The proposed merger between First & Merchants Corp. and Virginia National Bankshares would significantly reduce the possibility of an unfriendly takeover, F&M Chairman C. Coleman McGehee said yesterday.

"An unfriendly takeover would be detrimental to shareholders," McGehee told F&M stockholders at a regional information meeting at the Tysons Corner Marriott Hotel.

F&M of Richmond and VNB of Norfolk announced on Feb. 17 that they planned to merge, creating the largest bank holding company in the state. The two companies have combined assets of about $7 billion. They signed a letter of intent on Feb. 25, but a definite agreement probably won't be completed for several weeks, McGehee said after yesterday's meeting.

McGehee said officials of the two bank holding companies have begun work on an organizational structure for the new company and that, assuming regulatory approval is given, the merger should be completed by the end of this year.

Under terms of the agreement, VNB shareholders will own 52 percent of the company after the merger. F&M shareholders will own 48 percent.

The agreement in principle calls for VNB shareholders to receive 1.15 shares of the new company's stock for each share they own. F&M shareholders will receive one share for each common share.

F&M 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. F&M convertible preferred stock will be exchanged for an equal number of shares of the new company's convertible preferred.

VNB 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, VNB's chairman, will be chairman and chief executive officer of the new holding company and its subsidiary bank. McGehee will be president and chief operating officer and chairman of the executive committees of both institutions.

McGehee told stockholders that the only real option in the current competitive climate is consolidation. And that, he said, improves the chances of survival.

Other major advantages of a merger, McGehee noted, would be:

* The attractiveness that a bigger bank would have for large investors.

* The capacity to serve larger customers with the availability of a higher lending limit. F&M currently has a loan limit of $17 million to $18 million. The lending limit would increase to $26 million or $27 million if the merger goes through.

* A higher debt rating.

McGehee said shareholders would benefit from the merger by having a broader institutional base, increased trading volume, national recognition and value appreciation in the company's securities.