate swaps, see "Interest Rate Risk
Management."

First Bank System, Inc.                                                       31
                                                                             

<PAGE>
 
TABLE 11  SUMMARY OF ALLOWANCE FOR CREDIT LOSSES


<TABLE> 
<CAPTION> 
(Dollars in Millions)                                    1996      1995     1994     1993     1992          
- ---------------------------------------------------------------------------------------------------         
<S>                                                    <C>       <C>      <C>      <C>      <C> 
Balance at beginning of year.........................  $473.5    $474.7   $466.1   $483.8   $453.2
CHARGE-OFFS:
 Commercial:
  Commercial.........................................    43.5      25.9     57.1     53.5     87.6
  Financial institutions.............................      --        --      1.1      6.5       --
  Real estate:
   Commercial mortgage...............................    12.1      15.3     34.4     59.8     48.7
   Construction......................................     1.0        .1       .2       .4      6.1
                                                       --------------------------------------------          
   Total commercial..................................    56.6      41.3     92.8    120.2    142.4
 Consumer:
  Residential mortgage...............................     4.6       5.2      4.7      3.0      6.8
  Credit card........................................   100.1      85.6     78.5     71.6     85.5
  Other..............................................    91.7      77.0     50.8     44.4     50.5
                                                       --------------------------------------------          
   Total consumer....................................   196.4     167.8    134.0    119.0    142.8
                                                       --------------------------------------------          
   Total.............................................   253.0     209.1    226.8    239.2    285.2
RECOVERIES:
 Commercial:
  Commercial.........................................    43.2      38.7     42.8     33.6     40.2
  Financial institutions.............................      --        .5       .4      7.0       --
  Real estate:
   Commercial mortgage...............................    22.0      15.6     17.7     11.7      6.3
   Construction......................................      .6        .1       .9      1.3      1.9
                                                       --------------------------------------------          
   Total commercial..................................    65.8      54.9     61.8     53.6     48.4
 Consumer:
  Residential mortgage...............................     1.0        .7      1.1      1.7      2.3
  Credit card........................................    10.5      10.9      9.1      9.7      8.0
  Other..............................................    22.9      21.6     14.5     11.9     12.8
                                                       --------------------------------------------          
   Total consumer....................................    34.4      33.2     24.7     23.3     23.1
                                                       --------------------------------------------          
   Total.............................................   100.2      88.1     86.5     76.9     71.5
NET CHARGE-OFFS:
 Commercial:
  Commercial.........................................      .3     (12.8)    14.3     19.9     47.4
  Financial institutions.............................      --       (.5)      .7      (.5)      --
  Real estate:
   Commercial mortgage...............................    (9.9)      (.3)    16.7     48.1     42.4
   Construction......................................      .4        --      (.7)     (.9)     4.2
                                                       --------------------------------------------          
   Total commercial..................................    (9.2)    (13.6)    31.0     66.6     94.0
 Consumer:
  Residential mortgage...............................     3.6       4.5      3.6      1.3      4.5
  Credit card........................................    89.6      74.7     69.4     61.9     77.5
  Other..............................................    68.8      55.4     36.3     32.5     37.7
                                                       --------------------------------------------          
   Total consumer....................................   162.0     134.6    109.3     95.7    119.7
                                                       --------------------------------------------          
   Total.............................................   152.8     121.0    140.3    162.3    213.7
Provision charged to operating expense...............   136.0     115.0    123.6    133.1    191.7
Additions related to acquisitions and other..........    59.8       4.8     25.3     11.5     52.6
                                                       --------------------------------------------          
Balance at end of year...............................  $516.5    $473.5   $474.7   $466.1   $483.8
                                                       --------------------------------------------          
Allowance as a percentage of period-end loans........    1.90%     1.79%    1.93%    1.98%    2.34%
Allowance as a percentage of nonperforming loans.....     429       401      283      208      149
Allowance as a percentage of nonperforming assets....     375       308      204      137       95
- ---------------------------------------------------------------------------------------------------          
</TABLE>


32                                                       First Bank System, Inc.

<PAGE>
 
TABLE 12  ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES


<TABLE> 
<CAPTION> 
                                           Allocation Amount at December 31         Allocation as a Percent of Loans Outstanding  
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions)                   1996     1995     1994     1993     1992     1996     1995     1994     1993     1992   
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>      <C>      <C>      <C>      <C>        <C>      <C>      <C>      <C>      <C>    
COMMERCIAL:                                                                                                                     
 Commercial and financial                                                                                                       
  institutions......................  $ 85.2   $ 68.8   $ 78.8   $ 80.1   $105.9      .82%     .74%     .98%     .98%    1.53%  
 Real estate:                                                                                                                   
   Commercial mortgage..............    15.4     20.2     32.7     59.8     69.9      .50      .73     1.33     2.68     3.17   
   Construction.....................     4.4      2.1      1.9      1.0      7.3      .67      .52      .58      .41     3.05   
                                      -------------------------------------------------------------------------------------------
   Total commercial.................   105.0     91.1    113.4    140.9    183.1      .74      .73     1.04     1.32     1.96   
CONSUMER:                                                                                                                       
 Residential mortgage...............     7.2      7.8     10.6     13.8     14.9      .24      .16      .20      .22      .27   
 Credit card........................    41.0     34.0     32.5     22.0     38.9     1.43     1.31     1.35     1.25     2.18   
 Other..............................    41.6     41.1     40.5     28.4     33.5      .59      .64      .68      .59      .83   
                                      ------------------------------------------------------------------------------------------- 
   Total consumer...................    89.8     82.9     83.6     64.2     87.3      .69      .60      .61      .50      .77   
                                      ------------------------------------------------------------------------------------------- 
 Total allocated....................   194.8    174.0    197.0    205.1    270.4      .72      .66      .80      .87     1.31   
 Unallocated portion................   321.7    299.5    277.7    261.0    213.4     1.19     1.13     1.13     1.11     1.03   
                                      -------------------------------------------------------------------------------------------   

   Total allowance..................  $516.5   $473.5   $474.7   $466.1   $483.8     1.90%    1.79%    1.93%    1.98%    2.34%   
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


ANALYSIS AND ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES The allowance for credit
losses provides coverage for losses inherent in the Company's loan portfolio.
Management evaluates the allowance each quarter to determine that it is adequate
to cover inherent losses. The evaluation is based on continuing assessment of
problem loans and related off-balance sheet items, recent loss experience, and
other factors, including current and anticipated economic conditions.

     Management has determined that the allowance for credit losses is adequate.
At December 31, 1996, the allowance was $516.5 million, or 1.90 percent of
loans. This compares with an allowance of $473.5 million, or 1.79 percent of
loans, at year-end 1995, and $474.7 million, or 1.93 percent of loans, at
December 31, 1994. The ratio of the allowance for credit losses to nonperforming
loans increased to 429 percent at December 31, 1996, compared with 401 percent
at year-end 1995 and 283 percent at year-end 1994.

     Although the recent trend of slow, steady economic growth may contribute to
the continued improvement in the credit portfolio, economic stagnation or
reversals could increase the required level of the allowance for credit losses.

     Management allocates part of the allowance to certain sectors based on
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.

     The unallocated portion of the allowance increased to $321.7 million at
year-end 1996 from $299.5 million and $277.7 million at December 31, 1995, and
1994. Although the allocation of the allowance is an important credit management
tool, the entire allowance for credit losses is available for the entire loan
portfolio.

ANALYSIS OF NET LOAN CHARGE-OFFS Net loan charge-offs increased $31.8 million to
$152.8 million, compared with $121.0 million in 1995. Commercial loan net
recoveries for 1996 were $9.2 million, compared with $13.6 million in 1995.
Consumer loan net charge-offs in 1996 were $27.4 million higher than in 1995,
reflecting higher average balances and higher loss ratios on unsecured consumer
debt, including credit cards. Net charge-offs were $140.3 million in 1994. The
ratio of consumer net charge-offs to average loans in 1996 was 1.24 percent, up
from .98 percent in 1995. The ratio of total net charge-offs to average loans
was .57 percent in 1996, compared with .48 percent in 1995.

First Bank System, Inc.                                                       33
                                                      

<PAGE>
 
TABLE 13  NET CHARGE-OFFS AS A PERCENTAGE OF AVERAGE LOANS OUTSTANDING


<TABLE>   
<CAPTION> 
                                                1996       1995      1994      1993      1992              
- ---------------------------------------------------------------------------------------------               
<S>                                             <C>        <C>       <C>       <C>       <C>  
COMMERCIAL:
  Commercial................................      --%      (.16)%     .21%      .34%      .86%
  Financial institutions....................      --       (.06)      .06      (.03)       --
  Real Estate:                                 
   Commercial mortgage......................    (.33)      (.01)      .71      2.17      1.96
   Construction.............................     .08         --      (.26)     (.42)     1.56
                                                ---------------------------------------------
   Total commercial.........................    (.07)      (.12)      .29       .68      1.04
                                               
CONSUMER:                                      
  Residential mortgage......................     .10        .09       .06       .02       .10
  Credit card...............................    3.38       3.89      3.38      3.57      4.53
  Other.....................................    1.00        .89       .66       .74      1.03
                                                ---------------------------------------------
   Total consumer...........................    1.24        .98       .82       .79      1.19
                                                ---------------------------------------------
   Total....................................     .57%       .48%      .59%      .74%     1.12%
- ---------------------------------------------------------------------------------------------               
</TABLE>


ANALYSIS OF NONPERFORMING ASSETS Nonperforming assets include nonaccrual loans,
restructured loans, other real estate and other nonperforming assets owned by
the Company. At December 31, 1996, nonperforming assets totaled $137.7 million,
down $16 million (10 percent) from $153.7 million at year-end 1995 and down
$94.6 million (41 percent) from $232.3 million at year-end 1994. During 1996 the
Company conformed its reporting practice for nonperforming loans to that of most
banks and has excluded restructured revolving consumer loans from nonperforming
loans. At December 31, 1995, nonperforming loans included $9.5 million of
revolving consumer loans. Revolving consumer loans are charged off at specific
delinquency dates (generally 150 days). The ratio of nonperforming assets to
loans plus other real estate improved to .51 percent at December 31, 1996,
compared with .58 percent at year-end 1995 and .94 percent at year-end 1994.

     In 1996, the most significant reductions occurred in the following areas:
commercial mortgage, $11.5 million (27 percent); and other real estate, $19.7
million (59 percent).

     Interest payments are currently received on approximately 50 percent of the
Company's nonperforming loans. The payments are typically applied against the
principal balance and not recorded as income.

     Accruing loans 90 days or more past due totaled $49.6 million, compared
with $38.8 million at December 31, 1995, and $23.4 million at December 31, 1994.
These loans are not included in nonperforming assets and continue to accrue
interest because they are secured by collateral and/or are in the process of
collection and are reasonably expected to result in repayment or restoration to
current status. Consumer loans 30 days or more past due were 2.12 percent of the
total consumer portfolio at December 31, 1996 compared with 2.04 percent of the
total consumer portfolio at December 31, 1995. Consumer loans 90 days or more
past due totaled .63 percent of the consumer loan portfolio at December 31,
1996, compared with .62 percent at year-end 1995. 

TABLE 14  DELINQUENT LOAN RATIOS* 


<TABLE> 
<CAPTION> 
                                                                At December 31                   
                                                ---------------------------------------------  
90 days or more past due                        1996       1995      1994      1993      1992  
- ---------------------------------------------------------------------------------------------  
<S>                                             <C>        <C>       <C>       <C>       <C>   
COMMERCIAL:
 Commercial.................................     .50%       .32%      .52%     1.05%     2.67%
 Financial institutions.....................      --         --        --       .04       .29
 Real estate:                                 
  Commercial mortgage.......................    1.00       1.52      2.95      3.75      5.44
  Construction..............................    1.56        .37       .48      1.54      1.84
                                                ---------------------------------------------
  Total commercial..........................     .63        .56      1.03      1.44      3.02
CONSUMER:                                     
 Residential mortgage.......................    1.28        .91       .93      1.03       .71
 Credit card................................     .61        .73       .76      1.04      1.00
 Other......................................     .35        .36       .20       .38       .39
                                                ---------------------------------------------
  Total consumer............................     .63        .62       .58       .79       .64
                                                ---------------------------------------------
  Total.....................................     .63%       .59%      .78%     1.08%     1.72%
- --------------------------------------------------------------------------------------------- 
</TABLE>
 

*Ratios include nonperforming loans and are expressed as a percent of ending
 loan balances.
 
34                                                       First Bank System, Inc.

<PAGE>
 
TABLE 15  NONPERFORMING ASSETS*


<TABLE> 
<CAPTION> 
                                                                                    At December 31                    
                                                                    -------------------------------------------------  
(Dollars in Millions)                                                 1996       1995      1994      1993      1992   
- --------------------------------------------------------------------------------------------------------------------- 
<S>                                                                   <C>        <C>       <C>       <C>       <C>     
COMMERCIAL:                                                                                                           
 Commercial......................................................     $ 44.5     $ 25.1    $ 36.5    $ 63.2    $146.6
 Financial institutions..........................................         --         --        --        .9       3.3
 Real estate:
  Commercial mortgage............................................       30.8       42.3      71.0      83.3     118.9
  Construction...................................................       10.2        1.5       1.6       3.7       4.3
                                                                    -------------------------------------------------
  Total commercial...............................................       85.5       68.9     109.1     151.1     273.1

CONSUMER:
 Residential mortgage............................................       31.2       37.3      43.5      58.2      36.8
 Credit card.....................................................         --        5.7       7.5       7.6       8.1
 Other...........................................................        3.7        6.3       7.8       7.6       7.5
                                                                    -------------------------------------------------
  Total consumer.................................................       34.9       49.3      58.8      73.4      52.4
                                                                    -------------------------------------------------
  Total nonperforming loans......................................      120.4      118.2     167.9     224.5     325.5

OTHER REAL ESTATE................................................       13.5       33.2      64.0     115.9     181.3
OTHER NONPERFORMING ASSETS.......................................        3.8        2.3        .4       1.0       3.7
                                                                    -------------------------------------------------
  Total nonperforming assets.....................................     $137.7     $153.7    $232.3    $341.4    $510.5
                                                                    -------------------------------------------------
Accruing loans 90 days or more past due..........................     $ 49.6     $ 38.8    $ 23.4    $ 29.9    $ 29.4
Nonperforming loans to total loans...............................        .44%       .45%      .68%      .96%     1.57%
Nonperforming assets to total loans plus other real estate.......        .51        .58       .94      1.45      2.45
Net interest lost on nonperforming loans.........................     $  6.8     $  9.2    $ 11.0    $ 15.6    $ 18.1
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>


*Throughout this document, nonperforming assets and related ratios do not
 include loans more than 90 days past due and still accruing.

INTEREST RATE RISK MANAGEMENT The Company's policy is to maintain a low interest
rate risk position. The Company limits the exposure of net interest income to
risks associated with interest rate movements through asset/liability management
strategies. The Company's Asset and Liability Management Committee ("ALCO") uses
three methods for measuring and managing interest rate risk: Net Interest Income
Simulation Modeling, Market Value/Duration Analysis, and Repricing Mismatch
Analysis. The Company is in compliance with Board-approved guidelines,
established by ALCO, relating to the above methods for measuring and managing
interest rate risk. These three methods are discussed in detail below.

NET INTEREST INCOME SIMULATION: The Company has developed a net interest income
simulation model to measure near-term (next 12 months) risk due to changes in
interest rates. The model is particularly useful because it incorporates
substantially all the Company's assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance sheet mix and
assumptions that reflect the current interest rate environment. The balance
sheet changes are based on forecasted prepayments of loans and securities, loan
and deposit growth, and historical pricing spreads. The model is updated monthly
with the current balance sheet structure and the current forecast of expected
balance sheet changes. ALCO uses the model to simulate the effect of immediate
and sustained parallel shifts in the yield curve of 1 percent, 2 percent and 3
percent and flattening and steepening of the yield curve. ALCO also calculates
the sensitivity of the simulation results to changes in the key assumptions,
such as the Prime/LIBOR spread. The results from the simulation are reviewed by
ALCO monthly and are used to guide ALCO's hedging strategies. ALCO has
established guidelines, approved by the Company's Board of Directors, that limit
the estimated change in net interest income, over the succeeding 12 months to
approximately 3 percent of forecasted net interest income, assuming static
Prime/LIBOR spreads and modest changes in deposit pricing lags, given a 1
percent parallel change in interest rates.

MARKET VALUE/DURATION ANALYSIS: One of the limiting factors of the net interest
income simulation model is its dependence upon accurate forecasts of future
business activity and the resulting effect on balance sheet assets and
liabilities. As a result, its usefulness is greatly diminished for periods
beyond two years. The Company measures this longer-term component of interest
rate risk (referred to as market value or duration risk) by modeling the effect
of interest rate changes on the estimated discounted future cash flows of the
Company's current assets, liabilities and off-balance sheet instruments. The
amount of market value risk is subject to limits approved by the Company's Board
of Directors.

First Bank System, Inc.                                                       35

<PAGE>
 
REPRICING MISMATCH ANALYSIS: A traditional gap analysis provides a point-in-time
measurement of the relationship between the repricing amounts of the interest
rate sensitive assets and liabilities. While the analysis provides a useful
snapshot of interest rate risk, it does not capture all aspects of interest rate
risk. As a result, ALCO uses the repricing mismatch analysis primarily for
managing interest rate risk beyond one year and has established limits, approved
by the Company's Board of Directors, for the gap positions in the one- to three-
year time periods.

USE OF DERIVATIVES TO MANAGE INTEREST RATE RISK: While each of the interest rate
risk measurements has limitations, taken together they represent a comprehensive
view of the magnitude of the Company's interest rate risk over various time
intervals. The Company mitigates its interest rate risk by entering into off-
balance sheet transactions (primarily interest rate swaps), investing in fixed
rate assets or increasing variable rate liabilities. To a lesser degree, the
Company also uses interest rate caps and floors to hedge this risk. The Company
does not enter into derivative contracts for speculative purposes.

     Interest rate swap agreements involve the exchange of fixed and floating
rate risk payments without the exchange of the underlying notional amount on
which the interest payments are calculated. As of December 31, 1996, the Company
received payments on $2.7 billion notional amount of interest rate swap
agreements, based on fixed interest rates, and made payments based on variable
interest rates. These swaps had an average fixed rate of 6.51 percent and an
average variable rate, which is tied to various LIBOR rates, of 5.59 percent.
The remaining maturity of these agreements ranges from 1 month to 10.7 years
with an average remaining maturity of 4.1 years. Swaps increased net interest
income for the years ended December 31, 1996, 1995, and 1994 by $28.5 million,
$20.5 million, and $62.3 million, respectively.

     The Company also purchases interest rate caps and floors to minimize the
impact of fluctuating interest rates on earnings. Purchased caps can mitigate
the effects of rising interest

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, 1996 (In Millions)           3 Months   Months   Months      Years    5 Years  Sensitive    Total
- -----------------------------------------------------------------------------------------------------------------
<S>                                         <C>         <C>      <C>        <C>     <C>        <C>        <C> 
Assets:
 Loans.................................       $13,815   $1,532   $2,000     $7,086    $2,695    $    --   $27,128
 Available-for-sale securities.........           733      163      420      1,030     1,195         14     3,555
 Other earning assets..................         1,157        5       11         98        43         --     1,314
 Nonearning assets.....................           941        4      130        365     1,518      1,534     4,492
                                            ---------------------------------------------------------------------
  Total assets.........................       $16,646   $1,704   $2,561     $8,579    $5,451    $ 1,548   $36,489
                                            ---------------------------------------------------------------------
Liabilities and Equity:
 Deposits..............................       $ 9,572   $1,395   $1,364     $7,429    $4,611    $     8   $24,379
 Other purchased funds.................         4,076       --       --          8        13         --     4,097
 Long-term debt........................         1,558      228       67        583     1,117         --     3,553
 Company-obligated mandatorily redeemable
  capital securities of FBS Capital I..            --       --       --         --       300         --       300
 Other liabilities.....................            --       --      126         63        --        918     1,107
 Equity................................            --       --       --         --        --      3,053     3,053
                                            ---------------------------------------------------------------------
  Total liabilities and equity.........       $15,206   $1,623   $1,557     $8,083    $6,041    $ 3,979   $36,489
                                            ---------------------------------------------------------------------
Effect of off-balance sheet
 hedging instruments:
 Receiving fixed.......................       $   150   $   --   $  125     $1,456    $  925    $    --   $ 2,656
 Paying floating.......................        (2,656)      --       --         --        --         --    (2,656)
                                            ---------------------------------------------------------------------
  Total effect of off-balance sheet
   hedging instruments.................       $(2,506)  $   --   $  125     $1,456    $  925    $    --   $    --
                                           ----------------------------------------------------------------------
Repricing gap..........................       $(1,066)  $   81   $1,129     $1,952    $  335    $(2,431)  $    --
Cumulative repricing gap...............        (1,066)    (985)     144      2,096     2,431         --
- -----------------------------------------------------------------------------------------------------------------
</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 40 percent of regular savings, 30 percent
of interest-bearing checking, 50 percent of money market checking, and 60
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 69
percent of demand deposits and related nonearning asset accounts is allocated in
the More Than 5 Years category, 14 percent is allocated in the 1-5 Years
category with the remaining allocated in the Less Than 3 Months category.

36                                                       First Bank System, Inc.

<PAGE>
 
TABLE 17 INTEREST RATE SWAP HEDGING PORTFOLIO NOTIONAL BALANCES AND YIELDS BY
         MATURITY DATE


<TABLE>
<CAPTION>
At December 31, 1996 (Dollars in Millions)
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Weighted        Weighted
                                                                                                           Average         Average
Receive Fixed Swaps*                                                                       Notional  Interest Rate   Interest Rate
Maturity Date                                                                              Amount         Received            Paid
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>       <C>             <C>
1997.....................................................................................  $    275           6.42%           5.55%
1998.....................................................................................       681           5.97            5.58
1999.....................................................................................       450           6.40            5.61
2000.....................................................................................       150           6.57            5.55
2001.....................................................................................       175           6.54            5.62
After 2001**.............................................................................       925           6.96            5.60
                                                                                           --------
Total....................................................................................  $  2,656           6.51%           5.59%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


 * At December 31, 1996, the Company had no hedging swaps in its portfolio that
   required it to pay fixed-rate interest.
** Amount maturing after the year 2001 hedges fixed rate subordinated notes.

rates. Counterparties of these agreements pay the Company when certain short-
term rates rise above a specified point or strike level. The payment is based on
the difference in current rates and strike rates and the contract's notional
amount. The total notional amount of cap agreements purchased at December 31,
1996, was $100 million. To hedge against falling interest rates, the Company
uses interest rate floors. Floor counterparties pay the Company when specified
rates fall below the strike level. Like caps, the payment is based on the
difference in current rates and strike rates and the notional amount. The total
notional amount of floor agreements purchased as of December 31, 1996 was $1.25
billion. LIBOR-based floors totaled $950 million and Constant Maturity Treasury
floors totaled $300 million. The impact of caps and floors on net interest
income was not material for the years ended December 31, 1996, 1995 and 1994.
See Note N for further information on interest rate swaps, caps, and floors.

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 structuring the balance sheet to meet
these needs. It regularly reviews current and forecasted funding needs as well
as market conditions for issuing debt to wholesale investors. Based on this
information, ALCO supervises wholesale funding activity, as well as the
maintenance of contingent funding sources.

     A majority of the Company's funding comes from retail deposits within its
operating region. While the Company has funded incremental balance sheet growth
with negotiated funds, its purchased funds index remained relatively low at 13.6
percent at December 31, 1996, compared with a peer group median of 19.2 percent
at September 30, 1996. The index is calculated as negotiated funding (which
includes FHLB borrowings, foreign branch time deposits, national federal funds
purchased, bank and thrift notes and medium-term notes) and repurchase
agreements, net of federal funds sold and resale agreements, divided by loans
and securities.

     The Company's ability to raise negotiated funding at competitive prices is
influenced by rating agencies' views of the Company's credit quality, liquidity,
capital, and earnings. As of December 31, 1996, Moody's Investors Services,
Standard & Poors, and Thomson BankWatch rated the Company's senior debt as "A2,"
"A," and "A+," respectively. The strong debt ratings reflect the agencies'
recognition of the consistent financial performance of the Company and strength
of the balance sheet.

     At the parent company, funding primarily consists of long-term debt and
equity. During 1996, long-term debt, including medium-term notes, decreased to
$1.2 billion from $1.3 billion at year-end 1995. The decrease was primarily due
to maturing medium-term notes.

     The parent company issued $74 million of medium-term notes during 1996.
Total parent company debt maturing in 1997 is $187 million. These debt
obligations are expected to be met through medium-term note or subordinated debt
issuances, as well as from the approximately $343 million of parent company cash
and cash equivalents at December 31, 1996. It is the Company's practice to
maintain liquid assets at the parent company sufficient to fund its operating
cash needs, including debt repayment and common stock repurchases.

     In 1995, four of the Company's bank subsidiaries established a $4 billion
bank note program. The Company's thrift subsidiary also established a $1 billion
thrift note program. Notes issued under these programs may mature within 30 days
to 15 years and bear fixed or floating interest rates. Proceeds from note sales
are used for general corporate purposes. At December 31, 1996, there was $2.6
billion outstanding under these programs. The thrift subsidiary also had $1.0
billion in long-term advances from the FHLB at December 31, 1996.

First Bank System, Inc.                                                       37

<PAGE>
 
TABLE 18  CAPITAL RATIOS


<TABLE>
<CAPTION>
At December 31 (Dollars in Millions)             1996       1995      1994
- --------------------------------------------------------------------------
<S>                                          <C>          <C>       <C>
Tangible common equity*..................... $  2,385     $2,184    $2,082
     As a percent of assets.................      6.7%       6.5%      6.2%
Tier 1 capital**............................ $  2,355     $1,989    $2,052
     As a percent of risk-adjusted assets...      7.2%       6.5%      7.3%
Total risk-based capital**.................. $  3,943     $3,367    $3,227
     As a percent of risk-adjusted assets...     12.0%      11.0%     11.4%
Leverage ratio**............................      6.8        6.1       6.2
- --------------------------------------------------------------------------
</TABLE>


 * Defined as common equity less goodwill.
** In accordance with regulatory guidelines, unrealized securities gains and
   losses are excluded and Company-obligated mandatorily redeemable capital
   securities of FBS Capital I are included in these calculations. In addition,
   equity capital related to deferred tax assets is limited.

CAPITAL MANAGEMENT The Company is committed to managing capital for maximum
shareholder benefit and maintaining strong protection for depositors and
creditors. At December 31, 1996, tangible common equity (common equity less
goodwill) was $2.4 billion, or 6.7 percent of assets, compared with 6.5 percent
at year-end 1995 and 6.2 percent at year-end 1994. The tier 1 capital ratio
increased to 7.2 percent at December 31, 1996, compared with 6.5 percent at
December 31, 1995. This ratio was 7.3 percent at December 31, 1994. The total
risk-based capital ratio was 12.0 percent at December 31, 1996, compared with
11.0 percent at December 31, 1995 and 11.4 percent at December 31, 1994. The
leverage ratio increased to 6.8 percent at December 31, 1996, compared with 6.1
percent and 6.2 percent at December 31, 1995 and December 31, 1994,
respectively. The increase in the capital ratios reflects earnings retention as
well as the issuance of common stock to complete the FirsTier acquisition and
$300 million of Company-obligated mandatorily redeemable capital securities,
offset by common stock repurchases.

     On February 21, 1996, the Board of Directors authorized the repurchase of
up to 25.4 million common shares through December 1997. This new authorization
replaced previous authorizations. Approximately 15.1 million shares have been
repurchased under this authorization as of December 31, 1996. Under previous
authorizations, the Company repurchased 11.9 million shares in 1995. During
1994, the Company repurchased approximately 6.3 million shares of its common
stock.

     On November 26, 1996, the Company, through FBS Capital I trust, became the
first bank holding company to issue Company-obligated mandatorily redeemable
capital securities. The $300 million issue of the "trust preferred securities"
qualifies as tier 1 capital for bank holding companies and pays distributions
semi-annually at an annual rate of 8.09 percent.

     On November 29, 1996, the Company called all remaining shares of its Series
1991A Convertible Preferred Stock. Series 1991A was 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. As a result, at
December 31, 1996, (the redemption date) all remaining shares had been converted
into common stock or redeemed.

     In 1994, the Company redeemed $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. In connection with the MFC acquisition, the entire
$12 million Series B Cumulative Perpetual Preferred Stock of MFC was redeemed on
January 24, 1995.

     The measures used to assess capital include the capital ratios established
by the bank regulatory agencies, including the specific ratios for the "well
capitalized" designation. The Company manages various capital ratios to maintain
appropriate capital levels in accordance with Board-approved capital guidelines.
While the Company intends to maintain sufficient capital in each of its
bank/thrift subsidiaries to be "well capitalized" as defined by the regulatory
agencies, management ascribes the most significance to the tangible common
equity ratio.

DIVIDENDS During 1996, total dividends on common stock were $227.7 million
compared with $191.7 million in 1995 and $156.0 million in 1994. The Company has
raised its quarterly dividend rate in each of the past five years. On a per
share basis, dividends paid to common shareholders totaled $1.65 in 1996, $1.45
in 1995, and $1.16 in 1994. On February 19, 1997, the Board of Directors
increased the quarterly common dividend rate to $.465 from $.4125.

     The Company's primary funding sources for common stock dividends are
dividends received from its bank and nonbank subsidiaries. Payment of dividends
to the Company by its depository subsidiaries is subject to ongoing review by
banking regulators and to various statutory limitations. For further
information, see Note R.

38                                                       First Bank System, Inc.

<PAGE>
 
TABLE 19  SUBSIDIARY CAPITAL RATIOS


<TABLE>
<CAPTION>
                                                                    At December 31, 1996
                                                       -------------------------------------------
                                                                       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 AND THRIFT SUBSIDIARIES:
First Bank National Association (Minnesota).........       7.0          11.4         7.3   $17,055
Colorado National Bank..............................       7.2          11.5         6.2     6,894
First Bank, fsb.....................................         *          15.5         7.7     4,937
First Bank National Association (Nebraska)..........       9.6          12.7         6.9     3,511
First Bank of South Dakota (National Association)...       8.3          12.6         7.9     1,940
First Bank Montana, National Association............       7.7          12.0         8.7     1,181
First Bank (N.A.) (Wisconsin).......................       7.7          12.1         8.4     1,156
First Bank National Association (Illinois)..........      10.6          13.7         7.0       928
Colorado National Bank Aspen........................      31.1          32.4        16.9        52
First National Bank of East Grand Forks.............      23.4          26.5        14.2        38
- --------------------------------------------------------------------------------------------------
</TABLE>


Note: These balances and ratios were prepared in accordance with regulatory
accounting principles as disclosed in the subsidiaries' regulatory reports.

*At December 31, 1996, First Bank, fsb, a thrift subsidiary of the Company, had
tangible capital of 7.7 percent, core capital of 11.2 percent and risk-based
capital of 15.5 percent as compared with Thrift regulatory minimums of 1.5
percent, 3.0 percent and 8.0 percent, respectively.

ACCOUNTING CHANGES

SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" The Company adopted Statement of Financial Accounting
Standards No. ("SFAS") 121 on January 1, 1996, which requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
is not recoverable. During 1996, the Company recorded a $24.1 million adjustment
to the carrying value of certain bank premises following a decision to sell
several buildings in connection with the streamlining of the branch distribution
network. See Note K for further discussion.

SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" SFAS 123 establishes a new
fair value based accounting method for stock-based compensation plans. As
permitted by the Statement, the Company continues to apply the accounting
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," in determining net income. Refer to Note L for
the required pro forma disclosures of net income and earnings per share
calculated as if the fair value based method of accounting defined in SFAS 123
had been applied.

SFAS 125, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES" SFAS 125 addresses whether the transfer of
financial assets should be accounted for as a sale and removed from the balance
sheet, or as a financing recognized as a borrowing. The Statement uses a
"financial components" approach which focuses on control to determine whether
the assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal rights to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material impact on the Company.

IMPACT OF INFLATION

The assets and liabilities of a financial institution are primarily monetary in
nature. Therefore, 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.

First Bank System, Inc.                                                       39

<PAGE>
 
TABLE 20  FOURTH QUARTER SUMMARY


<TABLE>
<CAPTION>
                                                               Three Months Ended
                                                                   December 31
                                                                ----------------

(Dollars in Millions, Except Per Share Data)                       1996     1995
- --------------------------------------------------------------------------------
<S>                                                            <C>        <C>
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis)...........        $391.2   $363.7
Provision for credit losses..............................          35.0     31.0
                                                                ----------------
 Net interest income after provision for credit losses...         356.2    332.7
Noninterest income.......................................         222.0    197.3
Noninterest expense......................................         302.0    287.3
                                                                ----------------
 Income before income taxes..............................         276.2    242.7
Taxable-equivalent adjustment............................           5.0      3.4
Income taxes.............................................          99.8     88.6
                                                                ----------------
 Net income..............................................        $171.4   $150.7
                                                                ----------------
Return on average assets.................................          1.92%    1.80%
Return on average common equity..........................          22.1     22.4
Net interest margin (taxable-equivalent basis)...........          4.89     4.83
Efficiency ratio.........................................          49.2     51.2

PER SHARE DATA:
Net income (primary).....................................        $ 1.26   $ 1.14
Net income (fully diluted)...............................          1.24     1.12
Common dividends paid....................................         .4125    .3625
- --------------------------------------------------------------------------------
</TABLE>


FOURTH QUARTER SUMMARY

In the fourth quarter of 1996, the Company reported net income of $171.4 million
($1.24 per fully diluted share) compared to $150.7 million ($1.12 per fully
diluted share) in the fourth quarter of 1995. The strong results for the fourth
quarter of 1996 reflected growth in net interest and noninterest income,
controlled operating expenses, and effective capital management.

     Fourth quarter net interest income on a taxable-equivalent basis increased
$27.5 million (8 percent) to $391.2 million, compared with the fourth quarter of
1995. The increase was primarily attributable to growth in core commercial and
consumer loans, as well as the FirsTier acquisition. The net interest margin on
a taxable-equivalent basis increased to 4.89 percent, compared with 4.83 percent
a year ago, reflecting increases in loan fees and noninterest-bearing deposit
liabilities.

     The provision for credit losses increased to $35.0 million in the fourth
quarter of 1996, compared with $31.0 million in the fourth quarter of 1995.

     Noninterest income increased $24.7 million from the same quarter a year
ago, to $222.0 million. The improvement resulted primarily from growth in credit
card and trust fees and the addition of FirsTier and other acquisitions,
partially offset by the loss of revenues from the Company's mortgage banking
operations, which were sold in the first quarter of 1996. Credit card fees were
up as a result of higher sales volumes for Purchasing Card, Corporate Card and
the FBS WorldPerks VISA Card. Trust fees increased due to recent acquisitions
and core growth in personal and institutional trust revenues.

     Fourth quarter noninterest expense in 1996 was $302.0 million, an increase
of $14.7 million from the fourth quarter of 1995. On a pro forma basis, adjusted
for acquisitions and divestitures, noninterest expense declined in the fourth
quarter by $16.8 million (5 percent), reflecting effective acquisition
integration and ongoing expense control. The efficiency ratio for the fourth
quarter of 1996 improved to 49.2 percent from 51.2 percent for the same quarter
last year.

  40                                                     First Bank System, Inc.

<PAGE>
 
                           CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
At December 31 (In Millions, Except Shares)                                                            1996         1995     
- ----------------------------------------------------------------------------------------------------------------------------- 
<S>                                                                                                 <C>            <C>       
ASSETS                                                                                                                       
Cash and due from banks.........................................................................    $  2,413         $ 1,837
Federal funds sold..............................................................................          32              35
Securities purchased under agreements to resell.................................................         795             230
Trading account securities......................................................................         146              86
Available-for-sale securities...................................................................       3,555           3,256
Loans...........................................................................................      27,128          26,400
 Less allowance for credit losses...............................................................         517             474
                                                                                                    ------------------------- 
 Net loans......................................................................................      26,611          25,926
Bank premises and equipment.....................................................................         404             413
Interest receivable.............................................................................         202             197
Customers' liability on acceptances.............................................................         169             223
Other assets....................................................................................       2,162           1,671
                                                                                                    -------------------------
     Total assets...............................................................................    $ 36,489         $33,874
                                                                                                    -------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
 Noninterest-bearing............................................................................    $  7,871         $ 6,357
 Interest-bearing...............................................................................      16,508          16,157
                                                                                                    ------------------------- 
     Total deposits.............................................................................      24,379          22,514
Federal funds purchased.........................................................................       1,204           2,000
Securities sold under agreements to repurchase..................................................         819             269
Other short-term funds borrowed.................................................................       2,074           2,116
Long-term debt..................................................................................       3,553           3,201
Company-obligated mandatorily redeemable capital securities of FBS Capital I....................         300              --
Acceptances outstanding.........................................................................         169             223
Other liabilities...............................................................................         938             826
                                                                                                    -------------------------
     Total liabilities..........................................................................      33,436          31,149
Shareholders' equity:
 Preferred stock................................................................................          --             103
 Common stock, par value $1.25 a share-authorized 200,000,000 shares;
   issued: 1996 - 141,747,738 shares; 1995 - 135,632,324 shares.................................         177             170
 Capital surplus................................................................................       1,154             909
 Retained earnings..............................................................................       2,165           1,918
 Unrealized gain on securities, net of tax......................................................           3              23
 Less cost of common stock in treasury: 1996 - 6,877,497 shares,
   1995 - 8,297,756 shares......................................................................        (446)           (398)
                                                                                                    -------------------------
     Total shareholders' equity.................................................................       3,053           2,725
                                                                                                    -------------------------
     Total liabilities and shareholders' equity.................................................    $ 36,489         $33,874
- ----------------------------------------------------------------------------------------------------------------------------- 
</TABLE>
 

See Notes to Consolidated Financial Statements.
 
                                                                              
 
First Bank System, Inc.                                                       41

<PAGE>
 
                       CONSOLIDATED STATEMENT OF INCOME


<TABLE>
<CAPTION>
Year Ended December 31 (In Millions, Except Per-Share Data)                        1996          1995           1994
- ----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>            <C>           <C>
INTEREST INCOME
Loans........................................................................  $    2,339.3   $    2,273.4  $    1,914.7
Securities:
 Taxable.....................................................................         241.5          226.0         327.9
 Exempt from federal income taxes............................................          25.5           11.2          12.0
Other interest income........................................................          47.6           34.6          33.5
                                                                               ---------------------------------------------
     Total interest income...................................................       2,653.9        2,545.2       2,288.1

INTEREST EXPENSE
Deposits.....................................................................         673.1          706.7         597.3
Federal funds purchased and repurchase agreements............................         122.4          118.1         103.1
Other short-term funds borrowed..............................................         120.4           90.2          20.4
Long-term debt...............................................................         202.7          190.0         147.9
Company-obligated mandatorily redeemable capital securities of FBS Capital I.           2.3             --            --
                                                                               ---------------------------------------------
     Total interest expense..................................................       1,120.9        1,105.0         868.7
                                                                               ---------------------------------------------
Net interest income..........................................................       1,533.0        1,440.2       1,419.4
Provision for credit losses..................................................         136.0          115.0         123.6
                                                                               ---------------------------------------------
Net interest income after provision for credit losses........................       1,397.0        1,325.2       1,295.8

NONINTEREST INCOME
Credit card fees.............................................................         292.6          232.7         179.0
Trust fees...................................................................         230.7          175.3         159.2
Service charges on deposit accounts..........................................         141.5          123.7         127.3
Investment products fees and commissions.....................................          33.4           27.6          29.6
Securities gains (losses)....................................................          15.0             --        (115.0)
Termination fee..............................................................         190.0             --            --
State income tax refund......................................................          65.0             --            --
Gain on sale of mortgage banking operations..................................          45.8             --            --
Gain on sale of branches.....................................................            --           31.0            --
Other........................................................................         171.7          192.8         178.8
                                                                               ---------------------------------------------
     Total noninterest income................................................       1,185.7          783.1         558.9
NONINTEREST EXPENSE
Salaries.....................................................................         465.6          441.0         450.7
Employee benefits............................................................         105.0           96.4         105.7
Goodwill and other intangible assets.........................................         106.5           57.1          50.4
Net occupancy................................................................          98.5           98.6         103.8
Furniture and equipment......................................................          89.0           94.2          88.3
Other personnel costs........................................................          55.8           40.9          35.7
Professional services........................................................          39.9           36.9          38.5
Advertising and marketing....................................................          35.4           32.0          35.5
FDIC insurance...............................................................          11.4           35.8          58.4
SAIF special assessment......................................................          51.0             --            --
Merger, integration, and resizing............................................          69.9             --          66.2
Merger-related severance.....................................................            --             --          56.5
Other........................................................................         260.1          273.0         259.7
                                                                               ---------------------------------------------
     Total noninterest expense...............................................       1,388.1        1,205.9       1,349.4
                                                                               ---------------------------------------------
Income from continuing operations before income taxes........................       1,194.6          902.4         505.3
Applicable income taxes......................................................         454.8          334.3         191.8
                                                                               ---------------------------------------------
Income from continuing operations............................................         739.8          568.1         313.5
Loss from discontinued operations............................................            --             --          (8.5)
                                                                               ---------------------------------------------
Net income...................................................................  $      739.8   $      568.1  $      305.0
                                                                               ---------------------------------------------
Net income applicable to common equity.......................................  $      733.6   $      560.6  $      292.4
                                                                               ---------------------------------------------
EARNINGS PER COMMON SHARE
Average common and common equivalent shares..................................   137,415,619    133,936,030   136,274,991
Income from continuing operations............................................  $       5.34   $       4.19  $       2.21
Loss from discontinued operations............................................            --             --          (.06)
                                                                               ---------------------------------------------
Net income...................................................................  $       5.34   $       4.19  $       2.15
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

See Notes to Consolidated Financial Statements.
 

 
                                                         First Bank System, Inc.

42

<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 Tax   Stock**  Total 
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>       <C>      <C>      <C>       <C>             <C>      <C>     
BALANCE DECEMBER 31, 1993...................  130,408,480   $ 278.1 $ 169.8  $  852.2 $1,575.4         $  38.0  $(169.4) $2,744.1
Net income..................................                                             305.0                              305.0
Dividends declared:
 Preferred..................................                                             (12.6)                             (12.6)
 Common.....................................                                            (156.0)                            (156.0)
Purchase and retirement of treasury stock...   (7,131,513)             (4.6)    (48.0)   (70.1)                  (120.8)   (243.5)
Repurchase of stock warrants................                                     (2.3)                                       (2.3)
Issuance of common stock:
 Acquisition of Boulevard Bancorp, Inc......    6,227,649               1.9      54.9                             149.4     206.2
 Other acquisitions.........................    1,385,806                                (13.9)                    48.1      34.2
 Dividend reinvestment......................      185,890                          .2                               6.3       6.5
 Stock option and stock purchase plans......    2,068,922               1.0       7.7    (17.6)                    42.7      33.8
 Stock warrants exercised...................      687,175                .2       1.1    (10.4)                    17.0       7.9
Redemption of preferred stock...............                 (160.0)                      (7.0)                            (167.0)
Change in unrealized gains/(losses).........                                                            (144.4)            (144.4)
                                              ------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994...................  133,832,409     118.1   168.3     865.8  1,592.8          (106.4)   (26.7)  2,611.9
Net income..................................                                             568.1                              568.1
Dividends declared:
 Preferred..................................                                              (7.5)                              (7.5)
 Common.....................................                                            (191.7)                            (191.7)
Purchase of treasury stock..................  (11,944,405)                                                       (545.2)   (545.2)
Issuance of common stock:
 Acquisitions...............................    2,788,619                .3       4.3     (3.7)                   104.7     105.6
 Dividend reinvestment......................      224,255                          .5                               9.3       9.8
 Stock option and stock purchase plans......    2,299,172                .9      38.7    (36.3)                    54.6      57.9
 Stock warrants exercised...................       42,039                                 (1.3)                     1.6        .3
Redemption/conversion of preferred stock....       92,479     (14.9)                      (2.2)                     3.9     (13.2)
Change in unrealized gains/(losses).........                                                             128.9              128.9
                                              ------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995...................  127,334,568     103.2   169.5     909.3  1,918.2            22.5   (397.8)  2,724.9
Net income..................................                                             739.8                              739.8
Dividends declared:
 Preferred..................................                                              (6.2)                              (6.2)
 Common.....................................                                            (227.7)                            (227.7)
Purchase and retirement of treasury stock...  (15,120,587)             (3.2)   (151.4)                           (784.9)   (939.5)
Issuance of common stock:
 Acquisitions...............................   16,460,215              10.7     361.7    (44.4)                   384.2     712.2
 Dividend reinvestment......................      193,621                          .5                              11.5      12.0
 Stock option and stock purchase plans......    2,440,730                .2      33.8    (96.6)                   119.7      57.1
Redemption/conversion of preferred stock....    3,561,694    (103.2)                    (118.2)                   221.4        --
Change in unrealized gains/(losses).........                                                             (20.0)             (20.0)
                                              ------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996...................  134,870,241    $   -- $ 177.2  $1,153.9 $2,164.9         $   2.5  $(445.9) $3,052.6
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

 *Defined as total common shares less common stock held in treasury.
**Ending treasury shares were 6,877,497 at December 31, 1996, 8,297,756 at
  December 31, 1995, and 767,000 at December 31, 1994.
  See Notes to Consolidated Financial Statements.




First Bank System, Inc.                                                       43

<PAGE>
 
                     CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
Year Ended December 31 (In Millions)                                                             1996          1995          1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>         <C>             <C>
OPERATING ACTIVITIES
Net income..................................................................................  $   739.8       $   568.1   $   305.0
Adjustments to reconcile net income to net cash provided by operating activities:
 Provision for credit losses................................................................      136.0           115.0       123.6
 (Gains) losses on available-for-sale securities............................................      (15.0)             --       111.2
 Depreciation and amortization of bank premises and equipment...............................       68.0            76.5        74.5
 Provision for deferred income taxes........................................................       10.0            73.3        (1.1)
 Amortization of goodwill and other intangible assets.......................................      106.5            57.1        50.4
 Merger, integration and resizing...........................................................       69.9              --       122.7
 Gain on sale of mortgage banking operations................................................      (45.8)             --          --
 Changes in operating assets and liabilities, excluding the effects of purchase acquisitions:
   (Increase) decrease in trading account securities........................................      (59.6)           12.3       (22.6)
   Decrease (increase) in loans held for sale...............................................      103.1          (100.6)      580.8
   (Increase) decrease in accrued receivables...............................................     (148.9)          (29.4)       42.0
   Increase (decrease) in accrued liabilities...............................................       41.9           (41.1)      (11.7)
 Other - net................................................................................      (24.0)          (20.7)       14.5
                                                                                              --------------------------------------
     Net cash provided by operating activities..............................................      981.9           710.5     1,389.3
                                                                                              --------------------------------------

INVESTING ACTIVITIES
Net cash (used) provided by:
 Interest-bearing deposits with banks.......................................................         --            29.3        63.3
 Loans outstanding..........................................................................     (138.4)       (1,487.9)   (1,200.5)
 Securities purchased under agreements to resell............................................     (525.2)          105.9       (30.5)
Available-for-sale securities:
 Sales......................................................................................    1,226.7         2,058.9     1,607.1
 Maturities.................................................................................    1,059.6           527.5     1,083.7
 Purchases..................................................................................     (420.8)         (309.6)   (1,143.2)
Investment securities:
 Maturities.................................................................................         --              --       271.4
 Purchases..................................................................................         --              --      (283.4)
Proceeds from sales of other real estate....................................................       48.7            56.8       109.3
Proceeds from sales of bank premises and equipment..........................................       20.1            54.1         8.2
Purchases of bank premises and equipment....................................................      (77.6)          (55.6)      (73.3)
Sales of loans..............................................................................       77.4            97.5         1.7
Purchases of loans..........................................................................      (19.5)           (4.6)     (496.3)
Cash and cash equivalents of acquired subsidiaries..........................................      116.5            55.4        74.5
Acquisitions, net of cash received..........................................................      (38.3)         (117.5)     (107.2)
Sales of subsidiary operations..............................................................      162.1            11.7          --
Other - net.................................................................................      (62.9)            6.6        10.2
                                                                                              --------------------------------------
     Net cash provided (used) by investing activities.......................................    1,428.4         1,028.5      (105.0)
                                                                                              --------------------------------------

FINANCING ACTIVITIES
Net cash (used) provided by:
 Deposits...................................................................................     (903.7)       (1,519.9)   (4,135.6)
 Federal funds purchased and securities sold under agreements to repurchase.................     (430.6)         (298.9)    1,340.4
 Short-term borrowings......................................................................      (30.9)        1,447.6       226.2
Sales of deposits...........................................................................         --          (858.0)         --
Purchases of deposits.......................................................................         --              --        11.1
Long-term debt transactions:
 Proceeds...................................................................................      964.8           954.6     1,877.8
 Principal payments.........................................................................     (632.9)         (745.1)   (1,027.7)
Issuance of Company-obligated mandatorily redeemable capital securities of FBS Capital I....      300.0              --          --
Redemption of preferred stock...............................................................         --           (13.2)     (167.0)
Proceeds from dividend reinvestment, stock option, and stock purchase plans.................       69.1            67.7        40.3
Purchase of treasury stock and stock warrants...............................................     (939.5)         (545.2)     (245.8)
Stock warrants exercised....................................................................         --              .3         7.9
Cash dividends..............................................................................     (233.9)         (199.2)     (168.6)

                                                                                              --------------------------------------
     Net cash used by financing activities..................................................   (1,837.6)       (1,709.3)   (2,241.0)
                                                                                              --------------------------------------
     Change in cash and cash equivalents....................................................      572.7            29.7      (956.7)
Cash and cash equivalents at beginning of year..............................................    1,871.6         1,841.9     2,798.6
                                                                                              --------------------------------------
     Cash and cash equivalents at end of year...............................................  $ 2,444.3       $ 1,871.6   $ 1,841.9
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>
 

See Notes to Consolidated Financial Statements.
 
 
                                                         First Bank System, Inc.

44
 

<PAGE>
 

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A  SIGNIFICANT ACCOUNTING POLICIES

First Bank System, Inc. (the "Company") is a regional multibank holding company
that provides banking and other financial services principally to domestic
markets. The Company has five primary businesses that operate principally in the
11 states of Minnesota, Colorado, Wisconsin, Illinois, Montana, North Dakota,
South Dakota, Iowa, Kansas, Nebraska, and Wyoming. Retail Banking delivers
products and services to the broad consumer market and small-business through
branch offices, telemarketing, direct mail, and automated teller machines
("ATMs"). Payment Systems includes consumer and business credit cards, corporate
and purchasing card services, card-accessed secured and unsecured lines of
credit, ATM processing and merchant processing. Business Banking and Private
Financial Services includes middle-market banking services, private banking and
personal trust. Commercial Banking provides lending, treasury management, and
other financial services to middle-market, large corporate, and mortgage banking
companies. Corporate Trust and Institutional Financial Services includes
institutional and corporate trust services, investment management services, and
a full-service brokerage company. Based on earnings, Retail Banking is the
largest business, followed by Business Banking and Private Financial Services,
Commercial Banking, Payment Systems, and Corporate Trust and Institutional
Financial Services.

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

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual experience could differ from those estimates.

SECURITIES

TRADING ACCOUNT SECURITIES Debt and equity securities held for resale in
anticipation of short-term market movements are classified as trading account
securities and reported at fair value. Realized and unrealized gains or losses
are recorded in noninterest income.

AVAILABLE-FOR-SALE SECURITIES These securities are not trading account
securities but may be sold before maturity in response to changes in interest
rates, prepayment risk, and funding sources or terms, or to meet liquidity
needs. They are carried at fair value with unrealized net gains or losses
reported in shareholders' equity. When sold, the amortized cost of the specific
securities is used to compute the gain or loss.

LOANS

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

ALLOWANCE FOR CREDIT LOSSES Management determines the adequacy of the allowance
based on evaluations of the loan portfolio and related off-balance sheet
commitments, recent loss experience, and other pertinent factors, including
economic conditions. This evaluation is inherently subjective as it requires
estimates, including amounts of future cash collections expected on nonaccrual
loans that may be susceptible to significant change. The allowance for credit
losses relating to impaired loans is based on the loans' observable market
price, the collateral for certain collateral-dependent loans, or the discounted
cash flows using the loans' effective interest rate. The allowance is increased
through provisions charged to operating earnings and reduced by net charge-offs.

NONACCRUAL LOANS Generally loans (including impaired loans) are placed on
nonaccrual status when the collection of interest or principal has become 90
days past due or is otherwise considered doubtful. When a loan is placed on
nonaccrual status, unpaid interest is reversed. Future interest payments are
generally applied against principal.

LEASES Certain subsidiaries engage in both direct and leveraged lease financing.
The net investment in direct financing leases is the sum of all minimum lease
payments and estimated residual values, less unearned income and investment tax
credits. Unearned income is added to interest income over the terms of the
leases to produce a level yield.

  The investment in leveraged leases is the sum of all lease payments (less
nonrecourse debt payments) plus estimated residual values, less unearned income.
Unearned income is added to loan interest income over the positive years of the
net investment.

LOANS AND MORTGAGES HELD FOR SALE These loans are carried at the lower of cost
or market value as determined on an aggregate basis by type of loan.

OTHER REAL ESTATE Other real estate ("ORE"), which is included in other assets,
is property acquired through foreclosure or other proceedings. ORE is initially
recorded at fair value and

First Bank System, Inc. 

                                                                              45

<PAGE>
 
carried at the lower of cost or fair value, less estimated selling costs. The
property is evaluated regularly and any decreases in the carrying amount are
included in noninterest expense.

DERIVATIVE FINANCIAL INSTRUMENTS

INTEREST RATE SWAPS AND CONTRACTS The Company uses interest rate swaps and
contracts (forwards, options, caps and floors) to manage its interest rate risk,
as a financial intermediary, and in its trading operations. The Company does not
enter into these contracts for speculative purposes. Income or expense on swaps
and contracts designated as hedges of assets, liabilities or commitments is
recorded as an adjustment to interest income or expense. If the swap or contract
is terminated, the gain or loss is deferred and amortized over the remaining
life of the underlying asset or liability. If the hedged instrument is disposed
of, the swap or contract agreement is marked to market with any resulting gain
or loss included with the gain or loss from the disposition. The initial
bid/offer spread on intermediated swaps is deferred and recognized in trading
account profits and commissions over the life of the agreement. Intermediated
swaps and all other interest rate contracts are marked to market and resulting
gains or losses are recorded in trading account profits and commissions.

OTHER SIGNIFICANT POLICIES

BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less
accumulated depreciation and amortized primarily on a straight-line method
basis.

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

INTANGIBLE ASSETS Goodwill, the price paid over the book value of acquired
businesses, is included in other assets and is amortized over periods ranging up
to 25 years. Other intangible assets are amortized over their estimated useful
lives, which range from seven to fifteen 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 the purposes of reporting cash flows, cash
equivalents include cash and due from banks and federal funds sold.

STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly recognizes no compensation expense for the stock option grants.

