I had similar effects the first time I tried.. right now the styles seem to "behave". I think it was related to the offsets somehow. It also seemed, that giving some time for DO to digest changes on the thumbnail styles helped. I had to wait some time, before things appeared correctly now and then.
Been thinking about this.
With the merge options you are basically asking the user to create a smaller rectangle in the bigger rectangle (the style image).
I which case the thumbnail image needs to fit/fill/stretch. 3 options. 2 of which might need alignment options if not defaulting to centering the folder image.
I think in all the screenshots I missed the one where you had the bottom edge set to 145 for the style.
With that there I get the same as you - but this looks right to me? You're telling it you want the folder thumbnail to be positioned with a 145 pixel border at the bottom of the overlay image.
Or is the issue that the thumbnail isn't centered horizontally? Probably it should be.