Virginia National Bankshares Inc. of Norfolk and First & Merchants Corp. of Richmond have agreed in principle to merge the two holding companies and their principal bank subsidiaries, they announced yesterday.

Combined assets of $7 billion held by the two organizations would make the new company Virginia's largest banking institution.

Under terms of yesterday's agreement, Virginia National shareholders will own 52 percent of the company after the merger. First & Merchants' shareholders will own 48 percent.

The agreement in principle calls for Virginia National shareholders to receive 1.15 shares of the new company's stock for each share they own. First & Merchants shareholders will receive one share for each common shares.

First & Merchants had about 6.6 million common shares outstanding on Feb. 18 and about 1.4 million shares reserved for issuance upon conversion of its convertible debentures, preferred stock and stock options. First & Merchants' convertible preferred stock will be exchanged for an equal number of shares of the new company's convertible preferred.

Virginia National had about 7.5 million shares outstanding on Feb. 18, with an additional 51,454 shares reserved for issuance under stock options.

The agreement stipulates that C.A. Cutchins III, Virginia National Bankshares Inc. chairman, will be chairman and chief executive officer of the new holding company and its subsidiary bank. First & Merchants Chairman C. Coleman McGehee will be president and chief operating officer and chairman of the executive committees of both institutions.