PER SHARE CALCULATIONS Primary earnings per share is computed by dividing net
income (less preferred stock dividends) by the average number of common shares
and dilutive common stock equivalents outstanding during the year. To compute
the dilutive effect of restricted common shares, 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.

NOTE B  Accounting Changes

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. During 1996, the Company
recorded a $24.1 million adjustment to the carrying value of certain bank
premises following a decision to sell several buildings in connection with the
streamlining of the branch distribution network. See Note K for further
discussion.

  The Company also performed an evaluation of those intangible assets not
covered by SFAS 121 and recorded a charge of $29.5 million to reduce the
carrying value of credit card holder and core deposit intangibles to their fair
value. The Company performed this analysis of the fair value following its
reassessment of business alternatives for a segment of its credit card portfolio
and a change in the mix of deposits at certain acquired entities, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS 123, "Accounting for Stock-Based
Compensation," establishes a new fair value based accounting method for stock-
based compensation plans. As permitted by the Statement, the Company continues
to apply the accounting provisions of APB 25, "Accounting for Stock Issued to
Employees," in determining net income. Refer to Note L for the required pro
forma disclosures had SFAS 123 been applied.

ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES SFAS 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," addresses whether the

                                                         First Bank System, Inc.

46

<PAGE>
 
transfer of financial assets should be accounted for as a sale and removed from
the balance sheet, or as a financing recognized as a borrowing. The Statement
uses a "financial components" approach which focuses on control to determine
whether assets have been sold. If the entity has surrendered control over the
transferred assets, the transaction is considered a sale. Control is considered
surrendered only if the seller has no legal right to the assets, even in
bankruptcy; the buyer has the right to pledge or exchange the assets; and the
seller does not maintain effective control over the assets through an agreement
to repurchase or redeem them. SFAS 125 is effective for transactions occurring
after December 31, 1996, and is to be applied prospectively, with earlier or
retroactive application not permitted. The adoption of SFAS 125 is not expected
to have a material effect on the Company.

NOTE C  BUSINESS COMBINATIONS AND DIVESTITURES

FIRSTIER FINANCIAL, INC. On February 16, 1996, the Company issued 16.5 million
shares to complete its acquisition of Omaha-based FirsTier Financial, Inc.
("FirsTier"). FirsTier had $3.7 billion in assets, $2.9 billion in deposits, and
63 offices in Nebraska and Iowa. Under terms of the purchase agreement, the
Company exchanged .8829 shares of its common stock for each common share of
FirsTier. In addition, FirsTier's outstanding stock options were converted into
stock options for the Company's common stock.

  The acquisition of FirsTier was accounted for under the purchase method of
accounting, and accordingly, the purchase price of $717 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. Goodwill of $286 million
will be amortized over an average of 24 years and core deposit intangibles of
$63 million will be amortized over the estimated lives of the deposits of
approximately 10 years. The results of operations of FirsTier have been 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
FirsTier acquisition had occurred at the beginning of each period presented. 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)             1996            1995
- --------------------------------------------------------------------------
<S>                                              <C>              <C> 
Net interest income............................  $1,550.0         $1,556.6
Net income.....................................     737.6            587.3
Net income per share...........................      5.27             4.04
- --------------------------------------------------------------------------
</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.

BANKAMERICA CORPORATE TRUST BUSINESS During the fourth quarter of 1995 and the
first quarter of 1996 the Company acquired the corporate trust business of
BankAmerica Corporation. After the acquisition, the Company became one of the
nation's leading providers of domestic corporate trust services.

SALE OF MORTGAGE BANKING OPERATIONS During 1996, the Company sold its servicing
and mortgage loan production business to three parties. Bank of America, fsb, a
subsidiary of BankAmerica Corporation, purchased approximately $14 billion in
mortgage servicing rights. Columbia National, Inc., of Maryland, and Knutson
Mortgage Co., of Minnesota, agreed to purchase Company's loan production
business. The Company will now deliver mortgage loan products through bank
branches and telemarketing. These transactions resulted in a net gain of $45.8
million.

FIRST INTERSTATE BANCORP On November 6, 1995, the Company and First Interstate
Bancorp ("First Interstate") announced that they had entered into a definitive
agreement whereby the Company would exchange 2.6 shares of its common stock for
each share of First Interstate common stock. On January 24, 1996, First
Interstate announced that it had terminated the merger agreement with the
Company and had entered into a definitive agreement with Wells Fargo & Company
("Wells Fargo"). Under the terms of a settlement agreement, the Company received
$125 million on January 24, 1996. The Company received an additional $75 million
on April 1, 1996, upon consummation of the merger of First Interstate and Wells
Fargo. In addition, all litigation among the parties related to the acquisition
of First Interstate has been settled. The Company incurred transaction costs of
approximately $10 million in connection with the proposed merger.

METROPOLITAN FINANCIAL CORPORATION On January 24, 1995, the Company issued 21.7
million shares to complete its merger with Metropolitan Financial Corporation
("MFC"). The regional financial services holding company, headquartered in
Minneapolis, Minnesota, had approximately $7.9 billion in assets and $5.5
billion in deposits. MFC's 211 offices were principally located in North Dakota,
Minnesota, Nebraska, Iowa, Kansas, South Dakota, Wisconsin, and Wyoming. The
Company used the pooling of interests method to account for the transaction.
Accordingly, the Company's financial statements for all periods have been
restated to include MFC's accounts and operations.

First Bank System, Inc. 

                                                                              47

<PAGE>
 
OTHER ACQUISITIONS During 1995, the Company acquired several smaller financial
institutions in its existing markets, all of which further strengthen the
Company's retail banking franchise. These acquisitions, accounted for as
purchases, were not material to the financial condition or operating results of
the Company. These acquisitions include the November 1, 1995, acquisition of two
commercial bank holding companies - Midwestern Services, Inc. and Southwest
Holdings,Inc. - both of Omaha, Nebraska. Together, the two companies had total
assets of $424 million, total deposits of $380 million, and 12 branches in
Omaha. In addition, on March 16, 1995, the Company acquired First Western
Corporation, parent company of Western bank, with $317 million in assets,
$267 million in deposits, and nine branches in and around Sioux Falls, South
Dakota.

COMERICA CORPORATE TRUST BUSINESS On January 31, 1997, the Company completed its
acquisition of the bond indenture services and paying agency business of
Comerica Incorporated. This business serves approximately 860 municipal and
corporate clients with about 2,400 bond issues.

SALE OF EDINA REALTY, INC. On December 8, 1995, the Company sold Edina Realty,
Inc., its real estate brokerage subsidiary, to a local investor group. The
subsidiary was accounted for as discontinued operations. Edina's assets,
liabilities and cash flows were not material to the Company's financial
statements and were not segregated.

NOTE D  RESTRICTIONS ON CASH AND DUE FROM BANKS

Bank subsidiaries are required to maintain minimum average reserve balances with
the Federal Reserve Bank. The amount of those reserve balances was approximately
$245 million at December 31, 1996.

NOTE E  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>
                                             1996                                              1995
                       ---------------------------------------------------------------------------------------------------  
                                         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.........    $  553           $ 1         $ (9)    $  545      $  921            $ 8          $ (4)    $  925
Mortgage-backed.......     2,454            30          (20)     2,464       1,703             13           (23)     1,693
Other U.S. agencies...        42            --           (1)        41         157              1            (1)       157
State and political...       466             3           (4)       465         174              5            --        179
Other.................        36             4           --         40         265             38            (1)       302
                       ---------------------------------------------------------------------------------------------------  
   Total..............    $3,551           $38         $(34)    $3,555      $3,220            $65          $(29)    $3,256
- --------------------------------------------------------------------------------------------------------------------------  
</TABLE>


  Securities carried at $1.7 billion at December 31, 1996, and $1.2 billion at
December 31, 1995, were pledged to secure public, private and trust deposits and
for other purposes required by law. Securities carried at $1.0 billion at
December 31, 1996, and $1.3 billion at December 31, 1995, were pledged to secure
Federal Home Loan Bank advances. Securities sold under agreements to repurchase
were collateralized by securities and securities purchased under agreements to
resell with an amortized cost of $.8 billion and $.3 billion at December 31,
1996, and 1995, respectively.

  Gross realized gains and losses are shown in the table below. Included in the
1994 gross realized losses is $111.2 million related to the sale of $1.6 billion
of securities as a result of MFC's actions to reduce interest rate risk
consistent with prior regulatory requests and to align more closely the interest
rate risk profile of MFC with that of the Company.


<TABLE>
<CAPTION>
(In Millions)                                          1996       1995         1994
- -----------------------------------------------------------------------------------  
<S>                                                  <C>         <C>        <C> 
Gross realized gains...............................  $ 33.3      $ 1.7      $   3.1
Gross realized losses..............................   (18.3)      (1.7)      (118.1)
                                                     ------------------------------  
  Net realized gains (losses)......................  $ 15.0      $  --      $(115.0)
                                                     ------------------------------  
Income taxes (credit) on realized gains or losses..  $  5.7      $  --      $ (43.7)
- -----------------------------------------------------------------------------------  
</TABLE>


  For amortized cost, fair value and yield by maturity date of available-for-
sale securities outstanding as of December 31, 1996, see Table 10 on page 30
from which such information is incorporated by reference into these Notes to
Consolidated Financial Statements.
 
                                                         First Bank System, Inc.

48

<PAGE>
 
NOTE F  LOANS AND ALLOWANCE FOR CREDIT LOSSES

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


<TABLE> 
<CAPTION> 
(In Millions)                                                                                   1996           1995
- -------------------------------------------------------------------------------------------------------------------  
<S>                                                                                          <C>             <C> 
COMMERCIAL:                                                                                 
 Commercial................................................................................  $ 9,456         $8,271
 Financial institutions....................................................................      905          1,060
 Real estate:                                                                               
   Commercial mortgage.....................................................................    3,090          2,784
   Construction............................................................................      654            403
                                                                                             ----------------------  
     Total commercial......................................................................   14,105         12,518
                                                                                             ----------------------  
                                                                                            
CONSUMER:                                                                                   
 Residential mortgage......................................................................    3,019          4,655
 Residential mortgage held for sale........................................................       42            257
 Home equity and second mortgage...........................................................    3,263          2,805
 Credit card...............................................................................    2,858          2,586
 Automobile................................................................................    1,991          1,821
 Revolving credit..........................................................................      737            757
 Installment...............................................................................      607            607
 Student*..................................................................................      506            394
                                                                                             ----------------------  
     Total consumer........................................................................   13,023         13,882
                                                                                             ----------------------  
     Total loans........................................................................... $ 27,128        $26,400
- -------------------------------------------------------------------------------------------------------------------  
</TABLE>
 

* All or part of the student loan portfolio may be sold when the repayment
  period begins.

  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, 1996, and 1995. The aggregate dollar
amounts of these loans were $12.3 million and $13.1 million at December 31,
1996, and 1995, respectively. During 1996, additions totaled $43.8 million and
repayments totaled $44.6 million.

  Nonaccrual and renegotiated loans totaled $120 million, $118 million, and $168
million at December 31, 1996, 1995, and 1994, respectively. At December 31,
1996, and 1995, the Company had $86 million, and $69 million, respectively, in
loans considered impaired under SFAS 114 included in its nonaccrual loans. The
carrying value of the impaired loans was less than or equal to the present value
of expected future cash flows and, accordingly, no allowance for credit losses
was specifically allocated to impaired loans. For the years ended December 31,
1996, 1995, and 1994, the average recorded investment in impaired loans was
approximately $78 million, $77 million, and $118 million, respectively. The
effect of nonaccrual and renegotiated loans on interest income was as follows:


<TABLE>
<CAPTION>
                                                  Year ended December 31
                                                ------------------------- 
(In Millions)                                    1996      1995      1994
- -------------------------------------------------------------------------  
<S>                                             <C>       <C>       <C>
Interest income that would have been accrued                   
 at original contractual rates................  $10.9     $11.5     $13.7
Amount recognized as interest income..........    4.1       2.3       2.7
                                                ------------------------- 
Forgone revenue...............................  $ 6.8     $ 9.2     $11.0
- -------------------------------------------------------------------------  
</TABLE>


First Bank System, Inc. 

                                                                              49

<PAGE>
 
  Commitments to lend additional funds to customers whose loans were classified
as nonaccrual or renegotiated at December 31, 1996, totaled $45.0 million.
During 1996, 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)                                                                                    1996           1995       1994
- -------------------------------------------------------------------------------------------------------------------------------  
<S>                                                                                          <C>       <C>               <C>
Balance at beginning of year...............................................................  $  473.5         $474.7     $466.1
Add:                                                                                                                 
  Provision charged to operating expense...................................................     136.0          115.0      123.6
Deduct:                                                                                                              
  Loans charged off........................................................................     253.0          209.1      226.8
  Less recoveries of loans charged off.....................................................     100.2           88.1       86.5
                                                                                             ----------------------------------  
  Net loans charged off....................................................................     152.8          121.0      140.3
Additions from acquisitions and other......................................................      59.8            4.8       25.3
                                                                                             ----------------------------------  
Balance at end of year.....................................................................  $  516.5         $473.5     $474.7
- -------------------------------------------------------------------------------------------------------------------------------  
</TABLE>
 

NOTE G  BANK PREMISES AND EQUIPMENT

Bank premises and equipment at December 31 consisted of the following:


<TABLE> 
<CAPTION> 
(In Millions)                                                                                    1996           1995
- --------------------------------------------------------------------------------------------------------------------  
<S>                                                                                          <C>              <C>  
Land.......................................................................................  $     72         $   70
Buildings and improvements.................................................................       408            386
Furniture, fixtures and equipment..........................................................       401            373
Capitalized building leases................................................................        48             35
Capitalized equipment leases...............................................................        40             37
                                                                                             -----------------------  
                                                                                                  969            901            
Less accumulated depreciation and amortization.............................................       565            488
                                                                                             -----------------------  
   Total...................................................................................  $    404         $  413
- --------------------------------------------------------------------------------------------------------------------  
</TABLE>
 

                                                         First Bank System, Inc.
 
50
 

<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)                                                                                             1996           1995
- -----------------------------------------------------------------------------------------------------------------------------  
<S>                                                                                                   <C>              <C>
FIRST BANK SYSTEM (Parent Company):
Fixed-rate subordinated notes:
   6.625% due May 15, 2003..........................................................................  $    100         $  100
   8.00% due July 2, 2004...........................................................................       125            125
   7.625% due May 1, 2005...........................................................................       150            150
   6.875% due September 15, 2007....................................................................       250            250
Floating-rate subordinated notes - due November 30, 2010............................................       107            107
Medium-term notes...................................................................................       406            580
Capitalized lease obligations and other.............................................................        32             14
                                                                                                      -----------------------
                                                                                                         1,170          1,326
SUBSIDIARIES:
Fixed-rate subordinated notes:
   6.00% due October 15, 2003.......................................................................       100            100
   7.55% due June 15, 2004..........................................................................       100            100
   8.35% due November 1, 2004.......................................................................       100            100
   6.875% due April 1, 2006.........................................................................       125             --
Step-up subordinated notes - due August 15, 2005....................................................       100            100
Federal Home Loan Bank advances.....................................................................     1,005          1,099
Bank notes..........................................................................................       800            300
Capitalized lease obligations.......................................................................        39             35
Mortgage indebtedness and other.....................................................................        14             41
                                                                                                      -----------------------
   Total............................................................................................  $  3,553         $3,201
- -----------------------------------------------------------------------------------------------------------------------------  
</TABLE>


  The floating-rate subordinated notes due November 30, 2010, may be redeemed at
par at the Company's option. The annual interest rate for each quarterly period
is one-eighth of 1 percent above the London Interbank Offered Rate ("LIBOR") for
three-month Eurodollar deposits, subject to a minimum of 5.25 percent. At
December 31, 1996, the interest rate was 5.69 percent.

  The step-up subordinated notes due August 15, 2005, are issued by the
Company's subsidiary bank, First Bank National Association (the "Bank"). 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.

  The medium-term notes outstanding at December 31, 1996, mature from March 1997
through August 1999. The notes bear floating interest rates ranging from 5.67
percent to 5.82 percent. The weighted average interest rate at December 31,
1996, was 5.75 percent.

  The Federal Home Loan Bank advances outstanding at December 31, 1996, mature
from January 1997 through March 2011. The advances bear fixed or floating
interest rates ranging from 4.93 percent to 7.34 percent. The weighted average
interest rate at December 31, 1996, was 5.72 percent.

  The bank notes outstanding at December 31, 1996, mature from July 1997 through
March 2001. The notes bear fixed or floating interest rates ranging from 5.53
percent to 6.38 percent. The weighted average interest rate at December 31,
1996, was 5.72 percent.

Maturities of long-term debt outstanding at December 31, 1996 were:


<TABLE>
<CAPTION>
                                                                       Parent
(In Millions)                                       Consolidated      Company
- -----------------------------------------------------------------------------  
<S>                                                 <C>               <C>
1997...............................................       $1,072       $  187
1998...............................................          442           99
1999...............................................          327          125
2000...............................................           40            1
2001...............................................          105            2
Thereafter.........................................        1,567          756
                                                          ------------------- 
   Total...........................................       $3,553       $1,170
- -----------------------------------------------------------------------------  
</TABLE>


First Bank System, Inc. 

                                                                              51

<PAGE>
 
NOTE I  COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF FBS
        CAPITAL I

On November 26, 1996, FBS Capital I (the "Trust"), a Delaware business trust
wholly-owned by the Company, completed the sale of $300 million of 8.09 percent
Capital Securities (the "Capital Securities"). The Trust used the net proceeds
from the offering to purchase a like amount of 8.09 percent Junior Subordinated
Deferrable Interest Debentures (the "Debentures") of the Company. The Debentures
are the sole assets of the Trust and are eliminated, along with the related
income statement effects, in the consolidated financial statements. The Company
used the proceeds from the sale of the Debentures for general corporate
purposes.

  The Capital Securities accrue and pay distributions semi-annually at an annual
rate of 8.09 percent of the stated liquidation amount of $1,000 per Capital
Security. The Company has fully and unconditionally guaranteed all of the
obligations of the Trust. The guarantee covers the semi-annual distributions and
payments on liquidation or redemption of the Capital Securities, but only to the
extent of funds held by the Trust.

  The Capital Securities are mandatorily redeemable upon the maturity of the
Debentures, on November 15, 2026 or upon earlier redemption as provided in the
Indenture. The Company has the right to redeem the Debentures, in whole (but not
in part), on or after November 15, 2006, at a redemption price specified in the
Indenture plus any accrued but unpaid interest to the redemption date.

NOTE J  SHAREHOLDERS' EQUITY

COMMON STOCK At December 31, 1996, the Company had 11,155,479 shares of common
stock reserved for future issuances under the Dividend Reinvestment Plan,
Employee Stock Purchase Plan, and the Stock Option Plans (see Note L).

  On February 21, 1996, the Board of Directors authorized the repurchase of up
to 25.4 million shares through December 1997. Approximately 15.1 million shares
have been repurchased under the 1996 authorization. In addition, the Board of
Directors authorized the retirement of 2.6 million shares repurchased in the
second quarter of 1996. Under previous authorizations, the Company repurchased
11.9 million shares in 1995.

  Approximately 5.8 million common shares sold through private placements in
July 1990 remain outstanding. Periodic stock purchase rights ("PSPRs") and risk
event warrants were also issued in such private placements. The PSPRs become
exercisable if the Company fails to pay quarterly dividends equal to at least
$.205 per share of common stock in any twelve-month period between July 1990 and
July 2000. Upon exercise, PSPR holders will receive cash or the Company's
common or preferred shares equal to the dividend shortfall. The risk event
warrants become exercisable when a change in control occurs and the value
received by common shareholders is less than $13.875 per share. If exercised,
the Company has the option to pay warrant holders the shortfall in cash, common
or preferred stock.

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

PREFERRED STOCK The Company has six classes of cumulative preferred stock, with
10 million shares authorized. Since 1992, the Company has redeemed or called the
four classes of $1.00 par value cumulative preferred stock and redeemed both
classes of $.01 par value cumulative preferred stock.

  On November 29, 1996, the Company called the remaining 1,543,025 shares of its
Series 1991A Cumulative Convertible Preferred Stock. As a result, at December
31, 1996, (the redemption date) all remaining shares had been redeemed or
converted into common stock. Prior to conversion, dividends on the Series 1991A
shares, which had a $1.00 par value, were 7.125 percent per year.

  In January 1995, the Company redeemed for $27.00 per share in cash, plus
accumulated and unpaid dividends, 488,750 shares of Series B, $2.875 Cumulative
Perpetual Preferred Stock. Dividends on the Series B shares, which had a $.01
par value, were $2.875 per share prior to redemption.

NOTE K  MERGER, INTEGRATION AND RESIZING CHARGES

The Company recorded merger, integration and resizing charges of $69.9 million
and $66.2 million in 1996 and 1994, respectively. Merger and integration charges
of $31.3 million recorded in 1996 were associated with the acquisitions of
FirsTier and the BankAmerica corporate trust business. Resizing charges of $38.6
million were associated with the Company's streamlining of the branch
distribution network and trust operations as the Company expands its alternative
distribution channels, including telemarketing, automated teller machines and
in-store branches. Merger and integration charges of $66.2 million recorded in
1994 related to the acquisition of MFC. The components of the charges are shown
below:


<TABLE>
<CAPTION>
                                           Year ended December 31
                                           ----------------------
(In Millions)                                1996            1994
- -----------------------------------------------------------------
<S>                                        <C>              <C> 
Systems conversions, required              
 customer communications and                       
 professional services...........           $29.7           $40.4
Premises writedowns..............            26.0            19.6
Severance........................            14.2             6.2
                                           ----------------------
  Total merger, integration and                    
   resizing charges..............           $69.9           $66.2
- -----------------------------------------------------------------
</TABLE>


                                                         First Bank System, Inc.

52

<PAGE>
 
     Systems conversions, required customer communications and professional
services relate to preparation and mailing of numerous customer communications
for the acquisitions and conversion of customer accounts, printing and
distribution of training materials and policy and procedure manuals, outside
consulting fees, and similar expenses relating to the conversions and
integration of acquired branches and operations. Premises writedowns relate to
premise and equipment write-offs for redundant office space and branches. The
writedowns recorded in 1996 include valuation adjustments associated with the
planned sale of bank-owned properties as the Company consolidates and reduces
the space requirements of the branch facilities. Severance charges include the
cost of terminations, other benefits, and outplacement costs associated with the
elimination of employees primarily in branch offices and in centralized
corporate support and data processing functions. The following table presents a
summary of activity with respect to the Company's merger, integration and
resizing accrual:


<TABLE>
<CAPTION>
                                                                                                         Year Ended
                                                                                                        December 31
(In Millions)                                                                                                  1996
- -------------------------------------------------------------------------------------------------------------------
<S>                                                                                                     <C>  
BALANCE AT DECEMBER 31, 1995...........................................................................       $12.6
Provision charged to operating expense.................................................................        69.9
Cash outlays...........................................................................................       (43.8)
Noncash writedowns.....................................................................................       (26.0)
                                                                                                        -----------
Balance at December 31, 1996...........................................................................       $12.7
- -------------------------------------------------------------------------------------------------------------------
</TABLE>


     The Company expects that substantially all remaining costs will be paid in
early 1997. Additional noncash writedowns are not expected to be significant.

     In December 1994, the Company recorded a $111.2 million loss on the sale of
$1.6 billion of securities in January 1995 as a result of MFC's actions to
reduce interest rate risk consistent with prior regulatory requests and to align
more closely the interest rate risk profile of MFC with that of the Company. The
Company also recorded additional provision for credit losses of $16.5 million
and a $56.5 million severance-related charge related to MFC's pre-existing
change in control plan. A provision for other real estate related reserves of
$2.6 million was also recorded to provide for the Company's strategy of
accelerated disposition of problem assets.

First Bank System, Inc. 

                                                                              53

<PAGE>
 
NOTE L   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 amounts to its plans sufficient to meet the minimum
funding requirements of 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 the pension contribution is the projected
unit credit method.

     Prior to their acquisition dates, employees of acquired companies were
covered by separate, noncontributory pension plans that provided benefits based
on years of service and compensation. As of December 31, 1996, the Company has
merged the acquired companies' plans into its own plan with the exception of the
MFC and FirsTier plans, which are expected to be merged in 1997. The funded
status and income statement effects of the MFC plan have been aggregated with
the Company's plan for all years in the table below and the FirsTier plan is
included in 1996.


<TABLE>
<CAPTION>
(In Millions)                                                                           1996      1995      1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>       <C>       <C> 
Actuarial present value of benefit obligations:
  Accumulated benefit obligation, including vested benefits                            
   of $306.6 million in 1996, $287.9 million in 1995, and
   $265.4 million in 1994..........................................................  $(318.6)  $(297.5)  $(274.0)
                                                                                     ---------------------------
Projected benefit obligation for service rendered to date..........................  $(331.3)  $(312.3)  $(280.3)
Plan assets at fair value, primarily listed stocks and U.S. bonds..................    412.0     314.3     287.4
                                                                                     ---------------------------
Excess of plan assets over projected benefit obligation............................     80.7       2.0       7.1
Unrecognized net (gain) loss from past experience different from
  that assumed and effects of changes in assumptions                                   (33.3)     20.5      18.8
Unrecognized net asset at end of year (amortized over 15 years)....................    (19.1)    (23.1)    (26.4)
                                                                                     ---------------------------
Prepaid (accrued) pension cost included in other assets............................  $  28.3   $   (.6)  $   (.5)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>


     The Company also maintains several unfunded, nonqualified, supplemental
executive retirement programs that provide additional defined pension benefits
for certain officers. The following table summarizes the status of these
supplemental plans.


<TABLE>
<CAPTION>
(In Millions)                                                                             1996     1995     1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>      <C>      <C>
Actuarial present value of benefit obligations:
  Accumulated benefit obligation, including vested benefits
   of $14.7 million in 1996, $10.4 million in 1995, and
   $5.7 million in 1994............................................................     $(15.3)  $(11.1)  $ (7.2)

Projected benefit obligation for service rendered to date..........................     $(23.8)  $(16.8)  $(11.2)
Plan assets at fair value..........................................................         --       --       --
                                                                                        ------------------------
(Deficiency) of plan assets over projected benefit obligation......................      (23.8)   (16.8)   (11.2)
Unrecognized net loss from past experience different from
  that assumed and effects of changes in assumptions                                       2.5      5.2      1.9

Unrecognized net asset at end of year (amortized over 15 years)....................        1.1      1.3      1.3
                                                                                        ------------------------
Accrued pension cost included in other liabilities.................................     $(20.2)  $(10.3)  $ (8.0)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
 

     Net pension cost for all funded and unfunded plans is as follows:


<TABLE> 
<CAPTION> 
Year Ended December 31 (In Millions)                                                      1996     1995     1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>      <C>      <C> 
  Service cost-benefits earned during the period...................................     $ 22.5   $ 17.7   $ 20.4   
  Interest cost on projected benefit obligation                                           25.7     24.6     21.8 
  Actual return on plan assets                                                           (73.3)   (57.3)   (10.9)
  Net amortization and deferral....................................................       38.9     26.1    (18.7)
                                                                                        ------------------------
Net periodic pension benefit cost..................................................     $ 13.8   $ 11.1   $ 12.6  
- ----------------------------------------------------------------------------------------------------------------
</TABLE>


                                                         First Bank System, Inc.

54

<PAGE>
 
     The aggregate disclosures reflect the following weighted average
assumptions for the Company and acquired companies that sponsored plans.


<TABLE> 
<CAPTION> 
                                                                                          1996     1995     1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>      <C>      <C>
Weighted average discount rate in determining expense..............................        7.0%     8.0%     7.0%
Weighted average discount rate in determining benefit obligations at year-end......        7.5      7.0      8.0
Expected long-term rate of return..................................................        9.5      9.5      9.5
Rate of increase in future compensation............................................        5.6      5.6      5.6
- ----------------------------------------------------------------------------------------------------------------
</TABLE>


     OTHER POSTRETIREMENT PLANS In addition to providing pension benefits, the
Company provides certain health care and death benefits to retired employees.
Nearly all employees may become eligible for health care benefits at or after
age 55 if they have completed at least five years of service and their age plus
years of service is equal to or exceeds 65 while working for the Company.

     The Company subsidizes the cost of coverage for employees who retire before
age 65 with at least 10 years of service. The amount of the subsidy is based on
the employee's age and service at the time of retirement and remains frozen
until the retiree reaches age 65. After age 65 the retiree assumes
responsibility for the full cost of the coverage.

     The plan also contains other cost-sharing features such as deductibles and
coinsurance. The Company continues to subsidize the coverage for employees over
age 65 who retired before a plan change eliminated such subsidy.

     The Company accrues the estimated cost of retiree benefit payments, other
than pensions, during the employees' active service and in prior years funded
the postretirement benefit costs as they were incurred. In 1996, the Company
funded the tax deductible portion of its outstanding liability. 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> 
Year Ended December 31 (In Millions)                                                      1996     1995     1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>      <C>      <C> 
Accumulated postretirement benefit obligation:
  Retirees                                                                               $(48.9)  $(47.9)  $(41.7)
  Fully eligible active plan participants                                                  (2.6)    (2.4)    (3.6)
  Other active plan participants..............................................            (11.7)   (12.2)   (11.3)
                                                                                        ------------------------- 
   Total accumulated postretirement benefit obligation........................            (63.2)   (62.5)   (56.6)
Plan assets..................................................................               7.1       --       --
                                                                                        ------------------------- 
   Total unfunded accumulated postretirement benefit obligation...............            (56.1)   (62.5)   (56.6)
Unrecognized net gain from past experience different from that assumed
  and from changes in assumptions                                                          (9.5)    (5.5)   (10.1)
Unrecognized implementation obligation.......................................               4.0      4.2      4.4
                                                                                        ------------------------- 
Accrued postretirement benefit cost..........................................           $ (61.6) $ (63.8) $ (62.3)
                                                                                        ------------------------- 
Net periodic postretirement benefit cost includes the following components:                                 
  Service cost-benefits attributed to service during the period                         $   1.3  $   1.1  $   1.4
  Interest cost on accumulated postretirement benefit obligation                            4.5      4.3      4.2
  Net amortization and deferral...............................................               .2      (.1)      .3
                                                                                        ------------------------- 
Total postretirement benefit cost............................................           $   6.0  $   5.3  $   5.9
- -----------------------------------------------------------------------------------------------------------------
</TABLE>


First Bank System, Inc. 

                                                                              55

<PAGE>
 
     In 1996 the assumed annual rates of increase in the cost of health care
benefits for participants under 65 and 65 and older, were 9.1 percent and 6.0
percent, respectively. For 1997 the annual rate of increase assumptions are 8.1
percent and 5.5 percent, respectively. Both rates were assumed to decrease
gradually to 5.5 percent by 2004 and remain at that level thereafter. Trends in
health care costs have a significant effect on the amounts reported. For
example, increasing the health care cost trend rate assumptions by 1 percent
each year increases the accumulated postretirement benefit obligation as of
December 31, 1996, by $6.2 million. In addition, the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year then ended would increase by $.6 million.

     The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent as of December 31, 1996, and
7.0 percent as of December 31, 1995.

STOCK INCENTIVE AND PURCHASE PLANS The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for its employee stock incentive and purchase plans.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. On the date exercised, the option proceeds
equal to the par value of the shares are credited to common stock and additional
proceeds are credited to capital surplus.

     The 1984 Employee Stock Purchase Plan ("ESPP"), as amended in 1989, 1991
and 1996, permits all eligible employees with at least one year of service and
directors to purchase common stock. Plan participants can purchase stock for 85
percent to 100 percent of the fair market value, which is based on the price at
the beginning or the end of the purchase period, whichever is lower. Any
discount is determined by a committee of the Board of Directors. In 1996, the
purchase price was 85 percent of fair market value. The plan results in no
compensation expense to the Company.

     In April, 1996, the Board of Directors approved the 1996 Stock Incentive
Plan ("1996 Plan") which amends and restates the 1991 Stock Incentive Plan and
1994 Stock Incentive Plan. Seventeen million shares are authorized and available
for granting awards under the 1996 Stock Incentive Plan (including five million
which were previously authorized under the 1991 Stock Incentive plan and five
million under the 1994 Stock Incentive Plan). The 1996 Plan, as amended, allows
for the granting of nonqualified stock options, incentive stock options, stock
appreciation rights ("SARs"), restricted stock or stock units ("RSUs"),
performance awards, and other stock-based awards at or above 100 percent of the
market price at the date of grant. The 1991 Stock Incentive Plan, as amended by
the 1996 Plan, also provides automatic grants of stock options to nonemployee
directors. The rights of restricted stock and RSU holders to transfer shares are
generally limited during the restriction period. At December 31, 1996, there
were 2,898,541 shares (subject to adjustment for forfeitures), available for
grant under the Plans.

     Options granted are generally exercisable up to 10 years from the date of
grant and vest over three to five years. Restricted shares vest over three to
seven years. The vesting of certain options and restricted shares are subject to
acceleration based on the performance of the Company in comparison to the
performance of a predetermined group of regional banks. Compensation expense for
restricted stock is based on the market price of the Company stock at the time
of the grant and amortized on a straight-line basis over the vesting period. For
the performance-based restricted shares, compensation expense is amortized using
the estimated vesting period. Compensation expense related to the restricted
stock was $4.4 million, $3.4 million and $1.5 million in 1996, 1995, and 1994.

                                                         First Bank System, Inc.

56

<PAGE>
 
     The stock incentive plans of acquired companies were terminated at the
respective merger closing dates. Option holders under such plans received the
Company's common stock, or options to buy the Company's stock, based on the
conversion terms of the various merger agreements. The historical option
information presented below has been restated to reflect the options originally
granted under the acquired companies' plans.


<TABLE>
<CAPTION>
                                                                                   Weighted       Restricted
                                                                 Options      Average Price           Shares
                                                             Outstanding          Per Share      Outstanding
- ------------------------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>                <C> 
DECEMBER 31, 1993........................................      4,208,589             $19.47          261,296
Granted:
  Stock options..........................................      6,576,268              29.75               --
  Restricted stock.......................................             --                             192,732
Exercised................................................     (2,052,389)             20.33               --
Canceled/vested..........................................       (340,319)             28.61          (26,084)
                                                           -------------------------------------------------
DECEMBER 31, 1994........................................      8,392,149             $26.70          427,944
Granted:
  Stock options..........................................      2,083,807              45.05               --
  Restricted stock.......................................             --                             149,806
Exercised................................................     (3,545,183)             27.48               --
Canceled/vested..........................................     (1,044,808)             16.43          (22,882)
                                                           -------------------------------------------------
DECEMBER 31, 1995........................................      5,885,965             $34.33          554,868
Granted:
  Stock options..........................................      8,553,170              67.49               --
  Restricted stock.......................................             --                             114,898
FirsTier options converted...............................        270,164              29.42               --
Exercised................................................     (4,356,559)             36.37               --
Canceled/vested..........................................       (137,497)             50.69         (246,917)
                                                           -------------------------------------------------
DECEMBER 31, 1996........................................     10,215,243             $60.99          422,849
- ------------------------------------------------------------------------------------------------------------
</TABLE>


     At December 31, 1996, 1995, and 1994 exercisable options were 2.7 million,
2.9 million, and 3.7 million, and had a weighted average price of $41.50,
$31.40, and $28.31. For options outstanding at December 31, 1996, the exercise
prices ranged from $8.41 to $73.00, with a weighted average remaining
contractual life of 8.5 years.

     Pro forma information regarding net income and earnings per share is
required by SFAS 123, "Accounting and Disclosure of Stock-Based Compensation"
and has been determined as if the Company had accounted for its employee stock
option and stock purchase plans ("options") under the fair value method of that
Statement. The fair value of the options was estimated at the grant date using a
Black-Scholes option pricing model. Option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

     The following weighted average assumptions were used in the valuation
model: risk-free interest rates of 6.1 percent and 6.0 percent in 1996 and 1995;
dividend yield of 3.0 percent in both 1996 and 1995; stock price volatility
factors of .20 and .18 in 1996 and 1995; and, expected life of options of 4
years and 2 years in 1996 and 1995, respectively.

     The pro forma disclosures include options granted in 1996 and 1995 and are
not likely to be representative of the pro forma disclosures for future years.
The estimated fair value of the options is amortized to expense over the
options' vesting period.


<TABLE>
<CAPTION>                                                Year Ended December 31 
                                                         ----------------------
(In Millions, Except Per-Share Data)                           1996      1995
- -------------------------------------------------------------------------------
<S>                                                            <C>       <C>
Pro forma net income (primary).............................    $719.7    $553.6
Pro forma net income (fully diluted).......................     725.9     561.1
Pro forma earning per share:
  Primary..................................................     $5.24     $4.13
  Fully diluted............................................      5.15      4.06
- ------------------------------------------------------------------------------- 
</TABLE>

 
First Bank System, Inc. 
 
                                                                              57

<PAGE>
 
NOTE M  INCOME TAXES

     The components of income tax expense were:


<TABLE> 
<CAPTION> 
(Dollars in Millions)                                                                      1996     1995    1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>      <C>     <C> 
FEDERAL:
Current tax........................................................................      $403.4   $234.7  $156.3
Deferred tax provision.............................................................        13.3     68.3     8.3           
                                                                                         -----------------------
  Federal income tax...............................................................       416.7    303.0   164.6           
                                                                                         -----------------------
STATE:                                                                                                                     
Current tax........................................................................        41.4     26.3    36.6           
Deferred tax (credit) provision....................................................        (3.3)     5.0    (9.4)          
                                                                                         ----------------------- 
  State income tax.................................................................        38.1     31.3    27.2 
                                                                                         ----------------------- 
  Total income tax provision.......................................................      $454.8   $334.3  $191.8           
- ----------------------------------------------------------------------------------------------------------------
</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)                                                                      1996     1995    1994
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>      <C>     <C>
Tax at statutory rate (35%)........................................................      $418.1   $315.8  $176.9
State income tax, at statutory rates, net of federal tax benefit...................        24.8     20.4    17.7  
Tax effect of:                                                                                                    
  Tax-exempt interest:                                                                                            
   Loans...........................................................................        (4.5)    (5.1)   (6.0) 
   Securities......................................................................        (8.9)    (3.9)   (4.1) 
  Amortization of goodwill.........................................................        29.7     12.4    10.3  
  Other items......................................................................        (4.4)    (5.3)   (3.0) 
                                                                                         -----------------------
Applicable income taxes............................................................      $454.8   $334.3  $191.8   
- ---------------------------------------------------------------------------------------------------------------- 
</TABLE>


     During 1996, the Company received a tax refund of $65 million, including
interest, from the State of Minnesota relating to the exemption of interest
income received on investments in U.S. government securities for the period 1979
to 1983.

     At December 31, 1996, for income tax purposes, the Company had federal net
operating loss carryforwards of $29.5 million available, which expire in year
2009. In addition, the Company had state net operating loss carryforwards of
$43.7 million available, primarily in one taxing jurisdiction. These
carryforwards expire in years 2006 through 2008.

     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)                                                            1996            1995
- -----------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>
DEFERRED TAX ASSETS:
Loan loss reserves..........................................................  $ 186.0         $ 162.2
Real estate and other asset basis differences...............................     78.3            48.1
Postretirement liability....................................................     27.7            25.4
Deferred loan fees..........................................................     21.9             9.1
Alternative minimum tax credit carryforward.................................     11.4            10.5
Federal operating loss carryforward.........................................     10.3            31.0
Contingent liabilities and other miscellaneous accruals.....................     69.3            85.2
                                                                              -----------------------
   Gross deferred tax assets................................................    404.9           371.5

DEFERRED TAX LIABILITIES:
Leasing activities..........................................................    (77.4)          (63.1)
Other investment basis differences..........................................    (17.8)          (22.3)
Accelerated depreciation....................................................    (11.8)            5.0
Accrued severance, pension and retirement benefits..........................     (9.7)            8.8
Adjustment of available-for-sale securities to market value.................     (1.5)          (13.8)
Other deferred liabilities and reserves.....................................    (68.3)          (64.3)
                                                                              -----------------------
   Gross deferred tax liabilities...........................................   (186.5)         (149.7)
Deferred tax assets valuation reserve.......................................     (2.2)           (5.5)
                                                                              -----------------------
NET DEFERRED TAX ASSETS.....................................................  $ 216.2         $ 216.3
- -----------------------------------------------------------------------------------------------------
</TABLE>


                                                         First Bank System, Inc.

58

<PAGE>
 
     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 $3.3 million from December 31, 1995, to December 31, 1996,
due to utilization of net operating losses.

NOTE N FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CREDIT 
       CONCENTRATIONS 


In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the financing needs of its customers and to manage
its interest rate risk. These instruments carry varying degrees of credit,
interest rate or liquidity risk. The contract or notional amounts of these
financial instruments at December 31, 1996, and 1995, were as follows:


<TABLE>
<CAPTION>
(Dollars in Millions)                                                                           1996            1995    
- --------------------------------------------------------------------------------------------------------------------    
<S>                                                                                          <C>              <C>
Commitments to extend credit:
  Commercial...............................................................................  $ 8,944          $7,240
  Corporate and purchasing cards...........................................................   13,820           5,220
  Consumer credit card.....................................................................   10,245           9,247
  Other consumer...........................................................................    3,066           3,264
Letters of credit:
  Standby..................................................................................    1,447           1,412
  Commercial...............................................................................      182             161
Interest rate swap contracts:
  Hedges...................................................................................    2,656           2,839
  Intermediated............................................................................      174             169
Options contracts:
  Hedge interest rate floors purchased.....................................................    1,250           1,250
  Hedge interest rate caps purchased.......................................................      100             200
  Intermediated interest rate and foreign exchange caps and floors purchased...............      122             126
  Intermediated interest rate and foreign exchange caps and floors written.................      122             126
Liquidity support guarantees...............................................................       81             142
Forward contracts..........................................................................       22             294
Commitments to sell loans..................................................................        3             223
Mortgages sold with recourse...............................................................      114             242
Foreign currency commitments:
  Commitments to purchase..................................................................      870             792
  Commitments to sell......................................................................      867             785
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
First Bank System, Inc. 
 
                                                                              59

<PAGE>
 
COMMITMENTS TO EXTEND CREDIT Commitments to extend credit are legally binding
and generally have fixed expiration dates or other termination clauses. The
contractual amount represents the Company's exposure to credit loss, in the
event of default by the borrower. The Company manages this credit risk by using
the same credit policies it applies to loans. Collateral is obtained to secure
commitments based on management's credit assessment of the borrower. The
collateral may include marketable securities, receivables, inventory, equipment,
and real estate. Since the Company expects many of the commitments to expire
without being drawn, total commitment amounts do not necessarily represent the
Company's future liquidity requirements. In addition, the commitments include
consumer credit lines that are cancelable upon notification to the consumer.

LETTERS OF CREDIT Standby letters of credit are conditional commitments the
Company issues to guarantee 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 or collection in connection with trade transactions.
In the event of a customer's nonperformance, the Company's credit loss exposure
is the same as in any extension of credit, up to the letter's contractual
amount. Management assesses the borrower's credit to determine the necessary
collateral, which may include marketable securities, real estate, accounts
receivable, and inventory. Since the conditions requiring the Company to fund
letters of credit may not occur, the Company expects its liquidity requirements
to be less than the total outstanding commitments.

INTEREST RATE OPTIONS AND SWAPS Interest rate swaps are contracts to exchange
fixed and floating rate interest payment obligations based on a notional
principal amount. The Company enters into swaps to hedge its balance sheet
against fluctuations in interest rates and as an intermediary for customers. At
December 31, 1996, and 1995, interest rate swaps totaling $2.7 billion and $2.8
billion, respectively, hedged commercial loans, medium-term notes, subordinated
debt, notes, wholesale certificates of deposit, deposit accounts, and savings
certificates.

     The Company receives fixed rate interest and pays floating rate interest on
all hedges as of December 31, 1996. Activity with respect to interest rate swap
hedges was as follows:


<TABLE>
<CAPTION>
(In Millions)                                               1996       1995       1994
- --------------------------------------------------------------------------------------
<S>                                                     <C>        <C>        <C>
Notional amount outstanding at beginning of year......  $2,838.8   $2,673.8   $3,010.8
Additions.............................................     550.0      625.0    1,275.0
Maturities............................................    (433.0)    (460.0)    (824.1)
Terminations..........................................    (300.0)        --     (787.9)
                                                        ------------------------------
  Notional amount outstanding at end of year..........  $2,655.8   $2,838.8   $2,673.8
- --------------------------------------------------------------------------------------

Weighted average interest rates paid..................      5.59%      5.86%      6.09%
Weighted average interest rates received..............      6.51       6.83       6.91
- -------------------------------------------------------------------------------------- 
</TABLE>


     For the hedging portfolio's notional balances and yields by maturity date
as of year-end 1996, see Table 17 on page 37. For a description of the Company's
objectives for using derivative financial instruments, refer to Interest Rate
Risk Management on pages 35 through 37. Such information is incorporated by
reference into these Notes to Consolidated Financial Statements.

     Interest rate caps are also used to minimize the impact of fluctuating
interest rates on earnings. The total notional amount of cap agreements
purchased at December 31, 1996, was $100 million with a 3-month LIBOR strike
rate of 6.00 percent. The total notional amount of cap agreements purchased at
December 31, 1995, was $200 million with a 3-month LIBOR strike rate of 6.00
percent. The premium on caps is amortized over the life of the contract. The
impact of the caps on net interest income was not material for the years ended
December 31, 1996, 1995 and 1994.

     At December 31, 1996, and 1995, LIBOR based interest rate floors totaling
$950 million with an average remaining maturity of 1.0 years and 2.0 years,
respectively, hedged floating rate commercial loans. The strike rate on these
LIBOR based floors ranged from 3.25 percent to 4.00 percent at December 31, 1996
and December 31, 1995. At December 31, 1996, and 1995, Constant Maturity
Treasury (CMT) interest rate floors totaling $300 million with an average
remaining maturity of 18 months and 9 months, respectively,

                                                         First Bank System, Inc.

60

<PAGE>
 
hedged the repayment risk of fixed rate residential mortgage loans. The strike
rate on these CMT floors ranged from 5.60 percent to 5.70 percent at December
31, 1996, and from 6.25 percent to 6.36 percent at December 31, 1995.

     In addition to utilizing swaps and options as part of its asset/liability
management strategy, the Company acts as an intermediary for swap and option
agreements on behalf of its customers. To reduce its market risk exposure, the
Company enters into generally matching or offsetting positions. The total
notional amount of customer swap agreements, including the offsetting positions,
was $174 million and $169 million at December 31, 1996, and 1995, respectively.
The total notional amount of customer option agreements, including the
offsetting positions, was $244 million and $252 million at December 31, 1996,
and 1995, 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
customer intermediated swaps and options, the Company records these gains and
losses as they occur in trading income. For swaps and options used as hedges,
the Company recognizes gains or losses by adjusting interest income or expense
over the terms of the hedge. The gain or loss on a terminated hedge is amortized
over the life of the original swap or the life of the hedged item, whichever is
shorter. The amortization of deferred gains and losses increased net interest
income by $2.2 million and $6.3 million during 1996, and 1995, respectively.
Unamortized deferred gains were $6.0 million at December 31, 1996. The Company
will amortize these net gains through the year 2000.

     The credit risk related to interest rate swap and option agreements is that
counterparties may be unable to meet the contractual terms. The Company
estimates this risk by calculating the present value of the cost to replace all
outstanding contracts in a gain position at current market rates, reported on a
net basis by counterparty. At December 31, 1996, and 1995, the gain position of
these contracts, in the aggregate, was approximately $48 million and $124
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. Commercial lending officers 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 that permit the Company to settle interest rate contracts with the
same counterparty on a net basis.

LIQUIDITY SUPPORT GUARANTEES Through liquidity support guarantees, the Company
agrees to provide market support for its customers' commercial paper or tax-
exempt bonds. These 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 occur, total guarantee amounts do not necessarily represent
the Company's future funding obligation.

FORWARD CONTRACTS AND COMMITMENTS TO SELL MORTGAGE LOANS Forward contracts are
agreements 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, 1996,
and 1995, forward contracts outstanding were $22 million and $294 million,
respectively. At December 31, 1996, net unamortized deferred gains on the
forward agreements were not material. The Company manages its credit risk on
forward contracts, which arises from nonperformance by counterparties, through
credit approval and limit procedures. The Company is committed under agreements
to sell mortgage loans pursuant to master delivery commitments. The remaining
balance on those commitments was $3 million at December 31, 1996, and $223
million at December 31, 1995.

MORTGAGES SOLD WITH RECOURSE The Company is obligated under recourse provisions
related to the sale of certain residential mortgages. The contract amount of
these mortgages, excluding the Government National Mortgage Association ("GNMA")
agreements, was $114 million at December 31, 1996, and $172 million at December
31, 1995. Mortgages sold with recourse under sale/servicing agreements with GNMA
totaled $6 million at December 31, 1996, and $700 million at December 31, 1995.
The Company has secondary recourse obligations under these agreements, but the
liability is not material.

FOREIGN CURRENCY COMMITMENTS The Company uses foreign currency commitments to
help customers reduce the risks associated with changes in foreign currency
exchange rates. Through these contracts, the Company exchanges currencies at
specified rates on specified dates with various counterparties. The Company
minimizes the market and liquidity risks by taking offsetting positions. In
addition, the Company controls the market risks by limiting the net exposure
through policies, procedures, and monitoring. The Company manages its credit
risk, or potential risk of loss from default by a counterparty, through credit
limit approval and monitoring procedures. The aggregate replacement cost of
contracts in a gain position at December 31, 1996, was not significant.

CREDIT CONCENTRATIONS The Company primarily lends to borrowers in the 11 states
where it has banking offices. Approximately 80 percent of the Company's
commercial and financial institutions loans were made to borrowers in this
operating region representing a diverse range of industries. Collateral may
include marketable securities, accounts receivable, inventory, and equipment.

                                                                              61
First Bank System, Inc. 

<PAGE>
 
     For detail of the Company's real estate portfolio by property type and
geography as of December 31, 1996, and 1995, see Table 8 on page 28. This
information is incorporated by reference into these Notes to Consolidated
Financial Statements. Such loans are collateralized by the related property.

     Approximately 80 percent of the total consumer portfolio consists of loans
to customers in the Company's operating region. Residential mortgages, home
equity, and auto loans are secured, but other consumer loans are generally not
secured. For detail of the Company's consumer loan portfolio referenced here,
see Table 7 on page 27 under the category "Consumer" as of December 31, 1996,
and 1995, which is incorporated by reference into these Notes to Consolidated
Financial Statements.

NOTE O  FAIR VALUES OF FINANCIAL INSTRUMENTS

SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the
disclosure of the fair value, where practically estimable, of all financial
instruments, both on and off balance sheet. Financial instruments are generally
defined as cash, equity instruments or investments, and contractual obligations
to pay or receive cash or another financial instrument. The Statement indicates
that quoted market prices are the preferred means of estimating value. When
market quotes are unavailable, valuation techniques including discounted cash
flow calculations and pricing models or services should be used.

     Due to the nature of its business and its customers' needs, the Company
offers a large number of financial instruments, most of which are not actively
traded. Accordingly, the Company uses several valuation techniques and
aggregation methods for valuing various products. The Company also uses various
assumptions, such as the discount rate and cash flow timing and amounts. As a
result, the fair value estimates can neither be substantiated by independent
market comparisons, nor realized by the immediate sale or settlement of the
financial instrument. Also, the estimates reflect a point in time and could
change significantly based on changes in economic factors, such as 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 estimate a market value of
the Company as a whole. A summary of the Company's valuation techniques and
assumptions follows.

CASH AND CASH EQUIVALENTS: The carrying value of cash, federal funds sold, and
securities under resale agreements 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 and fixed rate loans, the
fair value of which was estimated using discounted cash flow analyses and other
valuation techniques. To calculate discounted cash flows, the loans were
aggregated into pools of similar types and expected repayment terms. The
expected cash flows were reduced for estimated historical prepayment experience.
Projected cash flows on nonaccrual loans were further reduced by the amount of
the estimated losses on the portfolio and discounted over an assumed average
remaining life of one to two years.

COMMERCIAL AND FINANCIAL INSTITUTIONS: The fixed rate loans in the commercial
and financial institutions portfolio (excluding nonaccrual loans) had a weighted
average interest rate of 8.1 percent in 1996 and 8.0 percent in 1995. The
weighted average maturity was 1.6 years in 1996 and 1.8 years in 1995. The
floating rate loans had a weighted average rate of 7.9 percent in 1996 and 8.2
percent in 1995. The high-grade corporate bond yield curve was used to arrive at
the discount rates applied to these loans.

COMMERCIAL REAL ESTATE AND CONSTRUCTION: The fixed rate portion of this
portfolio (excluding nonaccrual loans) had a weighted average interest rate of
8.9 percent in 1996 and 1995 and a weighted average contractual remaining
maturity of 4.2 years in 1996 and 1995. The floating rate loans (excluding
nonaccrual loans) had a weighted average interest rate of 8.4 percent in 1996
and 8.6 percent in 1995. The weighted average contractual remaining maturity was
4.4 years in 1996 and 3.6 years in 1995. The high-grade corporate bond yield
curve was used to arrive at the discount rates applied to these loans.

RESIDENTIAL FIRST MORTGAGES: These loans were segregated into pools of similar
coupons and maturities. The pools were matched to similar mortgage-backed
securities, and market quotes were obtained. The estimated value also reflects
the related fair value of mortgage servicing rights, which was calculated using
a discounted cash flow analysis. The fixed rate portion of this portfolio had a
weighted average interest rate of 7.8 percent in 1996 and 7.7 percent in 1995.
The weighted average contractual remaining maturity was 14.5 years in 1996 and
16.0 years in 1995.

CONSUMER INSTALLMENT: The fair value of the consumer installment portfolio was
based on an approach the Company uses in evaluating potential acquisitions.
Prepayment assumptions ranging from 20 to 25 percent were applied to scheduled
cash flows, based upon the Company's experience. On the fixed rate portion, the
weighted average rate was 9.3 percent in 1996 and 8.9 percent in 1995. The
weighted average contractual remaining maturity was 2.0 years in 1996 and 1.8
years in 1995. The floating rate portion of the consumer installment portfolio
had a weighted average interest rate of 8.2 percent in 1996 and 9.6 percent in
1995.

62                                                      First Bank System, Inc.

<PAGE>
 
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 the approach the Company uses in evaluating potential acquisitions of similar
portfolios. In 1996, estimated net income adjusted for account attrition was
discounted using an estimated cost of capital of 11.3 percent for secured lines
and loans and 14.1 percent for unsecured. In 1995, the estimated cost of capital
was 12.4 percent for secured and 14.4 percent for unsecured. The home equity
lines had a weighted average interest rate of 9.4 percent in 1996 and 10.0
percent in 1995, with a weighted average life of 4.1 years in 1996 and 5.0 years
in 1995. Fixed rate second mortgages had a weighted average interest rate of 9.8
percent in 1996 and 9.6 percent in 1995. The weighted average contractual
remaining maturity was 3.6 years in 1996 and 3.1 years in 1995. Retail credit
cards had a weighted average interest rate of 11.4 percent in 1996 and 12.6
percent in 1995, with an estimated weighted average life of 4.4 years in 1996
and 6.0 years in 1995. Other revolving lines had a weighted average interest
rate of 10.8 percent in 1996 and 12.6 percent in 1995, with an estimated
weighted average life of 6.6 years in 1996 and 7.8 years in 1995.

