(Includes information on branch closings at BofA competitors.)

CHARLOTTE, N.C. ( TheStreet.com) -- Bank of America ( BAC) 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), JPMorgan Chase ( JPM) and Wells Fargo ( WFC), 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), Capital One ( COF), Fifth Third ( FITB) and KeyCorp ( KEY), are guilty of over-expansion as well.
Banks Mull Branch Strategy

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.

Case in point: Searching for a "bank near Grand Central Terminal," on Google Maps results in an image spotted with over 100 tiny circles. Searches for the "Big Four" banks -- BofA, Citi, JPMorgan, Wells and related Wachovia and WaMu branches -- yields at least four dozen results.

Population growth and urban sprawl, combined with deregulation in certain states, only fueled the trend. For example, in Illinois, the number of bank branches increased by a dramatic 66% between 1994 and 2006, after restrictions were lifted. That compares with a nationwide increase of 27%.

But tellingly, the study also finds that while there are more branches, there are fewer employees per branch. The reason is likely because customers are using ATMs for deposits and withdrawals more frequently, and online services to pay bills. If you only need to go into the bank to give them your cash in the first place, and visit every few months or years to refinance, lock in a new rate, or buy into a new service, the new branch's use is limited.

Rochdale Securities analyst Richard Bove argues online banking has less to do with BofA's decision to shutter branches than the changing dynamics of the industry. While it made sense to open more branches when deposit costs were low and low-income customers became more profitable, that's no longer the case. The environment today is not about quantity, but quality: Financially viable customers from whom banks can reap bigger fees.

"The branches will be closed because they are not economically viable," Bove writes in a report on Tuesday.

While BofA made a drastic statement by saying it will shutter 10% of its vast branch network, JPMorgan has been more aggressive in closing branches so far this year, according to data from SNL Financial. JPMorgan has closed 107 branches this year, representing 2% of its network at the end of 2008. BofA has closed 81 branches in 2009, which represents 1.3% of its 6,200 branches at the end of last year. Citi was the least aggressive, closing just 10 branches in 2009, or 0.9% of its network at year-end.

Although BofA is often touted as the largest bank in the country, Wells Fargo actually has a larger branch footprint than any of those aforementioned competitors. Wells now has 6,709 branches, down 1.1% from 6,786 at the end of 2008.

In good times, banks had the cash to finance expansions, and were apparently doing so in a manner that was profitable. But when things go amok, as in the case of past crises, the trend reverses.

For instance, after the U.S. savings & loan crisis, the rate of branch growth slowed dramatically, and even contracted from 1990 to 1993, according to the study, shortly after bank failures reached their peak in 1989. Although several dozen banks have already failed during the current crisis, more than 200 remain on the Federal Deposit Insurance Corp.'s list of institutions at risk.

History will likely repeat itself in the form of more frequent branch closures as the current crisis sputters out, so it won't be surprising if others follow BofA's move. But the branch trend may not reverse itself this time around -- at least not at such a flagrant pace -- and maybe that's not such a bad thing.

-- Reported by Lauren Tara LaCapra in New York.

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