I really can't see how else your problem could have occured, unless the user got another warning, as soon as he was unbanned. I checked the code and did a simulation with your settings in my site. The banned users end up in the proper usergroup and they are "temporarily" banned, as they should. Also, when a user is banned, while he is banned, even if he receives another warning, his ban status does not change, only the ban removal date is altered.
The only way they can end up being permanently banned, is (a) if they received a permanent ban warning the first time, or if they got another warning as soon as they were unbanned. Since your temp.ban limit is two (after they get banned twice, they become permanently banned), that's the only thing that I can think of.
Rgds
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