CORE DEPOSIT INTANGIBLE: Core deposits provide a stable, low-cost source of
funds that can be invested to earn a return that exceeds their cost. The fair
value of the Company's core deposit intangible was calculated using a discounted
cash flow model that estimates the present value of the difference between the
ongoing cost of the core deposits and 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 equal to the amount payable on demand at year-
end. Fair values for fixed rate certificates of deposits were estimated using a
discounted cash flow analysis based on the discount rates of the high-grade
corporate bond yield curve. The weighted average interest rate for the
certificates of deposits was 5.7 percent in 1996 and 1995 and the weighted
average maturity was 1.1 years in 1996 and 1.2 years in 1995.

SHORT-TERM BORROWINGS: Federal funds purchased, borrowings under repurchase
agreements, and other short-term borrowings are at variable rates or have short-
term maturities. Their carrying value is assumed to approximate their fair
value.

LONG-TERM DEBT: Medium-term notes, Federal Home Loan Bank Advances, capital
lease obligations, and mortgage note obligations totaled $2,273 million in 1996
and $2,067 million in 1995. Their estimated fair value was determined using a
discounted cash flow analysis based on current market rates of similar maturity
debt securities to discount cash flows. The weighted average interest rate was
6.0 percent in 1996 and 1995, with a weighted average contractual remaining
maturity of 3.2 years in 1996 and 2.1 years in 1995. Other long-term debt
instruments were valued using available market quotes.

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

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, Eurodollar future, and Treasury Note yield curves.

First Bank System, Inc.                                                      63

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


<TABLE> 
<CAPTION>
                                                                                      1996                      1995
                                                                            -----------------------------------------------
                                                                               Carrying         Fair    Carrying      Fair
(Dollars in Millions)                                                           Amount         Value     Amount       Value
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>       <C>         <C>
FINANCIAL ASSETS:
 Cash and due from banks...............................................      $  2,413         $ 2,413   $ 1,837     $ 1,837
 Federal funds sold and resale agreements..............................           827             827       265         265
 Trading account securities............................................           146             146        86          86
 Available-for-sale securities.........................................         3,555           3,555     3,256       3,256
 Loans:
  Commercial:
   Commercial..........................................................         9,456           9,731     8,271       8,523
   Financial institutions..............................................           905             833     1,060       1,015
   Commercial real estate and construction.............................         3,744           4,023     3,187       3,531
  Consumer:
   Residential mortgage................................................         3,019           3,009     4,655       4,742
   Residential mortgage held for sale..................................            42              42       257         257
   Home equity and second mortgage.....................................         3,263           3,367     2,805       2,909
   Credit card and revolving lines.....................................         3,595           3,759     3,343       3,586
   Other consumer installment..........................................         3,104           3,104     2,822       2,828
  Allowance for credit losses..........................................          (517)             --      (474)         --
                                                                            -----------------------------------------------
   Total loans.........................................................        26,611          27,868    25,926      27,391
                                                                            -----------------------------------------------
   Total financial assets..............................................        33,552          34,809    31,370      32,835

NONFINANCIAL ASSETS:
 Core deposit intangible...............................................           108             383        77         269
 Mortgage servicing portfolio..........................................             2               3        40         148
                                                                            -----------------------------------------------
   Total...............................................................        33,662         $35,195    31,487     $33,252
                                                                                          -----------            ----------
Other assets...........................................................         2,827                     2,387
                                                                            ---------                 ---------
   Total Assets........................................................      $ 36,489                   $33,874
                                                                            ---------                 ---------
FINANCIAL LIABILITIES:
 Deposits:
  Noninterest-bearing..................................................      $  7,871         $ 7,871   $ 6,357     $ 6,357
  Interest-bearing checking and other savings..........................         8,962           8,962     8,399       8,399
  Savings certificates and certificates > $100,000.....................         7,546           7,507     7,758       7,799
                                                                            -----------------------------------------------
   Total deposits......................................................        24,379          24,340    22,514      22,555
 Federal funds purchased...............................................         1,204           1,204     2,000       2,000
 Securities sold under agreements to repurchase........................           819             819       269         274
 Other short-term funds borrowed.......................................         2,074           2,074     2,116       2,116
 Long-term debt........................................................         3,553           3,596     3,201       3,267
 Company-obligated mandatorily redeemable
  capital securities of FBS Capital I..................................           300             314        --          --
                                                                            -----------------------------------------------
   Total financial liabilities.........................................        32,329         $32,347    30,100     $30,212
                                                                                          -----------            ----------
NONFINANCIAL LIABILITIES...............................................         1,107                     1,049

SHAREHOLDERS' EQUITY...................................................         3,053                     2,725
                                                                            ---------                 ---------
   Total Liabilities and Shareholders' Equity..........................      $ 36,489                   $33,874
                                                                            ---------                 --------- 
Off-Balance Sheet Financial Instruments:                                    
 Unrecognized gain on interest rate swaps and options..................           N/A         $    22       N/A     $   101
 Unrecognized loss on interest rate swaps and options..................           N/A              --       N/A          --
 Loan commitments......................................................           N/A              --       N/A          --
 Letters of credit.....................................................           N/A              --       N/A          --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>


64                                              First Bank System, Inc.

<PAGE>
 
NOTE P  COMMITMENTS AND CONTINGENT LIABILITIES

Rental expense for operating leases amounted to $68.1 million in 1996, $61.2
million in 1995, and $77.5 million in 1994. Future minimum payments, net of
sublease rentals, under capitalized leases and noncancelable operating leases
with initial or remaining terms of one year or more, consisted of the following
at December 31, 1996:

                                               Capitalized     Operating
(In Millions)                                     Leases         Leases
- ------------------------------------------------------------------------
1997............................................. $ 13.2         $ 62.5
1998.............................................    6.2           57.1
1999.............................................    6.2           52.4
2000.............................................    6.2           46.5
2001.............................................    6.2           47.0
Thereafter.......................................   66.0          289.9
                                                  ---------------------
Total minimum lease payments.....................  104.0         $555.4
                                                                -------

Less amount representing interest................   51.2
                                                  --------

Present value of net minimum lease payments...... $ 52.8
- ------------------------------------------------------------------------

     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 Pilsbury Center. The Bank and the Parent Company have long-term
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 $22.4 million at December 31, 1996 and
$22.7 million at December 31, 1995. Minimum annual payments required under the
leases are approximately $2.7 million. 
     Various legal proceedings are currently pending against the Company. Due to
their complex nature, it may be years before some matters are resolved. In the
opinion of management, the aggregate liability, if any, will not have a material
adverse affect on the Company's financial position, liquidity or results of
operations.

NOTE Q  SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET - Time certificates of deposit in denominations of
$100,000 or more totaled $866 million and $900 million at December 31, 1996, and
1995, 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)                                                  1996        1995         1994
- ----------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>           <C>         <C>  
Income taxes paid.............................................................    $   316.1     $  253.8    $   155.6
Interest paid.................................................................      1,098.6      1,072.8        833.1
Net noncash transfers to foreclosed property..................................         23.2         19.5         41.4
Change in unrealized gain (loss) on available-for-sale securities,
 net of taxes of $12.2 in 1996, $79.2 in 1995 and $89.6 in 1994...............        (20.0)       128.9       (144.4)
                                                                                -------------------------------------
Cash acquisitions of businesses:
 Fair value of noncash assets acquired........................................    $    38.3     $  120.2    $   805.9
 Liabilities assumed..........................................................           --         (2.7)      (698.7)
                                                                                -------------------------------------
  Net.........................................................................    $    38.3     $  117.5    $   107.2
                                                                                -------------------------------------
Stock acquisitions of businesses:
 Fair value of noncash assets acquired........................................    $ 3,627.9     $  746.9    $ 1,805.8
 Net cash acquired............................................................        116.5         55.4         74.5
 Liabilities assumed..........................................................     (3,032.2)      (696.7)    (1,648.0)
                                                                                -------------------------------------
  Net value of common stock issued............................................    $   712.2     $  105.6    $   232.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>


REGULATORY CAPITAL - The measures used to assess capital include the capital
ratios established by bank regulatory agencies, including the specific ratios
for the "well capitalized" designation. For a description of the regulatory
capital requirements and the actual ratios as of December 31, 1996 for the
Company and its bank and thrift subsidiaries, see Tables 18 and 19 from which
such information is incorporated by reference into these Notes to Consolidated
Financial Statements.

First Bank System, Inc.                                                      65

<PAGE>
 
NOTE R  FIRST BANK SYSTEM, INC. (PARENT COMPANY)

CONDENSED BALANCE SHEET


<TABLE> 
<CAPTION> 
December 31 (In Millions)                                                                          1996         1995
- ---------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>             <C> 
ASSETS
Deposits with subsidiary banks, principally interest-bearing..............................  $    343         $   244
Available-for-sale securities.............................................................        60             209
Investments in:
   Bank and thrift affiliates.............................................................     3,370           2,940
   Nonbank affiliates.....................................................................       402             115
Advances to:
   Bank and thrift affiliates.............................................................       528             372
   Nonbank affiliates.....................................................................       102              61
Other assets..............................................................................       277             382
                                                                                            -------------------------
     Total assets.........................................................................  $  5,082         $ 4,323
                                                                                            -------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term funds borrowed.................................................................  $     --         $    21
Advances from subsidiaries................................................................       334              40
Long-term debt............................................................................     1,170           1,326
Company-obligated mandatorily redeemable capital securities of FBS Capital I..............       300              --
Other liabilities.........................................................................       225             211
Shareholders' equity......................................................................     3,053           2,725
                                                                                            ------------------------
     Total liabilities and shareholders' equity...........................................  $  5,082         $ 4,323
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
 


CONDENSED STATEMENT OF INCOME


<TABLE> 
<CAPTION> 
Year Ended December 31 (In Millions)                                                            1996            1995      1994
- -------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>              <C>       <C>
INCOME
Dividends from subsidiaries (including $526.1, $613.7
  and $447.9 from bank and thrift subsidiaries)...........................................  $  572.9         $ 633.2   $ 480.9
Interest from subsidiaries................................................................      51.9            40.3      19.0
Service and management fees from subsidiaries.............................................      92.0            88.2     103.4
Other income..............................................................................     256.6            25.4      23.7
                                                                                            -----------------------------------
    Total income..........................................................................     973.4           787.1     627.0

EXPENSES
Interest on short-term funds borrowed.....................................................       3.7             3.0       2.8
Interest on long-term debt................................................................      81.7            80.5      55.0
Interest on Company-obligated mandatorily redeemable capital securities of FBS Capital I..       2.3              --        --
Operating expenses paid to subsidiaries...................................................       7.9             8.4       8.3
Other expenses............................................................................     110.3           103.3     193.3
                                                                                            -----------------------------------
    Total expenses........................................................................     205.9           195.2     259.4
                                                                                            -----------------------------------
Income before income taxes and equity in undistributed income of subsidiaries.............     767.5           591.9     367.6
Income tax expense (credit)...............................................................      71.4           (20.2)    (41.4)
                                                                                            -----------------------------------
Income of parent company..................................................................     696.1           612.1     409.0
Equity (deficiency) in undistributed income of subsidiaries:
  Bank and thrift affiliates..............................................................      60.5           (44.4)    (81.5)
  Nonbank affiliates......................................................................     (16.8)             .4     (22.5)
                                                                                            -----------------------------------
                                                                                                43.7           (44.0)   (104.0)
                                                                                            -----------------------------------
    Net income............................................................................  $  739.8         $ 568.1   $ 305.0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
                                                         First Bank System, Inc.

66

<PAGE>
 
CONDENSED STATEMENT OF CASH FLOWS


<TABLE> 
<CAPTION> 
Year Ended December 31 (In Millions)                                                            1996            1995      1994
- -------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>              <C>       <C>
OPERATING ACTIVITIES
Net income................................................................................. $  739.8         $ 568.1   $ 305.0
Adjustments to reconcile net income to net cash
    provided by operating activities:
  (Equity) deficiency in undistributed income of subsidiaries..............................    (43.7)           44.0     104.0
  (Gains) losses on available-for-sale securities..........................................    (31.3)             .4        .5
  Decrease (increase) in accrued receivables, net..........................................    119.2           (36.0)     46.1
  Increase (decrease) in accrued liabilities, net..........................................     19.4          (114.1)    (21.4)
  Amortization of goodwill and other intangibles...........................................      2.7             5.6       5.5
  Deferred tax (credit) provision..........................................................     (9.3)           37.8      27.5
  Provision for merger and integration.....................................................       --              --      72.8
  Other - net..............................................................................     34.0             (.2)    (38.6)
                                                                                            -----------------------------------
    Net cash provided by operating activities..............................................    830.8           505.6     501.4

INVESTING ACTIVITIES
Securities transactions:
  Sales and maturities.....................................................................    158.5            88.5      20.4
  Purchases................................................................................     (2.7)         (126.9)    (47.1)
Investments in subsidiaries................................................................   (315.8)         (121.9)    (83.7)
Equity distributions from subsidiaries.....................................................    323.0           150.0     235.0
Net (increase) decrease in short-term advances to affiliates...............................    (54.7)           52.3     (50.0)
Long-term advances made to affiliates......................................................   (150.0)         (259.7)       --
Principal collected on long-term advances made to affiliates...............................     10.0            25.2        .3
Other - net................................................................................    (11.1)            5.6     (31.6)
                                                                                            -----------------------------------
    Net cash (used) provided by investing activities.......................................    (42.8)         (186.9)     43.3

FINANCING ACTIVITIES
Net decrease in short-term advances from subsidiaries......................................    (17.1)          (27.7)    (27.2)
Net (decrease) increase in short-term funds borrowed.......................................    (12.1)           14.8       2.1
Proceeds from long-term advances from subsidiaries.........................................    309.3              --        --
Proceeds from long-term debt...............................................................     84.0           654.1     405.1
Principal payments on long-term debt.......................................................   (248.9)         (424.7)   (145.1)
Issuance of Company-obligated mandatorily redeemable capital securities of FBS Capital I...    300.0              --        --
Redemption of preferred stock..............................................................       --           (13.2)   (167.0)
Proceeds from dividend reinvestment, stock option, and
  stock purchase plans.....................................................................     69.1            67.7      40.3
Purchase of treasury stock and stock warrants..............................................   (939.5)         (545.2)   (245.8)
Stock warrants exercised...................................................................       --              .3       7.9
Cash dividends.............................................................................   (233.9)         (199.2)   (168.6)
                                                                                            -----------------------------------
    Net cash used by financing activities..................................................   (689.1)         (473.1)   (298.3)
                                                                                            -----------------------------------
    Change in cash and cash equivalents....................................................     98.9          (154.4)    246.4
Cash and cash equivalents at beginning of year.............................................    243.8           398.2     151.8
                                                                                            -----------------------------------
    Cash and cash equivalents at end of year............................................... $  342.7         $ 243.8   $ 398.2
- ------------------------------------------------------------------------------------------------------------------------------- 
</TABLE>


Transfer of funds -- dividends, loans or advances -- from bank and thrift
subsidiaries to the Company is restricted. Federal law prohibits loans unless
they are secured and generally limits any loan to the Company or individual
affiliate to 10 percent of the bank's or thrift's equity. In aggregate, loans to
the Company and all affiliates cannot exceed 20 percent of the bank's or
thrift's equity.

     Dividend payments to the Company by its subsidiary banks and thrift are
subject to regulatory review and statutory limitations and, in some instances,
regulatory approval. The approval of the Comptroller of the Currency is required
if total dividends 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 or if the bank's retained earnings are less
than zero. Furthermore, dividends are restricted by the Comptroller of the
Currency's minimum capital constraints for all national banks. Within these
guidelines, all bank subsidiaries have the ability to pay dividends without
prior regulatory approval except one bank, which bank represented three percent
of total assets at December 31, 1996.

     First Bank, fsb (the "Thrift") is required to give the Office of Thrift
Supervision ("OTS") 30-day notice prior to declaration of a cash dividend to the
parent company. The Thrift's dividends to the parent company are generally
limited to earnings in the calendar year plus 50 percent of the surplus capital
(the percentage by which the Thrift's regulatory capital ratios exceed the
minimum capital ratios required by the OTS) at the beginning of the year. In
addition, dividends are restricted by the OTS's minimum capital constraints for
all thrifts.

First Bank System, Inc.                                                       67

<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 and the Board of Directors.

     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-Finance



                        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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. 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
mis-statement. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.


/s/ Ernest & Young LLP

Minneapolis, Minnesota
January 9, 1997


68                                                       First Bank System, Inc.

<PAGE>
 
                CONSOLIDATED BALANCE SHEET -- FIVE-YEAR SUMMARY


<TABLE>
<CAPTION>
                                                                                                                % Change
December 31 (Dollars In Millions)                       1996        1995        1994        1993        1992   1995-1996
- ------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>         <C>         <C>         <C>       <C>
ASSETS
Cash and due from banks..........................    $ 2,413     $ 1,837     $ 1,707     $ 1,767     $ 2,011        31.4%
Federal funds sold and resale agreements.........        827         265         471       1,338       1,710           *
Interest-bearing deposits with banks.............         --          --          28          82         484           *
Trading account securities.......................        146          86          77          55          94        69.8
Securities held for sale.........................         --          --          --          --         295           *
Securities:
   U.S. Treasury.................................        545         925       1,113       1,554       1,827       (41.1)
   Mortgage-backed...............................      2,464       1,693       3,297       2,861       3,196        45.5
   State and political...........................        465         179         181         196         188           *
   U.S. agencies and other.......................         81         459         594         419         586       (82.4)
                                                    --------------------------------------------------------
     Total securities............................      3,555       3,256       5,185       5,030       5,797         9.2
Loans............................................     27,128      26,400      24,556      23,497      20,692         2.8
   Less allowance for credit losses..............        517         474         475         466         484         9.1
                                                    --------------------------------------------------------
     Net loans...................................     26,611      25,926      24,081      23,031      20,208         2.6
Other assets.....................................      2,937       2,504       2,579       2,067       2,159        17.3
                                                    --------------------------------------------------------
      Total assets...............................    $36,489     $33,874     $34,128     $33,370     $32,758         7.7%
                                                    --------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
   Noninterest-bearing...........................    $ 7,871     $ 6,357     $ 5,933     $ 7,743     $ 6,243        23.8%
   Interest-bearing..............................     16,508      16,157      18,323      18,643      20,152         2.2
                                                    --------------------------------------------------------
     Total deposits..............................     24,379      22,514      24,256      26,386      26,395         8.3
Short-term borrowings............................      4,097       4,385       3,226       1,334       1,540        (6.6)
Long-term debt...................................      3,553       3,201       2,981       2,070       1,151        11.0
Company-obligated mandatorily redeemable capital
   securities of FBS Capital I...................        300          --          --          --          --           *
Other liabilities................................      1,107       1,049       1,053         836         927         5.5
                                                    --------------------------------------------------------
     Total liabilities...........................     33,436      31,149      31,516      30,626      30,013         7.3
Shareholders' equity.............................      3,053       2,725       2,612       2,744       2,745        12.0
                                                    --------------------------------------------------------
     Total liabilities and shareholders' equity..    $36,489     $33,874     $34,128     $33,370     $32,758         7.7%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

*Not meaningful
 
First Bank System, Inc.                                                       

                                                                              69

<PAGE>
 
             CONSOLIDATED STATEMENT OF INCOME -- FIVE-YEAR SUMMARY



<TABLE>
<CAPTION>
                                                                                                                %   Change
Year Ended December 31 (In Millions)                          1996      1995      1994       1993      1992  1995-1996
- --------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>       <C>       <C>        <C>       <C>       <C>
INTEREST INCOME
Loans.......................................................  $2,339.3  $2,273.4  $1,914.7   $1,730.7  $1,687.2        2.9%
Securities:
  Taxable...................................................     241.5     226.0     327.9      352.1     336.5        6.9
  Exempt from federal income taxes..........................      25.5      11.2      12.0       14.6      12.0          *
Other interest income.......................................      47.6      34.6      33.5       37.1      70.4       37.6
                                                              -------------------------------------------------
  Total interest income.....................................   2,653.9   2,545.2   2,288.1    2,134.5   2,106.1        4.3

INTEREST EXPENSE
Deposits....................................................     673.1     706.7     597.3      648.3     797.7       (4.8)
Federal funds purchased and repurchase agreements...........     122.4     118.1     103.1       31.8      37.1        3.6
Other short-term funds borrowed.............................     120.4      90.2      20.4       20.1      17.1       33.5
Long-term debt..............................................     202.7     190.0     147.9       96.1     101.2        6.7
Company-obligated mandatorily redeemable
  capital securities of FBS Capital I.......................       2.3        --        --         --        --          *
                                                              -------------------------------------------------
  Total interest expense....................................   1,120.9   1,105.0     868.7      796.3     953.1        1.4
                                                              -------------------------------------------------
Net interest income.........................................   1,533.0   1,440.2   1,419.4    1,338.2   1,153.0        6.4
Provision for credit losses (1994 and 1992 include $16.5
  and $13.6, respectively, in merger-related provisions)....     136.0     115.0     123.6      133.1     191.7       18.3
                                                              -------------------------------------------------
Net interest income after provision for credit losses.......   1,397.0   1,325.2   1,295.8    1,205.1     961.3        5.4

NONINTEREST INCOME
Credit card fees............................................     292.6     232.7     179.0      137.1     116.9       25.7
Trust fees..................................................     230.7     175.3     159.2      146.1     127.8       31.6
Service charges on deposit accounts.........................     141.5     123.7     127.3      126.0     114.8       14.4
Investment products fees and commissions....................      33.4      27.6      29.6       24.3      21.8       21.0
Securities gains (losses)...................................      15.0        --    (115.0)        .3      46.3          *
Termination fee.............................................     190.0        --        --         --        --          *
State income tax refund.....................................      65.0        --        --         --        --          *
Gain on sale of mortgage banking operations.................      45.8        --        --         --        --          *
Gain on sale of branches....................................        --      31.0        --         --        --          *
Other.......................................................     171.7     192.8     178.8      185.1     186.1      (10.9)
                                                              -------------------------------------------------
  Total noninterest income..................................   1,185.7     783.1     558.9      618.9     613.7       51.4

NONINTEREST EXPENSE
Salaries....................................................     465.6     441.0     450.7      439.8     426.3        5.6
Employee benefits...........................................     105.0      96.4     105.7       99.1      94.9        8.9
Goodwill and other intangible assets........................     106.5      57.1      50.4       41.3      34.0       86.5
Net occupancy...............................................      98.5      98.6     103.8      109.7      97.7        (.1)
Furniture and equipment.....................................      89.0      94.2      88.3       80.7      72.7       (5.5)
Other personnel costs.......................................      55.8      40.9      35.7       31.0      23.3       36.4
Professional services.......................................      39.9      36.9      38.5       41.5      43.8        8.1
Advertising and marketing...................................      35.4      32.0      35.5       25.6      26.7       10.6
FDIC insurance..............................................      11.4      35.8      58.4       57.5      51.5      (68.2)
SAIF special assessment.....................................      51.0        --        --         --        --          *
Merger, integration, and resizing...........................      69.9        --      66.2       72.2      84.0          *
Merger-related severance....................................        --        --      56.5         --        --          *
Other (1992 includes $26.4 in merger-related other
  real estate expense)......................................     260.1     273.0     259.7      266.3     291.4       (4.7)
                                                              -------------------------------------------------
  Total noninterest expense.................................   1,388.1   1,205.9   1,349.4    1,264.7   1,246.3       15.1
                                                              -------------------------------------------------
Income from continuing operations before income taxes
 and cumulative effect of changes in accounting principles..   1,194.6     902.4     505.3      559.3     328.7       32.4
Applicable income taxes.....................................     454.8     334.3     191.8      198.6     115.7       36.0
                                                              -------------------------------------------------
Income from continuing operations before cumulative
  effect of changes in accounting principles................     739.8     568.1     313.5      360.7     213.0       30.2
Income (loss) from discontinued operations..................        --        --      (8.5)       2.5       2.7          *
                                                              -------------------------------------------------
Income before cumulative effect of changes in
  accounting principles.....................................     739.8     568.1     305.0      363.2     215.7       30.2
Cumulative effect of changes in accounting principles.......        --        --        --         --     233.2          *
                                                              -------------------------------------------------
Net income..................................................  $  739.8  $  568.1  $  305.0   $  363.2  $  448.9       30.2%
                                                              -------------------------------------------------
Net income applicable to common equity......................  $  733.6  $  560.6  $  292.4   $  334.0  $  417.3       30.9%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>


*Not meaningful

                                                         First Bank System, Inc.

70

<PAGE>
 
                     QUARTERLY CONSOLIDATED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                          1996                            1995
                                                         -----------------------------------------------------------------------
                                                          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..................................................  $ 594.5  $ 588.1  $ 582.0  $ 574.7  $ 580.4  $ 573.8  $ 572.0  $ 547.2
Securities:
  Taxable..............................................     54.8     59.3     63.6     63.8     50.8     52.6     56.1     66.5
  Exempt from federal income taxes.....................      6.4      6.8      7.4      4.9      2.8      2.8      2.8      2.8
Other interest income..................................     12.3     12.4     11.7     11.2      8.2      8.3      9.0      9.1
                                                         ----------------------------------------------------------------------
  Total interest income................................    668.0    666.6    664.7    654.6    642.2    637.5    639.9    625.6

INTEREST EXPENSE
Deposits...............................................    166.0    169.2    170.9    167.0    168.5    173.0    186.8    178.4
Federal funds purchased and repurchase agreements......     31.8     31.6     27.6     31.4     30.5     24.8     31.9     30.9
Other short-term funds borrowed........................     30.6     29.2     28.5     32.1     33.4     34.6     15.7      6.5
Long-term debt.........................................     51.1     50.7     51.4     49.5     49.5     48.0     46.0     46.5
Company-obligated mandatority redeemable capital
  securities of FBS Capital I..........................      2.3       --       --       --       --       --       --       --
                                                         ----------------------------------------------------------------------
  Total interest expense...............................    281.8    280.7    278.4    280.0    281.9    280.4    280.4    262.3
                                                         ----------------------------------------------------------------------
Net interest income....................................    386.2    385.9    386.3    374.6    360.3    357.1    359.5    363.3
Provision for credit losses............................     35.0     35.0     35.0     31.0     31.0     31.0     27.0     26.0
                                                         ----------------------------------------------------------------------
Net interest income after provision for credit losses..    351.2    350.9    351.3    343.6    329.3    326.1    332.5    337.3

NONINTEREST INCOME
Credit card fees.......................................     76.8     79.5     73.5     62.8     61.7     62.7     56.7     51.6
Trust fees.............................................     58.9     57.1     58.5     56.2     47.8     42.8     43.0     41.7
Service charges on deposit accounts....................     36.0     36.9     34.7     33.9     30.4     30.9     30.3     32.1
Investment products fees and commissions...............      8.8      7.4      8.7      8.5      7.6      7.8      6.7      5.5
Securities gains.......................................       --       --       .4     14.6       --       --       --       --
Termination fee........................................       --       --     75.0    115.0       --       --       --       --
State income tax refund................................       --       --     65.0       --       --       --       --       --
Gain on sale of mortgage banking operations............       --       --       --     45.8       --       --       --       --
Gain on sale of branches...............................       --       --       --       --       --     31.0       --       --
Other..................................................     41.5     39.4     44.1     46.7     49.8     41.3     53.0     48.7
                                                         ----------------------------------------------------------------------
  Total noninterest income.............................    222.0    220.3    359.9    383.5    197.3    216.5    189.7    179.6

NONINTEREST EXPENSE
Salaries...............................................    114.3    113.4    114.5    123.4    111.1    108.0    109.8    112.1
Employee benefits......................................     24.2     25.5     26.4     28.9     20.4     22.1     25.4     28.5
Goodwill and other intangible assets...................     19.6     19.6     19.9     47.4     14.9     13.9     14.2     14.1
Net occupancy..........................................     24.3     24.2     24.2     25.8     24.3     24.3     24.3     25.7
Furniture and equipment................................     22.0     21.1     22.1     23.8     22.4     23.5     24.8     23.5
Other personnel costs..................................     15.4     16.7     14.0      9.7     12.5     11.0      9.8      7.6
Professional services..................................     12.4      8.3     10.9      8.3     11.3      8.5     10.5      6.6
Advertising and marketing..............................      9.3      9.1     10.2      6.8      8.1      8.4      9.2      6.3
FDIC insurance.........................................       .8      3.5      3.6      3.5      5.6      2.8     13.8     13.6
SAIF special assessment................................       --     51.0       --       --       --       --       --       --
Merger, integration, and resizing......................       --       --       --     69.9       --       --       --       --
Other..................................................     59.7     63.1     60.4     76.9     56.7     88.6     61.4     66.3
                                                         ----------------------------------------------------------------------
  Total noninterest expense............................    302.0    355.5    306.2    424.4    287.3    311.1    303.2    304.3
                                                         ----------------------------------------------------------------------
Income before income taxes.............................    271.2    215.7    405.0    302.7    239.3    231.5    219.0    212.6
Applicable income taxes................................     99.8     78.2    150.9    125.9     88.6     85.8     81.1     78.8
                                                         ----------------------------------------------------------------------
Net income.............................................  $ 171.4  $ 137.5  $ 254.1  $ 176.8  $ 150.7  $ 145.7  $ 137.9  $ 133.8
                                                         ----------------------------------------------------------------------
Net income applicable to common equity.................  $ 170.1  $ 135.9  $ 252.5  $ 175.1  $ 148.8  $ 143.9  $ 136.0  $ 131.9
                                                         ----------------------------------------------------------------------
Primary net income per common share....................  $  1.26  $   .99  $  1.81  $  1.28  $  1.14  $  1.08  $  1.00  $   .97
Fully diluted net income per common share..............  $  1.24  $   .98  $  1.78  $  1.26  $  1.12  $  1.06  $   .99  $   .96

SELECTED AVERAGE BALANCES
Loans..................................................  $27,189  $26,771  $26,932  $26,329  $26,022  $25,536  $25,364  $24,592
Earning assets.........................................   31,840   31,698   32,105   31,371   29,904   29,480   29,559   29,466
Total assets...........................................   35,573   35,367   35,922   35,044   33,160   32,768   32,905   32,702
Deposits...............................................   23,276   23,410   24,041   23,047   21,995   22,107   23,181   23,575
Long-term debt.........................................    3,437    3,397    3,462    3,264    3,146    2,892    2,876    2,935
Common equity..........................................    3,066    3,110    3,132    3,032    2,640    2,693    2,670    2,531
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                           
First Bank System, Inc.                                                       

                                                                              71

<PAGE>
 
             CONSOLIDATED DAILY AVERAGE BALANCE SHEET AND RELATED


<TABLE> 
<CAPTION> 
Year ended December 31                                                 1996                                   1995              
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                    Interest                               Interest
                                                                                      Yields                                 Yields
(Dollars In Millions)                                     Balance     Interest     and Rates     Balance     Interest     and Rates
- ----------------------------------------------------------------------------------------------------------------------------------- 
<S>                                                      <C>          <C>          <C>           <C>         <C>          <C>  
ASSETS
Securities:
  U.S. Treasury........................................    $   688     $   42.5          6.18%    $   973     $   60.6         6.23%
  Mortgage-backed......................................      2,636        183.3          6.95       1,989        135.5         6.81
  State and political..................................        462         40.3          8.72         176         18.6        10.57
  U.S. agencies and other..............................        234         14.3          6.11         474         28.3         5.97
                                                         ----------------------                 ----------------------
    Total securities...................................      4,020        280.4          6.98       3,612        243.0         6.73
Unrealized loss on available-for-sale securities.......        (12)                                   (45)
                                                         ---------                              --------- 
    Net securities.....................................      4,008                                  3,567
Trading account securities.............................         94          5.1          5.43          92          5.0         5.43
Federal funds sold and resale agreements...............        503         26.5          5.27         280         16.2         5.79
Loans:
  Commercial:
    Commercial.........................................      9,264        735.0          7.93       8,013        687.8         8.58
    Financial institutions.............................        943         39.0          4.14         774         31.7         4.10
    Real estate:
       Commercial mortgage.............................      3,001        268.0          8.93       2,474        223.4         9.03
       Construction....................................        515         46.1          8.95         358         33.7         9.41
                                                         ----------------------                 ----------------------
       Total commercial................................     13,723      1,088.1          7.93      11,619        976.6         8.41
  Consumer:
    Residential mortgage...............................      3,398        265.5          7.81       4,904        371.9         7.58
    Residential mortgage held for sale.................        127          9.3          7.32         265         20.3         7.66
    Home equity and second mortgage....................      3,034        291.0          9.59       2,620        253.5         9.68
    Credit card........................................      2,654        300.6         11.33       2,341        290.5        12.41
    Other..............................................      3,870        391.9         10.13       3,634        368.5        10.14
                                                         ----------------------                 ----------------------
       Total consumer..................................     13,083      1,258.3          9.62      13,764      1,304.7         9.48
                                                         ----------------------                 ----------------------
       Total loans.....................................     26,806      2,346.4          8.75      25,383      2,281.3         8.99
  Allowance for credit losses..........................        522                                    473
                                                         ---------                              --------- 
    Net loans..........................................     26,284                                 24,910
Other earning assets...................................        331         16.1          4.86         236         13.5         5.72
                                                         ----------------------                 ----------------------
       Total earning assets*...........................     31,754      2,674.5          8.42      29,603      2,559.0         8.64
Cash and due from banks................................      1,815                                  1,664
Other assets...........................................      2,442                                  2,137
                                                         ---------                              --------- 
       Total assets....................................    $35,477                                $32,886
                                                         ---------                              --------- 
LIABILITIES and SHAREHOLDERS' EQUITY
Noninterest-bearing deposits...........................    $ 6,466                                $ 5,584
Interest-bearing deposits:
    Interest checking..................................      2,974         39.8          1.34       2,825         44.5         1.58
    Money market accounts..............................      4,277        153.5          3.59       3,858        145.3         3.77
    Other savings accounts.............................      1,635         34.8          2.13       1,712         42.1         2.46
    Savings certificates...............................      7,230        392.0          5.42       7,669        404.8         5.28
    Certificates over $100,000.........................        861         53.0          6.16       1,060         70.0         6.60
                                                         ----------------------                 ----------------------
       Total interest-bearing deposits.................     16,977        673.1          3.96      17,124        706.7         4.13
Short-term borrowings..................................      4,278        242.8          5.68       3,440        208.3         6.06
Long-term debt.........................................      3,393        202.7          5.97       2,963        190.0         6.41
Company-obligated mandatorily redeemable
  capital securities of FBS Capital I..................         29          2.3          8.09          --           --           --
                                                         ----------------------                 ----------------------
       Total interest-bearing liabilities..............     24,677      1,120.9          4.54      23,527      1,105.0         4.70
Other liabilities......................................      1,159                                  1,036
Preferred equity.......................................         90                                    105
Common equity..........................................      3,092                                  2,664
Unrealized loss on available-for-sale
  securities, net of tax...............................         (7)                                   (30)
                                                         ---------                              --------- 
       Total liabilities and shareholders' equity......    $35,477                                $32,886
                                                         ---------                              --------- 
Net interest income....................................                $1,553.6                               $1,454.0
                                                                      ---------                              ---------
Gross interest margin..................................                                  3.88%                                 3.94%
                                                                                      --------                              --------

Gross interest margin without taxable-equivalent
  increments...........................................                                  3.82%                                 3.90%
                                                                                      --------                              --------

PERCENT OF EARNING ASSETS
Interest income........................................                                  8.42%                                 8.64%

Interest expense.......................................                                  3.53                                  3.73
                                                                                      --------                              --------

    Net interest margin................................                                  4.89                                  4.91
                                                                                      --------                              --------

Net interest margin without taxable-equivalent
   increments..........................................                                  4.83%                                 4.87%

- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>


Interest and rates are presented on a fully taxable-equivalent basis under a tax
rate of 35 percent for 1996, 1995, 1994 and 1993 and 34 percent for 1992.
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.

72

<PAGE>
 
                   YIELDS AND RATES


<TABLE> 
<CAPTION> 
                       1994                                   1993                                1992                     1995-1996
- ------------------------------------------------------------------------------------------------------------------------------------
                                   Interest                               Interest                             Interest     % Change
                                     Yields                                 Yields                               Yields      Average
         Balance     Interest     and Rates     Balance     Interest     and Rates   Balance     Interest     and Rates      Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S>      <C>         <C>          <C>         <C>           <C>          <C>       <C>           <C>          <C>   
         $ 1,574     $   82.8          5.26%    $ 1,797     $  101.5          5.65%  $ 1,557     $   98.2          6.31%     (29.3)%
           3,288        208.7          6.35       3,323        207.8          6.25     2,673        207.3          7.76       32.5
             188         20.0         10.64         202         22.4         11.09       153         18.1         11.83         **
             619         34.4          5.56         630         38.1          6.05       444         26.2          5.90      (50.6)
       ----------------------                 ----------------------               ---------------------- 
           5,669        345.9          6.10       5,952        369.8          6.21     4,827        349.8          7.25       11.3
             (69)                                    --                                   --                                  73.3
       ---------                              ---------                            ---------
           5,600                                  5,952                                4,827                                  12.4
              73          3.4          4.66         117          4.7          4.02       137          6.5          4.74        2.2
             405         16.5          4.07         755         22.3          2.95     1,318         45.1          3.42       79.6


           6,832        506.6          7.42       5,804        403.6          6.95     5,490        407.1          7.42       15.6
           1,146         30.1          2.63       1,534         42.5          2.77     1,096         40.8          3.72       21.8

           2,365        202.2          8.55       2,213        190.5          8.61     2,164        194.5          8.99       21.3
             268         21.4          7.99         213         15.5          7.28       270         20.4          7.56       43.9
       ----------------------                 ----------------------               ---------------------- 
          10,611        760.3          7.17       9,764        652.1          6.68     9,020        662.8          7.35       18.1

           5,345        385.6          7.21       4,860        384.6          7.91     3,851        347.7          9.03      (30.7)
             387         27.4          7.08       1,040         72.4          6.96       867         70.5          8.13      (52.1)
           2,223        193.2          8.69       1,539        127.1          8.26     1,135        100.5          8.85       15.8
           2,054        248.9         12.12       1,733        233.1         13.45     1,709        243.0         14.22       13.4
           3,243        308.3          9.51       2,872        272.6          9.49     2,526        279.2         11.05        6.5
       ----------------------                 ----------------------               ---------------------- 
          13,252      1,163.4          8.78      12,044      1,089.8          9.05    10,088      1,040.9         10.32      (4.9)
       ----------------------                 ----------------------               ---------------------- 
          23,863      1,923.7          8.06      21,808      1,741.9          7.99    19,108      1,703.7          8.92        5.6
             486                                    489                                  496                                  10.4
       ---------                              ---------                            ---------
          23,377                                 21,319                               18,612                                   5.5
             255         13.7          5.37         275         13.5          4.91       509         23.7          4.66       40.3
       ----------------------                 ----------------------               ---------------------- 
          30,265      2,303.2          7.61      28,907      2,152.2          7.45    25,899      2,128.8          8.22        7.3
           1,749                                  1,786                                1,558                                   9.1
           2,086                                  1,987                                1,876                                  14.3
       ---------                              ---------                            ---------
         $33,545                                $32,191                              $28,837                                   7.9
       ---------                              ---------                            ---------

         $ 6,310                                $ 6,688                              $ 5,000                                  15.8

           2,940         44.4          1.51       2,789         45.2          1.62     2,553         59.5          2.33        5.3
           4,035        110.2          2.73       4,077        106.8          2.62     3,980        129.4          3.25       10.9
           2,245         49.5          2.20       2,157         49.2          2.28     1,666         59.0          3.54       (4.5)
           7,750        315.4          4.07       8,297        357.4          4.31     7,836        426.0          5.44       (5.7)
           1,381         77.8          5.63       1,629         89.7          5.51     1,918        123.8          6.45      (18.8)
       ----------------------                 ----------------------               ---------------------- 
          18,351        597.3          3.25      18,949        648.3          3.42    17,953        797.7          4.44        (.9)
           2,658        123.5          4.65       1,307         51.9          3.97     1,179         54.2          4.60       24.4
           2,609        147.9          5.67       1,633         96.1          5.88     1,453        101.2          6.96       14.5

              --           --            --          --           --            --        --           --            --         **
       ----------------------                 ----------------------               ---------------------- 
          23,618        868.7          3.68      21,889        796.3          3.64    20,585        953.1          4.63        4.9
             871                                    845                                  757                                  11.9
             143                                    360                                  405                                 (14.3)
           2,646                                  2,409                                2,090                                  16.1
             (43)                                    --                                   --                                  76.7
       ---------                              ---------                            ---------
         $33,545                                $32,191                              $28,837                                   7.9
       ---------                              ---------                            ---------                               ---------

                     $1,434.5                               $1,355.9                             $1,175.7 
                    ---------                              ---------                            ---------  
                                       3.93%                                  3.81%                                3.59%
                                      -------                               --------                             --------

                                       3.88%                                  3.75%                                3.50%
                                      -------                               --------                             --------

                                       7.61%                                  7.45%                                8.22%
                                       2.87                                   2.76                                 3.68
                                      -------                               --------                             --------
                                       4.74                                   4.69                                 4.54
                                      -------                               --------                             --------
                                       4.69%                                  4.63%                                4.45%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>


First Bank System, Inc.                                                       73

<PAGE>
 
                          SUPPLEMENTAL FINANCIAL DATA


EARNINGS PER SHARE SUMMARY


<TABLE>
<CAPTION>
                                                                   1996          1995           1994           1993           1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>            <C>            <C>            <C>
Primary income from continuing
   operations before cumulative effect
   of changes in accounting principles...................         $5.34         $4.19          $2.21          $2.46          $1.46
Income (loss) from discontinued operations...............            --            --           (.06)           .02            .02
Cumulative effect of changes in accounting principles....            --            --             --             --           1.87
                                                            ----------------------------------------------------------------------
Primary net income.......................................         $5.34         $4.19          $2.15          $2.48          $3.35
                                                            ----------------------------------------------------------------------

Fully diluted income from continuing
   operations before cumulative effect
   of changes in accounting principles...................         $5.25         $4.11          $2.20          $2.45          $1.45
Income (loss) from discontinued operations...............            --            --           (.06)           .02            .02
Cumulative effect of changes in accounting principles....            --            --             --             --           1.79
                                                            ----------------------------------------------------------------------
Fully diluted net income.................................         $5.25         $4.11          $2.14          $2.47          $3.26
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


RATIOS


<TABLE>
<CAPTION>
                                                                   1996          1995           1994           1993           1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>            <C>            <C>            <C> 
Return on average assets.................................          2.09%         1.73%           .91%          1.13%          1.56%
Return on average common equity..........................          23.8          21.3           11.2           13.9           20.0
Average total equity to average assets...................           8.9           8.3            8.2            8.6            8.7
Dividends per share to net income per share..............          30.9          34.6           54.0           40.3           26.3
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


OTHER STATISTICS


<TABLE>
<CAPTION>
                                                                   1996          1995           1994           1993           1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>            <C>            <C>            <C> 
Common shares outstanding - year end*....................   134,870,241   127,334,568    133,832,409    130,408,480    131,568,900
Average common shares outstanding and
   common stock equivalents:
   Primary...............................................   137,415,619   133,936,030    136,274,991    134,588,664    124,670,657
   Fully diluted.........................................   140,821,194   138,148,158    140,128,566    138,328,002    130,497,272
Number of shareholders - year-end**......................        22,264        21,033         25,481         25,653         28,572
Average number of employees
   (full-time equivalents)...............................        12,976        13,231         14,725         14,867         14,596
Common dividends paid (millions).........................        $227.7        $191.7         $156.0         $121.8          $80.8
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

STOCK PRICE RANGE AND DIVIDENDS


<TABLE>
<CAPTION>
                                                                  1996                                           1995
                                                ------------------------------------------------------------------------------------
                                                     Sales Price           Dividends                Sales Price            Dividends
                                                ----------------------                       ------------------------
                                                  High             Low          Paid           High               Low           Paid
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>      <C>    <C>           <C>            <C>      <C>      <C>            <C> 
First quarter...........................        $59.88          $46.00        $.4125         $40.50            $32.63         $.3625
Second quarter..........................         63.75           56.25         .4125          44.63             38.88          .3625
Third quarter...........................         68.00           55.38         .4125          48.25             39.50          .3625
Fourth quarter..........................         74.00           63.75         .4125          53.75             47.63          .3625
Closing price - December 31.............                 68.25                                        49.63
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

The common stock of First Bank System, Inc. is traded on the New York Stock
Exchange, under the ticker symbol, "FBS."



 
First Bank System, Inc.   


74

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


<TABLE>
<CAPTION>
                                                                                                           Maturing
                                                                                         -------------------------------------------
                                                                                         In 1 Year      After 1 Year
At December 31, 1996 (In Millions)                                                         or Less   Through 5 Years   After 5 Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>         <C>               <C>
Commercial..............................................................................   $ 7,088           $ 2,197         $   171
Financial institutions..................................................................       743               139              23
Real estate:
  Commercial mortgage...................................................................     1,722             1,103             265
  Construction..........................................................................       595                43              16
                                                                                           -----------------------------------------
    Total...............................................................................   $10,148           $ 3,482         $   475
- ------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                                                                                            Due in         Due After
                                                                                          One Year          One Year           Total
                                                                                          ------------------------------------------
<S>.....................................................................................  <C>              <C>               <C>
Loans at fixed interest rates...........................................................  $  1,395           $ 2,514         $ 3,909
Loans at variable interest rates........................................................     8,753             1,443          10,196
                                                                                          ------------------------------------------
    Total...............................................................................   $10,148           $ 3,957         $14,105
- ------------------------------------------------------------------------------------------------------------------------------------
</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>
                                                                                            Maturing
                                                              ----------------------------------------------------------------------
                                                                Under         Three         Six to              Over
                                                                Three        to Six         Twelve            Twelve
(In Millions)                                                  Months        Months         Months            Months           Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>            <C>               <C>              <C>
1996................................................             $395          $144           $106              $221            $866
1995................................................              349           124            164               263             900
1994................................................              399           138            266               515           1,318
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 

SHORT-TERM FUNDS BORROWED


<TABLE>
<CAPTION>
                                                                           Average        Maximum          Average         Weighted
                                                                             Daily    Outstanding    Interest Rate          Average
                                                        Outstanding         Amount      Month-End      Paid During    Interest Rate
(In Millions)                                           at Year-End    Outstanding        Balance         the Year      at Year-End
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>            <C>            <C>             <C>
1996
Federal funds purchased and securities sold
   under agreements to repurchase................            $2,023         $2,145         $2,258              5.71%           5.63%
Other............................................             2,074          2,133          2,700              5.64            5.57
                                                       ------------------------------
   Total.........................................            $4,097         $4,278          4,703              5.68            5.60
                                                       ------------------------------
1995
Federal funds purchased and securities sold
   under agreements to repurchase................            $2,269         $1,969         $2,562              6.00%           5.11%

Other............................................             2,116          1,471          2,554              6.13            5.77
                                                       ------------------------------
   Total.........................................            $4,385         $3,440          4,763              6.06            5.43
                                                       ------------------------------
1994
Federal funds purchased and securities sold
   under agreements to repurchase................            $2,568         $2,264         $3,223              4.55%           5.49%
Other............................................               658            394            864              5.18            5.72
                                                       ------------------------------
   Total.........................................            $3,226         $2,658          3,680              4.65            5.53
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


First Bank System, Inc.                                                       75

<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, 1996.

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 (and listed on
the New York Stock Exchange): Common Stock, Par Value $1.25. 
     Securities registered pursuant to Section 12(g) of the Act: Warrants to
Purchase Shares of Common Stock.

     As of January 31, 1997, First Bank System, Inc. had 133,740,046 shares of
common stock outstanding. The aggregate market value of common stock held by 
non-affiliates as of January 31, 1997, was approximately $10,007,000,000. 
     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...........................................................  77
          Distribution of Assets, Liabilities and
            Stockholders' Equity; Interest Rates
            and Interest Differential.............................  22-23, 72-73
          Investment Portfolio.................................... 29-30, 48, 69
          Loan Portfolio...........................  27-29, 31-34, 45, 49-50, 75
          Summary of Loan Loss Experience......................... 23, 31-34, 50
          Deposits................................................ 30, 72-73, 75
          Return on Equity and Assets........................................ 74
          Short-Term Borrowings.............................................. 75

ITEM 2    Properties......................................................... 78

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.......................... 38, 67, 76

ITEM 6      Selected Financial Data.......................................... 19

ITEM 7    Management's Discussion and
            Analysis of Financial Condition and
            Results of Operations......................................... 18-40

ITEM 8    Financial Statements and
            Supplementary Data........................................... 71, 78

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

PART III


ITEM 10   Directors and Executive Officers
            of the Registrant............................................... 80*

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.......................................... 78
</TABLE>


*First Bank System's definitive proxy statement for the 1997 Annual Meeting of
Shareholders is incorporated herein by reference, other than the sections
entitled "Report of the Compensation and Human Resources Committee on Executive
Compensation" and "Comparative Stock Performance."

                                                         First Bank System, Inc.

76                                                       

<PAGE>
 
GENERAL First Bank System, Inc. (the "Company") is a regional, multi-state bank
holding company headquartered in Minneapolis, Minnesota. The Company was
incorporated in Delaware in 1929 and owns more than 99 percent of the capital
stock of each of nine banks, a savings association and seven trust companies,
having 356 banking offices in Minnesota, Colorado, Wisconsin, Illinois, Montana,
North Dakota, South Dakota, Iowa, Kansas, Nebraska, and Wyoming. 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 $31 million to $11.1 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 treasury
management and receivable lockbox collection are provided for corporate
customers. Nine banks, a savings association, and seven 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 1996 averaged a total of
12,976 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 investment companies.
In recent years, competition 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 the prior approval of the Board before
acquiring more than 5 percent of the outstanding shares of another bank or bank
holding company, and must provide notice to, and in some situations obtain the
prior approval of, the Board in connection with the acquisition of more than 5
percent of the outstanding shares of a company engaged in a "bank-related"
business.

     Under the Act, as amended by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"), the Company may acquire
banks throughout the United States, subject only to state or federal deposit
caps and state minimum-age requirements. Effective June 1, 1997, the Interstate
Act authorizes interstate branching by acquisition and consolidation in those
states that have not opted out by that date.

First Bank System, Inc. 

                                                                              77

<PAGE>
 
     National banks are subject to the supervision of, and are examined by, the
Comptroller of the Currency. All subsidiary banks of the Company are members of
the Federal Deposit Insurance Corporation ("FDIC"), 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 authorities include the allowance for credit losses,
investments, loans, mergers, issuance of securities, payment of dividends,
establishment of branches and other aspects of operations.

     The Company's saving association subsidiary is subject to the supervision
of and is examined by the OTS. The savings association is a member of SAIF,
which is administered and is subject to examination by the FDIC. As a saving
association, the Company's subsidiary must meet the requirements of a qualified
thrift lender to avoid certain restrictions relating to dividends, branching and
certain new activities. As of December 31, 1996, the savings association was a
"qualified thrift lender." Similar to the Company's banking subsidiaries, the
savings association is also subject to regulation by the OTS in the areas of
credit losses, investments, loans, mergers, issuance of securities, payment of
dividends, establishment of branches, and other aspects of operations.

PROPERTIES The Company and its significant subsidiaries occupy their headquarter
offices under long-term leases. The Company also leases a freestanding
operations center in St. Paul and owns an operations center in Fargo, North
Dakota. At December 31, 1996, the Company's subsidiaries owned and operated a
total of 261 facilities and leased an additional 238 facilities, all of which
are well maintained. Additional information with respect to premises and
equipment is presented in Notes G and P.

EXHIBITS


<TABLE> 
<CAPTION> 
Financial Statements Filed                                                Page
- ------------------------------------------------------------------------------
<S>                                                                       <C>
First Bank System, Inc. and Subsidiaries
Consolidated Financial Statements                                           41
Notes to Consolidated Financial Statements                                  45
Report of Independent Auditors                                              68
</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, 1996, the Company did not file
any Current Reports on Form 8-K.

     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 3 to Form 10-Q for the quarter ended
              September 30, 1996.
           4A [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)/4B Certificate of Designation for First Bank System, Inc. Series
              1990A Preferred Stock. Filed as Exhibit 4.4 to Amendment No. 1 to
              Registration Statement on Form S-3, File No. 33-42650.
      /(1)/4C Certificate of Designation for First Bank System, Inc. Series
              1991A Convertible Preferred Stock. Filed as Exhibit 4.3 to
              Registration Statement on Form S-4, File No. 33-50700.
      /(1)/4D Warrant Agreement, dated as of October 2, 1995, between First Bank
              System, Inc. and First Chicago Trust Company of New York, as
              Warrant Agent, and Form of Warrant. Filed as Exhibits 4.18 and
              4.19 to Registration Statement on Form S-3, File No. 33-61667.
           4E Warrant Agreement, dated as of November 20, 1990, between
              Metropolitan Financial Corporation and American Stock Transfer and
              Trust Company, as Warrant Agent; Supplemental Warrant Agreement,
              dated as of January 24, 1995, between First Bank System, Inc. and
              American Stock Transfer and Trust Company, as Warrant Agent; and
              Form of Warrant.
     /(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, File No. 33-42650.
     /(2)/10B First Bank System, Inc. 1987 Stock Option Plan.


(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.

                                                         First Bank System, Inc.

78

<PAGE>
 
  /(1)(2)/10C First Bank System, Inc. Nonqualified Supplemental Executive
              Retirement Plan. Filed as Exhibit 10C to report on Form 10-Q for
              quarter ended March 31, 1995.
     /(2)/10D First Bank System, Inc. Executive Deferral Plan, as amended.
     /(2)/10E First Bank System, Inc. Annual Incentive Plan, as amended.
     /(2)/10F First Bank System, Inc. Independent Director Retirement and Death
              Benefit Plan, as amended.
  /(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)(2)/10H First Bank System, Inc. 1995 Executive Incentive Plan. Filed as
              Exhibit 10B to report on Form 10-Q for quarter ended March 31,
              1995.
  /(1)(2)/10I First Bank System, Inc. Restated Employee Stock Purchase Plan, as
              amended. Filed as Exhibit 10B to report on Form 10-Q for quarter
              ended September 30, 1996.
     /(2)/10J Form of Change-in-Control Agreement between First Bank System,
              Inc. and certain officers of the Company.
     /(2)/10K First Bank System, Inc. 1996 Stock Incentive Plan, as amended.
     /(2)/10L Agreement between First Bank System, Inc. and John F. Grundhofer
              dated January 18, 1995, as amended.
     /(2)/10M Description of First Bank System, Inc. Stock Option Loan Policy.
  /(1)(2)/10N Consulting Agreement dated as of January 23, 1995, by and between
              First Bank System, Inc. and Norman M. Jones. Filed as Exhibit 10T
              to report on Form 10-K for fiscal year ended December 31, 1994.
     /(1)/10O Agreement of Merger and Consolidation dated August 6, 1995 by and
              between First Bank System, Inc. and FirsTier Financial, Inc. Filed
              as Exhibit 2.1 to Registration Statement on Form S-4, File 
              No. 333-00299.
     /(1)/10P Settlement Agreement, dated as of January 23, 1996, between First
              Bank System, Inc., First Interstate Bancorp and Wells Fargo & Co.
              Filed as Exhibit 2.1 to Form 8-K filed January 26, 1996.
          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,
              1996.
          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 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.


