17. Earnings per Share

The following table provides a reconciliation of net income and the number of shares of common stock used in the computation of basic EPS and diluted EPS (amounts in thousands, except per share amounts):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Basic Earnings
Income attributable to STWD common stockholders	$	88,428	$	105,766	$	308,166	$	243,896
Less: Income attributable to participating shares		(761)		(456)		(2,489)		(1,743)
Basic earnings	$	87,667	$	105,310	$	305,677	$	242,153

Diluted Earnings
Basic — Income attributable to STWD common stockholders	$	88,428	$	105,766	$	308,166	$	243,896
Less: Income attributable to participating shares		(761)		(456)		(2,489)		(1,743)
Add: Undistributed earnings to participating shares		—		—		—		—
Less: Undistributed earnings reallocated to participating shares		—		—		—		—
Diluted earnings	$	87,667	$	105,310	$	305,677	$	242,153

Number of Shares:
Basic — Average shares outstanding		259,759		237,429		259,412		237,017
Effect of dilutive securities — Convertible Notes		2,313		3,445		2,284		3,766
Effect of dilutive securities — Contingently issuable shares		236		138		236		138
Effect of dilutive securities — Unvested non-participating shares		129		79		123		61
Diluted — Average shares outstanding		262,437		241,091		262,055		240,982

Earnings Per Share Attributable to STWD Common Stockholders:
Basic	$	0.34	$	0.44	$	1.18	$	1.02
Diluted	$	0.33	$	0.44	$	1.17	$	1.00

As of September 30, 2017 and 2016, participating shares of 1.6 million and 0.9 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.

Additionally, as of September 30, 2017, there were 61.9 million potential shares of common stock contingently issuable upon the conversion of the Convertible Notes. The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash. As a result, this principal amount, representing 59.6 million shares at September 30, 2017, was not included in the computation of diluted EPS. However, as discussed in Note 10, the conversion options associated with the 2018 Notes and 2019 Notes are “in-the-money” as the if-converted values of the 2018 Notes and 2019 Notes exceeded their principal amounts by $16.4 million and $34.6 million, respectively, at September 30, 2017. The dilutive effect to EPS is determined by dividing this “conversion spread value” by the average share price. The “conversion spread value” is the value that would be delivered to investors in shares based on the terms of the Convertible Notes, upon an assumed conversion. In calculating the dilutive effect of these shares, the treasury stock method was used and resulted in a dilution of 2.3 million shares for the three and nine months ended September 30, 2017. The conversion options associated with the 2017 Notes and 2023 Notes are “out-of-the-money” because the if-converted values of the 2017 Notes and 2023 Notes were less than their principal amounts by $38.5 million and $40.4 million, respectively, at September 30, 2017; therefore, there was no dilutive effect to EPS for the 2017 Notes and 2023 Notes.