I have had a lot of different blog banners in the past few years of blogging. (I posted a list of most of them here.) Currently, I have a photo mosaic of somewhat recent photos on display. This is a simple tutorial on how to make something similar for your blog. (Click on images to see them larger/clearer.)
I make my photo mosaics using an online application. Big Huge Labs works with Flickr and can be linked to your flickr account. At the top of the screen you can pick how many rows and columns included in your mosaic. I use 10x2 to make my banners.
Once you link the mosaic maker with your flickr account, you will be able to click "Choose a photo from Flickr" and a pop-up window with your photo gallery will appear to pick from. Easy, easy. Add all your photos, click create and then save the mosaic that appears to your desktop. NOTE : I recommend NOT using other people's photos in your mosaics - stick with yours.
In PSE or Photoshop, create a new document. The pixel width you choose is important - it should match the width of your blog. You can figure out what the width is by adding the value of your columns (my sidebars are each 200 and then the main content column is 500) and then subtracting 15 (not sure where I read this, but it works for mine.) Typepad makes it fairly easy to tell how wide your columns are. I think Blogspot is pretty simple too...
You can save the file normally or select "Save for Web" from the file tab. Usually when I am making visuals for the blog, I opt to "Save for Web" because it reduces the file size and allows me to adjust the size of the image.
Have a great Tuesday, I hope this was helpful. The mosaic maker is a fantastic shortcut for so many fun collage projects.