[mcguyver]

That little sensor you have resting on the top of your battery pack in the top picture is a temperature sensor, is it not? Funny it didn't kick the charger out when the battery got hot, unless it is adjustable and it was set too high. My charger has one of those sensors and I set it for 100F just to be on the safe side.

Peak detection means the charger is alwasy seeing feedback of the current it sends out to the battery during charging. When the current returning very nearly equals the current going out, the charger assumes that the battery is charged. During charging, the battery converts electrical energy from the charger into chemical energy stored in the electrolyte of the battery. The current required to do this declines as the battery becomes charged. At full charge, the current is nearly zero, but trying to insert too much current will lead to heating of the battery and damage to the electrolyte inside the battery. This is what causes damage.

It may also be that the excessive heating cause at the connection in the bottom picture may be the result of a poor solder connection. This will be a source of increased resistance, which leads to increased heat at that point. That may be what melted the heatshrink over the cells. At any rate, you would have to slice that open to check that connection point for damage, but only if your battery is not performing well. If your battery performs fine, leave it alone.