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Lloyds said it chose to sell the branches to Co-op, rather than a rival bid from NBNK codenamed "Lotus", because execution risks were lower for the Co-op and it would have been more attractive for staff and customers.
"While it was difficult to assess which buyer would be more acceptable to customers, Ferrari (Co-op) was a well known, ethical, brand that had weathered the financial crisis well," minutes from a Lloyds board meeting in December 2011 said.
Co-op Bank has since been rocked by a series of scandals, including a 1.5 billion pound ($2.5 billion) capital hole and a drugs scandal involving its former ex-chairman.
Lloyds' board meeting minutes were released on Friday by UK lawmakers studying the proposed sale of 632 of its branches to Co-op, which was agreed in 2012 but collapsed in April 2013 when Co-op was found to have a capital hole.
The minutes showed Lloyds was confident Co-op would be able to buy the branches until concerns surfaced in early 2013, even though Britain's financial regulator has said it warned the Co-op in 2011 that it needed to raise capital and was not in a position to buy the Lloyds branches.
The Bank of England has said it believed Co-op had passed on concerns about the capital position to Lloyds, although Lloyds executives have said they did not realise there was a problem with Co-op's capital strength until December 2012.
The June 2012 minutes for the Lloyds board meeting said: "It was understood that, although discussions were not yet complete, the FSA (Financial Services Authority) did not have any fatal concerns about the Co-op's interest in acquiring the Verde (branches) business."
At the January meeting, the board said it still expected the deal to be signed in March 2013.
On April 18, the board said the sale to Co-op was now "a less likely outcome than in the past. Progress was slow." The deal collapsed a week later.
The decision by Lloyds to sell the branches to Co-op has prompted allegations that politicians had encouraged the decision, keen to back customer-owned financial services businesses, such as Co-op.
The Lloyds board minutes said the NBNK offer was potentially marginally more valuable to Lloyds, but the cost of delivery would be higher. It said Co-op was already a fully functioning bank, although it said Co-op recognised if it bought the Lloyds branches "it would need to upskill significantly."
Lloyds has since separated the branches and rebranded them as TSB, and intends to float them later this year.
(Reporting by Steve Slater; Editing by Toby Chopra)
By Steve Slater
