What I think you're after is to only output the Letter for the first band that begins with that letter.
One way to achieve this is to change your query slightly (note I'm using what I think is SQL-92 syntax here, but there's probably a nicer way to get the first letter in your particular database):
select
band_name,
SUBSTRING(band_name from 1 for 1) AS first_letter
from
bands
order by
band_name
Which will get you the first letter in the query.
If you want to group all the bands with numeric first letters together, then you can use SQL's CASE statement to do that (you may need to find the equivalent to ascii() in your DBMS). You could also invert the logic and match against 'normal' letters and lump everything else into a '0-9 and punctuation' category if that's easier. I think that's what a number of music systems do (I'm thinking iTunes on the iPhone, but I'm sure there are others)
select
band_name,
CASE
WHEN ascii(left(band_name, 1)) BETWEEN 48 AND 57 THEN '0-9'
ELSE left(band_name, 1)
END AS first_letter
from
bands
order by
band_name
Now you can use that extra column along with cfoutput's group attribute to help get the output as you want it.
<UL>
<cfoutput query="bandNameList" group="first_letter">
<LI> #first_letter#
<UL>
<cfoutput>
<LI> #band_name# </LI>
</cfoutput>
</UL>
</LI>
</cfoutput>
</UL>