Just tested it and it works fine.
The banned avatar will show if the is_banned flag is set on the user in xf_user.
Once a ban has expired, a Cron entry needs to run to delete the ban. Are you sure they aren't still banned? Can you check in PHP My Admin or similar against that user to see if is_banned is 1 or 0?
Also check in the xf_user_ban table and make sure the ban has definitely expired and the user isn't in there.