Is each server limited to 25 connections or is that because I picked the default local database?
There is no limit to the number of connected users. It does not matter what database you use. Your limitation comes from environmental aspects: RAM, NIC speed, Processor, etc.
Great! It just showed max connections of 25 under the database tab of the admin console.
if you want to change the maximum connection limit you can change from c:\program files\openfire\conf\openfire.xml , you need to edit this file and change the max connection limit then restart the services of openfire