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
19, 1997, on its behalf by the undersigned thereunto duly authorized.

First Bank System, Inc.
By: 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 19, 1997, 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-Finance

SUSAN E. LESTER
Executive Vice President and Chief Financial Officer
(principal financial officer)

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

ARTHUR D. COLLINS, JR.
Director

PETER H. COORS
Director

ROGER L. HALE
Director

DELBERT W. JOHNSON
Director

NORMAN M. JONES
Director

RICHARD L. KNOWLTON
Director

JERRY W. LEVIN
Director

KENNETH A. MACKE
Director

MARILYN CARLSON NELSON
Director

EDWARD J. PHILLIPS
Director

JAMES J. RENIER
Director

S. WALTER RICHEY
Director

RICHARD L. ROBINSON
Director

RICHARD L. SCHALL
Director

WALTER SCOTT, JR.
Director


First Bank System, Inc. 

                                                                              79

<PAGE>
 
                               EXECUTIVE OFFICERS


JOHN F. GRUNDHOFER
Mr. Grundhofer, 58, has been Chairman of the Board, President and Chief
Executive Officer of First Bank System since 1990.

PHILIP G. HEASLEY
Mr. Heasley, 47, has served as Vice Chairman since 1993. He is responsible for
Retail Banking, Payment Systems, and operations and technology. In February
1996, Mr. Heasley assumed responsibility for consumer and small business sales
and services carried out through bank branches in addition to his previous
responsibility for retail bank products.

RICHARD A. ZONA
Mr. Zona, 52, was named Vice Chairman-Finance in February 1996, and assumed
responsibility for Business Banking and Private Financial Services, and
Corporate Trust. Mr. Zona previously served as Vice Chairman and Chief Financial
Officer.

J. ROBERT HOFFMANN
Mr. Hoffmann, 51, has been Executive Vice President and Chief Credit Officer
since 1990.

SUSAN E. LESTER
Ms. Lester, 40, was named Executive Vice President and Chief Financial Officer
in February 1996. She had served as Executive Vice President, Finance, since
December 1995. From May 1994 to November 1995, Ms. Lester was Executive Vice
President and Chief Financial Officer of Shawmut National Corporation. Before
that, she served as Executive Vice President and Controller at First Bank
System.

LEE R. MITAU
Mr. Mitau, 48, was named Executive Vice President, General Counsel and Secretary
in 1995. Previously, he was a Senior Partner at Dorsey & Whitney LLP.

JOHN M. MURPHY, JR.
Mr. Murphy, 55, has been Chairman and Chief Investment Officer, First Trust
National Association, since 1990.

DANIEL C. ROHR
Mr. Rohr, 50, has served as Executive Vice President of Commercial Banking since
1990.

ROBERT H. SAYRE
Mr. Sayre, 57, has served as Executive Vice President of Human Resources since
1990.

JOHN R. DANIELSON
Mr. Danielson, 52, was named Senior Vice President of Investor and Corporate
Relations in 1996. He previously served as Senior Vice President of Investor
Relations.

DAVID P. GRANDSTRAND
Mr. Grandstrand, 41, was named Senior Vice President and Treasurer in 1996. He
previously served as Senior Vice President of Asset/Liability Management and
Funding, and Senior Vice President of Funding and Treasury Operations.

DAVID J. PARRIN
Mr. Parrin, 41, has been Senior Vice President and Controller since 1994.
Previously, he was a Partner at Ernst & Young LLP.

                                   DIRECTORS

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

ARTHUR D. COLLINS, JR.
President and Chief Operating Officer Medtronic, Inc. Minneapolis, Minnesota

PETER H. COORS
Vice Chairman and Chief Executive Officer Coors Brewing Company Golden, Colorado

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

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

NORMAN M. JONES
Chairman First Bank, fsb Minneapolis, Minnesota

RICHARD L. KNOWLTON
Chairman The Hormel Foundation Austin, Minnesota

JERRY W. LEVIN
Chairman Revlon, Inc. New York, New York Chairman The Coleman Company, Inc.
Golden, Colorado

KENNETH A. MACKE
General Partner Macke Partners Golden Valley, Minnesota

MARILYN CARLSON NELSON
Vice Chair Carlson Companies, Inc. Minneapolis, Minnesota

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

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

S. WALTER RICHEY
Chairman and Chief Executive Officer Meritex, Inc. Minneapolis, Minnesota

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

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

WALTER SCOTT, JR.
Chairman, President and Chief Executive Officer Peter Kiewit Sons', Inc. Omaha,
Nebraska

                                                        First Bank System, Inc.

80

<PAGE>
 
                                 FBS LOCATIONS*


MINNESOTA                    COLORADO                       Holton            
Albert Lea                   Arvada                         Iola              
Alexandria                   Aspen                          Lawrence (2)      
Amboy                        Aurora (5)                     Manhattan         
Apple Valley                 Boulder (2)                    Overland Park     
Austin                       Breckenridge                   Prairie Village   
Babbitt                      Broomfield                     Pratt             
Blaine                       Canon City                     Topeka            
Blooming Prairie             Carbondale                     Wichita (4)       
Bloomington (5)              Colorado Springs (6)                             
Brainerd                     Denver (17)                    MONTANA           
Brooklyn Park                Englewood (3)                  Billings (2)      
Burnsville (2)               Evergreen                      Bozeman           
Chanhassen                   Fort Collins (2)               Butte             
Chisago City                 Glenwood Springs               Great Falls (3)   
Cloquet                      Golden                         Havre             
Columbia Heights             Grand Junction (2)             Helena            
Coon Rapids                  Greeley                        Miles City        
Cottage Grove                Highlands Ranch                Missoula (2)      
Duluth (6)                   La Junta                                         
Eagan (2)                    Lakewood (3)                   NEBRASKA          
East Grand Forks             Littleton (4)                  Beatrice          
Eden Prairie (2)             Longmont                       Bellevue (2)      
Edina (4)                    Louisville                     Blair             
Elk River                    Loveland                       Columbus          
Fairmont                     Northglenn                     David City        
Fergus Falls                 Parker                         Elkhorn           
Forest Lake                  Pueblo (5)                     Fremont (2)       
Golden Valley                Westminster (2)                Gering            
Grand Rapids                 Wheat Ridge                    Grand Island (2)  
Hibbing                                                     Hastings          
Hopkins                      ILLINOIS                       Kearney (2)       
Lamberton                    Chicago (4)                    La Vista          
Little Canada                Des Plaines (2)                Lincoln (10)      
Mankato (2)                  Downers Grove                  Millard           
Maple Grove                                                 Norfolk (2)       
Minneapolis (13)             IOWA                           North Platte      
Minnetonka (2)               Altoona                        Omaha (22)        
Monticello                   Ankeny                         Scottsbluff (3)   
Moorhead                     Carlisle                                         
New Prague                   Clear Lake                     NORTH DAKOTA      
Oakdale                      Council Bluffs (4)             Beulah            
Owatonna                     Davenport                      Bismarck (4)      
Pine City                    Des Moines (6)                 Devils Lake       
Pine River                   Doon                           Dickinson         
Plymouth (2)                 Hampton                        Fargo (5)         
Princeton                    Iowa Falls                     Grafton           
Prior Lake                   Knoxville                      Grand Forks (2)   
Robbinsdale                  Mason City (3)                 Jamestown  
Rochester (3)                Nevada                         Langdon    
Roseville                    Pella                          Lisbon     
Sauk Rapids                  Red Oak                        Minot (2)  
Shoreview                    Rock Valley                    Valley City
St. Anthony                  Wellman                        Wahpeton   
St. Cloud (2)                West Des Moines (2)            Williston  
St. Louis Park               Williamsburg                   
St. Paul (7)                                                SOUTH DAKOTA
Stillwater                   KANSAS                         Aberdeen    
Virginia                     Andover                        Colton      
Wayzata                      Augusta                        Hartford    
West St. Paul                Clay Center                    Mitchell    
White Bear Lake (2)          El Dorado                      Pierre      
Willmar                      Emporia                        Rapid City  (4) 
Woodbury                     Eureka                         Sioux Falls (7)
                             Garden City                         
                             Gardner                              


WISCONSIN                           
Appleton                            
Brookfield                          
Brown Deer                          
Hudson                              
La Crosse                           
Milwaukee (2)                       
Onalaska                            
Wauwatosa                           
                                    
WYOMING                             
Casper                              
Cheyenne (2)                        
Cody                                
Evanston                            
Gillette                            
Green River                         
Lander                              
Laramie                             
Riverton                            
Rock Springs                        
Sheridan                            
Torrington                          
Worland                             
                                    
CORPORATE TRUST OFFICES             
Billings, Montana                   
Chicago, Illinois                   
Denver, Colorado                    
Detroit, Michigan/**/               
Lansing, Michigan/**/               
Los Angeles, California             
New York, New York                  
Phoenix, Arizona                    
Portland, Oregon
San Francisco, California           
Seattle, Washington                 
Sioux Falls, South Dakota           
St. Paul, Minnesota                 
                                    
REPUBLIC ACCEPTANCE                 
CORPORATION                         
Des Plaines, Illinois               
Lakewood, Colorado                  
Milwaukee, Wisconsin                
Minneapolis, Minnesota              
Omaha, Nebraska/**/                 
St. Louis, Missouri                  

/*/ As of December 31, 1996, FBS
had 359 banking locations and 12 
nonbank offices.

/**/ Added in 1997.

First Bank System, Inc.                                                       81


<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 10:00 a.m. on
Thursday, April 24, 1997.

COMMON STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York acts as transfer agent and registrar,
dividend paying agent, and dividend reinvestment plan agent for First Bank
System and maintains all shareholder records for the corporation. For
information about First Bank System stock, or if you have questions regarding
your stock certificates (including transfers), address or name changes, lost
dividend checks, lost stock certificates, or Form 1099s, please call First
Chicago's Shareholder Services Center at (800) 446-2617, weekdays, 8:00 a.m. to
10:00 p.m. EST, and Saturdays, 8:00 a.m. to 3:30 p.m. EST. The TDD telephone
number for the hearing impaired is (201) 222-4955.

First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, New Jersey
07303-2500.

Telephone: (201) 324-0498
Fax: (201) 222-4892
Internet address: http://www.fctc.com
E-mail address: fctc@em.fcnbd.com

COMMON STOCK LISTING AND TRADING
First Bank System Common Stock is listed and traded on the New York Stock
Exchange under the ticker symbol FBS and also may be found under FtBkSy.

DIVIDENDS
First Bank System currently pays quarterly dividends on its Common Stock on or
about the 15th of March, June, September and December, subject to prior Board
approval. Shareholders may choose to have dividends electronically deposited
directly into their bank accounts. For enrollment information, please call First
Chicago at (800) 446-2617.

DIVIDEND REINVESTMENT PLAN
First Bank System shareholders can take advantage of a plan that provides
automatic reinvestment of dividends and/or optional cash purchases of additional
shares of FBS Common Stock up to $5,000 per calendar quarter. If you would like
more information, please contact First Chicago Trust Company of New York, P.O.
Box 2598, Jersey City, New Jersey 07303-2598, (800) 446-2617.

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

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

FINANCIAL INFORMATION
FBS news and financial results are available by fax, mail and the internet.

FAX. To access our fax-on-demand service, call (800) 758-5804. When asked, enter
FBS's extension number, "312402." Enter "1" for the most current news release or
"2" for a menu of recent releases. Enter your fax and telephone numbers as
directed. The information will be faxed to you promptly.

MAIL. On your request we will mail to you our quarterly earnings news releases.
To be added to FBS's mailing list, please contact Investor and Corporate
Relations, First Bank System, First Bank Place, 601 Second Avenue South,
Minneapolis, Minnesota 55402-4302, (612) 973-2434.

INTERNET. For information about FBS, including news and financial results,
product information, and service locations, access FBS's home page on the World
Wide Web. The address is http://www.fbs.com.

For additional annual reports, quarterly financial data on Form 10-Q, or
information about the 1997 annual meeting of shareholders, please contact
Investor and Corporate Relations, First Bank System, First Bank Place, 601
Second Avenue South, Minneapolis, Minnesota 55402-4302, (612) 973-2434.

COMMUNITY ANNUAL REPORT
For information about FBS's community reinvestment activities, call FBS
Community Relations, (612) 973-2322.

First Bank System, Inc. and each of its subsidiaries is an Equal Opportunity
Employer and a Drug-Free Workplace.

82                                                       First Bank System, Inc.

<PAGE>
 
Design and Typography: Larsen Design Office, Inc.
Printing: Banta Direct Marketing Group: The Press

<PAGE>
 
[LOGO] FIRST BANK SYSTEM

P.O. Box 522
Minneapolis, Minnesota
55480

http://www.fbs.com

<PAGE>
 
FIRST BANK SYSTEM, INC.
1996 ANNUAL REPORT/10-K
GRAPHICS APPENDIX

Inside Front Cover
- ------------------

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

Page 1
- ------

Graphs illustrate the following information:

Return on average common equity (percent)
1992: 12.6
1993: 15.8
1994: 17.6
1995: 21.3
1996: 21.4

Return on average assets (percent)
1992: 1.02
1993: 1.28
1994: 1.40
1995: 1.73
1996: 1.88

Earnings per share (dollars and fully diluted)
1992: 2.08
1993: 2:82
1994: 3.32
1995: 4.11
1996: 4.74

Efficiency ratio (percent)
1992: 65.2
1993: 60.4
1994: 58.1
1995: 53.3
1996: 49.9

Shareholders' equity to assets ratio (percent)
1992: 8.4
1993: 8.2
1994: 7.7
1995: 8.0
1996: 8.4

                                       1

<PAGE>
 
Allowance coverage of nonperforming loans ratio (percent)
1992: 149
1993: 208
1994: 283
1995: 401
1996: 429

Graphs before nonrecurring and merger-related items.

Page 2
- ------

Photo of John F. Grundhofer, chairman, president and chief executive officer


Page 3
- ------

Pie chart illustrating what business lines contribute to FBS operating earnings:

Retail Banking: 31 percent
Business Banking and Private Financial Services: 28 percent
Commercial Banking: 16 percent
Payment Systems: 16 percent
Corporate Trust and Institutional Financial Services: 9 percent


Page 4
- ------

Graph illustrates the following information: Seven-year total return*

Index: 12/31/89 = $100
FBS = FBS Common Stock
KBW 50 = Keefe, Bruyette & Woods 50 Bank Index
S&P 500 = Standard & Poor's Index of 500 Stocks

1989: FBS/100, S&P 500/100, KBW 50/100
1990: FBS/83, S&P 500/97, KBW 50/72
1991: FBS/159, S&P 500/126, KBW 50/114
1992: FBS/193, S&P 500/136, KBW 50/145
1993: FBS/217, S&P 500/150, KBW 50/153
1994: FBS/243, S&P 500/152, KBW 50/145
1995: FBS/375, S&P 500/209, KBW 50/232
1996: FBS/529, S&P 500/257, KBW 50/329

*Capital appreciation plus dividends

$100 invested in FBS common stock at December 31, 1989, would have been worth
$529 at year-end 1996. That compares with $329 for the KBW 50 Bank Index and
$257 for the S&P 500 stock index.


Page 6
- ------

Pie chart illustrating that Retail Banking accounts for 31 percent of FBS
operating earnings.

                                       2

<PAGE>
 
Page 9
- ------

Pie chart illustrating that Payment Systems accounts for 16 percent of FBS
operating earnings.


Page 12
- -------

Pie chart illustrating that Business Banking and Private Financial Services
accounts for 28 percent of FBS operating earnings.


Page 14
- -------

Pie chart illustrating that Commercial Banking accounts for 16 percent of FBS
operating earnings.


Page 16
- -------

Pie chart illustrating that Corporate Trust and Institutional Financial Services
accounts for 9 percent of  FBS operating earnings.

                                       3





<PAGE>
 
                                                                      EXHIBIT 4E

- --------------------------------------------------------------------------------

                      METROPOLITAN FINANCIAL CORPORATION

                                      AND

                   AMERICAN STOCK TRANSFER AND TRUST COMPANY

                                 WARRANT AGENT

                             ____________________



                               WARRANT AGREEMENT



                             ____________________



                         Dated as of November 20, 1990

- --------------------------------------------------------------------------------

<PAGE>
 
     WARRANT AGREEMENT, dated as of November 20, 1990, between Metropolitan
Financial Corporation, a Delaware corporation (the "Company"), and American
Stock Transfer and Trust Company, a New York corporation (said corporation, and
any successor which shall become such in the manner prescribed in this
Agreement, being herein called the "Warrant Agent").

     WHEREAS, the Company proposes to issue and sell up to 488,750 Units (the
"Units"), each Unit consisting of one share of $2.875 Cumulative Perpetual
Preferred Stock, Series B, of the Company, par value $.01 per share (the class
or series of such Preferred Stock being hereinafter called the "Preferred Stock"
and the Preferred Stock comprising part of a Unit being hereinafter called the
"Unit Preferred Stock"), and one Warrant (the "Warrant") entitling the holder
thereof to purchase one-half of one share of Common Stock of the Company, par
value $.01 per share (the class of such Common Stock being hereinafter called
the "Common Stock") and the Common Stock issuable upon exercise of a Warrant
comprising part of a Unit being
 hereinafter called the "Warrant Common Stock");
and

     WHEREAS, the Company desires to enter into this Agreement to set forth the
terms and conditions of the Warrants and the rights of the holders thereof; and

     WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants to be issued under this Agreement (the "Warrant Certificates") and the
exercise of the Warrants: and

     WHEREAS, it is desired that the Warrants and the Unit Preferred Stock will
not be separately transferable until after the close of business on the
Distribution Date (as hereinafter defined), after which the Warrant Agent shall
mail the certificates for the Unit Preferred Stock to the registered holders of
the Warrants as of the close of business on such Distribution Date; prior to the
close of business on such Distribution Date, each holder of one Warrant will be
the beneficial owner of one share of Unit Preferred Stock;

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:

     Section 1.  Appointment of Warrant Agent.  The Company hereby appoints the
                 ----------------------------
Warrant Agent to act as agent for the Company in accordance with the
instructions in this Agreement hereinafter set forth, and the Warrant Agent
hereby accepts such appointment.

     Section 2.  Issue of Preferred Stock Certificates.  The certificates for 
                 -------------------------------------
the Preferred Stock until after the close of business on February 19, 1991 or
such earlier date as the Company may publicly announce with the consent of Dain
Bosworth Incorporated and Piper, Jaffray & Hopwood Incorporated, with written
notice of 

<PAGE>
 
such determination to be given by the Company to the Warrant Agent (the earlier
of such dates herein called the "Distribution Date"), will be held by the
Warrant Agent as custodian for the holders of the Units unless the Distribution
Date is earlier than the close of business on the date of issue and sale of the
Units by the Company (the "Closing"). Until after the close of business on the
Distribution Date (unless the Distribution Date is prior to the Closing), the
Unit Preferred Stock will be evidenced by the Warrant Certificates registered in
the names of the holders of the Warrants, which certificates shall bear a legend
substantially of the following tenor and purport:

          "Under the terms of the Warrant Agreement, dated as of November 20,
     1990, between the Company and American Stock Transfer and Trust Company, as
     Warrant Agent, the Company has deposited with the Warrant Agent one share
     of $2.875 Cumulative Perpetual Preferred Stock, Series B, of the Company,
     par value $.01 per share, for each Warrant to purchase one-half of one
     share of Common Stock of the Company represented hereby. Until 4:00 p.m.,
     Minneapolis, Minnesota time, on the "Distribution Date" (as defined below),
     the registered owner of Warrants represented by this certificate is the
     beneficial owner of such number of shares of Preferred Stock. As soon as
     practicable after 4:00 p.m., Minneapolis, Minnesota time, on February 19,
     1991 or such earlier date as may be publicly announced by the Company with
     the consent of Dain Bosworth Incorporated and Piper, Jaffray & Hopwood
     Incorporated (the earlier of such dates being the "Distribution Date"), the
     Warrant Agent will mail (by first-class, insured, postage prepaid mail) to
     the holder in whose name the Warrants represented by this Certificate are
     registered as of 4:00 p.m., Minneapolis, Minnesota time, on the
     Distribution Date, at the address of such holder as such address shall
     appear on the records of the Warrant Agent, a certificate evidencing such
     shares of Preferred Stock registered in the name of such holder. Ownership
     of such Preferred Stock is not transferable until after the 4:00 p.m.,
     Minneapolis, Minnesota time, on the Distribution Date, except by and in
     connection with the transfer of the Warrants represented by this
     certificate, and every transfer hereof by the holder hereof at or prior to
     such time on the Distribution Date shall effect the transfer of the
     beneficial interest of such holder in the Preferred Stock. After 4:00 p.m.,
     Minneapolis, Minnesota time, on the Distribution Date, the holder of the
     Warrants represented by this certificate is not, by virtue of being such
     holder, the beneficial owner for the Preferred Stock. By accepting the
     warrants represented by this Certificate, the holder hereof shall (prior to
     4:00 p.m., Minneapolis, Minnesota time on the Distribution Date) possess
     all other rights and obligations of a holder of Preferred Stock as fully
     and effectually as if he had received the same."

                                       3

<PAGE>
 
     Until after the close of business on the Distribution Date (unless the
Distribution Date is prior to the Closing), the right to receive Unit Preferred
Stock will be transferable only in connection with the transfer of the Warrants
represented by certificates bearing the above legend.

     For purposes of this Agreement, the term "close of business" on any given
date shall mean 4:00 p.m., Minneapolis, Minnesota time, on such date; provided,
however, that if such date is not a business day it shall mean 4:00 p.m.
Minneapolis, Minnesota time, on the next succeeding business day.  For purposes
of this Agreement the term "business day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in Minneapolis,
Minnesota are authorized or obligated by law to be closed.

     Section 3.  Distribution of Preferred Stock Certificates.  As soon a 
                 --------------------------------------------
practicable after the Distribution Date (unless the Distribution Date is prior
to the Closing in which case the Closing Date shall control), the Warrant Agent,
as custodian, will mail, by first-class, insured, postage prepaid mail, to
record holders of the Warrants as of the close of business on the Distribution
Date, as shown by the records maintained by the Warrant Agent in accordance with
Section 7 hereof, at the address of such holders shown on such records, a
certificate evidencing one share of Unit Preferred Stock for each Warrant so
held.

     Section 4.  Date, Denomination and Execution of Warrant Certificates.  The
                 --------------------------------------------------------
Warrant Certificates (and the Form of Election to Purchase and the Form of
Assignment to be printed on the reverse thereof) shall be in registered form
only and shall be substantially of the tenor and purport recited in Exhibit A
hereto together with the legend set forth in Section 2 hereof, if issued prior
to the close of business on the Distribution Date, and may have such letters,
numbers or other marks of identification or designation and such legends,
summaries or endorsements printed, lithographed or engraved thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any law, or with any rule
or regulation made pursuant thereto, or with any rule or regulation of any stock
exchange on which the Unit Preferred Stock or the Warrants may be listed, or to
conform to usage. The Warrant Certificates, whenever issued, shall be dated as
of November 20, 1990 and shall entitle the registered holders thereof, subject
to the provisions of this Agreement and of the Warrant Certificate, to purchase,
subject to adjustment as provided in Section 10 hereof, one-half of one fully
paid and nonassessable share of Common Stock for each Warrant evidenced by such
Warrant Certificates at the price per share set forth therein.

     The Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, the President or a Vice President either manually or by
facsimile signature printed thereon, which shall be attested by the Treasurer or
an 

                                       4

<PAGE>
 
Assistant Treasurer or the Secretary or an Assistant Secretary of the Company,
either manually or by facsimile signature. The Warrant Certificates shall be
manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be such officer of
the Company before countersignature by the Warrant Agent and issue and delivery
thereof by the Company, such Warrant Certificates, nevertheless, may be
countersigned by the Warrant Agent, issued and delivered with the same force and
effect as though the person who signed such Warrant Certificates had not ceased
to be such officer of the Company.

     Section 5.  Maintenance of Office or Agency.  The Warrant Agent, or, if 
                 -------------------------------      
there shall be no such Warrant Agent, the Company, shall at all times maintain
an office or agency at which shall be kept and maintained books for registration
of ownership and transfer of ownership in accordance with Section 7 hereof and
at which Warrants may be exercised in accordance with Section 9 hereof. Such
office or agency shall initially be the corporate trust office of the Warrant
Agent.

     Section 6.  Issuance of Warrant Certificates.  Upon execution of this 
                 --------------------------------       
Agreement, Warrant Certificates shall be countersigned and delivered by the
Warrant Agent only upon written order of the Company signed by its Chairman,
President or a Vice President, and its Treasurer or any Assistant Treasurer or
its Secretary or any Assistant Secretary.

     Subsequent to their original issuance, no Warrant Certificates shall be
reissued except (i) Warrant Certificates issued upon transfer thereof in
accordance with Section 7 hereof, (ii) Warrant Certificates issued upon any
combination, split-up or exchange of Warrant Certificates pursuant to Section 7
hereof, (iii) Warrant Certificates issued in replacement of mutilated,
destroyed, lost or stolen Warrant Certificates pursuant to Section 8 hereof,
(iv) Warrant Certificates issued upon the partial exercise of Warrant
Certificates to evidence the unexercised portion of such Warrant Certificates
pursuant to Section 9 hereof and (v) Warrant Certificates issued to reflect any
adjustment or change in the Purchase Price or the number or kind of shares
purchasable thereunder pursuant to Section 25 hereof.  The Warrant Agent is
hereby irrevocably authorized to countersign and deliver, in accordance with the
provisions of said Sections 7, 8, 9 and 25, the new Warrant Certificates
required for the purposes thereof, and the Company, whenever required by the
Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly
executed on behalf of the Company for such purposes.

     Section 7.  Transfers and Exchanges of Warrant Certificates.  The Warrant 
                 -----------------------------------------------
Agent will keep or cause to be kept books for registration of ownership and
transfer of ownership of the Warrant Certificates issued hereunder. Such
registers shall 

                                       5

<PAGE>
 
show the names and addresses of the respective holders of the Warrant
Certificates and the number of Warrants evidenced by each such Warrant
Certificate.

     The Warrant Agent shall transfer, from time to time, any outstanding
Warrants upon the books to be maintained by the Warrant Agent for that purpose,
upon surrender of the Warrant Certificate evidencing such Warrants, with the
Form of Assignment duly filled in and executed, to the Warrant Agent, at its
principal corporate trust offices in New York, New York or at an office
maintained for such purpose at any time prior to the close of business on
November 20, 2000 (herein called the "Expiration Date"), and upon payment to the
Warrant Agent for the account of the Company of an amount equal to any
applicable transfer tax, any other taxes or governmental charges which the
Company may be required by law to collect in respect of such exercise and any
other amounts required pursuant to the Warrant Certificate.  Such payment may be
made in cash or by check, bank draft or money order, payable in lawful money of
the United States of America to the order of the Warrant Agent.

     Upon receipt of a Warrant Certificate, with the Form of Assignment duly
filled in and executed, accompanied by the required payment, the Warrant Agent
shall promptly countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
provided, however, in case the registered holder of any Warrant Certificate
shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Certificates for
the number of full Warrants not so transferred.

     Any Warrant Certificate or Certificates may be exchanged at the option of
the holder thereof for another Warrant Certificate or Certificates of different
denominations, of like tenor and representing in the aggregate the same number
of Warrants, upon surrender of such Warrant Certificate or Certificates, with
the Form of Assignment duly filled in and executed, to the Warrant Agent, at any
time or from time to time after the close of business on the Distribution Date
and prior to the close of business on the Expiration Date.

     Section 8.  Mutilated, Destroyed, Lost or Stolen Warrant Certificates.  
                 ---------------------------------------------------------
Upon receipt by the Company and the Warrant Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of any
Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them and reimbursement to them of all
reasonable expenses incidental thereto, and, in the case of mutilation, upon
surrender and cancellation of the Warrant Certificate, the Warrant Agent shall
countersign and deliver a new Warrant Certificate of like tenor for the same
number of Warrants.

                                       6

<PAGE>
 
     Section 9.  Duration and Exercise of Warrants.  The Purchase Price for 
                 ---------------------------------      
the Common Stock purchasable pursuant to the exercise of Warrants (each of which
shall be exercisable to purchase one-half of one share of Common Stock),
commencing as of the date hereof, shall be $12.50 per share of Common Stock in
lawful money of the United States of America, which Purchase Price shall
hereafter be subject to adjustment as provided in Section 10 hereof. Except as
the context otherwise requires, the term "Purchase Price" as used in this
Agreement shall mean the Purchase Price then in effect as of the relevant date
and shall reflect all adjustments made in accordance with the provisions of
Section 10 hereof. Each Purchase Price shall continue in effect until further
adjusted pursuant to the provisions of Section 10 hereof.

     The registered holder of any Warrant Certificates may, subject to Section
11 hereof, exercise each Warrant evidenced thereby, to purchase one-half of one
share of Common Stock at any time or in part from time to time, after the close
of business on the Distribution Date, and at or prior to the close of business
on November 20, 2000 (at which time the Warrant Certificates shall be and become
wholly void and of no value).

     Exercise of Warrants shall be accomplished upon surrender of the Warrant
Certificate evidencing such Warrants, with the Form of Election to Purchase on
the reverse side thereof duly filled in and executed, to the Warrant Agent at
its principal corporate trust offices in New York, New York or at an office
maintained for such purpose together with payment to the Warrant Agent for the
account of the Company of the Purchase Price (as of the date of such surrender)
for each share of Common Stock then being purchased and an amount equal to any
applicable transfer tax, and, if requested by the Company, any other taxes or
governmental charges which the Company may be required by law to collect in
respect of such exercise and any other charges required pursuant to the Warrant
Certificate.  Payment of the Purchase Price and other charges may be made in
cash or by check, bank draft or money order payable in lawful money of the
United States of America to the order of the Warrant Agent.  No adjustment shall
be made for any cash dividends, whether paid or declared, on any shares of
Common Stock issuable upon exercise of a Warrant.

     Upon receipt of a Warrant Certificate, with the Form of Election to
Purchase duly filled in and executed, accompanied by payment of the Purchase
Price for the Common Stock to be purchased (and of an amount equal to any
applicable taxes, governmental or other charges as aforesaid), the Warrant Agent
shall promptly requisition from the Transfer Agent of the Common Stock of the
Company and deliver to or upon the order of the registered holder of such
Warrant Certificate, in such name or names as such registered holder may
designate, a certificate or certificates for the number of full shares of Common
Stock to be purchased, together 

                                       7

<PAGE>
 
with cash made available by the Company pursuant to Section 11 hereof in respect
of any fraction of a share of such stock otherwise issuable upon such exercise.

     In case the registered holder of any Warrant Certificate shall exercise
fewer than all of the Warrants evidenced by such Warrant Certificate, the
Warrant Agent shall promptly countersign and deliver to the registered holder of
such Warrant Certificate, or to his duly authorized assigns, a new Warrant
Certificate or Certificates evidencing the number of Warrants that were not so
exercised.  The Warrant Agent may deem and treat the person named as the
registered holder on the face of the Warrant Certificate and of the Common Stock
as the true and lawful owner thereof for all purposes.

     Each person in whose name any certificate for shares of Common Stock is
issued upon the exercise of Warrants shall for all purposes be deemed to have
become the holder of record of such shares represented thereby and such
certificate shall be dated the date upon which the Warrant Certificate was duly
surrendered in proper form and payment of the Purchase Price (and of any
applicable taxes, governmental or other charges) was made; provided, however,
that if the date of such surrender and payment is a date on which the stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares on, and such certificate shall be dated,
the next succeeding business day on which the stock transfer books of the
Company are open.  The Company covenants and agrees that it shall not cause its
stock transfer books to be closed for a period of more than ten consecutive
business days except upon consolidation, merger, sale of all or substantially
all of its assets, dissolution or liquidation.

     Section 10. Adjustments of Number and Kind of Shares Purchasable and 
                 --------------------------------------------------------
Purchase Price. The initial number of shares of Common Stock purchasable upon
- --------------
exercise of a Warrant and the Purchase Price shall be subject to adjustment from
time to time upon the occurrence, after the date hereof, of the following
events:

     (A)  In case the Company shall (1) pay a dividend in, or make a
distribution of, shares of Common Stock or of the Company's capital stock
convertible into Common Stock on its outstanding Common Stock, (2) subdivide its
outstanding shares of Common Stock into a greater number of such shares or (3)
combine its outstanding shares of Common Stock into a smaller number of such
shares, the total number of shares of Common Stock and the number of shares of
capital stock convertible into Common Stock purchasable upon the exercise of
each Warrant outstanding immediately prior thereto shall be adjusted so that the
holder of any Warrant Certificate thereafter surrendered for the purchase of
Common Stock shall be entitled to receive at the same aggregate Common Stock
Purchase Price the number of shares of Common Stock and the number of shares of
the Company's capital stock convertible into Common Stock which he would have
owned or have been entitled to receive immediately following any of the events
described above 

                                       8

<PAGE>
 
had such Warrant been exercised in full immediately prior to any such event. An
adjustment made pursuant to this Subsection shall, in the case of a stock
dividend or distribution, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof. If, as a result of an adjustment made pursuant to this Subsection, the
holder of any Warrant thereafter surrendered for exercise shall become entitled
to receive shares of two or more classes of capital stock of the Company, the
Board of Directors of the Company (whose determination shall be conclusive and
shall be evidenced by a Board resolution filed with the Warrant Agent) shall
determine the allocation of the Adjusted Purchase Price between or among shares
of such classes of capital stock.

     (B)  In the event of any adjustment of the total number of shares of Common
Stock purchasable upon the exercise of the then outstanding Warrants pursuant to
Subsection (A) above, the Purchase Price per share applicable to each such
outstanding Warrant shall be adjusted to be the amount resulting from dividing
the number of shares (including fractional share interests) covered by such
Warrant immediately after such adjustment into the total amount payable upon
exercise of such Warrant in full immediately prior to such adjustment.

     (C)  In case the Company shall issue rights or warrants to all holders of
its Common Stock entitling them (for a period expiring within forty-five days
after the record date mentioned below) to subscribe for or purchase shares of
Common Stock at a price per share less than the current market price per share
of Common Stock (as defined in Subsection (F) below) at the record date
mentioned below, the Purchase Price shall be adjusted so that the same shall
equal the price determined by multiplying the Purchase Price in effect
immediately prior thereto by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on the record date mentioned below
plus the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock offered for
subscription or purchase would purchase at such current market price per share
of Common Stock, and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of shares of Common
Stock offered for subscription or purchase.  Such adjustments shall be made
whenever such rights or warrants are issued, and shall become effective as of
the record date for the determination of stockholders entitled to receive such
rights or warrants.

     (D)  In case the company shall distribute to all holders of its Common
Stock shares of its capital stock (other than Common Stock or shares of capital
stock convertible into Common Stock), evidences of its indebtedness or assets,
or rights or warrants (excluding those referred to in Subsection (C) above) to
subscribe or purchase such shares, evidences of indebtedness or assets, then in
each such case the Purchase Price in effect thereafter shall be determined by
multiplying the Purchase Price in effect immediately prior thereto by a
fraction, of which the numerator shall 

                                       9

<PAGE>
 
be the total number of outstanding shares of Common Stock multiplied by the
current market price per share of Common Stock (as determined in accordance with
the provisions of Subsection (F) below) on the record date mentioned below, less
the fair market value (as determined by the Board of Directors of the Company,
whose determination shall be conclusive and evidenced by a Board resolution
filed with the Warrant Agent) of the capital stock, assets or evidences of
indebtedness or of such rights or warrants so distributed to all such holders,
and of which the denominator shall be the total number of outstanding shares of
Common Stock multiplied by such current market price per share of Common Stock.
Such adjustments shall be made whenever any such distribution is made, and shall
become effective as of the record date for the determination of stockholders
entitled to receive such distribution.

     (E)  In the event of any capital reorganization or any reclassification of
the Common Stock (except as provided in Subsection (A) above or Subsection (I)
below), any holder of Warrants upon exercise thereof shall be entitled to
receive, in lieu of the Common Stock to which he would have become entitled upon
exercise immediately prior to such reorganization or reclassification, the
shares (of any class or classes) or other securities or property of the Company
that he would have been entitled to receive at the same aggregate Purchase Price
upon such reorganization or reclassification if his Warrants had been exercised
immediately prior thereto; and in any such case, appropriate provision (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and shall be evidenced by a Board resolution filed with the
Warrant Agent) shall be made for the application of this Section 10 with respect
to the rights and interests thereafter of the holders of Warrants (including but
not limited to the allocation of the adjusted Purchase Price between or among
shares of classes of capital stock), to the end that this Section 10 (including
the adjustments of the number of shares of Common Stock or other securities
purchasable and the Purchase Price thereof) shall thereafter be reflected, as
nearly as reasonably practicable, in all subsequent exercises of the Warrants
for any shares or securities or other property thereafter deliverable upon the
exercise of the Warrants.

     (F)  For the purpose of any computation under Subsections (C) and (D)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing market prices, if the Common Stock
is traded on a national securities exchange or the NASDAQ national market
system, or the average of the last daily bid and asked quotation if traded on
NASDAQ, for the ten consecutive trading days immediately prior to the day in
question.

     (G)  No adjustment in the Purchase Price under this Section 10 shall be
made unless such adjustment would require an increase or decrease of at least
one per cent (1%) in the Purchase Price; provided, however, that any adjustments
which by reason of this Subsection are not required to be made shall be carried
forward and 

                                      10

<PAGE>
 
taken into account in any subsequent adjustment; provided, further, that any
adjustments which are so carried forward shall be made no later than the earlier
of (i) three years after the date of the particular event on account of which an
adjustment would be required or (ii) the date as to which the aggregate
adjustments not previously made would require a total increase or decrease of 1%
in the Purchase Price. All calculations under this Section 10 shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case may be.

     (H)  Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant or the Purchase Price is adjusted as
provided in this Section 10, the Company will promptly file with the Warrant
Agent a certificate signed by the Chairman of the Board, the President or a Vice
President of the Company and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Company setting forth the number and
kind of shares purchasable and the Purchase Price, as so adjusted, stating that
such adjustments in the number or kind of shares or other securities, or in the
Purchase Price, conform to the requirements of this Section 10, and setting
forth a brief statement of the facts accounting for such adjustments.  Such
certificates shall be conclusive evidence of the correctness of such
adjustments.  Promptly after receipt of such certificate, the Company, or the
Warrant Agent at the Company's request, will mail a brief summary thereof (to be
supplied by the Company) to the registered holders of the Warrants; provided,
however, that failure to file or to give any notice required under this
Subsection, or any defect therein, shall not affect the legality or validity of
any such adjustments under this Section 10; and provided further, that, where
appropriate, such notice may be given in advance and included as part of the
notice required to be given pursuant to Section 15 hereof.

     (I)  In case of any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the corporation formed by such
consolidation or merger or the corporation which shall have acquired such
assets, as the case may be, shall execute and deliver to the Warrant Agent a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding shall have the right thereafter (until the expiration of such
Warrant) to receive, upon exercise of such Warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer.  Such
supplemental warrant agreement shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided in this
Section.  The above provision of this Subsection shall similarly apply to
successive consolidations, mergers, sales or transfers.

                                      11

<PAGE>
 
     The Warrant Agent shall not be under any responsibility to determine the
correctness of any provisions contained in any such supplemental warrant
agreement relating to either the kind or amount of shares of stock or securities
or property purchasable by holders of Warrant Certificates upon the exercise of
their Warrants after any such consolidation, merger, sale or transfer or to any
adjustment to be made with respect thereto, but subject to the provisions of
Section 23 hereof, may accept as conclusive evidence of the correctness of any
such provisions, and shall be protected in relying upon, a certificate of a firm
of independent certified public accountants with respect thereto.

     (J)  Irrespective of any adjustments in the Purchase Price or in the number
or kind of shares issuable upon exercise of Warrants, Warrant Certificates
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrant Certificates
initially issuable pursuant to this Warrant Agreement.

     (K)  The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee of
said Board, and not disapproved by the Warrant Agent, to make any computation
required under this Section, and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section.

     (L)  For the purpose of this Section, the term "Common Stock" shall mean
(i) the class of stock designated as Common Stock in the Certificate of
Incorporation of the Company, as amended, at the date of this Agreement or (ii)
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from par
value to no par value or from no par value to par value. In the event that at
any time as a result of an adjustment made pursuant to this Section, the holder
of any Warrant thereafter surrendered for exercise shall become entitled to
receive any shares of capital stock of the Company other than the shares of the
Common Stock, thereafter the number of such other shares so receivable upon
exercise of any Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in this Section, and all other provisions
of this Agreement, with respect to the Common Stock shall apply on like terms to
any such other shares.

     (M)  Anything in this Section 10 to the contrary notwithstanding, if the
Company or any subsidiary of the Company grants options or other rights to
purchase shares of Common Stock to any of its employees or directors, or if such
employees or directors otherwise receive shares of Common Stock under any
employee benefit plan of, or compensation agreement or arrangement with, the
Company or its subsidiaries, or if the Company offers any dividend reinvestment

                                      12

<PAGE>
 
plans, the granting of such options or rights, the issuance of shares of Common
Stock upon the exercise of such options or other rights or pursuant to such
plans, agreements or arrangements, and subscriptions for purchases of shares of
Common Stock under any such dividend reinvestment plan are not to be taken into
consideration for adjustments under this Section 10.

     Section 11. Fractional Interests.  The Company shall not be required to 
                 --------------------                        
issue any Warrant Certificate evidencing a fraction of a Warrant or to issue
fractions of shares of Common Stock on the exercise of the Warrants. If any
fraction (calculated to the nearest one-hundredth) of a share of Common Stock
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company shall purchase such fraction for an amount in cash
equal to the current value of such fraction computed on the basis of the closing
market price on the trading day immediately preceding the day upon which such
Warrant Certificate was surrendered for exercise in accordance with Section 9
hereof. By accepting a Warrant Certificate, the holder thereof expressly waives
any right to receive a Warrant Certificate evidencing any fraction of a Warrant
or to receive any fractional share of Common Stock upon exercise of a Warrant.

     Section 12. Reservation of Common Stock.  The Company covenants that it
                 ---------------------------               
will at all times reserve and keep available, free from any pre-emptive rights,
out of its authorized Common Stock, solely for the purpose of issue upon
exercise of the Warrants, such number of shares of Common Stock as shall then be
issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be so issuable shall upon such issue
be duly authorized, validly issued, fully paid and nonassessable. Promptly after
the Expiration Date of the Warrants, the Warrant Agent shall certify to the
Company the aggregate number of Warrants then outstanding, and thereafter no
shares of stock shall be subject to reservation in respect of such Warrants.

     The Warrant Agent is hereby irrevocably authorized to requisition from time
to time from the transfer agent of the Common Stock and any subsequent transfer
agent of any shares of the Company's capital stock issuable upon the exercise of
the Warrants, for stock certificates required to honor outstanding Warrants.
The Company hereby irrevocably authorizes its present and any future transfer
agent to comply with all such requests.  The Company will supply such transfer
agent with duly executed stock certificates for such purpose and will itself
provide or otherwise make available any cash which may be payable as provided in
Section 11 of this Agreement.

     The Company covenants that if any shares of Common Stock required to be
reserved for the purposes of issue upon exercise of the Warrants hereunder
require registration with or approval of any governmental authority under any
federal or state law, or listing on any national securities exchange, before
such shares may be 

                                      13

<PAGE>
 
issued upon exercise, the Company will, when and if the fair market value of one
share of Common Stock (as defined in Section 11) exceeds the Purchase Price, in
good faith and as expeditiously as possible endeavor to cause such shares to be
duly registered, approved or listed on the relevant national securities
exchange, as the case may be; provided, however, that in no event shall shares
of Common Stock be issued, and the Company is authorized to suspend the exercise
of all Warrants, for the period during which it is endeavoring to obtain such
registration, approval or listing.

     Section 13. Reduction of Conversion Price Below Par Value.  Before taking 
                 ---------------------------------------------
any action which would cause an adjustment pursuant to Section 10 hereof
reducing the Purchase Price below the then par value (if any) of the shares of
Common Stock issuable upon exercise of the Warrants, the Company will use its
best efforts to take any corporate action which, in the opinion of its counsel,
may be necessary in order that the Company may validly and legally issue fully
paid and nonassessable shares of such Common Stock at such adjusted Purchase
Price.

     Section 14. Payment of Taxes.  The Company covenants and agrees that it 
                 ----------------                            
will pay when due and payable any and all Federal and state original issue taxes
which may be payable in respect of the issue of the Warrant Certificates, or any
shares of Common Stock or other securities upon the exercise of Warrants. The
Company shall not, however, be required (i) to pay any tax which may be payable
in respect of any transfer involved in the transfer and delivery of Warrant
Certificates or the issuance or delivery of certificates for Common Stock or
other securities in a name other than that of the registered holder of the
Warrant Certificate surrendered for purchase or (ii) to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise of
any Warrant Certificate until any such tax shall have been paid, all such tax
being payable by the holder of such Warrant Certificate at the time of
surrender.

     Section 15. Notice of Certain Corporate Action.  In case the Company after
                 ----------------------------------      
the date hereof shall propose (i) to offer to all of the holders of Common Stock
rights to subscribe to or purchase any additional shares of any class of its
capital stock, any evidences of its indebtedness or assets, or any other rights
or options in a manner causing an adjustment pursuant to Section 10(A) or (ii)
to effect any reclassification of Common Stock (other than a reclassification
involving merely the subdivision or combination of outstanding shares of Common
Stock) or any capital reorganization, or any consolidation or merger to which
the Company is a party and for which approval of any stockholders of the Company
is required, or any sale, transfer or other disposition of its property and
assets substantially as an entirety, or the liquidation, voluntary or
involuntary dissolution or winding up of the Company, in a manner causing an
adjustment pursuant to Section 10(E), then, in each such case, the Company shall
file with the Warrant Agent and the Company, or the Warrant Agent on its behalf,
shall mail by first-class, postage prepaid mail to all 

                                      14

<PAGE>
 
registered holders of the Warrant Certificates notice of such proposed action,
which notice shall specify the date on which the books of the Company shall
close or a record be taken for such offer of rights or options, or the date on
which such reclassification, reorganization, consolidation, merger, sale,
transfer, other deposition, liquidation, voluntary or involuntary dissolution or
winding up shall take place or commence, as the case may be, and which shall
also specify any record date for determination of holders of Common Stock
entitled to vote thereon or participate therein and shall set forth such facts
with respect thereto as shall be reasonably necessary to indicate any
adjustments in the Purchase Price and the number or kind of shares or other
securities purchasable upon exercise of Warrants which will be required as a
result of such action. Such notice shall be filed and mailed in the case of any
action covered by clause (i) above, at least ten days prior to the record date
for determining holders of the Common Stock for purposes of such action or, if a
record is not to be taken, the date as of which the holders of shares of Common
Stock of record are to be entitled to such offering; and, in the case of any
action covered by clause (ii) above, at least twenty days prior to their earlier
of the date on which such reclassification, reorganization, consolidation,
merger, sale, transfer, other deposition, liquidation, voluntary or involuntary
dissolution or winding up in expected to become more effective and the date as
of which it is expected that holders of shares of Common Stock of record on such
date shall be entitled to exchange their shares for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
sale, transfer, other disposition, liquidation, voluntary or involuntary
dissolution or winding up.

     Failure to give any such notice or any defect therein shall not affect the
legality or validity of any transaction listed in this Section 15.

     Section 16. Disposition of Proceeds on Exercise of Warrant Certificates, 
                 ------------------------------------------------------------
etc. The Warrant Agent shall account promptly to the Company with respect to
- ---
Warrants exercised and concurrently pay to the Company all moneys received.

     The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours at its principal
corporate trust offices, 40 Wall Street, 46th Floor, New York, New York 10005
and at any office or agency maintained by it in accordance with Section 5
hereof.  Copies of this Agreement may be obtained upon written request addressed
to Chief Financial Officer, Metropolitan Financial Corporation, 1500 Lincoln
Centre, Minneapolis, Minnesota 55402.

     Section 17. Warrant Certificate Holder Not Deemed a Stockholder.  Except 
                 ---------------------------------------------------
as otherwise provided in Section 2, prior to the Distribution Date, no holder,
as such, of any Warrant Certificate shall be entitled to vote or be deemed the
holder of Common Stock or any other securities of the Company which may at any
time be issuable on the exercise of the Warrants represented thereby for any
purpose 

                                      15

<PAGE>
 
whatever, nor shall anything contained herein or in any Warrant Certificate be
construed to confer upon the holder of any Warrant Certificate, as such, any of
the rights of a stockholder of the Company or any right to vote for the election
of directors or upon any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether upon
any recapitalization, issue of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger, conveyance or
otherwise), or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 15 hereof), or to receive dividends
or subscription rights, or otherwise, until such Warrant Certificate shall have
been exercised in accordance with the provisions hereof and the receipt of the
Purchase Price and any other amounts payable upon such exercise by the Warrant
Agent as provided herein.

     Section 18. Right of Action.  All rights of action in respect to this 
                 ---------------                          
Agreement are vested in the respective registered holders of the Warrant
Certificates; and any registered holder of any Warrant Certificate, without the
consent of the Warrant Agent or of the holder of any Warrant Certificate, may,
in his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company suitable to enforce,
or otherwise in respect of, his right to exercise the Warrants evidenced by such
Warrant Certificate, for the purchase of shares of the Common Stock in the
manner provided in the Warrant Certificate and in this Agreement.

     Section 19. Agreement of Holders of Warrant Certificates.  Every holder 
                 --------------------------------------------
of a Warrant Certificate, by accepting the same, consents and agrees with the
Company, the Warrant Agent and with every other holder of a Warrant Certificate
that:

     (A)  The Warrant Certificates are transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in this Agreement;
and

     (B)  The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the absolute owner for all
purposes whatever and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.

     Section 20. Cancellation of Warrant Certificates.  In the event that the 
                 ------------------------------------     
Company shall purchase or otherwise acquire any Warrant Certificate or
Certificates after the issuance thereof, such Warrant Certificate or
Certificates shall thereupon be delivered to the Warrant Agent and be cancelled
by it and retired. The Warrant Agent shall also cancel any Warrant Certificate
delivered to it for exercise, in whole or in part, or delivered to it for
transfer, split up, combination or exchange. Warrant 

                                      16

<PAGE>
 
Certificates so cancelled shall be delivered by the Warrant Agent to the Company
from time to time, or disposed of in accordance with the instructions of the
Company.

     Section 21. Concerning the Warrant Agent.  The Company agrees to pay to 
                 ----------------------------              
the Warrant Agent from time to time, on demand of the Warrant Agent, reasonable
compensation for all services rendered by it hereunder and also its reasonable
expenses, including counsel fees, and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Warrant Agent
for, and to hold it harmless against, any loss, liability or expense, incurred
without negligence, bad faith or willful misconduct on the part of the Warrant
Agent, arising out of or in connection with the acceptance and administration of
this Agreement, including the costs and expenses of defending against any claim
of liability in the premises.

     Section 22. Merger or Consolidation or Change of Name of Warrant Agent.  
                 ----------------------------------------------------------
Any corporation into which the Warrant Agent may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Warrant Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 24 hereof. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, any of the
Warrant Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the original
warrant agent and deliver such Warrant Certificates so countersigned; and in
case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor warrant agent or in the name
of the successor warrant agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.

     In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant Certificates so countersigned; and in case at that time any
of the Warrant Certificates shall not have been countersigned, the Warrant Agent
may countersign such Warrant Certificates either in its prior name or in its
changed name; and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.

                                      17

<PAGE>
 
     The provisions of this Section 22 shall also apply to any agent appointed
pursuant to Section 5 hereof.

     Section 23. Duties of Warrant Agent.  The Warrant Agent undertakes the 
                 -----------------------
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrant Certificates
by their acceptance thereof, shall be bound:

     (A)  The Warrant Agent may consult with counsel (who may be counsel for the
Company) and the opinion of such counsel shall be full and complete
authorization and protection to the Warrant Agent as to any action taken,
suffered or omitted by it in good faith and in accordance with such opinion;
provided, however, that the Warrant Agent shall have exercised reasonable care
in the selection of such counsel.

     (B)  Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the President,
the Chief Financial Officer, the Treasurer or the Secretary of the Company and
delivered to the Warrant Agent; and such certification shall be full
authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.

     (C)  The Warrant Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.

     (D)  The Warrant Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.

     (E)  The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and deliver hereof (except the
due execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant Certificate (except its countersignature thereof), or
for any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant Certificate, or for the adjustment of the Purchase
Price or the making of any change in the number of shares of Common Stock
required under the provisions of Section 10 or for the manner, method or amount
of any such change 

                                      18

<PAGE>
 
or the ascertaining of the existence of facts that would require any such
adjustment or change (except with respect to the exercise of Warrant
Certificates after actual notice of any adjustment of the Purchase Price), and
it shall not by act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Common Stock to be
issued pursuant to this Agreement or any Warrant Certificate or as to whether
any shares of Common Stock will when issued be validly issued, fully paid and
nonassessable.

     (F)  The Warrant Agent and any stockholder, director, officer, employee or
agent appointed pursuant to Section 5 hereof of the Warrant Agent may buy, sell
or deal in any of the Warrants or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to or otherwise act as fully and
freely as though it was not Warrant Agent under this Agreement.  Nothing herein
shall preclude the Warrant Agent from acting in any other capacity for the
Company or for any other legal entity.

     (G)  The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, the Chief Financial Officer, the Treasurer
or the Secretary of the Company, and to apply to such officers for advice or
instructions in connection with the Warrant Agent's duties, and it shall not be
liable for any action taken or suffered or omitted by it in good faith in
accordance with instructions of any such officer.

     (H)  The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.

     (I)  The Warrant Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents or employees or for any loss to the Company resulting
from such neglect or misconduct; provided, however, that reasonable care shall
have been exercised in the selection and continued employment of such attorneys,
agents and employees.

     (J)  The Warrant Agent will not incur any lability or responsibility to the
Company or to any holder of any Warrant Certificate for any action taken, or any
failure to take action, in reliance on any notice, resolution, waiver, consent,
order, certificate, or other paper, document or instrument reasonably believed
by the Warrant Agent to be genuine and to have been signed, sent or presented by
the proper party or parties.

                                      19

<PAGE>
 
     (K)  The Warrant Agent will act hereunder solely as agent of the Company in
a ministerial capacity, and its duties will be determined solely by the
provisions hereof.  The Warrant Agent will not be liable for anything which it
may do or refrain from doing in connection with this Agreement except for its
own negligence, bad faith or fulfill misconduct.

