Mid-Atlantic law firms trailed their U.S. counterparts in 2018 as measured by revenue and net income growth, according to a review by Wells Fargo's law firm lending and advisory unit.

Wells Fargo found revenues growing just 0.82 percent year-over-year at the Mid-Atlantic firms it surveyed—comprising 13 firms in the D.C. and Baltimore region—with net income down approximately 1 percent. Anonymized data from the 150 firms in Wells Fargo's nationwide survey showed average revenue growth close to 6 percent and net income growth of 7.6 percent, the best figures since the Great Recession.

“The Mid-Atlantic region underperformed in 2018 compared to the other regions and the overall averages,” said Joseph Mendola, senior director of sales with Wells Fargo Private Bank's  Legal Specialty Group.

Mendola said revenue growth was lowest in the Mid-Atlantic of all nine regions it surveyed, which also include Northern California and the Pacific Northwest, Southern California, Florida, the Midwest, the Northeast, Pennsylvania and Delaware, and Texas.

Demand dropped 2.7 percent in the Mid-Atlantic, as measured by billable hours, compared to a 2.3 percent increase for all 150 firms, which represents a 5-percentage-point swing between the national average and the D.C.-area participants. (A report from Thomson Reuters on Tuesday said the legal marketplace saw its largest growth in demand nationwide last year at any point since 2011.)

Despite the less than stellar results for D.C. and the Mid-Atlantic, Wells Fargo recorded partner profits ticking up just over 2 percent across the region, which the bank attributed to declining partner head count.

Mendola said he thought the better-performing firms have reaped benefits from transactional practices that aren't necessarily associated with D.C. firms, namely M&A, private equity, and public debt practices. Changes in the regulatory regime in Washington and the nature of IP work may have also played a role in the “softer” results, Mendola said.

“I think one of the things I'd keep in mind, these are percentage changes from prior year to this year, and when I look at the specific firms there were a number of cases where some firms had extraordinary years in 2017,” Mendola said. “It could've been some extraordinary event, a contingency fee coming in, working on some particular matters that were unusual, a big litigation or something like that. And therefore if they normalize in 2018, for the purposes of our report, it would have been down.”

Overall, large law firms are posting some of their best financial results in recent years. Revenue growth in 2018 as recorded by Citi Private Bank's Law Firm Group was better than any time in more than 10 years, with revenues climbing 6.4 percent at the 191 firms Citi studied.

Consequently, Mid-Atlantic firms look optimistic about the coming year. Mendola said the region projected revenues of approximately 4.1 percent. That could be overly optimistic, however. Mendola said the same Mid-Atlantic region projected “somewhat better results” for 2018 than they ended up reporting.

There have been other signs that 2018 was ending with a whimper for firms in D.C. A flash survey of the third quarter by Citi Private Bank Law Firm Group reported revenue growth in D.C. trailing the rest of the country, which Citi attributed to less activity in the region.

The inventory level in the Mid-Atlantic is a concern as well. While other regions have begun 2019 with a buildup in inventory, which is often collected in the first quarter, Mendola said Mid-Atlantic firms reported inventory down 0.7 percent at the end of 2018 as compared with 2017. As a result, Mendola said firms are “probably not going to get out of the gate very quickly in terms of financial results” in 2019.

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