Question
we just realized that there are 2 holes, one in the main branch/trunk more then half way up the tree and one on another large branch. The bark has been removed in an almost perfect circle on the outside of the hole. The hole itself is only about 3 inches in diameter. Is this a disease or a hole that a bird or small animal has made?

Answer
This is either a wood pecker or a squirrel. Both will make about this size holes in the tree trunk. Usually the tree is older and the inside of the trunk is hollow or at least soft from decay. This allows the bird or animal to construct the hole as a nest. I would guess that it is a wood pecker that has built a nest in the cavity of the tree trunk. Watch for a wood pecker being in the area of the tree. IF you can reach the hole it can be plugged with insulation foam that comes in an aerosol can. It would be good to make sure the bird is not home when this is done. OR just leave it be and the hole and the nest is not going to adversely effect the health of the tree. I would fertilize the tree with  10-10-10 fertilizer at the rat of 1 lb of fertilizer per inch of trunk diameter scattered around the tree and watered in good--if you apply the fertilizer just before a rain storm you will not have to water it in. This will increase the overall health of the tree and help the tree fight the decay fungi.