     Section 24. Change of Warrant Agent.  The Warrant Agent may resign and be
                 -----------------------                                      
discharged from its duties under this Agreement upon thirty days' prior notice
in writing mailed to the Company by registered or certified mail, and to each
registered holder of Warrant Certificates.  The Company may remove the Warrant
Agent or any successor warrant agent upon thirty days' prior notice in writing,
mailed to the Warrant Agent or successor warrant agent, as the case may be, by
registered or certified mail.  If the Warrant Agent shall resign or be removed
or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Warrant Agent and shall, within fifteen days following such
appointment, give notice thereof in writing to each of the registered holders of
the Warrant Certificates.  If the Company shall fail to make such appointment
within a period of fifteen days after giving notice of such removal or after it
has been notified in writing of such resignation or incapacity by the resigning
or incapacitated Warrant Agent, then (i) the Company agrees to perform the
duties of the Warrant Agent hereunder and (ii) the registered holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent.  Any successor warrant agent, whether
appointed by the Company or by such a court, shall be a bank or trust company,
in good standing, having its principal corporate trust office in Minneapolis or
St. Paul, Minnesota, or in New York, New York, and having at the time of its
appointment as successor warrant agent a combined capital and surplus of at
least $25,000,000.  After appointment the responsibilities as if it had been
originally named as warrant agent without further act or deed; but the former
warrant agent shall deliver and transfer to the successor warrant agent any
property at the time held by in hereunder, and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose.  Failure to give
any notice provided for in this Section, however, or any defect therein shall
not affect the legality or validity of the resignation or removal of the Warrant
Agent or the appointment of the Warrant Agent or the appointment of the
successor warrant agent, as the case may be.

     Any agent appointed pursuant to Section 5 hereof may resign and be
discharged from its duties under this Agreement upon thirty days' prior notice
in writing mailed to the Warrant Agent at its principal corporate trust offices
by registered or certified mail.  The Warrant Agent may remove any such agent
upon thirty days' prior notice in writing, mailed to such agent by registered or
certified mail.  In the event a successor agent shall be appointed or another
office shall be maintained by the Warrant Agent pursuant to Section 5 hereof,
the Warrant Agent 

                                      20

<PAGE>
 
shall within fifteen days thereafter give notice thereof in writing to each of
the registered holders of Warrant Certificates.

     Section 25. Issuance of New Warrant Certificates. Notwithstanding any of 
                 ------------------------------------  
the provisions of this Agreement or the several Warrant Certificates to the
contrary, the Company may, at its option, issue new Warrant Certificates in such
form as may be approved by its Board of Directors to reflect any adjustment or
change in the Purchase Price or the number or kind of shares purchasable under
the several Warrant Certificates made in accordance with the provisions of this
Agreement.

     Section 26. Notices.  Any notice or demand pursuant to this Agreement to 
                 -------                                   
be given to or made on the Company by the Warrant Agent or by the registered
holder of any Warrant Certificate shall be sufficiently given or made if sent by
first-class or registered mail, postage prepaid, addressed (until another
address is filed in writing by the Company with the Warrant Agent) as follows:

               Metropolitan Financial Corporation
               1500 Lincoln Centre
               Minneapolis, Minnesota  55402
               Attention:  Chief Financial Officer

Any notice pursuant to this Agreement to be given or made by the Company or by
the holder of any Warrant Certificate to or on the Warrant Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company) as follows:

               American Stock Transfer and Trust Company
               40 Wall Street, 46th Floor
               New York, New York  10005
               Attention:  Stock Transfer Department

Any notice or demand authorized to be given or made to the registered holder of
any Warrant Certificate under this Agreement shall be sufficiently given or made
if sent by first-class or registered, postage prepaid mail, to the last address
of such holder as it shall appear on the registers maintained by the Warrant
Agent.

     Section 27. Modification of Agreement.  The Warrant Agent may, without 
                 -------------------------              
the consent or concurrence of the holders of the Warrant Certificates, by
supplemental agreement or otherwise, concur with the Company in making any
changes or corrections in this Agreement that the Warrant Agent shall have been
advised by counsel (who may be counsel for the Company) are necessary or
desirable to cure any ambiguity or to correct any defective or inconsistent
provision or clerical omission or mistake or manifest error herein contained, or
to make any other 

                                      21

<PAGE>
 
provisions in regard to matters or questions arising hereunder and which shall
not be inconsistent with the provisions of the Warrant Certificates and which
shall not adversely affect the interests of the holders of Warrant Certificates.

     Section 28. Successors.  All the covenants and provisions of this 
                 ---------- 
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.

     Section 29. Minnesota Contract.  This Agreement and each Warrant 
                 ------------------                          
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Minnesota and for all purposes shall be construed in
accordance with the laws of said State.

     Section 30. Benefits of This Agreement.  Nothing in this Agreement or in 
                 --------------------------                  
the Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Warrant Agent, their respective successors and
assigns hereunder and the registered holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement, and this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates.

     Section 31. Descriptive Headings.  The descriptive headings of the  
                 --------------------                  
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.

     Section 32. Counterparts.  This Agreement may be executed in any number 
                 ------------                        
of counterparts, each of which shall be an original; but such counterparts shall
together constitute one and the same instrument.

                                      22

<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective seals to be hereunto affixed and attested,
all as of the day and year first above written.


                              METROPOLITAN FINANCIAL         
                              CORPORATION


                              By     [SIGNATURE]
                                Its    [TITLE]


                              AMERICAN STOCK TRANSFER AND         
                              TRUST COMPANY


                              By     [SIGNATURE]
                                Its    [TITLE]

                              and


                              By     [SIGNATURE]
                                Its    [TITLE]

                                      23

<PAGE>
 
- --------------------------------------------------------------------------------



                            FIRST BANK SYSTEM, INC.


                                      AND


                   AMERICAN STOCK TRANSFER AND TRUST COMPANY


                                 WARRANT AGENT



                               _________________



                        SUPPLEMENTAL WARRANT AGREEMENT



                               _________________





                         DATED AS OF  JANUARY 24, 1995


- --------------------------------------------------------------------------------

<PAGE>
 
     SUPPLEMENTAL WARRANT AGREEMENT, dated as of January 24, 1995, between First
Bank System, Inc., a Delaware corporation (the "Company"), and American Stock
Transfer and Trust Company, a New York corporation (said corporation, and any
successor which shall become such in the manner prescribed in this Agreement,
being herein called the "Warrant Agent").

     WHEREAS, the Warrant Agent is a party to a Warrant Agreement, dated
November 20, 1990 (the "Warrant Agreement"), with Metropolitan Financial
Corporation, a Delaware corporation ("Metropolitan"); and

     WHEREAS, the Company and Metropolitan are parties to an Agreement of Merger
and Consolidation, dated July 21, 1994 (the "Merger Agreement"), pursuant to
which Metropolitan was merged (the "Merger") with and into the Company,
effective as of the date hereof; and

     WHEREAS, Section 10(I) of the Warrant Agreement provides, among other
things, that if Metropolitan is merged into another corporation, the corporation
formed by such merger will enter into a supplemental warrant agreement with the
Warrant Agent providing that each holder of a warrant (individually, a "Warrant"
and collectively the "Warrants") outstanding under the Warrant Agreement shall
have the right thereafter (until the expiration of such Warrant) to receive,
upon exercise of such Warrant, the kind and amount of shares of stock and other
securities or property receivable upon such merger by a holder of the number of
shares of common stock, par value $.01 per share ("Metropolitan Common Stock"),
for which such Warrant might have been exercised immediately prior to such
merger; and

     WHEREAS, it is the intention of the parties that this Agreement serve as
the supplemental warrant agreement required by the Warrant Agreement; and

     WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants issued under the Warrant Agreement (the "Warrant Certificates") and the
exercise of the Warrants.

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:

     Section 1.   Appointment of Warrant Agent.  The Company hereby appoints the
                  ----------------------------              
Warrant Agent to act as agent for the Company in accordance with the
instructions in this Agreement hereinafter set forth, and the Warrant Agent
hereby accepts such appointment.

<PAGE>
 
     Section 2.   Date, Denomination and Execution of Warrant Certificates. 
                  --------------------------------------------------------
The Warrant Certificates (and the Form of Election to Purchase and the Form of
Assignment to be printed on the reverse thereof) shall be in registered form
only and shall be substantially of the tenor and purport recited in Exhibit A to
the Warrant Agreement, except the Warrant Certificates issued after the date
hereof (the "Effective Date") shall, subject to the provisions of Section 10(j)
of the Warrant Agreement, refer to the Company as the issuer thereof, and may
have such letters, numbers or other marks of identification or designation and
such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law, or
with any rule or regulation made pursuant thereto, or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage. The Warrant Certificates shall entitle the registered holders
thereof, subject to the provisions of this Agreement and of the Warrant
Certificate, to purchase, subject to adjustment as provided in Section 8 hereof,
0.90 of a fully paid and nonassessable share of the common stock, par value
$1.25 per share (the "Common Stock"), of the Company for each Warrant evidenced
by such Warrant Certificates at the price of $6.94 per share.

     Warrant Certificates issued after the Effective Date shall, subject to
Section 10(j) of the Warrant Agreement, be executed on behalf of the Company by
its Chairman of the Board, the President or a Vice President either manually or
by facsimile signature printed thereon, which shall be attested by the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Company, either manually or by facsimile signature.  The Warrant Certificates
shall be manually countersigned by the Warrant Agent and shall not be valid for
any purpose unless so countersigned.  In case any officer of the Company who
shall have signed any of the Warrant Certificates shall cease to be such officer
of the Company before countersignature by the Warrant Agent and issue and
delivery thereof by the Company, such Warrant Certificates, nevertheless, may be
countersigned by the Warrant Agent, issued and delivered with the same force and
effect as though the person who signed such Warrant Certificates had not ceased
to be such officer of the Company.

     Section 3.   Maintenance of Office or Agency.  The Warrant Agent, or, if
                  -------------------------------      
there shall be no such Warrant Agent, the Company, shall at all times maintain
an office or agency at which shall be kept and maintained books for registration
of ownership and transfer of ownership in accordance with Section 5 hereof and
at which Warrants may be exercised in accordance with Section 7 hereof. Such
office or agency shall initially be the corporate trust office of the Warrant
Agent.

     Section 4.   Issuance of Warrant Certificates.  Subsequent to the original
                  --------------------------------  
issuance of the Warrant Certificates pursuant to Section 6 of the Warrant

                                      -2-

<PAGE>
 
Agreement, no Warrant Certificates shall be reissued except (i) Warrant
Certificates issued upon transfer thereof in accordance with Section 5 hereof,
(ii) Warrant Certificates issued upon any combination, split-up or exchange of
Warrant Certificates pursuant to Section 5 hereof, (iii) Warrant Certificates
issued in replacement of mutilated, destroyed, lost or stolen Warrant
Certificates pursuant to Section 6 hereof, (iv) Warrant Certificates issued upon
the partial exercise of Warrant Certificates to evidence the unexercised portion
of such Warrant Certificates pursuant to Section 7 hereof and (v) Warrant
Certificates issued to reflect any adjustment or change in the Purchase Price or
the number or kind of shares purchasable thereunder pursuant to Section 23
hereof. The Warrant Agent is hereby irrevocably authorized to countersign and
deliver, in accordance with the provisions of said Sections 5, 6, 7 and 23, the
new Warrant Certificates required for purposes thereof, and the Company,
whenever required by the Warrant Agent, will supply the Warrant Agent with
Warrant Certificates duly executed on behalf of the Company for such purposes.

     Section 5.   Transfers and Exchanges of Warrant Certificates. The Warrant
                  -----------------------------------------------
Agent will keep or cause to be kept books for registration of ownership and
transfer of ownership of the Warrant Certificates issued hereunder. Such
registers shall show the names and addresses of the respective holders of the
Warrant Certificates and the number of Warrants evidenced by each such Warrant
Certificate.

     The Warrant Agent shall transfer, from time to time, any outstanding
Warrants upon the books to be maintained by the Warrant Agent for that purpose,
upon surrender of the Warrant Certificate evidencing such Warrants, with the
Form of Assignment duly filled in and executed, to the Warrant Agent, at its
principal corporate trust offices in New York, New York or at an office
maintained for such purpose at any time prior to the close of business on
November 20, 2000 (herein called the "Expiration Date"), and upon payment to the
Warrant Agent for the account of the Company of an amount equal to any
applicable transfer tax, any other taxes or governmental charges which the
Company may be required by law to collect in respect of such exercise and any
other amounts required pursuant to the Warrant Certificate.  Such payment may be
made in cash or by check bank draft or money order, payable in lawful money of
the United States of America to the order of the Warrant Agent.

     For purposes of this Agreement, the term "close of business" on any given
date shall mean 4:00 p.m., Minneapolis, Minnesota time, on such date; provided,
however, that if such date is not a business day it shall mean 4:00 p.m.,
Minneapolis, Minnesota time, on the next succeeding business day.  For purposes
of this Agreement the term "business day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in Minneapolis,
Minnesota are authorized or obligated by law to be closed.

                                      -3-

<PAGE>
 
     Upon receipt of a Warrant Certificate, with the Form of Assignment duly
filled in and executed, accompanied by the required payment, the Warrant Agent
shall promptly countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
provided, however, that in case the registered holder of any Warrant Certificate
shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Certificates for
the number of full Warrants not so transferred.

     Any Warrant Certificate or Certificates may be exchanged at the option of
the holder thereof for another Warrant Certificate or Certificates of different
denominations, of like tenor and representing in the aggregate the same number
of Warrants, upon surrender of such Warrant Certificate or Certificates, with
the Form of Assignment duly filed in and executed, to the Warrant Agent, at any
time or from time to time prior to the close of business on the Expiration Date.

     Section 6.   Mutilated, Destroyed, Lost or Stolen Warrant Certificates.
                  ---------------------------------------------------------
Upon receipt by the Company and the Warrant Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of any
Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them and reimbursement to them of all
reasonable expenses incidental thereto, and, in the case of mutilation, upon
surrender and cancellation of the Warrant Certificate, the Warrant Agent shall
countersign and deliver a new Warrant Certificate of like tenor for the same
number of Warrants.

     Section 7.   Duration and Exercise of Warrants.  The Purchase Price for the
                  ---------------------------------      
Common Stock purchasable pursuant to the exercise of Warrants (each of which
shall be exercisable to purchase 0.90 of a share of Common Stock), commencing as
of the date hereof, shall be $6.94 per share of Common Stock in lawful money of
the United States of America, which Purchase Price shall hereafter be subject to
adjustment as provided in Section 8 hereof. Except as the context otherwise
requires, the term "Purchase Price" as used in this Agreement shall mean the
Purchase Price then in effect as of the relevant date and shall reflect all
adjustments made in accordance with the provisions of Section 8 hereof. Each
Purchase Price shall continue in effect until further adjusted pursuant to the
provisions of Section 8 hereof.

     The registered holder of any Warrant Certificates may, subject to Section 9
hereof, exercise each Warrant evidenced thereby, to purchase 0.90 of a share of
Common Stock at any time or in part from time to time prior to the close of
business on November 20, 2000 (at which time the Warrant Certificates shall be
and become wholly void and of no value).

                                      -4-

<PAGE>
 
     Exercise of Warrants shall be accomplished upon surrender of the Warrant
Certificate evidencing such Warrants, with the Form of Election to Purchase on
the reverse side thereof duly filled in and executed, to the Warrant Agent at
its principal corporate trust offices in New York, New York or at an office
maintained for such purpose together with payment to the Warrant Agent for the
account of the Company of the Purchase Price (as of the date of such surrender)
for each share of Common Stock then being purchased and an amount equal to any
applicable transfer tax, and, if requested by the Company, any other taxes or
governmental charges which the Company may be required by law to collect in
respect of such exercise and any other charges required pursuant to the Warrant
Certificate.  Payment of the Purchase Price and other charges may be made in
cash or by check, bank draft or money order payable in lawful money of the
United States of America to the order of the Warrant Agent.  No adjustment shall
be made for any cash dividends, whether paid or declared, on any shares of
Common Stock issuable upon exercise of a Warrant.

     Upon receipt of a Warrant Certificate, with the Form of Election to
Purchase duly filled in and executed, accompanied by payment of the Purchase
Price for the Common Stock to be purchased (and of an amount equal to any
applicable taxes, governmental or other charges as aforesaid), the Warrant Agent
shall promptly requisition from the Transfer Agent of the Common Stock of the
Company and deliver to or upon the order of the registered holder of such
Warrant Certificate in such name or names as such registered holder may
designate, a certificate or certificates for the number of full shares of Common
Stock to be purchased, together with cash made available by the Company pursuant
to Section 9 hereof in respect of any fraction of a share of such stock
otherwise issuable upon such exercise.

     In case the registered holder of any Warrant Certificate shall exercise
fewer than all of the Warrants evidenced by such Warrant Certificate, the
Warrant Agent shall promptly countersign and deliver to the registered holder of
such Warrant Certificate, or to his duly authorized assigns, a new Warrant
Certificate or Certificates evidencing the number of Warrants that were not so
exercised.  The Warrant Agent may deem and treat the person named as the
registered holder on the face of the Warrant Certificate and of the Common Stock
as the true and lawful owner thereof for all purposes.

     Each person in whose name any certificate for shares of Common Stock is
issued upon the exercise of Warrants shall for all purposes be deemed to have
become the holder of record of such shares represented thereby and such
certificate shall be dated the date upon which the Warrant Certificate was duly
surrendered in proper form and payment of the Purchase Price (and of any
applicable taxes, governmental or other charges) was made; provided, however,
                                                           --------  ------- 
that if the date of such surrender and payment is a date on which the stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder 

                                      -5-

<PAGE>
 
of such shares on, and such certificate shall be dated, the next succeeding
business day on which the stock transfer books of the Company are open. The
Company covenants and agrees that it shall not cause its stock transfer books to
be closed for a period of more than ten consecutive business days except upon
consolidation, merger, sale of all or substantially all of its assets,
dissolution or liquidation.

     Section 8.   Adjustments of Number and Kind of Shares Purchasable and 
                  --------------------------------------------------------
Purchase Price.  The initial number of shares of Common Stock purchasable upon
- --------------
exercise of a Warrant and the Purchase Price shall be subject to adjustment from
time to time upon the occurrence, after the Effective Date, of the following
events:

     (A) In case the Company shall (1) pay a dividend in, or make a distribution
of, shares of Common Stock or of the Company's capital stock convertible into
Common Stock on its outstanding Common Stock, (2) subdivide its outstanding
shares of Common on Stock into a greater number of such shares or (3) combine
its outstanding shares of Common Stock into a smaller number of such shares, the
total number of shares of Common Stock and the number of shares of capital stock
convertible into Common Stock purchasable upon the exercise of each Warrant
outstanding immediately prior thereto shall be adjusted so that the holder of
any Warrant Certificate thereafter surrendered for the purchase of Common Stock
shall be entitled to receive at the same aggregate Common Stock Purchase Price
the number of shares of Common Stock and the number of shares of the Company's
capital stock convertible into Common Stock which he would have owned or have
been entitled to receive immediately following any of the events described above
had such Warrant been exercised in full immediately prior to any such event.  An
adjustment made pursuant to this Subsection shall, in the case of a stock
dividend or distribution, become effective as of the record date therefor and,
in the case of a subdivision or combination, be made as of the effective date
thereof.  If, as a result of an adjustment made pursuant to this Subsection, the
holder of any Warrant thereafter surrendered for exercise shall become entitled
to receive shares of two or more classes of capital stock of the Company, the
Board of Directors of the Company (whose determination shall be conclusive and
shall be evidenced by a Board resolution filed with the Warrant Agent) shall
determine the allocation of the adjusted Purchase Price between or among shares
of such classes of capital stock

     (B) In the event of any adjustment of the total number of shares of Common
Stock purchasable upon the exercise of the then outstanding Warrants pursuant to
Subsection (A) above, the Purchase Price per share applicable to each such
outstanding Warrant shall be adjusted to be the amount resulting from dividing
the number of shares (including fractional share interests) covered by such
Warrant immediately after such adjustment into the total amount payable upon
exercise of such Warrant in full immediately prior to such adjustment.

                                      -6-

<PAGE>
 
     (C) In case the Company shall issue rights or warrants to all holders of
its Common Stock entitling them (for a period expiring within forty-five days
after the record date mentioned below) to subscribe for or purchase shares of
Common Stock at a price per share less than the current market price per share
of Common Stock (as defined in Subsection (F) below) at the record date
mentioned below, the Purchase Price shall be adjusted so that the same shall
equal the price determined by multiplying the Purchase Price in effect
immediately prior thereto by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on the record date mentioned below
plus the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock offered for
subscription or purchase would purchase at such current market price per share
of Common Stock, and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of shares of Common
Stock offered for subscription or purchase.  Such adjustments shall be made
whenever such rights or warrants are issued, and shall become effective as of
the record date for the determination of stockholders entitled to receive such
rights or warrants.

     (D) In case the Company shall distribute to all holders of its Common Stock
shares of its capital stock (other than Common Stock or shares of capital stock
convertible into Common Stock), evidences of its indebtedness or assets, or
rights or warrants (excluding those referred to in Subsection (C) above) to
subscribe for or purchase such shares, evidences of indebtedness or assets, then
in each such case the Purchase Price in effect thereafter shall be determined by
multiplying the Purchase Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the total number of outstanding shares
of Common Stock multiplied by the current market price per share of Common Stock
(as determined in accordance with the provisions of Subsection (F) below) on the
record date mentioned below, less the fair market value (as determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board resolution filed with the Warrant Agent) of the capital
stock, assets or evidences of indebtedness or of such rights or warrants so
distributed to all such holders, and of which the denominator shall be the total
number of outstanding shares of Common Stock multiplied by such current market
price per share of Common Stock.  Such adjustments shall be made whenever any
such distribution is made, and shall become effective as of the record date for
the determination of stockholders entitled to receive such distribution.

     (E) In the event of any capital reorganization or any reclassification of
the Common Stock (except as provided in Subsection (A) above or Subsection (I)
below), any holder of Warrants upon exercise thereof shall be entitled to
receive, in lieu of the Common Stock to which he would have become entitled upon
exercise immediately prior to such reorganization or reclassification, the
shares (of any class or classes) or other securities or property of the Company
that he would have been 

                                      -7-

<PAGE>
 
entitled to receive at the same aggregate Purchase Price upon such
reorganization or reclassification if his Warrants had been exercised
immediately prior thereto and in any such case, appropriate provision (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and shall be evidenced by a Board resolution filed with the
Warrant Agent) shall be made for the application of this Section 8 with respect
to the rights and interests thereafter of the holders of Warrants (including but
not limited to the allocation of the adjusted Purchase Price between or among
shares of classes of capital stock) to the end that this Section 8 (including
the adjustments of the number of shares of Common Stock or other securities
purchasable) and the Purchase Price thereof shall thereafter be reflected, as
nearly as reasonably practicable in all subsequent exercises of the Warrants for
any shares or securities or other property thereafter deliverable upon the
exercise of the Warrants.

     (F) For the purpose of any computation under Subsections (C) and (D) above,
the current market price per share of Common Stock at any date shall be deemed
to be the average of the daily closing market prices, if the Common Stock is
traded on a national securities exchange or the NASDAQ National Market, or the
average of the last daily bid and asked quotation if traded on NASDAQ, for the
ten consecutive trading days immediately prior to the day in question.

     (G) No adjustment in the Purchase Price under this Section 8 shall be made
unless such adjustment would require an increase or decrease of at least one per
cent (1%) in the Purchase Price; provided, however, that any adjustments which
                                 --------  -------                            
by reason of this Subsection are not required to be made shall be carried
forward and taken into account in any subsequent adjustment; and provided,
                                                                 -------- 
further, that any adjustments which are so carried forward shall be made no
- -------                                                                    
later than the earlier of (i) three years after the date of the particular event
on account of which an adjustment would be required or (ii) the date as to which
the aggregate adjustments not previously made would require a total increase or
decrease of 1% in the Purchase Price.  All calculations under this Section 8
shall be made to the nearest cent or to the nearest one hundredth of a share, as
the case may be.

     (H) Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant or the Purchase Price is adjusted as
provided in this Section 8, the Company will promptly file with the Warrant
Agent a certificate signed by the Chairman of the Board, the President or a Vice
President of the Company and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Company setting forth the number and
kind of shares purchasable and the Purchase Price, as so adjusted, stating that
such adjustments in the number or kind of shares or other securities, or in the
Purchase Price, conform to the requirements of this Section 8, and setting forth
a brief statement of the facts accounting for such adjustments.  Such
certificates shall be conclusive evidence of the correctness of such
adjustments.  Promptly after receipt of such certificate, the 

                                      -8-

<PAGE>
 
Company, or the Warrant Agent at the Company's request, will mail a brief
summary thereof (to be supplied by the Company) to the registered holders of the
Warrants; provided, however, that failure to file or to give any notice required
          --------  -------                                                   
under this Subsection, or any defect therein, shall not affect the legality or
validity of any such adjustments under this Section 8; and, provided, further,
                                                            --------- -------   
that, where appropriate, such notice may be given in advance and included as
part of the notice required to be given pursuant to Section 13 hereof.

     (I) In case of any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the corporation formed by such
consolidation or merger or the corporation which shall have acquired such
assets, as the case may be, shall execute and deliver to the Warrant Agent a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding shall have the right thereafter (until the expiration of such
Warrant) to receive, upon exercise of such Warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer.  Such
supplemental warrant agreement shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided in this
Section.  The above provision of this Subsection shall similarly apply to
successive consolidations, mergers, sales or transfers.

     The Warrant Agent shall not be under any responsibility to determine the
correctness of any provisions contained in any such supplemental warrant
agreement requiring to either the kind or amount of shares of stock or
securities or property purchasable by holders of Warrant Certificates upon the
exercise of their Warrants after any such consolidation, merger, sale or
transfer or to any adjustment to be made with respect thereto, but subject to
the provisions of Section 21 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants with respect
thereto.

     (J) Irrespective of any adjustments in the Purchase Price or in the number
or kind of shares issuable upon exercise of Warrants, Warrant Certificates
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrant Certificates
initially issued pursuant to this Warrant Agreement.

     (K) The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,

                                      -9-

<PAGE>
 
selected by the Board of Directors of the Company or the Executive Committee of
said Board, and not disapproved by the Warrant Agent, to make any computation
required under this Section, and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section.

     (L) For the purpose of this Section, the term "Common Stock" shall mean (i)
the class of stock designated as Common Stock in the Certificate of
Incorporation of the Company, as amended, at the Effective Date or (ii) any
other class of stock resulting from successive changes or reclassifications of
such Common Stock consisting solely of changes in par value, or from par value
to no par value or from no par value to par value.  In the event that at any
time as a result of an adjustment made pursuant to this Section, the holder of
any Warrant thereafter surrendered for exercise shall become entitled to receive
any shares of capital stock of the Company other than shares of the Common
Stock, thereafter the number of such other shares so receivable upon exercise of
any Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section, and all other provisions of this
Agreement with respect to the Common Stock shall apply on like terms to any such
other shares.

     (M) Anything in this Section 8 to the contrary notwithstanding, if the
Company or any subsidiary of the Company grants options or other rights to
purchase shares of Common Stock to any of its employees or directors, or if such
employees or directors otherwise receive shares of Common Stock under any
employee benefit plan of, or compensation agreement or arrangement with, the
Company or its subsidiaries, or if the Company offers any dividend reinvestment
plans, the granting of such options or rights, the issuance of shares of Common
Stock upon the exercise of such options or other rights or pursuant to such
plans, agreements or arrangements, and subscriptions for purchases of shares of
Common Stock under any such dividend reinvestment plan are not to be taken into
consideration for adjustments under this Section 8.

     Section 9.   Fractional Interests.  The Company shall not be required to
                  --------------------                        
issue any Warrant Certificate evidencing a fraction of a Warrant or to issue
fractions of shares of Common Stock on the exercise of the Warrants. If any
fraction (calculated to the nearest one hundredth) of a share of Common Stock
would, except for the provisions of this Section, be issuable on the exercise of
any Warrant, the Company shall purchase such fraction for an amount in cash
equal to the current value of such fraction computed on the basis of the closing
market price on the trading day immediately preceding the day upon which such
Warrant Certificate was surrendered for exercise in accordance with Section 7
hereof. By accepting a Warrant Certificate, the holder thereof expressly waives
any right to receive a Warrant Certificate evidencing any fraction of a Warrant
or to receive any fractional share of Common Stock upon exercise of a Warrant.

                                     -10-

<PAGE>
 
     Section 10.  Reservation of Common Stock.  The Company covenants that it
                  ---------------------------
will at all times from an after the Effective Time reserve and keep available,
free from any pre-emptive rights, out of its authorized Common Stock, solely for
the purpose of issue upon exercise of the Warrants, such number of shares of
Common Stock as shall then be issuable upon the exercise of all outstanding
Warrants. The Company covenants that all shares of Common Stock which shall be
so issuable shall upon such issue be duly authorized, validly issued, fully paid
and nonassessable. Promptly after the Expiration Date of the Warrants, the
Warrant Agent shall certify to the Company the aggregate number of Warrants then
outstanding, and thereafter no shares of stock shall be subject to reservation
in respect of such Warrants.

     The Warrant Agent is hereby irrevocably authorized to requisition from time
to time from the transfer agent of the Common Stock, and any subsequent transfer
agent of any shares of the Company's capital stock issuable upon the exercise of
the Warrants, stock certificates required to honor outstanding Warrants.  The
Company hereby irrevocably authorizes its present and any future transfer agent
to comply with all such requests.  The Company will supply such transfer agent
with duly executed stock certificates for such purpose and will itself provide
or otherwise make available any cash which may be payable as provided in Section
9 of this Agreement.

     The Company covenants that if any shares of Common Stock required to be
reserved for the purposes of issue upon exercise of the Warrants hereunder
require registration with or approval of any governmental authority under any
federal or state law, or listing on any national securities exchange, before
such shares may be issued upon exercise, the Company will, in good faith and as
expeditiously as possible endeavor to cause such shares to be duly registered,
approved or listed on the relevant national securities exchange, as the case may
be; provided, however, that in no event shall shares of Common Stock be issued,
    --------  -------                                                          
and the Company is authorized to suspend the exercise of all Warrants, for the
period during which it is endeavoring to obtain such registration, approval or
listing.

     Section 11.  Reduction of Conversion Price Below Par Value.  Before taking
                  ---------------------------------------------                
any action which would cause an adjustment pursuant to Section 8 hereof reducing
the Purchase Price below the then par value (if any) of the shares of Common
Stock issuable upon exercise of the Warrants, the Company will use its best
efforts to take any corporate action which, in the opinion of its counsel, may
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable shares of such Common Stock at such adjusted Purchase Price.

     Section 12.  Payment of Taxes.  The Company covenants and agrees that it
                  ----------------                            
will pay when due and payable any and all Federal and state original issue taxes
which may be payable in respect of the issue of any shares of Common Stock or

                                     -11-

<PAGE>
 
other securities upon the exercise of Warrants. The Company shall not, however,
be required (i) to pay any tax which may be payable in respect of any transfer
involved in the transfer and delivery of Warrant Certificates or the issuance or
delivery of certificates for Common Stock or other securities in a name other
than that of the registered holder of the Warrant Certificate surrendered for
purchase or (ii) to issue or deliver any certificate for shares of Common Stock
or other securities upon the exercise of any Warrant Certificate until any such
tax shall have been paid, all such tax being payable by the holder of such
Warrant Certificate at the time of surrender.

     Section 13.  Notice of Certain Corporate Action.  In case the Company after
                  ----------------------------------          
the Effective Date shall propose (i) to offer to all of the holders of Common
Stock rights to subscribe to or purchase any additional shares of any class of
its capital stock, any evidences of its indebtedness or assets, or any other
rights or options in a manner causing an adjustment pursuant to Section 8(A) or
(ii) to effect any reclassification of Common Stock (other than a
reclassification involving merely the subdivision or combination of outstanding
shares of Common Stock) or any capital reorganization, or any consolidation or
merger to which the Company is a party and for which approval of any
stockholders of the Company is required, or any sale, transfer or other
disposition of its property and assets substantially as an entirety, or the
liquidation, voluntary or involuntary dissolution or winding up of the Company,
in a manner causing an adjustment pursuant to Section 8(E), then, in each such
case, the Company shall file with the Warrant Agent and the Company, or the
Warrant Agent on its behalf, shall mail by first class postage prepaid mail to
all registered holders of the Warrant Certificates notice of such proposed
action, which notice shall specify the date on which the books of the Company
shall close or a record be taken for such offer of rights or options, or the
date on which such reclassification, reorganization, consolidation, merger,
sale, transfer, other disposition, liquidation, voluntary or involuntary
dissolution or winding up shall take place or commence, as the case may be, and
which shall also specify any record date for determination of holders of Common
Stock entitled to vote thereon or participate therein and shall set forth such
facts with respect thereto as shall be reasonably necessary to indicate any
adjustments in the Purchase Price and the number or kind of shares or other
securities purchasable upon exercise of Warrants which will be required as a
result of such action. Such notice shall be filed and mailed in the case of any
action covered by clause (i) above, at least ten days prior to the record date
for determining holders of the Common Stock for purposes of such action or, if a
record is not to be taken, the date as of which the holders of shares of Common
Stock of record are to be entitled to such offering; and, in the case of any
action covered by clause (ii) above, at least twenty days prior to the earlier
of the date on which such reclassification, reorganization, consolidation,
merger, sale, transfer, other disposition, liquidation, voluntary or involuntary
dissolution or winding up is expected to become effective and the date as of
which it is expected that holders of shares of Common Stock of record on such
date shall be entitled to exchange their

                                     -12-

<PAGE>
 
shares for securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, sale, transfer, other disposition,
liquidation, voluntary or involuntary dissolution or winding up.

     Failure to give any such notice or any defect therein shall not affect the
legality or validity of any transaction listed in this Section 13.

     Section 14.  Disposition of Proceeds on Exercise of Warrant Certificates, 
                  ----------------------------------------------------------- 
Etc.  The Warrant Agent shall account promptly to the Company with respect to
- ---
Warrants exercised and concurrently pay to the Company all moneys received.

     The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours at its principal
corporate trust offices, 40 Wall Street, 46th Floor, New York, New York 10005
and at any office or agency maintained by it in accordance with Section 3
hereof.  Copies of this Agreement may be obtained upon written request addressed
to Corporate Secretary, First Bank System, Inc., First Bank Place, 601 Second
Avenue South, Minneapolis, Minnesota 55402.

     Section 15.  Warrant Certificate Holder Not Deemed a Stockholder.  No 
                  ---------------------------------------------------   
holder, as such, of any Warrant Certificate shall be entitled to vote or be
deemed the holder of Common Stock or any other securities of the Company which
may at any time be issuable on the exercise of the Warrants represented thereby
for any purpose whatever, nor shall anything contained herein or in any Warrant
Certificate be construed to confer upon the holder of any Warrant Certificate,
as such, any of the rights of a stockholder of the Company or any right to vote
for the election of directors or upon any matter submitted to stockholders at
any meeting thereof, or to given or withhold consent to any corporate action
(whether upon any recapitalization, issue of stock reclassification of stock,
change of par value or change of stock to no par value, consolidation, merger,
conveyance or otherwise), or to receive notice of meetings or other actions
affecting stockholders (except as provided in Section 13 hereof, or to receive
dividends or subscription rights, or otherwise, until such Warrant Certificate
shall have been exercised in accordance with the provisions hereof and the
receipt of the Purchase Price and any other amounts payable upon such exercise
by the Warrant Agent as provided herein.

     Section 16.  Right of Action.  All rights of action in respect to this
                  ---------------                          
Agreement are vested in the respective registered holders of the Warrant
Certificates; and any registered holder of any Warrant Certificate, without the
consent of the Warrant Agent or of the holder of any Warrant Certificate, may,
in his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company suitable to enforce,
or otherwise in respect of, his right to exercise the Warrants evidenced by such
Warrant Certificate, for the purchase of 

                                     -13-

<PAGE>
 
shares of the Common Stock in the manner provided in the Warrant Certificate and
in this Agreement.

     Section 17.  Agreement of Holders of Warrant Certificates.  Every holder of
                  --------------------------------------------
a Warrant Certificate, by accepting the same, consents and agrees with the
Company, the Warrant Agent and with every other holder of a Warrant Certificate
that:

     (A) The Warrant Certificates are transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in this Agreement:
and

     (B) The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the absolute owner for all
purposes whatever and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.

     Section 18.  Cancellation of Warrant Certificate.  In the event that the
                  -----------------------------------         
Company shall purchase or otherwise acquire any Warrant Certificate or
Certificates after the issuance thereof, such Warrant Certificate or
Certificates shall thereupon be delivered to the Warrant Agent and be canceled
by it and retired. The Warrant Agent shall also cancel any Warrant Certificate
delivered to it for exercise, in whole or in part, or delivered to it for
transfer, split up, combination or exchange. Warrant Certificates so canceled
shall be delivered by the Warrant Agent to the Company from time to time, or
disposed of in accordance with the instructions of the Company.

     Section 19.  Concerning the Warrant Agent.  The Company agrees to pay to
                  ----------------------------              
the Warrant Agent from time to time, on demand of the Warrant Agent, reasonable
compensation for all services rendered by it hereunder and also its reasonable
expenses, including counsel fees, and other disbursements incurred in the
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Warrant Agent
for, and to hold it harmless against, any loss, liability or expense, incurred
without negligence, bad faith or willful misconduct on the part of the Warrant
Agent, arising out of or in connection with the acceptance and administration of
this Agreement, including the costs and expenses of defending against any claim
of liability in the premises.

     Section 20.  Merger or Consolidation or Change of Name of Warrant Agent. 
                  ----------------------------------------------------------
Any corporation into which the Warrant Agent may be merged or
with which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on 

                                     -14-

<PAGE>
 
the part of any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor warrant agent under the provisions of
Section 22 hereof. In case at the time such successor to the Warrant Agent shall
succeed to the agency created by this Agreement, any of the Warrant Certificates
shall have been countersigned but not delivered, any such successor to the
Warrant Agent may adopt the countersignature of the original warrant agent and
deliver such Warrant Certificates so countersigned; and in case at that time any
of the Warrant Certificates shall not have been countersigned, any successor to
the Warrant Agent may countersign such Warrant Certificates either in the name
of the predecessor warrant agent or in the name of the successor warrant agent;
and in all such cases such Warrant Certificates shall have the full force
provided in the Warrant Certificates and in this Agreement.

     In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant Certificates so countersigned; and in case at that time any
of the Warrant Certificates shall not have been countersigned, the Warrant Agent
may countersign such Warrant Certificates either in its prior name or in its
changed name; and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.

     The provisions of this Section 20 shall also apply to any agent appointed
pursuant to Section 3 hereof.

     Section 21.  Duties of Warrant Agent.  The Warrant Agent undertakes the
                  -----------------------                    
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrant Certificates
by their acceptance thereof, shall be bound;

     (A) The Warrant Agent may consult with counsel (who may be counsel for the
Company) and the opinion of such counsel shall be full and complete
authorization and protection to the Warrant Agent as to any action taken,
suffered or omitted by it in good faith and in accordance with such opinion;
provided, however, that the Warrant Agent shall have exercised reasonable care
- --------  -------                                                             
in the selection of such counsel.

     (B) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the President,
the Chief Financial Officer, the Treasurer or the Secretary of the Company and
delivered to the Warrant Agent; and 

                                     -15-

<PAGE>
 
such certification shall be full authorization to the Warrant Agent for any
action taken or suffered in good faith by it under the provisions of this
Agreement in reliance upon such certificate.

     (C) The Warrant Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.

     (D) The Warrant Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.

     (E) The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant Certificate (except its countersignature thereof), or
for any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant Certificate, or for the adjustment of the Purchase
Price or the making of any change in the number of shares of Common Stock
required under the provisions of Section 8 or for the manner, method or amount
of any such change or the ascertaining of the existence of facts that would
require any such adjustment or change (except with respect to the exercise of
Warrant Certificates after actual notice of any adjustment of the Purchase
Price), and it shall not by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of the shares
of Common Stock to be issued pursuant to this Agreement or any Warrant
Certificate or as to whether any shares of Common Stock will when issued be
validly issued, fully paid and nonassessable.

     (F) The Warrant Agent and any stockholder, director, officer, employee or
agent appointed pursuant to Section 3 hereof of the Warrant Agent may buy, sell
or deal in any of the Warrants or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to or otherwise act as fully and
freely as though it was not Warrant Agent under this Agreement.  Nothing herein
shall preclude the Warrant Agent from acting in any other capacity for the
Company or for any other legal entity.

     (G) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, the Chief Financial Officer, the Treasurer
or the Secretary of the Company, and to apply to such officers for advice or
instructions in connection with the Warrant Agent's duties, and it shall not be
liable for any 

                                     -16-

<PAGE>
 
action taken or suffered or omitted by it in good faith in accordance with
instructions of any such officer.

     (H) The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.

     (I) The Warrant Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents or employees or for any loss to the Company resulting
from such neglect or misconduct; provided, however, that reasonable care shall
                                 --------  -------                            
have been exercised in the selection and continued employment of such attorneys,
agents and employees.

     (J) The Warrant Agent will not incur any liability or responsibility to the
Company or to any holder of any Warrant Certificate for any action taken, or any
failure to take action, in reliance on any notice, resolution waiver, consent,
order, certificate, or other paper, document or instrument reasonably believed
by the Warrant Agent to be genuine and to have been signed, sent or presented by
the proper party or parties.

     (K) The Warrant Agent will act hereunder solely as agent of the Company in
a ministerial capacity, and its duties will be determined solely by the
provisions hereof.  The Warrant Agent will not be liable for anything which it
may do or refrain from doing in connection with this Agreement except for its
own negligence, bad faith or willful misconduct.

     Section 22.  Change of Warrant Agent.  The Warrant Agent may resign and be
                  -----------------------              
discharged from its duties under this Agreement upon thirty days prior notice in
writing mailed to the Company by registered or certified mail, and to each
registered holder of Warrant Certificates. The Company may remove the Warrant
Agent or any successor warrant agent upon thirty days' prior notice in writing,
made to the Warrant Agent or successor warrant agent, as the case may be, by
registered or certified mail. If the Warrant Agent shall resign or be removed or
shall otherwise become incapable of acting, the Company shall appoint a
successor to the Warrant Agent and shall, within fifteen days following such
appointment, give notice thereof in writing to each of the registered holders of
the Warrant Certificates. If the Company shall fail to make such appointment
within a period of fifteen days after giving notice of such removal or after it
has been notified in writing of such resignation or incapacity by the resigning
or incapacitated Warrant Agent, then (i) the Company agrees to perform the
duties of the Warrant Agent hereunder and (ii) the registered holder of any
Warrant Certificate may apply to any court of

                                     -17-

<PAGE>
 
competent jurisdiction for the appointment of a new warrant agent.  Any
successor warrant agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, having its principal
corporate trust office in Minneapolis or St. Paul, Minnesota, or in New York,
New York, and having at the time of its appointment as successor warrant agent a
combined capital and surplus of at least $25,000,000.  After appointment the
successor warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as warrant agent without
further act or deed; but the former warrant agent shall deliver and transfer to
the successor warrant agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose.  Failure to given any notice provided for in this Section, however,
or any defect therein shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be.

     Any agent appointed pursuant to Section 3 hereof may resign and be
discharged from its duties under this Agreement upon thirty days' prior notice
in writing mailed to the Warrant Agent at its principal corporate trust offices
by registered or certified mail.  The Warrant Agent may remove any such agent
upon thirty days' prior notice in writing, mailed to such agent by registered or
certified mail in the event a successor agent shall be appointed or another
office shall be maintained by the Warrant Agent pursuant to Section 3 hereof,
the Warrant Agent shall within fifteen days thereafter given notice thereof in
writing to each of the registered holders of Warrant Certificates.

     Section 23.  Issuance of New Warrant Certificates. Notwithstanding any of
                  ------------------------------------  
the provisions of this Agreement or the several Warrant Certificates to the
contrary, the Company may, at its option, issue new Warrant Certificates in such
form as may be approved by its Board of Directors to reflect any adjustment or
change in the Purchase Price or the number or kind of shares purchasable under
the several Warrant Certificates made in accordance with the provisions of this
Agreement.

     Section 24.  Notices.  Any notice or demand pursuant to this Agreement to
                  -------                                   
be given to or made on the Company by the Warrant Agent or by the registered
holder of any Warrant Certificate shall be sufficiently given or made if sent by
first-class or registered mail, postage prepaid, addressed (until another
address is filed in writing by the Company with the Warrant Agent) as follows:

                  First Bank System, Inc.
                  First Bank Place
                  601 Second Avenue South
                  Minneapolis, Minnesota 55402
                  Attention: Corporate Secretary

                                     -18-

<PAGE>
 
Any notice pursuant to this Agreement to be given or made by the Company or by
the holder of any Warrant Certificate to or on the Warrant Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company) as follows:

                  American Stock Transfer and Trust Company
                  40 Wall Street, 46th Floor
                  New York, New York 10005
                  Attention: Stock Transfer Department

Any notice or demand authorized to be given or made to the registered holder of
any Warrant Certificate under this Agreement shall be sufficiently given or made
if sent by first-class or registered, postage prepaid mail, to the last address
of such holder as it shall appear on the registers maintained by the Warrant
Agent.

     Section 25.  Modification of Agreement.  The Warrant Agent may, without the
                  -------------------------              
consent or concurrence of the holders of the Warrant Certificates, by
supplemental agreement or otherwise, concur with the Company in making any
changes or corrections in this Agreement that the Warrant Agent shall have been
advised by counsel (who may be counsel for the Company) are necessary or
desirable to cure any ambiguity or to correct any defective or inconsistent
provision or clerical omission or mistake or manifest error herein contained, or
to make any other provisions in regard to matters or questions arising hereunder
and which shall not be inconsistent with the provisions of the Warrant
Certificates and which shall not adversely affect the interests of the holders
of Warrant Certificates.

     Section 26.  Successors.  All the covenants and provisions of this
                  ----------                        
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.

     Section 27.  Minnesota Contract.  This Agreement and each Warrant
                  ------------------                          
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Minnesota and for all purposes shall be construed in
accordance with the laws of said State.

     Section 28.  Benefits of This Agreement.  Nothing in this Agreement or in
                  --------------------------                  
the Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Warrant Agent, their respective successors and
assigns hereunder and the registered holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement, and this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent, their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates.

                                     -19-

<PAGE>
 
     Section 29.  Descriptive Headings.  The descriptive headings of the several
                  --------------------                  
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.

     Section 30.  Counterparts.  This Agreement may be executed in any number of
                  ------------                        
counterparts, each of which shall be an original; but such counterparts shall
together constitute one and the same instrument.

     Section 31.  Effectiveness.  This Agreement shall become effective on the
                  -------------                                               
Effective Date, at which time the Warrant Agreement shall be deemed to have been
superseded in its entirety by this Agreement.

                                     -20-

<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective seals to be hereunto affixed and attested,
all as of the day and year first above written.

                                              FIRST BANK SYSTEM, INC.
                                              
                                              
                                              By     [SIGNATURE]
                                                Its    [TITLE]
                                              
                                              AMERICAN STOCK TRANSFER AND 
                                              TRUST COMPANY
                                              
                                              
                                              By     [SIGNATURE]
                                                Its    [TITLE]
                                              
                                              and
                                              
                                              By     [SIGNATURE]
                                                Its    [TITLE]

                                     -21-

<PAGE>
 
                              [FRONT OF WARRANT]

                              VOID AFTER 4 P.M.,
               MINNEAPOLIS, MINNESOTA TIME ON NOVEMBER 20, 2000

Certificate Number                                        Number of Warrants

    ________________                                       ________________


                      METROPOLITAN FINANCIAL CORPORATION
               WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK


THIS CERTIFIES THAT:

    ____________________________

or registered assigns, is the registered holder of the number of Warrants set
forth above. Each Warrant entitles the holder thereof to purchase from
Metropolitan Financial Corporation, a corporation incorporated under the laws of
the State of Delaware (the "Company"), subject to the terms and conditions set
forth hereinafter and in the Warrant Agreement hereinafter referred to, one-half
of one fully paid and nonassessable share of Common Stock, par value $.01 per
share of the Company (the "Common Stock"), upon presentation and surrender of
this Warrant Certificate, with the form of election to purchase duly executed,
the instructions for the registration and delivery of Common Stock filled in, at
any time at or prior to 4:00 p.m., Minneapolis, Minnesota time, on November 20,
2000, at the principal corporate trust offices of American Stock Transfer and
Trust Company, 40 Wall Street, New York, New York 10005, the Warrant Agent of
the Company (the "Warrant Agent") or of its successor warrant agent or, if there
be no successor warrant agent at the corporate offices of the Company, or at an
office or agency maintained for such purpose, and upon payment of the purchase
price (as hereinafter defined) and any applicable taxes and charges. The
purchase price per share of Common Stock is $12.50 (the "Purchase Price"). The
Purchase Price and the number and kind of shares of stock of the Company,
purchasable upon the exercise of the Warrants represented hereby are subject to
modification and adjustment upon the happening of certain events set forth in
the Warrant Agreement.

     This Warrant Certificate is subject to all of the terms, provisions and
conditions of the Warrant Agreement, dated as of November 20, 1990 (the "Warrant
Agreement"), between the Company and the Warrant Agent, to all of which terms,
provisions and conditions the registered holder of this Warrant Certificate
consents by acceptance hereof. The Warrant Agreement is hereby incorporated
herein by reference and made a part hereof and to which Warrant Agreement
reference is hereby made for a full description of the rights, limitations of
rights, obligations, 

<PAGE>
 
duties and immunities hereunder of the Warrant Agent, the Company and the
holders of the Warrant Certificates. Copies of the Warrant Agreement are
available for inspection at the corporate trust office of the Warrant Agent or
at the office or agency maintained for such purpose referred to above.

     The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of shares, but shall
make adjustment therefor to cash on the basis of the current market value of any
fractional interest (computed as provided in the Warrant Agreement). In no event
shall the Company be required to issue fractions of Warrants.

     The Warrant Certificate, with or without other certificates, upon surrender
to the Warrant Agent, any successor warrant agent or, in the absence of any
successor warrant agent, at the corporate offices of the Company, or at the
office or agency maintained for such purposes referred to above, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.

     No holder of this Warrant Certificate, as such, shall be entitled to vote
on or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder of this Warrant Certificate, as such, any of
the rights of a stockholder of the Company or any right to vote for the election
of directors or upon any matter submitted to stockholders at any meeting
thereof, or give or withhold consent to any corporate action hereunder upon any
recapitalization, issue of stock, reclassification of stock, change or par value
or change of stock to no par value, consolidation, merger, conveyance or
otherwise or to reserve notice of meetings or other actions affecting
stockholders (except as provided in the Warrant Agreement), or to receive
dividends or subscription rights or otherwise, until the Warrants evidenced by
this Warrant Certificate shall have been exercised and the Common Stock or any
other securities of the Company purchasable upon the exercise thereof shall have
become deliverable as provided in the Warrant Agreement.

     If the Warrant Certificate shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock or any
other securities of the Company purchasable upon the exercise of the Warrants
evidenced by this Warrant Certificate are closed for any purpose, the Company
shall not be required to make delivery of certificates for shares or other
securities purchasable upon such exercise until the date of the reopening of
said transfer books.

<PAGE>
 
     Every holder of this Warrant Certificate by accepting the same consents and
agrees with the Company, the Warrant Agent, and with every other holder of a
Warrant Certificate that:

     (a)  the Warrant Certificate is transferable on the registry books of the
          Warrant Agent and upon the terms and conditions set forth in the
          Warrant Agreement; and

     (b)  the Company and the Warrant Agent may deem and treat the person in
          whose name this Warrant Certificate is registered as the absolute
          owner hereof for all purposes whatever and neither the Company nor the
          Warrant Agent shall be affected by any notice to the contrary.

     The Company shall not be required to issue or deliver any certificate for
shares of Common Stock or other securities upon the exercise of Warrants
evidenced by this Warrant Certificate until any tax which may be payable in
respect thereof shall have been paid, such tax being payable by the holder of
this Warrant Certificate at the time of surrender.

     This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.

     In Witness Whereof, Metropolitan Financial Corporation has caused this
Certificate to bear the facsimile signatures of its duly authorized officers and
to be sealed with the facsimile seal of the Company.

Dated:    November 28, 1990

Countersigned:

AMERICAN STOCK TRANSFER &           METROPOLITAN FINANCIAL
TRUST COMPANY                       CORPORATION
(NEW YORK, NY) WARRANT AGENT


By__________________________        _____________________________________
Authorized Signature                Chairman and Chief Executive Officer


                                    _____________________________________
                                    Treasurer

<PAGE>
 
                               [BACK OF WARRANT]

Under the terms of the Warrant Agreement, dated as of November 20, 1990, between
the Company and American Stock Transfer and Trust Company, as Warrant Agent, the
Company has deposited with the Warrant Agent one share of $2.875 Cumulative
Perpetual Preferred Stock, Series B, of the Company, par value $.01 per share,
for each Warrant to purchase one-half of one share of Common Stock of the
Company represented hereby. Until 4:00 p.m., Minneapolis, Minnesota time, on the
"Distribution Date" (as defined below), the registered owner of Warrants
represented by this certificate is the beneficial owner of such number of shares
of Preferred Stock. As soon as practicable after 4:00 p.m., Minneapolis,
Minnesota time, on February 19, 1991 or such earlier date as may be publicly
announced by the Company with the consent of Dain Bosworth Incorporated and
Piper, Jaffray & Hopwood Incorporated (the earlier of such dates being the
"Distribution Date"), the Warrant Agent will mail (by first-class, insured,
postage prepaid mail) to the holder in whose name the Warrants represented by
this Certificate are registered as of 4:00 p.m., Minneapolis, Minnesota time, on
the Distribution Date, at the address of such holder as such address shall
appear on the records of the Warrant Agent, a certificate evidencing such shares
of Preferred Stock registered in the name of such holder. Ownership of such
Preferred Stock is not transferable until after 4:00 p.m., Minneapolis,
Minnesota time, on the Distribution Date, except by and in connection with the
transfer of the Warrants represented by this certificate, and every transfer
hereof by the holder hereof at or prior to such time on the Distribution Date
shall effect the transfer of the beneficial interest of such holder in the
Preferred Stock. After 4:00 p.m., Minneapolis, Minnesota time, on the
Distribution Date, the holder of the Warrants represented by this certificate is
not, by virtue of being such holder, the beneficial owner of the Preferred
Stock. By accepting the Warrants represented by this certificate, the holder
hereof shall (prior to 4:00 p.m., Minneapolis, Minnesota time, on the
Distribution Date) possess all other rights and obligations of a holder of
Preferred Stock as fully and effectually as if he had received the same.

                              FORM OF ASSIGNMENT

   (To Be Executed by the Registered Holder if He Desires to Assign Warrants
                 Evidenced by the Within Warrant Certificate.)

     FOR VALUE RECEIVED __________ hereby sells, assigns and transfers unto
__________ Warrants, evidenced by the within Warrant Certificate, and does
hereby irrevocably constitute and appoint __________ Attorney to transfer the
said Warrants evidenced by the within Warrant Certificate on the books of the
Company, with full power of substitution.

Dated:  ________                                      _______________________
                                                                    Signature

NOTICE:  THE ABOVE SIGNATURE MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
          FACE OF THE WITHIN WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT
          ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.

Signature Guaranteed:
                         FORM OF ELECTION TO PURCHASE

 (To Be Executed by the Holder if He Desires to Exercise Warrants Evidenced by
                       the Within Warrant Certificate.)

To:  METROPOLITAN FINANCIAL CORPORATION.

