UPDATE 1-Lehman cuts Downey Financial, drops coverage

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July 8 (Reuters) - Lehman Brothers downgraded Downey Financial Corp DSL.N to "equal weight" from "overweight" and said it would discontinue coverage of the company due to an uncertain outlook, pushing its shares to their lowest levels in at least 20 years.

Las month, Downey, one of the largest savings and loan holding companies in California, said one-seventh of its total assets were nonperforming and bad loans were up nine-fold from May a year ago, as the weak housing market continued to hurt.

"It appears DSL is overwhelmed by rising non-performing assets, and its excess capital, deposit franchise and underwriting may or may not save it, but that is now beyond the scope of analysis" the brokerage said.

Lehman also noted that Chief Operating Officer Rick McGill, a key management figure, suddenly left last week.

Shares of the Newport Beach, California-based company, which have lost about 97 percent of their value in the last 12 months, were trading down 21 cents at $2.27 Tuesday morning on the New York Stock Exchange. (Reporting by Eric Yep in Bangalore; Editing by Amitha Rajan)