Mortgage lender Northern Rock has reported an increase in arrears

Nationalised mortgage lender Northern Rock has reported an increase in arrears, but said it was making "solid progress" with its business plan.

Northern's executive chairman, Ron Sandler, said economic conditions combined with a shrinking loan book meant mortgages three months in arrears rose to 0.95% at the end of April, compared with 0.57% at the end of December.

However, he added that the overall credit quality of the loan book remained satisfactory and at a level assumed in the bank's strategic plan.

A key part of Northern's plan has been to reduce its balance sheet to a sustainable level, mainly through a higher rate of mortgage redemptions. It has sought to achieve this by assisting borrowers to transfer their mortgages to other lenders at the end of their fixed or discounted period.

However, Mr Sandler said current uncertainty in the UK mortgage industry had made this target more challenging.

The bank is offering a limited range of new mortgage products, with gross residential mortgage lending in the first quarter of the year being a "modest" £1.2 billion.

In line with its plan to achieve a more balanced mix between retail and non-retail sources of funding, Northern Rock has begun to rebuild its retail savings deposit base after the run on the bank in September. It ended the quarter at £12.8 billion.

As previously reported, the size of Bank of England loan facilities stood at £24.1 billion at the end of March, down from £26.9 billion at the end of 2007. The loan facilities are continuing to be repaid in line with expectations, a trading statement from Northern Rock said.

Mr Sandler added: "We remain firmly focused on our business priorities of repaying the Government debt, releasing the guarantee arrangements and, in due course, returning Northern Rock to private ownership."

The firm was bailed out with public cash after a funding crisis last September - sparking the first UK bank run for more than 140 years - before being nationalised in February.