It was reported incorrectly yesterday that no bank holding company in Virginia has assets of more than $4 billion. United Virginia Bankshares Inc. of Richmond has assets of $4.8 billion.

Regardless of the outcome of merger talks between Virginia National Bankshares Inc. and First & Merchants Corp., the mere fact that the two are considering a partnership means Virginia's banking industry is on the threshold of substantial change.

Although last week's announcement by VNB and First & Merchants surprised most in the state's banking industry, there are strong indications that other major bank holding companies would have decided eventually to follow a similar course.

In fact, merger fever is almost certain to spread among the state's bank holding companies as a result of last week's announcement, as competitors consider the likely impact of that type of merger.

Some executives say a VNB-First & Merchants merger wouldn't affect them adversely. But major banking organizations in Virginia could hardly afford to conduct business as usual if those two are permitted to consolidate their assets.

The suggestion of mergers might bruise the egos of some bank executives, but they may have to think seriously about repositioning their institutions to compete against an organization with $7 billion in assets and more than 300 branches across the state.

More important than the consideration of intrastate competition, however, is what some banking industry observers perceive as a need for protection against acquisition forays by larger out-of-state institutions if interstate banking is approved.

"Obviously, Virginia National and First & Merchants are doing this to get them to a size where they'll be prepared for interstate banking," remarked the president of one Virginia bank. Their aim, he added, is "to buy banks rather than being bought."

The impact of such a merger, the official continued, obviously would result in a greater concentration of deposits in a single institution. But, the impact wouldn't be "out of hand with what a big bank like Citibank would do," he added.

The VNB-First & Merchants talks also signal a shift away from the more expensive route of buying smaller banks to achieve growth and market penetration.

And, says the president of a competitor bank, "What makes this look good is that you've got two large banking institutions in two different cities Norfolk and Richmond and neither is a major factor in each other's market."

To be sure, there are economies of scale to be gained in that type of merger.

But positioning their institutions for the advent of interstate banking certainly has to be a prime factor in the decisions by VNB and First & Merchants to explore a merger. It's only speculation at this point because officials of the two banks have declined to discuss the matter.

In the meantime, some Virginia banking experts don't endorse the theory that banks in the state will be swallowed by big money-center banks if interstate banking comes about.

"If I were in one of those banks, I would not be so concerned about Citicorp or one of the other large money-center banks," says W. O. Pierce, executive vice president of the Virginia Bankers Association. "I think when interstate banking gets here, it will be more regional, and Virginia banks could be more vulnerable to one of the large North Carolina banks."

Indeed, that may have been factored into the thinking of VNB and First & Merchants. Both Maryland and North Carolina have banks with assets of more than $4 billion, while Virginia has none of this size.

There is yet another factor that has nothing to do with interstate banking. By consolidating, Virginia's banking industry would be in a stronger competitive position to serve regional corporate customers, many of whom have relationships with larger, out-of-state banks.

Regardless of the factors involved, most Virginia banking officials contacted this week agree that the VNB-First & Merchants parley will lead to merger discussions between other major banks in the state. "I would not be surprised to see another announcement and possibly two more this year," Pierce says.

Ironically, a merger of the size contemplated by Virginia National and First & Merchants probably won't have a significant effect on smaller Virginia banks. The 10 largest banking organizations in Virginia control 77 percent of all deposits.

In any event, none of Virginia's other banks is likely to raise an objection to a merger. "Banks are not going to contest it," said the chief executive of one.

The larger question at the moment, most bankers agree, is: will banking regulators and the Justice Department block a merger between VNB and First & Merchants?