BofA Branch Closings May Start Trend

(Includes information on branch closings at BofA competitors.)

CHARLOTTE, N.C. (TheStreet.com) -- Bank of America (BAC Quote) became the first of the big banks to announce major branch closures on Tuesday, but it likely won't be the last.

Despite the increasing dominance of online banking and the banking industry's continuous consolidation, banks just kept opening new branches. The number of brick-and-mortar commercial bank branches grew nearly 40% from 1988 to 2006, according to a study by the Federal Reserve.

The most high-profile banks that took part in the S&L sprawl are big players like BofA, Citigroup (C Quote), JPMorgan Chase (JPM Quote) and Wells Fargo (WFC Quote), and the once fast-expanding competitors they acquired, Washington Mutual and Wachovia. But other regional players engaged in cut-throat competition, like PNC Financial (PNC Quote), Capital One (COF Quote), Fifth Third (FITB Quote) and KeyCorp (KEY Quote), are guilty of over-expansion as well.

The reasons for what Fed researchers termed a "much discussed phenomenon" vary, but largely come down to capturing initial deposits. While a presence online is important, banks first get customers' money when they walk in the door, and then work to "cross-sell" them on other products like mortgages, student loans, small-business loans, credit cards and the like.

So, when BofA opened a branch on the northeast corner of Local Square, advertising low mortgage rates and competitive CDs, Wachovia decided to buy the empty lot on the southwest corner. The problem is, this happened excessively and rapidly, especially in urban areas, despite the consolidation of the banking industry. It turns out that only when banks acquired failing competitors did they close branches. When they acquired healthy ones, they kept expanding.