MILL VALLEY -- Redwood Trust (NYSE: RWT), the 18-year-old real estate investment trust headquartered in Mill Valley, today reported a net loss of $3 million in the final quarter of 2011.

That loss, equal to 3 cents per diluted share, compares with net income of $1 million in the third quarter and net income of $15 million in the fourth quarter of 2010. Yet for the year ending Dec. 31, Redwood Trust earned $25 million. That compared to $111 million at the end of 2010, or $1.36 per diluted share. At year end, earnings were 31 cents per common share in 2011.

In a letter to shareholders, Chief Executive Officer Martin Hughes and President Brett Nicholas today noted a downward trend in prices for residential mortgage-backed securities (RMBS) and a higher loan loss provision drove the quarter's results. Also part of it was a continuing but decreasing loss from hedging Redwood Trust's residential loan pipeline, they wrote.

But the firm plans to acquire and securitize more and higher-yield residential loans and securities in 2012, with the potential to sell to whole loan buyers as well, according to the letter.

"Still, it takes time to fully benefit from getting our capital deployed and, although we expect improvement in profitability in 2012, it will likely be slower than we would like, with real progress projected to be more apparent toward year end," wrote Mssrs. Hughes and Nicholas.

Net interest income between Oct. 1 and Dec. 31 was $27 million, compared with $34 million during the fourth quarter in 2010. That increase followed an increase in quarterly interest expense -- to $29 million from $22 million a year before. Net interest income was the same versus one year ago: $56 million.

The provision for loan losses was $8 million in the fourth quarter of 2011, matching the value during the same period in 2010 but twice the value in the third quarter of 2011.

Total assets grew to $5.74 billion at the end of 2011, versus $5.14 billion at the end of 2010. That growth included a $398 million increase in the residential real estate loan portfolio to $4.2 billion and a more than tripling of commercial real estate lending to $170 million from $50 million.

In the shareholder letter, Redwood Trust's executives said that they intended to grow the commercial loan origination platform, focusing on "quality" loans.

"While there are headwinds in the economy and sectors of the commercial market that are struggling more than others, the fundamentals for the higher-quality, stabilized properties we pursue generally continue to improve," the executives wrote.