The way I see it, there is a big difference between a display highlighting what someone believes, which I don't necessarily think is offensive, vs a display discrediting and belittling a belief, which I might think WAS potentially hurtful to someone's sensibilities.
I might be on the atheist side of the fence, but if the question is simply one of one type of display being more potentially offensive than another, I would have to say that for me, personally, I could understand the concept of the banner being hurtful more than I could the nativity scene. I've seen theists react as though the very notion of something which denies their god has wounded them to the heart, whereas, to the atheist, it would seem that the biggest reaction one could summon up to a nativity display might be a sense of ridicule or frustration, and even that seems a bit of an overreaction in the major scheme of things. Seeing a nativity display doesn't hack away at something I hold dear the way the banner might for a Christian.
I suppose that overall, I tend much more toward a "live and let live" perspective anyway, though. I can appreciate the fact that for the type of atheist who sees religion as a cancer within society, the nativity display might, indeed, be a painful thing to behold, but the overreactions on both sides of the spectrum are a bit perplexing to me.