During this collision process, kinetic energy is converted to internal energy. More specifically, elastic potential energy! While it may surprise you, each ball can actually be modeled as compressible, like a spring, under the study of Hertzian Contact Mechanics. This is due to the compressibility and deformation of the balls during collision.
In fact, length of compression between the 2 balls can be defined as
$$d^3=\frac{9F^2}{16E*^22/R},$$ where Poisson's ratio and the elastic moduli of the ball can affect $E*$.
Of course however, we are assuming no friction or energy loss to the surroundings, a key basis for Hertzian Contact Mechanics.
Consequently, this elastic potential energy will be converting back to kinetic energy.
You can read up on 2 research articles in 1975 and 1981 by N. Maw, J. R. Barber and J. N. Fawcett titled "The Oblique Impact of Elastic Spheres" and "The Role of Elastic Tangential Compliance in Oblique Impact" respectively.