12.

EARNINGS PER SHARE

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by ASC 206-10-45. Basic earnings per common share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards, but also excludes awards considered participating securities. Stock options for 407,297 shares were anti-dilutive for the three months ended March 31, 2014 and stock options for 816,342 shares were anti-dilutive for the three months ended March 31, 2013. Convertible preferred stock totaling 7,942 shares was anti-dilutive for the three months ended March 31, 2013.


	Three months ended			Three months ended
	March 31,			March 31,
	2014			2013
	(Dollars in thousands, except per share data)
Net income per consolidated statements of income	$	2,094		$	2,682
Net income allocated to participating securities		(9	)		(10	)
Amortization of discount on preferred stock		—			(821	)

Net income allocated to common stock	$	2,085		$	1,851

Basic earnings per common share computation:
Distributed earnings allocated to common stock	$	—		$	—
Undistributed earnings allocated to common stock		2,085			1,851

Net income allocated to common stock	$	2,085		$	1,851

Weighted average common shares outstanding, including shares considered participating securities		50,407			33,689
Less: Average participating securities		(211	)		(124	)

Weighted average shares		50,196			33,565

Basic earnings per common share	$	0.04		$	0.06

Diluted earnings per common share computation:
Net income allocated to common stock	$	2,085		$	1,851

Weighted average common shares outstanding for basic earnings per common share		50,196			33,565
Add: Dilutive effects of assumed exercises of stock options		254			264

Weighted average shares and dilutive potential common shares		50,450			33,829

Diluted earnings per common share	$	0.04		$	0.05

As previously announced and described under Note 16 below, United Community sold 7,942 preferred shares to various investors. In accordance with U.S. GAAP, United Community recorded a beneficial conversion feature (“BCF”) related to the issuance of these preferred shares because they contain a conversion feature at a fixed rate that was in-the-money when issued. A BCF is “in-the-money” when the investor is deemed to be able to obtain the underlying common shares at a below-market price upon conversion of the preferred shares. The BCF was recognized in United Community’s Shareholders’ Equity and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The effective purchase price of the common shares into which the preferred shares were convertible was deemed to be $2.75, which was used to compute the intrinsic value. The intrinsic value was calculated as the difference between the deemed purchase price of the common shares ($2.75 per share) and the market value ($3.60 per share) on the date the preferred shares were issued (March 22, 2013), multiplied by the number of shares into which the preferred shares were convertible. The BCF resulting from the issuance of the preferred shares of United Community is calculated as follows:


Total common shares that may be issued upon conversion of preferred shares		7,942,000
Intrinsic value (difference between consideration allocated to preferred stock upon conversion at $2.75 per share and market price of $3.60 per share on March 22, 2013)	$	0.85

Beneficial conversion feature	$	6,750,700

The BCF has no effect on net income. The BCF calculated above is deemed to be an implied dividend for purposes of determining earnings per common share in accordance with U.S. GAAP, and is amortized over the period the preferred shares were outstanding. The preferred shares converted to common shares upon shareholder approval which was obtained in the second quarter 2013. This amortization resulted in a reduction to retained earnings and thus net income available to common shareholders for earnings per common share purposes. Therefore, United Community took into account the BCF discount when computing earnings per common share in 2013.