These two scenarios would describe what I’ve encountered (and it was a hotel, not a prison ).
The everyday Catholic should not use a specifically Protestant Bible for study or inspiration. There are many good Catholic Bibles readily available. However, it does seem that prior to the Vatican II era, Protestants were viewed more as dangerous heretics, and that anything related to their religion was to be absolutely shunned. You will find this way of thinking, for instance, in the old Radio Replies book series. In the present day, though, we are encouraged to regard them more as “separated brethren” who possess many things that are good and holy.
Actually, the truth is a “both/and” situation. Just using it as a descriptive term, they are indeed material heretics. Keep in mind that “heretic” is not a pejorative term in and of itself, it comes from the Greek “to make a choice”. They are certainly not formal heretics (or I would hope not anyway). In other words, yes, they make a choice to follow a variant of Christianity that does not possess the fullness of truth. But they do not realize that their faith is incomplete, because if they did, presumably they would come to Catholicism. If they did realize this and continued to speak and believe contrary to the truth, then they would become formal heretics. Likewise, we are not to engage in habitual, repeated worship and study with them, as though we were “just another denomination”. Many lose their faith in this fashion.
That said, though, we do share a common baptism — there is only one. Many of their practices are “shadows”, to put it one way, of ours — the Lord’s Supper, calling for their elders to anoint the sick, and so on. Their sincerity and personal holiness is not to be questioned. Their biblical knowledge, quite honestly, puts ours to shame — it’s all they have, and they know it backwards and forwards. I do not hesitate to worship alongside them when the occasion calls for it, though I do not seek it out. We have much, much in common.
So, as I said, it is “both/and”.