     The undersigned hereby irrevocably elects to exercise ________ Warrants
evidenced by the within Warrant Certificate for, and to purchase thereunder,
________ full shares of Common Stock issuable upon exercise of said Warrants and
delivery of $________ and any applicable taxes and other charges.


     The undersigned requests that certificates for such shares be issued in the
name of

     PLEASE PRINT NAME AND ADDRESS             PLEASE INSERT SOCIAL SECURITY OR
                                                  TAX IDENTIFICATION NUMBER

________________________________________   ________________________        
________________________________________   ________________________        
________________________________________   ________________________        
 
     If said number of Warrants shall not be all the Warrants evidenced by the
within Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercised be issued in the name of
and delivered to
 
________________________________________
                                (Please print name and address)
 
 
________________________________________
________________________________________

Dated:  ________
                                                   ___________________________
                                                                     Signature

<PAGE>
 
NOTICE:   The above signature must correspond with the name as written upon the
          face of the within Warrant Certificate in every particular, without
          alteration or enlargement or any change whatsoever, or if signed by
          any other person the Form of Assignment hereon must be duly executed,
          and if the certificate representing the shares or any Warrant
          Certificate representing Warrants not exercised is to be registered in
          a name other than that in which the within Warrant Certificate is
          registered, the signature of the holder hereof must be guaranteed.

Signature Guaranteed:



<PAGE>
 
                                                                     EXHIBIT 10B


                               FIRST BANK SYSTEM

                            1987 STOCK OPTION PLAN

                                 (AS AMENDED)

<PAGE>
 
                               FIRST BANK SYSTEM
                            1987 STOCK OPTION PLAN
                                 (as amended)


                        Section 1.  Purpose and Effect
                                    ------------------
                                                  
          (a) The purpose of this Plan is to promote the interest of First Bank
System, Inc. (the "Company") and its shareholders by providing a method whereby
officers and other key employees of the Company and its subsidiaries may be
encouraged to invest in the Company's Common Stock and thereby increase their
proprietary interest in its business, encourage them to remain in the employ of
the Company and increase their personal interest in its continued success and
progress.

          (b) This plan is subject to approval by the shareholders of the
Company on or before January 1, 1987.  No options shall be granted and the
Company shall have no obligation of any nature whatsoever to any employee or
other person arising out of either this plan or any options to be granted
hereunder unless the shareholders shall have approved the plan.

          (c) Options granted under the plan may be either "incentive stock
options" as defined in Section 422A of the Internal Revenue Code of 1954, as
amended (the "Code") or options which do not so qualify (herein called
"nonqualified options").

          (d) The plan will not confer
 upon any optionee any right with respect
to continuance of employment by the Company or by a subsidiary of the Company,
nor will it affect in any way the right of the optionee's employer to terminate
the employment of the optionee.

                          Section 2.  Administration
                                      --------------
  
          (a) The Board of Directors shall designate from its members a
committee (hereinafter referred to as the "Committee"), which Committee shall
have full power and authority, subject to such orders or resolutions not
inconsistent with the provisions of the plan as may from time to time be issued
or adopted by the Board, to interpret the provisions and supervise the
administration of the plan.  None of the Committee members shall be eligible to
receive options.  All determinations by the Committee shall be made by the
affirmative vote of a majority of its members, but any determination reduced to
writing and signed by a majority of the members shall be fully as effective as
if it had been made by a majority vote at a meeting duly called and held.

                                      -1-

<PAGE>
 
          (b) Each option shall be evidenced by an option agreement which shall
contain such terms and conditions as may be approved by the Committee and shall
be signed by an officer of the Company and the employee.

          (c) All decisions made by the Committee pursuant to the provisions of
the plan and related orders or resolutions of the Board shall be final,
conclusive and binding on all persons, including the Company, shareholders,
employees and optionees.

                    Section 3.  Shares Subject to the Plan
                                --------------------------

          (a) The shares to be delivered upon exercise of options granted under
the plan shall be made available, at the discretion of the Board of Directors,
either from the authorized but unissued shares of the Company's Common Stock or
from shares of Common Stock reacquired by the Company, including shares
purchased in the open market.

          (b) Subject to adjustments made pursuant to the provisions of
paragraph (c) of this Section 3, the aggregate number of shares of Common Stock
to be delivered upon exercise of all options which may be granted under this
plan shall not exceed 1,300,000 shares.  If an option granted under the plan
shall expire or terminate for any reason during the term of the plan and prior
to exercise in full, the shares which were subject to but not delivered under
such option shall be available for the grant of other options thereafter.

          (c) In the event of a merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, or other change in corporate
structure affecting the Company's Common Stock, such adjustment shall be made in
the aggregate number of shares subject to the plan, and the number and option
prices of shares subject to options granted under the plan as may be determined
to be appropriate by the Board of Directors upon recommendation by the
Committee.

                   Section 4.  Eligibility and Participation
                               -----------------------------

          The employees eligible to receive options shall consist of salaried
officers and other key employees of the Company and its subsidiaries (whether or
not directors of the Company).  "Subsidiary" means any corporation (other than
the Company) in an unbroken chain of corporations beginning with the Company if,
at the time of the granting of the option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50 percent or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.  Subject to the limitations of the plan, the
Committee shall select the employees to be granted options, determine the number
and option price of the shares subject to each option, determine the times or
rates at which each option 

                                      -2-

<PAGE>
 
shall become exercisable and determine the time when each option shall be
granted. More than one option may be granted to the same employee.

                Section 5.  Term of the Plan and Option Period
                            ----------------------------------

          The term during which options may be granted under this plan shall
commence on January 1, 1987 and shall expire on February 28, 1992.  The maximum
period during which each option may be exercised shall be fixed by the Committee
at the time such option is granted but shall in no event exceed ten years.

                           Section 6.  Option Price
                                       ------------

          The price at which shares may be purchased upon exercise of a
particular option shall be not less than 100 percent of the fair market value of
such shares at the time such option is granted, as determined by the Committee.
For this purpose such fair market value shall be the closing price as reported
in the composite quotations for the principal stock exchange on which the
Company's Common Stock is traded on the day the option is granted.

                       Section 7.  Maximum Option Grants
                                   ---------------------

          (a) The aggregate fair market value of the shares (determined in
accordance with Section 6 of the plan as of the time an option is granted) for
which any employee may be granted incentive stock options in any calendar year
shall not exceed $100,000 (or such larger maximums as may hereafter be permitted
under Section 422A of the Code) plus any "unused limit carry-over" as defined in
Section422A of the Code and the regulations issued thereunder.

          (b) Nonqualified options may be granted without regard to the
foregoing annual limitation; and any option which is intended to be treated as
an incentive stock option but would exceed such limitation shall, to the extent
of the excess, be treated as a nonqualified stock option.  Each option or
portion of an option which is intended to be treated as an incentive stock
option and which qualifies under Section 422A of the Code will be clearly
identified as an incentive stock option and each option or portion of an option
not so qualifying will be clearly identified as a nonqualified stock option.
Upon exercise of an option which is in part an incentive stock option and in
part a nonqualified option, separate stock certificates will be issued for the
qualifying portion and the nonqualified portion.

                        Section 8.  Exercise of Option
                                    ------------------

          (a) Except in case of death, disability, retirement or termination of
employment as hereinafter provided, each option granted under this plan may be
exercised only during the continuance of the optionee's employment with the

                                      -3-

<PAGE>
 
Company or its subsidiaries (or a corporation or a subsidiary of such
corporation issuing or assuming a stock option in a transaction to which Code
Section 425(a) applies). Subject to the foregoing limitation, each option shall
be exercisable at such time or times and with respect to such number of shares
as shall be fixed by the Committee and set forth in the option agreement.

          (b) No incentive stock option granted hereunder to an employee shall
be exercisable at any time while there is outstanding any option, qualifying as
an incentive stock option under Section 422A of the Code, previously granted to
such employee to purchase stock in the Company or in a corporation which (at the
time of the granting of such option) is a parent or subsidiary corporation of
the Company, or in a predecessor corporation of any such corporation.  Any
incentive stock option shall be treated as outstanding until such option is
exercised in full or expires by reason of lapse in time.

          (c) No shares shall be delivered pursuant to the exercise of an
option, in whole or in part, until qualified for delivery under such laws and
regulations as may be deemed by the Committee to be applicable thereto and until
payment in full of the option price therefore is received by the Company.  When
exercising options in whole or in part, under rules established by the
Committee, optionee may be permitted to pay the exercise price either in cash or
in shares of the Company's Common Stock or any combination thereof.  Stock used
to pay the exercise price of any option in whole or in part shall be valued at
the closing price as reported in the composite quotations for the principal
stock exchange on which the Company's Common Stock is traded on the date of
payment.  No optionee, or the legal representative, legatee, or distributee of
an optionee, shall be deemed to be a holder of any shares subject to such option
unless and until the certificate or certificates therefor have been issued.

          (d) The Committee may, in its discretion, accelerate the exercise date
for any unexercisable option when the Committee deems such action to be
appropriate under the circumstances.

                   Section 9.  Nontransferability of Options
                               -----------------------------

          An option granted under the plan may not be transferred except by will
or the laws of descent and distribution and, during the lifetime of the employee
to whom granted, may be exercised only by such employee.

         Section 10.  Death, Retirement and Termination of Employment
                      -----------------------------------------------

          (a) In the event that an optionee shall cease to be employed by the
Company or its subsidiaries for any reason other than gross and willful
misconduct, death, disability or retirement, such optionee shall have the right
to exercise the

                                      -4-

<PAGE>
 
option at any time within three months after such termination of employment
to the extent of the full number of shares the optionee was entitled to purchase
under the option on the date of termination, subject to the condition that no
option shall be exercisable after the expiration of the term of the option.

          (b) In the event that an optionee shall cease to be employed by the
Company or its subsidiaries by reason of gross and willful misconduct during the
course of employment, including but not limited to wrongful appropriation of
funds of the employer or the commission of a gross misdemeanor or felony, the
option shall be terminated as of the date of the misconduct.

          (c) Upon termination of employment by reason of disability or
retirement, an optionee may purchase all or part of the shares with respect to
which such optionee becomes entitled to exercise such option in accordance with
the provisions of Section 8 hereof as though such retirement or disability never
occurred.

          (d) If the optionee shall die while in the employ of the Company or a
subsidiary or within three months after termination of employment for any reason
other than gross and willful misconduct, and such optionee shall not have fully
exercised the option, such option may be exercised at any time within twelve
months after the date of death by the personal representatives, administrators,
or by any person or persons to whom the option is transferred by will or the
applicable laws of descent and distribution, to the extent of the full number of
shares the optionee was entitled to purchase under the option on the date of
death or termination of employment, if earlier, and subject to the condition
that no option shall be exercisable after the expiration of the term of the
option.

                        Section 11.  Change in Control
                                     -----------------

          In the event of a change in control, all options granted under this
plan shall be immediately exercisable, notwithstanding any other provision of
this plan.  For this purpose, a change in control shall mean any of the
following events:

          (a) The merger or consolidation of the Company with, the sale of all
or substantially all the assets of the Company to, or the ownership of twenty
percent (20%) or more of the total voting capital stock of the Company then
issued and outstanding by, any person, or group of associated persons or
entities not affiliated with the Company as of the date of this Agreement,
either with or without the consent of the Company, or

          (b) A situation where individuals who were members of the Board of the
Company or Subsidiary immediately prior to a meeting of the shareholders of the
Company or Subsidiary involving a contest for the election of directors do not

                                      -5-

<PAGE>
 
constitute a majority of the Board immediately following such election, unless
the election of such new directors was recommended to the shareholders by
management of the Company or such Subsidiary.

          (c)  A tender offer for the Company's stock.

               Section 12.  Amendments and Discontinuance
                            -----------------------------

          The Board of Directors may amend, suspend or discontinue the plan, but
may not, without the approval of the Company's shareholders, make any amendment
which would (a) abolish the Committee, change the qualifications of its members,
or withdraw the administration of the plan from its supervision, (b)make any
material change in the class of eligible employees as defined in the plan, (c)
increase the total number of shares for which options may be granted under the
plan, (d) extend the term of the plan or the maximum option period, (e) decrease
the minimum option price, or (f) permit adjustments in the number and option
price of the shares granted under the plan except as permitted by the provisions
of paragraph (c) of Section 3 above.

                                      -6-



<PAGE>
 
                                                                     EXHIBIT 10D



                                COMPOSITE COPY


                            FIRST BANK SYSTEM, INC.
                            EXECUTIVE DEFERRAL PLAN
                               (1992 STATEMENT)


                        First Effective January 1, 1992


                                      AND

                                 As Amended By

                 The FIRST AMENDMENT Adopted October 20, 1993
                         But Effective January1, 1994

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                            EXECUTIVE DEFERRAL PLAN
                               (1992 STATEMENT)

                               TABLE OF CONTENTS



<TABLE> 
<CAPTION> 
                                                                                PAGE
<S>                                                                             <C>  
SECTION 1.  INTRODUCTION  ....................................................   1

            1.1.        Statement of Plan
            1.2.        Definitions
                        1.2.1.      Account                   
                        1.2.2.      Affiliate                 
                        1.2.3.      Annual Valuation Date     
                        1.2.4.      Beneficiary               
                        1.2.5.      Change in Control         
                        1.2.6.      Earliest Retirement Age   
                        1.2.7.      Effective Date            
                        1.2.8.      Employer                  
                        1.2.9.      Event of Maturity         
                        1.2.10.     FBS                       
                        1.2.11.     Normal Retirement Age     
                        1.2.12.     Participant               
                        1.2.13.     Plan                      
                        1.2.14.     Plan Statement            
                        1.2.15.     Plan Year                 
                        1.2.16.     Principal Sponsor         
                        1.2.17.     Termination of Employment 
                        1.2.18.     Valuation Date            
                        1.2.19.     Service                   
            1.3.        Rules of Interpretation    

SECTION 2.  PARTICIPATION  ...................................................   3

            2.1.        Participation
            2.2.        Enrollment             
            2.3.        Specific Exclusion    
 
SECTION 3.  ADJUSTMENT OF ACCOUNTS............................................   4   
 
            3.1.        Establishment of Accounts                  
            3.2.        Adjustments of Accounts                    
                        3.2.1.      Intermediate Distributions Subtraction     
                        3.2.2.      Investment Addition                        
                        3.2.3.      Deferral Addition                          
                        3.2.4.      Final Distributions Subtraction             
 
SECTION 4.  VESTING OF ACCOUNT ...............................................   5
 
SECTION 5.  MATURITY .........................................................   5

            5.1.        Events of Maturity                                   
            5.2.        Effect of Maturity upon Further Participation
 in Plan 
</TABLE>
 

                                      -i-

<PAGE>
 

<TABLE> 
<S>                                                                              <C> 
SECTION 6.  DISTRIBUTION......................................................   6

            6.1.   Form of Distribution
                   6.1.1.   Form of Distribution     
                   6.1.2.   Time of Payment          
                   6.1.3.   Installment Amounts      
                   6.1.4.   Default                   
            6.2.   Previously Scheduled Distribution
                   6.2.1.   Enrolling for the Distribution    
                   6.2.2.   Scheduled Distribution             
            6.3.   Hardship Distributions
                   6.3.1.   When Available      
                   6.3.2.   Purposes            
                   6.3.3.   Limitations         
                   6.3.4.   Forfeiture           
            6.4.   Change in Control Distributions
                   6.4.1.   When Available      
                   6.4.2.   Limitations         
                   6.4.3.   Forfeiture           
            6.5.   Acceleration of Annual Installments
                   6.5.1.   When Available     
                   6.5.2.   Forfeiture          
            6.6.   Designation of Beneficiaries
                   6.6.1.   Right to Designate                     
                   6.6.2.   Failure of Designation                 
                   6.6.3.   Disclaimers by Beneficiaries           
                   6.6.4.   Definitions                            
                   6.6.5.   Special Rules                        
                   6.6.6.   No Spousal Rights                     
            6.7.   Death Prior to Full Distribution           
            6.8.   Facility of Payment                         
 
SECTION 7.  FUNDING OF PLAN...................................................   11
 
            7.1.   Unfunded Agreement           
            7.2.   Spendthrift Provision         
 
SECTION 8.  AMENDMENT AND TERMINATION.........................................   12
 
SECTION 9.  DETERMINATIONS -- RULES AND REGULATIONS...........................   12

            9.1.      Determinations                               
            9.2.      Rules and Regulations                   
            9.3.      Method of Executing Instruments         
            9.4.      Claims Procedure                         
                      9.4.1.      Original Claim                          
                      9.4.2.      Claims Review Procedure            
                      9.4.3.      General Rules                       
            9.5.      Information Furnished by Participants   

SECTION 10. PLAN ADMINISTRATION...............................................   14

            10.1.     Employer                                   
                      10.1.1.   Officers                                
                      10.1.2.   Chief Executive Officer                 
                      10.1.3.   Board of Directors                      
            10.2.     Conflict of Interest                    
            10.3.     Administrator                           
            10.4.     Service of Process                       
</TABLE>
 

                                     -ii-

<PAGE>
 

<TABLE> 
<S>                                                                              <C> 
SECTION 11. DISCLAIMERS.......................................................   14

            11.1.     Term of Employment
            11.2.     Source of Payment
            11.3.     Delegation
</TABLE>
 
                                     -iii-

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                            EXECUTIVE DEFERRAL PLAN
                               (1992 STATEMENT)



                                   SECTION 1

                                 INTRODUCTION

1.1.  STATEMENT OF PLAN.  Effective January 1, 1992, FIRST BANK SYSTEM, INC., a
Delaware corporation (hereinafter sometimes referred to as "Principal Sponsor")
hereby creates a nonqualified, unfunded, elective deferral plan for the purpose
of allowing a select group of management and highly compensated employees of the
Principal Sponsor and other Employers to defer the receipt of incentive
compensation which would otherwise be paid to those employees.

1.2.  DEFINITIONS.  When the following terms are used herein with initial
capital letters, they shall have the following meanings:

      1.2.1.   ACCOUNT -- the separate bookkeeping account representing the
unfunded and unsecured general obligation of Principal Sponsor established with
respect to each Participant to which is credited the dollar amounts specified in
Section 3 and from which are subtracted payments and forfeitures made pursuant
to Section 6.  To the extent necessary to accommodate and effect the
distribution elections made by Participants pursuant to Section 2, separate
bookkeeping sub-accounts shall be established with respect to each of the
several annual deferral elections made by Participants.

      1.2.2.   AFFILIATE -- a business entity which is affiliated in ownership
with the Principal Sponsor or an Employer and is recognized as an Affiliate by
the Principal Sponsor for the purposes of this Plan.

      1.2.3.   ANNUAL VALUATION DATE -- each December 31.

      1.2.4.   BENEFICIARY -- a person designated by a Participant (or
automatically by operation of this Plan Statement) to receive all or a part of
the Participant's Account in the event of the Participant's death prior to full
distribution thereof.  A person so designated shall not be considered a
Beneficiary until the death of the Participant.

      1.2.5.   CHANGE IN CONTROL -- an event defined as a Change in Control in
the form of nonqualified stock option agreement adopted by the Organization
Committee of the Board of Directors under the "First Bank System, Inc. 1991
Stock Incentive Plan" or any comparable successor plan most recently before such
event.  FBS shall determine the date on which a Change in Control has occurred.

      1.2.6.   EARLIEST RETIREMENT AGE -- the earlier of:

                 (i)  the earliest date that a Participant who is at least age
                      fifty-five (55) years has a sum of his or her age (in
                      whole years) and Service (also in whole years) that equals
                      at least sixty-five (65), or

               (ii)   the date a Participant attains Normal Retirement Age.

      1.2.7.   EFFECTIVE DATE -- January 1, 1992.

      1.2.8.   EMPLOYER -- the Principal Sponsor and any business entity
affiliated with the Principal Sponsor that employs persons who are designated
for participation in this Plan.

<PAGE>
 
      1.2.9.   EVENT OF MATURITY -- any of the occurrences described in Section
5 by reason of which a Participant or Beneficiary may become entitled to a
distribution from the Plan.

      1.2.10.  FBS -- FIRST BANK SYSTEM, INC., a Delaware corporation.

      1.2.11.  NORMAL RETIREMENT AGE -- the last day of the calendar month in
which a Participant attains age sixty-five (65) years.

      1.2.12.  PARTICIPANT -- an employee of the Employer who is designated as
eligible to participate in this Plan by the Organization Committee of the Board
of Directors and elects to participate in accordance with the terms of this Plan
and becomes a Participant in the Plan in accordance with the provisions of
Section 2.  An employee shall not be eligible to become a Participant unless the
employee is a member of a select group of management or highly compensated
employees.  No employee is presumed or automatically eligible to participate in
this Plan.  An employee who has become a Participant shall be considered to
continue as a Participant in the Plan until the date of the Participant's death
or, if earlier, the date when the Participant is no longer employed by an
Employer or an Affiliate and upon which the Participant no longer has any
Account under the Plan (that is, the Participant has received a distribution of
all of the Participant's Account).

      1.2.13.  PLAN -- the nonqualified, income deferral program maintained by
the Principal Sponsor established for the benefit of Participants eligible to
participate therein, as set forth in this Plan Statement.  (As used herein,
"Plan" does not refer to the documents pursuant to which the Plan is maintained.
Those documents are referred to herein as the "Plan Statement").  The Plan shall
be referred to as the "FIRST BANK SYSTEM, INC. EXECUTIVE DEFERRAL PLAN."

      1.2.14.  PLAN STATEMENT -- this document entitled "FIRST BANK SYSTEM, INC.
EXECUTIVE DEFERRAL PLAN (1992 Statement)" as adopted by the Organization
Committee of the Board of Directors of FIRST BANK SYSTEM, INC. effective as of
January 1, 1992, as the same may be amended from time to time thereafter.

      1.2.15.  PLAN YEAR -- the twelve (12) consecutive month period ending on
any Annual Valuation Date.

      1.2.16.  PRINCIPAL SPONSOR -- FIRST BANK SYSTEM, INC., a Delaware
corporation.

      1.2.17.  TERMINATION OF EMPLOYMENT -- a complete severance of an
employee's employment relationship with the Employer and all Affiliates, if any,
for any reason other than the employee's death.  A transfer from employment with
the Employer to employment with an Affiliate of the Employer shall not
constitute a Termination of Employment.  If an Employer who is an Affiliate
ceases to be an Affiliate because of a sale of substantially all the stock or
assets of the Employer, then Participants who are employed by that Employer and
who cease to be employed by the Principal Sponsor or an Employer on account of
the sale of substantially all the stock or assets of the Employer shall be
deemed to have thereby had a Termination of Employment for the purpose of
commencing distributions from this Plan.

      1.2.18.  VALUATION DATE -- the last day of each calendar month of the Plan
Year.

      1.2.19.  SERVICE -- a measure of an employee's service with the Employer
and all Affiliates (stated as a number of years) which is equal to the number of
years of "Vesting Service" determined under the rules of the "First Bank System
Personal Retirement Account" (or any similar successor plan) as those rules may
exist at the time the Participant's Service is being determined.

                                      -2-

<PAGE>
 
1.3.  RULES OF INTERPRETATION.  An individual shall be considered to have
attained a given age on such individual's birthday for that age (and not on the
day before).  Individuals born on February29 in a leap year shall be considered
to have their birthdays on February28 in each year that is not a leap year.
Notwithstanding any other provision of this Plan Statement or any election or
designation made under the Plan, any individual who feloniously and
intentionally kills a Participant or Beneficiary shall be deemed for all
purposes of this Plan and all elections and designations made under this Plan to
have died before such Participant or Beneficiary.  A final judgment of
conviction of felonious and intentional killing is conclusive for the purposes
of this section.  In the absence of a conviction of felonious and intentional
killing, the Principal Sponsor shall determine whether the killing was felonious
and intentional for the purposes of this section.  Whenever appropriate, words
used herein in the singular may be read in the plural, or words used herein in
the plural may be read in the singular; the masculine may include the feminine;
and the words "hereof," "herein" or "hereunder" or other similar compounds of
the word "here" shall mean and refer to this entire Plan Statement and not to
any particular paragraph or section of this Plan Statement unless the context
clearly indicates to the contrary.  The titles given to the various sections of
this Plan Statement are inserted for convenience of reference only and are not
part of this Plan Statement, and they shall not be considered in determining the
purpose, meaning or intent of any provision hereof.  This Plan Statement shall
be construed and this Plan shall be administered to create an unfunded plan
providing deferred compensation to a select group of management or highly
compensated employees so that it is exempt from the requirements of Parts 2, 3
and 4 of Title I of ERISA and qualifies for a form of simplified, alternative
compliance with the reporting and disclosure requirements of Part 1 of Title I
of ERISA.  Any reference in this Plan Statement to a statute or regulation shall
be considered also to mean and refer to any subsequent amendment or replacement
of that statute or regulation.  This document has been executed and delivered in
the State of MINNESOTA and has been drawn in conformity to the laws of that
State and shall be construed and enforced in accordance with the laws of the
State of MINNESOTA.


                                   SECTION 2

                                 PARTICIPATION

2.1.  PARTICIPATION.  Each employee of the Employer designated by the
Organization Committee of the Board of Directors as eligible to enroll in this
Plan shall be a participant in the Plan as of the first day of the Plan Year
with respect to which the employee first enrolls as Participant.  Employees
shall be designated as eligible to enroll on a Plan Year by Plan Year basis.
Eligibility to enroll one Plan Year does not entitle the employee to enroll the
next Plan Year.

2.2.  ENROLLMENT.  Prior to the first day of any Plan Year, an employee who has
been designated as eligible to enroll may make an enrollment for that Plan Year.
A separate enrollment shall be made for each Plan Year.  Each such enrollment:

      (a)  Shall be irrevocable for the remainder of the Plan Year with respect
           to which it is made once it has been accepted by the Principal
           Sponsor.

- --------------------------------------------------------------------------------

                                       FIRST AMENDMENT-EFFECTIVE JANUARY 1, 1994

      (b)  Shall designate the amount or portion of the Participant's incentive
           compensation or base compensation or both which is earned during that
           Plan Year (without regard to whether it would be paid during that or
           a subsequent Plan Year) which shall not be paid to the Participant
           but instead shall be accumulated in this Plan under Section 3 and
           distributed from this Plan under Section 6. The amount or portion may
           be designed as a dollar amount or a percentage. The amount or portion
           of the base compensation 

                                      -3-

<PAGE>
 
           that can be designated shall not exceed fifty percent (50%) of the
           Participant's base compensation.

- --------------------------------------------------------------------------------

      (c)  Shall specify the form in which distribution of the portion of the
           Account attributable to that enrollment shall be made under Section 6
           upon the occurrence of an Event of Maturity (and if such designation
           is not clearly made to the contrary shall be deemed to have been an
           election of a single lump sum distribution).

      (d)  Shall specify whether and what amount of the Account attributable to
           that enrollment shall be distributed before an Event of Maturity in
           accordance with Section 6.2.

      (e)  Shall be made upon forms furnished by the Principal Sponsor, shall be
           made at such time as the Principal Sponsor shall determine, shall be
           made before the beginning of the Plan Year with respect to which it
           is made and shall conform to such other procedural and substantive
           rules as the Principal Sponsor shall make.

2.3.  SPECIFIC EXCLUSION.  Notwithstanding anything apparently to the contrary
in this Plan Statement or in any written communication, summary, resolution or
document or oral communication, no individual shall be a Participant in this
Plan, develop benefits under this Plan or be entitled to receive benefits under
this Plan (either for himself or herself or his or her survivors) unless such
individual is a member of a select group of management or highly compensated
employees (as that expression is used in ERISA).  If a court of competent
jurisdiction, any representative of the U.S. Department of Labor or any other
governmental, regulatory or similar body makes any direct or indirect, formal or
informal, determination that an individual is not a member of a select group of
management or highly compensated employees (as that expression is used in
ERISA), such individual shall not be (and shall not have ever been) a
Participant in this Plan at any time. If any person not so defined has been
erroneously treated as a  Participant in this Plan, upon discovery of such error
such person's erroneous participation shall immediately terminate ab initio and
the Employer shall distribute the individual's Account immediately.


                                   SECTION 3

                            ADJUSTMENT OF ACCOUNTS

3.1.  ESTABLISHMENT OF ACCOUNTS.  There shall be established for each
Participant an unfunded, bookkeeping Account which shall be adjusted each
Valuation Date.

3.2.  ADJUSTMENTS OF ACCOUNTS.  As of each Valuation Date (the "current
Valuation Date"), the value of each Account determined as of the immediately
preceding Valuation Date (the "initial Account value") shall be increased (or
decreased) by the following adjustments made in the following sequence:

      3.2.1.   INTERMEDIATE DISTRIBUTIONS SUBTRACTION.  The initial Account
value shall be reduced by the total amount distributed in fact to (or with
respect to) the Participant (or forfeited in connection with a distribution)
from such Account as of a date subsequent to the immediately preceding Valuation
Date but prior to the current Valuation Date.

      3.2.2.   INVESTMENT ADDITION.  The initial Account value (as adjusted
above) shall be increased by interest.

      (a)      The rate shall be determined from time to time by the Principal
               Sponsor. Except as provided in Section 8, the rate may be changed
               by the Principal 

                                      -4-

<PAGE>
 
               Sponsor by amendment of the Plan Statement without notice to or
               the consent of any Participant, former Participant or any
               Beneficiary.

      (b)      Beginning January 1, 1992, the rate for each month shall be
               determined annually for each Plan Year and shall be equal to the
               monthly equivalent of one hundred percent (100%) of the 10-year
               Treasury Note 120 month rolling average (as established on the
               September 30 of the preceding Plan Year).

      (c)      This rate shall be uniform for all Participants for the same
               Valuation Date but may change from Valuation Date to Valuation
               Date.

      3.2.3.   DEFERRAL ADDITION.  The initial Account value (as adjusted above)
shall be increased by the total amount of incentive compensation, if any, which
would have been paid to the Participant  as of a date subsequent to the
immediately preceding Valuation Date but prior to or coincident with the current
Valuation Date but for the enrollment agreement signed by the Participant
pursuant to Section 2.

      3.2.4.   FINAL DISTRIBUTIONS SUBTRACTION.  The initial Account value (as
adjusted above) shall be reduced by the total amount distributed in fact to (or
with respect to) the Participant (or forfeited in connection with a
distribution) from such Account as of the current Valuation Date.


                                   SECTION 4

                              VESTING OF ACCOUNT

Except as provided in Section 6.2 and Section 6.4 (relating to the forfeiture
for hardship or  Change in Control distributions) and Section 8 (relating to the
ability to amend the Plan Statement and terminate the Plan), the Account of each
Participant shall be fully (100%) vested and nonforfeitable at all times.


                                   SECTION 5

                                   MATURITY

5.1.  EVENTS OF MATURITY.  A Participant's Account shall mature and shall become
distributable in accordance with Section 6 upon the earliest occurrence of any
of the following events while in the employment of the Employer or an Affiliate:

      (a)      his or her death, or

      (b)      his or her Termination of Employment from the Employer, or

      (c)      termination of the Plan;

provided, however, that a termination of the opportunity to make an enrollment
by action of the Organization Committee of the Board of Directors pursuant to
Section 2 or a transfer of employment to an Affiliate that is not an Employer
shall not constitute an Event of Maturity.

5.2.  EFFECT OF MATURITY UPON FURTHER PARTICIPATION IN PLAN.  On the occurrence
of an Event of Maturity, a Participant shall cease to have any interest in the
Plan other than the right to receive payment of his or her Account as provided
in Section 6 hereof, adjusted from time to time as provided in Section 3.

                                      -5-

<PAGE>
 
                                   SECTION 6

                                 DISTRIBUTION

6.1.  FORM OF DISTRIBUTION.  Upon the occurrence of an Event of Maturity
effective as to a Participant, the Principal Sponsor shall commence payment of
such Participant's Account (reduced by the amount of any applicable payroll,
withholding and other taxes) in the form designated by the Participant in his or
her enrollment.  A Participant shall not be required to make application to
receive payment.  Distribution shall not be made to any Beneficiary, however,
until such Beneficiary shall have filed a written application for benefits in a
form acceptable to the Principal Sponsor and such application shall have been
approved by the Principal Sponsor.

      6.1.1.   FORM OF DISTRIBUTION.  Distribution shall be made in whichever of
the following forms as the Participant shall have designated in writing at the
time of his or her enrollment (to the extent that such election is consistent
with the rules of this Plan Statement):

      (a)      TERM CERTAIN INSTALLMENTS TO PARTICIPANT.  If the Distributee is
               a Participant and the Account at the Termination of Employment is
               at least Twenty Thousand Dollars ($20,000), in a series of annual
               installments payable over fifteen (15) years. (For the purpose of
               applying this dollar limitation, all portions of the Account
               distributable in fifteen annual installments shall be considered
               together notwithstanding that such amounts may have been
               attributable to enrollments relating to more than one Plan Year.)

      (b)      CONTINUED TERM CERTAIN INSTALLMENTS TO BENEFICIARY.  If the
               Distributee is a Beneficiary of a deceased Participant and
               distribution had commenced to the deceased Participant before his
               or her death over a fifteen (15) year period as specified in
               paragraph (a) above, in a series of annual installments payable
               over the remainder of the fifteen (15) year period.

      (c)      LUMP SUM.  If the Distributee is either a Participant or a
               Beneficiary of a deceased Participant, in a single lump sum
               payment.

      6.1.2.   TIME OF PAYMENT.  Payment shall be made or commenced to a
Participant in accordance with the following rules:

      (a)      RETIREMENT.  If the Participant's Termination of Employment is on
               a date on or after the Participant's Earliest Retirement Age,
               payment shall be made or commenced as of the Annual Valuation
               Date coincident with or immediately following the Participant's
               Termination of Employment and shall be made or commenced as soon
               as practicable after such Annual Valuation Date.

      (b)      DEATH.  If the payment is made or commenced on account of the
               Participant's death, payment shall be made or commenced as of the
               Annual Valuation Date coincident with or immediately following
               the Participant's Termination of Employment and shall be made or
               commenced as soon as practicable after such Annual Valuation
               Date.

      (c)      OTHER.  In all other cases, payment to the Participant shall be
               made as of the second Valuation Date subsequent to the
               Participant's Termination of Employment and shall be made as soon
               as practicable after such second Valuation Date.

                                      -6-

<PAGE>
 
      6.1.3.   INSTALLMENT AMOUNTS.  The amount of the annual installments shall
be  determined by dividing the amount of the Account as of the Annual Valuation
Date as of which the installment is being paid by the number of remaining
installment payments to be made (including the payment being determined).

      6.1.4.   DEFAULT.  If for any reason a Participant shall have failed to
make a timely written designation of form for distribution (including reasons
entirely beyond the control of the Participant), the distribution shall be made
in a single lump sum.  No spouse, former spouse, Beneficiary or other person
shall have any right to participate in the Participant's selection of a form of
benefit.

6.2.  PREVIOUSLY SCHEDULED DISTRIBUTION.

      6.2.1.   ENROLLING FOR THE DISTRIBUTION.  At the time of enrollment for
each Plan Year, each enrolling Participant shall have the opportunity to elect
to cause the Plan to make a scheduled distribution to the Participant from the
Account of a fixed dollar amount or percentage of Account (not less than $2,000)
as of an Annual Valuation Date designated by the Participant in the enrollment
which distribution shall be made as soon as practicable after such Annual
Valuation Date.  The failure to make such a scheduled distribution election one
Plan Year shall not preclude an election in a subsequent Plan Year.  Making a
scheduled distribution election for one Plan Year shall not require any such
election in a subsequent Plan Year.  The scheduled distribution election that is
made with each Plan Year's enrollment  shall relate only to the portion of the
Account that is attributable to that Plan Year's deferrals.

      6.2.2.   SCHEDULED DISTRIBUTION.  As of the Annual Valuation Date
designated by the Participant in his or her enrollment, there shall be
distributed from the Account to the Participant such amount as the Participant
shall have elected to receive from the Account when the Participant enrolled.
Notwithstanding the dollar amount designated by the Participant in his or her
enrollment, if a scheduled distribution is required as of an Annual Valuation
Date and the value of the portion of the Account that is attributable to the
Plan Year's deferrals on such Annual Valuation Date is less than Five Thousand
Dollars ($5,000) the entire Account attributable to that Plan Year's deferrals
shall be distributed.  In no event shall such scheduled distributions occur
after the death of the Participant or after any other Event of Maturity with
respect to the Participant.  In no event shall such scheduled distributions made
pursuant to an enrollment for a Plan Year exceed the Account attributable to
that Plan Year.

6.3.  HARDSHIP DISTRIBUTIONS.

      6.3.1.   WHEN AVAILABLE.  A Participant may receive a hardship
distribution from his or her Account if the Principal Sponsor determines that
such hardship distribution is for a purpose described in Section 6.3.2 and the
conditions in Section 6.3.3 and Section 6.3.4 have been fulfilled.  To receive
such a distribution, the Participant must file a written hardship distribution
application with the Principal Sponsor and furnish such documentation as the
Principal Sponsor may require.  In the application, the Participant shall
specify the basis for the distribution and the dollar amount to be distributed.
If such hardship distribution is approved by the Principal Sponsor, distribution
shall be made as of the Valuation Date coincident with or next following the
approval of a completed application by the Principal Sponsor and such hardship
distribution shall be made in a lump sum cash payment as soon as
administratively feasible after such Valuation Date.  The amount of each
hardship distribution shall be taken from the portion of the Account
attributable to the earliest enrollment (including related earnings) first.

      6.3.2.   PURPOSES.  Hardship distributions shall be allowed under Section
6.3.1 only if the Participant establishes that the hardship distribution is to
be made on account of an immediate and heavy financial need of the Participant
for which the Participant does not have other available resources.

                                      -7-

<PAGE>
 
      6.3.3.   LIMITATIONS.  The amount of the hardship distribution shall not
exceed the amount of the Participant's proven immediate and heavy financial
need.  A hardship distribution shall not be made after the death of the
Participant or after the occurrence of any other Event of Maturity.  The amount
of approved hardship distribution (and the forfeiture described below) shall not
exceed the value of the Account.

      6.3.4.   FORFEITURE.  Upon the approval of a hardship distribution, there
shall be irrevocably forfeited from the Account of the Participant an amount
equal to ten percent (10%) of the amount approved for distribution.

6.4.  CHANGE IN CONTROL DISTRIBUTIONS.

      6.4.1.   WHEN AVAILABLE.  A Participant or Beneficiary may receive a
distribution of his or her entire Account (after reduction for the forfeiture
described in Section 6.4.3) if a Change in Control has occurred and the
condition in Section 6.4.2 has been fulfilled.  To receive such a distribution,
the Participant or Beneficiary must file a written distribution application with
the Principal Sponsor.  The Principal Sponsor shall approve the Change in
Control distribution if such application has been filed and a Change in Control
has occurred.  Distribution of the entire Account (after reduction for the
forfeiture described in Section 6.4.3)  shall be made as of the Valuation Date
coincident with or next following the approval of a completed application by the
Principal Sponsor.  Such distribution shall be made in a lump sum cash payment
as soon as administratively feasible after such Valuation Date.

      6.4.2.   LIMITATIONS.  The amount of approved Change in Control
distribution (and the forfeiture described below) shall not exceed the value of
the Account.

      6.4.3.   FORFEITURE.  Upon the approval of a Change in Control
distribution, there shall be irrevocably forfeited from the Account of the
Participant or Beneficiary an amount equal to five percent (5%) of the Account.

6.5.  ACCELERATION OF ANNUAL INSTALLMENTS.

      6.5.1.   WHEN AVAILABLE.  A Participant or Beneficiary who is receiving
annual installments may receive an accelerated payment of his or her entire
Account (after reduction for the forfeiture described in Section 6.5.2).  To
receive such an accelerated payment, the Participant or Beneficiary must file a
written payment application with the Principal Sponsor.  Payment of the
accelerated payment (after reduction for the forfeiture described in Section
6.5.2)  shall be made as of the Annual Valuation Date coincident with or next
following the approval of a completed application by the Principal Sponsor.
Such accelerated payment shall be made in a lump sum cash payment as soon as
administratively feasible after such Valuation Date.  The amount of the
accelerated payment shall be equal to  the value of the Account as of such
Annual Valuation Date (after reduction for the forfeiture described below).

      6.5.2.   FORFEITURE.  Upon the approval of an accelerated payment, there
shall be irrevocably forfeited from the Account of the Participant or
Beneficiary an amount equal to ten percent (10%) of the Account.

6.6.  DESIGNATION OF BENEFICIARIES.

      6.6.1.   RIGHT TO DESIGNATE.  Each Participant may designate, upon forms
to be furnished by and filed with the Principal Sponsor, one or more primary
Beneficiaries or alternative Beneficiaries to receive all or a specified part of
such Participant's Account in the event of such Participant's death.  The
Participant may change or revoke any such designation from time to time without
notice to or consent from any Beneficiary.  No such designation, change or
revocation shall be effective unless executed by the Participant and received by
the Principal Sponsor during the Participant's lifetime.

      6.6.2.   FAILURE OF DESIGNATION.  If a Participant:

                                      -8-

<PAGE>
 
      (a)      fails to designate a Beneficiary,

      (b)      designates a Beneficiary and thereafter revokes such designation
               without naming another Beneficiary, or

      (c)      designates one or more Beneficiaries and all such Beneficiaries
               so designated fail to survive the Participant,

such Participant's Account, or the part thereof as to which such Participant's
designation fails, as the case may be, shall be payable to the first class of
the following classes of automatic Beneficiaries with a member surviving the
Participant and (except in the case of surviving issue) in equal shares if there
is more than one member in such class surviving the Participant:

               Participant's surviving spouse
               Participant's surviving issue per stirpes and not per capita
               Participant's surviving parents
               Participant's surviving brothers and sisters
               Representative of Participant's estate.

      6.6.3.   DISCLAIMERS BY BENEFICIARIES.  A Beneficiary entitled to a
distribution of all or a portion of a deceased Participant's Account may
disclaim an interest therein subject to the following requirements.  To be
eligible to disclaim, a Beneficiary must be a natural person, must not have
received a distribution of all or any portion of the Account at the time such
disclaimer is executed and delivered, and must have attained at least age
twenty-one (21) years as of the date of the Participant's death.  Any disclaimer
must be in writing and must be executed personally by the Beneficiary before a
notary public.  A disclaimer shall state that the Beneficiary's entire interest
in the undistributed Account is disclaimed or shall specify what portion thereof
is disclaimed.  To be effective, duplicate original executed copies of the
disclaimer must be both executed and actually delivered to the Principal Sponsor
after the date of the Participant's death but not later than one hundred eighty
(180) days after the date of the Participant's death.  A disclaimer shall be
irrevocable when delivered to the Principal Sponsor.  A disclaimer shall be
considered to be delivered to the Principal Sponsor only when actually received
by the Principal Sponsor.  The Principal Sponsor shall be the sole judge of the
content, interpretation and validity of a purported disclaimer.  Upon the filing
of a valid disclaimer, the Beneficiary shall be considered not to have survived
the Participant as to the interest disclaimed.  A disclaimer by a Beneficiary
shall not be considered to be a transfer of an interest in violation of the
provisions of Section 6 and shall not be considered to be an assignment or
alienation of benefits in violation of federal law prohibiting the assignment or
alienation of benefits under this Plan.  No other form of attempted disclaimer
shall be recognized by the Principal Sponsor.

      6.6.4.   DEFINITIONS.  When used herein and, unless the Participant has
otherwise specified in the Participant's Beneficiary designation, when used in a
Beneficiary designation, "issue" means all persons who are lineal descendants of
the person whose issue are referred to, including legally adopted descendants
and their descendants but not including illegitimate descendants and their
descendants; "child" means an issue of the first generation; "per stirpes" means
in equal shares among living children of the person whose issue are referred to
and the issue (taken collectively) of each deceased child of such person, with
such issue taking by right of representation of such deceased child; and
"survive" and "surviving" mean living after the death of the Participant.

      6.6.5.   SPECIAL RULES.  Unless the Participant has otherwise specified in
the Participant's Beneficiary designation, the following rules shall apply:

                                      -9-

<PAGE>
 
      (a)      If there is not sufficient evidence that a Beneficiary was living
               at the time of the death of the Participant, it shall be deemed
               that the Beneficiary was not living at the time of the death of
               the Participant.

      (b)      The automatic Beneficiaries specified in Section 6.6.2 and the
               Beneficiaries designated by the Participant shall become fixed at
               the time of the Participant's death so that, if a Beneficiary
               survives the Participant but dies before the receipt of all
               payments due such Beneficiary hereunder, such remaining payments
               shall be payable to the representative of such Beneficiary's
               estate.

      (c)      If the Participant designates as a Beneficiary the person who is
               the Participant's spouse on the date of the designation, either
               by name or by relationship, or both, the dissolution, annulment
               or other legal termination of the marriage between the
               Participant and such person shall automatically revoke such
               designation. (The foregoing shall not prevent the Participant
               from designating a former spouse as a Beneficiary on a form
               executed by the Participant and received by the Principal Sponsor
               after the date of the legal termination of the marriage between
               the Participant and such former spouse, and during the
               Participant's lifetime.)

      (d)      Any designation of a nonspouse Beneficiary by name that is
               accompanied by a description of relationship to the Participant
               shall be given effect without regard to whether the relationship
               to the Participant exists either then or at the Participant's
               death.

      (e)      Any designation of a Beneficiary only by statement of
               relationship to the Participant shall be effective only to
               designate the person or persons standing in such relationship to
               the Participant at the Participant's death.

A Beneficiary designation is permanently void if it either is executed or is
filed by a Participant who, at the time of such execution or filing, is then a
minor under the law of the state of the Participant's legal residence.  The
Principal Sponsor shall be the sole judge of the content, interpretation and
validity of a purported Beneficiary designation.

      6.6.6.   NO SPOUSAL RIGHTS.  No spouse or surviving spouse of a
Participant and no person designated to be a Beneficiary shall have any rights
or interest in the benefits accumulated under this Plan including, but not
limited to, the right to be the sole Beneficiary or to consent to the
designation of Beneficiaries (or the changing of designated Beneficiaries) by
the Participant.

6.7.  DEATH PRIOR TO FULL DISTRIBUTION.  If, at the death of the Participant,
any payment to the Participant was due or otherwise pending but not actually
paid, the amount of such payment shall be included in the Account which are
payable to the Beneficiary (and shall not be paid to the Participant's estate).

6.8.  FACILITY OF PAYMENT.  In case of the legal disability, including minority,
of a Participant or Beneficiary entitled to receive any distribution under the
Plan, payment shall be made, if the Principal Sponsor shall be advised of the
existence of such condition:

      (a)      to the duly appointed guardian, conservator or other legal
               representative of such Participant or Beneficiary, or

      (b)      to a person or institution entrusted with the care or maintenance
               of the incompetent or disabled Participant or Beneficiary,
               provided such person or institution has satisfied the Principal
               Sponsor that the payment will be used for the best interest and
               assist in the care of such Participant or Beneficiary, and
               provided further, that no prior claim for said payment has been
               made by 

                                      -10-

<PAGE>
 
               a duly appointed guardian, conservator or other legal
               representative of such Participant or Beneficiary.

Any payment made in accordance with the foregoing provisions of this section
shall constitute a complete discharge of any liability or obligation of the
Principal Sponsor therefor.


                                   SECTION 7

                                FUNDING OF PLAN

7.1.  UNFUNDED AGREEMENT.  The obligation of the Employer to make payments under
this Plan constitutes only the unsecured (but legally enforceable) promise of
the Employer to make such payments.  The Participant shall have no lien, prior
claim or other security interest in any property of the Employer.  The Employer
is not required to establish or maintain any fund, trust or account (other than
a bookkeeping account or reserve) for the purpose of funding or paying the
benefits promised under this Plan.  If such a fund is established, the property
therein shall remain the sole and exclusive property of the Employer.  The
Employer will pay the cost of this Plan out of its general assets.  All
references to accounts, accruals, gains, losses, income, expenses, payments,
custodial funds and the like are included merely for the purpose of measuring
the Employer's obligation to Participants in this Plan and shall not be
construed to impose on the Employer the obligation to create any separate fund
for purposes of this Plan.

If the Employer elects to finance all or a portion of its costs in connection
with this Plan through the purchase of life insurance or other similar
investments, the Participant agrees, as a condition of participation in this
Plan, to cooperate with the Employer in the purchase of such investment to any
extent reasonably required by the Employer and relinquishes any claim he or she
may have either for himself or herself or any beneficiary to the proceeds of any
such investment or any other rights or interests in such investment.  If a
Participant fails or refuses to cooperate, then notwithstanding any other
provision of this Plan Statement (including, without limiting the generality of
the foregoing, Section 4) the Employer shall distribute the individual's Account
immediately and the Participant shall not be eligible to enroll in the Plan
again.

7.2.  SPENDTHRIFT PROVISION.  No Participant or Beneficiary shall have any
interest in any Account which can be transferred nor shall any Participant or
Beneficiary have any power to anticipate, alienate, dispose of, pledge or
encumber the same while in the possession or control of the Employer, nor shall
the Employer recognize any assignment thereof, either in whole or in part, nor
shall any Account be subject to attachment, garnishment, execution following
judgment or other legal process while in the possession or control of the
Employer.

The power to designate Beneficiaries to receive the Account of a Participant in
the event of such Participant's death shall not permit or be construed to permit
such power or right to be exercised by the Participant so as thereby to
anticipate, pledge, mortgage or encumber such Participant's Account or any part
thereof, and any attempt of a Participant so to exercise said power in violation
of this provision shall be of no force and effect and shall be disregarded by
the Employer.

This section shall not prevent the Employer from exercising, in its discretion,
any of the applicable powers and options granted to it upon the occurrence of an
Event of Maturity, as such powers may be conferred upon it by any applicable
provision hereof.


                                   SECTION 8

                           AMENDMENT AND TERMINATION

                                      -11-

<PAGE>
 
The Principal Sponsor reserves the power to amend the Plan Statement or
terminate the Plan prior to a Change in Control.  No such amendment of the Plan
Statement or termination of the Plan, however, shall reduce a Participant's
Account earned as of the date of such amendment unless the Participant so
affected consents in writing to the amendment.  After a Change in Control, the
Plan cannot be amended or terminated (as applied to Participants who are
Participants on the date of the Change in Control) unless:

     (a)       all Accounts of all Participants as of the date of the Change in
               Control have been paid, or

     (b)       eighty percent (80%) of all the Participants as of the date of
               the Change in Control give written consent to such amendment or
               termination.


                                   SECTION 9

                    DETERMINATIONS -- RULES AND REGULATIONS

9.1.  DETERMINATIONS.  The Principal Sponsor shall make such determinations as
may be required from time to time in the administration of the Plan.  The
Principal Sponsor shall have the discretionary authority and responsibility to
interpret and construe the Plan Statement and to determine all factual and legal
questions under the Plan, including but not limited to the entitlement of
Participants and Beneficiaries, and the amounts of their respective interests.
Each interested party may act and rely upon all information reported to them
hereunder and need not inquire into the accuracy thereof, nor be charged with
any notice to the contrary.

9.2.  RULES AND REGULATIONS.  Any rule not in conflict or at variance with the
provisions hereof may be adopted by the Principal Sponsor.

9.3.  METHOD OF EXECUTING INSTRUMENTS.  Information to be supplied or written
notices to be made or consents to be given by the Principal Sponsor pursuant to
any provision of this Plan Statement may be signed in the name of the Principal
Sponsor by any officer who has been authorized to make such certification or to
give such notices or consents.

9.4.  CLAIMS PROCEDURE.  The claims procedure set forth in this Section 9.4
shall be the exclusive procedure for the disposition of claims for benefits
arising under the Plan until such time as a Change in Control occurs.

      9.4.1.   ORIGINAL CLAIM.  Any employee, former employee or beneficiary of
such employee or former employee may, if he or she so desires, file with the
Principal Sponsor a written claim for benefits under the Plan.  Within ninety
(90) days after the filing of such a claim, the Principal Sponsor shall notify
the claimant in writing whether the claim is upheld or denied in whole or in
part or shall furnish the claimant a written notice describing specific special
circumstances requiring a specified amount of additional time (but not more than
one hundred eighty days from the date the claim was filed) to reach a decision
on the claim.  If the claim is denied in whole or in part, the Principal Sponsor
shall state in writing:

      (a)      the specific reasons for the denial;

      (b)      the specific references to the pertinent provisions of this Plan
               Statement on which the denial is based;

      (c)      a description of any additional material or information necessary
               for the claimant to perfect the claim and an explanation of why
               such material or information is necessary; and

                                      -12-

<PAGE>
 
      (d)      an explanation of the claims review procedure set forth in this
               section.

      9.4.2.   CLAIMS REVIEW PROCEDURE.  Within sixty (60) days after receipt of
notice that the claim has been denied in whole or in part, the claimant may file
with the Principal Sponsor a written request for a review and may, in
conjunction therewith, submit written issues and comments.  Within sixty (60)
days after the filing of such a request for review, the Principal Sponsor shall
notify the claimant in writing whether, upon review, the claim was upheld or
denied in whole or in part or shall furnish the claimant a written notice
describing specific special circumstances requiring a specified amount of
additional time (but not more than one hundred twenty days from the date the
request for review was filed) to reach a decision on the request for review.

     9.4.3.  GENERAL RULES.

      (a)      No inquiry or question shall be deemed to be a claim or a request
               for a review of a denied claim unless made in accordance with the
               claims procedure. The Principal Sponsor may require that any
               claim for benefits and any request for a review of a denied claim
               be filed on forms to be furnished by the Principal Sponsor upon
               request.

      (b)      All decisions on claims and on requests for a review of denied
               claims shall be made by the Principal Sponsor.

      (c)      the Principal Sponsor may, in its discretion, hold one or more
               hearings on a claim or a request for a review of a denied claim.

      (d)      A claimant may be represented by a lawyer or other representative
               (at the claimant's own expense), but the Principal Sponsor
               reserves the right to require the claimant to furnish written
               authorization. A claimant's representative shall be entitled to
               copies of all notices given to the claimant.

      (e)      The decision of the Principal Sponsor on a claim and on a request
               for a review of a denied claim shall be served on the claimant in
               writing. If a decision or notice is not received by a claimant
               within the time specified, the claim or request for a review of a
               denied claim shall be deemed to have been denied.

      (f)      Prior to filing a claim or a request for a review of a denied
               claim, the claimant or his or her representative shall have a
               reasonable opportunity to review a copy of this Plan Statement
               and all other pertinent documents in the possession of the
               Principal Sponsor.

9.5.  INFORMATION FURNISHED BY PARTICIPANTS.  The Principal Sponsor shall not be
liable or responsible for any error in the computation of the Account of a
Participant resulting from any misstatement of fact made by the Participant,
directly or indirectly, to the Principal Sponsor, and used by it in determining
the Participant's Account.  The Principal Sponsor shall not be obligated or
required to increase the Account of such Participant which, on discovery of the
misstatement, is found to be understated as a result of such misstatement of the
Participant.  However, the Account of any Participant which are overstated by
reason of any such misstatement shall be reduced to the amount appropriate in
view of the truth.


                                   SECTION 10

                              PLAN ADMINISTRATION

                                      -13-

<PAGE>
 
10.1. EMPLOYER.

      10.1.1.  OFFICERS.  Except as hereinafter provided, functions generally
assigned to the Principal Sponsor shall be discharged by its officers or
delegated and allocated as provided herein.

