How to properly repair siding holes
Well, that's a bit messy looking!
The best repair would be to remove the two damaged planks and replace them with new ones.
Next best would be to cut back the planks away from the hole and replace the pieces that cross the hole.
Next best would be to install flashings that cover the hole.
Mold is definitely a possibility. I see moss growing on the insulation.
Pull or push some of that insulation out of the way and check for mold. The mold can probably be sufficiently treated though this hole without a need to disassemble the whole wall.