Lloyds was ordered to dispose of part of its branch network to comply with the European Commission's terms for receiving a government bailout.
The non-binding 'heads of agreement' negotiated with the Co-op call for an initial payment of 350 million pounds ($548 million) for the branches, with additional payments taking the total to 750 million pounds based on the Co-op bank's performance through 2027, Lloyds said.
The deal would secure Co-op's position as a major player in the U.K. banking market, with 10 per cent of the branches and 7 per cent of the personal current account market. The Co-op also would acquire the TSB and Cheltenham & Gloucester brands.
Lloyds says it aims to complete the disposal by the end of November next year.
Lloyds shares were down 0.3 per cent at 29.7 pence in early trading in London.
"The good news is that a deal finally looks to be reaching a conclusion," said Gary Greenwood, analyst at Shore Capital. "The bad news is that the price is disappointing from a shareholder perspective, in our view, given that this is a relatively clean business that is not understood to be awash with toxic assets."