<PAGE>   1
                                                                   EXHIBIT 10.12


                    DEFERRED COMPENSATION PLAN FOR DIRECTORS
                  OF ANDOVER BANCORP, INC. AND ITS SUBSIDIARIES

         The Deferred Compensation Plan For Directors of Andover Bancorp, Inc.
and Its Subsidiaries, originally effective July 1, 1993, is hereby amended and
restated as follows effective February 22, 1996:

1.       Eligibility.  Any member of the Board of Directors of Andover
         Bancorp, Inc. or any of its subsidiaries (each such entity
         being referred to herein as the "Corporation") who is not an
         employee of Andover Bancorp, Inc. or any of its subsidiaries
         may elect to defer, in accordance with this Plan, payment of
         all or a portion of the compensation payable to him for
         service as such Director.

2.       Election to Defer.  A Director's election to defer payments
         shall be made in writing and shall be effective upon receipt
         and acceptance by the Corporation.  Except in the case of a
         newly elected Director who may file an election to defer
         within thirty (30) days of his election as Director, an
         election to defer shall be made no later than ten (10) days
         preceding commencement of a calendar year with respect to
         deferral of compensation to be earned in such year.  Any
         election may be revoked in writing and shall be effective upon
         receipt by the Corporation, but only as to compensation to be
         earned at and after commencement of the next succeeding
         calendar month.  Any election may be changed in writing and
         shall be effective upon receipt by the Corporation, but only
         as to compensation to be earned at and after commencement of
         the next succeeding calendar year.

3.       Crediting of Interest.  The Corporation shall maintain a book
         account to which the deferred compensation of each Director
         participating in this Plan shall be credited as of the end of
         each calendar month after such compensation is earned.  As of
         the end of each calendar month, the Corporation shall also
         credit each deferred compensation account with interest on the
         amount then standing in the account, exclusive of any deferred
         compensation credited to the account as of such date.  The
<PAGE>   2
         rate to be used for this purpose shall be the maximum interest yield
         paid by Andover Bank with respect to its 36-month term deposit
         accounts, or if there shall be no 36-month term deposit accounts, at
         the maximum interest yield paid on the term deposit account of such
         duration as most closely approximates 36 months.

4.       Stock Units.

         (a)      In lieu of receiving interest credit each month, a Director
         may elect to convert the amounts in his deferred compensation account
         (and any future deferrals) into stock units equivalent in value to
         shares of common stock of Andover Bancorp, Inc. ("Stock"). Such an
         election must be made on an irrevocable basis at least six months in
         advance. A Director may revoke his election and elect to receive
         interest credits pursuant to Paragraph 3 above, but any such revocation
         must be made in writing on an irrevocable basis at least six months in
         advance. 

         (b)      The conversion of deferred compensation into stock units will
         be made on the basis of the fair market value of the Stock on the date
         of conversion, or the date the compensation would otherwise be paid,
         whichever is applicable. For this purpose, fair market value of the
         Stock on any given date shall mean the closing price reported for the
         Stock on the NASDAQ National Market on such date or, if no sales were
         reported on such date, for the last date preceding such date for which
         a sale was reported. 

         (c)      During the term of the deferral, each Director's account of
         stock units will be credited with additional units to reflect any
         payment of dividends (other than dividends payable only in shares of
         Stock). Each account will be credited with a number of whole and
         fractional shares of stock units determined by multiplying the dividend
         value per share of Stock by the number of units in the account on the
         record date and dividing the result by the fair market value of the
         Stock (as defined in Paragraph 4(b) above) on the record date.
<PAGE>   3
         (d)      In the event of a stock dividend, stock split or similar
         change in capitalization affecting the Stock, appropriate adjustments
         shall be made in the number of stock units credited to each Director's
         account.

5.       Time and Method of Payment

         (a)      Amounts credited to a Director's deferred compensation account
         shall be paid, or commenced to be paid, on the January 15 coincident
         with or next following the date on which the Director ceases to be a
         member of the Board of Directors of the Corporation for any reason
         whatsoever. In the case of semi-annual installments, payments shall be
         made on each July 15. 

         (b)      Payments of deferred compensation may be made either in a
         single lump sum or in annual, or semi-annual, installments over a
         period of ten (10) years, as the Director may have irrevocably
         specified before the compensation is earned. In the absence of an
         effective election, payment shall be made in a single lump sum. In the
         case of installment payments, interest or dividend equivalent shall
         continue to be credited in accordance with Paragraph 3 or 4 during the
         payment period. The amount of each installment payment shall be equal
         to the amount credited to the deferred compensation account as of the
         preceding June 30 or December 31, as the case may be, divided by the
         number of payments remaining to be made, including the current payment.
         On and after the date which is the later of six months from the
         effective date of this amendment or the date this amendment is approved
         by shareholders of Andover Bancorp, Inc., payments from each Director's
         deferred compensation account of stock units shall be payable only in
         the form of whole shares of Stock, with any fractional share payable in
         cash. 

