Fascinating thread I just stumbled on. Yes, in early parts of the phone system, the letters were geographic and referenced the street for where the central office was located switching those calls. For example, in Arlington VA, my grandfathers number was 533-9389 which was referred to as JE3-9389 and the CO was on Jefferson St. I'm pretty sure this fell apart rapidly as the system grew.
Whether it referenced the CO or not was a regional thing at best. For instance my home number when growing up was YU-71314, where YU was Yukon. For the first year or two that we had a phone it was only YU-1314, the 7 came along later when it became possible to direct dial more than the single CO you were attached to. There was absolutely nothing within several thousand miles that was named Yukon, Alaska, or anything else cold. The CO was on Foothill Blvd, which was a two-lane undivided street.
The main reason fo naming toll areas was memorability. It wasn't easy to remember a 7 digit number, but a prefix followed by 3, 4, or 5 digits (depending on the era and where you lived) was much easier to remember, or at least so Ma Bell thought at the time.
Named toll codes stayed around until the mid to late 1960s. What finished them off was the introduction of DDD - Direct Distance Dialing, or the area code system we are all familiar with.
Loren