FORMER building society Northern Rock said trading and lending was set to be strong in the second quarter but also warned the mortgage market was becoming quieter.

The mortgage bank said its first quarter performance was in line with its strategic target of growing assets under management by 20 per cent a year.

Northern Rock has benefited from the housing boom with low unemployment and low interest rates encouraging more homebuyers.

Adam Applegarth, chief executive, said: "Operating performance in the first quarter of the year continues to be very strong. It is in line with our operational expectations and strategic objectives, and builds on the excellent progress we made in 2002.

"We are again set to deliver against our low cost, high quality, high growth strategy."

In its first quarter trading statement, the Newcastle firm said it believed house price inflation will return to more long- term sustainable levels.

Although the group predicted a further quietening of the market for new mortgages, it said there were incentives to encourage the remortgage market.

Compared to the first quarter of last year, net residential lending was up 23 per cent. The company also has agreed business of more than £4.2bn - 27 per cent higher than at the same time last year.

The risk profile of new lending continued to improve with fewer first time buyers and the bank said mortgage arrears were tightly controlled with no signs of credit deterioration in its loan portfolios. Analysts predict pre-tax profits of between £351.8m and £376.7m for the full year, an average growth of 13 per cent compared with 2002.