      10.1.2.  CHIEF EXECUTIVE OFFICER.  Except as hereinafter provided, the
Chief Executive Officer of the Principal Sponsor may delegate or redelegate and
allocate and reallocate to one or more persons or to a committee of persons
jointly or severally, and whether or not such persons are directors, officers or
employees, such functions assigned to the Employer generally hereunder as the
Chief Executive Officer may from time to time deem advisable.

      10.1.3.  BOARD OF DIRECTORS.  Notwithstanding the foregoing, the
Organization Committee of the Board of Directors of the Principal Sponsor shall
have the exclusive authority, which may not be delegated, to act for the
Principal Sponsor to amend this Plan Statement, to terminate this Plan, and to
determine eligibility to participate in the Plan under Section 2.

10.2. CONFLICT OF INTEREST.  If any officer or employee of the Employer, or any
member of the Organization Committee of the Board of Directors of the Employer
to whom authority has been delegated or redelegated hereunder shall also be a
Participant in the Plan, such Participant shall have no authority as such
officer, employee or member with respect to any matter specially affecting such
Participant's individual interest hereunder or the interest of a person superior
to him or her in the organization (as distinguished from the interests of all
Participants and Beneficiaries or a broad class of Participants and
Beneficiaries), all such authority being reserved exclusively to the other
officers, employees or members as the case may be, to the exclusion of such
Participant, and such Participant shall act only in such Participant's
individual capacity in connection with any such matter.

10.3. ADMINISTRATOR.  FIRST BANK SYSTEM, INC. shall be the administrator for
purposes of section 3(16)(A) of the Employee Retirement Income Security Act of
1974.

10.4. SERVICE OF PROCESS.  In the absence of any designation to the contrary by
the Employer, the Secretary of FIRST BANK SYSTEM, INC. is designated as the
appropriate and exclusive agent for the receipt of service of process directed
to the Plan in any legal proceeding, including arbitration, involving the Plan.


                                  SECTION 11

                                  DISCLAIMERS

11.1. TERM OF EMPLOYMENT.  Neither the terms of this Plan Statement nor the
benefits hereunder nor the continuance thereof shall be a term of the employment
of any employee.  The Employer shall not be obliged to continue the Plan.  The
terms of this Plan Statement shall not give any employee the right to be
retained in the employment of the Employer.

11.2. SOURCE OF PAYMENT.  Neither the Employer nor any of its officers nor any
member of its Organization Committee of the Board of Directors in any way secure
or guarantee the payment of any benefit or amount which may become due and
payable hereunder to any Participant or to any Beneficiary or to any creditor of
a Participant or a Beneficiary.  Each Participant, Beneficiary or other person
entitled at any time to payments hereunder shall look solely to the assets of
the Employer for such payments or to the Accounts distributed to any Participant
or Beneficiary, as the case may be, for such payments.  In each case where
Accounts shall have been distributed to a former Participant or a Beneficiary or
to the person or any one of a group of persons entitled jointly to the receipt
thereof and which purports to cover in full the benefit hereunder, such former
Participant or Beneficiary, or such person or persons, as the 

                                      -14-

<PAGE>
 
case may be, shall have no further right or interest in the other assets of the
Employer. Neither the Employer nor any of its officers nor any member of its
Board of Directors shall be under any liability or responsibility for failure to
effect any of the objectives or purposes of the Plan by reason of the insolvency
of the Employer.

11.3. DELEGATION.  The Employer and its officers and the members of its Board of
Directors shall not be liable for an act or omission of another person with
regard to a responsibility that has been allocated to or delegated to such other
person pursuant to the terms of this Plan Statement or pursuant to procedures
set forth in this Plan Statement.


_________________, 1991                       FIRST BANK SYSTEM, INC.


                                              By ______________________________

                                                 Its __________________________

                                      -15-



<PAGE>
 
                                                                     EXHIBIT 10E
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN

I.   PURPOSE OF PLAN

     The purpose of the First Bank System ("FBS") Annual Incentive Plan ("Plan")
     is to:
          *  Focus attention on both near-term performance results and long-term
             strategic objectives;
          *  Emphasize financial and strategic business unit performance and
             incorporate relative performance and discretion into the evaluation
             process; and
          *  Strengthen the link between performance and pay by building
             significant risk (and potential return) into the award opportunity.

II.  ELIGIBILITY FOR PARTICIPATION

     A.   Participation in this Plan generally is limited to employees in
          positions which either control or directly influence key company or
          business unit resources. Participants are not required to be in
          managerial positions. Ongoing participation in this Plan is at the
          discretion of FBS executive management.

     B.   Participation in this Plan is subject to approval by respective group
          and business unit executives and the Chairman, President and Chief
          Executive Officer, First Bank System or the Executive Vice President,
          Human Resources on his behalf. Newly hired or transferred employees,
          or employees promoted to qualifying positions will become
 eligible for
          participation at the discretion of FBS executive management.

     C.   Participants are ineligible for participation in any other FBS
          incentive, bonus, or other variable pay plan, unless so authorized by
          the Chairman, President and Chief Executive Officer, First Bank System
          or the Executive Vice President, Human Resources on his behalf.

III.   BASIS OF AWARDS

     A.   Performance objectives for each Participant are established at the
          beginning of the Plan year. Each Participant's performance objectives
          should be documented for review and approval through the respective
          group executive level, and may also be reviewed and approved by the
          Chairman, President and Chief Executive Officer, First Bank System or
          the Executive Vice President, Human Resources on his behalf.

          When establishing individual objectives, managers should ensure that
          performance standards and criteria are compatible with those
          established in the FBS Executive Incentive Plan. Consideration should
          be given to annual financial performance objectives for the group or
          business unit and discretionary criteria which may include

                                       1

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN

          quantitative and qualitative measures, key initiatives, and/or
          individual performance expectations.

                                       2

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN

     B.   The Plan has no preestablished objective categories, weightings, or
          formulas. However, it is recommended that discretionary criteria and
          objectives be established in the areas of "Growth", "Profitability",
          "Risk" and overall "Management." At year-end, the profitability of FBS
          and the group or business unit will define the range of award
          opportunity. A discretionary assessment of individual performance
          against financial and strategic measures will determine the amount, if
          any, actually paid to each Participant.

     C.   The provisions of the Plan are subject to periodic review and possible
          change throughout the Plan year with the approval of the Chairman,
          President and Chief Executive Officer, First Bank System or the
          Executive Vice President, Human Resources on his behalf.

IV.    AWARD PAYMENTS

     A.   Target awards are expressed as a percentage of the Participant's
          November 30 annualized base salary. Although target award percentages
          are established for Participants based on grade level, Participants
          are not entitled to payouts solely by virtue of their participation in
          the Plan. Actual award amounts, if any, will be based on FBS, group
          and business unit performance and FBS executive management's
          discretionary evaluation of individual performance results. Target
          awards by grade level are as follows:


<TABLE>
<CAPTION>
                                         Annual
                     Grade Level     Target Award*
                  ---------------  -----------------   
                  <S>              <C>
                     23-24                 70%
                     21-22                 50%
                     19-20                 45%
                     17-18                 40% 
</TABLE>


            * As a percentage of November 30 annualized base salary

          There is no preestablished limit on the amount that may be paid to a
          Participant.

     B.   Target awards for individuals who become eligible for participation
          during the Plan year will be based on their November 30 annualized
          base salary, prorated by the number of full calendar months of actual
          Plan participation during the Plan year.

     C.   If a Participant's target award opportunity changes due to promotion
          or position reevaluation, the Plan year November 30 annualized based
          salary will be used to 

                                       3

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN


          determine the target award. The percentage used to calculate the
          target award will be prorated to reflect the target percentage prior
          to the change plus the target percentage after the change (e.g., seven
          months at 40% and five months at 45%). In evaluating the performance
          of Participants who change jobs during the Plan year, the length of
          time and performance results in each position will be considered.

     D.   Awards are determined on an annual basis and paid during the first
          quarter of the following year. Payment is made by direct deposit to
          the Participant's checking account or by check if the Participant does
          not have a checking account with FBS. Applicable withholdings are
          deducted from the payment. Awards are considered earned by the
          Participant on the date of actual distribution.

     E.   The Chairman, President and Chief Executive Officer, First Bank System
          or the Executive Vice President, Human Resources on his behalf
          approves all award recommendations prior to submission for payment.
          Individual award payments may be adjusted, at the discretion of the
          Chairman, President and Chief Executive Officer or the Executive Vice
          President, Human Resources on his behalf, to reflect the impact of any
          event which distorts actual results achieved. Any and all awards are
          paid at the discretion of FBS executive management.

V.   CHANGES IN EMPLOYMENT STATUS

     A.   If a Participant dies, becomes disabled (as defined by FBS Short-Term
          or Long-Term Disability Plan provision), retires (as defined by FBS
          Personnel Retirement Account provisions), or is on a leave of absence
          (as defined in the FBS Employee Handbook), he/she may be eligible for
          an award based on a year-end discretionary evaluation of performance
          results through the last date of active employment in the Plan-
          eligible position prorated by the number of full calendar months of
          the Participant's active employment in the Plan-eligible position.

     B.   In the event of death, the award payment (if any) will be issued in
          the name of the deceased and either deposited in the deceased's
          checking account (if open) or forwarded to the estate.

     C.   Participants who transfer within the company or out of eligible
          positions may be eligible for prorated awards based on tenure in the
          qualifying position, overall performance level, actual results
          attained, management discretion, and the approval of the Chairman,
          President and Chief Executive Officer, First Bank System or the
          Executive Vice President, FBS Human Resources on his behalf.

                                       4

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN


     D.   Under most circumstances, Participants who voluntarily or
          involuntarily terminate their employment with FBS prior to the date of
          actual payment will receive no award. Any exceptions require the
          approval of the Chairman, President and Chief Executive Officer, First
          Bank System or the Executive Vice President, FBS Human Resources on
          his behalf.

     E.   If a Participant's employment is involuntarily terminated for reasons
          other than position elimination, no award will be paid.

     F.   Generally, awards are determined and paid according to the provisions
          in Sections III and IV of this Plan document. Any exceptions require
          the approval of the Chairman, President and Chief Executive Officer,
          First Bank System or the Executive Vice President, FBS Human Resources
          on his behalf.

VI.    ETHICAL AND LEGAL STANDARDS

     A.   Participants are required to be familiar with the FBS Code of Ethics
          and comply with the letter and spirit of its provisions at all times.

     B.   Particular emphasis is placed on policies prohibiting:
             * Any internal communication of confidential customer information
               between FBS lending and FBS investment functions;
             * Trading in or recommending the purchase or sale of certain
               securities based on "material inside information" about FBS or a
               customer;
             * Accepting or giving gifts or favors above a nominal value;
             * Potential conflicts of interest relative to fiduciary
               appointment, legacy under wills or trusts, lending relationships,
               participation in public affairs and directorships;
             * Arrangements with competitors that set or control prices, rates,
               trade practices, or marketing policies; and/or
             * Conditional agreements with customers--for example, conditioning
               the sale of goods or services on their purchasing additional FBS
               goods and services.

     C.   In addition, a Participant shall not pay, offer to pay, assign or give
          any part of his/her compensation or any other money to any agent,
          customer, or representative of the customer or any other person as an
          inducement or reward for assistance in making a sale. Moreover, no
          rights under this Plan shall be assignable or subject to any pledge or
          encumbrance of any nature.

                                       5

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN

     D.   If a Participant fails to comply with the FBS code of Ethics or the
          ethical and legal provisions included in Section VI of this Plan
          document, his/her award may be deferred, reduced, or denied at the
          discretion of FBS management.

                                       6

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN


VII. ADOPTION AND ADMINISTRATION

     A.   This Plan was approved by the Chairman, President and Chief Executive
          Officer, First Bank System or the Executive Vice President, Human
          Resources on his behalf. This Plan is effective commencing January 1,
          1997 and continuing until terminated or otherwise amended. In the
          event of Plan amendment or termination, written notification including
          a revised Plan (when appropriate) will be provided to Plan
          Participants as soon as practicable following the effective date of
          such change.

     B.   General authority for Plan administration is held by the Chairman,
          President and Chief Executive Officer, First Bank System or the
          Executive Vice President, Human Resources on his behalf.
          Responsibility for on-going Plan administration rests with FBS group
          executives.

     C.   Any exceptions to the provisions in this Plan require approval of the
          Chairman, President and Chief Executive Officer, First Bank System or
          the Executive Vice President, Human Resources on his behalf. They have
          sole authority to interpret the terms of this Plan.

     D.   This Plan supersedes all prior variable pay plans. No agreements or
          understandings will modify this Plan unless they are in writing and
          approved by the Chairman, President and Chief Executive Officer, First
          Bank System or the Executive Vice President, Human Resources on his
          behalf. This Plan is reviewed annually to determine the
          appropriateness of future continuation.

     E.   The Chairman, President and Chief Executive Officer, First Bank System
          or the Executive Vice President, Human Resources on his behalf,
          reserves the right to amend this Plan, in whole or in part, including
          termination of such Plan at any time. Such amendments may preclude or
          alter the amount or timing of any payments or all awards.

     F.   Participation in this Plan does not create any contract rights in the
          Participant, constitute a contract of employment nor a contractual
          agreement of payment, and shall not affect the right of FBS to
          discharge, transfer, or change the position of a Participant. The Plan
          shall not be construed to limit or prevent FBS from adopting or
          changing, from time to time, any rules, standards, or procedures
          affecting a Participant's employment with FBS or any FBS affiliate,
          including those which affect award payments.

                                       7

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             ANNUAL INCENTIVE PLAN


     G.   If any provision of this Plan is found to be illegal, invalid or
          unenforceable under present or future laws, that provision shall be
          severed from the Plan. If such a provision is severed, this Plan shall
          be construed and enforced as if the severed provision had never been a
          part of it and the remaining provisions of the Plan shall remain in
          full force and effect and shall not be affected by the severed
          provision or by its severance from this Plan. In place of any severed
          position, there shall be added automatically as part of this Plan a
          provision as similar in terms to the severed provision as may be
          possible and be legal, valid, and enforceable.

                                       8



<PAGE>
 
                                                                     EXHIBIT 10F

                                COMPOSITE COPY


                            FIRST BANK SYSTEM, INC.
                             INDEPENDENT DIRECTOR
                       RETIREMENT AND DEATH BENEFIT PLAN
                              (1991 RESTATEMENT)


                        First Effective January 1, 1987
                As Amended and Restated Effective May 15, 1991


                                      AND

                                 As Amended By

                 The FIRST AMENDMENT Adopted February 15, 1995
                         But Effective January 1, 1995

                  The SECOND AMENDMENT Adopted July 17, 1996
                         But Effective January 1, 1996

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             INDEPENDENT DIRECTOR
                       RETIREMENT AND DEATH BENEFIT PLAN
                              (1991 RESTATEMENT)


                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                            PAGE
<S>                                                                         <C>
SECTION 1.  INTRODUCTION...................................................    1

          1.1.      Restatement of Plan
          1.2.      Definitions
                    1.2.1.    Accrued Benefit
                    1.2.2.    Beneficiary
                    1.2.3.    Change in Control
                    1.2.4.    Director
                    1.2.5.    Director Service
                    1.2.6.    FBS
                    1.2.7.    Plan
                    1.2.8.    Plan Statement
                    1.2.9.    Present Value
                    1.2.10.   Prior Plan Statement
                    +
                    1.2.12.   Supplemental Retirement Pension
                    1.2.13.   Termination of Service
          1.3.      Rules of Interpretation

SECTION 2.  ELIGIBILITY....................................................    5

SECTION 3.  SUPPLEMENTAL RETIREMENT BENEFITS...............................    5

          3.1.      Supplemental Retirement Pension
                    3.1.1.    When Available
                    3.1.2.    Amount
                    3.1.3.    Form of Pension
          3.2.      Change in Control
          3.3.      Facility of Payment

SECTION 4.  DEATH BENEFITS.................................................    7

          4.1.      Death Before Benefit Commencement
                    4.1.1.    When Available
                    4.1.2.    Amount
                    4.1.3.    Form of Benefit
          4.2.      Death After Benefit Commencement
          4.3.      Designation
 of Beneficiaries
                    4.3.1.    Right To Designate
                    4.3.2.    Failure of Designation
                    4.3.3.    Disclaimers by Beneficiaries
                    4.3.4.    Definitions
                    4.3.5.    Special Rules
                    4.3.6.    No Spousal Rights
</TABLE>
 

                                      -i-

<PAGE>
 

<TABLE> 
<S>                                                                          <C>
SECTION 5.  FUNDING OF PLAN................................................   9 
                                                                                
          5.1.      Unfunded Agreement                                          
          5.2.      Spendthrift Provision                                       
                                                                                
SECTION 6.  AMENDMENT AND TERMINATION......................................  10 
                                                                                
SECTION 7.  DETERMINATIONS -- RULES AND REGULATIONS........................  10 
                                                                                
          7.1.      Determinations                                              
          7.2.      Rules and Regulations                                       
          7.3.      Method of Executing Instruments                             
          7.4.      Information Furnished by Directors                          
                                                                                
SECTION 8.  PLAN ADMINISTRATION............................................  11 
                                                                                
          8.1.      FBS                                                         
          8.2.      Conflict of Interest                                        
                                                                                
SECTION 9.  DISCLAIMERS....................................................  11
</TABLE>
 

                                     -ii-

<PAGE>
 
                            FIRST BANK SYSTEM, INC.
                             INDEPENDENT DIRECTOR
                       RETIREMENT AND DEATH BENEFIT PLAN
                              (1991 RESTATEMENT)


                                   SECTION 1

                                 INTRODUCTION

1.1.  RESTATEMENT OF PLAN.  Effective February 18, 1987, FIRST BANK SYSTEM,
INC., a Delaware corporation (hereinafter sometimes referred to as "FBS"),
adopted the "First Bank System, Inc. Independent Director retirement and Death
Benefit Plan" for the purpose of establishing a supplemental retirement and
death benefit plan for the benefit of certain eligible members of its Board of
Directors (hereinafter referred to as the "Plan").  FBS reserved the right to
amend and terminate that Prior Plan Statement from time to time.  FBS now
desires to exercise that reserved power of amendment by the adoption of this
Plan Statement effective as of May 15,1991.

1.2.  DEFINITIONS.  When used herein with initial capital letters, the following
words have the following meanings:

      1.2.1.   ACCRUED BENEFIT -- the aggregate amount determined for the
Director as of a specified date equal to:

      (a)      the annualized amount of the base director retainer (exclusive of
               committee attendance and similar extra fees) in effect on the
               date on which occurs the earlier of: (i) the Director's
               Termination of Service, or (ii) the Director's death; multiplied
               by

      (b)      the number of full years, and fractions of years, of the
               Director's Director Service (not to exceed ten years).

For this purpose, fractions of years shall be recorded in twelfths (1/12) and
one-twelfth of a year of Director Service shall be credited only for each full
calendar month of Director Service.

      1.2.2.   BENEFICIARY -- a person designated by a Director (or
automatically by operation of this Plan Statement) to receive all or a part of
the Director's benefit in the event of the Director's death prior to full
distribution thereof.  A person so designated shall not be considered a
Beneficiary until the death of the Director.

      1.2.3.   CHANGE IN CONTROL -- any of the following events:

      (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 Act of
               1934, as amended (the "Exchange Act"), whether or not FBS 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 FBS or any "person" (as
               such term is used in Sections 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 FBS representing 20% or
               more of the combined voting power of FBS's then outstanding
               securities; provided, however, that notwithstanding the
               foregoing, no Change in

<PAGE>
 
               Control shall be deemed to have occurred for purposes of this
               Agreement in the event that twenty percent (20%) or more of the
               total voting capital stock of FBS then issued and outstanding is
               owned by

               (i)    FBS, any subsidiary of FBS or any employee benefit plan of
                      FBS or of any subsidiary of FBS 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
                      (i) is referred to herein as a "FBS Entity") or

               (ii)   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 FBS with the
                      Investors (the terms "Affiliates", "Permitted Transferee"
                      and "Persons" shall have the meanings given to them in the
                      Stock Purchase Agreement); or

      (c)      the announcement of a tender offer by any person or entity (other
               than an FBS Entity) for 20% or more of FBS'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 FBS; or

      (d)      the Continuing Directors (as hereinafter defined) cease to
               constitute a majority of FBS's Board of Directors; or

      (e)      the shareholders of FBS approve

               (i)    any consolidation or merger of FBS in which FBS is not the
                      continuing or surviving corporation or pursuant to which
                      shares of FBS stock would be converted into cash,
                      securities or other property, other than a merger of FBS
                      in which shareholders immediately prior to the merger have
                      the same proportionate ownership of stock of the surviving
                      corporation immediately after the merger;

               (ii)   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 FBS; or

               (iii)  any plan of liquidation or dissolution of FBS; or

      (f)      the majority of the members of the Organization Committee
               determines in its sole and absolute discretion that there has
               been a Change in Control of FBS.

For this purpose, "Continuing Director" shall mean any person who is a member of
the Board of Directors of FBS, 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

      (i)      was a member of the Board of Directors on the date of this
               Agreement as 

                                      -2-

<PAGE>
 
               first written above or

      (ii)     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 this purpose, "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 FBS representing 20% or more of the combined voting
power of FBS's then outstanding securities, but shall not include the Investors
or any FBS Entity; and "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange
Act. FBS shall determine the date on which a Change in Control has occurred.

      1.2.4.   DIRECTOR -- an individual serving on the Board of Directors of
FBS who is not at the same time a common law employee of FBS or any of its
subsidiary corporations.

================================================================================
                                      SECOND AMENDMENT-EFFECTIVE JANUARY 1, 1996

      1.2.5.   DIRECTOR SERVICE -- a measure of a Director's service as a
Director (stated as a number of months) which is equal to the total completed
months of the individual's service as a Director (irrespective of any
Termination of Service and subsequent reentry into service as a Director);
subject, however, to the following:

      (a)      PRE-EFFECTIVE SERVICE. Director Service shall be credited for any
               period of service completed before January 1, 1991, as if this
               Plan Statement were then in effect.

      (b)      SUBSIDIARY SERVICE. In the case of a Director who has performed
               at least one (1) month of actual Director Service, Director
               Service shall be credited for services performed as a member of
               the board of directors of any corporation which is an eighty
               percent (80%) or greater subsidiary of FBS (while such
               corporation was at least an eighty percent subsidiary of FBS) as
               if such service were performed as a Director for FBS.

      (c)      ACQUIRED ENTITIES SERVICE. In the case of a Director who has
               performed at least one (1) month of actual Director Service,
               Director Service shall be credited for pre-acquisition services
               performed as a member of the board of directors of any
               corporation if not less than ninety-five percent (95%) of its
               capital stock of that corporation is directly or indirectly
               acquired by FBS as if such pre-acquisition services were
               performed as a Director for FBS; provided, however, that such
               service shall be credited only if the Director agrees to have
               offset from benefits due under this Plan the value of benefits
               attributable such service in a fair and equitable manner as
               determined by the Organization Committee of the Board of
               Directors.

      (d)      ADVISORY BOARDS SERVICE. In the case of a Director who has
               performed at least one (1) month of actual Director Service,
               Director Service shall be credited for services performed as a
               member of an advisory board of any subsidiary described in (b)
               above or any acquired entity described in (c) above as if such
               service were performed as a Director for FBS; provided, however,
               that such service shall be credited only if the Director agrees
               to have offset from benefits due under this Plan the value of
               benefits 

                                      -3-

<PAGE>
 
               attributable such service in a fair and equitable manner as
               determined by the Organization Committee of the Board of
               Directors.

     (e)       EXCLUDED SERVICE. Director Service shall not be credited for any
               period of service during which the Director is a common law
               employee of FBS or any of its subsidiary corporations or acquired
               entities.
================================================================================

      1.2.6.   FBS -- FIRST BANK SYSTEM, INC., a Delaware corporation.

      1.2.7.   PLAN -- the supplemental retirement and death benefit program
maintained by FBS for the Board of Directors eligible to participate therein, as
first set forth in the Prior Plan Statement effective February 18, 1987, and as
amended and restated in the Plan Statement.  (As used herein, "Plan" does not
refer to the documents pursuant to which the Plan is maintained.  Those
documents are referred to herein as the "Prior Plan Statement" and the "Plan
Statement.")  The Plan shall be referred to as the "FIRST BANK SYSTEM, INC.
INDEPENDENT DIRECTOR RETIREMENT AND DEATH BENEFIT PLAN."

      1.2.8.   PLAN STATEMENT -- this document entitled "FIRST BANK SYSTEM, INC.
INDEPENDENT DIRECTOR RETIREMENT AND DEATH BENEFIT PLAN (1991 Restatement)," as
adopted by FBS effective as of May 15, 1991 as the same may be amended from time
to time thereafter.

      1.2.9.   PRESENT VALUE -- the actuarially equivalent single sum value of
the unpaid installments of the Supplemental Retirement Pension determined as of
a specified date assuming:

      (a)      that the installments would have commenced on the earliest date
               when the installments benefit could have commenced; and

      (b)      the interest rate used by the Pension Benefit Guaranty
               Corporation to value annuities (for participants who are the same
               age) in the event of plan terminations occurring on the first day
               of the calendar year in which occurs the date as of which the
               actuarially equivalent single sum is being determined.

The number of unpaid installments of the Supplemental Retirement Pension shall
never be greater than ten (10) minus the number of annual installments already
paid and shall never be less than zero (0).

      1.2.10.  PRIOR PLAN STATEMENT -- the series of documents pursuant to which
this Plan was established as of January 1, 1987, and operated thereafter until
May 15, 1991.

      +

      1.2.12.  SUPPLEMENTAL RETIREMENT PENSION -- the pension benefit described
in Section 3.1.

      1.2.13.  TERMINATION OF SERVICE -- the termination of the Director's
service as a Director for any of the following reasons:

      (a)      The Director retires as required under the terms of the FBS
               Directors' Retirement Policy then in effect.

      (b)      The Director resigns voluntarily.

      (c)      The Director is not reelected to a succeeding term as a member of
               the Board of Directors when his or her term expires.

                                      -4-

<PAGE>
 
      (d)      The Director terminates after he or she is determined by FBS to
               be disabled and is, therefore, unable to fulfill the duties of a
               member of the Board of Directors because of that disability,
               however caused.

When necessary, FBS shall determine the date of the Termination of Service.  The
death of the Director is not a Termination of Service.

1.3.  RULES OF INTERPRETATION.  An individual shall be considered to have
attained a given age on his birthday for that age (and not on the day before).
The birthday of any individual born on a February 29 shall be deemed to be
February 28 in any year that is not a leap year.  Notwithstanding any other
provision of this Plan Statement or any election or designation made under the
Plan, any individual who feloniously and intentionally kills a Director or
Beneficiary shall be deemed for all purposes of this Plan and all elections and
designations made under this Plan to have died before such Director or
Beneficiary.  A final judgment of conviction of felonious and intentional
killing is conclusive for the purposes of this section.  In the absence of a
conviction of felonious and intentional killing, FBS shall determine whether the
killing was felonious and intentional for the purposes of this section.
Whenever appropriate, words used herein in the singular may be read in the
plural, or words used herein in the plural may be read in the singular; the
masculine may include the feminine; and the words "hereof," "herein" or
"hereunder" or other similar compounds of the word "here" shall mean and refer
to this entire Plan Statement and not to any particular paragraph or section of
this Plan Statement unless the context clearly indicates to the contrary.  The
titles given to the various sections of this Plan Statement are inserted for
convenience of reference only and are not part of this Plan Statement, and they
shall not be considered in determining the purpose, meaning or intent of any
provision hereof.  Any reference in this Plan Statement to a statute or
regulation shall be considered also to mean and refer to any subsequent
amendment or replacement of that statute or regulation.  This document has been
executed and delivered in the State of Minnesota and has been drawn in
conformity to the laws of that State and shall be construed and enforced in
accordance with the laws of the State of Minnesota.


                                   SECTION 2

                                  ELIGIBILITY

Each Director shall be a participant in the Plan as of the first day the
Director first becomes a Director.  A Director shall not be required to enroll
as a condition of participation in this Plan.


                                   SECTION 3

                        SUPPLEMENTAL RETIREMENT BENEFITS

3.1.  SUPPLEMENTAL RETIREMENT PENSION.

      3.1.1.   WHEN AVAILABLE.  Upon the later of:

      (i)      the Director's Termination of Service, or

      (ii)     the Director's attainment of age sixty-five (65) years,

the Director who has completed at least sixty (60) months of Director Service
shall receive a Supplemental Retirement Pension.  (No benefits shall be payable
under this Plan to, or with respect to, any Director who dies or has a
Termination of Service before completing sixty months of Director Service.)

                                      -5-

<PAGE>
 
      3.1.2.   AMOUNT.  The annual amount of the Director's Supplemental
Retirement Pension shall be the amount of the Director's Accrued Benefit
determined as of the date of the Director's Termination of Service divided by
ten (10).

================================================================================
                                      SECOND AMENDMENT-EFFECTIVE JANUARY 1, 1996

      3.1.3.   FORM OF PENSION.  The form of the Supplemental Retirement Pension
is an annuity payable annually on or about each May 1.

      (a)      If, at the Director's Termination of Service, the Director was at
               least age sixty-seven (67) years or had completed one hundred
               forty-four (144) months of Director Service (i.e., the Director
               is entitled to a lifetime annuity),

               (i)  the first payment shall be due on the May 1 coincident with
                    or next following the later of the Director's Termination of
                    Service, or the Director's attainment of age sixty-seven
                    (67) years, and

               (ii) the last payment to the Director shall be due on the May 1
                    immediately preceding the date on which the Director dies.

      (b)      In all other cases,

               (i)  the first payment shall be due on the May 1 coincident with
                    or next following the later of the Director's Termination of
                    Service or the Director's attainment of age sixty-five (65)
                    years, and

               (ii) the last payment to the Director shall be due on the date on
                    which the tenth annual payment is made or, if earlier, on
                    the May 1 immediately preceding the date on which the
                    Director dies.

Provided, however, if the payment of the Supplemental Retirement Pension is on
account of the disability of the Director, the first payment shall be due on the
May 1 coincident with or next following the Director's Termination of Service.
================================================================================

3.2.  CHANGE IN CONTROL.  For the purpose of this Section 3, all Directors shall
be deemed to have had a Termination of Service on the date of a Change in
Control if they have not previously had a Termination of Service.
Notwithstanding anything to the contrary in this Plan Statement, in the event of
a Change in Control, the remaining benefits payable hereunder (whether payable
to Directors who are deemed to have had a Termination of Service, payable to
Directors who have previously had a Termination of Service, without regard to
whether payment of their benefits has begun, or payable with respect to
Directors who have previously died) shall be commuted to their Present Value as
of the date of such Change in Control.  The commuted benefits shall be paid in a
single lump sum payment within thirty (30) days following the date of such
Change in Control.

3.3.  FACILITY OF PAYMENT.  In case of the legal disability of a Director
entitled to receive any distribution under the Plan, payment shall be made, if
the Board of Directors shall be advised of the existence of such condition:

      (a)      to the duly appointed guardian, conservator or other legal
               representative of such Director, or

      (b)      to a person or institution entrusted with the care or maintenance
               of the incompetent or disabled Director, provided such person or
               institution has

                                      -6-

<PAGE>
 
               satisfied the Board of Directors that the payment will be used
               for the best interest and assist in the care of such Director,
               and provided further, that no prior claim for said payment has
               been made by a duly appointed guardian, conservator or other
               legal representative of such Director.

Any payment made in accordance with the foregoing provisions of this section
shall constitute a complete discharge of any liability or obligation of FBS and
the Board of Directors.


                                   SECTION 4

                                 DEATH BENEFITS

4.1.  DEATH BEFORE BENEFIT COMMENCEMENT.

      4.1.1.   WHEN AVAILABLE.  If, upon the death of a Director who:

      (a)      has not begun to receive any payment of any supplemental
               retirement benefits under this Plan;

      +

      (b)      has completed sixty (60) months of Director Service;

a death benefit shall be payable to the Director's Beneficiary.  (If any benefit
is payable under this Section 4.1, no benefit shall be payable under Section
4.2.)

      4.1.2.   AMOUNT.  The amount of the death benefit payment shall be the
Present Value of an annuity of ten (10) annual payments each payment of which is
equal to one-tenth (1/10) of the Director's Accrued Benefit.  The Accrued
Benefit and the Present Value shall be determined as of the date of the
Director's death.  The annuity will be deemed to commence on the May 1
coincident with or next following the Director's death.

      4.1.3.   FORM OF BENEFIT.  The death benefit payable hereunder shall be
paid in a single lump sum payment as soon as administratively practicable
following the Director's death.

4.2.  DEATH AFTER BENEFIT COMMENCEMENT.  The only death benefits which shall be
payable under the Plan upon the death of a Director after payment of the
Supplemental Retirement Pension has commenced to the Director shall be:

      (a)      the payment of any unpaid installments of the Supplemental
               Retirement Pension to the Director's Beneficiary at the same
               times and in the same amount as would have been paid if the
               Director had not died; or

      (b)      if the Director has so elected in writing prior to the date of
               his or her Termination of Service, the payment to the Beneficiary
               in a single lump sum of the Present Value of any unpaid
               installments of the Supplemental Retirement Pension to the
               Director's Beneficiary as soon as administratively practicable
               after the Director's death.

For this purpose, the number of any unpaid installments of the Supplemental
Retirement Pension and the Present Value of such unpaid installments shall be
determined as of the date of the Director's death.  The number of unpaid
installments of the Supplemental Retirement Pension shall never be greater than
ten (10) minus the number of annual installments paid before the Director's
death and shall never be less than zero (0).

                                      -7-

<PAGE>
 
4.3.  DESIGNATION OF BENEFICIARIES.

      4.3.1.   RIGHT TO DESIGNATE.  Each Director may designate, upon forms to
be furnished by and filed with FBS, one or more primary Beneficiaries or
alternative Beneficiaries to receive all or a specified part of such Director's
benefit in the event of such Director's death.  The Director may change or
revoke any such designation from time to time without notice to or consent from
any Beneficiary.  No such designation, change or revocation shall be effective
unless executed by the Director and received by FBS during the Director's
lifetime.

      4.3.2.   FAILURE OF DESIGNATION.  If a Director:

     (a)       fails to designate a Beneficiary,

     (b)       designates a Beneficiary and thereafter revokes such designation
               without naming another Beneficiary, or

     (c)       designates one or more Beneficiaries and all such Beneficiaries
               so designated fail to survive the Director,

such Director's benefit, or the part thereof as to which such Director's
designation fails, as the case may be, shall be payable to the first class of
the following classes of automatic Beneficiaries with a member surviving the
Director and (except in the case of surviving issue) in equal shares if there is
more than one member in such class surviving the Director:

          Director's surviving spouse
          Director's surviving issue per stirpes and not per capita
          Director's surviving parents
          Director's surviving brothers and sisters
          Representative of Director's estate.

      4.3.3.   DISCLAIMERS BY BENEFICIARIES.  A Beneficiary entitled to a
distribution of all or a portion of a deceased Director's benefit may disclaim
an interest therein subject to the following requirements.  To be eligible to
disclaim, a Beneficiary must be a natural person, must not have received a
distribution of all or any portion of the benefit at the time such disclaimer is
executed and delivered, and must have attained at least age twenty-one (21)
years as of the date of the Director's death.  Any disclaimer must be in writing
and must be executed personally by the Beneficiary before a notary public.  A
disclaimer shall state that the Beneficiary's entire interest in the
undistributed benefit is disclaimed or shall specify what portion thereof is
disclaimed.  To be effective, duplicate original executed copies of the
disclaimer must be both executed and actually delivered to FBS after the date of
the Director's death but not later than one hundred eighty (180) days after the
date of the Director's death.  A disclaimer shall be irrevocable when delivered
to FBS.  A disclaimer shall be considered to be delivered to FBS only when
actually received by FBS.  FBS shall be the sole judge of the content,
interpretation and validity of a purported disclaimer.  Upon the filing of a
valid disclaimer, the Beneficiary shall be considered not to have survived the
Director as to the interest disclaimed.  A disclaimer by a Beneficiary shall not
be considered to be a transfer of an interest in violation of the provisions of
Section 5.  No other form of attempted disclaimer shall be recognized by FBS.

      4.3.4.   DEFINITIONS.  When used herein and, unless the Director has
otherwise specified in the Director's Beneficiary designation, when used in a
Beneficiary designation, "issue" means all persons who are lineal descendants of
the person whose issue are referred to, including legally adopted descendants
and their descendants but not including illegitimate descendants and their
descendants; "child" means an issue of the first generation; "per stirpes" means
in equal shares among living children of the person whose issue are referred to
and the issue (taken collectively) of each deceased child of such person, with
such issue taking by right of representation of such deceased child; and
"survive" and "surviving" mean living after the death of the Director.

                                      -8-

<PAGE>
 
      4.3.5.   SPECIAL RULES.  Unless the Director has otherwise specified in
the Director's Beneficiary designation, the following rules shall apply:

      (a)      If there is not sufficient evidence that a Beneficiary was living
               at the time of the death of the Director, it shall be deemed that
               the Beneficiary was not living at the time of the death of the
               Director.

      (b)      The automatic Beneficiaries specified in Section 4.3.2 and the
               Beneficiaries designated by the Director shall become fixed at
               the time of the Director's death so that, if a Beneficiary
               survives the Director but dies before the receipt of all payments
               due such Beneficiary hereunder, such remaining payments shall be
               payable to the representative of such Beneficiary's estate.

      (c)      If the Director designates as a Beneficiary the person who is the
               Director's spouse on the date of the designation, either by name
               or by relationship, or both, the dissolution, annulment or other
               legal termination of the marriage between the Director and such
               person shall automatically revoke such designation. (The
               foregoing shall not prevent the Director from designating a
               former spouse as a Beneficiary on a form executed by the Director
               and received by FBS after the date of the legal termination of
               the marriage between the Director and such former spouse, and
               during the Director's lifetime.)

      (d)      Any designation of a nonspouse Beneficiary by name that is
               accompanied by a description of relationship to the Director
               shall be given effect without regard to whether the relationship
               to the Director exists either then or at the Director's death.

      (e)      Any designation of a Beneficiary only by statement of
               relationship to the Director shall be effective only to designate
               the person or persons standing in such relationship to the
               Director at the Director's death.

FBS shall be the sole judge of the content, interpretation and validity of a
purported Beneficiary designation.

      4.3.6.   NO SPOUSAL RIGHTS.  No spouse or surviving spouse of a Director
and no person designated to be a Beneficiary shall have any rights or interest
in the benefits accumulated under this Plan including, but not limited to, the
right to be the sole Beneficiary or to consent to the designation of
Beneficiaries (or the changing of designated Beneficiaries) by the Director.


                                   SECTION 5

                                FUNDING OF PLAN

5.1.  UNFUNDED AGREEMENT.  The obligation of FBS to make payments under this
Plan constitutes only the unsecured (but legally enforceable) promise of FBS to
make such payments.  The Director shall have no lien, prior claim or other
security interest in any property of FBS.  FBS is not required to establish or
maintain any fund, trust or account for the purpose of funding or paying the
benefits promised under this Plan.  If such a fund is established, the property
therein shall remain the sole and exclusive property of FBS.  FBS will pay the
cost of this Plan out of its general assets.

5.2.  SPENDTHRIFT PROVISION.  No Director or Beneficiary shall have any
transmissible interest in any benefit under this Plan nor shall any Director or
Beneficiary have any power to 

                                      -9-

<PAGE>
 
anticipate, alienate, dispose of, pledge or encumber the same while in the
possession or control of FBS, nor shall FBS recognize any assignment thereof,
either in whole or in part, nor shall any benefit be subject to attachment,
garnishment, execution following judgment or other legal process while in the
possession or control of FBS.

The power to designate Beneficiaries to receive the benefit of a Director in the
event of such Director's death shall not permit or be construed to permit such
power or right to be exercised by the Director so as thereby to anticipate,
pledge, mortgage or encumber such Director's benefit or any part thereof, and
any attempt of a Director so to exercise said power in violation of this
provision shall be of no force and effect and shall be disregarded by FBS.


                                   SECTION 6

                           AMENDMENT AND TERMINATION

FBS reserves the power to amend or terminate the Plan prior to a Change in
Control.  No amendment of the Plan, however, shall reduce a Director's benefits
earned as of the date of such amendment unless the Director so affected consents
in writing to the amendment.  Benefits earned as of the date of an amendment
shall be determined as if the Director had a Termination of Service on that
date.  After a Change in Control, the Plan cannot be amended or terminated (as
applied to Directors who are Directors on the date of the Change in Control)
unless:

     (a)       all benefits earned by all Directors as of the date of the Change
               in Control have been paid, or

     (b)       a majority of the Continuing Directors (as defined in Section
               1.2.3) as of the date of the Change in Control give written
               consent to such amendment or termination.

The foregoing restrictions and limitations on the ability to amend and terminate
the Plan shall not be effective, however, if, within ten (10) business days
following the date of the Change in Control, a majority of the members of the
Organization Committee of the Board of Directors determines in its sole
discretion that such restrictions and limitations shall not apply with respect
to such Change in Control.


                                   SECTION 7

                    DETERMINATIONS -- RULES AND REGULATIONS

7.1.  DETERMINATIONS.  FBS shall make such determinations as may be required
from time to time in the administration of the Plan.  FBS shall have the
authority and responsibility to interpret and construe the Plan Statement and to
determine all factual and legal questions under the Plan, including but not
limited to the entitlement of Directors and Beneficiaries, and the amounts of
their respective interests.  Each interested party may act and rely upon all
information reported to them hereunder and need not inquire into the accuracy
thereof, nor be charged with any notice to the contrary.

7.2.  RULES AND REGULATIONS.  Any rule not in conflict or at variance with the
provisions hereof may be adopted by FBS.

7.3.  METHOD OF EXECUTING INSTRUMENTS.  Information to be supplied or written
notices to be made or consents to be given by FBS pursuant to any provision of
this Plan Statement may be signed in the name of FBS by any officer or director
thereof who has been authorized to make such certification or to give such
notices or consents.

                                      -10-

<PAGE>
 
7.4.  INFORMATION FURNISHED BY DIRECTORS.  FBS shall not be liable or
responsible for any error in the computation of the benefit of a Director
resulting from any misstatement of fact made by the Director, directly or
indirectly, to FBS, and used by it in determining the Director's benefit.  FBS
shall not be obligated or required to increase the benefit of such Director
which, on discovery of the misstatement, is found to be understated as a result
of such misstatement of the Director.  However, the benefit of any Director
which are overstated by reason of any such misstatement shall be reduced to the
amount appropriate in view of the truth.


                                   SECTION 8

                              PLAN ADMINISTRATION

8.1.  FBS.  Except as hereinafter provided, functions generally assigned to FBS
shall be discharged by the Organization Committee of the Board of Directors or
delegated and allocated as provided herein.

8.2.  CONFLICT OF INTEREST.  If any member of the Board of Directors of FBS to
whom authority has been delegated or redelegated hereunder shall have an benefit
in the Plan, such Director shall have no authority as such Director with respect
to any matter specially affecting such Director's individual interest hereunder
(as distinguished from the interests of all Directors and Beneficiaries or a
broad class of Directors and Beneficiaries), all such authority being reserved
exclusively to the other Directors, to the exclusion of such Director, and such
Director shall act only in such Director's individual capacity in connection
with any such matter.


                                   SECTION 9

                                  DISCLAIMERS

Neither FBS nor any of its officers nor any member of its Board of Directors in
any way secure or guarantee the payment of any benefit or amount which may
become due and payable hereunder to any Director or to any Beneficiary or to any
creditor of a Director or a Beneficiary.  Each Director, Beneficiary or other
person entitled at any time to payments hereunder shall look solely to the
assets of FBS for such payments or to the benefit distributed to any Director or
Beneficiary, as the case may be, for such payments.  In each case where benefit
shall have been distributed to a former Director or a Beneficiary or to the
person or any one of a group of persons entitled jointly to the receipt thereof
and which purports to cover in full the benefit hereunder, such former Director
or Beneficiary, or such person or persons, as the case may be, shall have no
further right or interest in the other assets of FBS.  Neither FBS nor any of
its officers nor any member of its Board of Directors shall be under any
liability or responsibility for failure to effect any of the objectives or
purposes of the Plan by reason of the insolvency of FBS.  FBS and its officers
and the members of its Board of Directors shall not be liable for an act or
omission of another person with regard to a responsibility that has been
allocated to or delegated to such other person pursuant to the terms of this
Plan Statement or pursuant to procedures set forth in this Plan Statement.

                                      -11-



<PAGE>
 
                                                                     EXHIBIT 10J

                                    [DATE]



[NAME]
[TITLE]
First Bank System, Inc.
601 Second Avenue South
Minneapolis, MN  55402

Dear [NAME]:

First Bank System, Inc. recognizes that your contribution to the growth and
success of the Company (as defined herein) has been substantial and desires to
assure the Company of your continued employment.  In this connection, the Board
of Directors (as defined herein) recognizes that, as is the case with many
publicly held companies, the possibility of a change in control may exist and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders.

The Board of Directors has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of the Company.

In order to induce you to remain in the employ of the Company, the Company
agrees that you shall receive the severance benefits set
 forth in this letter
agreement ("Agreement") in the event your employment with the Company is
terminated under the circumstances described below:

<PAGE>
 
1.   Term of Agreement.  This Agreement will commence on the date hereof and
     -----------------                                                      
     shall continue in effect until the third anniversary of the date hereof;
     and, commencing on the first anniversary of the date hereof and on each
     anniversary thereafter, the term of this Agreement shall automatically be
     extended for one additional year unless, not later than 90 days prior to
     any such date of automatic extension of this Agreement, the Company shall
     have given notice that the Agreement will not be so extended; provided,
     however, if a Change in Control shall have occurred during the original or
     any extended term of this Agreement, this Agreement shall in all events
     continue in effect for a period of at least 24 months following a Change in
     Control; provided, further, that if you become entitled to payments in
     accordance with Sections 4 and 5 of this Agreement (or assert a claim for
     such payments) during the term of this Agreement as heretofore described,
     this Agreement will thereafter survive indefinitely to ensure that you
     receive all payments and benefits to which you are entitled pursuant to the
     terms hereof.

2.   Definitions.  When the following terms are used in this Agreement with
     -----------                                                           
     initial capital letters, they shall have the following meanings.

     2.1.  "Acquiring Person" shall mean any Person 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 the Company representing 20% or more of the
     combined voting power of the Company's then outstanding securities, but
     shall not include any Company Entity.

     2.2.  "Affiliate" shall have the meaning ascribed to such term in Rule 12b-
     2 promulgated under the Exchange Act.

<PAGE>
 
     2.3.  "Announcement Date" shall mean the date of the public announcement of
     the transaction, event or course of action that results in a Change in
     Control.

     2.4.  "Anticipatory Termination" shall mean a Termination of Employment as
     a result of an act or event that occurs prior to a Change in Control and
     after the Announcement Date and either (i) at the request of any other
     party to a transaction, or any Person associated with the event or course
     of events (other than the Company or a Company Entity), that results in a
     Change in Control, or (ii) otherwise in contemplation of a Change in
     Control.

     2.5.  "Associate" shall have the meaning ascribed to such term in Rule
           12b-2 promulgated under the Exchange Act.

     2.6.  "Beneficial Owner" shall have the meaning ascribed to such term in
     Rule 13d-3 promulgated under the Exchange Act.

     2.7.  "Board of Directors" shall mean the board of directors of the
     Company.

     2.8.  "Cause" shall mean (i) the willful and continued failure by you to
     substantially perform your duties with the Company (other than any such
     failure resulting from your disability or from termination by you for Good
     Reason), after a written demand for substantial performance is delivered to
     you that specifically identifies the manner in which the Company believes
     that you have not substantially performed your duties, and you have failed
     to resume substantial performance of your duties on a continuous basis
     within 14 days of receiving such demand, (ii) in the case of a Full Change
     in Control, the willful engaging by you in conduct which is demonstrably
     and materially injurious to the Company, monetarily or otherwise; and in
     the case of a Partial Change in Control, gross and willful misconduct
     during the course of employment, including but not limited to, wrongful
     appropriation of funds 

<PAGE>
 
     of the Company or its Affiliates or the commission of a gross misdemeanor
     or felony, or (iii) your conviction of a felony which impairs your ability
     substantially to perform your duties with the Company. For purposes of this
     definition, no act, or failure to act, on your part shall be deemed
     "willful" unless done, or omitted to be done, by you not in good faith and
     without reasonable belief that your action or omission was in the best
     interest of the Company.

     2.9.   "Change in Control" shall mean a Full Change in Control or a Partial
     Change in Control.

     2.10.  "Code" shall mean the Internal Revenue Code of 1986, as amended.

     2.11.  "Company" shall mean First Bank System, Inc., a Delaware
     corporation, or any successor thereto pursuant to Section 8 hereof
     (including a Resulting Corporation) or by operation of law.

     2.12.  "Company Entity" shall mean the Company, any subsidiary of the
     Company or any employee benefit plan of the Company or of any subsidiary of
     the Company or any entity holding shares of the voting capital stock of the
     Company organized, appointed or established for, or pursuant to the terms
     of, any such plan.

     2.13.  "Continuing Director" shall mean any person who is a member of the
     Board of Directors, while such person is a member of the Board of
     Directors, who is not an Acquiring Person or an Affiliate or Associate 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 as of the date of this Agreement 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 has been approved in
     advance by the Continuing 

<PAGE>
 
     Directors; provided that any director designated by or on behalf of a
     Person who has entered into an agreement with the Company (or who is
     contemplating entering into such an agreement) to effect a consolidation or
     merger of the Company or a Company Entity, or other reorganization, with or
     into one or more entities which are not Company Entities, and any director
     that serves in connection with the act of the Board of Directors of
     increasing the number of directors and filling vacancies in connection
     with, or in contemplation of, any such transaction, shall not be deemed to
     have received such advance approval for initial nomination or election, and
     any such director shall not be deemed to be a Continuing Director;
     provided, further, that any such director shall subsequently become a
     Continuing Director at such time as a new term of office as a director is
     approved by the Company's shareholders at an annual meeting of shareholders
     occurring subsequent to the completion of any such transaction (and
     excluding any annual meeting at which the shareholders approve any such
     transaction); and, provided, further, that in the case of a Permitted
     Transaction, any such director shall not become a Continuing Director until
     the later of (i) the end of the three-year period following consummation of
     such Permitted Transaction or (ii) such time as a new term of office as a
     director is approved by the Company's shareholders at an annual meeting of
     shareholders occurring subsequent to the completion of such Permitted
     Transaction.

     2.14.  "Date of Termination" shall mean the date specified in the Notice of
     Termination (except in the case of your death, in which case Date of
     Termination shall be the date of death); provided, however, that if your
     employment is terminated by the Company, in the case of a Full Change in
     Control the date specified in the Notice of Termination shall be at least
     30 days from the date the Notice of Termination is given to you, except in
     the case of termination for Cause which may be a shorter period, and if
     your employment is terminated by you for Good Reason, the date specified in
     the Notice of Termination shall not be more than 30 days from the date the

<PAGE>
 
     Notice of Termination is given to the Company.  Notwithstanding the
     foregoing, in the event of an Anticipatory Termination, the Date of
     Termination shall be deemed to be the date of the Change in Control.  If
     Notice of Termination is given by you for Good Reason (Partial), and prior
     to the Date of Termination the Company terminates your employment for
     Cause, the Date of Termination shall be the date specified in the Notice of
     Termination provided by the Company in connection with the termination for
     Cause.  If Notice of Termination is given by you for Good Reason (Full),
     the Company shall not be entitled to terminate your employment for Cause
     following such Notice of Termination.

     2.15.  "Exchange Act" shall mean the Securities Exchange Act of 1934, as
     amended.

     2.16.  "Full Change In Control" shall mean:

            (A) 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 the Company or any Person that a Person (other than
     a Company Entity) has become the Beneficial Owner, directly or indirectly,
     of securities of the Company (x) representing 20% or more, but not more
     than 50%, of the combined voting power of the Company's then outstanding
     securities unless the transaction resulting in such ownership has been
     approved in advance by the Continuing Directors or (y) representing more
     than 50% of the combined voting power of the Company's then outstanding
     securities (regardless of any approval by the Continuing Directors); or

            (B) the Continuing Directors cease to constitute a majority of the
     Board of Directors of the Company or the Resulting Corporation, except in
     accordance with the terms of a Permitted Transaction and except as a result
     of the death, retirement or disability of one or more Continuing Directors

<PAGE>
 
     (unless any such death, retirement or disability occurs following a
     Permitted Transaction and any vacancies created thereby are not filled in
     accordance with the terms of the written agreement governing such Permitted
     Transaction); or

            (C) any sale, lease, exchange or other transfer (in one transaction
     or a series of related transactions) of all or substantially all of the
     consolidated assets of the Company and its subsidiaries or the adoption of
     any plan of liquidation or dissolution of the Company.

     2.17.  "Good Reason" shall mean either Good Reason (Full) or Good Reason
     (Partial).

     2.18.  "Good Reason (Full)" shall mean the occurrence of any one or more of
     the following events, without your express written consent, within 24
     months following a Full Change in Control (or prior to a Full Change in
     Control in the event of an Anticipatory Termination):

            (A) the assignment to you of any duties inconsistent in any respect
     with your position (including status, offices, titles, and reporting
     requirements), authorities, duties, or other responsibilities as in effect
     immediately prior to the Announcement Date or any other action of the
     Company which results in a diminishment in such position, authority,
     duties, or responsibilities, other than an insubstantial and inadvertent
     action which is remedied by the Company promptly after receipt of notice
     thereof given by you;

            (B) a reduction by the Company in your base salary as in effect
     immediately prior to the Announcement Date (or as in effect following the
     Announcement Date, if greater);

<PAGE>
 
          (C) the failure by the Company to provide you total cash compensation
     (consisting of base salary plus cash bonus) with respect to any fiscal year
     or portion thereof at least equal to the greatest of (i) actual total cash
     compensation paid to you with respect to the prior fiscal year, (ii) the
     average annual total cash compensation paid to you with respect to the
     prior two fiscal years or (iii) if you were not an employee for the entire
     prior fiscal year, your base salary plus target bonus as in effect
     immediately prior to the Announcement Date (or as in effect following the
     Announcement Date, if greater); (total cash compensation "with respect to
     any fiscal year or portion thereof" shall be determined at the time the
     bonus with respect to such fiscal year or portion thereof is determined,
     even if such bonus is determined after the 24-month period following a Full
     Change in Control, and the bonus portion of cash compensation for services
     rendered in any portion of a fiscal year within 24 months following a Full
     Change in Control shall be determined by reference to the pro-rata portion
     of any annual bonus for such fiscal year);

          (D) the Company's requiring you to be based at a location that is both
     outside the same metropolitan area of, and in excess of 30 miles from, the
     location of your principal office immediately prior to the Announcement
     Date;

          (E) the failure by the Company to provide employee benefit plans,
     programs, policies and practices (including, without limitation, retirement
     plans and medical, dental, life and disability insurance coverage) to you
     and your family and dependents (if applicable) that provide substantially
     similar benefits, in terms of aggregate monetary value, to you and your
     family and dependents (if applicable) at substantially similar costs to you
     as the benefits provided by those plans, programs, policies and practices
     in effect immediately prior to the Announcement Date (or as in effect
     following the Announcement Date, if greater);

<PAGE>
 
          (F) the failure of the Company to obtain a satisfactory agreement from
     the Resulting Corporation or any other successor to the Company to assume
     and agree to perform this Agreement, as contemplated in Section 8 hereof;
     and

          (G) any purported termination by the Company of your employment that
     is not effected pursuant to a Notice of Termination.