         (c)      Elections by a Director of a method of payment under sub-
         paragraph (b) shall be made in writing, effective upon receipt and
         acceptance by the Corporation, and applicable only to compensation to
         be earned after the effective date of the election. Such elections may
         also be changed by a Director,
<PAGE>   4
         subject to the same restrictions.

         (d)      Payments of deferred compensation shall be made as they become
         due to the Director if then living, otherwise to a beneficiary or
         beneficiaries designated by the Director in writing to the Corporation
         prior to the Director's death, or failing such designation, the
         Director's estate. 

         (e)      Notwithstanding any provision hereof to the contrary, if a
         Director, or after a Director's death the Director's beneficiary,
         believes he is suffering from financial hardship, an application may be
         made to the Board of Directors of the Corporation for an acceleration
         of payments from the deferred compensation account of the Director. A
         "financial hardship" shall mean a need for financial assistance due to
         the occurrence of an unanticipated emergency caused by an event beyond
         the Director's control. The need for financial assistance must be such
         that the Director, any member of the Director's immediate family or,
         after the Director's death, a designated beneficiary will be subject to
         substantial hardship if the acceleration is not permitted. If the Board
         of Directors of the Corporation determines, in its sole discretion,
         that a hardship exists, the Corporation may accelerate payment to the
         Director or the designated beneficiary of only so much of the deferred
         compensation account as the Board of Directors of the Corporation may
         determine is required to alleviate such hardship, and the deferred
         compensation account shall be charged with said amount upon payment.

6.       Limitation on Rights of Directors.  No action taken pursuant
         to this Plan shall create or be deemed to create a trust or
         fiduciary relationship of any kind between the Corporation and
         the Directors.  Although the Corporation shall have no
         obligation to establish any separate fund, reserve or to
         invest in any specific asset to provide security with respect
         to any deferred amounts during the deferral period, the
         Corporation may elect to do so and, in such event, the
         Directors shall not have any interest in such assets and all
<PAGE>   5
         such assets shall continue for all purposes to be a part of the general
         assets of the Corporation, with the title to the beneficial ownership
         of such assets remaining at all times in the Corporation. Each
         Director, his legal representative or any of his beneficiaries shall
         not have any right, other than the right of an unsecured general
         creditor of the Corporation, in respect to the deferred compensation
         account established hereunder, and such persons shall have no property
         interest in any specific assets of the Corporation.

7.       Nonforfeitable. The right of each Director to the payment of deferred
         compensation under this Plan shall be nonforfeitable and no action or
         failure to act by the Director, the Corporation or any other person
         shall deprive the Director of, or excuse the Corporation from its
         obligations to pay, the amounts due hereunder.

8.       Withholding Tax. The Corporation shall have the right to deduct from
         all deferred amounts or payments hereunder any federal or state taxes
         required by law to be withheld with respect to such deferred amounts or
         payments.

9.       Non-Assignable. The deferred compensation payable under this Plan shall
         not be subject to alienation, assignment, garnishment, execution or
         levy of any kind, and any attempt to cause any compensation to be so
         subjected shall not be recognized.

10.      Termination and Amendment. This Plan may be amended at any time or may
         be terminated, in whole or in part, at any time, and from time to time,
         by Andover Bancorp, Inc. The foregoing provisions of this Paragraph
         notwithstanding, no amendment or termination of this Plan shall,
         without the consent of a Director, adversely affect the amounts payable
         hereunder on account of compensation deferred prior to the effective
         date of such amendment or termination. 

11.      Notices. All notices, elections or designations by a Director to the
         Corporation shall be delivered in person or by registered mail, postage
         prepaid, and noted to be brought to the attention of the Treasurer,
         Andover Bancorp, Inc.
<PAGE>   6
12.      Governing Law. This Plan, and all actions taken hereunder, shall be
         governed by and construed in accordance with the laws of the State of
         Massachusetts, except as such laws may be superseded by any applicable
         federal law.

13.      Shares Issuable. The aggregate maximum number of shares of Stock
         reserved and available for issuance under the Plan shall be 50,000,
         subject to appropriate adjustments in the event of a stock dividend,
         stock split, or similar change in capitalization affecting the Stock.
         Shares subject to the Plan are authorized but unissued shares or
         Treasury shares. Notwithstanding the foregoing, no shares of Stock may
         be issued under the Plan until the amendment and restatement of this
         Plan has been approved by the affirmative votes of the holders of a
         majority of the shares of Stock of Andover Bancorp, Inc. present, or
         represented, and entitled to vote at a meeting of shareholders.