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Unfortunately, in MTW 2 if you take all the settlements of a faction it is gone. And this is it. I have many times seen 2-3 full armies with family members turning in to rebels when i take the last city or castle. The Turks or the Milanese or Sicily are typically case for this. It is boring, not fer and basically stupid. Not to mention that they can not be bribed. I mean these army's sometimes are so strong, that I have to assinete the general and bring a full scale army to kill them all.
If a faction wasn’t destroyed when their last settlement was taken then all their armies and navies would still be on the map. It would take forever to go around mopping these up. Imagine trying to find the last few Russian units that are lying in ambush somewhere. You could spend hours / days trying to find them.