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Unfortunately, cedar siding seems to get a lot of damage from woodpeckers particularly if the house is adjacent to a wooded area. Large holes like you are describing sound like roosting or nesting holes. These holes are often placed in corners and can go into the insulation. Legally all woodpeckers are protected so can not be legally killed without a federal permit. This means that most control methods are some form of disturbance. Recommendations include:
Woodpeckers may also be attracted to insects in the siding. My suggestion would be to use some deterrents to try and repel the woodpeckers and most importantly get the house checked and treated for insects. Cornell also has some excellent information on woodpecker damage and control
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