Our $26 target price for COLB is derived from our discounted residual income model, which values an enterprise based on its discounted excess returns over its cost of equity. Our residual income model incorporates our 3-year forward earnings projection followed by a 7-year fade period to our normalized ROTE estimate of 14.5%. The key inputs to our 12.4% cost of equity are a risk-free rate of 4.5%, ERP of 3.5%, and a beta of 2.2. We assume a 3.0% long-term growth rate.

Key macroeconomic risk to COLB is the Fed is unable to achieve a “soft landing”, which could lead to increased credit risk. While we do not expect significant losses, if credit conditions deteriorate beyond our expectations, it may impose significant headwinds to earnings and achieving our target price.

Company-Specific Positive Risks: We find COLB's outsized growth profile to position the bank well for above average return metrics. Additionally, overall loan growth and improving loan yields have generated an improving NII revenue trend. Should national economic trends continue to perform well, future loan loss provisioning expenses are likely to be lower than current consensus expectations, supportive of future upside to consensus estimates.

Company-Specific Negative Risks: COLB has a unique concentration of commercially focused clients throughout the pacific northwest. While we believe management has proven to be solid operators, should COLB start to see modestly elevated charge-offs, the valuation multiple is likely to compress.

If the impact on the company from any of these factors proves to be greater/less than we anticipate, it could prevent the stock from achieving our target price or could cause our target price to be materially outperformed.