     2.19. "Good Reason (Partial)" shall mean the occurrence of any one or more
     of the following events, without your express written consent, within 24
     months following a Partial Change in Control (or prior to a Partial Change
     in Control in the event of an Anticipatory Termination):

          (A) a reduction by the Company in your base salary as in effect
     immediately prior to the Announcement Date;

          (B) a reduction by the Company in your annual target bonus or maximum
     bonus award opportunities as in effect immediately prior to the
     Announcement Date;

          (C) the Company's requiring you to be based at a location that is both
     outside the same metropolitan area of, and in excess of 30 miles from, the
     location of your principal office immediately prior to the Announcement
     Date; and

          (D) any purported termination by the Company of your employment that
     is not effected pursuant to a Notice of Termination.

     2.20.  "Notice of Termination" shall mean a written notice which sets forth
     the Date of Termination and, in reasonable detail, the facts and
     circumstances claimed to provide a basis, if any, for termination of your
     employment.

<PAGE>
 
     2.21.  "Partial Change in Control" shall mean:

            (A) a consolidation or merger of the Company or a Company Entity, or
     other reorganization, with or into one or more entities which are not
     Company Entities, as a result of which less than 60% of the outstanding
     voting securities of the Resulting Corporation are, or are to be, owned by
     former shareholders of the Company as determined immediately prior to
     consummation of such transaction (excluding voting securities of the
     Resulting Corporation owned, or to be owned, by such shareholders by reason
     of their ownership prior to such transaction of securities of any entity
     other than the Company) and as a result of which the Continuing Directors
     constitute (i) more than 50% of the Board of Directors of the Resulting
     Corporation or (ii) exactly 50% of the Board of Directors of the Resulting
     Corporation if the transaction resulting in such event is a Permitted
     Transaction; 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 the Company or any Person that a Person (other than
     a Company Entity) has become the Beneficial Owner, directly or indirectly,
     of securities of the Company representing 20% or more, but not more than
     50%, of the combined voting power of the Company's then outstanding
     securities if the transaction resulting in such ownership has been approved
     in advance by the Continuing Directors.

     2.22.  "Permitted Transaction" shall mean a transaction in which, pursuant
     to a written agreement between the Company and all Persons who have entered
     into an agreement with the Company to effect a transaction described in
     paragraph (A)of the definition of Partial Change in Control, it is agreed
     that (w) the Chief Executive Officer of the Company immediately prior to
     the consummation of such transaction shall be the Chief Executive Officer
     of the 

<PAGE>
 
     Resulting Corporation for not less than three years following consummation
     of such transaction, (x) upon termination of service of any Continuing
     Director for any reason, including upon death, disability or retirement,
     prior to the expiration of such director's term during such three-year
     period, the vacancy thereby created shall be filled by a nominee selected
     solely by the Continuing Directors, (y) upon expiration of the term of any
     such director during such three-year period, the nominee to succeed such
     director shall be selected solely by the Continuing Directors and (z) the
     parties will take other appropriate steps to ensure that the Board of
     Directors of the Resulting Corporation will be evenly divided between
     Continuing Directors and all directors designated by other parties to the
     transaction during such three-year period.

     2.23.  "Person" shall have the meaning ascribed to such term as such term
     is used in Sections 13(d) and 14(d) of the Exchange Act.

     2.24.  "Resulting Corporation" shall mean the surviving corporation in any
     consolidation, merger or other reorganization to which the Company is a
     party; provided, however, that if the surviving corporation in any such
     transaction is a subsidiary of another corporation, then the Resulting
     Corporation is the ultimate parent corporation of such surviving
     corporation; and provided, further, that in the event of a consolidation,
     merger or other reorganization to which a Company Entity (other than the
     Company) is a party, then the Company shall be deemed the Resulting
     Corporation.

     2.25.  "Termination of Employment" shall mean termination of your
     employment (a) by the Company for any reason other than Cause or (b) by you
     for Good Reason; but shall not include termination by reason of your death.
     If Notice of Termination is given by you for Good Reason (Partial), and
     prior to the Date of Termination the Company terminates your employment for
     Cause, the termination shall be considered a termination by 

<PAGE>
 
     the Company for Cause and shall not be considered a Termination of
     Employment.

3.   Termination Procedures.
     ---------------------- 

     3.1.  Notice of Termination.  Any purported termination of your employment
           ---------------------                                               
     by the Company or you (including a Termination of Employment) (other than
     by reason of your death) within 24 months following a Change in Control,
     and any Anticipatory Termination by the Company or you, shall be
     communicated by a Notice of Termination in accordance with Section 9
     hereof.  No purported termination by the Company of your employment in such
     24-month period (or prior thereto in the event of an Anticipatory
     Termination) shall be effective if it is not pursuant to a Notice of
     Termination.  Failure by you to provide Notice of Termination shall not
     limit any of your rights under this Agreement except to the extent the
     Company can demonstrate that it suffered actual damages by reason of such
     failure.

     3.2.  Participant's Termination Rights.  Your right to terminate your
           --------------------------------                               
     employment pursuant to the terms of this Agreement shall not be affected by
     your incapacity due to physical or mental illness.  Your continued
     employment shall not constitute consent to, or a waiver of rights with
     respect to, any circumstance constituting Good Reason pursuant to the terms
     of this Agreement.  Termination of your employment for Good Reason shall
     constitute termination for Good Reason for all purposes of this Agreement,
     notwithstanding that you may also thereby be deemed to have "retired" under
     any applicable retirement programs of the Company.

4.   Qualification for Severance Benefits.  Except as otherwise provided in this
     ------------------------------------                                       
     Section 4, to qualify for a severance payment from the Company or the
     Resulting Corporation under this Agreement, a Change in Control must 

<PAGE>
 
     occur and you must (a) be an employee of the Company or its Affiliates
     immediately prior to the time of such Change in Control (or, in the case of
     an Anticipatory Termination, immediately prior to the Announcement Date),
     (b) have a Termination of Employment that occurs within 24 months following
     such Change in Control or have an Anticipatory Termination, and (c) execute
     an effective general release of all claims against the Company and its
     Affiliates in the form and manner prescribed by the Company.
     Notwithstanding the foregoing, you shall be deemed to have a Termination of
     Employment within 24 months following a Full Change in Control if the basis
     for Termination of Employment is Good Reason (Full) and if the reason that
     the Termination of Employment did not occur within such 24-month period is
     that cash compensation for services rendered in any portion of a fiscal
     year within 24 months following a Full Change in Control shall have been
     determined more than 24 months following a Full Change in Control;
     provided, that the Termination of Employment occurs within 10 days
     following determination of cash compensation for such fiscal year or
     portion thereof.  In the event that a Partial Change in Control is followed
     by a Full Change in Control, commencing on the date of the Full Change in
     Control, provisions in this Agreement relating to a Full Change in Control
     shall supersede provisions relating to a Partial Change in Control if you
     are employed by the Company or its Affiliates on the date of the Full
     Change in Control.  You shall not qualify for a severance payment from the
     Company or the Resulting Corporation under this Agreement if you have
     announced in writing, prior to the date the Company provides Notice of
     Termination to you, the intention to terminate employment or retire (other
     than pursuant to a Termination of Employment), provided, in the case of
     retirement, that any earlier termination by the Company or the Resulting
     Corporation does not result in the diminution of retirement benefits that
     you would have received if such retirement had occurred on your intended
     retirement date.  Further, you shall not qualify for a severance payment
     from the Company or the Resulting Corporation under this Agreement if at
     least 30 days prior to the 

<PAGE>
 
     Announcement Date the Company has announced that the business, line of
     business, unit, staff group or other identifiable business group, whether
     or not a legal entity, or operations in any designated geographical area,
     for which you are at such time employed will be divested, sold, downsized
     or restructured by the Company and you are informed in writing, prior to
     the occurrence of the Change in Control, that your employment will
     terminate as a result of such divestiture, sale, downsizing or
     restructuring; provided, that determinations and interpretations with
     respect to this provision shall be in the sole discretion of the Company.

5.   Compensation Upon Termination.
     ----------------------------- 

     5.1.   Amounts.  Upon qualification for severance benefits pursuant to this
            -------                                                             
     Agreement, you shall be entitled to the benefits, to be funded from the
     general assets of the Company, provided below:

            (A) your full base salary through the Date of Termination at the
      rate in effect at the time Notice of Termination is given;

            (B) an amount equal to three times the sum of (i) your annual base
     salary in effect at the time Notice of Termination is given or immediately
     prior to the date of the Change in Control, whichever is greater, plus (ii)
     the average actual incentive pay for the three fiscal years preceding the
     year in which the Announcement Date occurs, or, if you were not an employee
     of the Company for such three-year period, the average actual incentive pay
     for any prior full fiscal years, or, if you were not an employee of the
     Company for any such full fiscal year, your annual target bonus potential
     available at the time Notice of Termination is given or immediately prior
     to the date of the Change in Control, whichever is greater;

<PAGE>
 
          (C) for a 36-month period after the Date of Termination, the Company
     will arrange to provide you and your dependents (if applicable) with
     welfare benefits (including, without limitation, medical, dental, life, and
     individual disability insurance coverage), perquisites and other employee
     benefits that provide substantially similar benefits, in terms of aggregate
     monetary value, to you and your dependents (if applicable) at substantially
     similar costs to you as the welfare benefits, perquisites and other
     employee benefits (i) in effect immediately prior to the Change in Control
     (or as in effect following the Change in Control, if greater), in the case
     of a Full Change in Control, or (ii) that would have been provided to you
     from time to time if you had not had a Termination of Employment, in the
     case of a Partial Change in Control; but benefits otherwise receivable by
     you pursuant to this clause (C) shall be discontinued if you obtain full-
     time employment providing comparable welfare benefits during the 36-month
     period following such termination;
      
          (D) the full amount of any long-term cash incentive award for any plan
     periods then in progress to the extent not provided for in such plan or
     plans;
  
          (E) the year-to-date pro-rata amount of any annual cash incentive 
     award for any plan as in effect immediately prior to the Change in Control
     to the extent not provided for in such plan or plans;
     
          (F) credit for five (5) additional years of service under section
     1.2.2(c)(iii) of the First Bank System, Inc. Nonqualified Supplemental 
     Executive Retirement Plan (or any appropriate successor to such section
     and/or plan) for purposes of determining the additional years of service
     with which you will be credited in the formulation of your Accrued SERP
     benefit in that plan;

          (G) to the extent not otherwise provided in the Company's qualified or
     non-qualified retirement plans, three (3) additional years of accruals
     premised on the assumption that you had continued in service with the
     Company and 

<PAGE>
 
     had received remuneration in the amount determined in accordance with
     Section 5.1(B) above; and
     
           (H) individual outplacement counseling services.

     5.2.  Group Disability. The Company shall not be required to continue to
           ----------------                                                  
     provide group disability benefits following your Date of Termination other
     than with respect to benefits to which you became entitled prior to the
     Date of Termination and which are required to be paid following such Date
     of Termination in accordance with the terms of applicable disability plans
     or policies in effect prior to such Date of Termination.

     5.3.  Time and Form of Cash Payments.  The cash payments provided for in
           ------------------------------                                    
     Sections 5.1(A), (B), (D) and (E) above shall be made not later than 20
     days following the Date of Termination; provided, however, that if the
     amounts of such payments cannot be finally determined on or before such
     day, the Company shall pay to you on such day an estimate as determined in
     good faith by the Company of the minimum amount of such payments and shall
     pay the remainder of such payments (together with interest from the date of
     such estimated payment at the rate provided in Section 1274(b)(2)(B) of the
     Code) as soon as the amount thereof can be determined but in no event later
     than 45 days after the Date of Termination.  In the event that the amount
     of the estimated payment exceeds the amount subsequently determined to have
     been due, such excess shall constitute a loan by the Company to you payable
     no later than 30 days after demand by the Company (together with interest
     from the date of such estimated payment at the rate provided in Section
     1274(b)(2)(B) of the Code).

     5.4.  Legal Fees and Expenses.  The Company shall also pay to you any legal
           -----------------------                                              
     fees and expenses incurred by you (i) as a result of successful litigation
     against the Company for nonpayment of any benefit hereunder or (ii) in
     connection 

<PAGE>
 
     with any dispute with any Federal, state or local governmental agency with
     respect to benefits claimed under this Agreement. If you utilize
     arbitration to resolve any such dispute, the Company will pay any legal
     fees and expenses incurred by you in connection therewith.

     5.5.  No Mitigation.  You shall not be required to mitigate the amount of
           -------------                                                      
     any payment provided for in this Section 5 by seeking other employment or
     otherwise, nor shall the amount of any payment provided for in this Section
     5 be reduced by any compensation earned by you as the result of employment
     by another employer after the Date of Termination, or otherwise, except as
     set forth in Section 5.1(C) hereof.

6.   Additional Payments.  In the event you become entitled to payments under
     -------------------                                                     
     Section 5 of this Agreement, the Company shall cause its independent
     auditors promptly to review, at the Company'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
     the Company to you or for your 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 you 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 you of all taxes (including any interest or penalties
     imposed with respect to such taxes), including any Excise Tax, imposed upon
     the Gross-Up Payment, you 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, your tax rate shall be deemed to be the
     highest statutory marginal state and Federal tax rate (on a combined basis)
     (including your share of F.I.C.A. and Medicare taxes) then in effect.  If

<PAGE>
 
     no determination by the Company's auditors is made prior to the time a tax
     return reflecting the Total Payments is required to be filed by you, you
     will be entitled to receive a Gross-Up Payment calculated on the basis of
     the Total Payments reported by you 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 your tax return pursuant to this Section 6, you 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 the Company within 30 days of such determination.

7.   Nonexclusivity of Rights.    Nothing in this Agreement shall prevent or
     ------------------------                                               
     limit your continuing or future participation in any benefit, bonus,
     incentive, retirement or other plan or program provided by the Company and
     for which you may qualify, nor shall anything herein limit or reduce such
     rights as you may have under any other agreement with, or plan, program,
     policy or practice of, the Company.  Amounts which are vested benefits or
     which you are otherwise entitled to receive under any agreement with, or
     plan, program, policy or practice of, the Company (including, without
     limitation, the cash-out 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 you become entitled to
     benefits under this Agreement, you shall not be entitled to receive
     payments under any other severance pay plan or program sponsored or
     maintained by the Company or any of its Affiliates.

8.   Successors.
     ---------- 

          (A) The Company will require the Resulting Corporation or any other
     successor (whether direct or indirect, by purchase, merger, consolidation,
     or 

<PAGE>
 
     otherwise) to all or substantially all of the business and/or consolidated
     assets of the Company and its subsidiaries to expressly assume and agree to
     perform this Agreement in the same manner and to the same extent that the
     Company would be required to perform if no such succession had taken place.
     Failure of the Company to obtain such assumption and agreement prior to the
     effectiveness of any such succession shall entitle you to compensation from
     the Company in the same amount and on the same terms as you would be
     entitled under this Agreement if you met the qualification requirements set
     forth in Section 4, 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.

          (B) This Agreement shall inure to the benefit of and be enforceable by
     your personal or legal representatives, executors, administrators,
     successors, heirs, distributees, devisees, and legatees.  If you should die
     while any amount would still be payable to you hereunder if you had
     continued to live, all such amounts, unless otherwise provided herein,
     shall be paid in accordance with the terms of this Agreement, to your
     devisee, legatee or other designee or, if there is no such designee, to
     your estate or, if no estate, in accordance with applicable law.

9.   Notice.  For the purpose of this Agreement, notices and all other
     ------                                                           
     communications provided for in the Agreement shall be in writing and shall
     be deemed to have been duly given when delivered or mailed by United States
     registered mail, postage prepaid, addressed to the other party as follows:

          If to the Company, to:
          First Bank System, Inc.
          Attention:  Corporate Secretary
          First Bank Place
          601 Second Avenue South

<PAGE>
 
          Minneapolis, Minnesota  55402

          If to you, to:

          [NAME]
          First Bank System, Inc.
          601 Second Avenue South
          Minneapolis, MN  55402

     Either party to this Agreement may change its address for purposes of this
     Section 8 by giving 15 days' prior notice to the other party hereto.

10.  Miscellaneous.  No provision of this Agreement may be modified, waived or
     -------------                                                            
     discharged unless such waiver, modification or discharge is agreed to in
     writing and signed by you and such officer as may be specifically
     designated by the Board.  The validity, interpretation, construction, and
     performance of this Agreement shall be governed by the laws of the State of
     Minnesota.

11.  Validity.  The invalidity or unenforceability of any provision of this
     --------                                                              
     Agreement shall not affect the validity or enforceability of any other
     provision of this Agreement, which shall remain in full force and effect.

12.  Counterparts.  This Agreement may be executed in several counterparts, each
     ------------                                                               
     of which shall be deemed to be an original but all of which together will
     constitute one and the same instrument.

13.  Arbitration.  If you so elect, 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; provided, however, that you shall
     be entitled to seek specific performance of your right to be paid until the
     Date of Termination during the pendency of  any dispute or controversy
     arising under or in connection with 

<PAGE>
 
     this Agreement. If you do not elect arbitration, you may pursue any and all
     legal remedies available to you.

14.  Effective Date.  This Agreement shall become effective as of the date set
     --------------                                                           
     forth above.

15.  Employment.  This Agreement does not constitute a contract of employment or
     ----------                                                                 
     impose on the Company any obligation to retain you as an employee, to
     continue your current employment status or to change any employment
     policies of the Company.

<PAGE>
 
     If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter which
will then constitute our agreement on this subject.

Sincerely,

FIRST BANK SYSTEM, INC.


By__________________________ 
  Name:
  Title:



Agreed to this ___ day
of _____________, 199___
     


By__________________________ 
   
    Name:
    Title:



<PAGE>
 
                                                                     EXHIBIT 10K

                            FIRST BANK SYSTEM, INC.
                           1996 STOCK INCENTIVE PLAN
                     (AS AMENDED THROUGH JANUARY 15, 1997)
                                        

SECTION 1.  PURPOSE; EFFECT ON PRIOR PLANS.
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          (a)  Purpose.  The purpose of the First Bank System, Inc. 1996 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.  The Company hereby adopts these proposed
amendments and restatements of the 1991 Stock Incentive Plan and the 1994 Stock
Incentive Plan, subject to stockholder approval.  As so amended, restated,
established and approved, the Plan shall be known as the 1996 Stock Incentive
Plan.  All outstanding options issued, restricted stock issued and other awards
issued under other plans of the Company shall remain subject to the terms and
conditions of the plans under which
 they were issued, but shares of stock
relating to outstanding options, restricted stock or other awards under the 1991
Stock Incentive Plan and the 1994 Stock Incentive Plan are considered as shares
of stock subject to the Plan under Section 4 of the Plan.

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 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.

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          (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 two directors, each of whom is a "Non-Employee Director" within the
meaning of Rule 16b-3 (which term is defined in this paragraph for purposes of
the definition of "Committee" only and is not intended to define such term as
used elsewhere in the Plan). Each member of the Committee shall be an "outside
director" within the meaning of Section 162(m) of the Code.

          (f)  "Eligible Person" shall mean any employee, officer, director
(including any Non-Employee Director), consultant or independent contractor
providing services to the Company or any Affiliate who the Committee determines
to be an Eligible Person.

          (g)  "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(g), 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.

          (h)  "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.

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

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

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

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

          (m)  "Performance Award" shall mean any right granted under
Section 6(d) of the Plan.

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

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

          (p)  "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.

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

          (r)  "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 7(c) of the Plan.

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

SECTION 3.  ADMINISTRATION.

          The Plan shall be administered by the Committee; provided, however,
that Section 6(g) 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(g). Subject to the terms of the Plan and applicable law, and
except with respect to Section 6(g) 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; (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

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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.

SECTION 4.  SHARES AVAILABLE FOR AWARDS.

          (a)  Shares Available.  Subject to adjustment as provided in Section
7(c), the number of Shares available for granting Awards under the Plan shall be
17,000,000 (5,000,000 of which were previously authorized under the 1991 Stock
Incentive Plan, 5,000,000 of which were previously authorized under the 1994
Stock Incentive Plan and 7,000,000 of which will be authorized upon stockholder
approval of the Plan).  Not more than 1,000,000 of such Shares will be available
for grant of additional Awards of Restricted Stock following the effective date
of the Plan determined in accordance with Section 10 of the Plan.  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 of the Plan, shall again be
available for granting Awards under the Plan.

          (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)  Incentive Stock Options.  Notwithstanding the foregoing, the
number of Shares available for granting Incentive Stock Options under the Plan
shall not exceed 7,000,000, subject to adjustment as provided in the Plan and
Section 422 or 424 of the Code or any successor provisions.

          (d) 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 1,000,000 Shares, in the aggregate, in any calendar year beginning
with the year commencing January 1, 1996. The foregoing limitation specifically
includes the grant of any "performance-based" Awards within the meaning of
Section 162(m) of the Code.

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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.

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 

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     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 granted under this Plan or any other stock option plan of the
     Company. 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 

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     appropriate legend referring to the 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 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)   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(e) 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 Committee shall determine, the value of which
consideration, as established by the 

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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.

          (f)  General.  Except as otherwise specified with respect to Awards to
Non-Employee Directors pursuant to Section 6(g) 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.

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

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           (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(g) 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(g) 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.

          (g)  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(g).

          Each Non-Employee Director serving on the Company's Board of Directors
immediately prior to the 1996 Annual Meeting of Stockholders of the Company was
granted an Option to purchase 2,500 Shares (subject to adjustment pursuant to
Section 7(c) of the Plan) pursuant to the terms of the 1991 Stock Incentive
Plan. Each Non-Employee Director first elected or appointed to the Company's
Board of Directors after the 1996 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 7(c) of the
Plan). After the initial grant to each Non-Employee Director as set forth above
in this Section 6(g), 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
commencing with the 1996 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 1,500 Shares (subject to adjustment pursuant to Section 7(c)
of the Plan); provided, however, that commencing with the 1997 Annual Meeting of
Stockholders of the Company, such grant shall be a Non-Qualified Stock Option to
purchase 1,700 Shares (subject to adjustment pursuant to Section 7(c) of the
Plan).

          Each Non-Qualified Stock Option granted to a Non-Employee Director
pursuant to this Section 6(g) 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 

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and shall expire on the tenth anniversary of the date of grant, except as
provided below.

          Except as hereinafter provided, each Option granted pursuant to this
Section 6(g) (including those Options granted pursuant to Section 6(h) of the
1991 Stock Incentive Plan as provided therein) shall be deemed to include a
provision entitling the optionee to a further Non-Qualified Stock Option (a 
"Non-Employee Director Reload Option") in the event the optionee exercises such
an Option, in whole or in part, by surrendering other Shares in accordance with
this Section 6(g) (including any predecessor provision under the 1991 Stock
Incentive Plan) and the terms of the Option and/or when shares of the Company's
Common Stock are delivered or withheld as payment of an amount representing
income tax obligations in connection with the exercise of an option. Any such
Non-Employee Director Reload Option (i) shall be for a number of Shares equal to
the sum of (x) the number of Shares surrendered as part or all of the exercise
price of the Option to which it relates plus (y) the number of Shares, if any,
delivered or withheld as payment of an amount representing income tax
obligations in connection with the exercise of the Option to which it relates;
(ii) shall have an expiration date which is the same as the expiration date of
the Option to which it relates; (iii) shall have an exercise price equal to the
Fair Market Value of a Share on the date of exercise of the Option to which it
relates; and (iv) shall be exercisable in full as of the date of grant. A Non-
Employee Director Reload Option may be reloaded under the same terms, provided
that the original Option to which such series of Non-Employee Director Reload
Options relates may be reloaded a maximum of three times. Non-Employee Director
Reload Options shall only be granted to a Director during such Director's term
as a Non-Employee Director. Any such Non-Employee Director Reload Option shall
be subject to availability of sufficient shares for grant under the Plan. Shares
surrendered as part or all of the exercise price of the Option to which it
relates that have been owned by the optionee less than six months will not be
counted for purposes of determining the number of Shares that may be purchased
pursuant to a Non-Employee Director Reload Option.

          All grants of Non-Qualified Stock Options pursuant to this Section
6(g) 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.

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               (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 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 be a full recourse note and shall
     (A) be secured by the Shares to be delivered upon exercise of such Option,
     (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 for a Non-Employee Director to satisfy obligations
     under income tax laws in connection with an Option granted pursuant to this
     Section 6(g) (including any predecessor provision under the 1991 Stock
     Incentive Plan), such Director may (A) elect to have the Company withhold a
     portion of the Shares otherwise to be delivered upon exercise of such
     Option 
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     with a Fair Market Value equal to the amount of such taxes. (an "Election")
     or (B) deliver to the Company Shares other than Shares isssuable 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.

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,
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(g) 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)   Adjustments.  In the event that any dividend or other
distribution (whether in the form of cash, Shares, other 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 or other similar corporate
transaction or event affecting the Shares would be reasonably likely to result
in the diminution or enlargement of any of the benefits or potential benefits
intended to be made available under the Plan or under an Award (including,
without limitation, the benefits or potential benefits of provisions relating to
the term, vesting or exercisability of any Option, the availability of any
tandem stock appreciation rights 

                                       12

<PAGE>
 
or "reload" option rights, if any, contained in any Option Award, and any
"change in control" or similar provisions of any Award), the Committee (or, in
the case of grants under Section 6(g) of the Plan, the Board of Directors)
shall, in such manner as it shall deem equitable or appropriate in order to
prevent such diminution or enlargement of any such benefits or potential
benefits, 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)  Correction of Defects, Omissions and Inconsistencies.  The
Committee (or, in the case of grants under Section 6(g) 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.

          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.

SECTION 9.  GENERAL PROVISIONS.

          (a)  No Rights to Awards.  Except as otherwise provided in Section
6(g) 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.

                                       13

<PAGE>
 
          (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.

          (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(g) 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(g)
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.

                                       14

<PAGE>
 
          (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(g) 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.

          (k)  Section 16 Compliance.  The Plan is intended to comply in all
respects with Rule 16b-3 or any successor provision, as in effect from time to
time and in all events the Plan shall be construed in accordance with the
requirements of Rule 16b-3.  If any Plan provision does not comply with Rule
16b-3 as hereafter amended or interpreted, the provision shall be deemed
inoperative.  The Board of Directors, in its absolute discretion, may bifurcate
the Plan so as to restrict, limit or condition the use of any provision of the
Plan with respect to persons who are officers or directors subject to Section 16
of the Securities and Exchange Act of 1934, as amended, without so restricting,
limiting or conditioning the Plan with respect to other Participants.

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 10L

                             AMENDED AND RESTATED
                             EMPLOYMENT AGREEMENT


     THIS AGREEMENT, dated as of August 15, 1996, by and between First Bank
System, Inc., a Delaware corporation (as further defined in Section 8.13.11
hereof, "Employer"), and John F. Grundhofer ("Executive"), amending and
restating the Employment Agreement by and between Executive and Employer dated
as of January 18, 1995.

     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 

<PAGE>
 
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 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 

                                      -2-

<PAGE>
 
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.

          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

                                      -3-

<PAGE>
 
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 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.

                                      -4-

<PAGE>
 
          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 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 

                                      -5-

<PAGE>
 
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 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
$[10,000].

     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 

                                      -6-

<PAGE>
 
          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 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
          as of the Commencement Date; (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 the Resulting Corporation (as
          hereinafter defined) or any other 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; (vii) any purported termination by Employer of Executive's
          employment that is not effected pursuant to a Notice of Termination
          (as hereinafter defined); (viii) for the 24 month period following a
          Full Change in Control (as hereinafter defined) (or prior to a Full
          Change in Control in the event of an Anticipatory Termination (as
          hereinafter defined)), the failure by the Employer to provide
          Executive total cash compensation (consisting of base salary plus cash
          bonus) with respect to any fiscal year or portion thereof at least
          equal to the greater of (x) actual total cash compensation paid to
          Executive with respect to the prior fiscal year or (y) the average
          annual total cash compensation paid to Executive with respect to the
          prior two fiscal years (total cash compensation "with respect to any
          fiscal year or portion thereof" shall be determined at the time the
          bonus with respect to such fiscal year or portion thereof is
          determined, even if such bonus is determined after the 24-month period
          following a Full Change in

                                      -7-

<PAGE>
 
          Control, and the bonus portion of cash compensation for services
          rendered in any portion of a fiscal year within 24 months following a
          Full Change in Control shall be determined by reference to the pro-
          rata portion of any annual bonus for such fiscal year) and (vix)
          within 24 months following a Partial Change in Control (as hereinafter
          defined) (or prior to a Partial Change in Control in the event of an
          Anticipatory Termination), a reduction by Employer in Executive's
          annual target bonus or maximum bonus award opportunities as in effect
          in the prior fiscal year. 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, 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 

                                      -8-

<PAGE>
 
          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 or in the event of an Anticipatory Termination, 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 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 

                                      -9-

<PAGE>
 
          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 or in the event of an Anticipatory Termination)
          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 or in
          the event of an Anticipatory Termination, 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, (ix) in the event of termination within
          24 months following a Change in Control or in the event of an
          Anticipatory Termination, pay Executive the year-to-date pro-rata
          amount of any annual cash incentive award for any plan as in effect
          immediately prior to the Change in Control to the extent not provided
          for in such plan or plans, and (x) pay for individual outplacement
          counseling services to Executive up to a maximum of $60,000. Except as
          otherwise provided in clause (ix) of this Section 5.02(d), 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 or in the event of an Anticipatory Termination,
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 or with respect to the 36-month period after the
date of termination, or (B) in 

                                      -10-

<PAGE>
 
the event of termination at any time not within 24 months following a Change in
Control and that is not an Anticipatory Termination, 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 or in the event of an Anticipatory Termination, 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 December31 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 

                                      -11-

<PAGE>
 
days of such determination equal to an amount such that after payment by
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) (including Executive's share of
F.I.C.A. and Medicare taxes) 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 Employer'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 any other severance pay plan or program
sponsored or maintained by Employer or any of its Affiliates.

     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 

                                      -12-

<PAGE>
 
association or holding company thereof, in each case if such entity conducts
business in the State of Colorado, the State of Illinois, the State of Iowa, the
State of Kansas, the State of Minnesota, the State of Montana, the State of
Nebraska, the State of North Dakota, the State of South Dakota, the State of
Wisconsin, the State of Wyoming 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 

                                      -13-

<PAGE>
 
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 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 the Resulting Corporation or any other successor
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or consolidated assets of
Employer and its subsidiaries to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company 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.

                                      -14-

<PAGE>
 
          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 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 

                                      -15-

<PAGE>
 
          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 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.

                                      -16-

<PAGE>
 
          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, the following
               -----------------                                                
additional definitions shall apply:

     8.13.1.  "Acquiring Person" shall mean any Person who or which, together
     with all Affiliates and Associates of such person, is the Beneficial Owner,
     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 any Company Entity.

     8.13.2.  "Affiliate" shall have the meaning ascribed to such term in Rule
     12b-2 promulgated under the Exchange Act.

     8.13.3.  "Announcement Date" shall mean the date of the public announcement
     of the transaction, event or course of action that results in a Change in
     Control.

     8.13.4.  "Anticipatory Termination" shall mean a termination of employment
     pursuant to Section 5.01(d) or 5.01(e) hereof as a result of an act or
     event that occurs prior to a Change in Control and after the Announcement
     Date and either (i) at the request of any other party to a transaction, or
     any Person associated with the event or course of events (other than
     Employer or a Company Entity), that results in a Change in Control, or (ii)
     otherwise in contemplation of a Change in Control; provided, that no
     termination shall be deemed an Anticipatory Termination unless the Change
     in Control to which it relates actually occurs.

     8.13.5.  "Associate" shall have the meaning ascribed to such term in
     Rule 12b-2 promulgated under the Exchange Act.

     8.13.6.  "Beneficial Owner" shall have the meaning ascribed to such term in
     Rule 13d-3 promulgated under the Exchange Act.

     8.13.7.  "Board of Directors" shall mean the board of directors of
     Employer.

     8.13.8.  "Change in Control" shall mean a Full Change in Control or a
     Partial Change in Control.

     8.13.9.  "Company Entity" shall mean Employer, any subsidiary of Employer
     or any employee benefit plan of Employer or of any subsidiary of Employer
     or     

                                      -17-

<PAGE>
 
     any entity holding shares of the voting capital stock of Employer
     organized, appointed or established for, or pursuant to the terms of, any
     such plan.

     8.13.10.  "Continuing Director" shall mean any person who is a member of
     the Board of Directors, while such person is a member of the Board of
     Directors, who is not an Acquiring Person or an Affiliate or Associate 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 as of the date of this Agreement 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 has been approved in
     advance by the Continuing Directors; provided that any director designated
     by or on behalf of a Person who has entered into an agreement with Employer
     (or who is contemplating entering into such an agreement) to effect a
     consolidation or merger of Employer or a Company Entity, or other
     reorganization, with or into one or more entities which are not Company
     Entities, and any director that serves in connection with the act of the
     Board of Directors of increasing the number of directors and filling
     vacancies in connection with, or in contemplation of, any such transaction,
     shall not be deemed to have received such advance approval for initial
     nomination or election, and any such director shall not be deemed to be a
     Continuing Director; provided, further, that any such director shall
     subsequently become a Continuing Director at such time as a new term of
     office as a director is approved by Employer's shareholders at an annual
     meeting of shareholders occurring subsequent to the completion of any such
     transaction (and excluding any annual meeting at which the shareholders
     approve any such transaction); and, provided, further, that in the case of
     a Permitted Transaction, any such director shall not become a Continuing
     Director until the later of (i) the end of the three-year period following
     consummation of such Permitted Transaction or (ii) such time as a new term
     of office as a director is approved by Employer's shareholders at an annual
     meeting of shareholders occurring subsequent to the completion of such
     Permitted Transaction.

     8.13.11.  "Employer" shall mean First Bank System, Inc., a Delaware
     corporation, or any successor thereto pursuant to Section 8.02 hereof
     (including a Resulting Corporation) or by operation of law.

     8.13.12.  "Exchange Act" shall mean the Securities Exchange Act of 1934, as
     amended.

     8.13.13.  "Full Change In Control" shall mean:

          (A) the public announcement (which, for purposes of this definition,
     shall include, without limitation, a report filed pursuant to Section 13(d)
     of 

                                      -18-

<PAGE>
 
     the Exchange Act) by Employer or any Person that a Person (other than a
     Company Entity) has become the Beneficial Owner, directly or indirectly, of
     securities of Employer (x) representing 20% or more, but not more than 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 or (y) representing more than 50% of
     the combined voting power of Employer's then outstanding securities
     (regardless of any approval by the Continuing Directors); or

          (B) the Continuing Directors cease to constitute a majority of the
     Board of Directors of Employer or the Resulting Corporation, except in
     accordance with the terms of a Permitted Transaction and except as a result
     of the death, retirement or disability of one or more Continuing Directors
     (unless any such death, retirement or disability occurs following a
     Permitted Transaction and any vacancies created thereby are not filled in
     accordance with the terms of the written agreement governing such Permitted
     Transaction); or

          (C) any sale, lease, exchange or other transfer (in one transaction or
     a series of related transactions) of all or substantially all of the
     consolidated assets of Employer and its subsidiaries or the adoption of any
     plan of liquidation or dissolution of Employer.

     8.13.14.  "Partial Change in Control" shall mean:

          (A) a consolidation or merger of Employer or a Company Entity, or
     other reorganization, with or into one or more entities which are not
     Company Entities, as a result of which less than 60% of the outstanding
     voting securities of the Resulting Corporation are, or are to be, owned by
     former shareholders of Employer as determined immediately prior to
     consummation of such transaction (excluding voting securities of the
     Resulting Corporation owned, or to be owned, by such shareholders by reason
     of their ownership prior to such transaction of securities of any entity
     other than Employer) and as a result of which the Continuing Directors
     constitute (i) more than 50% of the Board of Directors of the Resulting
     Corporation or (ii) exactly 50% of the Board of Directors of the Resulting
     Corporation if the transaction resulting in such event is a Permitted
     Transaction; 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 that a Person (other than a
     Company Entity) has become the Beneficial Owner, directly or indirectly, of
     securities of Employer representing 20% or more, but not more than 50%, of
     the combined voting power of Employer's then outstanding securities if the
     

                                      -19-

<PAGE>
 
     transaction resulting in such ownership has been approved in advance by the
     Continuing Directors.

     8.13.15.  "Permitted Transaction" shall mean a transaction in which,
     pursuant to a written agreement between Employer and all Persons who have
     entered into an agreement with Employer to effect a transaction described
     in paragraph (A)of the definition of Partial Change in Control, it is
     agreed that (w) the Chief Executive Officer of Employer immediately prior
     to the consummation of such transaction shall be the Chief Executive
     Officer of the Resulting Corporation for not less than three years
     following consummation of such transaction, (x) upon termination of service
     of any Continuing Director for any reason, including upon death, disability
     or retirement, prior to the expiration of such director's term during such
     three-year period, the vacancy thereby created shall be filled by a nominee
     selected solely by the Continuing Directors, (y) upon expiration of the
     term of any such director during such three-year period, the nominee to
     succeed such director shall be selected solely by the Continuing Directors
     and (z) the parties will take other appropriate steps to ensure that the
     Board of Directors of the Resulting Corporation will be evenly divided
     between Continuing Directors and all directors designated by other parties
     to the transaction during such three-year period.

     8.13.16.  "Person" shall have the meaning ascribed to such term as such
     term is used in Sections 13(d) and 14(d) of the Exchange Act.

     8.13.17.  "Resulting Corporation" shall mean the surviving corporation in
     any consolidation, merger or other reorganization to which Employer is a
     party; provided, however, that if the surviving corporation in any such
     transaction is a subsidiary of another corporation, then the Resulting
     Corporation is the ultimate parent corporation of such surviving
     corporation; and provided, further, that in the event of a consolidation,
     merger or other reorganization to which a Company Entity (other than
     Employer) is a party, then Employer shall be deemed the Resulting
     Corporation.

          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 

                                      -20-

<PAGE>
 
months after the end of Employer's fiscal year in which Executive's termination
of 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/ LEE R. MITAU
                                       ----------------------------------------
                                    Its  Executive Vice President, General
                                        ---------------------------------------
                                         Counsel and Secretary
                                        ----------------------------------------


                                      /s/ JOHN F. GRUNDHOFER
                                    --------------------------------------------
                                    John F. Grundhofer

                                      -21-



<PAGE>
 
                                                                     EXHIBIT 10M

               FIRST BANK SYSTEM, INC. STOCK OPTION LOAN PROGRAM
                               SUMMARY OF TERMS

Pursuant to the Stock Option Loan Program adopted by the First Bank System, Inc.
("FBS") Board of Directors, beginning February 27, 1993, active employees
holding stock options ("Participants") are entitled to borrow from FBS the
amount necessary to pay the exercise price upon exercise of an FBS stock option.
Loans will be made to Participants on the following terms:

1.   MAXIMUM LOAN AMOUNT. Participants may borrow up to the full exercise price
     upon exercise of an FBS stock option. The loan amount will be immediately
     applied to payment of the exercise price to FBS, and Participants will not
     directly receive the funds prior to such payment. The loan amount shall not
     include amounts intended to satisfy applicable tax withholding payments or
     for any other purpose other than payment of the stock option exercise
     price.

2.   TERM. Participants may select the length of the term of the loan (in whole
     years) up to a maximum of six years.

3.   PAYMENT SCHEDULE. Subject to applicable prepayment requirements, all
     principal and interest on a loan will be payable at the end of the term of
     the loan. Participants may prepay a loan or any portion thereof without

     penalty.

4.   INTEREST RATE. The interest rate on loans will be the applicable federal
     rate (determined in accordance with Section 1274(d) of the Internal Revenue
     Code of 1986, as amended) on the date the loan is extended. Interest will
     be compounded semi-annually and due and payable at the time the principal
     is due and payable.

5.   SECURITY. Participants are required to initially provide FBS with a
     security interest in all of the FBS Common Stock received upon the exercise
     of the loan. FBS will retain a Participant's share certificates in
     connection with securing a loan, and Participants will be required to
     execute a stock power in favor of FBS. In the event that a Participant
     elects to deliver shares issued upon exercise to FBS to satisfy the
     Participant's tax withholding responsibility, however, no security interest
     will be retained in such shares. To the extent that FBS Common Stock held
     as collateral has a market value exceeding 125% of the loan balance, a
     Participant may request release of the excess collateral in accordance with
     the other terms and conditions of the Loan Program. Payment towards
     principal of $1.25, the par value of FBS Common Stock, per released share
     is required in connection with the release of excess collateral. FBS
     reviews collateral coverage once a year (in March) and requires that
     Participants who have received releases of collateral either reduce their
     loan balances or provide more collateral if coverage falls below 110% of
     the loan balance. In the event of a reclassification of shares of FBS
     Common Stock, an exchange of shares of FBS Common Stock for another
     security, a stock split or granting of a stock dividend, or any similar
     event, FBS or its successor shall retain a security interest in the
     securities to which the Participant is entitled pursuant to such event. If
     a Participant desires to sell shares of the capital stock held as
     collateral for the security interest, the Participant must repay such
     portion of the loan as is secured by such collateral (i.e., the exercise
     price on such shares plus accrued interest thereon). Capital stock
     constituting collateral may be released in blocks of a minimum of 100
     shares (unless all of the remaining collateral constitutes less than 100
     shares). Regardless of any security interest maintained by FBS in shares of
     FBS Common Stock, Participants are personally liable for the entire amount
     of any loan under the Loan Program.

6.   TERMINATION OF EMPLOYMENT; DEATH. In the case of retirement by a
     Participant, the Participant's loan may remain outstanding with the same
     terms and conditions as if no termination had occurred until the end of its
     term. In the event of resignation or involuntary termination, the loan must
     be repaid in full within 90 days of a Participant's last day of active

                                       1

<PAGE>
 
     employment. In the case of the death of a Participant, the loan shall
     become immediately due and payable.

7.   DOCUMENTATION. In connection with loans extended under the Loan Program,
     Participants will be required to complete such loan documentation as FBS
     deems appropriate. Such documentation may include, without limitation, a
     promissory note, a stock power and such documents as are required under
     Federal Reserve Regulation G.

8.   RIGHT OF OFFSET. In the event that a Participant defaults on repayment of a
     loan under the Loan Program, and to the extent that the loan repayment is
     not satisfied by the security interest, FBS may offset wages otherwise owed
     to a Participant (subject to applicable law).

9.   CERTAIN FEDERAL TAX CONSEQUENCES. The following is a discussion of general
     tax principles affecting the Loan Program. The general tax principles
     discussed below are subject to changes that may be brought about by
     subsequent legislation or by regulations and administrative rulings, which
     may be applied on a retroactive basis. Participants may be subject to state
     or local income taxes and should refer to the applicable laws of those
     jurisdictions. Each Participant should consult his or her own tax counsel
     on questions regarding tax liability in connection with the loans. The
     following discussion is not intended to address matters relating to the
     award or exercise of the stock options to which loans apply. Such a
     discussion is included in FBS' Prospectus relating to its 1996 Stock
     Incentive Plan.

     If the principal and interest payments to be made with respect to a loan
     under the Loan Program are less than or equal to $250,000, the Participant
     will recognize interest expense only at the time the loan is repaid or
     accrued interest is repaid in cash. If the principal and interest payments
     to be made with respect to a loan under the Loan Program are greater than
     $250,000, the difference between the amount loaned and the amount due,
     including all interest, upon maturity of the loan represents original issue
     discount. In accordance with applicable provisions of the Internal Revenue
     Code of 1986, as amended, the original issue discount must be recognized as
     interest expense by the Participant over the life of the loan. Whenever
     recognized, such interest expense is deductible for federal income tax
     purposes only to the extent of investment income for the same year, all in
     accordance with the rules applicable to investment interest expense found
     in Section 163(d) of the Internal Revenue Code of 1986, as amended.

10.  TERMINATION OF PROGRAM. The Loan Program may be terminated, or its terms
     and conditions changed, at the discretion of the Board of Directors without
     notice to Participants; provided, however, that outstanding loans would not
     be affected by any such termination or changes.

                                       2



<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)             1996             1995            1994
- -------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>             <C>      
Primary:                                                                                                    
Average shares outstanding                                             135,484,920      131,794,439     133,752,000
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                       1,930,699        2,141,591       2,522,991
                                                                       -----------------------------------------------
                                                                       137,415,619      133,936,030     136,274,991
                                                                       -----------------------------------------------
                                                                                                            
Income from continuing operations                                           $739.8           $568.1          $313.5
Preferred dividends                                                           (6.2)            (7.5)          (12.6)
                                                                       ----------------------------------------------- 

Income from continuing operations applicable to common equity               $733.6           $560.6          $300.9
                                                                       -----------------------------------------------
Income from continuing operations per common share                          $ 5.34           $ 4.19          $ 2.21
                                                                       -----------------------------------------------
                                                                                                            
Loss from discontinued operations                                              --               --           $ (8.5)
                                                                       -----------------------------------------------
Loss from discontinued operations per common share                             --               --           $ (.06)
                                                                       -----------------------------------------------
                                                                                                            
Net income                                                                  $739.8           $568.1          $305.0
Preferred dividends                                                           (6.2)            (7.5)          (12.6)
                                                                       -----------------------------------------------
Net income applicable to common equity                                      $733.6           $560.6          $292.4
                                                                       -----------------------------------------------
Net income per common share                                                 $ 5.34           $ 4.19          $ 2.15
                                                                       -----------------------------------------------
                                                                                                            
Fully diluted: *                                                                                            
Average shares outstanding                                             135,484,920      131,794,439     133,752,000
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
                                      2,271,264        2,790,528       2,720,882
Conversion of Series 1991A Preferred Stock                               3,065,010        3,563,191       3,655,684
                                                                       -----------------------------------------------    
                                                                       140,821,194      138,148,158     140,128,566
                                                                       -----------------------------------------------
                                                                                                            
Income from continuing operations                                           $739.8           $568.1          $313.5
Preferred dividends, excluding 1991A Preferred Stock                          --               --              (5.1)
                                                                       -----------------------------------------------
Income from continuing operations applicable to common equity               $739.8           $568.1          $308.4
                                                                       -----------------------------------------------    
Income from continuing operations per common share                           $5.25            $4.11          $ 2.20
                                                                       -----------------------------------------------
                                                                                                            
Loss from discontinued operations                                             --              --             $ (8.5)
                                                                       -----------------------------------------------   
Loss from discontinued operations per common share                            --              --             $ (.06)
                                                                       -----------------------------------------------
                                                                                                            
Net income                                                                  $739.8           $568.1          $305.0
Preferred dividends, excluding 1991A Preferred Stock                          --               --              (5.1) 
                                                                       -----------------------------------------------  
Net income applicable to common equity                                      $739.8           $568.1          $299.9 
                                                                       -----------------------------------------------      
Net income per common share                                                  $5.25           $ 4.11           (2.14) 
                                                                       -----------------------------------------------   
</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)                               1996        1995         1994        1993        1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>          <C>         <C>          <C>    
Earnings                                                                                                      
 1. Net income from continuing operations before cumulative effect      $  739.8    $  568.1     $  313.5    $  360.7     $  213.0
 2. Applicable income taxes                                                454.8       334.3        191.8       198.6        115.7
                                                                      --------------------------------------------------------------
 3. Income before taxes (1 + 2)                                         $1,194.6    $  902.4     $  505.3    $  559.3     $  328.7
                                                                      --------------------------------------------------------------
 4. Fixed charges:                                                                                                               
    a. Interest expense excluding interest on deposits                  $  447.8    $  398.3     $  271.4    $  148.0     $  155.4
    b. Portion of rents representative of interest and amortization                                                               
       of debt expense                                                      29.2        29.0         30.2        34.8         36.7
                                                                      --------------------------------------------------------------
    c. Fixed charges excluding interest on deposits (4a + 4b)              477.0       427.3        301.6       182.8        192.1
    d. Interest on deposits                                                673.1       706.7        597.3       648.3        797.7
                                                                      --------------------------------------------------------------
    e. Fixed charges including interest on deposits (4c + 4d)           $1,150.1    $1,134.0     $  898.9    $  831.1     $  989.8
                                                                      --------------------------------------------------------------
  5. Amortization of interest capitalized                               $     --    $     --     $     --    $     --     $     .3
  6. Earnings excluding interest on deposits (3 + 4c + 5)                1,671.6     1,329.7        806.9       742.1        521.1
  7. Earnings including interest on deposits (3 + 4e + 5)                2,344.7     2,036.4      1,404.2     1,390.4      1,318.8
  8. Fixed charges excluding interest on deposits (4c)                     477.0       427.3        301.6       182.8        192.1
  9. Fixed charges including interest on deposits (4e)                   1,150.1     1,134.0        898.9       831.1        989.8
                                                                                                                                 
Ratio of Earnings to Fixed Charges                                                                                               
10. Excluding interest on deposits (line 6 / line 8)                        3.50        3.11         2.68        4.06         2.71
11. Including
 interest on deposits (line 7 / line 9)                        2.04        1.80         1.56        1.67         1.33
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>




<PAGE>
 
                                                                      Exhibit 13

Pursuant to General Instruction (H) to form 10-K the Company is filing an 
integrated Annual Report on Form 10-K. See page 76 for 10-K cover page for the 
sections of the Annual Report incorporated into the Form 10-K.





<PAGE>


                                                                      EXHIBIT 21

                            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 of Arizona, National Association
                  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
                  First Trust National Association

MONTANA
- -------
                  First Bank Montana, National Association
                  First Trust Company of Montana National Association

NEBRASKA
- --------
                  First Bank National Association

NEW YORK
- --------
                  First Trust of New York, National Association

NORTH DAKOTA
- ------------
                  First Bank, fsb
                  First Trust Company of North Dakota National Association

OREGON
- ------
                  First Trust Oregon

SOUTH DAKOTA
- ------------
                  First Bank of South Dakota (National Association)

WASHINGTON
- ----------
                  First Trust National Association

WISCONSIN
- ---------
                  First Bank (National Association)

<PAGE>
 

                           NON-BANKING SUBSIDIARIES
                           ------------------------
                        
                                                                  State of
     Subsidiary                                                   Incorporation
     ----------                                                   -------------

     FBS Associated Properties, Inc.                              Minnesota

     FBS Capital I                                                Delaware

     FBS Capital II    (Inactive since inception in 1996.)        Delaware

     FBS Card Services, Inc.                                      Minnesota


     FBS Community Development Corporation                        Minnesota

     FBS Information Services Corporation                         Minnesota

     FBS Merchant Banking Co.                                     Minnesota

     FBS Portfolio, Inc.                                          Minnesota

     FBS Service Center, Inc.                                     North Dakota

     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

     LMN Management Corporation                                   Minnesota

     Wyoming Trust and Management Company                         Wyoming

     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 the following Registration
   Statements and related Prospectuses of First Bank System, Inc. of our report
   dated January 9, 1997, with respect to the consolidated financial statements
   of First Bank System, Inc. included in this Annual Report (Form 10-K) for the
   year ended December 31, 1996.


<TABLE>
<CAPTION>

                     Registration
     Form           Statement No.                       Purpose
     ----           -------------                       -------

     <S>            <C>                 <C>
     S-8               33-16242         1987 Stock Option Plan
     S-8               33-42333         Employee Stock Purchase Plan
     S-8               33-55932         WCIC Options
     S-8               33-52835         1988 Equity Participation Plan
     S-8              333-01099         FirsTier Financial, Inc. Omnibus
                                         Equity Plan (as assumed by First
                                         Bank System, Inc.)
     S-8              333-01421         1994 & 1991 Stock Incentive Plan
     S-8              333-02623         1996 Stock Incentive Plan
     S-8              333-02621         Amended & Restated Employee Stock
                                         Purchase Plan
     S-8              333-21291         Capital Accumulation Plan

     S-3               33-38268         Northern Cities Bancorp Acquisition
     S-3               33-33508         Dividend Reinvestment Plan
     S-3               33-47785         Siouxland acquisition
     S-3               33-57169         Metropolitan Financial Corporation
                                         warrants
     S-3               33-55485         First Dakota Financial Corporation
                                         acquisition
     S-3               33-52495         American Bankshares of Mankato
                                         acquisition
     S-3               33-58521         $1 billion shelf registration
     S-3               33-61667
         Warrants for settlement of Edina
                                         Realty litigation
     S-3               33-62251         Southwest Holdings, Inc. acquisition
     S-3              333-01455         $1.5 billion universal shelf
                                         registration
     S-3              333-02983         Common shares for the Automatic
                                         Dividend Reinvestment and Common
                                         Stock Purchase Plan

     S-4              333-16991         $300 million Capital Securities

</TABLE>


                                             /s/ Ernst & Young LLP
Minneapolis, Minnesota
February 25, 1997



<TABLE> <S> <C>


<PAGE>

<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
BANK SYSTEM, INC. DECEMBER 31, 1996, 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                       2,413,000
<INT-BEARING-DEPOSITS>                               0
<FED-FUNDS-SOLD>                               827,000
<TRADING-ASSETS>                               146,000
<INVESTMENTS-HELD-FOR-SALE>                  3,555,000
<INVESTMENTS-CARRYING>                               0
<INVESTMENTS-MARKET>                                 0
<LOANS>                                     27,128,000
<ALLOWANCE>                                    516,500
<TOTAL-ASSETS>                              36,489,000
<DEPOSITS>                                  24,379,000
<SHORT-TERM>                                 4,097,000
<LIABILITIES-OTHER>                            938,000
<LONG-TERM>                                  3,553,000
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                       177,000
<OTHER-SE>                                   2,876,000
<TOTAL-LIABILITIES-AND-EQUITY>              36,489,000
<INTEREST-LOAN>                              2,339,300
<INTEREST-INVEST>                              267,000
<INTEREST-OTHER>                                47,600
<INTEREST-TOTAL>                             2,653,900
<INTEREST-DEPOSIT>                             673,100
<INTEREST-EXPENSE>                           1,120,900
<INTEREST-INCOME-NET>                        1,533,000
<LOAN-LOSSES>                                  136,000
<SECURITIES-GAINS>                              15,000
<EXPENSE-OTHER>                              1,388,100
<INCOME-PRETAX>                              1,194,600
<INCOME-PRE-EXTRAORDINARY>                     739,800
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   739,800
<EPS-PRIMARY>                                     5.34
<EPS-DILUTED>                                     5.25
<YIELD-ACTUAL>                                    4.89
<LOANS-NON>                                    120,300
<LOANS-PAST>                                    49,600
<LOANS-TROUBLED>                                   100
<LOANS-PROBLEM>
                                      0
<ALLOWANCE-OPEN>                               473,500
<CHARGE-OFFS>                                  253,000
<RECOVERIES>                                   100,200
<ALLOWANCE-CLOSE>                              516,500
<ALLOWANCE-DOMESTIC>                                 0
<ALLOWANCE-FOREIGN>                                  0
<ALLOWANCE-UNALLOCATED>                              0
        

</TABLE>


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