Nationalised-lender Northern Rock says the UK mortgage market remains "uncertain" and arrears have increased.
The Newcastle-based bank said mortgages in arrears for at least three months stood at 0.95% of total lending on 30 April, up from 0.57% on 31 December.
Chairman Ron Sandler said while arrears rose, the credit quality of its loans was still "satisfactory".
He said the bank's turnaround plan, aimed at returning it to private ownership, was progressing.
"We remain firmly focused on our business priorities of repaying the government debt," Mr Sandler said in the bank's quarterly trading update.
The bank is redeeming mortgages by transferring customers to other lenders to reduce its debt and pay off its emergency loans from the Bank of England.
The loan facilities stood at £24.1bn at the end of March, down from £26.9bn at the end of 2007, the bank said.
The bank also said it had attracted more savings as part of its plan to develop a more balanced funding base.
Northern Rock had primarily relied on borrowing from money markets, rather than its own deposits, to fund mortgage lending.
It was nationalised in February after the credit crisis forced it to seek emergency funds from the Bank of England.
The move triggered the first run on a UK bank in more than a century.
'Challenges'
Northern Rock is helping its mortgage holders transfer to other lenders when their fixed or discounted deals come to an end.
However, the bank said that this was proving difficult given the squeeze on the availability of mortgages in recent months.
Many lenders have tighten up their loan policies following problems in the US mortgage market which spread to Europe and the UK, and limited the amout of money that was available.
"This environment presents Northern Rock with challenges, especially as regards the company's ability to meet its targeted mortgage redemption levels in the future," it said.
"Nevertheless, given this backdrop, the company's progress against its plan to date is encouraging."
The bank is also cutting 2,000 jobs as part of the restructuring plan.
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