I was wondering if any of you have ever been merciful towards bandits? I'm roleplaying a Paladin of Stendarr at the moment and I recently got a random encounter with a thief who wanted to rob me. I started fighting with him and at some point he's crying for mercy. Seeing as Stendarr happens to be the god of mercy I put my weapon away. I fully expected him tobecome hostile again, but instead he said something to the effect of: "You're not worth it" and walked away.. I thought that was pretty cool. I only wish that for roleplaying purposes I could've taken him in custody and taken him to jail, though.

Not often I'm afraid. They normally get up and attack my Paladin no matter how many times he scabbards his weapon and tries to grant mercy. Hopefully a mod will allow you to actually grant mercy, but for now I'll try once, then shield bash them to RP knocking them unconcious.
Being able to turn them into the guard would be amazing though!