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UPDATE 1-Online lender OnDeck posts surprise quarterly adjusted profit

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Aug 7 (Reuters) - Online lender OnDeck Capital posted a surprise quarterly adjusted profit on Monday, driven by lower costs and higher interest income.

OnDeck has been trying to keep a tight leash on its expenses to improve profitability and said in May it would slash annual costs by $45 million, mainly by cutting headcount by about 27 percent.

Investors have been concerned about the quality of OnDeck's loans and its ability to sustain a strong pace of growth.

To address this, the company said it would fund more loans by itself, which would lead to larger loss reserves and lower originations in 2017, but going forward it would see growth.

Excluding items, OnDeck earned 2 cents per share in the second quarter ended June 30, compared with the average analyst estimate of loss of 1 cent, according to Thomson Reuters I/B/E/S.

Net loss attributable to common shareholders narrowed to $1.49 million, or 2 cents per share, in the quarter, from a loss of $17.9 million, or 25 cents per share, a year earlier.

Net loss attributable to shareholders included a $3.2 million severance charge, the company said.

Originations fell 21.3 percent to $464.4 million.

OnDeck set aside $32.7 million to cover loan losses in the quarter, up 1.4 percent from a year ago, while funding costs surged about 39 percent to $11.6 million.

Operating expenses fell about 6.3 percent to $44.6 million.

Gross revenue rose 25 percent to $86.7 million due to a 31 percent rise in interest income.

OnDeck said it expects gross revenue of $82 million to $86 million in the third quarter.

Up to Friday's close, OnDeck's stock had fallen nearly 9 percent so far this year. (Reporting by Nikhil Subba in Bengaluru; Editing by Martina D'Couto)