First Merchants did not disclose the name of the borrower but said it is pursuing legal action to recover the loss.
The Muncie Star Press reported the loss may have been related to the bank's business relationship with the Eye Center Group, a Muncie-based eye care and surgery practice. In a recent lawsuit to collect unpaid fees, Eye Center Group ophthalmologist Jeffrey Rapkin alleged that the corporation was $21 million in debt.
The quarterly loss of $31.2 million amounted to $1.48 per share compared to a profit of $6.6 million, or 36 cents per share, in the same period a year earlier.
First Merchants' loan charge-offs for the quarter totaled $40.4 million. Commercial real estate and commercial and industrial loans accounted for much of the charge-offs.
"The single largest charge-off, totaling $10.2 million, was taken as a result of fraudulent financial statements provided by a large commercial and industrial borrower," the bank said in a prepared statement.
First Merchants said it boosted provision for loan losses to $59 million, or 2.2 percent of total loans, from 1 percent in the same quarter last year.
Total assets in the second quarter rose 19 percent over the year-ago period, to $4.7 billion. Deposits grew 20 percent, to $3.6 billion, in the same period.
Much of the growth can be attributed to First Merchant's acquisition of Plainfield-based Lincoln Bancorp., which closed late last year. The purchase expanded First Merchant's share of the Indianapolis market.
Lincoln Bancorp, the parent of Lincoln Bank, had Hendricks County locations in Avon, Brownsburg and Plainfield. In Johnson County, Lincoln branches were in Bargersville, Franklin, Greenwood and Trafalgar.