Irish bank permanent tsb posts small H1 profit, first since 2007

* Underlying profit of 1 mln euros vs 171 mln eur loss yr earlier

* Net interest margin, capital levels rise

* To compensate more than 1,000 customers (Recasts, adds H1 details)

By Padraic Halpin

DUBLIN, July 28 (Reuters) - Ireland (Other OTC: IRLD - news) 's permanent tsb (PTSB) on Tuesday reported an underlying profit of 1 million euros for the first half, its first since 2007, reflecting lower mortgage arrears and a rise in new business.

The small profit, in its first results since partly returning to private ownership, compared to a loss of 171 million euros a year earlier.

Exceptional one-off items mainly resulting from a deleveraging programme agreed with the European Commission totaled 432 million euros.

Its shares were up 2.9 percent at 5.10 euros by 0900 GMT.

The bank is the smallest of Ireland's three remaining domestically owned banks and last to return to profit after the financial crisis.

"There is still a long way to travel but these results show we are making progress in returning the group to sustainable profitability," Chief Executive Jeremy Masding said in a statement.

Masding also apologised to 1,372 customers whom the bank agreed to compensate after the central bank found that permanent tsb failed to warn them of the consequence of breaking the term of a particular loan agreement.

The consequences for customers who should have been allowed to move to cheaper mortgages that track the low European Central Bank rate when they broke the term of fixed-rate products early included overpayments, mortgage arrears, legal proceedings and in 22 cases, the loss of home ownership, the central bank said on Tuesday.

PTSB said it would correct the position of every impacted customer, the majority of whom were affected between 2006 and 2011, as quickly as possible.

It said it had made an "appropriate" provision for the associated costs, without giving details.

The mortgage lender will release its full earnings report on Wednesday. It had to publish its preliminary results a day ahead of schedule because of the announcement of the mortgage redress scheme.

The bank, in which the government cut its stake to 75 percent in April through a 400 million euro share sale, trimmed its operating expenses by 19 percent year on year to 147 million euros. Its impairment charges fell by 83 percent to just 24 million euros.

Net interest margin, a key measure of profitability that the bank aims increase to 1.7 percent by 2018, rose by 10 basis points in the first half to 1 percent.

Its fully loaded core tier 1 ratio increased to 13.4 percent from 12.4 percent.

(Editing by Louise Heavens and Jason Neely)