It looks good!
I don't like more cities -> more unrest mechanic.
All large empires from past days till today actually always suffered from same problem they grew - bureaucracy. Larger empire is, it's harder to manage, in game mechanic Maintenance costs increases. Yes, empires also fell apart after death of some great ruler, but since in FE world rulers are technically immortal and they won't die of old age, this shouldn't happen.
When you capture the city you should be able to give a order to ...
raze and pillage - your army will simply plunder everything valuable what is not nailed to the ground and destroy the city in the process, so you won't suffer from penalties from managing a new territory. If you also have slaver trait you will enslave part of the population
install puppet government/- no penalty to maintenance but also no direct control to the city, plus they might eventually rebel against you and form their own independent kingdom or join back with their original one if it exist
annex/occupy the city - it will become part of your Empire. There will be large unrest penalty in that particular city, your maintenance penalty across the empire will increase slightly as you now need to manage more land. After some time unrest penalty will disappear since you assimilated the inhabitants, but maintenance penatly will still remain. It would be nice to be able to recruit units of different bloodline from that city if you want to (and feel they can be trusted)
Above will need diplomacy improved in whole city but nowdays all NPC factions are psychos declaring war on you on first occasion no matter the actual relations you have.