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Firms headquartered in Texas outpaced the U.S. legal industry in revenue growth during the first quarter of 2019, but Texas demand declined by a large margin compared with the national average, according to data collected by the Citi Private Bank Law Firm Group.

First quarter revenue reported by the Texas-based firms in Citi's survey was 5.6 % higher than during the first quarter of 2018. That compares with a 4.5% increase nationally.

Demand declined by 4.8% in Texas during the first quarter, compared with the first quarter of 2018, according to the survey. Nationally, Citi reported a decline of 0.3%.

The Texas statistics are derived from nine firms of various sizes and based in Texas that Citi polled for its Q1 Flash Survey. The national sample includes 187 firms, ranging from Am Law 100 firms to niche and boutique firms.

The statistics for Texas don't tell the full story, said David Altuna, a client adviser at Citi Private Bank's Law Firm Group. He notes that the Texas group only includes firms based in Texas and does not account for firms based elsewhere but with Texas offices.

“The 4.8 percent decline in demand is not at all indicative of the state of Texas. The state of Texas is seeing an improvement—a good amount of activity—it's just being done by other firms,” Altuna said.

While demand according to the survey was down for Texas firms, Altuna said the Texas firms countered with a strong increase in billing rates, up by  6.1% in the first quarter, compared with a 4.4% increase nationally.

That was a big factor in the Texas increase in revenue growth for the first quarter, he said, along with collections.

However, in less rosy news, Altuna said expenses grew by 9.8% during the quarter in Texas, compared with a 6.5% national increase.

“That's a challenge,” he said, noting that increasing expenses compress the profit margin.

Interestingly, Altuna said, expenses grew in many regions of the country because firms increased their full-time lawyer counts during the first quarter, compared with 2018. But Texas was one of two regions in the country where FTE head count was down, meaning that the higher expenses in Texas are not related to more lawyers, but to firms paying lawyers more.

“That's an indication of the competition, largely driven by associates,” he said. He said that firms are presumably paying more for talent, because the Texas lateral hiring market has been so competitive.

There was very little growth in equity partnerships during the first quarter, with only a 0.2% increase nationally. But the growth rate declined by 2.7% in Texas during the same period.

That could be another marker that homegrown Texas firms lost equity partners to firms based elsewhere during the first quarter, a trend that's accelerated over the last 18 months as more firms have opened offices in Texas.

While results were mixed, the Texas cutout for the first quarter of 2019 had more positive notes than the report a year ago, when revenue and demand in Texas were both down.

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Law Firm Revenue Rose as Demand Dropped in the First Quarter of 2019

Citi Report: Demand, Revenue Declined at Texas Firms During First Quarter