Long story short, the characters fought off some bandits with minimal damage, then fought some goblins in a different area. Most of them took a bit of damage from the goblins, which led to their deaths when the bandits came back for round 2. I decided to give the bandits another chance because I made a mistake on the morale rules.
My biggest issue with the rules I've used is allowing a saving throw on the Sleep spell, which is not allowed on Basic/Advanced D&D. OSR characters are on the whole more vulnerable than d20 characters at level 1*, and a Sleep spell can make the difference in the party's survival. In this case, 2 bandits were hit by the sleep spell, but one made his saving throw. He spent his action waking up his sleeping comrade instead of attacking, which helped the party. But all bandits were awake and combat ready in the next encounter. The previous time I used the sleep spell (different characters), 3 out of 4 orcs made their saving throws, and those characters had to run for their lives. I plan to use the B/X version of the spell in the future.
* Remember that in Basic D&D clerics don't get spells until level 2, and hit dice for all character types except for magic-users were lower than those of their AD&D counterparts.