Some details:

I have the menu type for this page as: K2 Categories, single category view.

I've messed with every combination of settings I can think of and it still happens.

The featured banner and text overlap.

Here's what I've noticed, on my home page, I have the same setup, except two categories instead of just one being displayed, it works perfectly. So, it has to be a bug or some configuration with only displaying the one category.

Any idea of how to get the item title display to line up and spaced out correctly for this?

Hi. It has to do with your template. You should use either the text "Featured" or the image, not both of them.