Do you think this will affect your business adversely?
In many cases, people like to deal with people close to them, or at least from the same region (even if they never meet them). Often I find that running a regional ad will have a higher conversion rate than a national ad based on people's emotional ties to that region.
In the case of goods, not only does the 'emotional' tie have some effect, but they think shipping will be quicker, and thus people like to use someone close to them for that reason as well.
Google is trying to tell the surfer that your company handles clients from that particular city/state/region. Do you think this will affect your business adversely?
Good point. Only viewers who seem to be in that state (based on their IP address) will see the target area mentioned below the ad, e.g. "California" or "San Francisco-Oakland-San Jose, CA"
I don't see a large benefit to the searcher, particularly when such ads are in the minority. Regional ads just need to be served to the desired region and we already have the means to insert dynamic terms in the ad.
If they found a way to be much narrower in focus, e.g. the specific city, it would make the ad more appealing to mention the region below it.