Philadelphia. Photo: Shutterstock

The first-quarter results for 2018 are trickling in, and for Pennsylvania law firms, it's mostly good news.

The U.S. legal industry on the whole had a strong first quarter, according to a recent report by Citi Private Bank, and Pennsylvania's performance stood out. Still, the data suggested some challenges ahead.

Among the 11 regions Citi surveys, Pennsylvania had one of the strongest starts to the year, said David Altuna of Citi Private Bank's Law firm Group. But some of the numbers that contributed to that performance are concerning, he said, as they show revenue growth driven by collections rather than rates.

Revenue increased by 9.4 percent among the surveyed firms headquartered in Pennsylvania, according to Altuna. That puts Pennsylvania revenue growth way ahead of national growth, which registered 4.2 percent.

Demand also grew more than twice as quickly in Pennsylvania as it did nationally. Demand was up 2.9 percent among Pennsylvania firms, compared with 1.3 percent industrywide.

Of the regions Citi surveys, Pennsylvania had the fastest acceleration in collections. Industrywide, the collections cycle slowed by 3.1 percent in the first quarter, but in Pennsylvania, the pace increased 4 percent, Altuna said.

The one area where Pennsylvania firms struggled, relative to other regions, was in rates. Standard rates were up 4.8 percent nationally—the strongest increase since 2008, Altuna said—but in Pennsylvania, there was only a 2.2 percent increase. It was tied with Texas for lowest amount of rate growth.

Altuna said the expectation nationally going into 2018 was that the first quarter would be strong, thanks to a lot of inventory left in the fourth quarter of 2017. But that inventory buildup has remained nationally, he said, meaning revenue growth came from demand and rates.

“We expected a strong start. We got it, but we got there a little differently than we expected to,” Altuna said. “We do believe this will be a strong year, but a strong year in the context of modest results.”

Inventory increased by 7.3 percent nationally, which Altuna said is the greatest increase for a first quarter since 2008. But in Pennsylvania, inventory increased by just 5.1 percent, Altuna said.

As the rest of the regions saw collections slow and inventory continue to grow, while rates and demand drove revenue, Pennsylvania firms were unable to raise rates quite so much, and cashed in on some of that abundant inventory from the end of 2017. Still, Altuna said, at 5.1 percent inventory growth, Pennsylvania was able to replenish some of that.

“In any other year, that would be a very fine result, and I'm sure for the rest of the year it bodes fine,” he said.

Pennsylvania firms also stood out in terms of head count, growing their lawyer ranks by 4.1 percent, compared to 1.8 percent growth nationally. That's the second-highest regional head count growth after Northern California, Altuna said. At the same time, equity partnership tiers at Pennsylvania-headquartered firms shrank by 1.1 percent, versus a 0.3 percent decline nationally.

Productivity was flat in Pennsylvania and nationally, and Altuna said that may be good news, considering the head count growth that took place.

Expense growth was 4.8 percent nationally, and 6.8 percent in Pennsylvania—relatively high, Altuna said, but still outpaced by revenue growth.

Bigger (Brand) Is Better

In a separate report this week, Thomson Reuters Corp. saw a 0.5 percent dip in demand nationally, with the average pulled down by law firms outside the Am Law 100.

Am Law 100 firms saw demand rise by 0.4 percent—that was driven by 0.6 percent demand growth at Am Law 50 firms, as Am Law 50-100 firms saw 0.3 percent demand growth. Am Law Second Hundred firms saw a 0.3 percent decline in demand, and midsize firms saw demand drop 1.2 percent, according to Thomson Reuters.

Rates at Am Law 50 firms grew by 6.3 percent, Thomson Reuters found, compared to 3.5 percent at Am Law 51-100 firms. Am Law Second Hundred firms saw rates increase by 2.7 percent, and midsize firms grew rates by 2.8 percent.

Citi, too, saw stratification between the country's largest law firms and the rest of the pack, Altuna said.

“At this point, at least going back two years plus, its undoubtable that the biggest firms are faring the best,” he said.

That may make Pennsylvania's results surprising, at least in terms of revenue and demand, since the large firms headquartered in Philadelphia and Pittsburgh fall below the Am Law 50.

“The story isn't that bigger is better … it's more a commentary on the importance of brand in this market,” Altuna said. “In the Am Law 50, you have a very high concentration of those very strong brands.”

He said firms outside the Am Law 200 with a strong practice niche or industry focus have similar results to those in the Am Law 50.