Investors can’t resist the Sunshine State’s financial firms—and here’s why.

You would think a semiobscure failed Florida thrift, hobbled by $10 billion or so of bad assets, wouldn't draw an A-list of potential acquirers. In the case of BankUnited Financial (BKUNA) of Coral Gables, however, you would be wrong. The company was seized last week by its regulators, who then immediately turned around and sold it to a group of Wall Street big shots including W.L. Ross, Carlyle Group, and Blackstone Group (BX). To win the deal, the Ross group had to top competing bids from the likes of Goldman Sachs (GS). J.C. Flowers was said to be sniffing around, as well. This was a private-equity version of a buying frenzy.

It's an example of the almost mystical hold the Florida banking market can have on investors. BankUnited may be insolvent, but it still has one distinction that sets it apart from the rest of the walking-dead banks in the Sunshine State: It's the largest locally based FDIC-insured depositary institution. Which is to say, BankUnited is the closest thing there is to a platform an investor might use to create a Florida banking empire. As you'll see in a minute, that's the kind of thing that can set certain hearts racing. The private-equity powerhouse that bought BankUnited could very well transform the banking business in Florida and seems intent on trying. It might end up transforming the entire banking industry as well.

Let's start at the beginning. Florida has a special spot in bank investors' hearts for one simple reason. It is a burgeoning source of what bankers prize most: low-cost, stable deposits. In banking, loans may get the headlines (especially when, like now, they're going sour), but it's those federally insured deposits that are the secret sauce that can make the business so boring and reliably profitable when run properly. The basic proposition, of course, couldn't be simpler: Take in deposits that cost next to nothing, lend them prudently at a reasonable interest rate, and pocket the spread. With one-year CDs yielding less than 1 percent in Florida lately, and savings accounts even less than that, it's not hard to make the numbers work. Banks can extract additional revenues from their depositors in the form of fees, mainly bounced-check charges.

So deposits are it. And for banks seeking steady deposit growth, Florida is the closest thing there is to Shangri-La. To begin with, it's already a huge market. Florida has $368 billion in bank deposits, the fourth-highest of any state, according to the FDIC. Plus, it's still growing fast. Statewide population grew by 14 percent annually, on average, from 2000 through 2007—twice the national rate. Those newcomers have to put their money somewhere. Sure enough, over the past five years, deposits at Florida-based banks have grown by more than 20 percent annually, on average. For perspective, deposit growth industrywide averaged just below 9 percent per year over the same period.

It all adds up to a fire hose spewing semifree money. No wonder, then, that before the banking industry imploded last year, non-Florida banks were beating down the door to enter the market. The numbers some buyers were willing to pay were, in retrospect, wondrous. One illustrative transaction happened in 2004, when Cincinnati's Fifth Third Bancorp (FITB) acquired Naples-based First National Bankshares of Florida, then the state's largest locally based institution, for $1.6 billion. That price works out to (and this is not a typo) 42 times earnings, 2.6 times book value, and nearly six times tangible book value. For reference, the typical non-Florida bank buyout this decade occurred at around 2.2 times tangible book. Typical bank-stock price-earnings ratios, meanwhile, tend to range between 12 and 14.

The Fifth Third-Bankshares of Florida deal was hardly a one-off, though. In July 2006, National City Corp. (NCC) of Cleveland acquired Fort Pierce-based Harbor Florida Bancshares for $1.1 billion, or 3.2 times book value and 22 times earnings. Then, later that same month, it bought Fidelity Bankshares of West Palm Beach for 3.7 times book and 30 times earnings.