Flaxseed has to be ground to be beneficial; otherwise it just passes through whole. I buy it preground at the HFS. The food processor should be fine. A lot of people use coffee grinders that they keep just for flaxseed.
I throw it in all sorts of things: pizza crust, bread, pancakes, hot cereal (just stir in after the cereal's cooked)
You could definitely add it to banana bread. I'd probably use about 1/2 cup. You may have to add a tiny bit more liquid, but check the consistency first because it might be fine with the normal amount.